1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER 0-21229
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
(Address of principal executive offices)
(847) 367-5910
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [ x ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On March 29, 2000, the aggregate market value of the Registrant's
voting stock held by non-affiliates of the Registrant was $288,633,703.
On March 29, 2000, there were 14,768,885 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Items 10, 11, 12 and 13 of Part III of this
Report is incorporated by reference from the Registrant's definitive Proxy
Statement for the Annual Meeting of Stockholders in 2000 to be held on May 11,
2000.
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PART I
ITEM 1. BUSINESS
Unless the context requires otherwise, "we," "us" or "our" refers to
Stericycle, Inc. and its subsidiaries on a consolidated basis.
COMPANY OVERVIEW
We are the largest regulated medical waste management company in North
America, serving over 237,000 customers throughout the United States, Canada and
Puerto Rico. We have the only fully integrated, national medical waste
management network. Our network includes 33 treatment/collection centers and 87
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 ("ETD") as well as traditional methods such
as autoclaving and incineration. For the years ended December 31, 1999 and 1998,
our revenues were $132.8 million and $66.7 million, respectively.
In November 1999, we acquired the medical waste business of
Browning-Ferris Industries, Inc. ("BFI") from Allied Waste Industries, Inc.
("Allied"). Allied had acquired BFI in a merger completed in July 1999. Prior to
our acquisition, BFI had been the largest provider of regulated medical waste
services in the United States. The purchase price for our acquisition was $410.5
million in cash, subject to post-closing adjustments.
Our operations benefit significantly from the stability associated with
our long-term customer relationships. We have long-term customer contracts of
between one and five years with substantially all of our customers. In general,
our contracts with small account customers 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 their risk of the
large fines associated with regulatory non-compliance.
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 over 232,800 small account customers (e.g., outpatient clinics, medical
and dental offices and long-term and sub-acute care facilities) and over 4,200
large account customers (e.g., hospitals, blood banks and pharmaceutical
manufacturers). Small account customers tend to be most likely to outsource
medical waste management services and tend to be more service oriented and less
price sensitive, resulting in higher margins for us. We are targeting new small
account customers through our large proprietary database of potential new small
account customers and our dedicated small account sales force. We successfully
increased the proportion of revenues from small account customers from 33% of
revenues in the fourth quarter of 1996 to 56% in the fourth quarter of 1999.
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 ("MWTA"), which Congress enacted in response
to media attention after medical waste washed ashore on beaches, particularly in
New York and New Jersey. Since the 1980s, the public and government regulators
have increasingly demanded the proper handling and disposal of the medical waste
generated
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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 1999 to be approximately $1.4 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. We also believe that the regulated medical
waste industry is less susceptible than most industries to the effects of a
general economic downturn. Industry sources estimate that the current annual
growth rate of the United States regulated medical waste industry to be 7-10%,
driven by a number of factors. These factors include:
PRESSURE TO REDUCE HOSPITAL COSTS LEADS TO OUTSOURCING. 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.
GROWING IMPORTANCE OF SMALLER ACCOUNT CUSTOMERS. 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 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 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 ("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. The Environmental Protection Agency ("EPA") estimates 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
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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 LEADER. We are the largest and the only national provider of
medical waste management services in the United States. 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 service national accounts. 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 33 treatment/collection centers and our
237,000 customers in 46 states give us the largest and the only national network
in the regulated medical waste industry. 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.
LOW-COST OPERATOR. We are often the low-cost provider within the markets
we serve. Our low cost results 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 five 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 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.
STRONG SALES NETWORK AND PROPRIETARY DATABASE. We have the largest, most
well-established sales force in the medical waste industry, with over 220 sales
and marketing personnel. 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
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advantage in identifying and reaching these higher-margin customers. We believe
that we have been particularly successful at attracting new small account
customers through our innovative "flex-rep" program in which part-time field
sales representatives work in tandem with telemarketers. We believe that the
combination of the two allows us in a cost-effective manner to sell
"face-to-face" to potential small account customers and is more effective at
converting sales leads into customers than telemarketing alone.
EXPERIENCED MANAGEMENT TEAM. Our four most senior executives and the
Chairman of our Board of Directors collectively have over 45 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. Anthony J. Tomasello has been our Executive Vice
President 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 Chief Financial Officer, previously served as chief
financial officer of Hexacomb Corporation. Jack W. Schuler, our Chairman, is
also the current chairman 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:
TARGET HIGHER MARGIN, SMALL ACCOUNT CUSTOMERS. We intend to continue
actively targeting and increasing our base of higher-margin, small account
customers. Prior to the BFI acquisition, our management had successfully raised
the percentage of our revenues from small account customers from 33% of revenues
in the fourth quarter of 1996 to 56% in the fourth quarter of 1999, which helped
increase our operating income margin significantly. 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. Small
account customers are more service sensitive and typically rely on fully
integrated service providers like us for timely waste removal, staff training,
assistance with recordkeeping, and OSHA compliance consulting. We believe that
the number of small account customers and the opportunities for sales of
ancillary services and products to these customers will continue to grow, which
will generate significant additional opportunities for revenue growth.
CAPITALIZE ON OUTSOURCING DUE TO NEWLY ENACTED 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 most 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. We
believe that approximately 35% of the total medical waste disposal market is
treated on-site at hospitals. Because our facilities are modern and well
maintained, we believe that our capital expenditures required to bring our
incinerators into compliance with these new regulations will be only
approximately $4.0 million.
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
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example, we are expanding our collection and treatment services through the
inclusion of materials like 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 may begin 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 intend to increase
these offerings in the future.
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.
BFI ACQUISITION. 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. Allied had acquired BFI in a merger completed in July 1999. 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, subject to post-closing adjustments. 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 certain investment funds
associated with Bain Capital, Inc. and Madison Dearborn Partners, Inc. These
transactions were completed concurrently with the completion of our acquisition
of BFI medical waste business.
ACQUISITION HISTORY. We have completed the following 43 acquisitions:
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SELLER DATE MARKETS SERVED
Allied Waste Industries, Inc. (BFI acquisition)... November 1999 United States, Canada and Puerto Rico
All-Med Safewaste Inc............................. July 1999 Massachusetts
Ionization Research Company, Inc.................. July 1999 California
Enviro-Tech Services.............................. June 1999 Arizona
Foster Environmental Services Corp................ May 1999 New York
Environmental Guardian, Inc....................... May 1999 Wisconsin
Browning-Ferris Industries, Inc................... April 1999 Texas
Arizona Medical Waste Management.................. March 1999 Arizona
Enviro-Tech Disposal Division of March 1999 Pennsylvania
Lancaster General Services Business Trust......
Medical Express and General Courier
Service, Inc................................... February 1999 Pennsylvania
Southwest Medecol L.C............................. February 1999 Kansas, Texas and Colorado
Medical Resources Recycling Systems, Inc.......... February 1999 Washington and Idaho
Medical Resources Corporation..................... February 1999 New Mexico, Colorado and Arizona
Environmental Transloading Services, Inc.......... January 1999 California
Med-Tech Environmental Limited.................... January 1999 and Alberta, British Columbia, Ontario,
December 1998 Quebec, Connecticut, Maine,
Massachusetts, New Hampshire, New
York, Rhode Island and Vermont
Mid-America Environmental, Inc.................... December 1998 Indiana
Waste Systems, Inc. (3CI Complete
Compliance Corporation)........................ October 1998 Alabama, Arkansas, Florida, Georgia,
Kansas, Louisiana, Mississippi,
Missouri, Oklahoma, Tennessee and
Texas
Medical Compliance Services, Inc.................. September 1998 New Mexico and Texas
Regional Recycling, Inc........................... August 1998 New Jersey
Allegro Carting and Recycling, Inc................ August 1998 New York
Mediwaste Disposal Services LLC................... July 1998 Texas
Superior of Wisconsin, Inc........................ July 1998 Wisconsin
Arizona Hazardous Waste Disposal.................. July 1998 Arizona
Controlled Medical Disposal, Inc.................. June 1998 New Jersey
Arizona Hazardous Waste Disposal.................. June 1998 Arizona
Medisin, Inc...................................... April 1998 Kentucky and Ohio
Bridgeview, Inc................................... March 1998 Pennsylvania
Browning-Ferris Industries, Inc................... December 1997 Arizona
Phoenix Services, Inc............................. November 1997 Maryland
Cal-Va, Inc....................................... November 1997 Virginia and Washington, D.C.
Envirotech Enterprises, Inc....................... August 1997 Arizona
Rumpke Container Service, Inc..................... July 1997 Ohio
Regional Carting, Inc............................. July 1997 New Jersey
Waste Management, Inc............................. June 1997 Wisconsin
Environmental Control Co., Inc.................... May 1997 Connecticut, New Jersey and New York
Waste Management, Inc............................. December 1996 Arizona, Colorado, Indiana,
Kentucky, Maryland,
North Carolina, Ohio,
Pennsylvania, South Carolina,
Tennessee, Utah, Washington
and Washington, D.C.
Doctors Environmental Control, Inc................ May 1996 California
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WMI Medical Services of New England............... February 1996 New Hampshire, Massachusetts and
Maine
Bio-Med of Oregon, Inc............................ January 1996 Oregon
Safetech Health Care.............................. June 1995 California
Safe Way Disposal Systems, Inc.................... September 1994 Connecticut and New York
Recovery Corporation of America................... March 1994 Illinois, Indiana and Michigan
Therm-Tec Destruction Service of
Oregon, Inc.................................... August 1993 Oregon
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 33 treatment/collection
facilities located in 23 states and Puerto Rico that service over 237,000
customers, consisting of over 232,800 small account customers and over 4,200
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 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 the 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 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 and patented 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 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.
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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 Steri-Tub(R) plastic 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, 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 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, most well-established sales
force in the medical waste industry, with over 220 sales and marketing
personnel. 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 customers. We believe
that we have been particularly effective at attracting new small account
customers through our innovative "flex-rep" program in which part-time field
sales representatives work in tandem with telemarketers. We believe that the
combination of the two allows us in a cost-effective fashion to sell
"face-to-face" to potential small account customers and is more effective at
converting sales leads into customers than telemarketing alone.
Our more than 900 drivers also 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 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
telemarketers use our proprietary database to identify and qualify these small
account customers and arrange appointments for our trained "flex-reps." We
believe that our telemarketing program provides a cost-effective way to reach
the numerous but scattered small account customers.
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We have a "mail-back" service through which we can reach small account
customers located in outlying areas that would be inefficient to serve using our
regular route structure. In addition, we have introduced a medical waste
management and compliance program specifically targeted to small account
customers who are required to comply with the OSHA bloodborne pathogens
regulations but who lack the internal personnel and systems to do so.
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 4,200 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 have several
strategic alliances to supplement our marketing and sales efforts to large
account customers.
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 focus on national
accounts (as the BFI medical waste business had done successfully).
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 or quarterly 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 ("CAVO"), to assist in exploring opportunities for
the commercialization of our medical waste management technology in
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South America. This relationship was expanded in July 1998, when we entered into
an agreement for an exclusive license 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 February 1998, we announced the formation of Medam S.A. de C.V.
("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 150-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 ownership interest
in the joint venture from 24.5% to 49%.
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.
TREATMENT TECHNOLOGIES
We primarily use three treatment technologies for treating regulated
medical waste: autoclaving, incineration and our proprietary ETD technology. The
approximate percentages of medical waste, by volume, that we treated in 1999, by
type of treatment technology used, were as follows:
- autoclaving, 65 - 70%
- incineration, 15 - 20%, and
- our proprietary ETD technology, 10%
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. However,
incineration has come under criticism from the public and from federal, state
and local regulators because of the air emissions which need to be controlled.
Air 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. As a result, it is expensive
to permit and construct new incineration facilities.
ETD TREATMENT PROCESS. Electro-thermal deactivation ("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(degree)C. Although ETD is effective in destroying pathogens present in
anatomical waste, we do not currently treat anatomical waste using the ETD
process.
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We believe that ETD offers advantages over 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.
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 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.
Department of Transportation 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 the Medical Waste Tracking Act of
1988 ("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
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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. Under the MWTA, the EPA was supposed to deliver three reports to
Congress on different aspects of medical waste management and the success of the
demonstration program for tracking medical waste. Two of these reports were
completed; the third report has not yet been issued. The third report is
expected to cover the use of alternative medical waste treatment technologies,
including our ETD technology. It is possible that this third report will contain
findings or make recommendations that are unfavorable to our business and
technology.
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." The EPA estimates 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 12 incinerators. Because our facilities are modern and well
maintained, we believe that our capital expenditures required to bring our
incinerators into compliance with these new regulations will be only
approximately $4.0 million. 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 have a material adverse effect on us to
the extent that we incur increased costs 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.
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
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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 ("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. Department of Transportation ("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.
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 ("CERCLA") established a regulatory and remedial program to provide for
the investigation and cleanup of facilities that have released or
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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.
In recent years, a number of communities have instituted "flow control"
requirements, which require that waste collected within a particular area be
deposited at a designated facility. In May 1994, the U.S. Supreme Court ruled
that a flow control ordinance was inconsistent with the Commerce Clause of the
Constitution of the United States. A number of lower federal courts have struck
down similar measures. The U.S. Congress may consider legislation that would at
least partially overturn these court decisions.
Similarly, the U.S. Supreme Court has consistently held that state and
local measures that seek to restrict the importation of waste into the
particular jurisdiction, or to tax imported waste at a higher rate, are
unconstitutional. To date, congressional efforts to enable states to impose
differential taxes on out-of-state waste or restrict waste importation have been
unsuccessful.
In the absence of federal legislation, various local laws that direct
waste to designated facilities, or limit or tax the interstate movement of
waste, may continue to be invalidated by the courts. If the U.S. Congress adopts
legislation allowing for specific types of flow control or authorizing
restrictions on the importation of waste, or if valid legislation affecting
interstate transportation of waste is adopted at the federal or state level, our
business could be adversely affected. In addition, it is possible that
municipalities will pass ordinances which effectively block or discourage us
from locating a treatment or transfer facility within their limits.
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
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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.
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 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."
Subsequent to the issuance of our original license for our Woonsocket,
Rhode Island treatment facility, the State of Rhode Island enacted legislation
that required us to obtain an additional license for our medical waste
management operations. We applied for but have not yet received this additional
license. Until regulatory action is taken on this additional license, we are
being permitted to continue to operate under our current license. Denial of this
additional license could result in us being required to cease our operations in
Rhode Island, which could have a material adverse effect on our business.
Our ETD treatment technology has not been approved in all states. We have
received permits or been granted legislative approval to operate our ETD
treatment technology in 15 states, with additional applications pending. We
cannot be sure, however, that our treatment technology will be approved for the
treatment of medical waste in each state or other jurisdiction in which we may
want to use it. In these circumstances, our inability to obtain regulatory
approval could have a material adverse effect on our business.
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
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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 through our joint venture, Medam,
which collects medical waste and transports it for treatment to a new facility
close to Mexico City. Medical waste is regulated in Mexico as a category of
waste distinct from solid or "municipal" waste. Mexican regulations have
established collection schedules that are specific to the type and size of
generator. The Secretariat of the Environment, Natural Resources and Fisheries
is responsible for the enforcement of Mexico's medical waste law. We believe
that our joint venture operations in Mexico are in compliance with all
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, 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
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some foreign countries.
We hold nine 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 Russia, Hungary, Canada, Mexico and Australia. We also hold one
United States patent for our reusable container, which is used under the
registered trademark Steri-Tub(R).
In November 1995, we entered into a cross-license agreement with IIT
Research Institute ("IITRI"). Under this agreement, IITRI granted us an
exclusive royalty-free license in North America, portions of Europe (including
all 15 member countries of the European Union), Japan and other industrialized
countries throughout the world to use and commercialize various patent rights
and know-how held by IITRI relating to the use of radio-frequency technology in
the treatment of medical waste, and we granted to IITRI a royalty-free exclusive
license in the remaining countries of the world to use and commercialize
specified corresponding patent rights and know-how held by us. The agreement
continues until the expiration of the last-to-expire of any of the subject
patents held by either IITRI or us.
The term of the first-to-end of our existing United States patents
relating to our ETD treatment process will end in October 2009 at the earliest
or in September 2010 at the latest, and the term of the last-to-end of these
patents will end in January 2015.
In addition, we own additional technology relating to the processing of
medical waste and other health care waste that we believe is patentable. We are
evaluating the technology to determine whether to file for patent protection on
it.
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, that our patents will not be challenged by other parties, or that
the existing or future patents of other parties will not have an adverse effect
on our ability to carry out our business. In addition, there can be no assurance
that other companies will not independently 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 development of our 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. In addition, to determine the priority of inventions or
patent applications we may have to participate in proceedings before the U.S.
Patent and Trademark Office or in proceedings before foreign agencies, any of
which could result in substantial costs to us and distraction of our management.
We own federal registrations of the trademarks "Steri-Fuel(R),"
"Steri-Plastic(R)," "Steri-Tub(R)," and "Steri-Cement(R)," the service mark
Stericycle(R) and a service mark consisting of six green disks that we use in
the United States. 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 trademark, service mark or trade name of us could
result in the loss of any goodwill associated with that trademark, service mark
or trade name and could entail significant expense.
We also rely on unpatented and unregistered trade secrets, trademarks,
proprietary know-how and
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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.
EMPLOYEES
As of December 31, 1999, we had 2,199 full-time and 86 part-time
employees (including 168 full-time and six part-employees of our majority-owned
subsidiary, 3CI Complete Compliance Corporation ("3CI")). Approximately 37 of
our drivers and transportation helpers at our New York City and Montreal
facilities are covered by collective bargaining agreements with the
International Brotherhood of Teamsters. Our production and maintenance employees
at our Morton, Washington facility were previously represented by the Teamsters
but voted in April 1998 to decertify the union. Approximately 88 former
employees of the BFI medical waste business who are now our employees are
covered by a total of 16 collective bargaining agreements with local Teamster
unions. These agreements expire at various dates from April 2000 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, and
- 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 $26.0 million of liability insurance (including umbrella
coverage), and under a separate policy, $10.0 million of aggregate pollution and
legal liability insurance ($5.0 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.
ITEM 2. FACILITIES
We lease office space for our corporate offices in Lake Forest, Illinois.
We own or lease three ETD treatment facilities, 10 incineration facilities, 15
autoclave facilities and five facilities that use a combination of these methods
or other methods (including two facilities owned or leased by 3CI). We also
operate one ETD treatment facility through Medam, our Mexican joint venture
company. All of our treatment facilities also serve as collection sites. We own
or lease 87 additional transfer and collection sites (including six sites owned
or leased by 3CI).
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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.
ITEM 3. LEGAL 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. From time to time, we may consider it more cost-effective to
settle proceedings than to become involved in costly and time-consuming
administrative actions or litigation. 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.
In April 1997, a worker at our Morton, Washington treatment facility was
diagnosed with active tuberculosis. Testing revealed two additional cases of
active tuberculosis and 15 additional workers who tested positive for exposure
to tuberculosis. Officials of the Washington Departments of Health and of Labor
and Industries concluded that workers were probably exposed to tuberculosis
bacteria from the medical waste being processed at the Morton facility. We
believe that the actual source of exposure has not been determined. However, we
have complied with the recommendations of all regulatory authorities to outfit
the facility's workers with personal protective equipment. In addition, we have
complied with governmental recommendations to modify equipment at the Morton
facility. We are also taking these actions, as applicable, at our other
treatment facilities. The safety measures being taken include those recommended
by the National Institute for Occupational Safety and Health in a report issued
in December 1998. While future claims are possible, to date we have not been
subject to any civil proceedings by the affected employees as a result of this
incident, which the Washington Department of Labor and Industries has determined
is covered by the state workers' compensation program.
In 1998, BFI filed a plea agreement with the U.S. Department of Justice
regarding possible violations of the Clean Water Act by its Washington, D.C.
treatment facility. The possible violations arose from the wastewater treatment
system used to contain and treat all wastewater produced by the facility. BFI
pleaded guilty to three violations under the Clean Water Act and agreed to pay
$1,500,000 in fines and make a $100,000 community service contribution. These
obligations have been satisfied. The facility was closed in 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 1999 Annual Meeting of Stockholders on October 15, 1999.
Holders of 13,462,068
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shares were represented in person or by proxing at the meeting. At the meeting,
all of our incumbent directors were reelected to serve as directors until our
Annual Meeting of Stockholders in 2000. The seven directors who were reelected
and the votes that they received are as follows:
DIRECTOR VOTES FOR VOTES AGAINST
Jack W. Schuler 13,273,612 188,456
Mark C. Miller 13,273,212 188,856
Rod F. Dammeyer 13,271,712 190,356
Patrick F. Graham 13,274,612 187,456
John Patience 12,669,478 792,590
Peter Vardy 13,273,712 188,356
L. John Wilkerson, Ph.D. 13,273,712 188,356
At the Annual Meeting, our stockholders also approved proposals (1) to
amend our certificate of incorporation to authorize and create a class of
preferred stock and (2) to authorize us to issue and sell, for $75.0 million in
cash, less certain fees and expenses, 75,000 shares of newly-created Series A
Convertible Preferred Stock. Both proposals were submitted to the stockholders
in connection with obtaining the financing required to complete the BFI
acquisition. See Item 1, "Business -- Acquisitions -- BFI Acquisition." The
first proposal received 9,420,604 votes for and 1,496,293 votes against, with
28,413 abstentions and 2,516,758 broker non-votes; and the second proposal
received 10,187,736 votes for and 730,339 votes against, with 27,235 abstentions
and 2,516,758 broker non-votes.
In addition, our stockholders ratified the appointment of Ernst & Young
LLP as our independent public accountants for the year ending December 31, 1999.
There were 13,417,989 votes for and 25,289 votes against, with 18,790
abstentions.
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SUPPLEMENTAL INFORMATION
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table contains certain information regarding our four current
executive officers:
NAME POSITION AGE
Mark C. Miller President, Chief Executive Officer and a Director 44
Richard T. Kogler Chief Operating Officer 40
Anthony J. Tomasello Executive Vice President and Chief Technical Officer 53
Frank J.M. ten Brink Vice President, Finance and Chief Financial Officer 43
Mark C. Miller has served as 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
AmericasDoctor.com (formerly Affiliated Research Centers, Inc.), an Internet
health care company that provides product development and promotion services to
pharmaceutical companies, and is a director of 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.
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.
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.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is quoted on the Nasdaq National Market under the symbol
"SRCL." On March [date], 2000, we had approximately 5,600 stockholders of
record.
The following tables provides high and low sales prices of our Common
Stock for each calendar quarter during our two most recent fiscal years:
QUARTER HIGH LOW
First quarter 1998....................... 16.500 12.250
Second quarter 1998...................... 17.250 11.125
Third quarter 1998....................... 19.750 13.500
Fourth quarter 1998...................... 21.000 13.625
First quarter 1999....................... 18.000 11.438
Second quarter 1999...................... 15.500 9.500
Third quarter 1999....................... 16.313 11.875
Fourth quarter 1999...................... 19.750 14.375
We did not pay any dividends during 1999 and have never paid any
dividends on our capital stock. We currently expect that we will retain future
earnings for use in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future. We are
prohibited from paying cash dividends under the terms of our senior credit
facility and the indenture pursuant to which we issued our 12-3/8% Senior
Subordinated Notes due 2009, and under an agreement in connection with the
industrial developments bonds issued to finance our treatment facility at
Woonsocket, Rhode Island. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In November 1999, we issued and sold 75,000 unregistered shares of Series
A Convertible Preferred Stock to certain investment funds associated with Bain
Capital, Inc. and Madison Dearborn Partners LLC 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
acquisition of the medical waste business of Browning-Ferris Industries, Inc.
from Allied Waste Industries, Inc. Our issuance and sale of the shares of Series
A Convertible Preferred Stock was exempt from the registration requirements of
the Securities Act under Section 4(2) of the Act and Rule 506 of Regulation D.
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 shares into shares of
our Common Stock. The price at which a holder may convert is $17.50 per share,
subject to adjustment. We reported the issuance and sale of the Series A
Convertible Preferred Stock on Current Reports on Form 8-K that we filed on
August 20, October 15 and November 29, 1999.
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ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997 1998 1999
STATEMENTS OF OPERATIONS DATA(1)
Revenues.................................... $ 21,339 $ 24,542 $ 46,166 $ 66,681 $ 132,848
Income (loss) from operations(2)............ (4,276) (2,437) 1,386 6,424 12,284
Net income (loss)(3)........................ (4,544) (2,389) 1,430 5,713 13,968
Net income (loss) applicable to common stock(3) (4,544) (2,389) 1,430 5,713 13,628
Diluted net income (loss) per share of common
stock(4)(5)................................. (0.81) (0.32) 0.13 0.51 0.92
Depreciation and amortization............... 1,916 2,064 3,078 4,064 9,879
EBITDA(6)................................... $ (2,360) $ (373) $ 4,464 $ 10,489 $ 30,689
BALANCE SHEET DATA (at December 31)(1)
Cash, cash equivalents and short-term
investments................................. $ 138 $ 17,749 $ 7,709 $ 1,819 $ 19,629
Total assets................................ 23,491 55,155 61,226 97,755 595,786
Long-term debt, net of current maturities 5,622 4,591 3,475 23,460 355,444
Convertible redeemable preferred stock...... -- -- -- -- 69,195
Shareholders' equity........................ $ 12,574 $ 40,014 $ 45,026 $ 53,651 $ 118,114
(1) See Note 5 to the Consolidated Financial Statements for information
concerning our acquisitions during the three years ended December 31,
1999.
(2) Includes $7,961,000 of acquisition related charges in 1999.
(3) Includes $6,257,000 of tax benefit in 1999 related to recognition of
deferred tax asset principally related to unused net operating losses.
(4) See Note 9 to the Consolidated Financial Statements for information
concerning the computation of net income (loss) per common share.
(5) Diluted net income per share of common stock for 1999 includes the
effects of the acquisition related charges and tax benefit referred to in
Notes (2) and (3), respectively. Without these items, diluted net income
per share of common stock for 1999 would have been $0.82.
(6) EBITDA for any period is calculated as the sum of net income, plus
interest expense, income tax expense, depreciation expense, amortization
expense and, in 1999, acquisition related charges, to the extent deducted
in calculating net income. 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, is not a measurement required by generally
accepted accounting principles and does not represent cash flow from
operations as defined by generally accepted accounting principles. 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes in Item 8 of this Report.
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 $1,563,000 in 1991 to $132,848,000 in
1999. 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 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 December 31, 1999, we served
over 237,000 customers.
We currently expense as incurred all permitting, design and start-up
costs associated with our facilities. We elect to expense rather than to
capitalize the costs of obtaining permits and approvals for each proposed
facility regardless of whether we are ultimately successful in obtaining the
desired permits and approvals and developing the facility. We currently
recognize as a current expense all legal fees and other costs related to
obtaining and maintaining permits and approvals. In addition, we currently
expense all costs related to research and development as incurred.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following summarizes (in thousands) our operations:
Year Ended December 31,
---------------------------------------------
1999 1998
--------------------- ---------------------
Revenues........................................... $ 132,848 100.0% $ 66,681 100.0%
Cost of revenues.................................. 86,123 64.8% 45,328 68.0%
----------- -----------
Gross profit....................................... 46,725 35.2 21,353 32.0%
Selling, general and administrative expenses....... 26,480 19.9% 14,929 22.4%
Income from operations before acquisition
related costs.................................... 20,245 15.2% 6,424 9.6%
Acquisition related costs.......................... 7,961 6.0% -- --
----------- -----------
Income from operations............................. 12,284 9.2% 6,424 9.6%
Net income......................................... 13,968 10.5% 5,713 8.6%
Depreciation and amortization...................... 9,879 7.4% 4,064 6.1%
EBITDA before acquisition related costs*........... $ 30,689 23.1% $ 10,489 15.7%
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*EBITDA before acquisition related costs is calculated as the sum of net
income, plus net interest expense, income tax expense, depreciation
expense, amortization expense, and acquisition related costs, to the
extent deducted in calculating net income. See Item 6, Note (6).
Revenues. Our revenues increased $66,167,000, or 99.2%, to $132,848,000
during the year ended December 31, 1999 from $66,681,000 during the year ended
December 31,1998 as we completed the acquisition of the medical waste business
of Browning-Ferris Industries, Inc. (the "BFI acquisition") from Allied Waste
Industries, Inc., 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 $5,862,000 during 1999 as compared to $5,952,000
during 1998. During 1999, acquisitions contributed approximately $61,479,000 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 $40,795,000, or 90.0%,
to $86,123,000 during the year ended December 31, 1999, from $45,328,000 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% during 1998,
as a result of the further 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 $26,480,000 during the year ended December
31, 1999, from $14,929,000 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 revenue
decreased to 19.9% during 1999 from 22.4% during 1998. Excluding amortization,
selling, general and administrative expenses as a percentage 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 $7,961,000 related to
the BFI acquisition. 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 $1,586,000 in integration and
transition-related expenses during 2000.
EBITDA. Earnings before interest, income taxes, depreciation and
amortization ("EBITDA") before acquisition related charges increased by 192.6%
to $30,689,000, or 23.1% of revenues for the year ended December 31, 1999 as
compared to $10,489,000, or 15.7% of revenues, for the year ended December 31,
1998. This increase in EBITDA was primarily due to the factors described above.
Interest expense and interest income. Interest expense increased to
$6,195,000 during the year ended December 31, 1999, from $777,000 during the
year ended December 31, 1998, primarily due to increased borrowings for the BFI
acquisition. Interest income also increased to $1,144,000 during 1999 from
$713,000 during 1998, primarily due to interest income on the investment of
excess funds from the secondary offering of commons stock that we completed in
February 1999.
Other Income and Expense. During the year ended December 31, 1999, a
one-time gain of $756,000 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
$192,000 for warrants issued with bridge loan borrowings in December 1998 and
January 1999.
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Income tax expense. Income tax expense for the year ended December 31,
1999 reflects a one time tax benefit of $6,257,00 recorded in compliance with
FASB 109. Under FASB 109, we are required to recognize our net deferred assets
if we believe that we are more likely than not to benefit from our carryforward
losses and tax credits in future years.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following summarizes (in thousands) our operations:
Year Ended December 31,
---------------------------------------------
1998 1997
--------------------- ---------------------
Revenues........................................... $ 66,681 100.0% $ 46,166 100.0%
Cost of revenues................................... 45,328 68.0% 34,109 73.9%
----------- -----------
Gross profit....................................... 21,353 32.0% 12,057 26.1%
Selling, general and administrative expenses....... 14,929 22.4% 10,671 23.1%
Income from operations............................. 6,424 9.6% 1,386 3.0%
Net income......................................... 5,713 8.6% 1,430 3.1%
Depreciation and amortization...................... 4,064 6.1% 3,078 6.7%
EBITDA*............................................ $ 10,489 15.7% $ 4,464 9.7%
*EBITDA is calculated 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. See Item 6,
Note (6).
Revenues. Our revenues increased $20,515,000, or 44.4%, to $66,681,000
during the year ended December 31, 1998 from $46,166,000 during the year ended
December 31, 1997 as we continued to focus on sales to higher-margin small
account customers while simultaneously paring certain lower-margin large account
customers. The increase also reflects $5,952,000 in revenues from the sale of
equipment to a Brazilian company, Companhia Auxiliar de Viacao e Obras ("CAVO"),
and to a Mexican joint venture, Medam S.A. de C.V. ("Medam"), that we and others
formed for the collection, treatment and disposal of regulated medical waste in
the Mexico City metropolitan market utilizing the our ETD treatment technology.
During 1998, acquisitions contributed approximately $13,103,000 to the increase
in our revenues from 1997. For 1998, internal growth from small account
customers increased 14.8% while revenues from large account customers decreased
by 7.2%.
Cost of revenues. Our cost of revenues increased $11,219,000, or 32.9%,
to $45,328,000 during the year ended December 31, 1998, from $34,109,000 during
the year ended December 31, 1997. The increase was primarily due to the
substantial increase in revenues during 1998 compared to 1997 and to the cost of
equipment supplied to CAVO and Medam. Our gross margin percentage increased to
32.0% during 1998 from 26.1% during 1997 as a result of the sale of equipment
internationally, further integration of new acquisitions into our existing
infrastructure, lower costs relating to the changing mix of small account and
large account customers and increased utilization of existing treatment
capacity.
Selling, general and administrative expenses. Our selling, general and
administrative expenses increased to $14,929,000 during the year ended December
31, 1998, from $10,671,000 during the year ended December 31,1997, due to our
continued progress in strengthening our sales and administrative organizations
and to the increase in the amortization of goodwill associated with
acquisitions. Selling, general and administrative expenses as a percentage of
revenues decreased to 22.4% during 1998 from 23.1% during 1997. Excluding
amortization, selling, general and administrative expenses as a percentage of
revenue decreased to 20.1% during 1998 from 20.9% during 1997.
EBITDA. EBITDA increased by 135.0.% to $10,489,000, or 15.7% of revenues,
for the year ended December 31, 1998 as compared to $4,464,000, or 9.7% of
revenues, for the year ended December 31, 1997. This increase in EBITDA was
primarily due to the factors described above.
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Interest expense and interest income. Interest expense increased to
$777,000 during the year ended December 31, 1998, from $428,000 during the year
ended December 31, 1997, primarily due to borrowings on our revolving line of
credit offset by the repayment of certain debt issued in connection with one of
our acquisitions. Interest income also increased to $713,000 during 1998 from
$618,000 during 1997, primarily due to interest income on the subordinated debt
of Med-Tech Environmental Ltd. that acquired in October, 1998 offset by lower
cash balances.
Income tax expense. The estimated effective tax rate of approximately
10.2% for the year ended December 31, 1998 reflects the utilization of our net
operating losses for income tax purposes offset by alternative minimum tax and
state income taxes in states where we have no offsetting net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, our working capital was $26,858,000 compared to
working capital of $1,166,000 at December 31, 1998. The increase in working
capital was primarily due to higher cash and accounts receivable balances as a
result of the BFI acquisition.
Net cash provided by operating activities was $11,777,000 during the year
ended December 31, 1999 compared to $4,862,000 for the year ended December 31,
1998. This increase primarily reflects higher net income and depreciation and
amortization expense, offset by changes in working capital.
Net cash used in investing activities for the year ended December 31,
1999 was $425,628,000 compared to $23,753,000 for the year ended December
31,1998. This change is primarily attributable to the increase in cash used for
funding acquisitions and international investments completed in 1999. Capital
expenditures were $3,795,000 for 1999 compared to $4,342,000 for 1998. Payments
for acquisitions and international investments amounted to $422,280,000 during
1999 primarily related to the BFI acquisition which we completed in November
1999.
In order to finance the BFI acquisition, we conducted a series of
financings. 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 will experience a corresponding
large increase in our amortization expense.
We have a credit agreement with a group of lenders that provides for an
aggregate of up to $275 million in senior secured financing comprised of (i) a
six-year term loan A amortizing facility of $75 million, (ii) a seven-year term
loan B amortizing facility of $150 million, and (iii) a $50 million revolving
loan facility. As of December 31, 1999 we had not drawn on the revolving loan
facility.
In addition, we issued 12-3/8% Series A Senior Subordinated Notes due
2009 in the aggregate principal amount of $125 million to Donaldson, Lufkin &
Jenrette Securities Corporation, Bear, Stearns & Co., Inc. Credit Suisse First
Boston Corporation and Warburg Dillon Read LLC.
Pursuant to a Series A Convertible Preferred Stock Purchase Agreement, on
November 12, 1999 we issued and sold to investment funds associated with Bain
Capital, Inc. and Madison Dearborn Partners LLC, a total of 75,000 shares of
our convertible preferred stock for $1,000 per share, or an aggregate of $75
million, in cash, less fees of $6.1 million. Dividends on the convertible
preferred stock are payable in kind in additional shares and accrue at the
annual rate of 3.375%, subject to adjustment.
Net cash provided by financing activities was $431,912,000 during the
year ended December 31, 1999 compared to $14,800,000 for the year ended December
31,1998. The difference between the two years results primarily from the
completion of the financings previously described and of our second public
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offering of common stock in February 1999, in which raised $47,158,000 net of
offering costs.
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 $1,145,000 as of December 31, 1999 at fixed interest rates
ranging from 6.3% 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 and 1998, consisting primarily of a 10-year note issued
as a part of the Environmental Control Corporation, Inc. acquisition, which has
an outstanding balance of $1,840,000 at December 31, 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 our consolidated balance sheet 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 our consolidated statement of earnings. This statement will be
effective for us beginning January 1, 2001. The adoption of SFAS No. 133 is not
expected to have a material impact on us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk includes the possibility of rising interest
rates in connection with our senior credit facility, thereby increasing our debt
service obligations, which could adverse affect our cash flows. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Stericycle, Inc.
We have audited the accompanying consolidated balance sheets of
Stericycle, Inc. and Subsidiaries as of December 31, 1998 and 1999, 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,
1999. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). 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, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, 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
March 17, 2000
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STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
DECEMBER 31,
1998 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 1,283 $ 19,344
Short-term investments............................................ 536 285
Accounts receivable, less allowance for doubtful
accounts of $901 in 1998 and $980 in 1999....................... 16,582 48,284
Parts and supplies................................................ 1,291 2,035
Prepaid expenses.................................................. 1,283 863
Other............................................................. 835 6,729
------------- -------------
Total current assets............................................ 21,810 77,540
------------- -------------
Property, plant and equipment:
Land.............................................................. 680 7,308
Buildings and improvements........................................ 10,514 29,123
Machinery and equipment........................................... 18,924 50,011
Office equipment and furniture.................................... 1,425 5,182
Construction in progress.......................................... 1,007 386
------------- -------------
32,550 92,010
Less accumulated depreciation..................................... (9,450) (16,898)
------------- -------------
Property, plant and equipment, net.............................. 23,100 75,112
Other assets:
Goodwill, less accumulated amortization of $3,551
in 1998 and $7,974 in 1999...................................... 49,112 421,001
Other............................................................. 3,733 22,133
------------- -------------
Total other assets.............................................. 52,845 443,134
------------- -------------
Total assets.................................................. $ 97,755 $ 595,786
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt................................. $ 5,499 $ 5,741
Accounts payable.................................................. 6,502 14,347
Due to sellers.................................................... -- 3,576
Accrued compensation.............................................. -- 7,569
Accrued acquisition - related expenses............................ -- 7,101
Accrued liabilities............................................... 6,465 12,206
Deferred revenue.................................................. 2,178 142
------------- -------------
Total current liabilities....................................... 20,644 50,682
------------- -------------
Long-term debt, net of current portion............................... 23,460 355,444
Other liabilities.................................................... -- 2,351
Redeemable preferred stock:
Series A convertible preferred stock (par value $.01 per share,
75,000 shares authorized and outstanding in 1999, liquidation
preference of $80,625 at December 31, 1999)........................ -- 69,195
Shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares authorized,
10,865,862 issued and outstanding
in 1998, 14,665,106 issued and outstanding in 1999)............. 109 147
Additional paid-in capital-common stock........................... 85,894 136,691
Accumulated deficit............................................... (32,352) (18,724)
------------- -------------
Total shareholders' equity...................................... 53,651 118,114
------------- -------------
Total liabilities and shareholders' equity........................... $ 97,755 $ 595,786
============= =============
The accompanying notes are an integral part of these financial statements.
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STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
1997 1998 1999
------------- ------------- -------------
Revenues............................................... $ 46,166 $ 66,681 $ 132,848
Costs and expenses:
Cost of revenues.................................... 34,109 45,328 86,123
Selling, general and administrative................. 10,671 14,929 26,480
Acquisition related costs........................... -- -- 7,961
------------- ------------- -------------
Total costs and expenses.......................... 44,780 60,257 120,564
------------- ------------- -------------
Income from operations................................. 1,386 6,424 12,284
Other income (expense):
Interest income..................................... 618 713 1,144
Interest expense.................................... (428) (777) (6,195)
Other income, net................................... -- 1 565
------------- ------------- -------------
Total other income (expense)...................... 190 (63) (4,486)
------------- ------------- -------------
Income before income taxes............................. 1,576 6,361 7,798
Income tax expense (benefit)........................... 146 648 (6,170)
------------- ------------- -------------
Net income............................................. $ 1,430 $ 5,713 $ 13,968
============= ============= =============
Earnings per share -- Basic............................ $ 0.14 $ 0.54 $ 0.96
============= ============= =============
Earnings per share -- Diluted.......................... $ 0.13 $ 0.51 $ 0.92
============= ============= =============
Weighted average number of common
shares outstanding -- Basic......................... 10,239,996 10,647,083 14,240,084
============= ============= =============
Weighted average number of common
shares outstanding -- Diluted....................... 10,766,116 11,263,528 15,241,778
============= ========== =============
The accompanying notes are an integral part of these financial statements.
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STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
1997 1998 1999
------------- ------------- -------------
OPERATING ACTIVITIES:
Net income ................................................ $ 1,430 $ 5,713 $ 13,968
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Issuance of warrants.................................. -- -- 192
Depreciation and amortization......................... 3,078 4,064 9,879
Deferred income taxes................................. -- -- (7,119)
Change in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable................................... (4,123) (1,884) (31,595)
Parts and supplies.................................... (300) (420) 526
Prepaid expenses...................................... (14) 58 320
Other assets.......................................... 98 302 (1,759)
Accounts payable...................................... (413) 1,781 7,845
Due to Allied Waste Industries, Inc................... -- -- 3,576
Accrued liabilities................................... 559 (6,223) 17,980
Deferred revenue...................................... (415) 1,471 (2,036)
------------- ------------- -------------
Net cash provided by (used in) operating activities........ (100) 4,862 11,777
------------- ------------- -------------
INVESTING ACTIVITIES:
Payments for acquisitions and international
investments, net of cash acquired.................. (5,552) (19,775) (422,280)
Proceeds from sale of property........................ -- 405 --
Proceeds from maturity of short-term
investments......................................... 5,799 -- 447
Purchases of short-term investments................... (2,335) (41) --
Capital expenditures.................................. (1,235) (4,342) (3,795)
------------- ------------- -------------
Net cash used in investing activities...................... (3,323) (23,753) (425,628)
FINANCING ACTIVITIES:
Net proceeds from (payments on) bank lines of credit.. -- 16,386 (16,359)
Net proceeds from (payments on) 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........................... (2,905) (3,189) (4,366)
Payments of deferred financing costs.................. -- (218) (10,828)
Principal payments on capital lease obligations....... (305) (1,273) (290)
Net proceeds from secondary public offering
of common stock..................................... -- -- 47,158
Net proceeds from issuance of preferred stock......... -- -- 68,855
Proceeds from other issuances of common stock......... 57 344 492
------------- ------------- -------------
Net cash provided by (used in) financing activities........ (3,153) 14,800 431,912
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents....... (6,576) (4,091) 18,061
Cash and cash equivalents at beginning of year............. 11,950 5,374 1,283
------------- ------------- -------------
Cash and cash equivalents at end of year................... $ 5,374 $ 1,283 $ 19,344
============= ============= =============
Non-cash activities:
Net issuances of notes payable for certain
acquisitions........................................ $ 1,120 $ 195 $ 103
Net issuances of common stock for certain
acquisitions........................................ $ 3,525 $ 2,568 $ 3,043
The accompanying notes are an integral part of these financial statements.
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STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
NOTES
RECEIVABLE
FOR TOTAL
ISSUED AND ADDITIONAL COMMON SHARE-
OUTSTANDING PAID-IN STOCK ACCUMULATED HOLDERS
SHARES PAR VALUE CAPITAL PURCHASES DEFICIT EQUITY
BALANCES AT DECEMBER 31, 1996....... 10,000 $ 100 $79,409 $ (4) $(39,491) $40,014
Issuance of common stock for
exercise of options and warrants
and employee stock purchases........ 70 1 56 57
Common stock issued for
acquisitions........................ 403 4 3,521 3,525
Net income.......................... 1,430 1,430
------ ------- ------- ------- -------- -------
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 com-
mon 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
====== ====== ======= ====== ======== =======
The accompanying notes are an integral part of these financial statements.
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STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 medical waste collection, transportation and treatment
services to hospitals, health care providers and other small quantity generators
in North America. We are also expanding into international markets through joint
ventures and by licensing our proprietary technology and selling associated
equipment.
NOTE 2 -- SUMMARY OR SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Our consolidated financial statements include the accounts of Stericycle,
Inc. and its wholly-owned subsidiaries, Stericycle of Arkansas, Inc., Stericycle
of Washington, SWD Acquisition Corporation, Environmental Control Co., Inc.
("ECCO"), Waste Systems, Inc. ("WSI") (the majority shareholder of 3CI Complete
Compliance Corporation), 507375 N.B. Ltd., Med-Tech Environmental Ltd.
("Med-Tech"), BFI Medical Waste, Inc. ("BFI"), BFI Medical Waste of Connecticut,
Inc., BFI Medical Waste, Inc. (Puerto Rico). All significant intercompany
accounts and transactions have been eliminated. In addition, we have a 49%
ownership in Medam (a Mexico company) and a 33% ownership in Medam B.A. Srl (an
Argentine company) which are both accounted for using the equity method.
Revenue Recognition
We recognize revenue when the treatment of the regulated medical waste is
completed on-site or when the waste is shipped off-site for processing and
disposal. For waste shipped off-site, all associated costs are recognized at
time of shipment. 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 improvement -- 10 to 30 years
Machinery and equipment-- 3 to 10 years
Office equipment and furniture -- 5 to 10 years
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Goodwill
Goodwill is amortized using straight-line method over 25 years except for
goodwill in connection with our acquisition of the medical waste business of
Browning-Ferris Industries, Inc. (the "BFI acquisition"), which is being
amortized over 40 years. Amortization expense for 1997, 1998 and 1999 related to
goodwill was approximately $1,042,000, $1,505,000 and $4,278,000 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, 1999, 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 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 our 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
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recognized in our consolidated statement of operations. This statement will be
effective for us beginning January 1, 2001. The adoption for SFAS No. 133 is not
expected to have a material impact on us.
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. Our 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 16.
NOTE 3 -- PUBLIC OFFERING
In February 1999, we successfully completed a public offering of
3,500,000 shares of common stock at $14.50 per share. We received total proceeds
from the offering, net of offering costs, of approximately $47,158,000.
NOTE 4 -- INCOME TAXES
At December 31, 1999, we had net operating loss carryforwards for federal
income tax purposes of approximately $24,500,000 (excluding 3CI), 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 $238,000 available indefinitely.
Significant components of our income tax expense (benefit) for the years
ended December 31, 1997, 1998 and 1999 are as follows:
1997 1998 1999
------------- ------------- -------------
Deferred
Federal -- -- $(6,015,000)
State -- -- (1,104,000)
Current
Federal $ 60,000 $ 243,000 $ 100,000
State 86,000 405,000 849,000
----------- ----------- -----------
Total Provisions $ 146,000 $ 648,000 $(6,170,000)
============ =========== ===========
A reconciliation of the income tax provision computed at the federal
statutory rate to the effective tax rate for the years ended December 31, 1997,
1998 and 1999 is as follows:
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1997 1998 1999
------------- ------------- -------------
Federal statutory income tax rate ........................................ 34.0% 34.0% 34.0%
Effect of:
State taxes, net of federal tax effect ............................... 4.4% 4.0% 7.6%
Alternative minimum taxes ............................................ 3.8% 3.8% --
Nondeductible goodwill amortization .................................. 4.5% 1.8% 3.9%
Change in valuation allowance ........................................ (39.1)% (33.4)% (126.9)%
Other................................................................. 1.7% -- 2.3%
------------ ------------ -----------
Effective tax rate ....................................................... 9.3% 10.2% (79.1)%
============ ============ ============
We paid income taxes of $1,030,000 and $2,014,000 in 1998 and 1999,
respectively.
Our deferred tax liabilities and assets as of December 31, 1999 and 1998 are as
follows:
1998 1999
------------- -------------
Deferred tax liabilities:
Capital lease obligations........................ $ (561,000) --
Property, plant, and equipment................... (2,114,000) $ (2,511,000)
Goodwill......................................... (465,000) (4,014000)
Other............................................ (334,000) (201,000)
------------- -------------
Total deferred tax liabilities....................... $ (3,474,000) $ (6,726,000)
Deferred tax assets:
Accrued liabilities.............................. $ 659,000 $ 2,561,000
Other............................................ 1,982,000 1,538,000
Net operating tax loss carryforwards............. 20,174,000 19,095,000
Alternate minimum tax credit carryforward........ 140,000 238,000
------------- -------------
Total deferred tax assets............................ $ 22,955,000 $ 23,432,000
Net deferred tax assets.............................. $ 19,481,000 $ 16,706,000
Valuation allowance.................................. (19,481,000) (9,587,000)
------------- -------------
Net deferred tax assets.............................. $ -- $ 7,119,000
============= =============
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" ("SFAS No. 109), 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, the valuation allowance relates principally to the net
operating loss carryforward at 3CI.
NOTE 5 -- ACQUISITIONS
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 purchase price for our acquisition was $410.5 million
in cash, subject to post-closing adjustments. We paid
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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, Inc. and Madison Dearborn
Partners LLC. These transactions were completed concurrently with the
completion of our acquisition of the BFI medical waste business. See Note 6 --
Long-Term Debt -- Senior Credit Facility and -- Senior Subordinated Notes and
Note 11 -- 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 $8,216,000 of which $6,491,000 was paid in cash, $1,622,000 was
paid by the issuance of unregistered shares of our common stock, and $103,000
was paid by the issuance of promissory notes. In addition, we assumed certain
liabilities of the sellers aggregating approximately $105,000. In certain cases,
the purchase price is subject to downwards adjustment if revenues from customer
contracts acquired do not reach certain specified levels.
In September 1999, we purchased an additional 18.45% in our Mexican joint
venture, increasing our ownership percentage to 49%. The purchase price was
immaterial and was paid by the issuance of shares of our common stock.
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
$3,059,000 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 $3,576,000, paying the face value of the acquired debt, in the
form of $2,920,000 in cash and 36,940 shares of our common stock, and replacing
a letter of credit of approximately $1,641,000 (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 $10,000,000 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 $6,237,000 on or before
March 31, 2000. Upon satisfaction of certain conditions, 3CI may elect to extend
the maturity of this note until September 30, 2000.
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.
During 1997 we acquired customer contracts and certain assets of six
regulated medical waste businesses. The purchase price for these six
acquisitions was paid in the form of cash, issuance of shares of our common
stock, assumption of liabilities, and in three cases, delivery of notes paid in
1997 and 1998. Also in 1997, we acquired all of the outstanding stock of
Environmental Control Co., Inc. ("ECCO"), a medical waste company operating in
the New York City market. We paid $4,200,000 in cash; issued 125,000 shares of
common stock, assumed certain debt on vehicles and issued a $2,300,000 10-year
promissory note for the balance of the purchase price. The note bears interest
at a rate of 6.86% per annum payable in 10 equal annual installments of $230,000
starting in May 1998.
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For financial reporting purposes these acquisition transactions were
accounted for using the purchase method of accounting. The total purchase price
for 1997, 1998 and 1999 of $10,197,000, $22,538,000 and $425,426,000,
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 1997, 1998 and 1999 acquisitions
includes the value of 403,000, 167,000 and 220,058 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, WSI
and ECCO acquisitions.
The following unaudited pro forma results of operations assumes that
the Med Tech, WSI and BFI acquisitions occurred as of January 1, 1998, 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 WSI,
Med Tech and BFI did not reflect these costs:
1998 1999
(in thousands, except per share data)
Pro forma revenues $290,725 $304,386
Pro forma net income 12,360 20,277
Pro forma diluted net income per share $ 0.52 $ 1.07
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 periods indicated or of future results of
operations.
NOTE 6 -- LONG-TERM DEBT
Our long-term debt consists of the following at December 31:
1998 1999
(in thousands)
Industrial development revenue bonds $ 1,093 $ 1,145
Obligations under capital leases 847 6,140
Notes payable to bank 19,412 225,000
Subordinated debt 2,750 --
Senior subordinated debt -- 125,000
Notes payable 4,857 3,900
-------- --------
28,959 361,185
Less: Current portion 5,499 5,741
-------- --------
Total $ 23,460 $355,444
======== ========
In December 1998, we entered into a subordinated loan agreement with a
group of lenders consisting of six of our seven directors (Patrick F. Graham
being the only director not participating) pursuant to which the lenders agreed
to provide us with up to $5,500,000 of short-term financing upon our request.
Under the terms of the subordinated loan agreement, the lenders have been
granted five-year warrants to purchase shares of our Common Stock exercisable at
any time after the first anniversary of the grant date. Upon entering into the
loan agreement, each lender was granted a warrant for a number of shares of
common stock equal to the amount of the lender's loan commitment multiplied by
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41
0.05 and then divided by the closing price of a share of common stock on the
trading day immediately prior to the date of the lender's execution of the loan
agreement. This closing price is also the exercise price of the warrant. In
addition, at the time of each loan, each lender was granted a warrant for a
number of shares of common stock equal to the amount of the loan multiplied by
0.30 and then divided by the closing price of a share of common stock on the
trading day immediately prior to date of disbursement of the lender's loan. This
closing price is also the exercise price of the warrant. 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 59,052
shares of common stock at $16.50 per share. In March 1999, we repaid all of the
loans in cash.
In connection with our May 1997 purchase of ECCO's stock, we issued a
10-year note for $2,300,000 to the sellers. This note is payable in 10 equal
annual installments due on May 1 of each year starting in 1998. The note bears
interest at the rate of 6.86% per annum.
During 1992, we entered into an obligation to finance the development of
our Woonsocket, Rhode Island treatment facility. The development and purchase of
substantially all of the property and equipment for the facility was financed
from the issuance of industrial development revenue bonds. The bonds are due in
various amounts through 2017 at fixed interest rates ranging from 6.3% to 7.375%
and are collateralized by the property and equipment at the facility. The terms
of an agreement entered into in connection with the issuance of the bonds
contain, among other provisions, requirements for maintaining defined levels of
working capital and various financial ratios, including debt to net worth.
Payments due on long-term debt excluding capital lease obligations,
during each of the five years subsequent to December 31, 1999 are as follows:
(in thousands)
2000 ............................................................................$ 4,472
2001 ............................................................................ 8,266
2002 ............................................................................ 11,627
2003 ............................................................................ 18,783
2004 ............................................................................ 20,562
Thereafter ...................................................................... 291,335
The company paid interest of $444,000, $670,000 and $2,202,000 for the
fiscal years ended December 31, 1997, 1998 and 1999, respectively.
Capital Leases
In November 1999, we assumed capital lease obligations in connection with
the BFI acquisition in the amount of $5,785,000. The capital leases have terms
ranging from 30 to 120 months and the final lease will expire in 2008.
At December 31, property under capital leases included with property,
plant and equipment in the accompanying Consolidated Balance Sheet is as
follows:
1999
(in thousands)
Machinery and Equipment................................ $ 416
Vehicles............................................... $ 5,965
Less -- accumulated depreciation and amortization...... 438
-------------
$ 5,943
=============
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Minimum future lease payments under capital leases are as follows:
(in thousands)
2000....................................................................... $ 1,743
2001....................................................................... 1,408
2002....................................................................... 1,228
2003....................................................................... 1,077
2004....................................................................... 860
Thereafter................................................................. 1,427
-------------
Total minimum lease payments............................................... $ 7,743
Less: amounts representing interest....................................... 1,603
-------------
Present value of net minimum lease payments................................ 6,140
Less: Current portion..................................................... 1,269
-------------
Long-term obligations under capital leases................................. $ 4,871
-------------
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 $65.0
million and (iii) a seven-year term loan B in the principal amount of up to
$160.0 million. We 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, 1999, we had not made any draws under the revolving
credit facility.
Repayment. Term loan A matures in quarterly installments, resulting in
aggregate annual amortization payments as a percentage of the initial principal
amount as follows:
YEAR AFTER CLOSING OF BFI ACQUISITION ANNUAL 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:
YEAR AFTER CLOSING OF BFI ACQUISITION ANNUAL 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
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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, 1999, the range on the rate
of interest on term loan A was 8.93%-10.25% per annum, and the rate of interest
on term loan B was 9.67% 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 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).
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 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
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Series B notes registered under the Securities Act. This exchange offer was
completed in January 2000, with holders of all of 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, 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 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
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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 7 -- 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 our
properties contain renewal provisions.
Our rent expense for 1997, 1998 and 1999 was $3,284,000, $3,508,000 and
$6,823,000, respectively.
Minimum future rental payments under noncancelable operating leases that
have initial or remaining terms in excess of one year as of December 31, 1999
for each of the next five years and in the aggregate are as follows:
(in thousands)
2000....................................................................... $ 5,695
2001....................................................................... 5,125
2002....................................................................... 4,165
2003....................................................................... 2,935
2004....................................................................... 1,871
Thereafter................................................................. 3,348
-------------
Total minimum lease payments............................................... $ 23,139
=============
NOTE 8 -- ACQUISITION RELATED EXPENSES
In 1999, we recorded $7,961,000 in costs related to the BFI acquisition.
The closure of redundant offices and elimination of excess revenue producing
assets resulted in costs being incurred for severance and closure expenses of
$3,373,000. Transition related expenses of $1,659,000 were incurred as part of
the transition. In addition other non-recurring acquisition related costs were
written off to expense in the amount of $2,929,000.
The following table reflects the activity related to the 1999 acquisition
related costs (in thousands):
Charges
Charges in Expected in
1999 Future Periods
-------------- --------------
(in thousands)
Severance and closure costs................................. $ 3,373 $ --
Transition expenses......................................... 1,659 1,586
Other non-recurring acquisition related costs............... 2,929 --
------------- -------------
Total.................................................. $ 7,961 $ 1,586
============= =============
In 1999, we paid approximately $3,689 of these acquisition related
expenses and, at December 31, 1999, $4,272 was accrued.
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NOTE 9 -- NET INCOME PER COMMON SHARE
The following tables sets forth the computation of basic and diluted net
income per share:
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---- ---- ----
(in thousands, except share and per share data)
Numerator:
Net income $ 1,430 $ 5,713 $ 13,968
Preferred stock dividends -- -- (340)
Numerator for basic earnings per share --
income available to common stockholders $ 1,430 $ 5,713 $ 13,628
Effect of dilutive securities:
Preferred stock dividends -- -- 340
Numerator for diluted earnings per share --
income available to common stockholders
after assumed conversions $ 1,430 $ 5,713 $ 13,968
============= ============= =============
Denominator:
Denominator for basic earnings per share --
weighted-average shares 10,239,996 10,647,083 14,240,084
Effect of dilutive securities:
Employee stock options 441,586 473,723 338,540
Warrants 84,534 142,722 86,482
Convertible preferred stock -- -- 576,672
Dilutive potential common shares 526,120 616,445 1,001,694
Denominator for diluted earnings per share --
adjusted weighted-average shares and
assumed conversions 10,766,116 11,263,528 15,241,778
============= ============= =============
Basic net income per share $ 0.14 $ 0.54 $ 0.96
============= ============= ============
Diluted net income per share $ 0.13 $ 0.51 $ 0.92
============= ============= =============
For additional information regarding outstanding employee stock options
and outstanding warrants, see Note 10.
In 1997, 1998 and 1999, options and warrants to purchase 75,495 shares,
67,615 shares and 458,363 shares, respectively, at exercise prices of $10.25 -
$69.02, $15.50 - $69.02 and $12.75 - $18.13, respectively, were not included in
the computation of diluted earnings per share because the effect would be
antidilutive.
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NOTE 10 -- STOCK OPTIONS AND WARRANTS
Stock Options
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 our 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 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. 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 June 1996, our Board of Directors adopted and in July, 1996,
our shareholders approved, the Directors Stock Option Plan. The plan authorizes
stock options for a total of 285,000 shares of common stock to be granted to our
eligible directors, consisting of directors who are neither officers nor
employees of the Company. Each of the six incumbent eligible directors
automatically received an option as of the date of closing our initial public
offering for 8,195 shares of common stock with an exercise price of $10.25. As
of each annual meeting of our shareholders, each incumbent eligible director who
is reelected as a director at the annual meeting automatically receives an
option grant based on a predetermined formula. The exercise price of each option
will be the closing price on the date of grant. The term of each option is six
years from the date of grant, and each option vests in 16 equal quarterly
installments and may be exercised only while the holder of the option remains a
director or during the 90-day period following the date that he or she ceases to
serve as a director.
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, 1999
1995 Plan options.......................................................... 119,942
1996 Directors Plan options................................................ 184,601
1997 Plan options.......................................................... 1,267,816
Warrants................................................................... 311,709
---------
Total shares reserved................................................. 1,884,068
=========
A summary of stock option information follows:
1997 1998 1999
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning
of year.............................. 537,166 $ 1.93 845,861 $ 4.98 945,970 $ 8.37
Granted.......................... 433,367 $ 7.97 360,238 $ 13.92 840,579 $ 12.91
Exercised........................ (83,006) $ 0.70 (155,979) $ 2.21 (146,419) $ 2.36
Cancelled/forfeited.............. (41,666) $ 5.38 (104,150) $ 8.89 (67,771) $ 11.36
--------- --------- ---------
Outstanding at end of year............ 845,661 $ 4.98 945,970 $ 8.37 1,572,359 $ 11.22
========= ========= =========
Exercisable at end of year............ 326,119 $ 1.53 393,084 $ 5.37 448,948 $ 8.49
========= ========= =========
Available for future grant............ 1,700,303 $ 1,434,821 662,013
========= ========= =========
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Our options outstanding and exercisable as of December 31, 1999 by price range:
OUTSTANDING EXERCISABLE
----------------------------------- ---------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
LIFE EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES IN YEARS PRICE SHARES PRICE
$0.53 - $10.25..................................... 457,040 6.15 $ 6.44 296,475 $ 5.77
$10.8125 - $12.75.................................. 765,623 9.49 $ 12.72 10,401 $ 10.82
$13.25 - $18.125................................... 349,696 7.38 $ 14.18 142,072 $ 14.01
----------- --------- --------- ----------- ---------
1,572,359 8.05 $ 11.22 448,948 $ 8.49
=========== ========= ========= =========== =========
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB25") 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, loss and net loss 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 1997, 1998 and 1999 were valued using the
Black-Scholes option pricing model. Options granted in 1996 and 1995, when we
were not a public company, were valued using the minimum value method. The
following assumptions were used in 1997, 1998 and 1999: expected volatility of
0.50 in 1997, 0.61 in 1998, and 0.62 in 1999; risk-free interest rates ranging
from 5.9% to 6.8% in 1997, 4.5% to 4.8% in 1998, and 4.83% to 6.73% in 1999; 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 1997, 1998
and 1999 were $4.48 per share, $6.52 per share and $7.27 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,
1997 1998 1999
------------- ------------- -------------
Pro forma net income................................. $ 1,112 $ 4,485 $ 11,860
Pro forma net income per share....................... $ 0.10 $ 0.40 $ 0.78
The pro forma effect in 1997, 1998, 1999 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.
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Warrants
During 1995, several of our shareholders and directors provided a bridge
loan to the Company. The loan totaled $830,000 with interest at the prime rate
plus 3% and was repaid. In addition to the interest, the lenders received
warrants to purchase 220,559 shares of our common stock at $1.59 per share.
These warrants expire on July 31, 2000. In 1996 and 1998, the lenders exercised
warrants to purchase 166,749 and 53,810 shares, respectively.
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 2001. In 1998, warrants
to purchase 35,940 shares were exercised. At December 31, 1999, warrants to
purchase 190,096 shares remained outstanding.
In connection with a subordinated loan agreement, six of our 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 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.
NOTE 11 -- 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. 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 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 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 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 our 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) 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.
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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 our Board of Directors or grant or reprice stock options (at a price not
lower than 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 on May 12, 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 with the
initial investors, 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. We and the initial investors entered into
a registration rights agreement at closing. This agreement requires us, 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), 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. We 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 our 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 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 1.75 to 1.0 (2.0 to 1.0 after the second anniversary of the initial
issuance of the Series A
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51
Convertible Preferred Stock).
NOTE 12 -- EMPLOYEE STOCK PURCHASE PLAN
Under a plan for 1997 approved by the Board of Directors, our employees
can purchase shares of common stock at the market price. Under the terms of the
plan, employees were allowed to purchase shares throughout the year and to pay
for the stock through salary deductions. Employees elected to purchase a total
of 5,534 shares under this plan in 1999. The plan was discontinued on December
31, 1999.
NOTE 13 -- 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 match up to 30%
of the first $1,000 contributed to the plan by each employee. Our contributions
for the years ended December 31, 1997, 1998 and 1999 were approximately $25,000,
$10,000 and $49,000 respectively.
NOTE 14 -- RELATED PARTIES
In February 1998, we announced the formation of an international jount
venture company called Medam S.A.de C.V. ("Medam"), which utilizes our
electro-thermal deactivation ("ETD") technology to treat medical waste in the
Mexico City market. We own 49% of the common stock of Medam. At December 31,
1999 we had made $2,865,000 in capital contributions. Our investment in Medam is
accounted for under the equity method and is included in other non-current
assets in the Consolidated Balance Sheets. Our share of the results of
operations of Medam in 1999 was not material.
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 we recorded
$2,866,000 of revenue.
NOTE 15 -- 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. From time to time, we may consider
it more cost-effective to settle such proceedings than to involve ourselves in
costly and time-consuming administrative actions or litigation. 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 16 -- PRODUCTS AND SERVICES AND GEOGRAPHIC INFORMATION
Summary revenue information for our products and services is as follows:
YEAR ENDED DECEMBER 31,
1997 1998 1999
------------- ------------- -------------
Medical waste management services.................. $ 46,166 $ 59,669 $ 126,286
Proprietary equipment sales........................ -- 5,952 5,862
Technology license................................. -- 1,060 700
------------- ------------- -------------
Total.......................................... $ 41,166 $ 66,681 $ 132,848
============= ============= =============
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Summary financial information by geographic area is as follows:
YEAR ENDED DECEMBER 31,
1997 1998 1999
------------- ------------- -------------
Revenues:
United States.................................. $ 46,166 $ 59,206 $ 119,618
Canada......................................... -- 463 6,145
Other foreign countries........................ -- 7,012 7,085
------------- ------------- -------------
Total.............................................. $ 46,166 $ 66,681 $ 132,848
============= ============= =============
Long-lived assets:
United States.................................. $ 44,074 $ 66,853 $ 508,956
Canada......................................... -- 9,092 8,310
Other foreign countries........................ -- -- 980
------------- ------------- -------------
Total.............................................. $ 44,074 $ 75,945 $ 518,246
============= ============= =============
Revenues are attributed to countries based on the location of customers.
In 1998 and 1999, the Company provided medical waste management services to
customers in Canada and Puerto Rico, and licensed and sold proprietary equipment
to a Brazilian company and to joint ventures in Mexico and Argentina.
Additionally, no individual customer represents more than 1% of our revenues.
NOTE 17 -- SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following table summarizes our unaudited consolidated quarterly
results of operations as reported for 1998 and 1999 (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
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NOTE 18 -- CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Payments under our senior subordinated notes (the "notes") are
unconditionally guaranteed, jointly and severally, by all of our wholly-owned
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, 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 we have 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.
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CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
Non-
Guarantor Guarantor
STERICYCLE, Subsidiaries Subsidiaries ELIMINATIONS CONSOLIDATED
INC.
--------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,808 $ 246 $ 290 $ -- $ 19,344
Other current assets 52,928 8,840 4,648 (8,220) 58,196
--------------------------------------------------------------------------------
Total current assets 71,736 9,086 4,938 (8,220) 77,540
Property, plant and equipment, net 15,029 49,932 10,151 -- 75,112
Goodwill, net 40,920 369,914 10,167 -- 421,001
Investment in subsidiaries 441,423 3,627 -- (445,050) --
Other assets 17,817 13,617 3,675 (12,976) 22,133
--------------------------------------------------------------------------------
Total assets $ 586,925 $ 446,176 $ 28,931 $ (466,246) $ 595,786
================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term debt $ 3,954 $ 892 $ 895 $ -- $ 5,741
Other current liabilities 43,517 5,084 4,677 (8,337) 44,941
--------------------------------------------------------------------------------
Total current liabilities 47,471 5,976 5,572 (8,337) 50,682
Long-term debt, net of current
portion 349,794 4,539 13,970 (12,859) 355,444
Other liabilities 2,351 -- -- -- 2,351
Convertible redeemable preferred stock 69,195 -- -- -- 69,195
Shareholders' equity 118,114 435,661 9,389 (445,050) 118,114
--------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 586,925 $ 446,176 $ 28,931 $ (466,246) $ 595,786
================================================================================
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CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
NON-
GUARANTOR GUARANTOR
STERICYCLE, SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
INC.
--------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,590 $ 173 $ (480) $ -- $ 1,283
Other current assets 13,339 10,139 8,657 (11,608) 20,527
--------------------------------------------------------------------------------
Total current assets 14,929 10,312 8,177 (11,608) 21,810
Property, plant and equipment, net 11,569 788 10,727 16 23,100
Goodwill, net 29,065 14,246 6,016 (215) 49,112
Investment in subsidiaries 25,976 2,588 -- (28,564) --
Other assets 3,559 5 174 (5) 3,733
--------------------------------------------------------------------------------
Total assets $ 85,098 $ 27,939 $ 25,094 $ (40,376) $ 97,755
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,937 $ 99 $ 2,463 $ -- $ 5,499
Other current liabilities 7,255 925 18,395 (11,430) 15,145
--------------------------------------------------------------------------------
Total current liabilities 10,192 1,024 20,858 (11,430) 20,644
Long-term debt, net of current
portion 20,997 -- 2,463 -- 23,460
Shareholders' equity 53,909 26,915 1,773 (28,946) 53,651
--------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 85,098 $ 27,939 $ 25,094 $ (40,376) $ 97,755
================================================================================
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CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
NON-
GUARANTOR GUARANTOR
STERICYCLE, SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
INC.
--------------------------------------------------------------------------------
Revenues $ 61,069 $ 46,618 $ 25,533 $ (372) $ 132,848
Cost of revenues 38,455 28,892 19,086 (310) 86,123
Selling, general, and
administrative expense 15,478 6,306 4,931 (235) 26,480
Acquisition related expenses 7,961 -- -- -- 7,961
--------------------------------------------------------------------------------
Total costs and expenses 61,894 35,198 24,017 (545) 120,564
--------------------------------------------------------------------------------
Income (loss) from operations (825) 11,420 1,516 173 12,284
Equity in net income of subsidiaries 8,675 119 -- (8,794) --
Other income (expense), net (3,934) 778 (1,157) (173) (4,486)
--------------------------------------------------------------------------------
Income before income taxes 3,916 12,317 359 (8,794) 7,798
Income tax (benefit) expense (10,052) 3,882 -- -- (6,170)
--------------------------------------------------------------------------------
Net income (loss) $ 13,968 $ 8,435 $ 359 $ (8,794) $ 13,968
================================================================================
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
NON-
GUARANTOR GUARANTOR
STERICYCLE, SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
INC.
--------------------------------------------------------------------------------
Revenues $ 52,357 $ 9,598 $ 4,726 $ -- $ 66,681
Cost of revenues 35,194 6,334 3,800 -- 45,328
Selling, general, and
administrative expense 12,789 1,408 732 -- 14,929
--------------------------------------------------------------------------------
Total costs and expenses 47,983 7,742 4,532 -- 60,257
--------------------------------------------------------------------------------
Income from operations 4,374 1,856 194 -- 6,424
Equity in net income (loss) of
subsidiaries 2,081 (106) -- (1,975) --
Other income (expense), net (244) 144 37 -- (63)
--------------------------------------------------------------------------------
Income before income taxes 6,211 1,894 231 (1,975) 6,361
Income tax expense 498 150 -- -- 648
--------------------------------------------------------------------------------
Net income $ 5,713 $ 1,744 $ 231 $ (1,975) $ 5,713
================================================================================
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
NON-
GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating
activities $ 4,951 $ 283 $ 6,543 $ -- $ 11,777
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,534) (85) (1,176) -- (3,795)
Payments for acquisitions, net of
cash acquired (418,280) -- (4,000) -- (422,280)
Proceeds from sale of short-term
investments 447 -- -- -- 447
--------------------------------------------------------------------------------
Net cash used in investing activities (420,367) (85) (5,176) -- (425,628)
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from bank lines of
credit (16,359) -- -- -- (16,359)
Repayment of long term debt (3,884) -- (482) -- (4,366)
Principal payments on capital lease
obligations (50) (125) (115) -- (290)
Proceeds from senior notes 225,000 -- -- -- 225,000
Proceeds from senior subordinated
notes 125,000 -- -- -- 125,000
Net payments of subordinated notes (2,750) -- -- -- (2,750)
Payment of deferred financing costs (10,828) -- -- -- (10,828)
Net proceeds from secondary common
stock offering 47,158 -- -- -- 47,158
Proceeds from issuance of preferred
stock 68,855 -- -- -- 68,855
Proceeds from issuance of common
stock 492 -- -- -- 492
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 432,634 (125) (597) -- 431,912
--------------------------------------------------------------------------------
Net increase in cash and cash
equivalents $ 17,218 $ 73 $ 770 $ -- 18,061
================================================================
Cash and cash equivalents at beginning
of year 1,283
-----------------
Cash and cash equivalents at end of year
$ 19,344
=================
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
NON-
GUARANTOR GUARANTOR
STERICYCLE, SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
INC.
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in
operating activities $ 3,749 $ 278 $ 835 $ -- $ 4,862
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (3,629) (271) (442) -- (4,342)
Payments for acquisitions, net
of cash acquired (19,775) -- -- -- (19,775)
Purchases of short-term
investments (41) -- -- -- (41)
Proceeds from sale of property 395 10 -- -- 405
--------------------------------------------------------------------------------
Net cash used in investing
activities (23,050) (261) (442) (1,894) (23,753)
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from bank lines of
credit 16,589 -- (203) -- 16,386
Repayment of long term debt (2,513) (6) (670) -- (3,189)
Principal payments on capital
lease obligations (1,273) -- -- -- (1,273)
Proceeds from subordinated notes 2,750 -- -- -- 2,750
Payment of deferred financing
costs (218) -- -- -- (218)
Proceeds from issuance of common
stock 344 -- -- -- 344
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 15,679 (6) (873) -- 14,800
--------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents $ (3,622) $ 11 $ (480) $ -- (4,091)
================================================================
Cash and cash equivalents at
beginning of year 5,374
-----------------
Cash and cash equivalents at end of
year $ 1,283
=================
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SCHEDULE II - VALUATION AND ALLOWANCE ACCOUNTS
(IN THOUSANDS)
BALANCE CHARGES OTHER WRITE-OFFS/ BALANCE
12/31/1996 TO EXPENSE CHARGES(1) PAYMENTS 12/31/97
Allowance for
doubtful accounts $ 181 $155 $ 30 $(2) $361
Deferred tax
valuation allowance 15,281 (699) - - 14,582
BALANCE CHARGES OTHER WRITE-OFFS/ BALANCE
12/31/1997 TO EXPENSE CHARGES(1) PAYMENTS 12/31/98
Allowance for
doubtful accounts $361 $642 $574 $(676) $901
Deferred tax
valuation allowance 14,582 4,899 - - 19,481
BALANCE CHARGES OTHER WRITE-OFFS/ BALANCE
12/31/1998 TO EXPENSE CHARGES(1) PAYMENTS 12/31/99
Allowance for
doubtful accounts $901 $842 $202 $(965) $980
Accrued severance
and closure costs $-- $3,373 $-- $(210) $3,163
Accrued transition
expenses $-- $1,659 $-- $(650) $1,009
Deferred tax
valuation allowance 19,481 (9,894) - - 9,587
(1) Charges consist primarily of costs assumed from acquired companies
recorded prior to the date of acquisition.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL STATEMENT DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding our directors is
incorporated by reference to the information contained under the caption
"Election of Directors -- Nominees for Director" in our definitive proxy
statement for our Annual Meeting of Stockholders to be held on May 11, 2000, to
be filed pursuant to Regulation 14A.
The information required by this Item regarding our executive officers is
contained under the caption "Executive Officers of the Registrant" in Part I of
this Report.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the
information contained under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the our definitive proxy statement for our Annual
Meeting of Stockholders to be held on May 11, 2000, to be filed pursuant to
Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information contained under the caption "Executive Compensation" in the
Company's definitive proxy statement for our Annual Meeting of Stockholders to
be held on May 11, 2000, to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information contained under the caption "Stock Ownership -- Stock Ownership of
Directors and Executive Officers" in our definitive proxy statement for our
Annual Meeting of Stockholders to be held on May 11, 2000, to be filed pursuant
to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information contained under the caption "Election of Directors -- Certain
Transactions" in our definitive proxy statement for our Annual Meeting of
Stockholders to be held on May 11, 2000, to be filed pursuant to Regulation 14A.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS (Item 14(a)(1) and (2))
We have filed the following financial statements and schedules with this
Report:
PAGE
Report of Independent Auditors, Ernst & Young LLP......................................
Consolidated Financial Statements -- Stericycle, Inc. and Subsidiaries
Consolidated Balance Sheets at December 31, 1998 and 1999...........................
Consolidated Statements of Operation for Each of the Years in the
Three-Year Period Ended December 31, 1999...........................................
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended December 31, 1999...........................................
Consolidated Statements of Changes in Shareholders' Equity
for Each of the Years in the Three-Year Period Ended December 31, 1999..............
Notes to Consolidated Financial Statements..........................................
Schedule II -- Valuation and Allowance Accounts.....................................
EXHIBITS (Item 14(a)(3))
We have filed the following exhibits with this Report:
FILED WITH
EXHIBIT ELECTRONIC
INDEX DESCRIPTION SUBMISSION
2.1* Stock Purchase Agreement, dated as of April 14, 1999, between
Allied Waste Industries, Inc. and the Registrant (incorporated
by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K filed April 23, 1999).............................
2.2* Asset Purchase Agreement, dated as of April 14, 1999, between
Allied Waste Industries, Inc. and the Registrant (incorporated
by reference to Exhibit 2.2 to the Registrant's Current Report
on Form 8-K filed April 23, 1999).............................
2.3* First Amendment to Stock Purchase Agreement, dated as of
October 22, 1999, between Allied Waste Industries, Inc. and
the Registrant (incorporated by reference to Exhibit 2.1 to
the Registrant's Current Report on Form 8-K filed October 25,
1999).........................................................
2.4* First Amendment to Asset Purchase Agreement, dated as of
October 22, 1999, between Allied Waste Industries, Inc. and
the Registrant (incorporated by reference to Exhibit 2.2 to
the Registrant's Current Report on Form 8-K filed October 25,
1999).........................................................
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62
2.5* Second Amendment to Stock Purchase Agreement, dated as of
November 12, 1999, between Allied Waste Industries, Inc. and
the Registrant (incorporated by reference to Exhibit 2.1 to
the Registrant's Current Report on Form 8-K filed November 29,
1999).........................................................
3.1* Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Registrant's 1996 Form S-1)...................................
3.2* First Certificate of Amendment to Amended and Restated
Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.1 to the Registrant's Current Report
on Form 8-K filed November 29, 1999)..........................
3.3* Certificate of Designation Relating to Certificate of
Designation Relating to Series A Convertible Preferred Stock,
Par Value $.01 Per Share (incorporated by reference to Exhibit
3.2 to the Registrant's Current Report on Form 8-K filed
November 29, 1999)............................................
3.4* Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's 1996 Form
S-1)..........................................................
3.5 Amendment to Amended and Restated Bylaws of the
Registrant.................................................... x
4.1* Registration Rights Agreement, dated as of November 12, 1999,
among Donaldson, Lufkin & Jenrette Securities Corporation,
Bear, Stearns & Co., Inc., Credit Suisse First Boston
Corporation, Warburg Dillon Read LLC, the Registrant and the
guarantors named in the agreement (incorporated by reference to
Exhibit 4.1 to the Registrant's 1999 Form S-4)................
4.2* Registration Rights Agreement, dated as of November 12, 1999,
between the Registrant and certain investors affiliated with
Bain Capital, Inc. and Madison Dearborn Partners LLC
(incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K filed November 29, 1999)...........
4.3* Amended and Restated Registration Agreement, dated October 19,
1994, between the Registrant and certain of its stockholders,
and related First Amendment dated September 30, 1995 and
Second Amendment dated July 1, 1996 (incorporated by reference
to Exhibit 4.4 to the Registrant's 1996 Form S-1).............
4.4* Specimen certificate for shares of the Registrant's Common
Stock, par value $.01 per share (incorporated by reference to
Exhibit 4.1 to the Company's 1996 Form S-1)...................
4.5* Form of Common Stock Purchase Warrant in connection with July
1995 line of credit (incorporated by reference to Exhibit 4.2
to the Company's 1996 Form S-1)...............................
4.6* Form of Common Stock Purchase Warrant in connection with May
1996 short-term loan (incorporated by reference to Exhibit 4.3
to the Company's 1996 Form S-1)...............................
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63
4.7* Form of Common Stock Purchase Warrant in connection with
December 1998 subordinated loan (incorporated by reference to
Exhibit 4.1 to the Company's 1999 Form S-3)...................
10.1* Credit Agreement. dated as of November 12, 1999, among the
Registrant, the various financial institutions from time to
time parties to the agreement, DLJ Capital Funding, Inc., as
syndication agent for the financial institutions, lead
arranger and sole book running manager, Bank of America, N.A.,
as administrative agent for the financial institutions, and
Bankers Trust Company, as documentation agent for the
financial institutions (incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K filed
November 29, 1999)............................................
10.2* Indenture, dated as of November 12, 1999, among the
Registrant, the guarantors named in the indenture, and State
Street Bank and Trust Company, as trustee (incorporated by
reference to Exhibit 10.1 to the Registrant's 1999 Form
S-4)..........................................................
10.3* Amended and Restate Series A Convertible Preferred Stock
Purchase Agreement, dated September 26, 1999, between the
Registrant and certain investors affiliated with Bain Capital,
Inc. and Madison Dearborn Partners LLC (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K filed October 15, 1999)...........................
10.4 Corporate Governance Agreement, dated as of November 12, 1999,
between the x Registrant and certain investors affiliated with
Bain Capital, Inc. and Madison Dearborn Partners LLC.......... x
10.5*+ Amended and Restated Incentive Compensation Plan (incorporated
by reference to Exhibit 10.1 to the Registrant's 1996 Form
S-1)..........................................................
10.6*+ First Amendment to Amended and Restated Incentive Compensation
Plan (incorporated by reference to Exhibit 10.7 to the
Registrant's 1999 Form S-3)...................................
10.7*+ Directors Stock Option Plan (incorporated by reference to
Exhibit 10.2 to the Registrant's 1996 Form S-1)...............
10.8*+ First and Second Amendments to Directors Stock Option Plan
(incorporated by reference to Exhibit 10.8 to the Registrant's
1999 Form S-3)................................................
10.9+ Third Amendment to Directors Stock Option Plan................ x
10.10*+ 1997 Stock Option Plan (incorporated by reference to Exhibit
10.3 to the Registrant's Annual Report on Form 10-K for
1997).........................................................
10.11*+ First Amendment to 1997 Stock Option Plan (incorporated by
reference to Exhibit 10.9 of the Registrant's 1999 Form
S-3...........................................................
10.12* Guaranty Agreement dated June 1, 1992 among the Registrant,
Fleet National Bank, as trustee, and Rhode Island
Industrial-Recreational Building Authority, and related
Regulatory Agreement dated June 1, 1992 between the Registrant
and the Rhode Island Industrial-Recreational
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64
Building Authority (incorporated by reference to Exhibit 10.5
to the Registrant's 1996 Form S-1)............................
10.13* Industrial Building Lease dated July 28, 1998 between Curto
Reynolds Oelerich, Inc. and the Company, relating to the
Registrant's lease of office and warehouse space in Lake
Forest, Illinois (incorporated by reference to Exhibit 10.3 to
the Registrant's 1999 Form S-3)...............................
10.14* Joint Venture Agreement dated May 16, 1997 among the Company,
Pennoni Associates, Inc., Conopam, S.A. de C.V. and
Controladora Ambiental, S.A. de C.V., relating to the
organization of Medam, S.A. de C.V. (incorporated by reference
to Exhibit 10.2 to the Registrant's 1999 Form S-3).............
11 Statement re computation of per share earnings................. x
12 Statement re computation of ratios.............................. x
21 Subsidiaries of the Registrant.................................. x
23 Consent of Ernst & Young LLP.................................... x
27 Financial data schedule for the year ended December 31,
1999............................................................ x
* Previously filed
+ Management contract or compensatory plan required to be filed pursuant
to Item 601 of Regulation S-K
References to the Registrant's "1996 Form S-1" are to the Registrant's
Registration Statement on Form S-1 as declared effective on August 22,
1996 (Registration No. 333-05665); references to the Registrant's "1999
Form S-3" are to the Registrant's Registration Statement on Form S-3 as
declared effective on February 4, 1999 (Registration No. 333-60591);
and references to the Registrant's "1999 Form S-4" are to the
Registrant's Registration Statement on Form S-4 as declared effective
on December 15, 1999 (Registration No. 333-91831).
REPORTS ON FORM 8-K (Item 14(b))
During the quarter ended December 31, 1999, we filed the following
reports on Form 8-K:
(a) We filed a Current Report on Form 8-K on October 15, 1999 to
report (i) the approval by our stockholders of the matters submitted to a
vote at the Annual Meeting of Stockholders held on October 15, 1999 (see
Part I, Item 4 of this Report) and (ii) the participation by investment
funds associated with Madison Dearborn Partners LLC with investment funds
associated with Bain Capital, Inc., in the purchase of shares of our
Series A Convertible Preferred Stock (which we reported on a Form 8-K
that we filed on August 20, 1999).
(b) We filed a Current Report on Form 8-K on October 25, 1999 to
report that we had entered into first amendments to the stock purchase
and asset purchase agreements with Allied Waste Industries, Inc.
("Allied") in connection with our purchase from Allied of the medical
waste business of Browning-Ferris Industries, Inc. ("BFI") (which we
reported on a Form 8-K that we filed on April 23, 1999).
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65
(c) We filed a Current Report on Form 8-K on November 29, 1999 to
report that we had closed our purchase from Allied of BFI's medical waste
business.
(d) We filed a Current Report (Amended) on Form 8-K/A on December 29,
1999 to amend the Form 8-K that we filed on November 29, 1999 to include
certain financial statements of BFI's medical waste business.
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66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000
STERICYCLE, INC.
By: /s/ Mark C. Miller
-----------------------------------------
Mark C. Miller
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
NAME TITLE DATE
/s/ Jack W. Schuler Chairman of the Board of Directors March 29, 2000
- ------------------------------------------------
Jack W. Schuler
/s/ Mark C. Miller President, Chief Executive Officer and a March 29, 2000
- ------------------------------------------------ Director (Principal Executive Officer)
Mark C. Miller
/s/ Frank J.M. ten Brink Vice President, Finance and Chief Financial March 29, 2000
- ------------------------------------------------ Officer (Principal Financial
Frank J.M. ten Brink and Accounting Officer)
/s/ John P. Connaughton Director March 29, 2000
- ------------------------------------------------
John P. Connaughton
/s/ Rod F. Dammeyer Director March 29, 2000
- ------------------------------------------------
Rod F. Dammeyer
/s/ Patrick F. Graham Director March 29, 2000
- ------------------------------------------------
Patrick F. Graham
/s/ John Patience Director March 29, 2000
- ------------------------------------------------
John Patience
/s/ Thomas R. Reusche Director March 29, 2000
- ------------------------------------------------
Thomas R. Reusche
/s/ L. John Wilkerson, Ph.D. Director March 29, 2000
- ------------------------------------------------
L. John Wilkerson, Ph.D.
/s/ Peter Vardy Director March 29, 2000
- ------------------------------------------------
Peter Vardy
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67
EXHIBIT INDEX
FILED WITH
EXHIBIT ELECTRONIC
INDEX DESCRIPTION SUBMISSION
2.1* Stock Purchase Agreement, dated as of April 14, 1999, between Allied Waste
Industries, Inc. and the Registrant (incorporated by reference to Exhibit 2.1 to
the Registrant's Current Report on Form 8-K filed April 23, 1999).................
2.2* Asset Purchase Agreement, dated as of April 14, 1999, between Allied Waste
Industries, Inc. and the Registrant (incorporated by reference to Exhibit 2.2 to
the Registrant's Current Report on Form 8-K filed April 23, 1999).................
2.3* First Amendment to Stock Purchase Agreement, dated as of October 22, 1999, between
Allied Waste Industries, Inc. and the Registrant (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed October 25,
1999).............................................................................
2.4* First Amendment to Asset Purchase Agreement, dated as of October 22, 1999, between
Allied Waste Industries, Inc. and the Registrant (incorporated by reference to
Exhibit 2.2 to the Registrant's Current Report on Form 8-K filed October 25,
1999).............................................................................
2.5* Second Amendment to Stock Purchase Agreement, dated as of November 12, 1999,
between Allied Waste Industries, Inc. and the Registrant (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed
November 29, 1999)................................................................
3.1* Amended and Restated Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.1 to the Registrant's 1996 Form S-1)....................
3.2* First Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K filed November 29, 1999)..................
3.3* Certificate of Designation Relating to Certificate of Designation Relating to
Series A Convertible Preferred Stock, Par Value $.01 Per Share (incorporated by
reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed
November 29, 1999)................................................................
3.4* Amended and Restated Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's 1996 Form S-1)....................................
3.5 Amendment to Amended and Restated Bylaws of the Registrant........................ x
4.1* Registration Rights Agreement, dated as of November 12, 1999, among Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co., Inc., Credit Suisse
First Boston Corporation, Warburg Dillon Read LLC, the Registrant and the
guarantors named in the agreement (incorporated by
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reference to Exhibit 4.1 to the Registrant's 1999 Form S-4)........................
4.2* Registration Rights Agreement, dated as of November 12, 1999, between the
Registrant and certain investors affiliated with Bain Capital, Inc. and Madison
Dearborn Partners LLC (incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K filed November 29, 1999)..................
4.3* Amended and Restated Registration Agreement, dated October 19, 1994, between the
Registrant and certain of its stockholders, and related First Amendment dated
September 30, 1995 and Second Amendment dated July 1, 1996 (incorporated by
reference to Exhibit 4.4 to the Registrant's 1996 Form S-1).......................
4.4* Specimen certificate for shares of the Registrant's Common Stock, par
value $.01 per share (incorporated by reference to Exhibit 4.1 to the Company's
1996 Form S-1)....................................................................
4.5* Form of Common Stock Purchase Warrant in connection with July 1995 line of credit
(incorporated by reference to Exhibit 4.2 to the Company's 1996 Form S-1).........
4.6* Form of Common Stock Purchase Warrant in connection with May 1996
short-term loan (incorporated by reference to Exhibit 4.3 to the Company's 1996
Form S-1).........................................................................
4.7* Form of Common Stock Purchase Warrant in connection with December 1998
subordinated loan (incorporated by reference to Exhibit 4.1 to the Company's 1999
Form S-3).........................................................................
10.1* Credit Agreement. dated as of November 12, 1999, among the Registrant, the various
financial institutions from time to time parties to the agreement, DLJ Capital
Funding, Inc., as syndication agent for the financial institutions, lead arranger
and sole book running manager, Bank of America, N.A., as administrative agent for
the financial institutions, and Bankers Trust Company, as documentation agent for
the financial institutions (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed November 29, 1999)..................
10.2* Indenture, dated as of November 12, 1999, among the Registrant, the guarantors
named in the indenture, and State Street Bank and Trust Company, as trustee
(incorporated by reference to Exhibit 10.1 to the Registrant's 1999 Form S-4).....
10.3* Amended and Restate Series A Convertible Preferred Stock Purchase Agreement, dated
September 26, 1999, between the Registrant and certain investors affiliated with
Bain Capital, Inc. and Madison Dearborn Partners LLC (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed October 15,
1999).............................................................................
10.4 Corporate Governance Agreement, dated as of November 12, 1999, between the x
Registrant and certain investors affiliated with Bain Capital, Inc. and Madison
Dearborn Partners LLC.............................................................
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10.5*+ Amended and Restated Incentive Compensation Plan (incorporated by reference to
Exhibit 10.1 to the Registrant's 1996 Form S-1)...................................
10.6*+ First Amendment to Amended and Restated Incentive Compensation Plan (incorporated
by reference to Exhibit 10.7 to the Registrant's 1999 Form S-3)...................
10.7*+ Directors Stock Option Plan (incorporated by reference to Exhibit 10.2 to the
Registrant's 1996 Form S-1).......................................................
10.8*+ First and Second Amendments to Directors Stock Option Plan (incorporated by
reference to Exhibit 10.8 to the Registrant's 1999 Form S-3)......................
10.9+ Third Amendment to Directors Stock Option Plan.................................... x
10.10*+ 1997 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for 1997).................................
10.11*+ First Amendment to 1997 Stock Option Plan (incorporated by reference to Exhibit
10.9 of the Registrant's 1999 Form S-3............................................
10.12* Guaranty Agreement dated June 1, 1992 among the Registrant, Fleet National Bank,
as trustee, and Rhode Island Industrial-Recreational Building Authority, and
related Regulatory Agreement dated June 1, 1992 between the Registrant and the
Rhode Island Industrial-Recreational Building Authority (incorporated by reference
to Exhibit 10.5 to the Registrant's 1996 Form S-1)................................
10.13* Industrial Building Lease dated July 28, 1998 between Curto Reynolds Oelerich,
Inc. and the Company, relating to the Registrant's lease of office and warehouse
space in Lake Forest, Illinois (incorporated by reference to Exhibit 10.3 to the
Registrant's 1999 Form S-3).......................................................
10.14* Joint Venture Agreement dated May 16, 1997 among the Company, Pennoni Associates,
Inc., Conopam, S.A. de C.V. and Controladora Ambiental, S.A. de C.V., relating to
the organization of Medam, S.A. de C.V. (incorporated by reference to Exhibit 10.2
to the Registrant's 1999 Form S-3)................................................
11 Statement re computation of per share earnings.................................... x
12 Statement re computation of ratios................................................ x
21 Subsidiaries of the Registrant.................................................... x
23 Consent of Ernst & Young LLP...................................................... x
27 Financial data schedule for the year ended December 31, 1999...................... x
* Previously filed
+ Management contract or compensatory plan required to be filed pursuant
to Item 601 of Regulation S-K
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References to the Registrant's "1996 Form S-1" are to the Registrant's
Registration Statement on Form S-1 as declared effective on August 22,
1996 (Registration No. 333-05665); references to the Registrant's "1999
Form S-3" are to the Registrant's Registration Statement on Form S-3 as
declared effective on February 4, 1999 (Registration No. 333-60591); and
references to the Registrant's 1999 Form S-4 are to the Registrant's
Registration Statement on Form S-4 as declared effective on December 15,
1999 (Registration No. 333-91831).
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