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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, 2000
[ ] 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
required to be filed 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 16, 2001, the aggregate market value of the Registrant's
voting stock held by non-affiliates of the Registrant was $482,474,811.
On March 16, 2001, there were 15,258,245 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 2001 Annual Meeting of Stockholders to be held on May 15,
2001.
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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 approximately 250,000 customers throughout the United States,
Canada, Puerto Rico and Mexico. We have the only fully integrated, national
medical waste management network. Our network includes 33 treatment/collection
centers and 99 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,
2000 and 1999, our revenues were $323.7 million and $132.8 million,
respectively.
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 approximately 245,300 small account customers (e.g., outpatient clinics,
medical and dental offices and long-term and sub-acute care facilities) and
approximately 4,700 large account customers (e.g., hospitals, blood banks and
pharmaceutical manufacturers). Small account customers tend to be more 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 57% in the fourth quarter
of 2000.
In November 1999, we acquired the medical waste business of
Browning-Ferris Industries, Inc. ("BFI") from Allied Waste Industries, Inc.
("Allied") for $410.5 million in cash. 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.
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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
ocean 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 by the health care industry.
Regulated medical waste is generally described as any medical waste that can
cause an infectious disease, including single-use disposable items, such as
needles, syringes, gloves and other medical supplies; cultures and stocks of
infectious agents; and blood and blood products.
An independent study estimated the size of the regulated medical waste
market in the United States in 2000 to be approximately $1.5 billion. We believe
that the worldwide market for regulated medical waste management services is
currently approximately $3.0 billion and is in excess of $10.0 billion when
ancillary services such as training, education, product sales and consulting
services are taken into account. Industry growth is driven by a number of
factors. These factors include:
PRESSURE TO REDUCE HOSPITAL COSTS 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
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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. In 1997, the U.S. Environmental Protection Agency ("EPA") estimated
that approximately 83-90% of small medical waste incinerators, 60-95% of medium
medical waste incinerators and up to 35% of large medical waste incinerators in
the United States will be closed over the next several years. In addition, OSHA
has issued regulations concerning employee exposure to bloodborne pathogens and
other potentially infectious materials that require, among other things, special
procedures for the handling and disposal of medical waste and annual training of
all personnel who may be exposed to blood and other body fluids. We believe that
these regulations will help to expand the market for our services beyond
traditional providers of health care.
COMPETITIVE STRENGTHS
We believe that we benefit from the following competitive strengths:
MARKET 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 provide national accounts with local service.
We believe that our leading market position provides us with more operating
leverage and a unique competitive advantage in attracting and retaining
customers as compared to our smaller regional and local competitors.
BROAD RANGE OF SERVICES. We offer our customers a broad range of
services to help them develop internal systems and processes which allow them to
manage their medical waste efficiently and safely from the point of generation
through treatment and disposal. For example, we have developed programs to help
train our customers' employees on the proper methods of handling medical waste
in order to reduce potential employee exposure. Other services include those
designed to help clients ensure and maintain compliance with OSHA and other
relevant regulations. We also supply specially designed containers for use by
most of our large account customers, including our Steri-Tub(R) container, a
reusable leak and puncture-resistant container, made from recycled plastic,
which we developed and patented.
ESTABLISHED NATIONAL NETWORK. Our 33 treatment/collection centers and
our over 250,000 customers in 48 states give us the largest and the only
national network in the regulated medical waste industry. In addition, we also
serve customers in Canada, Mexico and Puerto Rico. The extensive federal, state
and local laws and regulations governing the regulated medical waste
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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 four treatment facilities, and we believe that most of
our competitors do not have fully integrated operations. We believe that our
vertically-integrated operations provide us with a competitive advantage over
smaller, less integrated competitors.
DIVERSE CUSTOMER BASE AND REVENUE STABILITY. We have developed strong
contracts and service agreements with a diverse network of established
customers. Our top 10 customers account for less than 3% of revenues, and no
single customer accounts for more than 1% of revenues. We believe that our
diverse customer base would mitigate the impact of the loss of any particular
customer. We are also generally protected from regulatory changes and other
factors which affect our costs, because our contracts typically contain
provisions which allow us to adjust our prices to reflect any additional costs
caused by changes in regulations or costs.
STRONG SALES NETWORK AND PROPRIETARY DATABASE. We have the largest
sales force in the medical waste industry. We use both telemarketing and direct
sales efforts to obtain new customers. In addition, we have developed a large
proprietary database of potential new small account customers, which we believe
gives us a competitive advantage in identifying and reaching these higher-margin
accounts.
EXPERIENCED MANAGEMENT TEAM. Our four most senior executives and the
Chairman of our Board of Directors collectively have over 70 years of management
experience in the health care and waste management industries. Our Chief
Executive Officer, Mark C. Miller, had more than 15 years of senior management
experience at Abbott Laboratories and, since joining us in 1992 as Chief
Executive Officer, has been with us during our growth from an early stage
venture capital concept to the industry leader. Richard T. Kogler joined us in
late 1998 as Executive Vice President for domestic operations and Chief
Operating Officer. Mr. Kogler previously served in senior roles with American
Disposal Services, Inc. Anthony J. Tomasello has been our Executive Vice
President for international operations and Chief Technical Officer since January
1999, and previously was our Vice President, Operations beginning in 1990. Mr.
Tomasello was previously president and chief
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operating officer of Pi Enterprises and Orbital Systems. Frank J.M. ten Brink,
our Executive Vice President and Chief Financial Officer, previously served as
chief financial officer of Telular, Inc. and Hexacomb Corporation. Jack W.
Schuler, our Chairman, is also currently chairman of the board of directors of
Ventana Medical Systems. Mr. Schuler was previously president and chief
operating officer of Abbott Laboratories.
BUSINESS STRATEGY
Our goals are to strengthen our position as the largest provider of
integrated services in the regulated medical waste industry and to continuously
improve our profitability. Components of our strategy to achieve these goals
include:
TARGET HIGHER MARGIN, SMALL ACCOUNT CUSTOMERS. We intend to continue
actively targeting and increasing our base of higher-margin, small account
customers. We have successfully raised the percentage of our revenues from
small account customers from 33% of revenues in the fourth quarter of 1996 to
57% in the fourth quarter of 2000, which has helped to 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 many hospitals will shut down their
incinerators in response to regulations adopted in 1997, which limit the
discharge into the atmosphere of pollutants released by medical waste
incineration. We plan to capitalize on the anticipated movement by hospitals to
outsource medical waste treatment rather than incur the cost of installing the
air pollution control systems necessary to comply with these EPA regulations.
Because our facilities are modern and well maintained, we believe that our
future capital expenditures required to bring our incinerators into compliance
with these new regulations will be covered within our normal capital expenditure
budgets.
EXPAND RANGE OF SERVICES AND PRODUCTS. We believe that we have the
opportunity to expand our business by increasing the range of products and
services that we offer to our existing customers. For example, we are expanding
our collection and treatment services through the inclusion of materials like
photographic chemicals, lead foils and amalgam used in dental and radiology
laboratories. In addition, we now offer a broad range of OSHA compliance and
consulting services to our dental customers and have begun to offer these
services to other types of customers. Because our drivers call on numerous
medical facilities on a routine basis, we also offer many single-use disposable
medical supplies to our medical customers, and we may increase these offerings
in the future.
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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
- 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. 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.,
Deutsche Bank 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.
RECENT ACQUISITIONS. We completed a total of 43 acquisitions from
1993 through 1999. In 2000, we completed a further seven acquisitions, as
follows:
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Seller Date Markets Served
A & J Medwaste, Inc............................................... October 2000 Florida
Waste Management of New York, Inc................................. September 2000 New York
Environmental Solutions LLC....................................... August 2000 Minnesota
Sharps Away (JS Holdings, Inc.)................................... August 2000 Minnesota
Stick Proof Company............................................... July 2000 North Carolina
Med Tech Environmental Services, Inc.............................. May 2000 New York
American Medical Waste, Inc....................................... March 2000 California
SERVICES AND OPERATIONS
Our services and operations are comprised of collection,
transportation, treatment, disposal and recycling, together with related
training and education programs, consulting services and product sales. We have
33 treatment/collection facilities located in 22 states, Puerto Rico, Canada
and Mexico that serve approximately 250,000 customers, consisting of
approximately 245,300 small account customers and approximately 4,700 large
account customers. We develop programs to help our customers handle, separate
and contain medical waste. We also advise our health care customers on the
proper methods of recording and documenting their medical waste management to
comply with federal, state and local regulations. In addition, we offer
consulting services to our health care customers to assist them in reducing the
amount of medical waste they generate.
COLLECTION AND TRANSPORTATION. We consider efficiency of collection and
transportation to be a critical element of our operations because it represents
the largest component of our operating costs. We try to maximize the number of
stops on each route. We use a tracking system for our collection vehicles that
helps to improve efficiency. We try to match the size of our collection vehicles
to the amount of medical waste to be collected at a particular stop or on a
particular route. We collect reusable containers or corrugated boxes of medical
waste from our customers at intervals depending upon customer requirements,
terms of service and volume of medical waste produced. The containers or boxes
are inspected at 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 select circumstances we transport medical waste
to other specially-licensed medical waste treatment facilities. We transport
small quantities of specific hazardous substances, such as photographic fixer,
lead foils and dental amalgam, from certain of our customers to a metals
recycling operation.
The use of transfer stations is another important component of our
collection and transportation operations. We utilize transfer stations in a "hub
and spoke" configuration which allows us to expand our geographic service area
and increase the volume of medical waste that can be treated at a particular
facility. Smaller loads of waste containers are temporarily held at the transfer
stations until they can be consolidated into full truckloads and transported to
a treatment facility.
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] 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.
TREATMENT AND DISPOSAL. Upon arrival at a treatment facility,
containers or boxes of medical waste are scanned to verify that they do not
contain any unacceptable substances like radioactive material. Any container or
box that is discovered to contain unacceptable waste is returned to the
customer. In some cases our operating permits require that unacceptable waste be
reported to regulatory authorities. After inspection, the waste is treated using
one of our various treatment technologies. Upon completion of the particular
process, the resulting waste or incinerator ash is transported for resource
recovery, recycling or disposal in a nonhazardous waste landfill operated by
parties unaffiliated with us. After the plastic containers such as Steri-Tubs(R)
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 store, retrieve and reprint old manifests and other documentation. We
believe that our ability to offer document archiving and retrieval services
represents a competitive advantage.
MARKETING AND SALES
MARKETING STRATEGY. We have the largest sales force in the medical
waste industry. We use both telemarketing and direct sales efforts to obtain new
customers. In addition, we have developed a large
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proprietary database of potential new small account customers, which we believe
gives us a competitive advantage in identifying and reaching these higher-margin
accounts.
Our more than 900 drivers also may participate in our marketing and
sales efforts by actively soliciting small account customers while they service
their routes.
SMALL ACCOUNT CUSTOMERS. We have targeted small account customers as a
growth area. We believe that these customers offer high profit potential
compared to other potential customers. Typical small account customers are
individual or small groups of doctors, dentists and other health care providers
who are widely dispersed and generate only small amounts of medical waste. These
customers are very concerned about having the medical waste picked up and
disposed of in compliance with applicable state and federal regulations. We
believe that that these customers view the potential risks of non-compliance
with applicable state and federal medical waste regulations as disproportionate
to the cost of the services that we provide. We believe that this factor has
been the basis for the significantly higher gross margins that we have achieved
with our small account customers relative to our large account customers.
Our "Steri-Safe" program, which after market testing in 1999, we began
to offer to select new and existing small account customers in 2000, provides an
integrated medical waste management and compliance-assistance program for small
account customers who typically lack the internal personnel and systems to
comply with OSHA bloodborne regulations. Our Steri-Safe customers pay a
predetermined fee in advance for medical waste collection and treatment services
and can also choose from available packages of training and education services
and products designed to help them to comply with OSHA regulations. We believe
that our implementation of the Steri-Safe program will provide us with new and
enhanced opportunities to leverage our existing customer base through the
program's prepayment structure and diversified product and service offerings.
We also operate several "mail-back" programs through which we can reach
small account customers located in outlying areas that would be inefficient to
serve using our regular route structure.
LARGE ACCOUNT CUSTOMERS. We believe that we have been successful in
serving large account customers and plan to continue to serve those customers as
long as satisfactory levels of profitability can be maintained. Our marketing
and sales efforts to large account customers are conducted by full-time account
executives whose responsibilities include identifying and attracting new
customers and serving our existing account base of approximately 4,700 large
account customers. In addition to securing new contracts, our marketing and
sales personnel
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provide consulting services to our health care customers, assisting them in
reducing the amount of medical waste that they generate, training their
employees on safety issues and implementing programs to audit, classify and
segregate medical waste in a proper manner.
We believe that the implementation of more stringent Clean Air Act and
other federal regulations directly and indirectly affecting medical waste will
enable us to improve our marketing efforts to large account customers because
the additional costs that they will incur to comply with these regulations will
make the costs of our services more attractive, particularly relative to their
use of their own incinerators.
NATIONAL ACCOUNTS. As a result of our extensive geographic coverage, we
are the only medical waste business capable of servicing national account
customers (i.e., customers requiring medical waste disposal services at various
geographically dispersed locations). We will continue to selectively focus on
national accounts (as the BFI medical waste business had done successfully prior
to our acquisition).
CONTRACT AND SERVICE AGREEMENTS. We have long-term contracts with
substantially all of our customers. We negotiate individual service agreements
with each large account and small account customer. Although we have a standard
form of agreement, particularly for small account customers, terms may vary
depending upon the customer's service requirements and the volume of medical
waste generated and, in some jurisdictions, requirements imposed by statute or
regulation. Service agreements typically include provisions relating to the
types of containers, frequency of collection, pricing, treatment and
documentation for tracking purposes. Each agreement also specifies the
customer's obligation to pack its medical waste in approved containers.
Substantially all of our agreements with small account customers contain
automatic renewal provisions.
Service agreements are generally for a period of one to five years,
although customers may terminate on written notice and, in most service areas,
upon payment of a penalty. Many payment options are available, including flat
monthly, quarterly or annual charges. We may set our prices on the basis of
the number of containers that we collect, the weight of the medical waste that
we collect and treat, the number of collection stops that we make on the
customer's route, the number of collection stops that we make for a particular
multi-site customer, and other factors.
We have a diverse customer base, with no single customer accounting for
more than 1% of revenues, and our top 10 customers accounting for less than 3%
of revenues. We do not believe that the loss of any single customer would have a
material adverse effect on our business, financial condition or results of
operations.
INTERNATIONAL. We have also expanded beyond the United States and
Canada. In 1996, we entered into an agreement with a Brazilian company,
Companhia Auxiliar de Viacao e Obras ("CAVO"), to assist in exploring
opportunities for the commercialization of our medical waste management
technology in South America. This relationship was expanded in July 1998, when
we entered into an agreement for an exclusive license 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.
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In 1998, we formed 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 50
metric-ton per day capacity. This facility, which is the largest medical waste
treatment facility permitted to date in Mexico, became operational in June 1998.
In September 1999, we increased our interest in Medam from 24.5% to 49%, and in
July 2000, we acquired a further 15% to give us a 64% interest in the joint
venture.
In 1999, we established a joint venture in Argentina, Medam, B.A. Srl,
to utilize our ETD technology to treat medical waste primarily in the Buenos
Aires market. We also entered into agreements to supply ETD equipment and
license ETD technology and other proprietary rights to Medam B.A., and to
provide consulting assistance to Medam B.A. in the installation, start-up and
validation of the ETD processing equipment in the joint venture's treatment
facility in Buenos Aires.
In June 2000, we entered into agreements with Aso Cement Co., Ltd and
Aso Mining Co., Ltd, to establish an ETD processing facility in Japan. Under
these agreements, we will supply ETD processing equipment to Aso and provide
consulting assistance to Aso in the installation, start-up and validation of the
ETD equipment. In addition, we exclusively licensed to Aso our ETD technology
and other proprietary rights for use in certain select territories within Japan.
In August 2000, we established a joint venture, Evertrade Medical Waste
(Proprietary) Limited, a South Africa corporation, to utilize our ETD technology
to treat medical waste in the Republic of South Africa. We also entered into
agreements to supply ETD equipment and license ETD technology and other
proprietary rights to Evertrade Medical Waste, and to provide consulting
assistance to Evertrade Medical Waste in the installation, start-up and
validation of the ETD processing equipment in the joint venture's treatment
facility in South Africa.
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 2000, by
type of treatment technology used, were as follows:
- autoclaving, 60-65%
- incineration, 27-32%
- our proprietary ETD technology, 8%
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.
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INCINERATION. Incineration burns medical waste at elevated temperatures
and reduces it to ash. Incineration reduces the volume of waste, and it is the
recommended treatment and disposal option for some types of medical waste such
as anatomical waste or residues from chemotherapy procedures. Air emissions from
incinerators can contain certain byproducts which are subject to federal, state
and, in some cases, local regulation. In some circumstances the ash byproduct of
incineration may be regulated.
ETD TREATMENT PROCESS. 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.
We believe that ETD offers advantages over many other methods of
treating medical waste. We believe that it is easier to get permits for ETD
facilities than for incineration facilities because ETD does not produce fluid
or air pollution. ETD facilities also can be more cost-effective to construct
than incinerators or autoclaves with shredding capability. ETD also renders
medical waste unrecognizable and thus more acceptable for landfills and reduces
the volume of waste as well. It may also facilitate recycling of polypropylene
plastics and some of the ETD-treated waste may be used for fuel in
"waste-to-energy" electrical plants.
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.
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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 wastes which were
generated in a covered state and which posed environmental problems, including
an unsightly appearance, were delivered to disposal or treatment facilities with
minimum exposure to waste management workers and the public. The MWTA's tracking
requirements included accounting for all waste transported and imposed civil and
criminal sanctions for violations.
In regulations implementing the MWTA, the EPA defined medical waste and
established guidelines for its segregation, handling, containment, labeling and
transport. The MWTA demonstration program expired in 1991, but the MWTA
established a model
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followed by many states in developing their specific medical waste regulatory
frameworks.
Clean Air Act Regulations. In August 1997, the EPA adopted regulations
under the Clean Air Act Amendments of 1990 that limit the discharge into the
atmosphere of pollutants released by medical waste incineration. These
regulations required every state to submit to the EPA for approval a plan to
meet minimum emission standards for these pollutants. See "--State and Local
Regulation." In 1997, the EPA estimated that of the approximately 1,100 small,
690 medium and 460 large medical waste incinerators in operation in May 1996,
approximately 83-90% of the small incinerators, 60-95% of the medium
incinerators and up to 35% of the large incinerators will be closed as hospitals
seek less expensive methods of medical waste disposal rather than incur the cost
of installing the necessary air pollution control systems to comply with the
EPA's regulations. We currently operate 12 incinerators. Because our facilities
are modern and well maintained, we believe that our future capital expenditures
required to bring our incinerators into compliance with these new regulations
will be covered by our normal capital expenditure budget. We believe that we
will be successful in obtaining all necessary federal and state permits to
continue the operation of our incinerators. The Natural Resources Defense
Council, an environmental organization, has sued the EPA challenging the
validity of its regulations on the grounds that the minimum emissions standards
are too lenient. If successful, this lawsuit could result in the EPA's adoption
of stricter air emissions standards for medical waste incinerators. Stricter
emissions standards could benefit us if the result is that hospitals and other
generators increase or accelerate their use of outside medical waste treatment
contractors like us. Stricter emissions standards could also increase the cost
to bring our own incinerators into compliance with the more stringent standards.
We might also face price increases for treatment of medical waste that we
deliver to other parties for incineration.
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
- forklift safety
We are subject to unannounced OSHA safety inspections at any time.
Our employees are required by our policy to receive new employee
training, annual refresher training and training in their specific tasks. As
part of our medical surveillance program, employees receive pre-employment
physicals, including drug testing, annually-
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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
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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 threaten to
release hazardous substances into the environment. CERCLA and state laws similar
to it may impose strict, joint and several liability on the current and former
owners and operators of facilities from which releases of hazardous substances
have occurred and on the generators and transporters of the hazardous substances
that come to be located at these facilities. Responsible parties may be liable
for substantial site investigation and cleanup costs and natural resource
damages, regardless of whether they exercised due care and complied with
applicable laws and regulations. If we were found to be a responsible party for
a particular site, we could be required to pay the entire cost of the site
investigation and cleanup, even though other parties also may be liable. This
result would be the case if we were unable to identify other responsible
parties, or if those parties were financially unable to contribute money to the
cleanup.
United States Postal Service. We have obtained a permit from the U.S.
Postal Service to conduct our "mail-back" program, pursuant to which customers
mail approved "sharps" (needles, knives, broken glass and the like) containers
directly to our treatment facilities.
STATE AND LOCAL REGULATION. We conduct business in numerous states.
Each state has its own regulations related to the handling, treatment and
storage of medical waste. Although there are many differences among the various
state laws and regulations, many states have followed the medical waste model
under the MWTA and are implementing programs under RCRA. In each of the states
where we operate a treatment facility or a transfer station, we are required to
comply with numerous state and local laws and regulations as well as our
operating plan for each site. State agencies involved in regulating the medical
waste industry are frequently the departments of health and environmental
protection agencies. In addition, many local governments have ordinances, local
laws and regulations, such as zoning and health regulations, that affect our
operations.
States usually regulate medical waste as a solid or "special" waste and
not as a hazardous waste under RCRA. State definitions of medical waste include:
- microbiological waste (cultures and stocks of infectious agents)
- pathology waste (human body parts from surgical procedures and
autopsies)
- blood and blood products, and
- sharps
Most states require segregation of different types of medical waste at
the hospital or other location where they were created. A majority of states
require that the universal biohazard symbol or a label appear on medical waste
containers. Storage regulations may apply to the party generating the waste, the
treatment facility, the transport vehicle, or all three. Storage rules seek
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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 and other technologies to treat medical
waste, and
- various business operator's licenses
We believe that we are currently in compliance in all material respects
with our permits and applicable laws and regulations.
Pursuant to medical waste incinerator regulations adopted by the EPA in
1997, every state was required by September 1998 to adopt a plan to comply with
federal guidelines which, among other things, limit the release of some airborne
pollutants from medical waste incinerators to levels prescribed by the EPA. Each
state's implementation plan must be at least as restrictive as the federal
emissions standards. If a state in which we operate an incinerator adopts more
stringent limits than the federal emissions standards, it could be very
expensive for us to bring our incinerator into compliance with the state's
requirements. See "--Governmental Regulation--Federal Regulation--Clean Air Act
Regulations."
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FOREIGN AND TERRITORIAL REGULATION. We presently conduct business in
several provinces in Canada. Our activities in British Columbia are governed at
the federal level by the Canadian Transportation of Dangerous Goods Act and the
Canadian Environmental Protection Act, and at the provincial level by comparable
legislation. The Canadian Environmental Protection Act regulates, among other
things, the transborder movement of medical waste. The federal Transportation of
Dangerous Goods Act regulates the movement of dangerous goods, including
infectious substances, by all modes of transportation. It imposes joint and
several liability on all persons who are responsible for, or who caused or
contributed to the release of any dangerous substance into the environment. Any
business engaged in a regulated activity is presumed to be liable for any
release, unless the business can demonstrate that it acted reasonably.
Provincial legislation typically regulates the storage, transportation
and disposal of waste, including biomedical waste, and imposes strict, joint and
several liability for all the costs of cleanup of contaminated sites.
We presently conduct business in the United States territory of Puerto
Rico. Our storage and treatment activities in Puerto Rico are governed at the
territorial level by the Puerto Rico Environmental Quality Board, while the U.S.
DOT regulates the transportation of medical waste in Puerto Rico and applies the
regulations promulgated under the Hazardous Materials Transportation
Authorization Act of 1994.
We believe that we have obtained all permits required by Canadian
federal and provincial legislation and by federal and territorial legislation
applicable to Puerto Rico.
We also conduct business in Mexico 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 material
applicable laws, rules and regulations.
If we expand our operations into other foreign jurisdictions, we will
be required to comply with the laws and regulations of each of these
jurisdictions.
PERMITTING PROCESS. Each state in which we currently operate, and each
state in which we may operate in the future, has a specific permitting process.
After we have identified a geographic area in which we want to locate a
treatment or transfer facility, we identify one or more locations for a
potential new site. Typically, we will develop a site contingent on obtaining
zoning approval and local and state operating authority. Most communities rely
on state authorities to provide operating rules and safeguards for their
community. Usually the state provides public notice of the project and, if
enough public interest is shown, 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
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opportunity for public opposition or other action that may impede our ability to
construct or operate the planned facility. Permitting for transportation
operations frequently involves registration of vehicles, inspection of
equipment, and background investigations on our officers and directors.
We have been successful in obtaining permits for our current medical
waste transfer, treatment and processing facilities and for our transportation
operations. Several of our past attempts to construct and operate medical waste
treatment facilities, however, have met with significant community opposition.
In some of these cases, we have withdrawn our permit application.
PATENTS AND PROPRIETARY RIGHTS
We consider the protection of our technology to be important to our
business. Our policy is to protect our technology by a variety of means,
including applying for patents in the United States and in some foreign
countries.
We hold 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).
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.
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 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.
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EMPLOYEES
As of December 31, 2000, we had 2,369 full-time and 82 part-time
employees (including employees of our subsidiaries). Approximately 140 of our
drivers and transportation helpers are covered by a total of eight collective
bargaining agreements with local unions of the International Brotherhood of
Teamsters. These agreements expire at various dates from April 2002 to April
2004. We consider our employee relations to be satisfactory.
POTENTIAL LIABILITY AND INSURANCE
The medical waste industry involves potentially significant risks of
statutory, contractual, tort and common law liability claims. Potential
liability claims could involve, for example:
- cleanup costs
- personal injury
- damage to the environment
- employee matters
- property damage
- alleged negligence or professional errors or omissions in the
planning or performance of work
We could also be subject to fines or penalties in connection with
violations of regulatory requirements.
We carry $26 million of liability insurance (including umbrella
coverage), and under a separate policy, $10 million of aggregate pollution and
legal liability insurance ($5 million per incident), which we consider
sufficient to meet regulatory and customer requirements and to protect our
employees, assets and operations. Our pollution liability insurance excludes
liabilities under CERCLA. There can be no assurance that we will not face claims
under CERCLA or similar state laws resulting in substantial liability for which
we are uninsured and which could have a material adverse effect on our business.
Our insurance programs utilize large deductible plans offered by a
commercial insurance company. Large deductible plans allow us the benefits of
cost-effective risk financing while protecting us from catastrophic risk with
specific stop loss insurance limiting the amount of self-funded exposure for any
one loss and aggregate stop loss insurance limiting the self-funding exposure
for any one year.
ITEM 2. FACILITIES
We lease office space for our corporate offices in Lake Forest,
Illinois. We own or lease four ETD treatment facilities, nine 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 and one ETD facility owned by Medam). All of our treatment facilities also
serve as collection sites. We
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own or lease 99 additional transfer and collection sites (including six sites
owned or leased by 3CI). We consider that these facilities are adequate for our
present and anticipated needs. Substantially all of our owned facilities are
pledged to secure our indebtedness under our senior credit facility.
We do not own or operate any landfills or any other type of disposal
site. After treatment, all remaining waste materials are transported to
unaffiliated parties for permanent disposal.
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. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our stockholders during the fourth
quarter of 2000.
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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 45
Richard T. Kogler................ Executive Vice President and Chief Operating Officer 41
Anthony J. Tomasello............. Executive Vice President and Chief Technical Officer 54
Frank J.M. ten Brink............. Executive Vice President and Chief Financial Officer 44
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.) and Ventana
Medical Services, Inc., 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 Executive Vice President for domestic
operations and 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 for
international operations 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 Executive Vice President 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 16, 2001, there were approximately 275 stockholders of
record.
The following table provides the 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 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
First quarter 2000 25.313 15.188
Second quarter 2000 25.875 19.000
Third quarter 2000 27.000 20.125
Fourth quarter 2000 42.250 24.063
We did not pay any dividends during 2000 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."
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ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Operations Data (1)
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $24,542 $46,166 $66,681 $132,848 $323,722
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (2) (2,437) 1,386 6,424 12,284 63,466
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) (2,389) 1,430 5,713 13,968(3) 14,511
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to Common Stock (2,389) 1,430 5,713 13,628 11,968
- ---------------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share of Common (0.32) 0.13 0.51 0.92(5) 0.72(5)
Stock (4)
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 2,064 3,078 4,064 9,879 23,469
- ---------------------------------------------------------------------------------------------------------------------------
EBITDA (6) $(373) $4,464 $10,489 $30,689 $90,966
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at December 31) (1)
- ---------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term $ 17,749 $7,709 $ 1,819 $ 19,629 $ 2,947
investments
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 55,155 61,226 97,755 595,786 597,982
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt, net of current maturities 4,591 3,475 23,460 355,444 345,104
- ---------------------------------------------------------------------------------------------------------------------------
Convertible redeemable preferred stock -- -- -- 69,195 71,437
- ---------------------------------------------------------------------------------------------------------------------------
Shareholder's equity $40,014 $45,026 $53,651 $118,114 $134,700
- ---------------------------------------------------------------------------------------------------------------------------
(1) See Note 4 to the Consolidated Financial Statements for information
concerning our acquisitions during the three years ended December 31,
2000.
(2) Includes $7,961,000 and $4,454,000 of acquisition related charges in 1999
and 2000, respectively.
(3) Includes $6,257,000 of tax benefit related to recognition of deferred tax
asset principally related to unused net operating losses.
(4) See Note 8 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 those items, fully-taxed diluted
net income per share of common stock for 1999 would have been $0.62.
Diluted net income per share of common stock for 2000 includes the
affects of the acquisition related charges listed in Note (2). Without
this item, fully-taxed diluted net income per share of common stock would
have been $0.86.
(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 and 2000, 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
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.
- 24 -
26
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 $1.6 million in 1991 to $323.7 million
in 2000. We derive our revenues from services to two principal types of
customers: (i) long-term and sub-acute care facilities, outpatient clinics,
medical and dental offices, biomedical companies, municipal entities and other
smaller-quantity generators of regulated medical waste ("small account"
customers) and (ii) hospitals, blood banks, pharmaceutical manufacturers and
other larger-quantity generators of regulated medical waste ("large account"
customers). Substantially all of our services are provided pursuant to customer
contracts specifying either scheduled or on-call regulated medical waste
management services, or both. Contracts with small account customers generally
provide for annual price increases and have an automatic renewal provision
unless the customer notifies us prior to completion of the contract. Contracts
with hospitals and other large account customers, which may run for more than
one year, typically include price escalator provisions, which allow for price
increases generally tied to an inflation index or set at a fixed percentage. As
of December 31, 2000, we served over 250,000 customers.
- 25 -
27
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
The following summarizes (in thousands) our operations:
Year Ended December 31,
2000 1999
---- ----
Revenues $323,722 100.0% $132,848 100.0%
Cost of revenues 196,345 60.7% 86,126 64.8%
------- ------
Gross profit 127,377 39.3% 46,725 35.2%
Selling, general and administrative 59,457 18.4% 26,480 19.9%
expenses ------- ------
Income from operations before 67,920 21.0% 20,245 15.2%
acquisition related costs
Acquisition related costs 4,454 1.4% 7,961 6.0%
----- -----
Income from operations 63,466 19.6% 12,284 9.2%
Net income 14,511 4.5% 13,968 10.5%
Depreciation and amortization 23,469 7.2% 9,879 7.4%
EBITDA before acquisition related $90,966 28.1% $30,689 23.1%
costs*
Earnings per share--
Diluted, fully taxed, before
acquisition-related costs $0.86 $0.62
Cash flow per share** $1.75 $1.25
* 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.
** Cash flow per share includes the benefit of 15-year goodwill
amortization for tax purposes versus 25 to 40 year goodwill amortization
for book purposes and excludes acquisition related costs.
Revenues. Our revenues increased $190.9 million, or 143.7%, to $323.7
million during the year ended December 31, 2000 from $132.8 million during the
year ended December 31,1999 as we had a full year of revenues from our
acquisition of the medical waste business from Browning Ferris Industries, Inc.
(the "BFI acquisition") completed in November 1999 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 and licensing of technology
internationally were $7.2 million during 2000 as compared to $5.9 million
during 1999. During 2000, acquisitions contributed approximately $180.0 million
to the increase in our revenues from 1999. For the year, internal growth for
small account customers increased approximately 8.0% while revenues from large
account customers increased by approximately 3.5%.
Cost of revenues. Our cost of revenues increased $110.2 million or
128.0%, to $196.3 million during the year ended December 31, 2000, from $86.1
million during the year ended December 31, 1999. The increase was primarily due
to the substantial increase in revenues during 2000 compared to 1999 and to the
cost of equipment sold internationally. Our gross margin percentage increased
to 39.3% during 2000 from 35.2% during 1999 as a result of the further
integration of the BFI acquisition into our existing infrastructure, lower
costs relating to the changing mix of small account versus large account
customers, higher gross margins on international equipment sales, and increased
utilization of treatment capacity.
Selling, general and administrative expenses. Our selling, general and
administrative expenses increased to $59.5 million during the year ended
December 31, 2000, from $26.5 million during the year ended December 31,1999.
This increase was largely the result of increases in selling and marketing
expenses and goodwill amortization as a result of the BFI acquisition. Selling,
general and administrative expenses as a percentage of revenue decreased to
18.4% during 2000 from 19.9% during 1999. Excluding amortization, selling,
general and administrative expenses as a percent of revenue decreased to 14.1%
during 2000 from 16.7% during 1999.
- 26 -
28
Acquisition related costs. During the year end December 31, 2000 we
incurred integration and other non-recurring acquisition costs of $4.5 million
related to the BFI acquisition as compared to $8.0 million during the year ended
December 31, 1999. These costs included severance and facility closure costs,
other non-recurring acquisition related costs, and transition related expenses.
We anticipate that we will incur an additional $1,000,000 in acquisition related
expenses during the year ended December 31, 2001.
EBITDA. Earnings before interest, income taxes, depreciation and
amortization ("EBITDA") before acquisition related charges increased by 196.4%
to $91 million or 28.1% of revenues for the year ended December 31, 2000 as
compared to $30.7 million or 23.1% of revenues for the year ended December 31,
1999. The increase in EBITDA is primarily due to the factors described above.
Interest expense and interest income. Interest expense increased to
$39.8 million during the year ended December 31, 2000, from $6.2 million during
the year ended December 31, 1999, primarily due to increased borrowings for the
BFI acquisition. Interest income decreased to $.6 million during 2000, from $1.1
million during 1999, primarily due lower cash balances throughout the year.
Income tax expense. Income taxes for the year ended December 31, 2000
reflects an effective tax rate of approximately 39.1% for federal and state
income taxes. Income tax expense for the year ended December 31, 1999 reflects a
one time tax benefit of $6.3 million recorded in compliance with FASB 109.
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 26,480 19.9% 14,929 22.4%
expenses
Income from operations before 20,245 15.2% 6,424 9.6%
acquisition related costs
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 $ 30,689 23.1% $ 10,489 15.7%
costs*
Earning per share
Diluted, fully taxed before $ 0.62 $ 0.34
acquisition-related costs
Cash flow per share** $ 1.25 $ 0.82
- 27 -
29
* 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).
** Cash flow per share includes the benefit of 15 year goodwill amortization
for tax purposes versus 25 to 40 year goodwill amortization for book
purposes and excludes acquisition related costs.
Revenues. Our revenues increased $66.1 million or 99.2%, to $132.8
million during the year ended December 31, 1999 from $66.7 million during the
year ended December 31,1998 as we completed the acquisition of the medical waste
business from the BFI acquisition and continued to focus on sales to
higher-margin small account customers while simultaneously paring specified
higher-revenue but lower-margin accounts with large account customers. Revenues
generated from the sale of machinery internationally were $5.9 million during
the year ended December 31, 1999 as compared to $6.0 million during 1998. During
1999, acquisitions contributed approximately $61.5 million to the increase in
our revenues from 1998. For the year, internal growth for small account
customers increased approximately 15.8% while revenues from large account
customers decreased by approximately 1.3%.
Cost of revenues. Our cost of revenues increased $40.8 million, or
90.0%, to $86.1 million during the year ended December 31, 1999, from $45.3
million during the year ended December 31, 1998. The increase was primarily due
to the completion of the BFI acquisition and the substantial increase in
revenues during 1999 compared to 1998 and to the cost of equipment sold
internationally. Our gross margin percentage increased to 35.2% during 1999,
from 32% 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 $26.5 million during the year ended
December 31, 1999, from $14.9 million during the year ended December 31,1998.
This increase was largely the result of increases in selling and marketing
expenses and goodwill amortization as a result of our acquisitions, expansion of
our sales network, and increased administrative expenses related to the higher
volume. Selling, general and administrative expenses as a percentage of revenues
decreased to 19.9% during 1999 from 22.4% during 1998. Excluding amortization,
selling, general and administrative expenses as a percent of revenues decreased
to 16.7% during 1999 from 20.1% during 1998.
Acquisition related costs. During the fourth quarter of 1999, we
incurred integration and other non-recurring acquisition costs of $8.0 million
related to the BFI acquisition. These costs included severance and facility
closure costs, other non-recurring acquisition related costs, and transition
related expenses.
EBITDA. Earnings before interest, income taxes, depreciation and
amortization ("EBITDA") before the acquisition related charges increased by
192.6% to $30.7 million, or 23.1% of revenues for the year ended December 31,
1999 as compared to $10.5 million, or
- 28 -
30
15.7% of revenues for the year ended December 31, 1998. The increase in EBITDA
is primarily due to the factors described above.
Interest expense and interest income. Interest expense increased to
$6.2 million during the year ended December 31, 1999, from $.8 million during
the year ended December 31, 1998, primarily due to increased borrowings for the
BFI acquisition. Interest income also increased to $1.1 million during 1999,
from $.7 million during 1998, primarily due to interest income on the investment
of excess funds from the secondary offering of public stock that we completed in
February 1999.
Other Income and Expense. During the year ended December 31, 1999, a
one-time gain of $.8 million on the sale of routes by 3CI Complete Compliance
Corporation, of which our wholly-owned subsidiary, Waste Systems, Inc. is a
majority shareholder, was partially offset by a one-time cash expense of $.2
million for warrants issued with bridge loan borrowings in December 1998 and
January 1999.
Income tax expense. Income tax expense for the year ended December 31,
1999 reflects a one time tax benefit of $6.3 million recorded in compliance with
FASB 109. Under FASB 109, we are required to recognize our net deferred tax
assets if we believe that we are more likely than not to benefit from our
carryforward losses and tax credits in future years.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, our working capital was $47.9 million compared to
working capital of $26.9 million at December 31, 1999. The increase in working
capital was primarily due to a higher accounts receivable balance as a result of
the BFI acquisition.
Net cash provided by operating activities was $10.2 million during the
year ended December 31, 2000 compared to $11.8 million for the year ended
December 31, 1999. This decrease primarily reflects higher accounts receivable
balances offset by higher depreciation and amortization expense and a decrease
in our deferred tax asset.
Net cash used in investing activities for the year ended December 31,
2000 was $15.7 million compared to $425.6 million for the year ended December
31, 1999. The change is primarily attributable to the decrease in cash used for
funding acquisitions and international investments completed in 2000. Capital
expenditures were $11.6 million for 2000 compared to $3.8 million for
1999. Payments for acquisitions and international investments amounted to $4.6
million during 2000.
In order to finance the BFI acquisition in 1999, 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 have experienced a corresponding
large increase in amortization expense.
We have a credit agreement with a group of lenders that provides for an
aggregate of up to $260 million in senior secured financing comprised of (i) a
six-year term loan A amortizing
- 29 -
31
facility of $70 million, (ii) a seven-year term loan B amortizing facility of
$140 million, and (iii) a $50 million revolving loan facility. As of December
31, 2000 we had drawn $5.0 million on the revolving loan facility. Payments of
$14.5 million were made on the term loans during 2000.
In addition, we have outstanding 12-3/8% Series A Senior Subordinated
Notes due 2009 in the aggregate principal amount of $125 million.
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 and Madison Dearborn Partners, 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 used in financing activities was $11.2 million during the year
ended December 31, 2000 compared to net cash provided by financing activities of
$431.9 million for the year ended December 31,1999. The difference between the
two periods results primarily from the completion of the financings in 1999
previously described and of our second public offering of common stock in
February 1999, which raised $47.2 million 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 $1.0 million as of December 31, 2000 at fixed interest
rates ranging from 6.5% to 7.375% are due in various amounts through June 2017.
In addition, we have issued various promissory notes in connection with
acquisitions during 1997, 1998 and 2000, consisting primarily of a 10-year note
issued as a part of the Environmental Control Corporation, Inc. ("ECCO")
acquisition, which has an outstanding balance of $1.6 million at December 31,
2000.
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 the consolidated balance sheets at fair value and establishes
criteria for hedges of changes in fair value of assets, liabilities or firm
commitments, hedges of variable cash flows of forecasted transactions and hedges
of foreign currency exposures of net investments in foreign operations. Changes
in the fair value of derivatives that do not meet the criteria for hedges would
be recognized in the consolidated statement of earnings. This statement was
effective for us beginning January 1, 2001. The adoption of SFAS No. 133 did not
have a material impact on us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- 30 -
32
We are exposed to interest rate risk on our senior credit facility,
which is variable rate debt. A 1% change in the interest rate would result in a
change in our interest expense of approximately $2.1 million. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Liquidity and Capital Resources."
- 31 -
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Stericycle, Inc.
We have audited the accompanying consolidated balance sheets of
Stericycle, Inc. and Subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2000. Our audits also included the financial statement schedule listed in the
Index at Items 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, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Chicago, Illinois
February 23, 2001
34
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share data)
December 31,
1999 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 19,344 $ 2,666
Short-term investments 285 281
Accounts receivable, less allowance for doubtful
accounts of $980 in 1999 and $3,625 in 2000 48,284 71,225
Parts and supplies 2,035 3,216
Prepaid expenses 863 1,858
Other 6,729 11,765
--------- ---------
Total current assets 77,540 91,011
--------- ---------
Property, plant and equipment:
Land 7,308 7,486
Buildings and improvements 29,123 26,565
Machinery and equipment 50,011 54,040
Office equipment and furniture 5,182 6,515
Construction in progress 386 3,834
--------- ---------
92,010 98,440
Less accumulated depreciation (16,898) (24,532)
--------- ---------
Property, plant and equipment, net 75,112 73,908
--------- ---------
Other assets:
Goodwill, less accumulated amortization of $7,974
in 1999 and $24,507 in 2000 421,001 418,790
Other 22,133 14,273
--------- ---------
Total other assets 443,134 433,063
--------- ---------
Total assets $ 595,786 $ 597,982
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 5,741 $ 5,097
Accounts payable 14,347 14,444
Due to seller 3,576 1,631
Accrued compensation 7,569 3,887
Accrued acquisition related expenses 7,101 3,766
Accrued liabilities 12,206 13,783
Deferred revenue 142 505
--------- ---------
Total current liabilities 50,682 43,113
--------- ---------
Long-term debt, net of current portion 355,444 345,104
Other liabilities 2,351 3,628
Redeemable preferred stock:
Series A convertible preferred stock (par value $.01 per share, 75,000 shares
authorized and outstanding in 1999 and 2000, liquidation preference of
$75,340 at December 31, 1999 and $77,883 at December 31, 2000 69,195 71,437
Common shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares authorized,
14,665,106 issued and outstanding in 1999, 15,208,866 issued and
outstanding in 2000) 147 152
Additional paid-in capital-common stock 136,691 141,304
Accumulated deficit (18,724) (6,756)
--------- ---------
Total shareholders' equity 118,114 134,700
--------- ---------
Total liabilities and shareholders' equity $ 595,786 $ 597,982
========= =========
The accompanying notes are an integral part of these financial statements.
- 1 -
35
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
---------------------------------------------
1998 1999 2000
------------ ----------- -------------
Revenues $ 66,681 $ 132,848 $ 323,722
Costs and expenses:
Cost of revenues 45,328 86,123 196,345
Selling, general and administrative 14,929 26,480 59,457
Acquisition related costs -- 7,961 4,454
------------ ------------ ------------
Total costs and expenses 60,257 120,564 260,256
------------ ------------ ------------
Income from operations 6,424 12,284 63,466
Other income (expense)
Interest income 713 1,144 558
Interest expense (777) (6,195) (39,785)
Other income, net 1 565 (423)
------------ ------------ ------------
Total other income (expense) (63) (4,486) (39,650)
------------ ------------ ------------
Income before income taxes 6,361 7,798 23,816
Income tax expense (benefit) 648 (6,170) 9,305
------------ ------------ ------------
Net income $ 5,713 $ 13,968 $ 14,511
============ ============ ============
Earnings per share - Basic $ 0.54 $ 0.96 $ 0.80
============ ============ ============
Earnings per share - Diluted $ 0.51 $ 0.92 $ 0.72
============ ============ ============
Weighted average number of
common shares outstanding - Basic 10,647,086 14,240,084 14,879,103
============ ============ ============
Weighted average number of
common shares outstanding - Diluted 11,263,528 15,241,778 20,092,844
============ ============ ============
The accompanying notes are an integral part of these financial statements.
- 2 -
36
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------------
1998 1999 2000
--------- --------- ----------
OPERATING ACTIVITIES:
Net income $ 5,713 $ 13,968 $ 14,511
Adjustments to reconcile net income to net cash provided by operating activities:
Issuance of warrants -- 192 160
Depreciation and amortization 4,064 9,879 23,469
Deferred income taxes -- (7,119) --
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (1,884) (31,595) (21,979)
Parts and supplies (420) 526 (881)
Prepaid expenses 58 320 (1,085)
Other assets 302 (1,759) (1,737)
Accounts payable 1,781 7,845 66
Due to seller -- 3,576 (1,353)
Tax benefit of disqualifying dispositions of stock options -- -- 1,059
Accrued liabilities (6,223) 17,980 (2,124)
Deferred revenue 1,471 (2,036) 363
--------- --------- ---------
Net cash provided by operating activities 4,862 11,777 10,469
--------- --------- ---------
INVESTING ACTIVITIES:
Payments for acquisitions and international investments, net of cash acquired (19,775) (422,280) (4,516)
Proceeds from sale of property 405 -- --
Proceeds from maturity of short-term investments -- 447 502
Purchases of short-term investments (41) -- --
Capital expenditures (4,342) (3,795) (11,586)
--------- --------- ---------
Net cash used in investing activities (23,753) (425,628) (15,600)
--------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds and repayment from bank lines of credit 16,386 (16,359) 5,000
Net proceeds and repayment from subordinated debt 2,750 (2,750) --
Proceeds from long term bank debt -- 225,000 --
Proceeds from senior subordinated debt -- 125,000 --
Repayment of long term debt (3,189) (4,366) (16,428)
Payments of deferred financing costs (218) (10,828) (631)
Principal payments on capital lease obligations (1,273) (290) (1,487)
Net proceeds from secondary public offering of common stock -- 47,158 --
Net proceeds from (payments related to) issuance of
preferred stock -- 68,855 (300)
Proceeds from other issuances of common stock 344 492 2,299
--------- --------- ---------
Net cash provided by (used in) financing activities 14,800 431,912 (11,547)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (4,091) 18,061 (16,678)
Cash and cash equivalents at beginning of period 5,374 1,283 19,344
--------- --------- ---------
Cash and cash equivalents at end of period $ 1,283 $ 19,344 $ 2,666
========= ========= =========
Non-cash activities:
Net issuances of notes payable for certain acquisitions $ 195 $ 103 $ 250
Net issuances of common stock and warrants for certain acquisitions $ 2,568 $ 3,043 $ 1,260
The accompanying notes are an integral part of these financial statements.
- 3 -
37
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1999 and 2000
(in thousands)
Notes
Issued Receivable
and Additional for Common
Outstanding Paid-in Stock
Shares Amount Capital Purchases
----------- ------ ---------- ----------
Balances at December 31, 1997......................................... 10,473 $ 105 $ 82,986 $ (4)
Issuance of common stock for exercise of options and
warrants and employee stock purchase................................ 226 2 342 --
Common stock issued for acquisitions.................................. 167 2 2,566 --
Principal payments under note receivable.............................. -- -- -- 4
Net income............................................................ -- -- -- --
------ ------ --------- -------
Balances at December 31, 1998......................................... 10,866 109 85,894 --
Issuance of common stock for exercise of options and
warrants and employee stock purchases............................... 148 1 633 --
Common stock issued for acquisitions.................................. 220 2 3,041 --
Secondary public offering of common stock (net of offering costs)..... 3,500 35 47,123 --
Preferred dividends................................................... -- -- -- --
Net income............................................................ -- -- -- --
------ ------ --------- -------
Balances at December 31, 1999......................................... 14,734 147 136,691 --
Issuance of common stock for exercise of options and
warrants and employee stock purchases............................... 449 5 2,294 --
Common stock and warrants issued for acquisitions..................... 26 -- 1,260 --
Tax benefit of disqualifying dispositions of stock options............ -- -- 1,059 --
Preferred dividends................................................... -- -- -- --
Net income............................................................ -- -- -- --
------ ------ --------- -------
Balances at December 31, 2000......................................... 15,209 $ 152 $ 141,304 $ --
====== ====== ========= =======
Total
Accumulated Shareholders'
Deficit Equity
----------- -------------
Balances at December 31, 1997......................................... (38,061) 45,026
Issuance of common stock for exercise of options and
warrants and employee stock purchase................................ -- 344
Common stock issued for acquisitions.................................. -- 2,568
Principal payments under note receivable.............................. (4) --
Net income............................................................ 5,713 5,713
--------- ---------
Balances at December 31, 1998......................................... (32,352) 53,651
Issuance of common stock for exercise of options and
warrants and employee stock purchases............................... -- 634
Common stock issued for acquisitions.................................. -- 3,043
Secondary public offering of common stock (net of offering costs)..... -- 47,158
Preferred dividends................................................... (340) (340)
Net income............................................................ 13,968 13,968
--------- ---------
Balances at December 31, 1999......................................... (18,724) 118,114
Issuance of common stock for exercise of options and
warrants and employee stock purchases............................... -- 2,299
Common stock and warrants issued for acquisitions..................... -- 1,260
Tax benefit of disqualifying dispositions of stock options............ -- 1,059
Preferred dividends................................................... (2,543) (2,543)
Net income............................................................ 14,511 14,511
--------- ---------
Balances at December 31, 2000......................................... $ (6,756) $ 134,700
========= =========
The accompanying notes are an integral part of these financial statements.
-4-
38
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
Unless the context requires otherwise, "we," "us" or "our" refers to
Stericycle, Inc. and its subsidiaries on a consolidated basis.
Note 1-DESCRIPTION OF BUSINESS
We provide regulated medical waste collection, transportation, and
treatment services to our customers and related training, education and
compliance programs and consulting services. We also sell ancillary supplies and
transport pharmaceuticals, photographic chemicals, lead foil and amalgam for
recycling in selected geographic service areas. We are also expanding into
international markets through joint ventures and by licensing our proprietary
technology and selling associated equipment.
Note 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of Stericycle,
Inc. and its wholly-owned subsidiaries, Stericycle of Arkansas, Inc., Stericycle
of Washington, SWD Acquisitions Corporation, Environmental Control Co., Inc.
("ECCO"), Waste Systems, Inc. ("WSI") (the majority shareholder of 3CI Complete
Compliance Corporation), Med Tech Environmental Ltd. ("Med-Tech"), BFI Medical
Waste, Inc. ("BFI"), BFI Medical Waste, Inc. (Puerto Rico) as well as our 64%
ownership in Medam (a Mexican company). All significant intercompany accounts
and transactions have been eliminated. In addition, we have a 33% ownership in
Medam B.A. Srl (an Argentine company) and a 26.5% ownership in Medical Waste
Specialists (PTY) Ltd. (a South African company) which are both accounted for
using the Equity method.
Revenue Recognition:
We recognize revenue at the time of medical waste collection. Revenue and
costs on contracts to supply our proprietary treatment equipment are accounted
for by the percentage of completion method, whereby income is recognized based
on the estimated stage of completion of the individual contract.
Cash Equivalents and Short-Term Investments:
We consider all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents. Short-term investments
consist of highly liquid investments in corporate debt obligations which mature
in less than one year and are classified as held-to-maturity. These obligations
are stated at amortized cost, which approximates fair market value. Interest
income is recognized as earned.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation and
amortization, which include the depreciation of assets recorded under capital
leases, are computed using the straight-line method over the estimated useful
lives of the assets as follows:
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Buildings and Improvement-------10 to 30 years
Machinery and Equipment----------3 to 10 years
Office Equipment and Furniture---5 to 10 years
Software--------------------------3 to 7 years
Goodwill:
Goodwill is amortized using straight-line method over 25 years except for
the goodwill related to our acquisition of the medical waste business of
Browning-Ferris Industries, Inc. (the "BFI acquisition"), which is being
amortized over 40 years. Amortization expense for 1998, 1999 and 2000 related to
goodwill was approximately $1.5 million, $4.3 million and $13.8 million
respectively. We continually evaluate the value and future benefits of our
goodwill. We assess recoverability from future operations using cash flows of
the related acquired business as a measure. Under this approach, the carrying
value of goodwill would be reduced if it becomes probable that our best estimate
for expected undiscounted future cash flows of the related business would be
less than the carrying amount of goodwill over its remaining amortization
period. For the three-year period ended December 31, 2000, there were no
adjustments to the carrying amounts of goodwill resulting from these
evaluations.
New Plant Development and Permitting Costs:
We expense costs associated with the operation of new plants prior to the
commencement of services to customers and all initial and most on-going costs
related to permitting.
Income Taxes:
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax liabilities
and assets are determined based on the differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Financial Instruments:
Our financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable and payable and long-term debt. The fair values
of these financial instruments were not materially different from their carrying
values. financial instruments which potentially subject us to concentrations of
credit risk consist principally of accounts receivable. Credit risk on trade
receivables is minimized as a result of the large size of our customer base. No
single customer represents greater than 1% of total accounts receivable. We
perform ongoing credit evaluation of our customers and maintain allowances for
potential credit losses. These losses, when incurred, have been within the range
of our expectations.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Derivative Reporting:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity." SFAS No. 133
provides comprehensive and consistent standards for the recognition and
measurement of derivative and hedging activities. It requires that derivatives
be recorded on
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the consolidated balance sheets at fair value and establishes criteria for
hedges of changes in fair value of assets, liabilities or firm commitments,
hedges of variable cash flows of forecasted transactions and hedges of foreign
currency exposures of net investments in foreign operations. Changes in the fair
value of derivatives that do not meet the criteria for hedges would be
recognized in the consolidated statement of operations. This statement was
effective for us beginning January 1, 2001. The adoption of SFAS No. 133 did not
have a material impact on us.
Segment Reporting:
Effective January 1, 1998, we adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
enterprise-wide disclosures about products and services, geographic areas, and
major customers. The adoption of FAS 131 did not affect our results of
operations or financial position, but did affect our disclosures. Our operating
segments (Stericycle, Inc., BFI, WSI and Med Tech) have similar economic
characteristics and are similar in the nature of their products and services,
treatment processes, types of customers, methods of distribution of services,
and nature of their regulatory environments. Based on this conclusion, we have
not presented segment disclosure information. We have provided our
enterprise-wide disclosures in Note 15.
Note 3-INCOME TAXES
At December 31, 2000, we had net operating loss carryforwards for federal
income tax purposes of approximately $9.4 million (excluding 3CI and Med-Tech),
which expire beginning in 2006. Based on the Internal Revenue Code of 1986, as
amended, and changes in our ownership, utilization of the net operating loss
carryforwards is subject to annual limitations which could significantly
restrict or partially eliminate the utilization of the net operating losses.
Additionally, we have an alternative minimum tax credit carryforward of $.3
million available indefinitely as well as a foreign tax credit of approximately
$2.2 million which will begin to expire beginning in 2004.
Significant components of our income tax expense (benefit) for the years
ended December 31, 1998, 1999 and 2000 are as follows:
1998 1999 2000
Deferred
Federal $ -- ($6,015,000) $ 4,450,000
State -- (1,104,000) 530,000
----------- ----------- -----------
-- (7,119,000) 4,980,000
Current
Federal $ 243,000 $ 100,000 3,165,000
State 405,000 849,000 1,160,000
----------- ----------- -----------
Total Provisions $ 648,000 ($6,170,000) $ 9,305,000
A reconciliation of the income tax provision computed at the federal
statutory rate to the effective tax rate for the years ended December 31, 1998,
1999 and 2000 is as follows:
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1998 1999 2000
Federal statutory income tax rate 34.0% 34.0% 35.0%
Effect of:
State taxes, net of federal tax effect 4.0% 7.6 5.0%
Alternative minimum taxes 3.8% -- --
Non deductible goodwill amortization 1.8% 3.9% 0.4%
Change in valuation allowance (33.4%) (126.9%) (1.2%)
Other -- 2.3% (0.1%)
------ ------ -----
Effective tax rate 10.2% (79.1%) 39.1%
Paid income taxes were $1,030,000, $2,014,000 and $1,966,000 in 1998, 1999 and
2000, respectively.
Our deferred tax liabilities and assets as of December 31, 1999 and 2000 are as
follows:
1999 2000
Deferred tax liabilities:
Capital lease obligations
Property, plant, and equipment $ (2,511,000) $ (3,085,000)
Goodwill (4,014,000) (6,861,000)
Other (201,000) (2,127,000)
------------ ------------
Total deferred tax liabilities (6,726,000) (12,073,000)
Deferred tax assets:
Accrued liabilities 2,561,000 3,807,000
Other 1,538,000 2,291,000
Net operating tax loss carryforward 19,095,000 16,378,000
Alternate minimum tax credit carryforward 238,000 324,000
------------ ------------
Total deferred tax assets 23,432,000 22,800,000
------------ ------------
Net deferred tax assets 16,706,000 10,727,000
Valuation allowance (9,587,000) (8,588,000)
------------ ------------
Net deferred tax assets $ 7,119,000 $ 2,139,000
During the fourth quarter of 1999, we re-evaluated the estimated amount of
valuation allowance required in light of the profitability achieved in 1997,
1998 and 1999 as well as the improved profitability expected in future years as
a result of the BFI acquisition in November 1999. As a result, we reduced the
valuation allowance on deferred tax assets in accordance with SFAS No. 109,
"Accounting for Income Taxes", to an amount that we believe is
more likely than not of being recovered. Accordingly, an income tax benefit of
approximately $6.3 million was reflected in the fourth quarter. The amount of
net deferred tax assets estimated to be recoverable was based upon our
assessment of the likelihood of near term operating income coupled with
uncertainties with respect to the impact of future market conditions. At
December 31, 1999 and 2000, the valuation allowance relates principally to the
net operating loss carryforward at 3CI.
Note 4-ACQUISITIONS
During the year ended December 31, 2000, we purchased customer lists and
selected other assets of seven medical waste management businesses. The
aggregate purchase price for these acquisitions was approximately $3.2 million,
of which $2.4 million was paid in cash, $.5 million was paid by the issuance of
unregistered shares of our common stock, and $.3 million was paid by the
issuance of promissory notes. In
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certain cases, the purchase price is subject to downwards adjustment if revenues
from customer contracts acquired do not reach certain specified levels.
On July 1, 2000 we increased our ownership in our Mexico joint venture,
Medam S.A. de C.V. ("Medam"), to 64% from 49% by purchasing an additional 15%
interest from our co-venturer. We paid the purchase price of $1.6 million by
combination of cash installment payments and warrants to purchase common stock.
The increase in ownership changes our accounting method for the joint venture
from the equity to the consolidation method beginning July 1, 2000.
In November 1999, we completed the acquisition from Allied Waste
Industries, Inc. ("Allied") of the medical waste business of Browning-Ferris
Industries, Inc. ("BFI") in the United States, Canada and Puerto Rico. Prior to
our acquisition, BFI had been the largest provider of regulated medical waste
services in the United States, with revenues of $201.7 million for the 12 months
ended June 30, 1999. The purchase price for our acquisition was $410.5 million
in cash. We paid the purchase price from the following sources, in addition to
cash on hand: (i) $225.0 million in borrowings under the term loan facilities of
a new senior credit facility that we established with DLJ Capital Funding, Inc.,
Bankers Trust Company and Bank of America, N.A.; (ii) $125.0 million in proceeds
from the sale of 12-3/8% senior subordinated notes due 2009; and (iii) $75.0
million in proceeds from the issuance of new Series A Convertible Preferred
Stock to investment funds affiliated with Bain Capital, 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 5--
Long Term Debt-Senior Credit Facility and - Senior Subordinated Notes and
Note 10 - Series A Preferred Stock.
In addition, during the year ended December 31, 1999, we purchased the
customer lists and selected other assets of 13 medical waste management
businesses. The aggregate purchase price for these acquisitions was
approximately $8.2 million, of which $6.5 million was paid in cash, $1.6 million
was paid by the issuance of unregistered shares of our common stock, and $.1
million was paid by the issuance of promissory notes. In addition, we assumed
certain liabilities of the sellers aggregating approximately $.1 million. In
certain cases, the purchase price is subject to downwards adjustment if revenues
from customer contracts acquired do not reach certain specified levels.
In December 1998 and January 1999, we acquired all of the outstanding stock
and warrants of Med-Tech Environmental Ltd. ("Med-Tech"). Med-Tech, which is
located in Toronto, Canada, provides medical waste management services in Canada
and the northeastern United States. We paid a total of approximately $3.1
million in cash for the Med-Tech shares and warrants that we acquired. In
October 1998, we purchased Med-Tech's junior secured indebtedness of
approximately $3.6 million, paying the face value of the acquired debt, in the
form of $2.9 million in cash and 36,940 shares of Common Stock, and replacing a
letter of credit of approximately $1.6 million (which was returned in January
1999).
In October 1998, we acquired all the outstanding capital stock of Waste
Systems, Inc. ("WSI"). The purchase price was $10 million in cash and the grant
of certain exclusive negotiation and first refusal rights to the sellers in
respect of the purchase, for installation and operation in the Federal Republic
of Germany, of medical waste treatment units incorporating our proprietary ETD
technology. WSI owns approximately 55.5% of the common stock and all of the
preferred stock of 3CI Complete Compliance Corporation ("3CI"), which provides
regulated medical waste management services in the southeastern United States.
3CI's common stock is traded over-the-counter under the symbol "TCCC". WSI also
owns a secured promissory note from 3CI which, as amended in December, 1998, is
payable to WSI in the principal amount of approximately $5.6 million on or
before March 31, 2001.
In addition, during 1998, we acquired customer contracts and certain assets
of 10 regulated medical waste businesses. The purchase price for these six
acquisitions was paid in the form of cash, issuance of our common stock,
assumption of liabilities, and in two cases delivery of notes payable in 1998.
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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 1998, 1999 and 2000 of $22.5 million, $424.4 million and $3.1 million
respectively, net of cash acquired, was allocated to assets acquired and
liabilities assumed based on the estimated fair market value at the date of
acquisition. The total purchase price of 1998, 1999, and 2000 acquisitions
includes the value of 167,000, 220,058 and 26,000 shares respectively, of our
common stock issued to the sellers. The excess of the purchase price over the
fair market value of the net assets acquired is reflected in the accompanying
Consolidated Balance Sheets as goodwill. The results of operations of these
acquired businesses are included in the Consolidated Statement of Operations
from the date of the acquisition. The effect of these acquisitions would not
have a significant effect on our operations, except for the BFI, Med Tech, and
Waste Systems acquisitions.
The following unaudited pro forma results of the operations assumes that
the BFI acquisition occurred as of January 1, 1999 after giving effect to
certain adjustments including amortization of goodwill, increased interest
expense on debt incurred in connection with the acquisitions and adjustments to
record incremental recurring costs associated with the consolidation of the
operations as the historical results of operations of BFI did not reflect these
costs:
Year ended December 31, 1999
(in thousands, except per share data)
Pro forma revenues $304,386
Pro forma net income* 20,277
Pro forma diluted net income per share* 1.07
* includes a tax benefit of $6.3 million in 1999
The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the transactions taken
place at the beginning of the period indicated or of future results of
operations.
Note 5--LONG TERM DEBT
Long term debt consists of the following at December 31:
1999 2000
-------- --------
(in thousands)
Industrial development revenue bonds $ 1,145 $ 990
Obligations under capital leases 6,140 4,749
Notes Payable to Bank 225,000 215,456
Senior Subordinated Debt 125,000 125,000
Notes Payable 3,900 4,006
-------- --------
361,185 350,201
Less: Current Portion 5,741 5,097
-------- --------
Total $355,444 $345,104
======== ========
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In connection with our May 1997 purchase of ECCO's stock, a 10-year note
for $2,300,000 was issued to the owners of ECCO. The note is payable in 10 equal
annual installments due on May 1 of each year starting in 1998. The note bears
interest at the rate of 6.86% per annum.
During 1992, we entered into an obligation to finance the development of
its Woonsocket, Rhode Island facility. The development and purchase of
substantially all of the property and equipment for the facility was financed
from the issuance of industrial development revenue bonds. The bonds are due in
various amounts through 2017 at fixed interest rates ranging from 6.5% to 7.375%
and are collateralized by the property and equipment at the facility. The terms
of an agreement entered into in connection with the issuance of the bonds
contain, among other provisions, requirements for maintaining defined levels of
working capital and various financial ratios including debt to net worth.
Payments due on long-term debt excluding capital lease obligations, during
each of the five years subsequent to December 31, 2000 are as follows:
(in thousands)
2001 $ 4,143
2002 15,588
2003 17,283
2004 19,148
2005 23,685
Thereafter 265,605
The company paid interest of $.7 million, $2.2 million and $37.9 million for the
fiscal years ended December 31, 1998, 1999 and 2000, respectively.
At December 31, 2000 property under capital leases included with property,
plant and equipment in the accompanying Consolidated Balance Sheet is as
follows:
(in thousands)
Machinery and Equipment $ 43
Vehicles 5,741
Less--accumulated depreciation and amortization (1,350)
--------
$ 4,435
Minimum future lease payments under capital leases are as follows:
(in thousands)
2001 $1,334
2002 1,288
2003 1,041
2004 844
2005 711
Thereafter 691
------
Total minimum lease payments 5,909
Less amounts representing interest (1,160)
------
Present value of net minimum lease payments 4,749
Less Current portion 954
------
Long-term obligations under capital leases $3,795
------
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Senior Credit Facility
In November 1999, we established a term loan and revolving credit facility
under a credit agreement with various financial institutions. The facility
consists of (i) a six-year revolving credit facility of up to $50.0 million,
(ii) a six-year term loan A in the principal amount of up to $75.0 million and
(iii) a seven-year term loan B in the principal amount of up to $150.0 million.
The Company borrowed the full amount available under term loan A and term loan B
principally to finance a portion of the purchase price of our acquisition of
BFI. As of December 31, 2000, we have made $5.0 million in payments on the term
loan A and $9.5 million in payments on the term loan B. In addition, we had $5.0
million outstanding under the revolving credit facility.
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 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 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 subsidiaries with the exception that no more than 65%
of the capital stock or similar equity interests of our foreign subsidiaries
which is directly held by us or by a domestic subsidiary has been pledged, and
no capital stock of our foreign subsidiaries which are held by a foreign
subsidiary has been pledged, and (iii) all intercompany notes other than
intercompany notes held by the Company's foreign subsidiaries.
The credit facility is guaranteed on a senior secured basis by entities
customary for transactions of this nature, including all of our direct and
indirect domestic subsidiaries (other than any unrestricted subsidiaries).
Interest. At our option, the interest rates per annum applicable to the
revolving credit facility, term loan A and term loan B are fluctuating rates of
interest determined by reference to (a) the London Interbank Offered Rate
("LIBOR") plus the applicable margin, or (b) a base rate which is the greater of
the prime rate and the rate which is 1/2 of 1% in excess of the rates on
overnight federal funds transactions as published by the Federal Reserve Bank of
New York, plus the applicable margin. The applicable margin is determined on the
basis of our total leverage ratio. At December 31, 2000, the range on the rate
of interest on term loan A was 8.95%-9.25% per annum, and the range on the rate
of interest on term loan B was 9.95%-12.00% per annum.
Prepayments. We are permitted at any time voluntarily to prepay the
obligations under the term loans and to reduce the amount committed under the
revolving credit facility without any penalty or premium. we are required to
prepay the term loans with: (i) 100% of the net proceeds of specified asset
sales, proceeds from condemnation and the like, and proceeds from loss or
casualty, subject to customary exceptions for repairs and replacements; (ii)
100% of the net proceeds from the sale or issuance of debt securities; (iii) 50%
of the net proceeds from the issuance of equity securities, subject to customary
adjustments to be mutually determined; (iv) 75% of excess cash flow, subject to
customary adjustments to be mutually determined; and (v) 100% of payments by or
on behalf of Allied in respect of any purchase price adjustments in connection
with the BFI acquisition. Prepayments will be applied pro rata to term loan A
and term loan B and will be applied to scheduled installments on each loan on a
pro rata basis (with the exception that the lenders with respect to term loan B
can decline to be prepaid). At December 31, 2000, we had prepaid the term loan A
by $3.1 million and had prepaid the term loan B by $8.0 million.
Covenants; Events of Default. The credit facility contains covenants
restricting our ability and the ability of any of our subsidiaries to, among
other things: incur debt; subject our assets to liens; make investments; incur
contingent liabilities; pay dividends; merge or sell assets; make capital
expenditures; enter into sale/lease-back transactions; enter into new
businesses; discount receivables; and enter into affiliate transactions. In
addition, the credit facility requires us to meet financial performance tests,
including a maximum leverage ratio and a minimum cash interest coverage ratio
and, as we elect, either a minimum fixed charge coverage ratio or minimum EBITDA
(earnings before income taxes, depreciation and amortization).
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The credit facility contains conditions under which an event of default
under the credit facility will exist, including: failure to make payments when
due under the credit facility; defaults in other agreements; breach of
covenants; material misrepresentations; involuntary or voluntary bankruptcy;
judgments or attachments against us; dissolution; and changes in control.
Senior Subordinated Notes
In November 1999, we issued 12-3/8% Series A Senior Subordinated Notes due
2009 in the aggregate principal amount of $125.0 million. In connection with the
issuance of the Series A notes to the initial purchasers, we agreed to make an
offer to holders of the Series A notes to exchange their notes for substantially
identical Series B notes registered under the Securities Act. This exchange
offer was completed in January 2000, with holders of all the Series A notes
exchanging their notes for new, registered 12-3/8% Series B notes. We used the
net proceeds from the sale of the notes to finance a portion of the purchase
price of our acquisition of BFI.
The notes are general unsecured obligations of ours, and are subordinated
in right of payment to our debt under our senior credit facility.
The notes will mature on November 15, 2009. Interest on the notes accrues
at the rate of 12-3/8% per annum and is payable semiannually on May 15 and
November 15, beginning on May 15, 2000.
Subsidiary Guarantees. The notes are guaranteed by all of our subsidiaries
except our foreign subsidiaries and 3CI. All of our subsidiaries are restricted
subsidiaries for purposes of the trust indenture pursuant to which the notes
were issued. Under certain circumstances, we may designate one or more
subsidiaries as an unrestricted subsidiary. An unrestricted subsidiary is not
subject to many of the restrictive covenants in the trust indenture and, if it
has previously been a guarantor of the notes, is released from its guarantee.
Redemption at Our Option. Prior to November 15, 2002, we may elect to
redeem, from the net proceeds of one or more equity offerings, up to 35% of
the initial aggregate principal amount of the notes at a redemption price of
112.375% of the principal amount redeemed, plus accrued interest to the
redemption date. Except for any such permitted redemptions, we may not otherwise
redeem the notes prior to November 15, 2004. After this date, we may elect to
redeem all or any part of the notes at a redemption price (expressed as a
percentage of the principal amount redeemed) during the 12-month 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
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required to use a portion of the net proceeds from asset sales or the issuance
of stock to offer to redeem the outstanding notes on a pro rata basis at a
redemption price of 100% of the aggregate principal amount redeemed plus accrued
interest to the redemption date. We are not otherwise required to make mandatory
redemptions with respect to the notes.
Covenants; Events of Default. The trust indenture contains covenants
restricting our ability and the ability of any of our subsidiaries to, among
other things: incur debt (including debt junior to our senior debt but senior to
the notes); subject our assets to liens; make investments; incur contingent
liabilities; pay dividends; merge or sell assets; make capital expenditures;
enter into sale/lease-back transactions; enter into new businesses; discount
receivables; and enter into affiliate transactions.
The trust indenture contains conditions under which an event of default
under the notes will exist, including: failure to make payments when due; breach
of covenants in the indenture and notes; material misrepresentations;
involuntary or voluntary bankruptcy; and judgments or attachments against us.
acceleration of the notes following an event of default will not be effective
until the acceleration of our debt our senior credit facility.
Note 6--LEASE COMMITMENTS
We lease various plant equipment, office furniture and equipment, motor
vehicles and office and warehouse space under operating lease agreements which
expire at various dates over the next eight years. The leases for most of the
properties contain renewal provisions.
Rent expense for 1998, 1999, and 2000 was $3,508,000, $6,823,000 and
$11,167,000 respectively.
Minimum future rental payments under non-cancelable operating leases that
have initial or remaining terms in excess of one year as of December 31, 2000
for each of the next five years and in the aggregate are as follows:
(in thousands)
2001 $ 8,020
2002 7,200
2003 6,283
2004 5,379
2005 4,359
Thereafter 3,039
-------
Total minimum rental payments $34,280
Note 7--ACQUISITION RELATED EXPENSES
During the year ended December 31, 2000 we recorded $4,454,000 of
acquisition related expenses compared to $7,961,000 in the year ended December
31, 1999. The closure of redundant offices and eliminating excess revenue
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producing assets resulted in costs being incurred for severance and closure
expenses of $3,351,000. Transition related expenses of $1,103,000 were incurred
as part of the transition.
The following table reflects the activity related to the 1999 and 2000
acquisition related costs (in thousands)
Charges In Charges in Charges Expected
1999 2000 In Future Periods
Severance and closure costs $3,373 $3,351 --
Transition expenses 1,659 1,103 1,000
Other non-recurring acquisition related costs 2,929 -- --
-------- ------ ------
Total $7,961 $4,454 $1,000
In 1999 and 2000, we paid approximately $3,789,000 and $7,502,000 of these
acquisition related expenses and, at December 31, 1999 and 2000, $4,172,000 and
$1,124,000 was accrued.
Note 8-NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income per share:
YEAR ENDED DECEMBER 31,
1998 1999 2000
------------ ------------ ------------
(in thousands, except share and per share data)
Numerator:
Net income $ 5,713 $ 13,968 $ 14,511
Preferred stock dividends -- (340) (2,543)
------------ ------------ ------------
Numerator for basic earnings per share ----
income available to common stockholders $ 5,713 $ 13,628 $ 11,968
Effect of dilutive securities:
Preferred stock dividends -- 340 2,543
------------ ------------ ------------
Numerator for diluted earnings per share ---
income available to common stockholders
after assumed conversions $ 5,713 $ 13,968 $ 14,511
============ ============ ============
Denominator:
Denominator for basic earnings per share ---
weighted-average shares 10,647,083 14,240,084 14,879,103
Effect of dilutive securities:
Employee stock options 473,723 338,540 640,714
Warrants 142,722 86,482 195,328
Convertible preferred stock -- 576,672 4,377,699
------------ ------------ ------------
Dilutive potential common shares 616,445 1,001,694 5,213,741
------------ ------------ ------------
Denominator for diluted earnings per share ---
adjusted weighted-average shares and
assumed conversions 11,263,528 15,241,778 20,092,844
============ ============ ============
Basic net income per share $ 0.54 $ 0.96 $ 0.80
============ ============ ============
Diluted net income per share $ 0.51 $ 0.92 $ 0.72
============ ============ ============
For additional information regarding outstanding employee stock options and
outstanding warrants, see Note 9.
In 1998, 1999 and 2000, options and warrants to purchase 67,615 shares,
458,363 shares and 41,471 shares respectively, at exercise prices of
$15.50-$69.02, $12.75-$18.13, and $25.06-$42.47 respectively, were not included
in the computation of diluted earnings per share because the effect would be
antidilutive.
- 15 -
49
Note 9--STOCK OPTIONS AND WARRANTS
Stock Options
In 2000, our Board of Directors approved the 2000 Nonstatutory Stock
Option Plan (the "2000 Plan"), which provides for the granting of 500,000
shares of our common stock in the form of stock options to employees, (but not
to officers or directors). The exercise price of options granted under the 2000
Plan must be at least equal to the fair market value of the common stock on the
date of the grant. All options granted to date have 10 year terms and vest over
periods of up to five years after the date of grant.
In 1997, our Board of Directors and shareholders approved the 1997 Stock
Option Plan (the "1997 Plan"), which provides for the granting of 1,500,000
shares of common stock in the form of stock options to selected officers,
directors and employees of the Company and its subsidiaries. The exercise price
of options granted under the 1997 Plan must be at least equal to the fair market
value of the common stock on the date of grant. All options granted to date have
10-year terms and vest over periods of up to 5 years after the date of grant.
In 1995, our Board of Directors and shareholders approved an incentive
compensation plan (the "1995 Plan"), which as amended and restated in 1996,
provides for the granting of 1,500,000 shares of common stock in the form of
stock options and restricted stock to employees, officers, directors and
consultants. The exercise price of options granted under the 1995 Plan must be
at least equal to the fair market value of the common stock on the date of
grant. All options granted to date have 10-year terms and vest over periods of
up to four years after the date of grant.
In June 1996, our Board of Directors adopted and in July, 1996, our
shareholders approved, the Directors Stock Option Plan (the "Directors Plan").
The Directors Plan authorizes stock options for a total of 285,000 shares of
common stock to be granted to our outside directors. Option grants are made by
the Board of Directors at the times and in amounts that the Board determines,
taking into account any guidelines that the Board may adopt for this purpose.
The exercise price of options granted under the Directors Plan must be at least
equal to the fair market value of the common stock on the date of grant. Options
granted prior to April 1, 1998 vest in 16 consecutive quarterly installments;
options granted after March 31, 1998 vest in 12 equal monthly installments.
Shares of the Company's common stock have been reserved for issuance upon
the exercise of options and warrants. These shares have been reserved as follows
at December 31, 2000
1995 Plan options 420,549
1996 Directors Plan options 285,000
1997 Plan options 1,170,009
2000 Plan options 500,000
Warrants 177,289
---------
Total shares reserved 2,552,847
=========
A summary of stock option information follows:
1998 1999 2000
---------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------
Outstanding at beginning 845,861 $ 4.98 945,970 $ 8.37 1,572,359 $ 11.22
of year
Granted 360,238 $ 13.92 840,579 $ 12.91 583,106 $ 20.63
Exercised (155,979) $ 2.21 (146,419) $ 2.36 (358,249) $ 9.57
Cancelled/Forfeited (104,150) $ 8.89 (67,771) $ 11.36 (156,258) $ 13.97
---------- --------- ---------
Outstanding at end of year 945,970 $ 8.37 1,572,359 $ 11.22 1,640,958 $ 14.66
Exercisable at end of year 393,084 $ 5.37 448,948 $ 8.49 532,518 $ 11.46
Available for future grant 1,434,821 662,013 734,600
========== ========= =========
Options outstanding and exercisable as of December 31, 2000 by price range:
Outstanding Exercisable
Average Weighted Weighted
Remaining Average Average
Life Exercise Exercise
Range of Exercise Price Shares In Years Price Shares Price
- ------------------------ ---------- ---------- -------- -------- ----------
$0.53-$10.25 297,270 4.88 $ 7.36 228,456 $ 7.17
$10.81-$12.75 541,127 8.46 $12.73 98,821 12.65
$13.25-$18.125 310,215 6.59 $14.60 180,770 14.77
$20.25-$42.47 492,346 9.44 $21.22 24,471 22.33
--------- ---- ------ ------- ------
1,640,958 7.75 $14.66 532,518 $11.46
- 16 -
50
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB25") and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
our employee stock options approximate the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and net income per share is
required by FAS 123 as if we had accounted for our employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
statement. Options granted in 1998, 1999 and 2000 were valued using the
Black-Scholes option pricing model. Options granted in 1996 and 1995, as a
non-public company, were valued using the minimum value method. The following
assumptions were used in 1998, 1999 and 2000: expected volatility of 0.61 in
1998, 0.62 in 1999 and 0.61 in 2000; risk-free interest rates ranging from 4.5%
to 4.8% in 1998, 4.83% to 6.73% in 1999, and 5.02% to 6.69% in 2000; a dividend
yield of 0%; and a weighted-average expected life of the option of 72 months.
The weighted-average fair values of options granted during 1998, 1999 and 2000
were $6.52 per share, $7.27 per share, and $10.18 per share respectively.
Option value models require the input of highly subjective assumptions.
Because our employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing method does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. Our pro forma
information follows (in thousands, except for per share information):
Year Ended December 31,
1998 1999 2000
---- ---- ----
Pro forma net income $4,485 $11,860 $10,585
Pro forma net income per
share-diluted $ 0.40 $ 0.78 $ 0.53
- 17 -
51
The pro forma effect in 1998, 1999, 2000 is not representative of the pro
forma effect in future years as the pro forma disclosures reflect only the fair
value of stock options granted subsequent to December 31, 1994.
Warrants:
In May 1996, in connection with a loan from certain shareholders, directors
and officers, we issued warrants to purchase 226,036 shares of common stock at
$7.96 per share. These warrants expire in May 2001. In 1998 and 2000, warrants
to purchase 35,940 shares and 178,794 shares, respectively were exercised. At
December 31, 2000, warrants to purchase 11,302 shares remained outstanding.
In connection with a subordinated loan agreement, six directors were
granted five-year warrants to purchase shares of our Common Stock exercisable at
any time after the first anniversary of the grant date in December 1998 and
January 1999, the lenders were granted warrants to purchase, in the aggregate,
18,970 shares of Common Stock at $14.50 per share, 43,551 shares of Common Stock
at $15.50 per share and 59,092 shares of Common Stock at $16.50 per share.
In June 2000, in connection with our acquisition of an additional 15%
interest in Medam, we issued warrants to purchase 44,374 shares of our common
stock. Of these warrants, warrants for 31,128 shares are immediately
exercisable, while the remaining 13,246 shares become contingently exercisable
over five years. The exercise price of the warrants is $17.50 per share.
Note 10-SERIES A PREFERRED STOCK
In November 1999, we issued and sold 75,000 shares of Series A Convertible
Preferred Stock for $1,000 per share, or $75.0 million in the aggregate, in
cash, less various fees and expenses. The company used the net proceeds from the
sale to finance a portion of the purchase price of our BFI acquisition.
Dividends. The Series A Convertible Preferred Stock bears preferential
dividends, payable in additional shares of Series A Convertible Preferred Stock,
at the rate of 3.375% per annum from the date of issuance. Dividends accrue
daily and accumulate annually on the anniversary date of the initial issuance.
The Series A Convertible Preferred Stock is also entitled to share pro rata with
holders of Common Stock, on the basis of the number of shares of Common Stock
into which the Series A Convertible Preferred Stock is convertible, in all other
dividends and distributions.
Liquidation. Upon any liquidation, dissolution or winding up of the
Company, holders of Series A Convertible Preferred Stock are entitled to be
paid, before any distribution or payment is made to holders of Common Stock, the
greater of (i) the sum of $1,000 per share plus accumulated preferential
dividends plus accrued and unpaid dividends not yet accumulated (the
"liquidation value") or (ii) the amount that would be payable if the Series A
Convertible Preferred Stock had been converted into common stock.
Voting. Holders of Series A Convertible Preferred Stock are entitled to
vote with holders of Common Stock as a single class on each matter submitted to
a vote of the Company's stockholders. Each share of Series A Convertible
Preferred Stock has a number of votes equal to the number of votes possessed by
the Common
- 18 -
52
Stock into which the Series A Convertible Preferred Stock is convertible. As
long as the initial investors of the Series A Convertible Preferred Stock and
their affiliates hold 50% or more of the "underlying common stock" (i.e., the
shares of common stock issuable, or previously issued, upon conversion of the
Series A Convertible Preferred Stock), they will have the right, voting as a
separate class, to elect two directors to the Company's Board of Directors. If
the initial investors and their affiliates cease to hold 50% but still hold 25%
or more of the underlying common stock, they will have the right, voting as a
separate class, to elect one director; and if they cease to hold 25% of the
underlying common stock, their right to elect directors as a separate class will
terminate.
Conversion. Each holder of Series A Convertible Preferred Stock may at any
time, upon 10 business days' notice, convert all or part of the holder's Series
A Convertible Preferred Stock into shares of common stock. The price at which a
holder may convert is $17.50 per share, subject to adjustment. The conversion
price will be adjusted if (i) the Company issues or is deemed to issue
additional shares of common stock for a price per share less than the conversion
price or the market price at the time of issuance or (ii) the Company issues or
is deemed to issue options, warrants or convertible securities with an exercise
price or conversion price per share less than the conversion price or the market
price at the time of issuance. The conversion price will also be adjusted in
certain other circumstances.
There will be no adjustment of the conversion price to the extent that in
any fiscal year, the Company issues common stock in connection with acquisitions
approved by the Board of Directors or grants or reprices stock options (at a
price not lower than the market price at the time of grant or repricing),
and the aggregate number of shares of common stock issued or for which options
are granted or repriced does not exceed 4.0% of the shares of common stock
outstanding on the last trading day of the prior fiscal year. For purposes of
any adjustment to the conversion price, the "market price" per share for common
stock is the average closing price over the 20 business day period preceding the
date of determination.
Redemption at Company's Option. Beginning on May 12, 2002, if the closing
price of common stock exceeds 150% of the conversion price for 20 consecutive
trading days, the Company may elect, upon at least 30 days' prior written
notice, to redeem all (but not part) of the outstanding shares of Series A
Convertible Preferred Stock, subject to any holder's right to convert its shares
into common stock prior to the redemption date. If the Company makes such an
election, the redemption price will equal the liquidation value to the date of
redemption.
Redemption at Holder's Option. At any time after a change of control, or
after the occurrence of a bankruptcy event which continues for 60 days, each
holder of Series A Convertible Preferred Stock may require the Company to redeem
all or any part of the holder's shares at a price equal to the liquidation value
per share, upon 15 days' prior written notice.
Covenants and Restrictions. Under the stock purchase agreement with the
initial investors, the Company agreed to various covenants and restrictions.
these covenants and restrictions include the Company's grant of preemptive
rights to holders of Series A Convertible Preferred Stock under certain
circumstances and the Company's agreement to provide them with specified
financial and business information.
Registration Rights Agreement. The Company and the initial investors
entered into a registration rights agreement at closing. This agreement requires
the Company, at the request of holders of a majority of the underlying common
stock at any time after the first anniversary of closing, to register all or any
portion of their shares under the Securities Act in an underwritten public
offering. Holders of Series A Convertible Preferred Stock are limited to three
such registrations. The agreement also grants holders of Series A Convertible
Preferred Stock "piggyback" registration rights. In all registrations (with
certain limited exceptions), the Company will be required to pay the expenses of
registration of the holders of Series A Convertible Preferred Stock (excluding
the underwriting discounts and commissions).
- 19 -
53
Corporate Governance Agreement. The Company and the initial investors also
entered into a corporate governance agreement at closing. This agreements
contains certain provisions intended to implement the right of the initial
investors to elect directors to the Company's Board of Directors. It also
provides that until the earlier of (i) the date on which the initial investors
and their permitted transferees cease to own any Series A Convertible Preferred
Stock, (ii) the date on which the initial investors have completed a
distribution of the Series A Convertible Preferred Stock to their partners or
(iii) the first anniversary of closing, the initial investors and their
transferees and affiliates will not acquire beneficial ownership of more than
30% of the voting power of the Company or acquire or attempt to acquire control
of the Company, except in response to a proposal that has been made to the
stockholders that would materially and adversely affect the investors, or
pursuant to the exercise of their preemptive rights. The corporate governance
agreement also contains specified restrictions, for a period of five years, on
the initial investors' ability to transfer their shares of Series A Convertible
Preferred Stock (but not the shares of common stock issuable upon conversion of
those shares). In addition, the agreement provides that the approval of holders
of a majority of the underlying common stock is required for the company to: (1)
engage in mergers, acquisitions or divestitures of specified sizes, (2) enter
into contracts with the Company's officers, directors, employees or affiliates,
except for ordinary employment contracts, benefit plans and transactions with
the Company's subsidiaries, and (3) incur indebtedness or issue specified
capital stock that would cause the Company's fixed charge coverage ratio to be
less than 1.75 to 1.0 (2.0 to 1.0 after the second anniversary of the initial
issuance of the Series A Convertible Preferred Stock).
Note 12-EMPLOYEE BENEFIT PLAN
We have a 401(k) defined contribution retirement savings plan covering
substantially all employees. Each participant may elect to defer a portion of
his or her compensation subject to certain limitations. We may contribute up to
50% of the first 5% of compensation contributed to the plan by each employee.
Our contributions for the years ended December 31, 1998, 1999, and 2000 were
approximately $10,000, $49,000 and $782,000 respectively.
NOTE 13-RELATED PARTIES
In September 1999, we announced the formation of a new joint venture,
Medam, B.A. Srl, an Argentine corporation, to utilize our ETD technology to
treat medical waste primarily in the Buenos Aires market. In 1999 and 2000, we
recorded $2,866,000 and $507,000 in revenues, respectively, related to the sale
of equipment and other agreements.
In August 2000, we announced the formation of a new joint venture, Medical
Waste Specialists (Pty) Ltd, to service the medical waste market in South Africa
using our ETD technology. The joint venture company will be headquartered in
Johannesburg, South Africa. In 2000, we recorded $5,085,000 in revenue related
to the sale of equipment and other agreements.
NOTE 14-LEGAL PROCEEDINGS
We operate in a highly regulated industry and are exposed to regulatory
inquiries or investigations from time to time. Investigations can be initiated
for a variety of reasons. We have been involved in several legal and
administrative proceedings that have been settled or otherwise resolved on terms
acceptable to us, without having a material adverse effect on our business,
financial condition or results of operations. We are also a party to various
legal proceedings arising in the ordinary course of business. We believe that
the resolution of these other matters will not have a material adverse affect on
our business, financial condition or results of operation.
- 20 -
54
Note 15-PRODUCTS AND SERVICES AND GEOGRAPHIC INFORMATION
Summary revenue information for the Company's products and services is as
follows:
Year Ended December 31,
---------------------------
1998 1999 2000
------- -------- --------
(in thousands)
Medical waste management services $59,669 $126,286 $316,549
Proprietary equipment and technology license 7,012 6,562 7,173
sales
------- -------- --------
Total $66,681 $132,848 $323,722
======= ======== ========
Summary financial information by geographic area is as follows:
Year Ended December 31,
---------------------------
1998 1999 2000
------- -------- --------
(in thousands)
Revenues:
United States $59,206 $119,618 $304,512
Foreign countries 7,475 13,230 19,210
------- -------- --------
Total $66,681 $132,848 $323,722
======= ======== ========
Long-lived assets
United States $66,853 $508,956 $494,755
Foreign countries 9,092 9,290 12,216
------- -------- --------
Total $75,945 $518,246 $506,971
======= ======== ========
Revenues are attributed to countries based on the location of customers. In
1998, 1999 and 2000, we provided medical waste management services to customers
in Canada and Mexico, and licensed proprietary equipment to Brazilian and
Japanese companies and to joint ventures in Argentina and South Africa.
Note 16-SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes our unaudited consolidated quarterly results
of operations as reported for 1998, 1999 and 2000 (in thousands, except for per
share amounts):
- 21 -
55
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
First Second Third Fourth
Quarter Quarter Quarter Quarter
2000 2000 2000 2000
------- ------- ------- -------
Revenues $77,668 $79,557 $81,066 $85,431
Gross profit 30,311 31,296 31,915 33,855
Income before acquisition related costs 15,827 16,570 17,150 18,373
Net income 3,773 3,086 3,433 4,219
Basic earnings per common share 0.21 0.17 0.19 0.24
*Diluted earnings per common share 0.19 0.15 0.17 0.21
- -------
* Earnings per share are calculated on a quarterly basis, and, as such, the
amounts may not total the calculated full-year earnings per share.
Note 17-CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Payments under the Company's senior subordinated notes (the Notes) are
unconditionally guaranteed, jointly and severally, by all of the Company's
wholly domestic subsidiaries, which include ECCO, WSI, Med-Tech and BFI and
certain other subsidiaries which have insignificant assets and operations
(collectively, the "guarantors"). Financial information concerning the
Guarantors as of and for the years ended December 31, 2000, 1999 and 1998 is
presented below for purposes of complying with the reporting requirements of the
Guarantor Subsidiaries. The financial information concerning the Guarantors is
being presented through condensed consolidating financial statements since the
Company has more than minimal independent operations and the guarantees are full
and unconditional and are joint and several. Guarantor financial statements have
not been presented because management does not believe that such financial
statements are material to investors.
- 22 -
56
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
COMBINED
STERICYCLE
AND NON-
STERICYCLE, GUARANTOR GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,408 $ 595 $ 2,003 $ 663 $ -- $ 2,666
Other current assets 78,193 12,220 90,413 7,113 (9,181) 88,345
--------------------------------------------------------------------------------------
Total current assets 79,601 12,815 92,416 7,776 (9,181) 91,011
Property, plant and equipment,
net 60,165 242 60,407 13,501 -- 73,908
Goodwill, net 377,178 29,384 406,562 12,228 -- 418,790
Investment in subsidiaries 63,306 3,308 66,614 -- (66,614) --
Other assets 19,234 6,582 25,816 124 (11,667) 14,273
--------------------------------------------------------------------------------------
Total assets $599,484 $ 52,331 $651,815 $ 33,629 $(87,462) $597,982
======================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of $ 4,035 $ -- $ 4,035 $ 1,062 $ -- $ 5,097
long-term debt
Other current liabilities 43,175 1,233 44,408 2,793 (9,185) 38,016
--------------------------------------------------------------------------------------
Total current liabilities 47,210 1,233 48,443 3,855 (9,185) 43,113
Long-term debt, net of current
portion 344,142 -- 344,142 12,585 (11,623) 345,104
Other liabilities 1,995 -- 1,995 1,633 -- 3,628
Convertible preferred stock 71,437 -- 71,437 -- -- 71,437
Common shareholders' equity 134,700 51,098 185,798 15,556 (66,654) 134,700
--------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $599,484 $ 52,331 $651,815 $ 33,629 $(87,462) $597,982
======================================================================================
- 23 -
57
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
COMBINED
STERICYCLE
AND NON-
STERICYCLE, GUARANTOR GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,808 $ 246 $ 19,054 $ 290 $ -- $ 19,344
Other current assets 52,928 8,840 61,768 4,648 (8,220) 58,196
--------------------------------------------------------------------------------------
Total current assets 71,736 9,086 80,822 4,938 (8,220) 77,540
Property, plant and equipment,
net 15,029 49,932 64,961 10,151 -- 75,112
Goodwill, net 40,920 369,914 410,834 10,167 -- 421,001
Investment in subsidiaries 441,423 3,627 445,050 -- (445,050) --
Other assets 17,817 13,617 31,434 3,675 (12,976) 22,133
--------------------------------------------------------------------------------------
Total assets $ 586,925 $ 446,176 $1,033,101 $ 28,931 $ (466,246) $ 595,786
======================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of
long-term debt $ 3,954 $ 892 $ 4,846 $ 895 $ -- $ 5,741
Other current liabilities 43,517 5,084 48,601 4,677 (8,337) 44,941
--------------------------------------------------------------------------------------
Total current liabilities 47,471 5,976 53,447 5,572 (8,337) 50,682
Long-term debt, net of current
portion 349,794 4,539 354,333 13,970 (12,859) 355,444
Other liabilities 2,351 -- 2,351 -- -- 2,351
Convertible preferred stock 69,195 -- 69,195 -- -- 69,195
Common shareholders' equity 118,114 435,661 553,775 9,389 (445,050) 118,114
--------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 586,925 $ 446,176 $1,033,101 $ 28,931 $ (466,246) $ 595,786
======================================================================================
- 24 -
58
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2000
COMBINED
STERICYCLE
AND NON-
STERICYCLE, GUARANTOR GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------------------
Revenues $ 135,981 $ 158,992 $ 294,973 $ 29,580 $ (831) $ 323,722
Cost of revenues 78,593 96,568 175,161 22,015 (831) 196,345
Selling, general, and
administrative expense 34,419 19,695 54,114 5,343 -- 59,457
Acquisition related expenses 4,454 -- 4,454 -- -- 4,454
--------------------------------------------------------------------------------
Total costs and expenses 117,466 116,263 233,729 27,358 (831) 260,256
--------------------------------------------------------------------------------
Income from operations 18,515 42,729 61,244 2,222 -- 63,466
Equity in net income (loss) of
subsidiaries 28,001 (1,025) 26,976 -- (26,976) --
Other (expense) income, net (38,329) 483 (37,846) (1,804) -- (39,650)
--------------------------------------------------------------------------------
Income before income taxes 8,187 42,187 50,374 418 (26,976) 23,816
Income tax expense (benefit) (6,324) 15,462 9,138 167 -- 9,305
--------------------------------------------------------------------------------
Net income $ 14,511 $ 26,725 $ 41,236 $ 251 $ (26,976) $ 14,511
================================================================================
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR
INC. SUBSIDIARIES GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------------
Revenues $ 61,069 $ 46,618 $ 107,687 $ 25,533 $ (372) $ 132,848
Cost of revenues 38,455 28,892 67,347 19,086 (310) 86,123
Selling, general, and
administrative expense 15,478 6,306 21,784 4,931 (235) 26,480
Acquisition related expenses 7,961 -- 7,961 -- -- 7,961
--------------------------------------------------------------------------------------
Total costs and expenses 61,894 35,198 97,092 24,017 (545) 120,564
--------------------------------------------------------------------------------------
Income (loss) from operations (825) 11,420 10,595 1,516 173 12,284
Equity in net income of
subsidiaries 8,675 119 8,794 -- (8,794) --
Other (expense) income, net (3,934) 778 (3,156) (1,157) (173) (4,486)
--------------------------------------------------------------------------------------
Income before income taxes 3,916 12,317 16,233 359 (8,794) 7,798
Income tax (benefit) expense (10,052) 3,882 (6,170) -- -- (6,170)
--------------------------------------------------------------------------------------
Net income $ 13,968 $ 8,435 $ 22,403 $ 359 $ (8,794) $ 13,968
======================================================================================
- 25 -
59
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
COMBINED
STERICYCLE
AND NON-
STERICYCLE, GUARANTOR GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------------
Revenues $ 52,357 $ 9,598 $ 61,955 $ 4,726 $ -- $ 66,681
Cost of revenues 35,194 6,334 41,528 3,800 -- 45,328
Selling, general, and
administrative expense 12,789 1,408 14,197 732 -- 14,929
------------------------------------------------------------------------------------
Total costs and expenses 47,983 7,742 55,725 4,532 -- 60,257
------------------------------------------------------------------------------------
Income from operations 4,374 1,856 6,230 194 -- 6,424
Equity in net income (loss) of
subsidiaries 2,081 (106) 1,975 -- (1,975) --
Other (expense) income, net (244) 144 (100) 37 -- (63)
------------------------------------------------------------------------------------
Income before income taxes 6,211 1,894 8,105 231 (1,975) 6,361
Income tax expense 498 150 648 -- -- 648
------------------------------------------------------------------------------------
Net income $ 5,713 $ 1,744 $ 7,457 $ 231 $ (1,975) $ 5,713
====================================================================================
- 26 -
60
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
COMBINED
STERICYCLE
AND NON-
STERICYCLE, GUARANTOR GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by operating
activities $ 2,911 $ 4,801 $ 7,712 $ 2,757 $ -- $ 10,469
----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (8,816) (2,109) (10,925) (661) -- (11,586)
Payments for acquisitions and
international investments,
net of cash acquired (3,044) (1,456) (4,500) (16) -- (4,516)
Proceeds from maturity of
short-term investments 502 -- 502 -- -- 502
----------------------------------------------------------------------------------
Net cash used in investing
activities (11,358) (3,565) (14,923) (677) -- (15,600)
----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from bank line of
credit 5,000 -- 5,000 -- -- 5,000
Principal payments on capital
lease obligations (309) (887) (1,196) (291) -- (1,487)
Repayment of long term debt (15,012) -- (15,012) (1,416) -- (16,428)
Payments of deferred financing
costs (631) -- (631) -- -- (631)
Proceeds from issuance of
common stock 2,299 -- 2,299 -- -- 2,299
Payments related to issuance
of preferred stock (300) -- (300) -- -- (300)
----------------------------------------------------------------------------------
Net cash used in financing
activities (8,953) (887) (9,840) (1,707) -- (11,547)
----------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents $(17,400) $ 349 $(17,051) $ 373 $ -- (16,678)
==================================================================================
Cash and cash equivalents at
beginning of period 19,344
Cash and cash equivalents at end --------
of period $ 2,666
========
- 27 -
61
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
COMBINED
STERICYCLE
AND NON-
STERICYCLE, GUARANTOR GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by
operating activities $ 4,951 $ 283 $ 5,234 $ 6,543 $ -- $ 11,777
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (2,534) (85) (2,619) (1,176) -- (3,795)
Payments for acquisitions
and international
investments, net of cash (418,280) -- (418,280) (4,000) -- (422,280)
acquired
Proceeds from maturity of
short-term investments 447 -- 447 -- -- 447
--------------------------------------------------------------------------------
Net cash used in investing
activities (420,367) (85) (420,452) (5,176) -- (425,628)
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net payment on bank lines (16,359) -- (16,359) -- -- (16,359)
of credit
Repayment of long term debt (3,884) -- (3,884) (482) -- (4,366)
Principal payments on
capital lease obligations (50) (125) (175) (115) -- (290)
Proceeds from long term debt 350,000 -- 350,000 -- -- 350,000
Net payments on (2,750) -- (2,750) -- -- (2,750)
subordinated debt
Payment of deferred (10,828) -- (10,828) -- -- (10,828)
financing costs
Net proceeds from common
stock offering 47,158 -- 47,158 -- -- 47,158
Proceeds from issuance of
preferred stock 68,855 -- 68,855 -- -- 68,855
--------------------------------------------------------------------------------
Proceeds from other
issuances of common stock 492 -- 492 -- -- 492
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 432,634 (125) 432,509 (597) -- 431,912
--------------------------------------------------------------------------------
Net increase in cash and cash
equivalents $ 17,218 $ 73 $ 17,291 $ 770 $ -- 18,061
================================================================================
Cash and cash equivalents at
beginning of period 1,283
-------
Cash and cash equivalents at
end of period $19,344
=======
- 28 -
62
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
COMBINED
STERICYCLE
AND NON-
STERICYCLE, GUARANTOR GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by
operating activities $ 3,749 $ 278 $ 4,027 $ 835 $ -- $ 4,862
------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (3,629) (271) (3,900) (442) -- (4,342)
Payments for acquisitions
and international
investments, net of cash (19,775) -- (19,775) -- -- (19,775)
acquired
Purchases of short-term
investments (41) -- (41) -- -- (41)
Proceeds from sale of property 395 10 405 -- -- 405
----------------------------------------------------------------------------------------
Net cash used in investing activities (23,050) (261) (23,311) (442) -- (23,753)
----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from bank
lines of credit 16,589 -- 16,589 (203) -- 16,386
Repayment of long term debt (2,513) (6) (2,519) (670) -- (3,189)
Principal payments on
capital lease obligations (1,273) -- (1,273) -- -- (1,273)
Proceeds from subordinated
debt 2,750 -- 2,750 -- -- 2,750
Payment of deferred
financing costs (218) -- (218) -- -- (218)
Proceeds from issuance of
common stock 344 -- 344 -- -- 344
----------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 15,679 (6) 15,673 (873) -- 14,800
----------------------------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents $ (3,622) $ 11 $ (3,611) $ (480) $ -- (4,091)
========================================================================================
Cash and cash equivalents at
beginning of period 5,374
--------
Cash and cash equivalents at
end of period $ 1,283
========
- 29 -
63
SCHEDULE II - VALUATION AND ALLOWANCE ACCOUNTS
(in thousands)
Balance Charges Other Write-offs/ Balance
12/31/97 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
12/31/98 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
Balance Charges Other Write-offs/ Balance
12/31/99 to Expense Charges (1) Payments 12/31/00
Allowance for doubtful accounts $ 980 $ 1,552 $ 1,996 $ (903) $ 3,625
Accrued severance and closure costs 3,163 3,351 -- (5,390) 1,124
Accrued transition expenses 1,009 1,103 -- (2,112) --
Deferred tax valuation allowance 9,857 (999) -- -- 8,588
(1) Amounts consist primarily of costs assumed from acquired companies
recorded prior to the date of acquisition
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
STATEMENT DISCLOSURE
None
- 30 -
64
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 2001 Annual Meeting of Stockholders to be held on May 15, 2001, 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 our definitive proxy statement for our 2001 Annual
Meeting of Stockholders to be held on May 15, 2001, 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 our
definitive proxy statement for our 2001 Annual Meeting of Stockholders to be
held on May 15, 2001, 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 2001
Annual Meeting of Stockholders to be held on May 15, 2001, 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 2001 Annual Meeting of
Stockholders to be held on May 15, 2001, to be filed pursuant to Regulation 14A.
- 1 -
65
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, 1999 and 2000..............................
Consolidated Statements of Operation for Each of the Years in the
Three-Year Period Ended December 31, 2000..............................................
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended December 31, 2000..............................................
Consolidated Statements of Changes in Shareholders' Equity
for Each of the Years in the Three-Year Period Ended December 31, 2000.................
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 -
66
Filed with
Exhibit Electronic
Index Description Submission
------- ----------- ----------
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 (incorporated by
reference to Exhibit 3.5 to the Registrant's Annual Report on Form 10-K for 1999)
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).....................................................
- 3 -
67
Filed with
Exhibit Electronic
Index Description Submission
------- ----------- ----------
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).......................................................................
4.8 Form of Common Stock Purchase Warrant in connection with July 2000 purchase of x
additional 15% interest in Medam, S.A. de C.V.
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).........
- 4 -
68
Filed with
Exhibit Electronic
Index Description Submission
------- ----------- ----------
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 Restated 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
Registrant and certain investors affiliated with Bain Capital, Inc. and Madison
Dearborn Partners LLC (incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for 1999)...............................
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 (incorporated by reference to
Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for 1999)...........
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..........................................
- 5 -
69
Filed with
Exhibit Electronic
Index Description Submission
------- ----------- ----------
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
- ---------------
* 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, 2000, we did not file any reports
on Form 8-K.
- 6 -
70
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 21, 2001
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 21, 2001
- --------------------------------------------
Jack W. Schuler
/s/ Mark C. Miller President, Chief Executive Officer and a March 21, 2001
- -------------------------------------------- Director (Principal Executive Officer)
Mark C. Miller
/s/ Frank J.M. ten Brink Executive Vice President and Chief March 21, 2001
- -------------------------------------------- Financial Officer (Principal Financial
Frank J.M. ten Brink and Accounting Officer)
/s/ John P. Connaughton Director March 21, 2001
- --------------------------------------------
John P. Connaughton
/s/ Rod F. Dammeyer Director March 21, 2001
- --------------------------------------------
Rod F. Dammeyer
/s/ Patrick F. Graham Director March 21, 2001
- --------------------------------------------
Patrick F. Graham
/s/ John Patience Director March 21, 2001
- --------------------------------------------
John Patience
/s/ Thomas R. Reusche Director March 21, 2001
- --------------------------------------------
Thomas R. Reusche
/s/ L. John Wilkerson, Ph.D. Director March 21, 2001
- --------------------------------------------
L. John Wilkerson, Ph.D.
/s/ Peter Vardy Director March 21, 2001
- --------------------------------------------
Peter Vardy
- 7 -