<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT (AMENDED)
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): October 1, 1998
STERICYCLE, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-21229 36-3640402
(State or other (Commission file (IRS employer
jurisdiction of number) identification number)
incorporation)
1419 Lake Cook Road, Suite 410
Deerfield, Illinois 60015
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 945-6550
1
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ITEM 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
Audited and unaudited interim financial statements for Waste Systems, Inc.
("WSI"), as required by Rule 3-05 of Regulation S-X (17 C.F.R. 210.3-05(b)), are
filed with this Report.
(b) Pro Forma Financial Information
Pro forma financial information, as required by Article 11 of Regulation
S-X, is filed with this Report.
(c) Exhibits
Audited financial statements for WSI are filed as Exhibit 99.1 to this
Report.
Unaudited interim financial statements for WSI are filed as Exhibit 99.2 to
this Report.
Pro forma financial information is filed as Exhibit 99.3 to this Report.
2
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 14, 1998.
STERICYCLE, INC.
By /s/ Frank J.M. ten Brink
----------------------------------
Frank J.M. ten Brink
Vice President, Finance
and Chief Financial Officer
3
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EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
- -----------------------------------------------------------------------------------------------------------
<S> <C>
23.1 Consent of Heard McElroy & Vestal LLP ........................................... 6
99.1 Waste Systems, Inc. and Subsidiary
December 31, 1997 and 1996....................................................... 7
Independent Auditor's Report..................................................... 8
Consolidated Balance Sheets
at December 31, 1997 and 1996.................................................. 9
Consolidated Statements of Operations
for the Years Ended December 31, 1997 and 1996................................. 10
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended December 31, 1996 and 1997................................. 11
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997 and 1996................................. 12
Notes to Consolidated Financial Statements....................................... 13
99.2 Waste Systems, Inc. and Subsidiary
September 30, 1998 and 1997 (Unaudited).......................................... 31
Consolidated Balance Sheets
at September 30, 1998 and 1997 (Unaudited)..................................... 32
Consolidated Statements of Operations
for the Nine Months Ended September 30, 1998 and 1997 (Unaudited).............. 33
Consolidated Statements of Shareholders' Equity (Deficit)
for the Nine Months Ended September 30, 1998 and 1997 (Unaudited).............. 34
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 (Unaudited).............. 35
Selected Information............................................................. 36
99.3 Stericycle, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Financial Statements............................ 39
Unaudited Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 1997........................................... 40
Unaudited Pro Forma Consolidated Statement of Operations
for the Nine Months Ended September 30, 1998................................... 42
Unaudited Pro Forma Consolidated Balance Sheet
at September 30, 1998.......................................................... 44
</TABLE>
4
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
As independent certified public accountants, we hereby consent to the inclusion
in this Form 8-K/A of our report dated November 4, 1998 on the consolidated
financial statements of Waste Systems, Inc. and Subsidiary as of and for the
years ended December 31, 1997 and 1996 and to all references to our Firm
included in this Form 8-K/A.
HEARD, McELROY & VESTAL, L.L.P.
Shreveport, Louisiana
December 14, 1998
5
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EXHIBIT 99.1
Waste Systems, Inc. and Subsidiary
December 31, 1997 and 1996
6
<PAGE> 2
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Waste Systems, Inc.
We have audited the accompanying consolidated balance sheets of Waste Systems,
Inc. and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated 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 consolidated
financial statement presentation. We believe that 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 Waste
Systems, Inc. and Subsidiary as of December 31, 1997 and 1996 and the results of
its consolidated operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and
13 to the consolidated financial statements, the Company (i) has suffered
recurring losses from operations, (ii) has a negative working capital, (iii) has
suffered recurring negative cash flow from operating activities and (iv) is
involved in legal proceedings, all of which collectively raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Notes 1 and 13. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HEARD MCELROY & VESTAL LLP
Shreveport, Louisiana
November 4, 1998
7
<PAGE> 3
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
(dollars in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents..................................................... $ 44 $ 32
Restricted cash............................................................... -- 130
Accounts receivable, net of allowance for doubtful
accounts of $875,144 and $990,994........................................... 3,559 3,753
Inventory..................................................................... 72 59
Other current assets.......................................................... 441 233
--------- ---------
Total current assets...................................................... 4,116 4,207
Property, plant and equipment, at cost.......................................... 10,927 11,396
Less--accumulated depreciation.................................................. (2,477) (2,933)
--------- ---------
Net property, plant and equipment......................................... 8,450 8,463
Excess of cost over net assets acquired, net of accumulated
amortization of $74,988 and $49,888........................................... 362 387
Other intangible assets, net of accumulated amortization of
$149,104 and $74,552.......................................................... 274 350
Other assets.................................................................... 25 48
--------- ---------
Total assets.................................................................... $ 13,227 $ 13,455
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdrafts............................................................... $ 157 $ 34
Notes payable................................................................. 217 212
Notes payable-revolving line of credit........................................ -- 12,785
Current portion of long-term debt, unaffiliated lenders....................... 1,374 1,314
Accounts payable.............................................................. 1,069 2,288
Accrued liabilities........................................................... 2,189 2,501
Notes payable-stockholders.................................................... -- 3,851
--------- ---------
Total current liabilities................................................. 5,006 22,985
Long-term debt unaffiliated lenders, net of current portion..................... 986 742
--------- ---------
Total liabilities......................................................... 5,992 23,727
Accrued stock put option (565,500 shares of 3CI common
stock at $3.00 per share)..................................................... -- 1,697
Shareholders' equity (deficit):
Common stock, no par value, 100 shares authorized,
issued and outstanding........................................................ 500 500
Additional paid-in capital...................................................... 31,596 11,152
Accumulated deficit............................................................. (24,861) (23,621)
-------- --------
Total shareholders' equity (deficit)...................................... 7,235 (11,969)
-------- --------
Total liabilities and shareholders' equity (deficit)............................ $ 13,227 $ 13,455
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 4
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
(dollars in thousands
except per share amounts
and share data)
<S> <C> <C>
Revenues........................................................................ $ 18,790 $ 17,748
Expenses:
Cost of services.............................................................. 14,286 13,815
Depreciation.................................................................. 1,171 1,304
Write-off of intangibles--Note 12............................................. -- 11,385
Write-off of fixed assets--Note 3............................................. -- 1,184
Selling, general and administrative........................................... 3,784 5,496
--------- ---------
Total expenses............................................................ 19,241 33,184
--------- ---------
Net loss from operations........................................................ (451) (15,436)
Other income (expense):
Interest expense.............................................................. (855) (1,444)
--------- ---------
Loss before income taxes and accretion of stock put............................. $ (1,306) $ (16,880)
Income taxes.................................................................... -- --
Accretion of stock put.......................................................... -- (26)
--------- ---------
Loss before minority interest in loss of subsidiary............................. (1,306) (16,906)
Minority interest in loss of subsidiary......................................... 66 6,040
--------- ---------
Net loss........................................................................ $ (1,240) $ (10,866)
========= =========
Weighted average shares outstanding............................................. 100 100
========= =========
Loss per common share........................................................... $ (12,400) $(108,660)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 5
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
(dollars in thousands)
Common stock:
<S> <C> <C>
Balance at beginning of period................................................ $ 500 $ 500
Additional shares issued (retired)............................................ -- --
--------- ---------
Balance at end of period...................................................... $ 500 $ 500
Additional paid-in capital:
Balance at beginning of period................................................ $ 11,152 $ 11,152
Conversion of stockholder debt and other liabilities
to additional paid-in capital............................................... 5,507 --
Stockholder contributions to additional paid-in
capital .................................................................... 14,937 --
--------- ---------
Balance at end of period...................................................... $ 31,596 $ 11,152
Accumulated deficit:
Balance at beginning of period ............................................... $ (23,621) $ (12,755)
Net loss...................................................................... (1,240) (10,866)
--------- ---------
Balance at end of period...................................................... $ (24,861) $ (23,621)
--------- ---------
Total stockholders' equity (deficit)............................................ $ 7,235 $ (11,969)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 6
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
(dollars in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net loss.......................................................................... $ (1,240) $ (10,866)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
(Gain) on disposal of fixed and intangible assets............................. (24) --
Depreciation and amortization................................................. 1,375 2,249
Accretion of stock put........................................................ -- 26
Write-off of impaired intangible assets....................................... -- 11,385
Write-off of fixed assets..................................................... -- 1,183
(Increase) decrease in restricted cash........................................ 130 (30)
(Increase) decrease in net accounts receivable................................ 194 (783)
(Increase) decrease in inventory.............................................. (13) 31
(Increase) in prepaid expenses................................................ (207) (5)
(Increase) decrease in other current assets................................... 92 126
Increase (decrease) in accounts payable....................................... (869) 777
Increase in accounts payable, affiliated companies............................ 72 12
(Decrease) in accrued liabilities............................................. (193) (110)
Gain on foreign currency transaction.......................................... (31) (138)
Minority interest in loss of subsidiary....................................... (66) (6,040)
--------- ---------
Total adjustments............................................................. 460 8,683
--------- ---------
Net cash (used in) operating activities..................................... (780) (2,183)
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment............................... 249 62
Purchase of property, plant and equipment......................................... (1,417) (1,680)
--------- ---------
Net cash (used in) investing activities..................................... (1,168) (1,618)
Cash flows from financing activities:
Increase in bank overdrafts....................................................... 122 34
Proceeds from issuance of notes payable........................................... 1,019 522
Principal reduction of notes payable.............................................. (1,013) (536)
Reduction of put option........................................................... (861) --
Proceeds from issuance of long-term debt, unaffiliated lenders.................... 931 1,222
Reduction of long-term debt, unaffiliated lenders................................. (1,444) (2,638)
Proceeds from issuance of note payable to majority shareholders................... 1,054 5,126
Repayment of revolving line of credit............................................. (12,785) --
Contributed capital............................................................... 14,937 --
--------- ---------
Net cash provided by financing activities................................... 1,960 3,730
--------- ---------
Net increase (decrease) in cash and cash equivalents................................ 12 (71)
Cash and cash equivalents, beginning of period...................................... 32 103
--------- ---------
Cash and cash equivalents, end of period............................................ $ 44 $ 32
========= =========
Supplemental disclosures:
Cash paid during the year for :
Interest........................................................................ $ 671 $ 960
========= =========
Taxes........................................................................ $ -- $ --
========= =========
Noncash transactions:
Conversion of stockholder debt and other
liabilities to additional paid-in capital....................................... $ 5,507 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 7
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying financial statements present the consolidated accounts of
Waste Systems, Inc. ("WSI" or "Company") and its majority-owned subsidiary,
3CI Complete Compliance Corporation ("3CI" or "Subsidiary"). WSI was owned
by a group of German corporate investors and has a year ending on December
31. 3CI's year ends on September 30. The consolidated financial statements
include the accounts for the respective year-ends. All significant
intercompany accounts and transactions have been eliminated in
consolidation. 3CI has suffered recurring net losses. Such losses have
exceeded the minority interest's equity capital. Under generally accepted
accounting principles, such excess losses are charged against the majority
interest. If the losses reverse in later years, the majority interest will
be credited with the amount of minority interest losses previously absorbed
before credit is made to the minority interests.
Organization and Basis of Presentation
3CI, a Delaware corporation, is publicly held and is engaged in the
collection, transportation and incineration of biomedical waste in the
southeastern and southwestern United States. In February 1994, subsidiaries
of 3CI acquired all the assets and business operations of American Medical
Transports Corporation ("AMTC"), an Oklahoma corporation, and A/MED, Inc.
("A/MED"), a Delaware corporation. Both AMTC and A/MED were engaged in
businesses similar to that of 3CI. Waste Systems, Inc. (WSI), a Delaware
corporation, was the majority shareholder of both AMTC and A/MED (the
"Companies"). Additionally, in February 1994, WSI purchased 1,255,182
shares of 3CI common stock ("Common Stock") from American Medical
Technologies ("AMOT").
As a result of the transactions described above, WSI became the majority
shareholder of 3CI immediately following the acquisition of AMTC and A/MED.
For accounting purposes, AMTC and A/MED were considered the acquirer in a
reverse acquisition. The combined financial statements of AMTC and A/MED
are the historical financial statements of 3CI for periods prior to the
date of the business acquisition. Historical combined shareholders' equity
of AMTC and A/MED has been retroactively restated for the equivalent number
of 3CI shares received for the assets and business operations of AMTC and
A/MED, and the combined accumulated deficit of AMTC and A/MED has been
carried forward.
In October 1992, Medical Environmental Disposal, Inc., a wholly-owned
subsidiary of WSI was merged with and into AMTC, with AMTC being the
surviving corporation.
Predecessor to 3CI
Prior to the merger with AMTC and A/MED, 3CI was a majority owned
subsidiary of AMOT. In September 1991, AMOT purchased the business and
assets and assumed certain liabilities of 3CI and 3CI Transportation
Systems Corporation (the "Predecessor Companies"), both existing Texas
corporations that had been in the medical waste disposal business since
1989 and 1990, respectively. 3CI began operations when AMOT contributed
substantially all the net assets and business operations of the Predecessor
Companies to 3CI. In April 1992, 3CI completed an initial public offering
of Common Stock whereby 800,000 shares were sold by 3CI and 580,000 shares
were sold by AMOT.
12
<PAGE> 8
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
Substantial Doubt Regarding Ability to Continue as a Going Concern
The Subsidiary has consistently suffered losses for the past several fiscal
years, and losses have continued in fiscal 1998. As of September 30, 1997,
the Subsidiary had a working capital deficit of $6,135,666. The Subsidiary
has historically relied on WSI, the Subsidiary's majority stockholder, for
funding, and such support was again necessary in fiscal 1997. In the
absence of the Subsidiary being able to secure third party financing, WSI
agreed to provide the Subsidiary with a revolving credit facility of $8
million under a Promissory Note dated September 30, 1995, which provides
for deferred interest with cash advances not to exceed $7.4 million, of
which $4.8 million including deferred interest, and $4.9 million including
deferred interest, has been drawn as of September 30, 1997, and December
31, 1997. During the fiscal year ended September 30, 1996, WSI made
additional cash advances that were in excess of the principal in the
original Promissory Note, and 3CI entered into a second Revolving Credit
Facility of $2.7 million including deferred interest, dated December 20,
1996 with a maturity date of February 28, 1997. It was the intent of WSI
and 3CI that this Revolving Promissory Note evidence all sums owing by 3CI
to WSI to the extent that such sums represent advances of funds to 3CI in
excess of the maximum limits fixed under that certain $8,000,000 Revolving
Promissory Note dated September 30, 1995. The Promissory Note dated
September 30, 1995 had a due date of December 31, 1996 of which 3CI
requested from and received an extension to discuss with WSI the
possibility of restructuring the terms of such Promissory Note. In February
1997, 3CI received a letter from the Nasdaq Stock Market, Inc. regarding
3CI's failure to meet listing requirements. These requirements include
maintaining a minimum capital and surplus of at least $1,000,000 and a
minimum bid price of $1.00. While 3CI remained out of compliance with these
requirements, the Nasdaq Stock Market, Inc. allowed 3CI to remain listed
with an exception added to its trading symbol. The Nasdaq Stock Market,
Inc. gave 3CI until June 25, 1997, to meet the listing requirements. In
June 1997, WSI converted $7,000,000 of debt into 1,000,000 shares of 3CI
preferred stock. This conversion allowed 3CI to meet the listing
requirements of the Nasdaq Stock Market, Inc. On June 26, 1997, the Nasdaq
Stock Market, Inc. informed 3CI that it had been found to be in compliance
with all requirements necessary for continued listing on the exchange, and
the exception to its trading symbol had been removed. In connection with
the conversion of debt to preferred stock, WSI canceled the Revolving
Credit Facility of $2.7 million dated December 20, 1996, with a maturity
date of February 28, 1997, which had been previously extended to June 30,
1997. The conversion also resulted in the reduction of the outstanding
indebtedness of the Promissory Note dated September 30, 1995. During the
fiscal years ended December 31, 1997 and 1996 WSI made cash advances to 3CI
of $2,303,000 and $4,000,000. Since the year ended December 31, 1997, 3CI
has not requested nor received any additional cash advances from WSI. WSI
is under no obligation to provide additional advances and could demand
payment on the debt at any time. During the fiscal year 1997, 3CI had began
to have discussions with a third party lender to obtain an alternative
source of financing apart from WSI. In the event 3CI and WSI do not come to
a resolution on the restructuring of the September 30, 1995 Promissory Note
and 3CI is unable to obtain alternative financing, there can be no
assurance that 3CI will be able to meet its obligations as they become due
or realize the recorded value of its assets and would likely be forced to
seek bankruptcy protection.
13
<PAGE> 9
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
The nature and level of competition in this industry have remained at a
high level for several years. This condition has produced aggressive price
competition and results in pressure on profit margins. 3CI competes against
companies which may have access to greater capital resources. In order to
compete in this industry on a long-term basis and fully realize its
business strategy, 3CI will require additional and continued financing and
other assistance from its current shareholders and if available, from
outside sources. There is no assurance that adequate funds for these
purposes will be available when needed or, if available, on terms
acceptable to 3CI.
Inventory
Inventory, consisting of containers and supplies, are stated at the lower
of cost (first-in, first-out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is calculated on the straight-line method over the
estimated useful lives of the assets. Expenditures for major renewals and
betterments are capitalized, and expenditures for repairs and maintenance
are charged to expense as incurred.
Impact of Recently Issued Accounting Pronouncements
In March 1995, the FASB issued Statement No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed. The
Company adopted Statement No. 121 in 1996 and, has completed an analysis to
determine the impact. Prior to the adoption of Statement No. 121, in the
course of preparing its financial statements, the Company routinely
reviewed assets for impairment by reviewing expected future undiscounted
net cash flows.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share."
This pronouncement is effective for periods ending after December 15, 1997.
This statement requires that basic earnings per share be presented on the
face of the income statement. Further, entities with complex capital
structures must also present diluted earnings per shares on the face of the
income statement. Basic earnings per share excludes dilution and is to be
computed by dividing income available to common stockholders by the
weighted average number of common shares of stock outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities, options, or other contracts to issue common
stock were converted into common stock that then shared in the earnings of
the company. No potential common shares may be included in the computation
of any diluted per-share amount when a loss from continuing operations
exists, even if the company reports net income. At the present time the
ultimate impact of the adoption of this standard is not known or reasonably
estimable.
14
<PAGE> 10
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
In February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure." This pronouncement is effective for
periods ending after December 15, 1997. This statement establishes
standards for disclosing information for an entity's capital structure.
Adoption of this standard does not have a significant impact on the
Company's financial statements.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." This pronouncement will be effective for years beginning after
December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Because the Company does not presently have
any "items of other comprehensive income," adoption of this standard should
not have a significant impact on the Company's financial statements.
Incineration Rights and Permits
The incineration rights represent amounts capitalized pursuant to the
reverse merger of 3CI for incineration contracts with the cities of
Carthage and Center, Texas (the "Cities"), which own the incineration
facilities. The amortization of the incineration rights commences at the
start of the contract and is amortized on the straight-line method over
nine years, which corresponds to the contract periods. Costs associated
with the permits are being amortized over the life of the contracts. See
Note 12 for write-off of incineration rights and permits.
Intangible Assets
Intangible assets are amortized on a straight-line method as follows:
Excess of cost over net assets acquired 17.5-40 years
Permits 5-7 years
Customer lists 5-10 years
Amortization expense charged to operations for the years ended December 31,
1997 and 1996 was $122,479 and $864,084, respectively.
Management evaluates the realization of the intangible assets recorded for
each acquisition based on the prospects for the ongoing operations of each
acquired company.
See Note 12 for write-off of intangibles during the fiscal year 1996.
Revenue Recognition
The Company recognizes revenue from the treatment of medical waste in the
period in which the wastes are treated.
15
<PAGE> 11
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
Net Loss Per Share
Net loss per common share was computed by dividing the net loss by the
weighted average number of common shares outstanding. For the years ended
December 31, 1997 and 1996, the weighted average common shares outstanding
was 100 for both years.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less
to be cash equivalents.
Restricted Cash
At December 31, 1997 and 1996, the Company had cash of $-0- and $130,000,
respectively, which was restricted pursuant to an irrevocable standby
letter of credit related to workers compensation insurance.
Income Taxes
The Company utilizes the liability method of accounting for income taxes in
accordance with the provisions of Statement of Financial Accounting
Standards No. 109 ("SAS No. 109"). SAS No. 109 requires that deferred
income taxes reflect the tax consequences of differences between the tax
bases of assets and liabilities and their financial reporting amounts.
Management Estimates
Management has used estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates that were used.
Reclassifications
Certain reclassifications have been made to the prior financial statements
to conform to the classifications used in the current financial statements.
16
<PAGE> 12
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. BUSINESS ACQUISITIONS:
River Bay Corporation
In October 1994, 3CI acquired substantially all of the assets and assumed
certain liabilities of River Bay corporation, a Mississippi Corporation
("River Bay"), in consideration for 865,500 shares of Common Stock and
additional shares of Common Stock contingent upon the profits of the
operations attributable to the assets purchased from River Bay through
December 31, 1996. In addition, 3CI issued to River Bay a promissory note
in the original principal amount of $1,000,000 bearing an interest rate of
8.75%, which as amended, provided for monthly principal payments ranging
from $50,000 to $100,000 through February 1996.
Pursuant to a Put Option Agreement with River Bay, as amended ("Put Option
Agreement"), 3CI, in October 1995, repurchased 300,000 of the shares of
Common Stock issued in connection with acquisition in consideration for its
promissory note in the original principal amount of $900,000 ($3.00 per
share) and providing for monthly principal payments ranging from $25,000 to
$75,000, plus interest, through January 1997. Pursuant to the Put Option
Agreement, 3CI were obligated to repurchase the remaining 565,500 shares of
3CI Common Stock issued in connection with the acquisition at the option of
River Bay, from February 1, 1997 until April 1, 1997 for $3.00 per share.
The liability associated with the Put Option Agreement covering the
remaining shares is included in Accrued Stock Put Option on the
accompanying balance sheet as of December 31, 1996. River Bay exercised its
Put Option on or about February 14, 1997, for 3CI to repurchase the 565,500
shares of Common Stock. On or about March 10, 1997, 3CI commenced
arbitration proceedings before the American Arbitration Association in
Houston, Texas against River Bay and Marlan Baucum seeking to set aside the
Purchase Agreement (the "Purchase Agreement") entered into between 3CI and
those parties on or about October 10, 1994, together with ancillary
agreements pertaining thereto. 3CI was seeking damages and/or to set aside
the Purchase Agreement and collateral agreements, including the Put Option
Agreement which, if otherwise enforceable, would have required the payment
by 3CI of approximately $1,700,000 for 565,500 shares of 3CI Common Stock.
In response, on April 9, 1997, Bank of Raleigh and Smith County Bank,
assignees of certain rights under the Purchase Agreement, commenced a
complaint for declaratory and monetary relief in the U.S. District Court
for the Southern District of Mississippi, Jackson Division in Civil Action
No. 3:97cv249BN. T he Smith County Bank and Bank of Raleigh prayed
declaratory judgment declaring the arbitration provision in the Purchase
Agreement to be not binding upon said banks, the claims of 3CI against
River Bay to be subordinate to the claims of the banks, unspecified
compensatory damages, and punitive damages of at least $1,000,000. In April
1997, the Bank of Raleigh and Smith County Bank gave notice to certain
customers in the River Bay division that 3CI was in default of the Put
Option Agreement and that its payments should be directly made to the Bank
of Raleigh and Smith County Bank. From these efforts, the Bank of Raleigh
and Smith County Bank collected $463,000 of 3CI's accounts receivables that
were pledged in the Purchase Agreement. On or about May 10, 1997, 3CI filed
a Petition of Arbitration in Suit No. 422,107 of the First Judicial
District Court, Caddo Parish, Louisiana, naming River Bay and Marlan Baucum
as defendants therein. This lawsuit sought an injunction and stay of all
judicial and extra-judicial proceedings pursuant to the Put Option
Agreement until such time as the arbitration is completed. This action was
removed by the defendants to the U.S. District Court for the Western
District of Louisiana, Shreveport Division in Civil Action No. 97-0578. On
or about October 14, 1997, the parties settled the lawsuits. In the
settlement, 3CI agreed to repurchase the remaining 565,500 shares of Common
Stock related to the Put Option Agreement, at a price of $816,364, with
payments ranging from $100,000 to $63,500. This liability is recorded in
the financial
17
<PAGE> 13
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. BUSINESS ACQUISITIONS (CONTINUED)
statements at December 31, 1997.
River Bay has been engaged in the business of medical waste management
services in Mississippi, Tennessee, Florida, Georgia and Alabama.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
Useful
1997 1996 Life
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Land 591 591
Buildings and improvements 1,622 1,538 3-40 years
Transportation equipment 3,287 3,917 5-10 years
Machinery and equipment 5,098 4,859 5-20 years
Furniture and fixtures 329 491 3-10 years
------ -------
10,927 11,396
====== =======
</TABLE>
Depreciation expense charged to operations was $1,252,462 and $1,385,072
for the years ending December 31, 1997 and 1996, respectively. During the
year ended December 31, 1996, an analysis was done of all the fixed assets
of 3CI. In conjunction with the analysis, 3CI reconsidered the appropriate
asset lives as well as revising various accounting estimates as a result of
recent operating experiences and current market conditions. This write down
of $1,183,446 appears as "write-off of fixed assets" on the Consolidated
Statement of Operations.
Substantially all of the Company's property, plant and equipment has been
pledged as collateral against certain of the Company's liabilities.
Set forth below is a summary of the write-offs relating to fixed assets
during fiscal 1996:
Buildings $12,700
During 1996, it was necessary to replace the refractory in one of 3CI's
incinerators due to the normal wear and tear. There was a net book value of
$12,700 of the previously capitalized refractory that is being written-off.
Leasehold Improvements $80,000
During 1996, 3CI updated and refurbished several of its transportation and
incinerator locations. Management believed the updating and refurbishment
was necessary to make the locations more functional and efficiently
operational. Also 3CI made an operational decision to close its Austin,
Texas transportation location. This closure was made in order to reduce
operating costs and personnel costs. Previous leasehold improvement costs,
which were being amortized over the life of the lease, (the lease was
18
<PAGE> 14
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
3. PROPERTY, PLANT AND EQUIPMENT (CONTINUED):
terminated due to the decision to close the location) were written-off as
they remained a part of the leased building.
Transportation Equipment $500,982
In February 1994, at the time of the reverse merger of 3CI, 3CI had a lease
agreement which was accounted for as a Capitalized Lease and was being
depreciated over the term of the lease agreement. During 1996, management
made a decision to terminate the lease agreement early due to the high cost
of maintenance of the leased transportation equipment. The Company had also
capitalized other costs associated with these leased assets. As the
transportation equipment was returned, it was necessary to write the
remaining capitalized net book value off of $500,982.
Reusable Containers $12,000
In 1996, 3CI made an operational decision to move a portion of their
customer base from disposable cardboard boxes to reusable plastic
containers. A significant investment was then made in reusable plastic
containers and based upon its prior operating experience with the reusable
containers, the Company estimated that a three (3) year life was more
reflective of the reusable containers than a five (5) year life. In
previous periods 3CI had estimated that the life of reusable containers was
five (5) years. Due to this change in estimate 3CI wrote-off previously
capitalized reusable containers with a net book value of $12,000.
Machinery and Equipment $88,000
During fiscal 1996, it was necessary to change the bags inside the scrubber
at an incinerator as these bags became excessively worn and the integrity
of the bags was beginning to deteriorate. These bags had a remaining net
book value of $22,200 that was written-off as they were no longer able to
remain in service. Also, there is a write-off of a previously capitalized
major improvement that was done to the upper chamber of the incinerator.
During 1996, there was a major improvement completed in the upper chamber
and the previously capitalized improvement was written-off at its net book
value of $28,405. In the River Bay division, machinery and equipment with a
net book value of $37,395 was written-off.
Computer and Software $490,000
During 1994 and 1995, 3CI began capitalizing cost associated with one of
3CI's bar coding systems and an accounting system that would streamline the
paperwork from the transportation locations, to the incinerators, to
ultimately the accounting department (production/billing/accounting
system). This was put into service in fiscal 1995 and was being amortized.
During fiscal 1996, due to continued problems in the ongoing training of
employees on the use of the software and the prohibitive expense of
replacing hardware due to harsh conditions, management determined the bar
coding system was no longer cost effective and abandoned the project and
appropriately wrote-off the unamortized costs. The write-off of these
capitalized costs totaled $472,000. The company also wrote-off previously
capitalized accounting software with a remaining net book value of $18,000
that was acquired in a previous acquisition (River Bay asset acquisition),
as this software was abandoned when the River Bay divi-
19
<PAGE> 15
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
3. PROPERTY, PLANT AND EQUIPMENT (CONTINUED):
sion was integrated in the fourth quarter of 1996 into the 3CI accounting
system.
4. NOTES PAYABLE:
<TABLE>
<CAPTION>
1997 1996
------ -----
(dollars in thousands)
<S> <C> <C>
Notes payable to an insurance company, due in
monthly installments including interest of 7%
to 9% through March 1998, unsecured 217 212
======== =========
The Company had a $12,800,000 unsecured revolving line of credit maturing
on December 31, 1997, of which $15,000 was unused at December 31, 1996.
Interest was payable monthly and accrued at the interbank offered rate
(IBOR) (7.15625 at December 31, 1996). The line of credit was repaid in
full on September 17, 1997 -- 12,785
======== =========
Notes payable to stockholders bear interest at 4.25%- 4.50% with all unpaid
principal and interest due at maturity. All stockholder notes were
converted to equity at January 1, 1997 -- 3,851
======== =========
</TABLE>
5. LONG-TERM DEBT:
Long-term debt-unaffiliated lenders consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(dollars in thousands)
<S> <C> <C>
Note payable to prior owner of Incendere, at an annual adjustable interest
rate generally ranging between 7.5% to 9.75%, with 34% of interest being
paid quarterly and 66% of interest deferred and added to principal until
May 21, 1995. Thereafter, principal and interest are due in equal monthly
installments until maturity on May 21, 1998, convertible into common stock
at $3.00 per share, secured by substantially all of the assets of A/MED 241 615
Notes payable for purchased vehicles and equipment held as collateral, due
in monthly installments, including interest, at rates ranging from 7% to
16.75%, maturing through 2002 1,303 991
</TABLE>
20
<PAGE> 16
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
5. LONG-TERM DEBT (CONTINUED):
<TABLE>
<CAPTION>
<S> <C> <C>
Note payable to Stone Container Corp. due in
monthly payments with interest at 10% through 1997 -- 74
Notes payable to River Bay Corporation due in monthly payments with
interest of 8.75% through December 1998, secured by accounts receivable,
equipment, and common stock 816 376
------- --------
2,360 2,056
Less--current portion (1,374) (1,314)
------- --------
986 742
======= ========
</TABLE>
Payments due on long-term debt, during each of the five years
subsequent to December 31, 1997, are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
1998 1,374
1999 662
2000 314
2001 7
2002 3
</TABLE>
The total interest expense was $855,115 and $1,443,542 for the years
ended December 31, 1997 and 1996, respectively.
6. INCINERATION CONTRACTS:
3CI is a party to exclusive incineration contracts with the Cities whereby
3CI is guaranteed minimum weekly burn capacity and is required to pay fees
to the Cities based on the total pounds incinerated. These contract rights
were obtained in exchange for the Predecessor Companies purchasing certain
equipment for the Cities' incinerators which enabled the Cities to meet all
current federal and state emissions control standards. Due to problems
arising from contractual agreements with the City of Center, 3CI is
presently not utilizing the incinerator at the City of Center for the
treatment of medical waste. The Company is no longer using the incinerator
in the City of Center and does not believe that discontinuing that use will
have a material effect on 3CI's business.
The City of Carthage requires minimum annual payments under the combined
contracts as follows:
<TABLE>
<CAPTION>
For the Year Ended Minimum Required
December 31, Payments
------------------ ----------------
(dollars in thousands)
<S> <C>
1998 1,000
1999 1,000
2000 1,000
-----
3,000
=====
</TABLE>
21
<PAGE> 17
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
6. INCINERATION CONTRACTS (CONTINUED):
In the event 3CI fails to meet the minimum amounts of annual guarantees to
the City of Carthage, after giving effect to amounts paid above prior year
minimums, annual required minimums (on a cumulative basis), the City of
Carthage has the option to terminate 3CI's exclusive incineration rights.
3CI had a minimum guaranteed payment to the City of Carthage, for
incineration fees for the years ended May 31, 1997, 1996, and 1995, of
$1,000,000, $716,000, and $596,250, respectively.In the years ended May 31,
1997, 1996, and 1995, 3CI paid incineration fees of $1,401,692, $843,000,
and $750,000, respectively to the City of Carthage. 3CI also had minimum
guaranteed payments to the City of Center, for incineration fees for the
years ended May 31, 1997, 1996, and 1995, of $762,000, $695,000, and
$495,250, respectively. In the years ended May 31, 1996 and 1995, 3CI paid
incineration fees of $779,000 and $551,000, respectively, to the City of
Center, in accordance with terms of the contract, thereby meeting the
annual minimum fees required.
In August 1996, 3CI discontinued use of the City of Center facility, due to
the City of Center's breach of the exclusivity portion of the contract. The
original agreement between 3CI and the City of Center, which was executed
on August 22, 1990, gave 3CI the exclusive and sole right to dispose of
medical waste at the City of Center's resource recovery facility. 3CI
discovered that the City of Center breached its exclusivity portions of the
1990 agreement, as amended on or about October 27, 1994. Due to this breach
of contract, 3CI does not believe that minimum guaranteed payment is due to
the City of Center. Despite not having the ability to treat waste at the
City of Center's resource recovery facility, 3CI has ample treatment
capacity to dispose of its medical waste. 3CI believes that the effect of
not utilizing this treatment facility has not and will not have a material
adverse effect on its financial position, results of operations or cash
flows.
Included in cost of sales for the years ended December 31, 1997 and 1996,
is $1,429,097 and $1,542,842, respectively, related to incineration costs
at the Cities since the reverse merger.
22
<PAGE> 18
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
7. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
rate used was 37 percent for the years ended December 31, 1997 and 1996
representing the federal rate and an average of state income tax rates. The
components of deferred income tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(dollars in thousands)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment 1,461 1,116
Other 69 67
------- ------
Total deferred income tax liabilities 1,530 1,183
Deferred income tax assets
Net operating loss carryforward 9,870 8,801
Bad debt reserves 323 344
Other 1,403 940
------- ------
Total deferred income tax assets 11,596 10,085
Valuation allowance (10,066) (8,902)
------- ------
Net deferred income tax asset (1,530) (1,183)
Total deferred income tax assets and liabilities -- --
======= ======
</TABLE>
At December 31, 1997, the Company had approximately $25,559,268 of net
operating loss carryforwards for federal tax purposes which will expire
beginning in 2004 and continue through the year 2012. The Company also had
state net operating losses at December 31, 1997. The Company has
established a valuation allowance for the federal and state net operating
losses of $10,066,016 and $8,902,294 as of December 31, 1997 and 1996,
respectively. Because of separate return limitations, change in ownership
limitations, and the weight of available evidence, it is more likely than
not that some portion or possibly all of the net operating losses will not
be available for use by the consolidated entities.
8. STOCK OPTION PLAN:
In conjunction with the business acquisition described in Note 1, a stock
option plan (the "Plan") approved by 3CI's previous shareholders in 1992
totaling 500,000 shares remains in effect. The purpose of the Plan is to
provide additional incentives to officers and employees of 3CI who are
primarily responsible for the management and growth of 3CI. Each option
granted pursuant to the Plan is designated at the time of grant as either
an "incentive stock option" or as a "nonqualified stock option." The
exercise price equals or exceeds the market price as of the grant date. At
September 30, 1995, 3CI had 230,000 shares outstanding under options for
two officers and one former officer of 3CI, of which all were exercisable,
at option prices of $3.00 to $4.00 per share. During 1995, 3CI reduced the
total shares available under the Plan to 375,000 shares, resulting in
145,000 shares available for future issuance as of December 31, 1997 and
1996.
23
<PAGE> 19
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
8. STOCK OPTION PLAN (CONTINUED):
During the years ended December 31, 1997 and 1996, 140,000 of the 230,000
option shares described above were canceled and a net of 47,500 option
shares were issued. As of December 31, 1997, a total of 137,500 option
shares are outstanding and a total of 237,500 option shares are available
for issuance under the Plan. The outstanding option shares vest monthly
over a three-year period. As of the year ended December 31, 1997, the
exercise prices of all options granted under the Plan have always exceeded
the market price of 3CI's Common Stock.
9. CONCENTRATION OF CREDIT RISK:
3CI's customers are concentrated in the medical industry and, therefore,
changes in economic, regulatory and other factors which affect the medical
industry may impact 3CI's overall credit risk. 3CI monitors the status of
its receivables including follow-up directly with customers on past due
balances.
10. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, Disclosure of Financial Instruments, requires companies to
disclose the fair value of each class of financial instruments for which it
is practical to estimate that value and for which the recorded value
significantly differs from the fair market value. The Company's primary
financial instruments are accounts receivable, notes payable, accounts
payable, and accrued liabilities. The fair value of accounts receivable
approximates its carrying amount. Because of the absence of availability of
alternative financing and the substantial doubt about the Company's ability
to continue as a going concern, it is not practical to estimate the fair
values of notes payable, accounts payable and accrued liabilities.
11. RELATED PARTY TRANSACTIONS:
During 1996, the Company made purchases of business forms with a company
owned by the father of Curtis W. Crane, the Chief Financial Officer of the
Company. Payments to the business forms company during fiscal years ended
December 31, 1997 and 1996 totaled $22,000 and $62,000, respectively.
12. INTANGIBLE ASSET WRITE-OFF:
In 1996, the Company adopted the provisions of Statement of Financial
Accounting Stand ards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No.
121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amounts. An evaluation of the fair value of the assets
associated with 3CI's operations resulted in the determination that certain
intangible assets were impaired. The impaired assets were written down by
$11,385,328. Fair value was based on the estimated future cash flows to be
generated by these intangible assets. This write down is included in the
"Write off of Intangibles" amount for fiscal 1996 on the Consolidated
Statements of Operations. During the fiscal year of 1995, WSI sent an
advisor to 3CI to review ongoing operations of 3CI and to make
recommendations as to how to achieve profitability. From this review 3CI
developed specific detail plans for its fiscal year ending September 1996.
In September 1995, management put together a business plan for the fiscal
year ending September 30, 1996. The Board of Directors reviewed the plan in
detail
24
<PAGE> 20
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
12. INTANGIBLE ASSET WRITE-OFF (CONTINUED):
and after thorough consideration in every aspect, the plan was approved by
the Board of Directors. The Chairman of the Board met with key operating
personnel and officers of the Company to discuss the actions to be taken.
Additionally, the Board installed a new officer to oversee the operations
and implementation of its plan. The business plan for the fiscal year ended
December 31, 1996, included cost reductions and a small amount of price
increases. As the fiscal year began to develop key operating objectives of
the business plan were not being achieved. In one of 3CI's key operating
territories (Houston, Texas), a competitor opened a treatment facility that
significantly increased the capacity to treat waste and by the competitor's
desire to fill the capacity, the competitor began deep discount pricing to
fill the capacity of the new treatment facility. Also, 3CI did not bring
its newly constructed incinerator into full operational use until March
1996; the business plan had projected the incinerator to be fully
operational in January 1996. As the losses continued, 3CI prepared a
forecast based on the best available business information. This forecast
was prepared in the fourth quarter of 1996. Because of the forecasted
continued losses, it became apparent that an impairment of long-lived
assets had occurred.
13. COMMITMENTS AND CONTINGENCIES:
In May 1995, a group of minority stockholders of the Company, including
Patrick Grafton, former Chief Executive Officer of the Company, acting
individually and purportedly on behalf of all minority stockholders, and on
behalf of the Company, filed suit in James T. Rash, et al v. Waste Systems,
Inc., et al., No. 95-024912 in the District Court of Harris County, Texas,
129th Judicial District, against 3CI, WSI and various directors of the
Company. The plaintiffs alleged minority stockholder oppression, breach of
fiduciary duty, breach of contract, and "thwarting of reasonable
expectations," and demanded an accounting, appointment of a receiver for
the sale of the Company, unspecified actual damages and punitive damages of
$10 million, plus attorney's fees. In addition, Mr. Grafton alleged
unspecified damages as a result of his removal as an officer and director
of the Company and the Company's failure to renew his employment agreement
in March 1995, and alleged that such removal was wrongful and ineffective.
The Company's insurer denied coverage in the lawsuit. The Company has
denied all material allegations of the lawsuit. However, the outcome of
this cannot be predicted, and an adverse decision in the lawsuit would
likely have a material adverse effect on the Company's financial condition
and results of operations and cash flows. The Company has reached an
agreement in principle with some, but not all, of the plaintiffs for the
settlement of this action. The execution of the appropriate documentation
to evidence this settlement has been completed and both parties are
awaiting court approval which is set for late February 1998. The Company
and Mr. Grafton reached a settlement of Mr. Grafton's individual claims
relating to his removal as an officer and director of the Company. The
terms of the settlement reached between the Company and Mr. Grafton are
confidential to both parties. The Company accrued an amount in its fiscal
year ended 1996 and 1995 financial statements which closely approximates
the actual settlement.
In June 1995, the former stockholders of Med-Waste Disposal Service, Inc.
("Med-Waste") filed suit in James H. Shepherd, et al v. 3CI Complete
Compliance Corporation, et al., No. C.V.-95-1441-1 in the Circuit Court of
Hot Springs County, Arkansas, against 3CI and various current and former
officers and directors of 3CI. Plaintiffs have alleged violations of
federal and state securities laws, breach of contract, common law fraud and
negligence in connection with the acquisition of Med-Waste by 3CI, and have
demanded rescission, restitution, unspecified actual damages and punitive
damages of $10 million, plus attorneys' fees. The case was transferred to
the United States District Court of the Western
25
<PAGE> 21
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
District of Arkansas Hot Springs Division and in November 1996 was
subsequently transferred to the United States District Court for the
Western District of Louisiana.
The parties, other than Patrick Grafton, former Chief Executive Officer of
3CI, have agreed to settle the suit in consideration of the issuance by 3CI
to the plaintiffs of 250,000 shares of Common Stock and the payment by 3CI
to the plaintiffs of 20% to 55% of the pre-tax profits, as defined,
attributable to the assets previously acquired from Med-Waste until such
time as the shares of Common Stock held by the plaintiffs become freely
tradable and the market price of the Common Stock averages at least $2.50
per share over a period of 42 consecutive days. In addition, 3CI and WSI
have agreed to repurchase the shares of Common Stock held by the plaintiffs
for $2.50 per share in certain events, including the bankruptcy of 3CI or
in the event WSI ceases to be the largest beneficial holder of the Common
Stock. The obligations of 3CI to the plaintiffs are secured by a security
interest in most of the assets of 3CI, and WSI has agreed to subordinate
its loans to 3CI, and all related security interests, to the obligations,
and the related security interests, of 3CI to the plaintiffs. This matter
has been settled by the parties and was dismissed in its entirety on July
31, 1997, by order of the court.
3CI accrued $250,000 in expenses, which was reflected in its September 30,
1995 financial statements relating to the settlement of the Med-Waste
lawsuit.
In connection with an auto accident in July 1996, two suits have been filed
against 3CI. Ryan O'Neil Youmans & Anita Youmans v. American 3CI, et al,
No. CV9604899, was filed in the Circuit Court of Jefferson County, Alabama,
in August 1996. Jimmy R. Whitfield & Rhonda Whitfield v. Paul Bronger,
American 3CI, et al., No. CV-96-847, was filed in the Circuit Court of
Shelby County, Alabama in November of 1996. These proceedings have been
settled by 3CI's insurance carrier and the related expenditure to 3CI are
reflected in the current year consolidated financial statements. The
resolution to these lawsuits did not have a material effect on the
Company's financial condition, results of operations and cash flows.
On or about March 10, 1997, 3CI commenced arbitration proceedings before
the American Arbitration Association in Houston, Texas against River Bay
Corporation ("River Bay") and Marlan Baucum seeking to set aside a Purchase
Agreement (the "Purchase Agreement") entered into between those parties on
or about October 10, 1994, together with ancillary agreements pertaining
thereto. 3CI was seeking damages and/or to set aside the Purchase Agreement
and collateral agreements, including a Put Option Agreement (the "Put
Option Agreement") which, if otherwise enforceable, would require the
payment by 3CI of approximately $1,700,000 for 565,500 shares of 3CI Common
Stock. In response, on April 9, 1997, Bank of Raleigh and Smith County
Bank, assignees of certain rights under the Purchase Agreement, commenced a
complaint for a declaratory and monetary relief in the U.S. District Court
for the Southern District of Mississippi, Jackson, Division in Civil Action
No. 3:97cv249BN. The Bank of Raleigh and Smith County Bank prayed
declaratory judgment declaring the arbitration provision in the Purchase
Agreement to be not binding upon the said banks, the claims of 3CI against
River Bay to be subordinate to the claims of the banks, unspecified
compensatory damages, and punitive damages for least $1,000,000. In this
action the Bank of Raleigh and Smith County Bank proceeded to collect the
Company's accounts receivable in the River Bay division as it was used as
collateral in the Purchase Agreement; they collected approximately
$463,000, through October 14, 1997. On or about May 10, 1997, the Company
filed a Petition of Arbitration in Suit No. 422,107 of the First Judicial
District
26
<PAGE> 22
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Court, Caddo Parish, Louisiana, naming River Bay and Marlan Baucum as
defendants therein. This lawsuit sought an injunction and stay of all
judicial and extra-judicial proceedings pursuant to the Put Option
Agreement until such time as the arbitration is completed. This action was
removed by the defendants to the U.S. District Court for the Western
District of Louisiana, Shreveport Division in Civil Action No. 97-0578. The
parties agreed to settle the suit in consideration of the Company
repurchasing the remaining 565,500 shares of Common Stock related to the
Put Option Agreement for $816,364. The outcome of this lawsuit does not
have a material adverse effect on the Company's financial position, result
of operations and net cash flows.
The Company is subject to certain other litigation and claims arising in
the ordinary course of business. In the opinion of management of the
Company, the amounts ultimately payable, if any, as a result of such
litigation and claims will not have a materially adverse effect on the
Company's financial position, results of operations, and net cash flows.
The Company operates within the regulated medical waste disposal industry
which is subject to intense governmental regulation at the federal, state
and local levels. The Company believes it is currently in compliance in all
material respects with all applicable laws and regulations governing the
medical waste disposal business. However, continuing expenditures may be
required in order for the Company to remain in compliance with existing and
changing regulations. Furthermore, because the medical waste disposal
industry is predicated upon the existence of strict governmental
regulation, any material relaxation of regulatory requirements governing
medical waste disposal or of their enforcement could result in a reduced
demand for the Company's services and have a material adverse effect on the
Company's revenues and financial condition. The scope and duration of
existing and future regulations affecting the medical waste disposal
industry cannot be anticipated and are subject to changing political and
economic pressures.
At September 30, 1995, 3CI had employment agreements with certain key
employees providing for compensation of $145,000 and $130,000 for the years
ended December 31, 1997 and 1996. These agreements further provide for a
bonus based on the achievement of certain performance objectives. For the
years ended December 31, 1997 and 1996, these performance objectives were
not achieved.
At December 31, 1997 and 1996, 3CI had certain noncancelable leases,
principally for office space and equipment, with various expiration dates.
The aggregate rental expenses under such leases were $735,696 and $866,203,
for the fiscal years ended December 31, 1997 and 1996, respectively. Future
minimum rentals under such leases for the following fiscal years aggregate
$605,000 for 1998, $353,000 for 1999, $106,000 for 2000, $60,000 for 2001
and $135,000 thereafter.
3CI granted River Bay security interests in certain of the assets purchased
from River Bay and certain accounts receivable attributable to these
purchased assets to secure future debt and the Put option.
The Company has agreed to pay the President of River Bay approximately
$65,000 over a period of 15 months related to the settlement of certain
issues. This liability is included in accrued liabilities in the December
31, 1997 and 1996 balance sheets.
27
<PAGE> 23
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
3CI has committed to reimburse WSI approximately $6,000 per month for
services provided and costs incurred by the Company's vice president.
Mr. Charles D. Crochet serves as President of 3CI pursuant to an employment
agreement commencing February 1994. Mr. Crochet was entitled to a salary of
$6,250 per month in February and March 1994, and then $7,500 per month from
April through September 1994, increasing to $9,583 per month commencing
October 1994 through September 1995. This employment agreement was
renegotiated and modified in August 1995, increasing Mr. Crochet's salary
to $10,833 per month commencing October 1, 1995 and thereafter increases to
$13,333 on October 1, 1997, and continues through May 1998. As an
additional incentive to Mr. Crochet under the new employment agreement, Mr.
Crochet is eligible for an annual bonus based on Fiscal Year Pre-Tax
Profits as a percentage of revenues. The amount of such annual bonus is
based on a percentage between 6% and 10% of an amount determined by the
Board of Directors from an approved bonus plan, and such actual percentage
depending upon the Company's Pre-Tax Profits as a percentage of revenue.
14. SUBSEQUENT EVENTS:
The James T. Rash, et al v. Waste Systems, Inc., et al suit (see Note 13)
has been settled. Court approval of such settlement was received in
February 1998. Pursuant to the settlement, 3CI has agreed to (i) transfer
78,014 shares of its Common Stock into escrow for later conveyance to the
plaintiffs, (ii) transfer warrants for 1,002,964 shares of 3CI Common Stock
into escrow for later conveyance to the plaintiffs on the basis of one
warrant for every three shares of 3CI Common Stock owned, that are
exercisable for two years from the effective date of the Settlement
Agreement at a price of $1.50 per share, (iii) pay $425,000 into an escrow
account to pay the plaintiffs, attorneys' fees, and (iv) obtain SEC
approval, if necessary, to convert the 1,000,000 shares of 3CI Series A
Preferred Stock into 7,000,000 shares of 3CI Series B Convertible Preferred
Stock ("Series B Preferred Stock"). Pursuant to the terms of the Settlement
Agreement, $425,469 has been paid to the plaintiff's attorneys' for fees
and 78,014 shares of 3CI Common Stock and warrants for 1,002,964 shares of
3CI Common Stock have been placed in escrow for subsequent conveyance to
the plaintiffs.
3CI, as authorized by the necessary approvals of the Board of Directors and
the 3CI's majority stockholder (WSI), has approved the adoption of an
amendment (the "Amendment") to 3CI's Certificate of Incorporation, as
amended, to (i) increase the authorized preferred stock, of 3CI from
1,000,000 shares to 16,050,000 shares, and (ii) increase the authorized
common stock, par value $.01 per share ("Common Stock"), of 3CI from
15,000,000 shares to 40,450,000 shares. The Amendment was adopted to
facilitate (i) the conversion of $7,000,000 of debt (the "Debt Conversion")
owed by 3CI to WSI, 3CI's largest stockholder, in exchange for 1,000,000
shares of 3CI's Series A Preferred stock, (ii) the exchange of the Series A
Preferred Stock for 7,000,000 shares of 3CI's Series B Preferred Stock, and
(iii) the conversion of an additional $750,000 of debt owed by 3CI to WSI
to 750,000 shares of the Company's Series C Convertible Preferred Stock
(the "Series C Preferred Stock").
28
<PAGE> 24
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
14. SUBSEQUENT EVENTS (CONTINUED):
3CI has filed the Registration Statement (Form S-1) with the Securities and
Exchange Commission to register 1,518,434 additional shares of its Common
Stock. On about February 27, 1998, an Information Statement was mailed to
3CI's stockholders informing them of the previous approval by the Board of
Directors of 3CI of the corporate actions referred to above and their
subsequent adoption by the majority stockholder of the 3CI.
On or about October 1, 1998, Stericycle, Inc., a Delaware Corporation with
its principal offices in Deerfield, Illinois, purchased all of the issued
and outstanding shares of stock of WSI. The purchase price for the WSI
shares was $10,000,000 in cash. Upon completion of the transaction, WSI
became a wholly-owned subsidiary of Stericycle, Inc. Stericycle is engaged
in the business of collecting, transporting, treating and disposing of
regulated medical waste. It has developed a proprietary treatment
technology known as electro-thermal deactivation ("ETD"). As a part of the
purchase transaction, Stericycle granted to the sellers certain exclusive
negotiation and first refusal rights in respect of medical waste treatment
units utilizing Stericycle's ETD technology.
On October 1, 1998, the Revolving Promissory Note dated September 30, 1995
(between 3CI and WSI) in the maximum principal amount of $8,000,000
("Original Note") was amended and restated in its entirety. 3CI made a new
secured promissory note in the amount of $5,487,308 due on or before
September 30, 1999. The note may be extended to a date not later than
September 30, 2000. The note bears interest at prime plus 2% and the
interest is payable quarterly. The security documents relating to the
original note remain in full force and effect. The note places certain
restrictions and financial covenants on 3CI.
29
<PAGE> 1
EXHIBIT 99.2
Waste Systems, Inc. and Subsidiary
September 30, 1998 and 1997
30
<PAGE> 2
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 1998 1997
(dollars in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 2 $ 68
Restricted cash................................................................. -- 130
Accounts receivable, net of allowance for doubtful
accounts of $597,861 and $960,921............................................. 2,813 4,091
Inventory....................................................................... 87 97
Other current assets............................................................ 758 732
--------- --------
Total current assets........................................................ 3,660 5,118
Property, plant and equipment, at cost............................................ 12,586 11,468
Less--accumulated depreciation.................................................... (3,600) (2,905)
--------- --------
Net property, plant and equipment........................................... 8,986 8,563
Excess of cost over net assets acquired, net of accumulated
amortization of $87,488 and $62,488............................................. 343 369
Other intangible assets, net of accumulated amortization of
$186,380 and $111,828........................................................... 226 293
Other assets...................................................................... -- 4
--------- --------
Total assets...................................................................... $ 13,215 $ 14,347
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdrafts................................................................. $ 356 $ 534
Notes payable................................................................... 642 514
Current portion of long-term debt, unaffiliated lenders......................... 1,018 863
Accounts payable................................................................ 1,393 1,519
Accounts payable-affiliated companies........................................... 93 386
Accrued liabilities............................................................. 843 1,249
--------- --------
Total current liabilities................................................... 4,345 5,065
Long-term debt unaffiliated lenders, net of current portion....................... 883 860
--------- --------
Total liabilities........................................................... 5,228 5,925
Accrued stock put option.......................................................... -- 1,592
Shareholders' equity:
Common stock, no par value, 100 shares authorized,
issued and outstanding........................................................ 500 500
Additional paid-in capital...................................................... 32,196 31,206
Accumulated deficit............................................................. (24,709) (24,876)
--------- --------
Total shareholders' equity.................................................... 7,987 6,830
--------- --------
Total liabilities and shareholders' equity......................................... $ 13,215 $ 14,347
========= ========
</TABLE>
31
<PAGE> 3
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
(dollars in thousands
except per share amounts
and share data)
<S> <C> <C>
Revenues.......................................................................... $ 14,127 $ 13,978
Expenses:
Cost of services................................................................ 10,475 10,800
Depreciation and amortization................................................... 814 881
Selling, general and administrative............................................. 2,555 2,746
--------- -----------
Total expenses............................................................... 13,844 14,427
--------- -----------
Net income (loss) from operations................................................. 283 (449)
Other income (expense):
Interest expense................................................................ (175) (806)
--------- -----------
Income (loss) before income taxes................................................. $ 108 $ (1,255)
Income taxes...................................................................... -- --
--------- -----------
Income (loss) before minority interest in loss of subsidiary...................... 108 (1,255)
Minority interest in loss of subsidiary........................................... 43 --
--------- -----------
Net income (loss)................................................................. $ 151 $ (1,255)
========= ===========
Weighted average shares outstanding............................................... 100 100
========= ===========
Income (loss) per common share.................................................... $1,513.73 $(12,548.16)
========= ===========
</TABLE>
32
<PAGE> 4
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
(dollars in thousands)
<S> <C> <C>
Common stock:
Balance at beginning of period.................................................. $ 500 $ 500
Additional shares issued (retired).............................................. -- --
---------- ---------
Balance at end of period........................................................ $ 500 $ 500
Additional paid-in capital:
Balance at beginning of period.................................................. $ 31,595 $ 11,152
Conversion of stockholder debt and other liabilities
to additional paid-in capital................................................... 601 18,775
Stockholder contributions to additional paid-in
capital......................................................................... -- 1,279
---------- ---------
Balance at end of period........................................................ $ 32,196 $ 31,206
Accumulated deficit:
Balance at beginning of period.................................................. $ (24,860) $ (23,621)
Net income (loss)............................................................... 151 (1,255)
--------- ---------
Balance at end of period........................................................ $ (24,709) $ (24,876)
---------- ---------
Total stockholders' equity (deficit).............................................. $ 7,987 $ 6,830
========= =========
</TABLE>
33
<PAGE> 5
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................... $ 151 $ (1,255)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
(Gain) loss on disposal of fixed and intangible assets...................... -- 18
Depreciation and amortization............................................... 930 1,041
(Increase) decrease in net accounts receivable.............................. 746 (338)
(Increase) in inventory..................................................... (15) (38)
(Increase) in prepaid expenses.............................................. (292) (474)
(Increase) decrease in other current assets................................. 11 (13)
Increase in accounts payable................................................ 363 127
Increase in accounts payable, affiliated companies.......................... 67 54
(Decrease) in accrued liabilities........................................... (1,335) (558)
Gain on foreign currency transaction........................................ -- (39)
Minority interest in loss of subsidiary..................................... (43) --
--------- ---------
Total adjustments......................................................... 432 (220)
--------- ---------
Net cash provided by (used in) operating activities....................... 583 (1,475)
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment............................. 99 233
Purchase of property, plant and equipment....................................... (1,411) (372)
--------- ---------
Net cash (used in) investing activities................................... (1,312) (139)
Cash flows from financing activities:
Increase in bank overdrafts..................................................... 199 --
Proceeds from issuance of notes payable......................................... 1,088 942
Principal reduction of notes payable............................................ (663) (13,496)
Reduction of put option......................................................... -- (105)
Proceeds from issuance of long-term debt, unaffiliated lenders.................. 633 --
Reduction of long-term debt, unaffiliated lenders............................... (1,092) (1,186)
Proceeds from issuance of note payable to majority shareholders................. 557 14,216
Contributed capital............................................................. -- 1,279
Other........................................................................... (35) --
--------- --------
Net cash provided by financing activities................................. 687 1,650
--------- ---------
Net increase (decrease) in cash and cash equivalents.............................. (42) 36
Cash and cash equivalents, beginning of period.................................... 44 32
--------- ---------
Cash and cash equivalents, end of period.......................................... $ 2 $ 68
========= =========
</TABLE>
34
<PAGE> 6
WASTE SYSTEMS, INC. AND SUBSIDIARY
SELECTED INFORMATION -
SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
ARE NOT INCLUDED
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements present the consolidated accounts of
Waste Systems, Inc. ("WSI" or the "Company") and its majority-owned
subsidiary, 3CI Complete Compliance Corporation ("3CI" or "Subsidiary").
WSI was owned by a group of German corporate investors and has a year
ending on December 31. 3CI's year ends on September 30. All significant
intercompany accounts and transactions have been eliminated in
consolidation. 3CI has suffered recurring net losses. Such losses have
exceeded the minority interest's equity capital. Under generally accepted
accounting principles, such excess losses are charged against the majority
interest. If the losses reverse in later years, the majority interest will
be credited with the amount of minority interest losses previously absorbed
before credit is made to the minority interests.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. As applicable under such regulations, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes that the
presentation and disclosures herein are adequate to make the information
not misleading and that the financial statements reflect all adjustments
that are of a normal recurring nature which are necessary for a fair
presentation of these financial statements. These financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the year ended December 31, 1997.
3. BUSINESS CONDITIONS
3CI has historically funded its operations, acquisitions and debt service
through cash advances from its majority shareholder, WSI. As a result of
3CI's prior expansion and program of acquisitions, it has experienced
liquidity deficiencies.
3CI has continued to have discussions with third party lenders to obtain an
alternative source of financing apart from WSI. In the event 3CI and WSI do
not come to a resolution on the restructuring of the 1995 Note and 3CI is
unable to obtain alternative financing, there can be no assurance that 3CI
will be able to meet its obligations as they become due or realize the
recorded value of its assets.
The nature and level of competition in the medical waste industry has
remained high for several years. This condition has produced aggressive
price competition and results in pressures on profit margins. The Company
competes against companies which have access to greater capital resources.
In order to effectively compete in the industry on a long-term basis and
fully realize its business strategy, 3CI will require additional and
continued financing and other assistance from its current majority
shareholder and, if available, from outside sources. There is no assurance
that adequate funds for these purposes will be available when needed or, if
available, on terms acceptable to 3CI.
35
<PAGE> 7
WASTE SYSTEMS, INC. AND SUBSIDIARY
SELECTED INFORMATION -
SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
ARE NOT INCLUDED
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
4. OTHER EVENTS
The James T. Rash, et al. v. Waste Systems, Inc., et al. suit (see Note 13
to the Company's consolidated financial statements for the year ended
December 31, 1997) has been settled. Court approval of such settlement was
received in February 1998. Pursuant to the settlement, 3CI has agreed to
(i) transfer 78,014 shares of its Common Stock into escrow for later
conveyance to the plaintiffs, (ii) transfer warrants for 1,002,964 shares
of 3CI Common Stock into escrow for later conveyance to the plaintiffs, on
the basis of one warrant for every three shares of 3CI Common Stock owned,
that are exercisable for two years from the effective date of the
Settlement Agreement at a price of $1.50 per share, (iii) pay $425,000 into
an escrow account to pay the plaintiffs' attorneys' fees, and (iv) obtain
SEC approval, if necessary, to convert the 1,000,000 shares of 3CI Series A
Preferred Stock into 7,000,000 shares of 3CI Series B Convertible Preferred
Stock ("Series B Preferred Stock"). Pursuant to the terms of the Settlement
Agreement, $425,469 has been paid to the plaintiffs' attorneys' for fees
and 78,014 shares of 3CI Common Stock and warrants for 1,002,964 shares of
3CI Common Stock have been placed in escrow for subsequent conveyance to
the plaintiffs.
3CI, as authorized by the necessary approvals of the Board of Directors and
the 3CI's majority stockholder (WSI), has approved the adoption of an
amendment (the "Amendment") to 3CI's Certificate of Incorporation, as
amended, to (i) increase the authorized preferred stock of 3CI from
1,000,000 shares to 16,050,000 shares, and (ii) increase the authorized
common stock, par value $.01 per share ("Common Stock"), of 3CI from
15,000,000 shares to 40,450,000 shares. The Amendment was adopted to
facilitate (i) the conversion of $7,000,000 of debt (the "Debt Conversion")
owed by 3CI to WSI, 3CI's largest stockholder, in exchange for 1,000,000
shares of 3CI's Series A Preferred stock, (ii) the exchange of the Series A
Preferred Stock for 7,000,000 shares of 3CI's Series B Preferred Stock, and
(iii) the conversion of an additional $750,000 of debt owed by 3CI to WSI
to 750,000 shares of the Company's Series C Convertible Preferred Stock
(the "Series C Preferred Stock").
3CI has filed a Registration Statement (Form S-1) with the Securities and
Exchange Commission to register 1,518,434 additional shares of its Common
Stock. On about February 27, 1998, an Information Statement was mailed to
3CI's stockholders informing them of the previous approval by the Board of
Directors of 3CI of the corporate actions referred to above and their
subsequent adoption by the majority stockholder of 3CI.
On or about October 1, 1998, Stericycle, Inc., a Delaware corporation with
its principal offices in Deerfield, Illinois, purchased all of the issued
and outstanding shares of stock of WSI. The purchase price for the WSI
shares was $10,000,000 in cash. Upon completion of the transaction, WSI
became a wholly-owned subsidiary of Stericycle, Inc. Stericycle is engaged
in the business of collecting, transporting, treating and disposing of
regulated medical waste. It has developed a proprietary treatment
technology known as electro-thermal deactivation ("ETD"). As a part of the
purchase transaction, Stericycle granted to the sellers certain exclusive
negotiation and first refusal rights in respect of medical waste treatment
units utilizing Stericycle's ETD technology.
36
<PAGE> 8
WASTE SYSTEMS, INC. AND SUBSIDIARY
SELECTED INFORMATION -
SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
ARE NOT INCLUDED
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
4. OTHER EVENTS (CONTINUED)
On October 1, 1998, the Revolving Promissory Note dated September 30, 1995
(between 3CI and WSI) in the maximum principal amount of $8,000,000
("Original Note") was amended and restated in its entirety. 3CI made a new
secured promissory note in the amount of $5,487,308 due on or before
September 30, 1999. The note may be extended to a date not later than
September 30, 2000. The note bears interest at prime plus 2% and the
interest is payable quarterly. The security documents relating to the
original note remain in full force and effect. The note places certain
restrictions and financial covenants on 3CI.
37
<PAGE> 1
EXHIBIT 99.3
STERICYCLE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements of the
Company present the unaudited pro forma consolidated statements of operations
for the year ended December 31, 1997 and the nine months ended September 30,
1998 and the unaudited pro forma consolidated balance sheet at September 30,
1998. The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1997 gives pro forma effect to the Company's acquisition of
Waste Systems, Inc. ("WSI") on October 1, 1998 as if such transaction had
occurred on January 1, 1997. The unaudited pro forma consolidated statement of
operations for the nine months ended September 30, 1998 gives pro forma effect
to the acquisition of WSI as if such transaction occurred on January 1, 1998.
The unaudited pro forma consolidated balance sheet gives pro forma effect to the
acquisition of WSI as if such transaction occurred on September 30, 1998. The
unaudited pro forma consolidated financial statements presented herein are based
on the assumptions and adjustments described in the accompanying notes. The
unaudited pro forma consolidated statements of operations do not purport to
represent what the Company's results of operations would have been if the events
described above had occurred as of the dates indicated or what such results will
be for any future periods. The unaudited pro forma consolidated financial
statements are based on assumptions and adjustments that the Company believes
are reasonable. The unaudited pro forma consolidated financial statements and
the accompanying notes should be read in conjunction with (i) the historical
financial statements of the Company, including the notes thereto, for the three
years ended December 31, 1997, as filed with the Company's 1997 Annual Report on
Form 10-K, and for the nine months ended September 30, 1998 and 1997, as filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, and (ii) the historical financial statements of WSI, including the
notes thereto, which are included elsewhere in this Report.
38
<PAGE> 2
STERICYCLE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ Adjust-
Company WSI (1) ments Pro Forma
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Revenues................................ $ 46,166 $ 18,790 -- $ 64,956
Costs and expenses:
Costs of revenues..................... 34,109 15,456 -- 49,565
Selling, general and administrative
expenses............................ 10,671 3,785 94(2) 14,550
--------- --------- ------- --------
Total costs and expenses............ 44,780 19,241 94 64,115
--------- --------- ------- --------
Income (loss) from operations........... 1,386 (451) (94) 841
Other income (expense):
Interest income....................... 618 -- -- 618
Interest expense...................... (428) (855) (895)(3) (2,178)
--------- --------- ------- --------
Total other income (expense)........ 190 (855) (895) (1,560)
--------- --------- ------- --------
Income (loss) before income taxes and
minority interest..................... 1,576 (1,306) (989) (719)
Income tax expense...................... 146 -- 146
--------- --------- ------- --------
Income (loss) before minority interest 1,430 (1,306) (989) (865)
Minority interest in net loss of
subsidiary............................ -- 66 -- --
--------- --------- ------- --------
Net income (loss)....................... $ 1,430 $ (1,240) $ (989) $ (865)
========= ========= ======= ========
Weighted average shares
outstanding--basic.................... 10,240 10,240
========= ========
Basic net income (loss) per share....... $ 0.14 $ (0.08)
========= ========
Weighted average number of
common shares and common stock
equivalent shares outstanding......... 10,766 10,766
========= ========
Diluted net income (loss) per share..... $ 0.13 $ (0.08)
========= ========
</TABLE>
(1) The statement of operations data for WSI for the year ended December 31,
1997 represent the results of operations of WSI from January 1, 1997
through December 31, 1997. The acquisition of WSI has been accounted for as
a purchase. Accordingly, the results of operations of WSI will be included
in the Company's results of operations from the date of acquisition. See
the financial statements of WSI appearing elsewhere in this Report.
39
<PAGE> 3
(2) The adjustment to selling, general and administrative expenses consists of
an increase in amortization of goodwill from the acquisition of WSI over a
25-year period, as if WSI had been acquired on January 1, 1997.
(3) The adjustment to interest expense reflects additional interest, commitment
fees, and amortization of deferred financing costs that would have been
incurred had the indebtedness issued to fund the acquisition of WSI been
incurred on January 1, 1997 ($10 million). The additional interest expense
is based on the interest rate of 8.50% in effect at October 1, 1998 on the
outstanding debt and commitment fees at an annual rate of 0.25% on the
unused portion ($10 million) of the related credit facility.
40
<PAGE> 4
STERICYCLE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ ADJUST-
COMPANY WSI (1) MENTS PRO FORMA
------- ------- ------------- ---------
<S> <C> <C> <C> <C>
Revenues................................... $ 44,759 $ 14,127 -- $ 58,886
Costs and expenses:
Costs of revenues........................ 30,492 11,289 -- 41,781
Selling, general and administrative
expenses............................... 10,151 2,555 71 (2) 12,777
--------- -------- ------- ---------
Total costs and expenses............... 40,643 13,844 71 54,558
--------- -------- ------- ---------
Income from operations..................... 4,116 283 (71) 4,328
Other income (expense):
Interest income.......................... 308 -- -- 308
Other income............................. 20 -- -- 20
Interest expense......................... (242) (175) (671) (3) (1,088)
--------- -------- ------- ---------
Total other income (expense)........... 86 (175) (671) (760)
--------- -------- ------- ---------
Income before income taxes and
minority interest........................ 4,202 108 (742) 3,568
Income tax expense......................... 781 -- -- 781
--------- -------- ------- ---------
Income before minority interest 3,421 108 (742) 2,787
Minority interest in net loss of
subsidiary............................... -- 43 -- 43
-------- -------- ------- ---------
Net income................................. $ 3,421 $ 151 $ (742) $ 2,830
======== ======== ======= =========
Weighted average shares
outstanding--basic....................... 10,580 10,580
======== =========
Basic net income per share................. $ 0.32 $ 0.27
======== =========
Weighted average number of
common shares and common stock equivalent
shares outstanding....................... 11,234 11,234
======== =========
Diluted net income per share............... $ 0.30 $ 0.25
======== =========
</TABLE>
- ---------------------
(1) The statement of operations data for WSI for the nine months ended
September 30, 1998 represent the results of operations of WSI from January
1, 1998 through September 30, 1998. The acquisition of WSI has been
accounted for as a purchase. Accordingly, the results of operations of WSI
will be included in the Company's results of operations from the date of
acquisition. See the financial statements of WSI appearing elsewhere in
this Report.
41
<PAGE> 5
(2) The adjustment to selling, general and administrative expenses consists of
an increase in amortization of goodwill from the acquisition of WSI over a
25-year period, as if WSI had been acquired on January 1, 1998.
(3) The adjustment to interest expense reflects additional interest, commitment
fees, and amortization of deferred financing costs that would have been
incurred had the indebtedness issued to fund the acquisition of WSI been
incurred on January 1, 1998 ($10 million). The additional interest expense
is based on the interest rate of 8.50% in effect at October 1, 1998 on the
outstanding debt and commitment fees at an annual rate of 0.25% on the
unused portion ($10 million) of the related credit facility.
42
<PAGE> 6
STERICYCLE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- ADJUST-
COMPANY WSI MENTS (1) PRO FORMA
------- --- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 775 $ 2 $ (100) $ 677
Short-term investments................ 2,335 -- -- 2,335
Accounts receivable, net.............. 10,902 2,813 -- 13,715
Parts and supplies.................... 1,037 87 -- 1,124
Prepaid expenses...................... 528 -- -- 528
Other................................. 2,087 758 -- 2,845
-------- -------- -------- --------
Total current assets................ 17,664 3,660 (100) 21,224
Property, plant and equipment.......... 20,912 12,586 (3,600) 29,898
Less: accumulated depreciation......... (8,869) (3,600) 3,600 (8,869)
-------- -------- -------- --------
Property, plant and equipment, net 12,043 8,986 -- 21,029
Goodwill, net.......................... 36,796 343 2,013 39,152
Other.................................. 1,680 226 100 2,006
-------- -------- -------- --------
Total assets........................ $ 68,163 $ 13,215 $ 2,013 $ 83,411
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..... $ 6,281 $ 1,660 $ 5,000 $ 12,941
Accounts payable...................... 1,986 1,842 -- 3,828
Accrued liabilities................... 5,436 843 -- 6,279
Deferred revenue...................... 663 -- -- 663
-------- -------- -------- --------
Total current liabilities........... 14,366 4,345 $ 5,000 $ 23,711
Long-term debt......................... $ 3,246 $ 883 5,000 9,129
Other liabilities...................... 21 -- -- 21
Shareholders' equity:
Common stock.......................... 107 500 (500) 107
Additional paid-in capital............ 85,087 32,196 (32,196) 85,087
Notes receivable...................... (4) -- -- (4)
Accumulated deficit................... (34,640) (24,709) 24,709 (34,640)
-------- -------- -------- --------
Total shareholders' equity.......... 50,550 7,987 (7,987) 50,550
-------- -------- -------- --------
Total liabilities and
shareholders' equity.............. $ 68,183 $ 13,215 $ 2,012 $ 83,411
======== ======== ======== ========
</TABLE>
(1) Reflects the allocation of the purchase price of the acquisition of WSI to
the underlying fair value of the net assets acquired and the issuance of
indebtedness required to fund the purchase price, including a related
payment of a $100,000 commitment fee to the lender. The allocation of the
purchase price is preliminary. The Company is in the process of determining
the fair value of the acquired property, plant and equipment, but does not
expect the final adjustments to the purchase price allocation to be
material.
43
