SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
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[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sections 240.14a-11(c) or Section 240.14a-
12
STERICYCLE, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X] No fee required
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to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
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paid previously. Identify the previous filing by registration statement
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<PAGE>
STERICYCLE, INC.
--------------------------
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON ______, 1999
--------------------------
Dear Stockholder:
You are cordially invited to attend the 1999 Annual Meeting of
Stockholders of Stericycle, Inc. which will be held at the Rosemont Suites
Hotel, 5500 North River Road, Rosemont, Illinois 60018 on ______, 1999,
beginning at 10:00 a.m. (Chicago time).
At the Annual Meeting, stockholders will be asked to consider and vote
upon the following items of business:
1. election of a Board of Directors to hold office until the Annual
Meeting of Stockholders in 2000;
2. a proposal to amend our certificate of incorporation to authorize
and create a class of preferred stock;
3. a proposal to authorize us to issue and sell, for $75,000,000 in
cash, net of issuance costs, 75,000 shares of newly-created
Series A Convertible Preferred Stock to nine investment funds
affiliated with Bain Capital, Inc.;
4. ratification of the appointment of Ernst & Young LLP as our
independent public accountants for the year ending
December 31, 1999; and
5. any other matters that properly come before the meeting or any
adjournment of the meeting.
We intend to sell the Series A Convertible Preferred Stock to
partially finance our acquisition of the medical waste operations of
Browning-Ferris Industries, Inc. and Allied Waste Industries, Inc. That
acquisition is described more fully under "The BFI Transaction" beginning on
page _____.
Only stockholders of record at the close of business on the record date
of ______, 1999 are entitled to notice of and to vote at the Annual Meeting and
any adjournment.
For the convenience of those stockholders who do not plan to attend the
Annual Meeting in person and who desire to have their shares voted, a proxy card
is enclosed. If you do not plan to attend the Annual Meeting, please complete
and return the proxy card in the envelope provided for that purpose. If you
return your proxy card and later decide to attend the Annual Meeting in person,
or for any other reason desire to revoke your proxy, you may do so at any time
before your proxy is voted.
For the Board of Directors
Jack W. Schuler Mark C. Miller
Chairman of the Board President and Chief Executive Officer
______, 1999
Lake Forest, Illinois
<PAGE>
STERICYCLE, INC.
28161 North Keith Drive
Lake Forest, Illinois 60045
--------------------------
PROXY STATEMENT
1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON ______, 1999
--------------------------
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Stericycle, Inc. for use at the
Company's 1999 Annual Meeting of Stockholders, to be held at the Rosemont Suites
Hotel, 5500 North River Road, Rosemont, Illinois on ______, ______, 1999,
beginning at 10:00 a.m. (Chicago time).
At the Annual Meeting, stockholders will be asked to consider and vote
upon the following items of business:
1. election of a Board of Directors to hold office until the Annual
Meeting of Stockholders in 2000;
2. a proposal to amend our certificate of incorporation to authorize
and create a class of preferred stock;
3. a proposal to authorize us to issue and sell, for $75,000,000 in
cash, net of issuance costs, 75,000 shares of newly-created
Series A Convertible Preferred Stock to nine investment funds
affiliated with Bain Capital, Inc. (collectively, "Bain"); and
4. ratification of the appointment of Ernst & Young LLP as our
independent public accountants for the year ending
December 31, 1999; and
5. any other matters that properly come before the meeting or any
adjournment of the meeting.
We intend to sell the Series A Convertible Preferred Stock to partially
finance our acquisition of the medical waste operations of Browning-Ferris
Industries, Inc. and Allied Waste Industries, Inc., (the "BFI Transaction"). The
BFI Transaction is described more fully under "The BFI Transaction" beginning on
page _____.
This Proxy Statement and the accompanying materials are being mailed to
stockholders beginning on or about ______, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
GENERAL ...................................................................1
STOCK OWNERSHIP............................................................1
Stock Ownership of Certain Beneficial Owners...................2
Stock Ownership of Directors and Executive Officers............2
ITEM 1 ELECTION OF DIRECTORS..............................................3
Nominees for Director..........................................3
Committees of the Board........................................4
Meetings.......................................................5
Compensation of Directors......................................5
Certain Transactions...........................................5
EXECUTIVE COMPENSATION.....................................................7
Summary Compensation Table.....................................7
1998 Stock Option Grants.......................................8
1998 Option Exercises and Year End Option Values...............8
Stock Option Plans.............................................9
Other Plans...................................................10
Employment Agreements.........................................10
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION............10
Executive Compensation Policies...............................10
Compensation of Chief Executive Officer.......................11
PERFORMANCE GRAPH.........................................................13
THE BFI TRANSACTION.......................................................14
Description of the Acquired Businesses........................14
Background of the BFI Transaction.............................14
Our Reasons for the BFI Transaction...........................15
Certain Federal Income Tax Consequences.......................16
Accounting Treatment..........................................16
Government and Regulatory Approvals...........................16
<PAGE>
TABLE OF CONTENTS
(continued)
THE ACQUISITION AGREEMENTS................................................18
General.......................................................18
Conditions to Closing.........................................18
Representations and Warranties................................19
Covenants.....................................................19
Termination or Amendment......................................20
Expenses and Termination Fees.................................21
FINANCING FOR THE BFI TRANSACTION.........................................21
ITEM 2 PROPOSAL TO AMEND OUR CERTIFICATE OF INCORPORATION TO AUTHORIZE
AND CREATE A CLASS OF PREFERRED STOCK....... ........................22
ITEM 3 PROPOSAL TO ISSUE 75,000 SHARES OF SERIES A CONVERTIBLE
PREFERRED STOCK..................................... ................24
Dividends.....................................................24
Liquidation...................................................24
Voting; Election of Directors.................................24
Conversion....................................................24
Redemption at Our Option......................................25
Redemption Upon a Change of Control...........................25
Conditions to Closing.........................................25
Representations and Warranties................................26
Covenants and Restrictions....................................26
Expenses......................................................27
Indemnification...............................................27
Registration Rights Agreement.................................27
Corporate Governance Agreement................................27
Relationship of Proposals in Items 2 and 3....................28
FINANCIAL STATEMENTS OF THE BFI MEDICAL WASTE BUSINESS....................29
Report of Independent Public Accountants......................29
Statements of Directly Identifiable Assets and Liabilities
of BFI Medical Waste As of September 30, 1997 and 1998 and
June 30, 1999.......... ......................................30
<PAGE>
TABLE OF CONTENTS
(continued)
Statements of Revenues and Direct Expenses of the
BFI Medical Waste Business For the Years Ended
September 30, 1996, 1997 and 1998 and for the
Nine Months Ended June 30, 1998 and 1999. ....................31
Notes to Financial Statements.................................32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -BFI MEDICAL WASTE BUSINESS...........................41
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF STERICYCLE AND THE
BFI MEDICAL WASTE BUSINESS..........................................45
Pro Forma Condensed Combined Balance Sheet as of
June 30, 1999................................................ 46
Pro Forma Condensed Combined Statement Of Operations
for the Six Months Ended June 30, 1999........................47
Pro Forma Condensed Combined Statement Of Operations
for the Year Ended December 31, 1998..........................48
Notes to Pro Forma Condensed Combined Financial Statements....49
SELECTED FINANCIAL DATA...................................................53
COMPARATIVE UNAUDITED PER SHARE DATA......................................53
ITEM 4 RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS.....53
OTHER MATTERS.............................................................54
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING.........................54
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE...................54
ADDITIONAL INFORMATION....................................................54
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.........................55
SCHEDULE I - First Amendment to Amended and Restated
Certificate of Incorporation
<PAGE>
GENERAL
Common Stock. Our authorized capital stock consists of Common Stock,
par value $0.01 per share ("Common Stock"). As of June 30, 1999, there were
14,559,417 shares of Common Stock outstanding.
Stockholders Entitled To Vote. Only stockholders of record at the close
of business on the record date of ______, 1999 are entitled to notice of the
Annual Meeting and to vote their shares of record at the Annual Meeting and at
any adjournment of the meeting. Each outstanding share of Common Stock is
entitled to one vote.
Quorum. Holders of a majority of the outstanding shares of Common Stock
entitled to vote at the Annual Meeting who are present in person or represented
by proxy will constitute a quorum to conduct business at the meeting. The
inspectors of election appointed at the meeting will determine the existence of
a quorum and tabulate the votes cast at the meeting.
Voting. The affirmative vote of the holders of a plurality of the
shares of Common Stock present in person or represented by proxy at the Annual
Meeting and entitled to vote will be required for the election of directors
(Item 1). The affirmative vote of the holders of a majority of the shares of
Common Stock outstanding as of the record date will be required to approve the
proposal to amend our certificate of incorporation to authorize a class of
preferred stock (Item 2). For each other matter coming before the meeting, the
affirmative vote of the holders of a majority of the shares present in person or
represented by proxy, entitled to vote and voting will be required for approval
of the matter.
A stockholder may withhold authority to vote for one or more nominees
for director and may abstain from voting on one or more of the other matters
coming before the Annual Meeting. Shares for which authority is withheld or
which a stockholder abstains from voting will be counted for purposes of
determining whether a quorum is present. Shares for which authority is withheld
will have no effect on the vote for election of directors (Item 1) or the vote
on the proposal to authorize the issuance and sale of 75,000 shares of Series A
Convertible Preferred Stock (Item 3) (which, as noted, require the affirmative
vote of a plurality and a majority, respectively, of the votes cast). Shares for
which authority is withheld will have the effect of a vote against the proposal
to amend our certificate of incorporation to authorize the creation of a class
of preferred stock (Item 2) (which, as noted, requires the affirmative vote of
holders of a majority of the shares of Common Stock outstanding as of the record
date). Shares which a stockholder abstains from voting will be included in the
total of the votes cast and will have the effect of a vote against the matter in
question. If a broker or nominee indicates on a proxy card that it does not have
discretionary authority to vote on a particular matter, the shares will be
counted for purposes of determining whether a quorum is present and will count
as a vote against the proposal to authorize the creation of a class of preferred
stock (Item 2), but will have no effect on any of the other matters acted upon
at the meeting.
Proxies. If a stockholder properly completes and returns the
accompanying proxy card, the shares of Common Stock represented by the proxy
will be voted as the stockholder directs. IF NO DIRECTIONS ARE GIVEN, THE
PERSONS APPOINTED AS PROXY HOLDERS WILL VOTE THE SHARES IN ACCORDANCE WITH THE
RECOMMENDATIONS OF THE BOARD OF DIRECTORS.
A stockholder may revoke a proxy at any time before it is voted by
filing a signed notice of revocation with the Secretary of the Company or by
returning a properly completed proxy card bearing a later date. In addition, a
stockholder may revoke a proxy by attending the Annual Meeting in person and
requesting to vote. Attending the meeting in person will not, by itself,
constitute revocation of the proxy.
STOCK OWNERSHIP
The following tables provide certain information regarding the
beneficial ownership of shares of our Common Stock as of June 30, 1999. Under
the rules of the Securities and Exchange Commission, beneficial ownership is
defined generally as the sole or shared power to vote or to direct the
disposition of a security. Unless otherwise indicated in a footnote, the persons
named in the following tables have sole voting and dispositive power in respect
of the shares of Common Stock shown as beneficially owned by them.
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table provides certain information regarding the
beneficial ownership of our Common Stock by each person (other than a director
or executive officer) who was known to us to be the beneficial owner as of June
30, 1999 of more than 5% of our outstanding Common Stock:
SHARES
BENEFICIALLY
NAME AND ADDRESS OWNED PERCENTAGE
---------------- ----- ----------
The TCW Group, Inc. (1)....................... 1,015,200 6.97%
865 South Figueroa Street
Los Angeles, California 90017
Dresdner RCM Global Investors (2)............. 1,418,400 9.74%
Four Embarcadero Center
San Francisco, California 94111
(1) The shares shown as beneficially owned by The TCW Group, Inc., are
derived from a Schedule 13F, jointly filed by The TCW Group, Inc., a
parent holding company, and Robert Day, an individual who may be deemed
to control The TCW Group, Inc., reporting that, as of March 31, 1999,
for reporting purposes, each of them holds sole voting and dispositive
power over 1,015,200 shares. The Schedule 13F indicates that: (a) no
shares are held directly by The TCW Group, Inc.; (b) The TCW Group,
Inc. indirectly holds shares through its subsidiaries, Trust Company of
the West, TCW Asset Management Company and TCW Funds Management, Inc.;
and (c) aside from the indirect holdings of The TCW Group, Inc., Robert
Day does not directly or indirectly hold any of these shares.
(2) The shares shown as beneficially owned by Dresdner RCM Global
Investors, are derived from a Schedule 13F, filed by Dresdner RCM
Global Investors as of March 31, 1999.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information regarding the
beneficial ownership of our Common Stock as of June 30, 1999 by (1) each of our
directors, (2) each of our executive officers listed in the Summary Compensation
Table on page _____ and (3) all of our directors and executive officers as a
group:
<TABLE>
OPTION AND
SHARES WARRANT SHARES
BENEFICIALLY BENEFICIALLY COMBINED
NAME OWNED OWNED(1) PERCENTAGE(2)
---- ----- -------- -------------
<S> <C> <C> <C>
Jack W. Schuler(3).................................. 894,515 51,969 6.48%
Mark C. Miller(4)................................... 543,932 138,483 4.64%
Rod F. Dammeyer(5).................................. 11,000 16,583 *
Patrick F. Graham................................... 9,783 19,567 *
John Patience....................................... 211,057 52,596 1.80%
Peter Vardy(6)...................................... 163,362 43,549 1.42%
L. John Wilkerson, Ph.D.(7)......................... 29,226 17,385 *
Anthony J. Tomasello................................ 129,013 39,612 1.16%
Frank J.M. ten Brink................................ 53 32,167 *
Michael J. Bernert(8)............................... 6,371 83,724 *
All directors and executive
officers as a group (12 persons)(9)............... 2,007,656 513,981 16.73%
<PAGE>
* Less than 1%.
(1) This column shows shares of Common Stock issuable upon the exercise of
stock options or warrants exercisable as of or within 60 days after June
30, 1999.
(2) Shares of Common Stock issuable upon the exercise of stock options or
warrants exercisable as of or within 60 days after June 30, 1999 are
considered outstanding for purposes of computing the percentage of the
person holding the option or warrant but are not considered outstanding for
purposes of computing the percentage of any other person.
(3) The shares shown as beneficially owned by Mr. Schuler include 35,218 shares
owned by his wife and trusts for the benefit of his children, as to which
Mr. Schuler disclaims any beneficial ownership, and 30,000 shares owned by
a family foundation of which Mr. Schuler is the sole trustee, as to which
Mr. Schuler disclaims beneficial ownership.
(4) The shares shown as beneficially owned by Mr. Miller include 76,346 shares
owned by trusts for the benefit of his sons, as to which Mr. Miller
disclaims beneficial ownership.
(5) The shares shown as beneficially owned by Mr. Dammeyer include 1,000 shares
owned by his wife, as to which Mr. Dammeyer disclaims beneficial ownership.
(6) The shares shown as beneficially owned by Mr. Vardy include 67,614 shares
owned by trusts for the benefit of his children, as to which Mr. Vardy
disclaims beneficial ownership.
(7) Dr. Wilkerson is an indirect general partner of Galen Partners, L.P. and
Galen Partners International, L.P., which together own 290,484 shares
(including 16,279 shares issuable upon the exercise of stock options and
warrants exercisable as of or within 60 days after June 30, 1999). Dr.
Wilkerson disclaims any beneficial interest in the shares held by these two
limited partnerships except to the extent of his individual ownership of
limited partnership interests and his pecuniary interest arising from his
indirect general partnership interest.
(8) The shares shown as beneficially owned by Mr. Bernert include 1,000 shares
owned by his wife, as to which Mr. Bernert disclaims beneficial ownership.
(9) The group of directors and executive officers does not include Ms. Lee, who
resigned as an employee in March 1999.
</TABLE>
ITEM 1
ELECTION OF DIRECTORS
Our Board of Directors is currently comprised of seven directors. All
seven directors will be elected at the Annual Meeting. Each director elected
will hold office until our Annual Meeting of Stockholders in 2000 or until his
successor is elected and qualified.
NOMINEES FOR DIRECTOR
The following table provides certain information regarding the nominees
for election as directors. All seven nominees are currently serving as our
directors.
<TABLE>
NAME POSITION WITH COMPANY AGE
---- --------------------- ---
<S> <C> <C>
Jack W. Schuler....................... Chairman of the Board of Directors 58
Mark C. Miller........................ President, Chief Executive Officer and a Director 43
Rod F. Dammeyer....................... Director 58
Patrick F. Graham..................... Director 58
John Patience......................... Director 51
Peter Vardy........................... Director 68
L. John Wilkerson, Ph.D. ............. Director 55
</TABLE>
Jack W. Schuler has served as our Chairman of the Board of Directors
since January 1990. From January 1987 to August 1989, Mr. Schuler served as
President and Chief Operating Officer of Abbott Laboratories, a diversified
health care company, where he served as a director from April 1985 to August
1989. Mr. Schuler serves as a director of Chiron Corporation and Medtronic, Inc.
and as Chairman of the Board of Directors of Ventana Medical Systems, Inc. He is
a co-founder of Crabtree Partners LLC, a private investment firm in Lake Forest,
<PAGE>
Illinois, which was formed in June 1995. Mr. Schuler received a B.S. degree in
mechanical engineering from Tufts University and a M.B.A. degree from the
Stanford University Graduate School of Business Administration.
Mark C. Miller has served as our President and Chief Executive Officer
and a director since joining us in May 1992. From May 1989 until he joined us,
Mr. Miller served as Vice President for the Pacific, Asia and Africa in the
International Division of Abbott Laboratories, which he joined in 1976 and where
he held a number of management and marketing positions. He is a director of
Affiliated Research Centers, Inc., which provides clinical research for
pharmaceutical companies and is a director of Lake Forest Hospital. Mr. Miller
received a B.S. degree in computer science from Purdue University, where he
graduated Phi Beta Kappa.
Rod F. Dammeyer has served on our Board of Directors since January
1998. He is the Managing Partner of Equity Group Corporate Investments and Vice
Chairman and a director of Anixter International Inc., where he has been
employed since 1985. Mr. Dammeyer is a director of Antec Corporation, CNA Surety
Corporation, Grupo Azucarero Mexico, IMC Global, Inc., Jacor Communications,
Inc., Matria Healthcare, Inc., Metal Management, Inc., TeleTech Holdings, Inc.
and Transmedia Network, Inc., and a trustee of Van Kampen Investments, Inc.
closed-end funds. He received a B.S. degree from Kent State University.
Patrick F. Graham has served on our Board of Directors since May 1991.
Mr. Graham is President and Chief Executive Officer and a director of World
Corporation and a director of Intelidata Technologies, Inc. He was a co-founder
of Bain & Company, Inc., a management consulting firm in Boston, Massachusetts,
where he served in a number of positions from 1973 to 1997. He received a B.A.
degree in economics from Knox College and a M.B.A. degree from the Stanford
University Graduate School of Business Administration.
John Patience has served on our Board of Directors since our
incorporation in March 1989. He is a co-founder and partner of Crabtree Partners
LLC, a private investment firm in Lake Forest, Illinois, which was formed in
June 1995. From January 1988 to March 1995, Mr. Patience was a general partner
of Marquette Venture Partners, L.P., a venture capital fund which he co-founded
and which led our initial capitalization. Mr. Patience is a director of TRO
Learning, Inc. and Ventana Medical Systems, Inc. He received B.A. and B.L
degrees from the University of Sydney in Sydney, Australia, and a M.B.A. degree
from the Wharton School of Business of the University of Pennsylvania.
Peter Vardy has served on our Board of Directors since July 1990. He is
the Managing Director of Peter Vardy & Associates, an international
environmental consulting firm in Chicago, Illinois, which he founded in June
1990. From April 1973 to May 1990, Mr. Vardy served at Waste Management, Inc., a
waste management services company, where he was Vice President, Environmental
Management. He is a director of EMCON, which he co-founded in 1971. Mr. Vardy
received a B.S. degree in geological engineering from the University of Nevada.
L. John Wilkerson, Ph.D., has served on our Board of Directors since
July 1992. He is a consultant to The Wilkerson Group, a health care products
consulting firm in New York, New York. Dr. Wilkerson has served with The
Wilkerson Group since 1980 and prior to its acquisition by IBM Corporation was
its Chairman. Dr. Wilkerson also serves as a general partner of Galen Partners,
L.P. and Galen Partners International, L.P., affiliated health care venture
capital funds. He is a director of British Biotech Plc. and several privately
held health care companies. Dr. Wilkerson received a B.S. degree in biological
sciences from Utah State University and a Ph.D. degree in managerial economics
and marketing research from Cornell University.
COMMITTEES OF THE BOARD
Our Board of Directors has standing Compensation and Audit Committees.
It does not have a standing nominating committee.
The Compensation Committee, consisting of Messrs. Schuler (Chairman)
and Vardy and Dr. Wilkerson, makes recommendations to the full Board of
Directors concerning the base salaries and cash bonuses of our executive
officers and reviews our employee compensation policies generally. The
Compensation Committee also administers our stock option plans as they apply to
executive officers. The Audit Committee, consisting of Messrs. Dammeyer
(Chairman), Patience and Vardy, makes recommendations to the full Board of
Directors regarding the selection of our independent public accountants, reviews
the results and scope of the audit and other services provided by our
<PAGE>
independent public accountants, and reviews and evaluates our financial
reporting process and internal accounting controls.
MEETINGS
Our Board of Directors held six meetings during 1998 (including one
meeting by teleconference) and acted without a meeting by unanimous written
consent on a number of occasions. The Compensation and Audit Committees each
held one meeting during 1998.
Messrs. Dammeyer, Graham, Miller and Vardy each attended all of the
meetings of the Board of Directors during 1998. Mr. Schuler and Dr. Wilkerson
each were unable to attend one meeting, and Mr. Patience was unable to attend
two meetings. With the exception of Mr. Graham, who was then a member of the
Audit Committee, all of the members of the Compensation and Audit Committees
attended the respective meetings of those committees.
COMPENSATION OF DIRECTORS
Our directors do not receive fees or other cash compensation for their
services as directors.
Our Directors Stock Option Plan, which was approved by our stockholders
in July 1996, authorizes nonstatutory stock options to purchase a total of
285,000 shares of Common Stock to be granted to our outside directors (i.e.,
directors who are neither our officers nor employees). Each option grant is for
a formula-determined number of shares.
As of each annual meeting, each incumbent outside director who is
reelected as a director at the annual meeting is automatically granted an option
to purchase a number of shares determined by multiplying 7,000 shares by a
fraction, the numerator of which is $12.00 and the denominator of which is the
closing price of a share of Common Stock on the date of the annual meeting; and
each outside director who is elected as a director for the first time is
automatically granted an option to purchase a number of shares determined by
multiplying 21,000 shares by a fraction, the numerator of which is $12.00 and
the denominator of which is the closing price on the date of the annual meeting.
These option grants are subject to a maximum grant of 9,500 shares and a minimum
grant of 4,500 shares (or a maximum grant of 28,500 shares and a minimum grant
of 13,500 shares in the case of an outside director who is appointed as a
director for the first time at an annual meeting). In accordance with these
terms, each of the six incumbent outside directors who were reelected as
directors at the 1998 Annual Meeting in April 1998 was granted an option to
purchase 5,895 shares at an exercise price of $14.25 per share. In addition,
with the approval of the full Board (other than Mr. Dammeyer), Mr. Dammeyer, who
was initially appointed as a director by the Board in January 1998, was granted
an option to purchase 28,500 shares at an exercise price of $14.00 per share in
February 1998, consistent with the option grant that he would have received if
he had been elected as a director for the first time at the 1998 Annual Meeting.
The exercise price of each option granted under the plan is the closing
price of a share of Common Stock on the date of grant, and the term of each
option is six years from the date of grant. Each option vests in 12 equal
monthly installments and may be exercised only when it is vested and only while
the holder of the option remains a director or during the 90-day period
following the date that he or she ceases to serve as a director. The Directors
Stock Option Plan has a six-year term, and no option may be granted under the
plan after its expiration in June 2002.
Each option granted under the Directors Stock Option Plan is
transferable to (1) a member of the outside director's immediate family, (2) a
trust for the primary benefit of the outside director or any one or more members
of his immediate family, or (3) a corporation, partnership or other entity
which, together with its affiliates, owns at the time of transfer at least 2.0%
of our outstanding Common Stock and with which the outside director has a
contractual obligation to assign his outside remuneration received by reason of
his relationship with that corporation, partnership or other entity. In
accordance with a contractual obligation, Dr. Wilkerson assigned to Galen
Partners, L.P. the option to purchase 5,895 shares that he was granted under the
plan in respect of his reelection as a director at the 1998 Annual Meeting.
<PAGE>
CERTAIN TRANSACTIONS
In December 1998, we entered into a subordinated loan agreement with
a group of lenders consisting of six of our seven directors, Mr. Graham being
the only director not participating. Under this agreement the lenders agreed to
provide us with up to $5,500,000 of short-term financing upon our request. In
December 1998, we borrowed $2,750,000, and in January 1999, we borrowed the
remaining amount available under the loan agreement. Each loan bore interest at
6.0% per annum and was repaid in March 1999 following the completion, in
February 1999, of our public offering, which was pending when the loans were
made. Under the terms of the subordinated loan agreement, we granted the lenders
five-year warrants to purchase shares of our common stock exercisable at any
time after the first anniversary of the grant date. These warrants expire on the
fifth anniversary of the grant date. We granted each lender a warrant to
purchase a number of shares of Common Stock equal to the amount of the lender's
loan commitment multiplied by 0.05 and then divided by the closing price of a
share of our Common Stock on the trading day immediately prior to the date of
the lender's execution of the loan agreement. This closing price is also the
exercise price of those warrants. In addition, at the time of each loan, we
granted each lender a warrant to purchase a number of shares of our Common Stock
equal to the amount of the loan multiplied by 0.30 and then divided by the
closing price of a share of Common Stock on the trading day immediately prior to
the date of disbursement of the lender's loan. This closing price is also the
exercise price of those warrants. In connection with the loans, we granted the
lenders warrants to purchase, in the aggregate, 18,970 shares of Common Stock at
$14.50 per share, 43,551 shares of Common Stock at $15.50 per share and 59,092
shares of Common Stock at $16.50 per share.
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain information regarding the
compensation paid to or earned by our President and Chief Executive Officer and
our four other most highly compensated executive officers (the "named executive
officers") for services rendered in 1998, 1997 and 1996:
<TABLE>
Summary Compensation Table
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------
FISCAL ANNUAL COMPENSATION NUMBER OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) UNDERLYING OPTIONS(2) COMPENSATION(3)
--------------------------- ---- ------ -------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Mark C. Miller(4).............................. 1998 $ 235,000 $ 30,500 51,429 $ 300
President and Chief Executive Officer 1997 235,000 -- 60,000 300
1996 148,481 -- 41,220 300
Anthony J. Tomasello........................... 1998 150,000 1,750 22,000 300
Executive Vice President and 1997 150,000 -- 20,972 300
Chief Technical Officer 1996 136,025 -- 9,946 300
Frank J.M. ten Brink(5)........................ 1998 150,000 16,867 20,429 300
Vice President, Finance and 1997 70,619 -- 55,000 300
Chief Financial Officer 1996 -- -- -- --
Linda D. Lee(6)................................ 1998 130,000 13,400 11,286 300
Vice President, Regulatory Affairs 1997 130,000 -- 16,830 300
and Quality Assurance 1996 120,583 -- 5,086 300
Michael J. Bernert............................. 1998 127,462 21,569 11,000 300
Vice President, Sales and Marketing 1997 123,833 -- 21,174 300
1996 112,615 -- 22,101 300
(1) The bonuses paid during 1998 to Messrs. Miller, Tomasello, ten Brink
and Bernert and Ms. Lee were awarded under the Company's cash bonus
program for executive officers. Under this program executive officers
may elect, in advance of any award, to forego some portion or all of
any bonus otherwise payable under the bonus program and receive instead
an immediately vested nonstatutory stock option. The option has an
exercise price per share equal to the closing price of a share of our
Common Stock on the bonus award date. For the bonuses paid in 1998, the
number of shares subject to an option was determined by dividing the
product of four times the amount of the cash bonus that a participating
executive officer elected to forego by the closing price. See "Report
of the Compensation Committee on Executive Compensation--Cash Bonuses."
Without giving effect to their prior elections to forego portions of
their cash bonuses, the cash bonuses paid to Messrs. Miller, Tomasello
and ten Brink and Ms. Lee would have been $70,500, $36,750, $21,867 and
$28,400, respectively. Mr. Bernert did not elect to forego any portion
of his cash bonus.
(2) The stock options granted during 1998 to Messrs. Miller, Tomasello and
ten Brink and Ms. Lee include options to purchase 11,429, 10,000, 1,429
and 4,286 shares, respectively. These options were granted to them in
lieu of portions of the cash bonuses otherwise payable to them under
the Company's cash bonus program for executive officers. See Note 1.
(3) These amounts represent our matching contribution under our 401(k)
plan. For 1996, 1997 and 1998, the matching contribution was 30% of the
first $1,000 contributed by each participant.
(4) The salary for 1996 shown for Mr. Miller includes $22,917 paid to him
in February 1997. This amount represented the additional salary that we
would have paid to Mr. Miller in 1996 if, like the Company's other
executive officers, he had resumed receiving his full base salary upon
the termination in mid-October 1996 of a voluntary 12-month salary
reduction program for management. This amount has been excluded from
the salary for 1997 shown for Mr. Miller.
(5) Mr. ten Brink joined us in June 1997.
(6) Ms. Lee resigned as an employee in March 1999.
</TABLE>
<PAGE>
1998 STOCK OPTION GRANTS
The following table provides certain information regarding stock
options granted to the named executive officers in 1998. In accordance with the
rules of the Securities and Exchange Commission, the following table also
provides the potential realizable value over the term of the options (i.e., the
period from the date of grant to the date of expiration) based upon assumed
rates of stock appreciation of 5% and 10%, compounded annually. These amounts do
not represent our estimate of future appreciation of the price of our Common
Stock. We did not grant stock appreciation rights to any named executive officer
in 1998.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION OPTION TERM(4)
OPTIONS(1) FISCAL YEAR(2) SHARE(3) DATE 5% 10%
------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Mark C. Miller......................... 8,545 2.90% $ 13.625 3/31/08 $ 73,880 $ 187,610
11,429 3.88% 14.00 3/31/08 101,499 257,726
31,455 10.69% 13.625 3/31/08 271,959 690,610
Anthony J. Tomasello................... 12,000 4.08% 13.625 3/31/08 103,751 263,466
10,000 3.40% 14.00 3/31/08 88,809 225,502
Frank J.M. ten Brink................... 7,725 2.62% 13.625 3/31/08 66,790 169,606
1,429 0.49% 14.00 3/31/08 12,691 32,224
11,275 3.83% 13.625 3/31/08 97,483 247,548
Linda D. Lee........................... 7,000 2.38% 13.625 3/31/08 60,522 153,688
4,286 1.46% 14.00 3/31/08 38,063 94,650
Michael J. Bernert..................... 11,000 3.74% 13.625 3/31/08 95,106 241,510
(1) All of the stock options granted to the named executive officers were
granted under our 1997 Stock Option Plan. Each option vests over a
four-year period: one-quarter of the option vests at the end of the
first year and the balance of the option vests in equal monthly
increments over the next 36 months. The options to purchase 11,429,
10,000, 1,429 and 4,286 shares granted to Messrs. Miller, Tomasello
and ten Brink and Ms. Lee, respectively, were granted in lieu of
portions of the cash bonuses otherwise payable to them under our cash
bonus program for executive officers. See "Report of the Compensation
Committee on Executive Compensation--Cash Bonuses."
(2) The percentages shown in the table reflect options to purchase a total
of 294,368 shares granted to employees during 1998. All of these
options were granted under our 1997 Stock Option Plan.
(3) The exercise price per share shown in the table is equal to the
closing price of a share of our Common Stock on the date of grant.
(4) The potential realizable value was calculated on the basis of the
10-year term of each option on its grant date, assuming that the fair
market value of the underlying stock on the grant date appreciates at
the indicated annual rate compounded annually for the entire term of
the option and that the option is exercised and sold on the last day
of its term for the appreciated stock price. The potential realizable
value of each option was calculated using the exercise price of the
option as the fair market value of the underlying stock on the grant
date.
</TABLE>
1998 OPTION EXERCISES AND YEAR END OPTION VALUES
The following table provides certain information regarding stock option
exercises in 1998 by the named executive officers and the value of the stock
options that they held at December 31, 1998. No named executive officer
exercised any stock appreciation rights during the year or had any stock
appreciation rights outstanding at the end of the year.
<PAGE>
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS OPTIONS AT
ACQUIRED VALUE FISCAL YEAR END FISCAL YEAR END(2)
ON EXERCISE REALIZED(1) VESTED UNVESTED VESTED UNVESTED
----------- ----------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Mark C. Miller....................... 26,400 $ 300,246 95,904 90,941 $ 1,163,146 $ 579,651
Anthony J. Tomasello................. 6,000 81,750 20,925 28,121 133,756 173,814
Frank J.M. ten Brink................. -- -- 17,925 57,504 137,067 360,345
Linda D. Lee......................... 11,354 159,532 5,658 19,292 21,770 123,791
Michael J. Bernert................... 2,000 29,940 62,361 31,929 901,741 238,446
(1) The value realized was determined by multiplying the number of option
shares acquired by the closing price of a share of our Common Stock on
the date of exercise, and then subtracting the aggregate exercise
price.
(2) The value of in-the-money stock options was determined by multiplying
the number of vested (exercisable) or unvested (unexercisable) options
by $16.125 per share, which was the closing price of a share of Common
Stock on December 31, 1998, and then subtracting the aggregate exercise
price.
</TABLE>
STOCK OPTION PLANS
We have adopted two stock option plans in addition to the Directors
Stock Option Plan: (1) the 1997 Stock Option Plan, which was approved by our
stockholders at the 1997 Annual Meeting; and (2) the Incentive Compensation
Plan, which was adopted in August 1995. Each plan authorizes a total of
1,500,000 shares of Common Stock to be issued pursuant to options granted under
the plan or, in the case of the Incentive Plan, restricted stock awarded under
the plan. If an option granted under either plan expires unexercised or is
surrendered, or, in the case of the Incentive Plan, if we repurchase shares of
restricted stock awarded under the plan, the shares subject to the option or
repurchased by us once again become available for option grants or, in the case
of the Incentive Plan, restricted stock awards.
As of December 31, 1998, 924,224 shares were available for future
option grants under the 1997 Plan, and 377,942 shares were available for future
option grants or restricted stock awards under the Incentive Plan. No option
grants or restricted stock awards were made under the Incentive Plan during
1998. Each plan has a 10-year term, and no option may be granted under the 1997
Plan after its expiration in January 2007, and no option may be granted or
shares of restricted stock awarded under the Incentive Plan after its expiration
in July 2005.
Both plans provide for the grant of incentive stock options intended to
satisfy the requirements of section 422 of the Internal Revenue Code of 1986, as
amended, nonstatutory stock options and, in the case of the Incentive Plan,
restricted stock awards. Incentive stock options may be granted and, in the case
of the Incentive Plan, shares of restricted stock may be awarded only to our
employees. Nonstatutory stock options may be granted under the 1997 Plan to
employees, directors and consultants and may be granted under the Incentive Plan
to employees and consultants. Both plans are administered by the Board of
Directors in respect of all eligible persons other than executive officers and
by the Compensation Committee of the Board of Directors in respect of executive
officers. The Board of Directors or the Compensation Committee, as the case may
be, selects the eligible persons to whom options are granted or, in the case of
the Incentive Plan, restricted stock is awarded and, subject to the provisions
of the particular plan, determines the terms of each option or award, including,
in the case of an option, the number of shares, type of option, exercise price
and vesting schedule, and, in the case of an award of restricted stock under the
Incentive Plan, the purchase price, if any, and the restrictions applicable to
the award.
The exercise price per share of options granted under either plan must
be at least equal to the closing price of a share of Common Stock on the date of
grant, with the exception that the exercise price per share of an incentive
stock option granted to an employee of ours who holds more than 10% of our
outstanding Common Stock must be at least 110% of the closing price. The maximum
term of an option granted under either plan may not exceed 10 years. An option
<PAGE>
may be exercised only when it is vested and, in the case of an option granted to
an employee, only while the holder of the option remains our employee or during
the 90-day period following the termination of his or her employment. In the
discretion of the Board of Directors or the Compensation Committee, as the case
may be, this 90-day period may be extended in the case of nonstatutory stock
options to any date ending on or before the expiration date of the option. In
addition, the Board of Directors or the Compensation Committee, as the case may
be, may accelerate the exercisability of an option at any time.
OTHER PLANS
We maintain a 401(k) plan in which employees who have completed one
year's employment and attained age 21 are eligible to participate. The plan
permits us to make matching contributions of a percentage of participants'
deferrals as determined each year by the Board of Directors. For 1998, we made
matching contributions of 30% of the first $1,000 contributed by participants.
We also maintain a nonqualified employee stock purchase plan under which our
employees may purchase Common Stock on the open market through payroll
deductions.
EMPLOYMENT AGREEMENTS
We have not entered into written employment agreements with any of our
executive officers or employees. All of our executive officers and employees
have signed confidentiality agreements with us.
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The compensation of our executive officers is determined generally by
the Compensation Committee of the Board of Directors. The three members of the
Compensation Committee, Messrs. Schuler and Vardy and Dr. Wilkerson, are outside
directors.
Decisions of the Compensation Committee relating to the executive
officers' base salaries and cash bonuses are subject to the review and approval
of the full Board of Directors; decisions of the Compensation Committee relating
to executive officers' stock options are reviewed by the full Board but are not
subject to the Board's approval.
EXECUTIVE COMPENSATION POLICIES
Our executive compensation policies seek to coordinate the executive
officers' compensation with our performance objectives and business strategy.
These policies are intended to attract, motivate and retain executive officers
whose contributions are critical to our long-term success and to reward
executive officers for attaining individual and corporate objectives that
enhance stockholder value.
Our compensation program for our executive officers consists of cash
compensation and long-term compensation. Cash compensation is paid in the form
of a base salary and a discretionary cash bonus, and long-term compensation is
paid in the form of stock options. Bonuses are intended to provide executive
officers with an opportunity to earn additional cash compensation through their
individual performance and our collective performance. Stock options are
intended to focus executive officers on managing from the perspective of owners
with an equity interest and to align their long-term compensation with the
benefits realized by our stockholders.
Salaries. The Compensation Committee determines the salaries of
executive officers on the basis of (1) the individual officer's salary grade,
scope of responsibilities and level of experience, (2) the rate of inflation,
(3) the range of our salary increases for our employees generally and (4) the
salaries paid to comparable officers in comparable companies. The Compensation
Committee has not commissioned any formal surveys of executive officer
compensation at comparable companies, but has relied on published salary surveys
for indications of salary trends generally and at small growth companies in
particular.
The Compensation Committee did not recommend any changes in the base
salaries of our executive officers for 1998. The base salaries for 1998 of our
executive officers were the same as their base salaries for 1997.
<PAGE>
Cash Bonuses. In March 1998, the Compensation Committee recommended
(and the Board of Directors approved) the adoption of a cash bonus program for
executive officers. Under this program, each of our executive officers is
eligible for a cash bonus of up to 20%, 25% or 30% of his or her base salary
(depending upon salary grade), with the actual amount awarded being determined
by the Compensation Committee on the basis of specific collective and individual
performance goals and criteria. Pursuant to this program and on the Committee's
recommendation, in March 1998 we paid cash bonuses to Messrs. Miller, Tomasello,
ten Brink and Bernert and Ms. Lee of $30,500, $1,750, $16,867, $21,569 and
$13,400, respectively, for their performance during 1997. (Without giving effect
to the prior elections of Messrs. Miller, Tomasello and ten Brink and Ms. Lee to
receive stock options in lieu of cash, pursuant to the program described in the
next paragraph, their bonuses would have been $70,500, $36,750, $21,867, and
$28,400, respectively. Mr. Bernert did not elect to forego any portion of his
cash bonus.)
In keeping with our philosophy of encouraging stock ownership by
management, in March 1998, the Compensation Committee recommended (and the Board
of Directors adopted) a program to allow executive officers to elect, in advance
of any award, to forego some portion or all of any bonus otherwise payable under
the cash bonus program and to receive instead an immediately vested nonstatutory
stock option with an exercise price per share equal to the closing price of a
share of our Common Stock on the bonus award date. For the bonuses paid in March
1998, the number of shares for which an option was granted to a participating
executive officer was determined by dividing the product of four times the
amount of the cash bonus that he or she elected to forego by the closing price.
Pursuant to this program and in accordance with the officers' prior elections,
in March 1998, we granted Messrs. Miller, Tomasello and ten Brink and Ms. Lee
nonstatutory stock options to purchase 11,429, 10,000, 1,429 and 4,286 shares of
Common Stock, respectively.
Stock Options. The Compensation Committee believes that the grant of
stock options is a desirable method of acknowledging the efforts of our
executive officers and encouraging their continued high levels of performance.
In deciding on the stock option grants to individual executive officers in
respect of their performance, the Compensation Committee employs a formula
taking into account each officer's salary grade and our financial performance as
measured by a trailing average of the market price of our Common Stock. The
Compensation Committee then adjusts the formula-determined option grant by a
factor reflecting the Committee's assessment of the individual officer's
performance, initiative and contribution to our success in meeting our
performance objectives. In accordance with this adjusted formula, in March 1998
the Committee granted our seven executive officers options to purchase a total
of 113,000 shares of Common Stock in respect of their performance during 1997,
and in February 1999, the Committee granted five of our six executive officers
options to purchase a total 117,756 shares of Common Stock in respect of their
performance during 1998. In addition, we granted Richard T. Kogler, who joined
us as Chief Operating Officer in February 1999, an option to purchase 100,000
shares of Common Stock in connection with his commencement as our Chief
Operating Officer.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee determines the compensation of our President
and Chief Executive Officer, Mark C. Miller, on the basis of the same criteria
applicable to our executive officers generally.
As noted earlier, the Compensation Committee recommended (and the Board
of Directors approved) continuing Mr. Miller's base salary of $235,000 through
1998. The Compensation Committee granted Mr. Miller an option to purchase 40,000
shares of Common Stock in March 1998 in respect of his performance during 1997
and an option to purchase 38,248 shares in February 1999 in respect of his
performance during 1998. Pursuant to the Committee's recommendation, Mr. Miller
was paid a cash bonus of $30,500 in March 1998 in respect of his services in
1997 and, in accordance with Mr. Miller's prior election to forego a portion of
his cash bonus, he also received a nonstatutory stock option to purchase 11,429
shares. The factors most influencing the Committee's determination of the amount
of Mr. Miller's cash bonus and stock option grant in March 1998 and his stock
option grant in March 1999 were his significant leadership in identifying and
negotiating our eight acquisitions during 1997 and our 12 acquisitions during
1998 (including, in particular, our acquisition of Waste Systems, Inc., the
majority shareholder
<PAGE>
of 3CI Complete Compliance Corporation, in October 1998 and our acquisition of
Med-Tech Environmental Limited in December 1998), his management of our growth
strategy generally and his oversight of the integration of acquired businesses
into our operations.
Compensation Committee
Jack W. Schuler, Chairman
Peter Vardy
L. John Wilkerson, Ph.D.
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total return (i.e., stock
price appreciation plus dividends) on our Common Stock for the period from
August 23, 1996, when the Common Stock was first traded, through December 31,
1998, with the cumulative total return for the same period on the Nasdaq NMS
Composite Index, the Russell 3000 Index and an index of a peer group of
companies selected by us. The graph assumes that $100 was invested on August 23,
1996 in our Common Stock and in the stock represented by each of the three
indexes, and that all dividends were reinvested. The common stock of the
following companies has been included in the peer group index: Allied Waste
Industries, Inc.; Browning-Ferris Industries, Inc.; Isolyser Company, Inc.;
Isomedix, Inc. (for 1996 only); Safety-Kleen Corporation (for 1996 and 1997
only); Sterigenics International, Inc. (for 1997 and 1998 only); Sterile
Recoveries, Inc.; Steris Corporation; United Waste Systems, Inc. (for 1996 and
1997 only); U.S.A. Waste Services, Inc. (for 1996 and 1997 only); and Waste
Management, Inc. The stock price performance of our Common Stock reflected in
the following graph is not necessarily indicative of future performance.
[A CHART]
8/23/96 12/31/96 12/31/97 12/31/98
- --------------------------------------------------------------------------------
Stericycle, Inc. $100 $124.32 $151.49 $161
Nasdaq NMS Composite Index $100 $113.04 $136.18 $175
Russell 3000 Index $100 $111.65 $144.29 $167
Peer Group Index $100 $106.53 $138.03 $130
<PAGE>
THE BFI TRANSACTION
On April 14, 1999, we entered into a stock purchase agreement (the
"Stock Purchase Agreement") and an asset purchase agreement (the "Asset Purchase
Agreement") (collectively, the "Acquisition Agreements") with Allied Waste
Industries, Inc. ("Allied") pursuant to which we agreed to acquire from Allied,
upon completion of Allied's acquisition of Browning-Ferris Industries, Inc.
("BFI"), all of BFI's medical waste management operations in the United States,
Canada and Puerto Rico (the "BFI Medical Waste Business"), and, in addition, all
of Allied's own medical waste management operations (the "Allied Medical Waste
Business" and, collectively with the BFI Medical Waste Business, the "Acquired
Businesses"), for $440 million in cash (the "BFI Transaction"). On July 30,
1999, Allied acquired BFI pursuant to a merger agreement.
DESCRIPTION OF THE ACQUIRED BUSINESSES
BFI is the largest provider of medical waste management services in the
United States and Canada, serving customers from 120 locations in 45 states,
Canada and Puerto Rico. Its services are fully integrated and include regulated
medical waste collection, transportation, transferal, treatment and disposal.
BFI's revenues from medical waste management operations were approximately $198
million during its fiscal year ending September 30, 1998. Allied's revenues from
medical waste management operations were less than $10 million during the year
ending December 31, 1998.
The Acquired Businesses collectively operate 12 incineration
facilities, 14 autoclave facilities, and 14 transfer stations in 40 states. The
Acquired Businesses collectively had approximately 1,400 full-time employees at
June 30, 1999.
The Acquired Businesses market their services to two principal types
of customers: small accounts, including outpatient clinics, medical and dental
offices, long-term and sub-acute care facilities, biomedical companies, and
municipal entities; and large accounts, including hospitals, blood banks and
pharmaceutical manufacturers.
Substantially all of the services of the BFI Medical Waste Business
are provided pursuant to long-term customer contracts and service agreements
specifying either scheduled or on-call services, or both. Contracts with small
accounts are generally two to three years in length, while contracts with
hospitals and other large accounts generally run for one to five years. The
marketing of the BFI Medical Waste Business emphasizes large accounts and
national accounts with large health service organizations that have multiple
locations throughout the United States. The BFI Medical Waste Business has an
established and diverse customer base, with no single customer accounting for
more than __% of its revenues for the fiscal year ending September 30, 1998.
BACKGROUND OF THE BFI TRANSACTION
On several occasions during the past several years our Chief Executive
Officer, Mark Miller, communicated to Henry L. Hirvela, Chief Financial Officer
of Allied, and Thomas H. Van Weelden, Chairman and Chief Executive Officer of
Allied, our interest in acquiring from Allied any medical waste management
operations that Allied might acquire as part of its acquisition of solid waste
management businesses. Other of our executive officers had also discussed this
possibility with other executive officers of Allied.
On March 8, 1999, Allied and BFI announced that they had reached
agreement for Allied to acquire BFI by merger. That same day Richard T. Kogler,
our Chief Operating Officer, spoke by telephone to Larry D. Henk, Chief
Operating Officer of Allied, about the possibility of our acquiring the BFI
Medical Waste Business. Subsequently, Messrs. Miller and Kogler spoke by
telephone with Mr. Henk on numerous occasions between March 11 and March 16, and
on March 16, 1999 they arranged a meeting to be held on March 23, 1999, in
Scottsdale, Arizona at Allied's headquarters to discuss a possible acquisition.
At that meeting, Messrs. Miller and Kogler, and Frank ten Brink, our Chief
Financial Officer, were in attendance representing us and Mr. Henk and Karen C.
McConnell, of the law firm of Fennemore Craig, P.C., counsel for Allied, were in
attendance representing Allied. The parties discussed, on a preliminary basis,
certain significant matters with respect to a potential acquisition, including,
among other things, the operations and available financial statements and other
data of the BFI Medical Waste Business, the general structure of the
transaction, and possible arrangements for financing the transaction.
<PAGE>
Following the initial telephone discussions between Messrs. Kogler and
Henk on March 8, 1999, we began to explore, through conversations with
investment bankers, the availability and likely terms of financing for the
transaction. The meeting on March 23 was also followed by a number of telephone
discussions between Messrs. Kogler, Miller and Henk during the next several
days. On March 26, 1999, they agreed to meet with their respective transaction
teams on March 29, 1999 in Scottsdale, Arizona at Allied's headquarters, for the
purpose of conducting negotiations regarding our purchase of the Acquired
Businesses, conducting due diligence and reviewing additional available
information. On March 25, 1999, Allied, through Ms. McConnell, provided us with
a draft stock purchase agreement.
Mr. Miller, Mr. Kogler, and Michael Bonn, of the law firm of Johnson &
Colmar, our counsel, were in attendance representing us and Mr. Henk, Ms.
McConnell and Pete Hathaway, Chief Accounting Officer of Allied, were in
attendance representing Allied at the meeting which began on March 29 and
continued through March 30 in Scottsdale. At this meeting the parties discussed
the Stock Purchase Agreement in some detail to define our and Allied's
respective positions on a number of points. Although a purchase price was not
agreed upon, the general structure of the transaction, including the accounting
and tax treatment, were agreed to. We also reviewed additional information
provided by Allied and made more requests to Allied for further information. We
also discussed with Allied the type of closing conditions and termination
provisions that would apply to the transaction, and the level of assurances that
we could provide to Allied concerning our ability to finance the transaction.
On March 31, 1999, Allied provided us with a revised draft of the Stock
Purchase Agreement and we provided them our written comments on that draft on
April 2. Telephone conversations between Messrs. Kogler and Henk and between our
respective counsels and other transaction team members occurred frequently
between March 30 and the execution of the Acquisition Agreements. These
conversations continued to involve negotiation of various transaction terms,
requests for information and responses to those requests. In particular, two
telephone conference calls involving both transaction teams occurred on April 6,
1999. During those calls the transaction price was agreed upon.
After the initial contact between us and Allied on March 8, 1999, Mr.
Miller began to inform our board members by telephone about the possibility of
our purchasing the Acquired Businesses, beginning with a conversation on that
date with Jack Schuler, the Chairman of our Board of Directors. By March 15,
1999, Mr. Miller had briefed all of the board members on one or more occasions
in telephone conversations. On March 15, 1999, Mr. Miller further briefed the
entire Board by teleconference. Mr. Schuler called for a telephonic meeting of
our Board of Directors to be held on April 7, 1999. At that meeting our
management presented the proposed transaction to the Board of Directors. All
members of our Board of Directors participated in that meeting and unanimously
authorized our management to continue negotiations on a definitive agreement,
subject to further Board approval.
From April 7 to April 13, 1999, our transaction team and Allied's
transaction team continued to finalize the Acquisition Agreements and continued
their respective due diligence investigations, primarily through telephone calls
and exchanges of documents by facsimile and e-mail. On April 12, 1999, Mr.
Miller called for a telephonic meeting of our Board of Directors to be held on
April 13, 1999. At that meeting management again presented the proposed
transaction to the Board and reviewed the terms of the proposed Acquisition
Agreements. All of our Board members participated in that meeting and they
unanimously approved the BFI Transaction. On April 14, 1999 we and Allied
executed the Acquisition Agreements and issued a joint press release announcing
the BFI Transaction.
OUR REASONS FOR THE BFI TRANSACTION
Our management and Board of Directors believe that the BFI
Transaction represents a unique strategic opportunity for us to substantially
expand the size and scope of our operations. Our management and Board of
Directors identified a number of potential benefits of the BFI Transaction which
they believe will contribute to our success and thus inure to the benefit of our
stockholders, including the following:
Synergies. Our management and Board of Directors believe the BFI
Transaction will result in a number of important synergies, including the
opportunity to leverage certain financial and administrative functions over a
<PAGE>
larger operational and revenue base. They also believe the BFI Transaction will
significantly increase our customer density in many of our largest markets, and
thus creating significant economies of scale (lower per-unit costs resulting
from larger operations) because of the fixed costs associated with the
collection and treatment of medical waste. In addition, our management and Board
believe that increased customer density and an increase in the number of
transfer and treatment facilities will yield transportation cost savings.
Through the integration of the Acquired Businesses, our management and Board
anticipate that within 24 months of the closing the combined company will
realize annual cost savings of approximately $18 million.
Growth. Our management and Board believe the BFI Transaction will be
more effective in implementing and accelerating our basic long-term growth
strategy than if our company continued operating without the operations of the
Acquired Businesses.
Combination of Best of Both Operations. After the BFI Transaction is
consummated, we will be able to take advantage of the best personnel and
operating systems and practices currently employed by us and by the BFI Medical
Waste Business. For example, the combined company will include highly skilled
field managers and a knowledgeable sales and marketing force from both
operations.
Geographically Complementary North American Operations. We and the
BFI Medical Waste Business are engaged in the medical waste management business
throughout North America and we both provide medical waste management services,
consisting of waste collection, transportation, treatment and disposal services
to various medical waste generators, including hospitals, blood banks,
pharmaceutical manufacturers, and dental offices. We and the BFI Medical Waste
Business have collection operations, transfer stations and treatment centers
which are highly complementary. Management believes our combined businesses will
allow us to better serve our national accounts. Our Board of Directors also
considered the strategic fit between the markets we serve and those served by
the BFI Medical Waste Business and believes that a combination of the businesses
will result in the potential for accelerated growth and further operational
efficiencies by allowing the combined company to expand, complete and link
existing services areas.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Under the Stock Purchase Agreement, the parties have agreed to make
an election pursuant to Section 338(h)(10) of the Internal Revenue Code of 1986
with respect to the purchase and sale of the stock of the newly-formed BFI
subsidiary. As a result of this election and the fact that our purchase of the
Canadian assets is structured as an asset purchase (see "The Acquisition
Agreements - General"), we will be able to write up the tax basis of each asset
of the Acquired Businesses for federal (and most state) income tax purposes to
the asset's fair market value and depreciate that basis for tax purposes over
the asset's useful life. The Stock Purchase Agreement also provides that any net
increase in state income taxes payable by Allied as a result of the Section
338(h)(10) election will be payable by us to Allied.
ACCOUNTING TREATMENT
We expect to account for the BFI Transaction using the "purchase"
method of accounting pursuant to APB No. 16. Under the purchase method we will
record, at fair value, the assets acquired and liabilities assumed and will
record as goodwill the difference between the cost of the acquisition and the
sum of the fair value of tangible and intangible assets acquired, less
liabilities assumed. The operations of the Acquired Businesses will be included
in our results of operations from the date of the closing.
GOVERNMENT AND REGULATORY APPROVALS
Hart-Scott-Rodino. The Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice ("DOJ") frequently scrutinize
the legality under the antitrust laws of transactions such as the BFI
Transaction. At any time before or after the closing of the BFI Transaction, the
FTC or the DOJ could take such action under the antitrust laws as they deem
necessary or desirable in the public interest, including seeking to enjoin the
transaction or seeking divestiture of substantial assets. Private parties and
state attorneys general may also bring action under the antitrust laws under
certain circumstances. We cannot assure you that a challenge to the BFI
Transaction on antitrust grounds will not be made or, if such a challenge is
made, of the result.
<PAGE>
On May 20, 1999, we and Allied effectively filed Pre-Merger
Notification and Report Forms with the FTC and the DOJ under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The HSR
Act, and the rules and regulations thereunder, provide that certain transactions
(including the BFI Transaction) may not be consummated until required
information and materials have been furnished to the FTC and the DOJ and certain
waiting periods have expired or been terminated. On June 18, 1999 each of the
Company and Allied received a second request with respect to the BFI Transaction
from the DOJ. The time period for the DOJ to review the BFI Transaction will
terminate 20 days following substantial compliance by us and Allied with the
second request. Consummation of the BFI Transaction is subject to the expiration
or termination of all applicable waiting periods under the HSR Act and no action
having been instituted by the FTC or the DOJ that is not withdrawn or terminated
prior to the closing of the BFI Transaction.
Other. Our obligation to consummate the BFI Transaction is
conditioned upon all governmental consents, approvals and authorizations legally
required for the consummation of the BFI Transaction and the transactions
contemplated thereby having been obtained and being in effect at the time of
closing, except where the failure to obtain the same would not have any effect
that is, or is reasonably likely to be, materially adverse to the business,
financial or results of operations of Stericycle and the Acquired Businesses
taken as a whole.
<PAGE>
THE ACQUISITION AGREEMENTS
GENERAL
The BFI Transaction is to be effected pursuant to two acquisition
agreements, both of which are dated as of April 14, 1999. The first agreement is
the Stock Purchase Agreement, which relates to the operations of the BFI Medical
Waste Business and the Allied Medical Waste Business in the United States and
Puerto Rico. The Stock Purchase Agreement calls for Allied to cause BFI to
transfer the relevant businesses to a newly-formed subsidiary of BFI and for us
to buy all of the stock of that newly-formed company for $436 million at
closing. The second agreement is the Asset Purchase Agreement, which relates to
the operations of the BFI Medical Waste Business in Canada. The Asset Purchase
Agreement calls for us to purchase the relevant assets for $4 million. The Stock
Purchase Agreement provides that the purchase price is to be reduced by $5.71
for each $1.00 that the annualized GOPDA (gross operating profit before
depreciation and amortization) of the U.S. and Puerto Rican operations of the
BFI Medical Waste Business for the six months ended March 31, 1999 is less than
$75,510,960. It also calls for an upward or downward purchase price adjustment
to be made after closing based on the level of working capital or working
capital deficit of the acquired business. Both the Stock Purchase Agreement and
the Asset Purchase Agreement provide for increases in the purchase price in an
amount equal to the cash portion of the purchase price paid by BFI prior to the
closing date for any businesses or assets BFI acquires that become part of the
BFI Medical Waste Business prior to closing and a corresponding reduction in
purchase price for businesses or assets disposed of prior to closing. Both the
Stock Purchase Agreement and the Asset Purchase Agreement were filed by us as
exhibits to our Current Report on Form 8-K dated April 14, 1999 and are
incorporated herein by reference.
CONDITIONS TO CLOSING
Conditions to Each Party's Obligations to Consummate the Merger. The
respective obligations of us and Allied to effect the BFI Transaction are
subject to the satisfaction or waiver of the following conditions on or prior to
the closing date:
o no provision of any law or regulation and no judgment,
injunction, order or decree of a court or governmental authority
shall be in effect which makes the BFI Transaction illegal or
otherwise prohibits its consummation;
o the waiting period under the HSR Act shall have expired or been
terminated;
o Allied's acquisition by merger of BFI shall have occurred;
o the simultaneous closing of the Asset Purchase Agreement, in the
case of the Stock Purchase Agreement, and vice versa.
Additional Conditions to the Obligations of Allied. The obligations of
Allied to effect the BFI Transaction are subject to satisfaction or waiver of
the following additional conditions:
o our having performed our obligations provided in the applicable
Acquisition Agreement, our representations and warranties being
true and correct in all material respects, and our delivering a
certificate to that effect to Allied;
o our delivering a certificate to Allied that after giving effect
to the BFI Transaction and the related transactions, including
financing transactions, Stericycle will not be insolvent, have
unreasonably small capital or have incurred or plan to incur debt
beyond its ability to pay when due; and
o Allied receiving a solvency letter.
Additional Conditions to Our Obligations. Our obligations to effect the
BFI Transaction are subject to the satisfaction or waiver of the following
additional conditions:
<PAGE>
o Allied having performed its obligations provided in the
applicable Acquisition Agreement and Allied's representations and
warranties being true and correct in all material respects, and
Allied delivering a certificate to that effect to us;
o the receipt of all material statutory approvals required in order
to permit the consummation of the BFI Transaction;
o the receipt of all consents, approvals or authorizations required
to be obtained pursuant to contracts or permits to which we are a
party or of which we are a beneficiary; and
o our obtaining financing for the BFI Transaction on commercially
reasonable terms.
REPRESENTATIONS AND WARRANTIES
In the Stock Purchase Agreement and the Asset Purchase Agreement, we
and Allied have made various customary representations and warranties relating
to, among other things, (1) due organization, valid existence and good standing
of the parties and similar corporate matters, (2) the authorization, execution,
delivery and enforceability of the respective agreements and the consummation of
the transactions contemplated by the Acquisition Agreements, (3) conflicts under
certificates of incorporation or by-laws, required consents or approvals and
violations of any instruments or law, in each case that might be caused by the
BFI Transaction, (4) the absence of brokers and finders, and, in the case of
Allied, (5) the capitalization of the newly-formed BFI subsidiary.
The Stock Purchase Agreement and the Asset Purchase Agreement also
contain representations and warranties by us related to: (1) the integrity of
our filings with the SEC, (2) the conduct of our business and no material
adverse change in our company and (3) the receipt of preliminary assurances from
a nationally recognized investment bank as to its high confidence of the
availability to us of financing for the BFI Transaction. The Stock Purchase
Agreement and the Asset Purchase Agreement also contain representations and
warranties of Allied, to its knowledge, with respect to the Acquired Businesses.
These representations and warranties are effective as of the closing and include
those related to: (1) the absence of undisclosed liabilities and certain changes
or events, (2) litigation, (3) violations of law, (4) compliance with
agreements, (5) taxes, (vi) employee benefit plans and ERISA, (7) labor
controversies, (8) environmental matters, (9) non-competition agreements, and
(10) title to assets.
COVENANTS
The Stock Purchase Agreement and the Asset Purchase Agreement
provide a number of covenants by the parties, including the following:
1) Allied agrees to cause the Allied Medical Waste Operations to
and, if applicable, to use its reasonable efforts to cause BFI to
cause the BFI Medical Waste Operations to: (a) be conducted in
the ordinary course, (b) not amend its certificate of
incorporation or by-laws, (c) not split, combine or reclassify
its capital stock, (d) not declare or pay dividends or
distributions, (e) not issue, sell, pledge or dispose of any
additional shares or options or rights to acquire any shares of
its capital stock or securities convertible into or exchangeable
for such capital stock, (f) not incur or become contingently
liable with respect to indebtedness for borrowed money, with
certain exceptions, (g) not make any acquisition or disposition
of assets or businesses, with certain exceptions, (h) use all
reasonable efforts to preserve intact the business organization
and goodwill and keep available the services of present officers
and key employees, (i) confer with our representatives concerning
operations, (j) not adopt or enter into or amend employment,
severance, termination, pension, bonus, profit sharing,
compensation, stock option or similar arrangements, with certain
exceptions, (k) not make expenditures, with certain exceptions,
and (l) not enter into any agreement to provide services with a
term of more than three years or reasonably expected revenues of
over $15 million, or any agreement to purchase services with a
term of more than one year or reasonably expected revenues of
over $1 million;
<PAGE>
2) we and Allied each agree to provide the other and the other's
representatives reasonable access to information;
3) we and Allied each agree to provide the other with notice of
certain events related to the BFI Transaction;
4) we agree to provide certain employees of the Acquired Businesses
certain employment opportunities, severance benefits (generally
two weeks of base salary or wages for each whole year of
service), and medical, dental and vision coverage;
5) we agree to hold a stockholders meeting and to prepare and mail a
related proxy statement for the purpose of seeking approval of
any action necessary in connection with the financing of the BFI
Transaction;
6) we and Allied each agree to use all reasonable best efforts to
take all actions and to do all things necessary, proper or
advisable to consummate the BFI Transaction and to obtain all
necessary waivers, consents or approvals of third parties or
governmental authorities (including approval under the HSR Act);
7) we agree to assume liability for the director and officer
indemnification provisions of the certificate of incorporation
and by-laws of the newly-formed BFI subsidiary, which provisions
are not to be amended or repealed for a period of six years;
8) Allied agrees to use its reasonable best efforts, pending the
closing, to cause BFI to provide us with specified quarterly
financial statements within 45 days following the end of each
calendar quarter;
9) Allied agrees, for a period for five years from the closing, not
to engage in any business involving the collection, interim
storage, transfer, recovery, processing, treatment or disposal of
regulated medical waste, or the marketing of regulated medical
waste management services within certain specified geographic
areas around the location of our customers and facilities or the
customers and facilities of the Acquired Businesses;
10) we agree to conduct our business in the ordinary course pending
the closing;
11) for a period of one year following the closing, Allied agrees to
honor the disposal rates currently charged by BFI to the BFI
Medical Waste Business for residual waste disposed of at BFI
landfills; and
12) for a period of five years following the closing, Allied agrees
to retain all liabilities relating to the Acquired Businesses and
their assets that relate to or arise out of occurrences prior to
the closing, with certain exceptions.
TERMINATION OR AMENDMENT
The Stock Purchase Agreement and the Asset Purchase Agreement may be
terminated at any time prior to the closing by the mutual written consent of us
and Allied or as follows: (1) by either Allied or us if the BFI Transaction has
not been consummated by September 15, 1999; provided that if required audited
financial statements of the BFI Medical Waste Business have not been delivered
two months prior to that date, the date shall automatically be extended to a
date two months following the date of delivery of those financial statements
(which occurred on August ___, 1999 and the date shall automatically be extended
until December 31, 1999 if, on September 15, 1999 the waiting period under the
HSR Act has not expired or been terminated, (2) by either Allied or us if the
BFI Transaction is enjoined by a final unappealable court order not entered at
the request of the terminating party, (3) by either Allied or us upon a breach
of a representation, warranty, covenant or agreement by the other in the
relevant Acquisition Agreement which would reasonably be expected to have a
material adverse effect on us or the Acquired Businesses, as the case may be, or
<PAGE>
prevent or delay the consummation of the BFI Transaction beyond the specified
date, (4) by Allied if our Board of Directors fails to recommend or withdraws,
modifies or amends in any material respect its approval or recommendation with
respect to any required approval of our stockholders for the BFI Transaction or
the related financings, (5) by Allied or us if our stockholders fail to provide
any required approval for the BFI Transaction or the related financings, and (6)
by Allied or us if the BFI Transaction has not been consummated by January 1,
2000, provided the terminating party has not been the cause of the failure to
consummate the transaction.
Any provision of the Stock Purchase Agreement and the Asset Purchase
Agreement may be amended or waived by an instrument in writing and signed on
behalf of both parties in the case of an amendment or, in the case of a waiver,
by the party against whom the waiver is to be effective.
EXPENSES AND TERMINATION FEES
Allied and we each agree to pay our own expenses in connection with
the Acquisition Agreements and the BFI Transaction and to pay the other party a
fee of $5 million if that other party terminates the Stock Purchase Agreement on
account of the non-terminating party's breach, provided the terminating party is
not then in default. In addition, either party may sue the breaching party for
specific performance.
OTHER AGREEMENTS
First Rights Agreement. The Acquisition Agreements call for us and
Allied to enter into a first rights agreement upon closing of the BFI
Transaction. This agreement will have a term of ten years from the closing and
will require us to give Allied and its affiliates the first right to bid on the
disposal of the residual, non-hazardous waste generated by the Acquired
Businesses. It also will require us and our affiliates on the one hand, and
Allied and its affiliates, on the other hand, to provide the right to bid with
the other on contracts that include both solid waste and medical waste.
Transition Agreement. The Acquisition Agreements also call for us
and Allied to enter into a transition agreement upon closing of the BFI
Transaction. This agreement will require Allied, for a period of one year
following the closing, to provide certain operational and administrative support
to us and to make certain facilities available to us in order to facilitate a
smooth transition of the Acquired Businesses. In particular, this agreement will
require Allied to: (1) continue to operate permitted treatment and disposal
facilities and transfer stations for the Acquired Businesses for us until we
receive the necessary permits and approvals to operate them, (2) make available
to us at operating locations of the Acquired Businesses substantially the same
space used by them prior to the closing, and (3) to provide operational and
administrative support to us at the operating locations of the Acquired
Businesses as we require to facilitate a smooth transition, including vehicle
maintenance, telephone answering, dispatching, backup drivers, personnel
assistance, and customer billing. The transition agreement will require us to
reimburse Allied for these services on a direct cost, pass-through basis, except
that for services other than facility operation there are no charges during the
first six months following the Closing, provided we use our reasonable best
efforts to stop using these services as soon as possible.
FINANCING FOR THE BFI TRANSACTION
One of the conditions to our obligation to consummate the BFI
Transaction is that we have obtained the necessary financing for the transaction
on commercially reasonable terms. We currently believe that the most likely
arrangements for the financing of the BFI Transaction will be our issuance of
approximately $375 million of debt, some of which is likely to be in the form of
a senior secured bank financing and some of which is likely to be in the form of
senior subordinated notes, and the issuance and sale of 75,000 shares of Series
A Convertible Preferred Stock to Bain (if proposed Items 2 and 3 are approved).
We believe that the issuance and sale of the Series A Convertible Preferred
Stock will improve our operating and capitalization ratios and thereby allow us
to obtain more favorable rates and other terms on any debt securities that we
may issue.
Bain manages capital in excess of $3 billion and has invested in more
than 110 companies representing over $10 billion in purchase price. Bain is one
of the most experienced and successful private equity investors in the United
States and the firm's principals have extensive experience working with
companies in a wide range of industries.
Our authorized stock currently consists of 30,000,000 shares of Common
Stock, of which, as of June 30, 1999, 14,559,417 shares were issued and
outstanding and 2,299,945 shares were reserved for issuance upon the exercise of
outstanding stock options and warrants and additional stock options that may be
<PAGE>
granted under our stock option plans. Accordingly, under the laws of Delaware,
our state of incorporation, we could issue approximately 13,140,000 shares of
Common Stock, or debt securities convertible into approximately 13,140,000
shares of Common Stock, without stockholder approval. Because we expect to issue
the Series A Convertible Preferred Stock as part of the plan to finance the BFI
Transaction, however, the Board of Directors has approved a proposal to amend
our certificate of incorporation to authorize a class of preferred stock which
the Board of Directors will have the authority to designate and issue from time
to time. That proposal is being submitted to the stockholders for consideration
as Item 2.
In addition, although under Delaware law our Board of Directors could
issue up to approximately 13,140,000 additional shares of Common Stock, or debt
securities convertible into approximately 13,140,000 additional shares of Common
Stock, without stockholder approval, the rules of the Nasdaq Stock Market, on
which our Common Stock is listed, require that stockholders approve the sale or
issuance by us of Common Stock (or securities convertible into Common Stock)
equal to 20% or more of the Common Stock outstanding prior to the sale or
issuance. We believe that in order to finance the BFI Transaction, it is in our
best interest to issue the Series A Convertible Preferred Stock, which will
initially be convertible into 4,285,715 shares of Common Stock, an amount equal
to approximately 23% of our Common Stock currently outstanding.
For a more complete description of the Series A Convertible Preferred
Stock, see "Item 3-Proposal to Issue and Sell 75,000 Shares of Series A
Convertible Preferred Stock." For a description of our expectations regarding
the terms of the debt securities we are likely to issue to finance the BFI
Transactions, see "Pro Forma Condensed Combined Financial Statements of the
Company and the BFI Medical Waste Business."
ITEM 2
PROPOSAL TO AMEND OUR CERTIFICATE OF INCORPORATION
TO AUTHORIZE AND CREATE A CLASS OF PREFERRED STOCK
As noted, we are not currently authorized to issue shares of preferred
stock. The Board of Directors has proposed and recommends to the stockholders
that Article 4 of our Amended and Restated Certificate of Incorporation be
amended to authorize the issuance by us of up to 1,000,000 shares of a new class
of undesignated preferred stock, par value $.01 per share. Under the proposed
amendment to Article 4, the Board of Directors would be authorized, without
further stockholder action, to provide for the issuance of all or any shares of
Preferred Stock in one or more series and to establish the powers, designations,
preferences, rights, qualifications, limitations and restrictions of those
shares as the Board, in its sole discretion, determines.
Adoption of the proposed amendment requires the approval of the holders
of a majority of the shares of Common Stock outstanding as of the record date
for the 1999 Annual Meeting. A copy of Article 4 of our Certificate of
Incorporation, as Article 4 is proposed to be amended, appears as Exhibit I to
this Proxy Statement.
As noted, authorization of this class of undesignated preferred stock
would give the Board of Directors the flexibility to create one or more series
of preferred stock, from time to time, and to determine the respective powers,
designations, preferences, rights, qualifications, limitations and restrictions
of each series. These matters would include, for example: (1) the number of
shares in each series, (2) whether a series will bear dividends and, if so,
whether the dividends will be cumulative, (3) the dividend rate and the dates of
dividend payments, (4) liquidation preferences, if any, (5) the terms of
redemption, if any, including timing, rates and prices, (6) conversion rights,
if any, (7) sinking fund requirements, if any, (8) any restrictions on the
issuance of additional shares of any series, (9) any voting rights and (10) any
other powers, designations, preferences, rights, qualifications, limitations or
restrictions.
Shares of preferred stock could have priority over shares of Common
Stock with respect to dividends (which may be made cumulative with respect to
the preferred stock) and with respect to our assets upon liquidation, and could
reduce the amount of assets available for distribution to the holders of Common
Stock upon a liquidation. Depending upon the particular terms of any series of
preferred stock, holders of that series may have significant voting rights and
the right to representation on our Board of Directors. In addition, the approval
of holders of shares of preferred stock, voting as a class or as a series, may
be required for the taking of certain corporate actions, such as mergers.
<PAGE>
Our Board of Directors believes that the proposed authorization of this
class of preferred stock is desirable because it would provide us with the
ability (1) to pursue our preferred method of financing the BFI Transaction and
(2) to meet future capital requirements through equity financings and to take
advantage of favorable market conditions and possible acquisition opportunities
without the delay and expense ordinarily attendant upon obtaining further
stockholder approval.
If the proposed amendment is approved, our Board of Directors will be
empowered to authorize the issuance of up to 1,000,000 shares of preferred
stock, from time to time, for those purposes, to such persons and for that
consideration as the Board may deem desirable, without further authorization by
the stockholders, except as may be required by applicable Delaware law, other
applicable law or the rules of the Nasdaq Stock Market or any stock exchange on
which the shares of our Common Stock or preferred stock may be listed or traded.
The timing of the actual issuance of shares of preferred stock will depend upon,
among other things, market conditions and the specific purpose for which the
shares are to be issued.
Stockholders will not have any preemptive rights to acquire shares of
preferred stock authorized by the proposed amendment. The proposed authorization
of the issuance of shares of the preferred stock will not change the number of
shares of Common Stock currently outstanding or the rights of holders of Common
Stock. Under certain circumstances, however, issuance of shares of preferred
stock could affect existing stockholders by dilution of their voting power as
well as by dilution of earnings and book value per share, especially in the case
of preferred stock which is convertible into shares of Common Stock.
Stockholders should recognize that the issuance of shares of preferred
stock may have the effect of discouraging or thwarting persons seeking to take
control of us through a tender offer or proxy fight or seeking to bring about
the removal of incumbent management or a corporate transaction, such as a
merger. For example, the issuance of shares of preferred stock in a public or
private sale, or in a merger or similar transaction, would increase the number
of our outstanding shares, thereby diluting the interest of a party seeking to
take us over. In addition, the preferred stock could be viewed as having the
effect of discouraging an attempt by another person or entity, through the
acquisition of a substantial number of shares of Common Stock, to acquire
control of us, because the authorization of undesignated preferred stock could
be used by our Board of Directors for the adoption of a stockholder rights plan
or "poison pill." Stockholders should note that any action taken by us that
discourages, or that has the effect of discouraging, an attempt to acquire
control of us might result in stockholders not being able to participate in any
possible premiums that they might obtain in the absence of anti-takeover
provisions. Any transaction which may be so discouraged or avoided could be a
transaction that our stockholders might consider to be in their best interests.
The proposed amendment to authorize a class of preferred stock is being
made because of our desire to have flexibility in arranging for financing of the
BFI Transaction. It has not been made in response to, and is not being presented
to deter, any effort to obtain control of us. It is also not being proposed as
an anti-takeover measure. We have no present plans to issue preferred stock
other than the Series A Convertible Preferred Stock described herein in
connection with the BFI Transaction, except that, the Board of Directors may
determine, if Item 2 is approved, to designate and issue up to 25,000 additional
shares of preferred stock for up to $25 million as part of the financing for the
BFI Transaction. The Board has no current plans to issue any such additional
preferred stock and we would be required to obtain Bain's approval to do so.
However, depending upon conditions in the debt market and the terms of the debt
financing available for the BFI Transaction, our Board may determine to pursue
the issuance and sale of additional preferred stock on terms no more favorable
to the investors than the Series A Convertible Preferred Stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO AMEND ARTICLE 4
OF THE COMPANY'S CERTIFICATE OF INCORPORATION TO AUTHORIZE THE CREATION OF A
CLASS OF PREFERRED STOCK.
<PAGE>
ITEM 3
PROPOSAL TO AUTHORIZE, ISSUE AND SELL 75,000 SHARES OF
SERIES A CONVERTIBLE PREFERRED STOCK
On August 13, 1999, we entered into a Series A Convertible Preferred
Stock Purchase Agreement (the "Preferred Stock Purchase Agreement") with nine
investment funds affiliated with Bain Capital, Inc. (the nine purchasers are
referred to, collectively, as "Bain"), providing for the issuance by us to Bain
of 75,000 shares of Series A Convertible Preferred Stock for $1,000 per share,
or an aggregate of $75 million, in cash, less certain fees and expenses which
are described below. We believe that the issuance of the Series A Convertible
Preferred Stock is in our best interest because it will facilitate the financing
of the BFI Transaction.
Subject to the negotiation of a definitive agreement acceptable to
our President, Mark Miller, our Board of Directors unanimously approved the
principal terms of the Preferred Stock Purchase Agreement and the other matters
contemplated by that agreement at a telephonic meeting of the Board on July 28,
1999, and recommended that following our entering into a definitive agreement,
our stockholders be asked to approve the issuance and sale of the Series A
Convertible Preferred Stock. If Items 2 and 3 are approved, the Board of
Directors intends to create the Series A Preferred Stock pursuant to a
Certificate of Designation in the form attached to the Preferred Stock Purchase
Agreement as Exhibit B (the "Certificate of Designation"). Stockholders should
consider the following summary of the Series A Convertible Preferred Stock
Proposal and the Preferred Stock Purchase Agreement before voting. The following
is only a summary, and stockholders are referred to and encouraged to read the
entire Preferred Stock Purchase Agreement, including the Certificate of
designation and other Exhibits, which was filed by us as an exhibit to a Form
8-K dated August 20, 1999:
DIVIDENDS
The Series A Convertible Preferred Stock will bear preferential
dividends, payable in additional shares of Series A Convertible Preferred Stock,
at the rate of 3.375% per annum from the date of issuance. Dividends accrue
daily at the per annum rate of 3.375% and will accumulate annually on the
anniversary date of initial issuance. In addition to preferential dividends, the
Series A Convertible Preferred Stock will also be entitled to share pro rata
with holders of Common Stock, on the basis of the number of shares of Common
Stock into which the Series A Convertible Preferred Stock is convertible, in all
other dividends and distributions. Because the Series A Convertible Preferred
Stock dividends are payable in additional shares of Series A Convertible
Preferred Stock, the Certificate of Designation covers 100,000 shares in order
that we will have shares available for the payment of those dividends for a
period of time.
LIQUIDATION
Upon any liquidation, dissolution or winding up of our company, each
holder of Series A Convertible Preferred Stock shall be entitled to be paid,
before any distribution or payment is made to the holders of Common Stock, the
greater of (i) the sum of $1,000 per share plus accumulated preferential
dividends plus accrued and unpaid dividends not yet accumulated and (ii) the
amount that would be payable if the Series A Convertible Preferred Stock had
been converted into Common Stock (the "Liquidation Value").
VOTING; ELECTION OF DIRECTORS
The Series A Convertible Preferred Stock is entitled to vote with
the holders of Common Stock as a single class on each matter submitted to our
stockholders. Each share of Series A Convertible Preferred Stock shall have a
number of votes for such matters equal to the number of votes possessed by the
Common Stock into which the Series A Convertible Preferred Stock is convertible.
So long as Bain and its affiliates hold 50% or more of the Series A Convertible
Preferred Stock or the Common Stock into which it is convertible, they will have
the right, voting as a separate class, to elect two directors to our Board of
Directors. If Bain and its affiliates cease to hold 50% but still hold 25% or
more, they will have the right, voting as a separate class, to elect one
director and if they cease to hold 25%, their right to elect directors as a
separate class will terminate.
<PAGE>
CONVERSION
Each holder of Series A Convertible Preferred Stock may, at any time
and from time to time, upon ten business days notice, convert all or part of the
Series A Convertible Preferred Stock into shares of Common Stock. The price at
which the holders may convert is $17.50 per share, subject to adjustment, and
this price, as adjusted from time to time, is referred to as the "Conversion
Price." The Conversion Price will be adjusted if (i) we issue additional shares
of Common Stock for a price per share less than the Conversion Price or the
Market Price (as defined below); or (ii) we (a) issue options, warrants or
convertible securities with an exercise price or conversion price that is less
than the Conversion Price or the Market Price at the time of issuance of the
options, warrants or convertible securities, or (b) fix a record date for the
determination of holders of any class of securities then entitled to receive any
additional shares of Common Stock or options, warrants or convertible securities
exercisable for or convertible into Common Stock; provided, that we will not be
required to make any further adjustment in the Conversion Price upon the
subsequent exercise of such options or warrants or conversion of such
convertible securities; provided, further, in any fiscal year, we may issue in
connection with Board of Director approved acquisitions a number of shares of
Common Stock, and we may grant or reprice (at a price not lower than the Market
Price at the time of issuance or repricing) options to purchase Common Stock in
connection with existing and future stock option plans, an aggregate number of
shares and options equal to 4.0% of the number of shares of Common Stock
outstanding on the last trading day of the immediately preceding fiscal year
(adjusted for stock splits, combinations and stock dividends on the Common Stock
during such year). In any such event, the Conversion Price will be reduced to
reflect the proportionate difference between the amount that we would have
received had we sold that Common Stock at the Market Price (or in the case of
options and convertible securities, received an amount equal to the Market Price
upon the exercise or conversion thereof), and the amount we actually obtained
from the issuance. The "Market Price" per share for Common Stock is the average
closing price over the 20 business day period preceding the date of
determination.
The 75,000 shares of Series A Convertible Preferred Stock to be
issued to Bain will be initially convertible into 4,285,715 shares of our Common
Stock, or approximately 23% of the amount of our Common Stock currently
outstanding.
If the options, warrants or conversion rights expire before being
exercised, the Conversion Price will be re-adjusted, upon 30 days' prior written
notice by us, as though the unexercised options, warrants or conversion rights
had never been issued.
REDEMPTION AT OUR OPTION
Beginning on the 30th month anniversary of the date of initial
issuance of the Series A Convertible Preferred Stock, if the closing price of
the Common Stock exceeds 150% of the Conversion Price for 20 consecutive trading
days, we may elect, upon at least 30 days' prior written notice, to redeem all
(but not part) of the outstanding shares of Series A Convertible Preferred
Stock, subject to any holder's right to first convert its shares into Common
Stock prior to the redemption date, in the manner described above. If we make
such an election, the redemption price will equal the Liquidation Value to the
date of redemption.
REDEMPTION UPON A CHANGE OF CONTROL
A "Change of Control" with respect to Stericycle is defined as a
circumstance in which: (i) any person or group (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) becomes the beneficial owner of more than 50% of
the total voting power of Stericycle; or (ii) during any consecutive 36-month
period, our directors at the beginning of such period and their successors cease
to comprise a majority of the Board.
In the event of a Change of Control, or if a Bankruptcy Event (as
defined in the Certificate of Designation) has occurred and continued for 60
days, each holder of shares of Series A Convertible Preferred Stock can, by the
giving of 15 business days notice, cause us to redeem all or any part of the
holder's shares at a price per share equal to the Liquidation Value per share.
<PAGE>
CONDITIONS TO CLOSING
Conditions to Each Party's Obligations. The respective obligations
of us and Bain to consummate the Preferred Stock Purchase Agreement are subject
to the satisfaction or waiver of the following conditions on or prior to the
closing date:
o the BFI Transaction shall have closed or be closing
simultaneously;
o the waiting period under the HSR Act with respect to Bain's
acquisition of the Series A Convertible Preferred Stock
shall have expired or been terminated; and
o our stockholders shall have approved Items 2 and 3 included
in this proxy statement.
Additional Conditions to the Obligations of Bain. The obligations of
Bain to consummate the Preferred Stock Purchase Agreement are subject to
satisfaction or waiver of the following additional conditions:
o our having performed our obligations provided in the
Preferred Stock Purchase Agreement, our representations and
warranties being true and correct in all material respects,
and our delivering a certificate to those effects to Bain;
o our not having amended the Acquisition Agreements in any
manner that materially changes the benefits to or financial
or other obligations of us;
o our adopting amendments to our by-laws to permit the holders
of at least 80% of the Series A Convertible Preferred Stock
to call a meeting of stockholders, to permit any director to
call a meeting of the Board, to establish the size of the
board at nine directors, to require Board meetings in each
of our fiscal quarters, and to provide that these provisions
cannot be amended without the approval of the holders of a
majority of the outstanding Series A Convertible Preferred
Stock;
o the absence of any material adverse change to us and the
Acquired Businesses taken as a whole or our ability to
consummate the transactions contemplated by the Preferred
Stock Purchase Agreement;
o Bain's receipt of an opinion of our counsel as to specified
matters;
o we shall have appointed two of Bain's representatives to our
Board; and
o we shall have obtained a senior credit facility and issued
senior subordinated notes on specified terms.
Additional Conditions to Our Obligations. Our obligations to consummate
the Preferred Stock Purchase Agreement are subject to the satisfaction or waiver
of the following additional conditions:
o Bain having performed its obligations provided in the
Preferred Stock Purchase Agreement, its representations and
warranties being true and correct in all material respects,
and Bain delivering a certificate to those effects to us;
and
o our receipt of an opinion of Bain's counsel as to specified
matters.
REPRESENTATIONS AND WARRANTIES
In the Preferred Stock Purchase Agreement, we and Bain have made
various customary representations and warranties relating to, among other
things, (1) due organization, valid existence and good standing of the parties
and similar corporate matters, (2) the authorization, execution, delivery and
enforceability of the Preferred Stock Purchase Agreement and the consummation of
the transactions contemplated by the agreement, and (3) the absence of brokers
and finders.
The Preferred Stock Purchase Agreement also contains representations
and warranties by us related to: (1) our capitalization, corporate structure and
subsidiaries, (2) the integrity of our filings with the SEC, (3) conflicts under
our certificate of incorporation or by-laws, required consents or approvals and
violations of any instruments or law, in each case that might be caused by the
transaction, (4) our legal proceedings and orders, (5) our taxes, (6) our
contracts, (7) our permits, (8) our environmental matters, (9) the conduct of
our business and no material adverse change in our company, (10) undisclosed
liabilities, (11) our title to our assets, (12) our employee benefit plans and
ERISA, (13) our patents and marks, (14) our labor relations, (15) our year 2000
compliance, and (16) our representations and warranties in the Acquisition
Agreements.
<PAGE>
The Preferred Stock Purchase Agreement also contains representations
and warranties of Bain related to (1) its investment intent with respect to the
Series A Convertible Preferred Stock, (2) its status as an accredited investor,
(3) its understanding that the Series A Convertible Preferred Stock has not been
registered under the Securities Act of 1933 (the "Securities Act"), and (4)
required consents and approvals.
COVENANTS AND RESTRICTIONS
The Preferred Stock Purchase Agreement provides for a number of
agreements by us and restrictions upon us, including the following:
o we agree to give the holders of the Series A Convertible
Preferred Stock and the underlying Common Stock into which
it is converted or convertible ("Underlying Common Stock")
the preemptive right to acquire any shares of our capital
stock or other of our securities with equity participation
features on the most favorable terms offered to any other
person, except for securities we issue in acquisitions or
public offerings, or to our employees;
o we agree to give specified financial and business
information to the holders of the Series A Convertible
Preferred Stock and the Underlying Common Stock so long as
they continue to hold at least 20% of that stock;
o we agree to cooperate with Bain and provide information to
Bain in order to enable it to obtain HSR approval for its
purchase of the Series A Convertible Preferred Stock;
o we agree to give Bain and its representatives reasonable
access to our properties, offices, personnel, accountants,
advisors, and records;
o we agree to hold a stockholders meeting to cover the matters
specified in Items 2 and 3 and to prepare, file and mail
this proxy statement; and
o we agree not to initiate, solicit or encourage inquiries
related to, or engage in negotiations or discussions with
anyone other than Bain, concerning the acquisition from us
of our convertible preferred stock or any other capital
stock having equity or profit participation features or any
debt securities in lieu of or substitution for such
securities.
EXPENSES
Bain and we each agree to pay our own fees and expenses in connection
with the Preferred Stock Purchase Agreement, with the exception that we agree to
pay up to $600,000 of Bain's expenses (of which $300,000 will be paid at the
closing of the Preferred Stock Purchase Agreement and the balance on the first
anniversary of the closing.) We also agree to pay Bain a closing fee of
$750,000. We will also pay Donaldson, Lufkin & Jenrette Securities Corporation
an advisory fee equal to 4 1/2% of the proceeds from the sale of the Series A
Convertible Preferred Stock.
INDEMNIFICATION
Pursuant to the Preferred Stock Purchase Agreement, we and Bain each
agree to indemnify the other and the other's affiliates against Claims (as
defined in the Preferred Stock Purchase Agreement) arising out of an inaccuracy
or breach of any of our representations or warranties. We also agree to
indemnify Bain against any claims arising out of any breach or default by us in
respect of any of our covenants or obligations in the Preferred Stock Purchase
Agreement and specified environmental matters.
REGISTRATION RIGHTS AGREEMENT
The Preferred Stock Purchase Agreement provides for us and Bain to
enter into a registration rights agreement at the closing. The registration
rights agreement will require us, at the request of the holders of a majority of
the Underlying Common Stock, at any time after the first anniversary of the
closing, to register all or any portion of those shares under the Securities
Act, in connection with an underwritten public offering; provided that we are
only required to effect two of those registrations. The registration rights
agreement will also require us to give notice to the holder of Underlying Common
Stock when we propose to register any of our securities under the Securities Act
<PAGE>
if the registration form is applicable to their shares, and, if the holders so
request, to include their shares in the registration; provided that under
certain circumstances the number of shares they can include in these "piggyback"
registrations will be limited. In all registrations we will be required to pay
the expenses of registration, including the fees and expenses of one counsel to
the holders, but excluding the underwriting discounts and commissions, and to
provide customary indemnification.
CORPORATE GOVERNANCE AGREEMENT
The Preferred Stock Purchase Agreement provides for us and Bain to
enter into a corporate governance agreement at the closing. The corporate
governance agreement will contain certain provisions intended to implement the
right of Bain to elect directors to our Board. The corporate governance
agreement will also provide that until the earlier of (i) the date on which Bain
and its Permitted Transferees (as defined in the corporate governance agreement)
cease to own any Series A Convertible Preferred Stock, (ii) the date on which
Bain has completed a distribution of the Series A Convertible Preferred Stock to
its partners or (iii) the first anniversary of the closing, Bain and its
transferees and affiliates will not acquire beneficial ownership of more than
30% of the voting power of our company or acquire or attempt to acquire control
of our company, except in response to a proposal that has been made to our
stockholders that would materially and adversely affect Bain, or pursuant to the
exercise of their preemptive rights. The corporate governance agreement will
also contain specified restrictions, for a period of five years, on Bain's
ability to transfer the Series A Convertible Preferred Stock and will further
provide that the approval of the holders of a majority of the Series A
Convertible Preferred Stock and Underlying Common Stock be obtained for us to:
(1) engage in mergers, acquisitions or divestitures of specified sizes, (2)
enter into contracts with our officers, directors, employees or affiliates,
except for ordinary employment and benefit plans and transactions with our
subsidiaries, and (3) incur indebtedness or issue specified capital stock that
would cause our Fixed Charge Coverage Ratio (as defined in the Preferred Stock
Purchase Agreement) to be less than 1.75 to 1.0 (2.0 to 1.0 after the second
anniversary of the initial issuance of the Series A Convertible Preferred
Stock).
RELATIONSHIP OF PROPOSALS IN ITEMS 2 AND 3
If stockholders approve both this proposal and the proposal in Item 2
(to amend the Certificate of Incorporation to create a class of undesignated
preferred stock), our Board of Directors would have the authority to create one
or more series of preferred stock; to fix the powers, designations, preferences
and rights of each series of preferred stock created; and to issue shares of
Series A Convertible Preferred Stock that are convertible into a greater number
of shares of Common Stock than would have been the case if this proposal had not
been approved. If stockholders approve the proposal in this Item 3 but not the
proposal in Item 2, our Board would not have the authority to issue any shares
of preferred stock other than the Series A Convertible Preferred Stock. If the
proposal in Item 2 is approved but the proposal in this Item 3 is not, the Board
of Directors would have the authority to create one or more series of preferred
stock and to fix the powers, designations, preferences and rights of each
series, with the limitation that if the preferred stock were convertible into
Common Stock and were issued and sold in a private transaction, the number of
shares of Common Stock into which any such preferred stock could be converted
could not exceed 20% of the number of shares of Common Stock outstanding before
the issuance of the preferred stock. Accordingly, the Board would not have the
authority to issue the full 75,000 shares of Series A Convertible Preferred
Stock pursuant to the Preferred Stock Purchase Agreement. In that event, we
would seek to amend the Preferred Stock Purchase Agreement to reduce the number
of shares to be issued or to increase the Conversion Price so that the amount of
Common Stock into which the Series A Convertible Preferred Stock is convertible,
including dividends on the Series A Convertible Preferred Stock for some
reasonable period of time, would not exceed 20% of the Common Stock outstanding.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO AUTHORIZE, ISSUE
AND SELL 75,000 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK.
<PAGE>
FINANCIAL STATEMENTS OF THE BFI MEDICAL WASTE BUSINESS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Stericycle, Inc.:
We have audited the accompanying statements of directly identifiable
assets and liabilities of the Medical Waste Business of Browning-Ferris
Industries, Inc., a Delaware corporation ("BFI Medical Waste" as described in
Note 1), as of September 30, 1998 and 1997, and the related statements of
revenues and direct expenses of BFI Medical Waste for each of the three years in
the period ended September 30, 1998. These financial statements are the
responsibility of management of BFI Medical Waste. Our responsibility is to
express an opinion on these 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 audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 3, and are not intended to be a complete
presentation of BFI Medical Waste's financial position as of September 30, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1998.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the directly identifiable assets and
liabilities of BFI Medical Waste as of September 30, 1998 and 1997, and its
revenues and direct expenses for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
Chicago, Illinois
July 30, 1999
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
<TABLE>
STATEMENTS OF DIRECTLY IDENTIFIABLE ASSETS AND LIABILITIES OF BFI MEDICAL WASTE
AS OF SEPTEMBER 30, 1997 AND 1998 AND JUNE 30, 1999 (IN THOUSANDS)
<CAPTION>
AS OF
AS OF SEPTEMBER 30, JUNE 30, 1999
------------------- -------------
1997 1998 (UNAUDITED)
---- ---- -----------
<S> <C> <C> <C>
Directly Identifiable Assets
- ----------------------------
Accounts Receivable, net of Allowance for Doubtful Accounts of $840,
$904, and $1,040 as of September 30, 1997 and 1998 and June 30, 1999 $ 15,356 $ 16,300 $ 16,552
Parts and Supplies 1,456 1,435 1,393
Prepaid Expenses 317 181 207
--------- --------- ---------
Total Current Assets 17,129 17,916 18,152
--------- --------- ---------
Property, Plant and Equipment
Land 3,014 2,951 3,308
Buildings and Improvements 34,108 36,181 37,134
Machinery and Equipment 104,771 102,972 105,744
Office Furniture and Equipment 2,139 1,878 2,228
Construction in Progress - 141 204
--------- --------- ---------
144,032 144,123 148,618
Accumulated Depreciation (81,367) (83,999) (88,070)
--------- --------- ---------
Property, Plant and Equipment, net 62,665 60,124 60,548
--------- --------- ---------
Intangibles, net of Accumulated Amortization of $20,064, $22,781 and
$24,988 as of September 30, 1997 and 1998 and June 30, 1999 49,709 47,592 56,161
--------- --------- ---------
Total Directly Identifiable Assets $ 129,503 $ 125,632 $ 134,861
========= ========= =========
Directly Identifiable Liabilities
- ---------------------------------
Compensation Accruals $ 1,875 $ 2,168 $ 1,969
Other Accrued Liabilities 1,752 259 1,229
Current Portion of Capital Lease Obligation 370 669 970
--------- --------- ---------
Total Current Liabilities 3,997 3,096 4,168
--------- --------- ---------
Capital Lease Obligation, net of current portion 1,396 2,346 4,162
Other Long-Term Liabilities 2,391 2,223 938
--------- --------- ---------
Total Long-Term Liabilities
3,787 4,569 5,100
--------- --------- ---------
Total Directly Identifiable Liabilities 7,784 7,665 9,268
--------- --------- ---------
Total Directly Identifiable Assets in Excess of Directly Identifiable
Liabilities
$ 121,719 $ 117,967 $ 125,593
========= ========= =========
The accompanying notes are an integral part of these Financial Statements.
</TABLE>
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
<TABLE>
STATEMENTS OF REVENUES AND DIRECT EXPENSES OF BFI MEDICAL WASTE FOR THE YEARS
ENDED SEPTEMBER 30, 1996, 1997 AND 1998 AND FOR THE NINE MONTHS ENDED JUNE 30,
1998 AND 1999 (IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------ --------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues $ 199,886 $ 199,060 $ 198,222 $ 148,837 $ 152,266
--------- --------- --------- --------- ---------
Cost of Revenues:
Direct Operating Costs 123,801 124,156 121,096 90,460 91,568
Depreciation 16,681 13,844 11,533 8,946 8,263
--------- --------- --------- --------- ---------
Total Cost of Revenues 140,482 138,000 132,629 99,406 99,831
--------- --------- --------- --------- ---------
Other Expenses:
Selling, General and Administrative 19,051 17,465 9,834 6,358 6,077
Depreciation and Amortization 3,417 3,483 3,439 2,579 2,747
Special Charge (Credit) 9,236 4,500 257 257 (469)
--------- --------- --------- --------- ---------
Total Other Expenses 31,704 25,448 13,530 9,194 8,355
--------- --------- --------- --------- ---------
Revenues in excess of Direct Expenses $ 27,700 $ 35,612 $ 52,063 $ 40,237 $ 44,080
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
The accompanying financial statements include certain assets and
liabilities and revenues and direct expenses of the Medical Waste
Business of Browning-Ferris Industries, Inc. ("BFI Medical Waste").
For the periods presented herein, BFI Medical Waste is a service
line of Browning-Ferris Industries, Inc. ("BFI"), a Delaware
corporation. BFI Medical Waste provides medical waste collection,
transportation, treatment, and disposal services to hospitals,
healthcare providers and other small quantity generators in the
United States, Canada, and Puerto Rico.
2. DESCRIPTION OF ACQUISITION
On April 14, 1999, Stericycle entered into purchase agreements with
Allied Waste Industries, Inc. ("Allied"), pursuant to which
Stericycle will acquire all of the medical waste operations of BFI
in the United States, Canada, and Puerto Rico, for $440 million in
cash. As of July 30, 1999, concurrent with Allied's acquisition of
BFI, BFI Medical Waste became a wholly-owned subsidiary of Allied
Waste Industries, Inc.
Under Stericycle's purchase agreements with Allied, Allied will
cause BFI to transfer all of the assets, as defined in the
agreements, used by BFI in its United States, Canada and Puerto Rico
medical waste operations, which are currently held and operated with
a variety of other BFI operations by many different BFI
subsidiaries, to one or more newly-formed wholly-owned subsidiaries.
At closing, Allied will sell all of the stock of these newly-formed
subsidiaries to Stericycle for $440 million in cash, subject to
closing adjustments as provided for in the purchase agreements. The
purchase agreements are subject to a number of conditions including
Stericycle obtaining the necessary financing to fund the acquisition
and the U.S. Department of Justice ("DOJ") approval among other
items. The purchase agreements also contain clauses regarding shared
assets, employee benefits, transition services and assumed
liabilities, among other items.
3. BASIS OF PRESENTATION
BFI's operating organization is aligned along functional lines into
five groups: sales and marketing, collection, post-collection,
business development and business analysis. As a result of this and
other factors, BFI does not maintain separate books and records for
its medical waste operations other than service line revenues and
direct operating costs. The basis upon which these financial
statements have been prepared is described further below and in Note
4. As a result, the accompanying financial statements are not
intended to be a complete presentation of the assets and liabilities
and results of operations and cash flows of BFI Medical Waste.
Rather, these financial statements were prepared for the purpose of
complying with rules and regulations of the Securities and Exchange
Commission, which indicate that certain financial statements are
required for BFI Medical Waste. All significant transactions among
BFI Medical Waste units have been eliminated. Significant
transactions with other BFI business units are disclosed in Note 9.
STATEMENTS OF DIRECTLY IDENTIFIABLE ASSETS AND LIABILITIES OF BFI
MEDICAL WASTE
Service line balance sheet information is not prepared by BFI.
However, certain assets and liabilities, which are specific to the
medical waste operations, are directly identifiable. Assets and
liabilities included in the accompanying financial statements of BFI
Medical Waste include accounts receivable, parts and supplies,
prepaid expenses, property, plant and equipment, intangibles,
compensation accruals and other accruals specifically related to
and identified with BFI Medical Waste.
All treasury related activities including cash payments, receipts,
and borrowings are performed by BFI's corporate headquarters and are
not separately directly identifiable with BFI Medical Waste. BFI
does not separately identify intercompany loans receivable or
payable associated with different service lines. Accordingly, all
<PAGE>
treasury related assets and liabilities (cash and debt and the
related interest income and expense) and intercompany loans
receivable and payable have been excluded from these financial
statements.
Accounts receivable presented in the financial statements include
only those accounts receivable attributable to medical waste
operations which are identified separately from other BFI
operations. Accounts receivable, other assets, accounts payable and
accrued liabilities, that are not directly identifiable to the
individual service lines due to the fact that they are managed and
accounted for on a consolidated basis, have not been included in
these financial statements.
Property, plant and equipment included in the accompanying financial
statements include all assets and related accumulated depreciation
that are specific to BFI Medical Waste. Excluded from the BFI
Medical Waste specific assets are shared operating facilities and
administrative offices.
STATEMENTS OF REVENUES AND DIRECT EXPENSES OF BFI MEDICAL WASTE
Revenues and direct cost of revenues for BFI's medical waste service
line are separately accounted for within BFI's accounting systems.
Cost of revenues (including certain allocations) include costs of
vehicle drivers and related benefit costs, vehicle operating
expenses, processing operations, disposal costs, containers,
supplies and certain occupancy costs. Cost of revenues also include
an allocation for costs of shared facilities and employees that can
be attributed to BFI Medical Waste. This allocation is generally
based on square footage and number of employees attributable to BFI
Medical Waste at these shared facilities.
Direct selling, general and administrative expense and special
charges (credits) include only those costs which are incurred solely
for the medical waste operations and are separately identified as
such in BFI's accounting records. These costs include payroll costs
for sales and administrative employees whose function is to solely
support the medical waste business and general and administrative
costs of medical waste only facilities. In connection with the
installation of new computer systems in January 1998, certain
selling, general and administrative costs previously identifiable
directly to medical waste operations through December 1997 were no
longer accounted for in this manner. Beginning in January 1998,
these costs were pooled with similar costs related to BFI's other
business operations by marketplace so that only the selling, general
and administrative costs related to medical waste - only geographic
locations could be specifically identified and charged to medical
waste in fiscal year 1998 and subsequent financial statements.
Significant additional costs related to selling, general and
administrative ("SG&A") efforts are performed by BFI on a shared
service basis. Such costs have been excluded from the statements of
revenues and direct expenses of BFI Medical Waste because these
costs have not been allocated to the various BFI service lines.
Accordingly, as discussed above, the accompanying financial
statements are not intended to be a complete presentation of the
assets and liabilities and results of operations of BFI Medical
Waste.
Depreciation and amortization expense relates to the property, plant
and equipment and intangible assets which are directly related to
BFI Medical Waste and included in the statements of directly
identifiable assets and liabilities.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING PRONOUNCEMENT
In April 1998, Statement of Position No. 98-5 - "Reporting on the
Costs of Start-Up Activities" ("SOP No. 98-5") was issued by the
American Institute of Certified Public Accountants. The statement
requires costs of start-up activities and organization costs to be
expensed as incurred. Initial application of the statement, which is
effective for BFI Medical Waste's fiscal year 2000, is to be
reported as a cumulative effect of a change in accounting principle.
Management of BFI Medical Waste believes that the future adoption of
SOP No. 98-5 will not have a material effect on its results of
operations or financial position.
<PAGE>
REVENUE RECOGNITION
For processing activities, BFI Medical Waste recognizes revenue when
the treatment of the regulated medical waste is completed at its
facilities or the waste is shipped off-site for processing and
disposal. For waste shipped off-site, all associated costs are
recognized at time of shipment. For collection activities, BFI
Medical Waste recognizes revenue when regulated medical waste is
collected from its customers.
ACCOUNTS RECEIVABLE
The financial statements include only those accounts receivable
directly attributable to the medical waste operations. Accounts
receivable at certain facilities co-located with other BFI
operations are not separately directly identifiable. BFI Medical
Waste grants credit to the majority of its customers on terms of up
to 60 days. It is not the policy of BFI Medical Waste to require
collateral from its customers in order to obtain credit. Management
does not believe a significant credit risk exists as of June 30,
1999.
PARTS AND SUPPLIES
Parts and supplies consist of containers and vehicle and processing
facility replacement parts and are carried at the lower of cost
("first in, first out") or market. The amounts presented in the
financial statements reflect parts and supplies at medical waste
only operations. Parts and supplies at facilities co-located with
other BFI operations are not separately directly identifiable.
PREPAID EXPENSES
Prepaid expenses consist of prepaid licenses, insurance and permits.
The amounts presented in the financial statements reflect prepaid
expenses at medical waste only operations. Prepaid expenses at
facilities co-located with other BFI operations are not separately
directly identifiable.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation
expense, which includes the depreciation of assets recorded under
capital leases, is computed using the straight-line method over the
estimated useful lives (or life of lease if shorter) of the assets
as follows:
ASSET DESCRIPTION LIFE
----------------- ----
Buildings and improvements 10 to 30 years
Machinery and equipment 5 to 12 years
Office furniture and equipment 3 to 10 years
Expenditures for major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as
incurred. During fiscal years 1996, 1997 and 1998, maintenance and
repairs charged to expense were $12,822,000, $13,388,000 and
$12,745,000, respectively.
When property and equipment is retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in operating
expenses.
INTANGIBLE ASSETS
Goodwill is amortized using the straight-line method over 40 years.
Amortization expense for 1996, 1997 and 1998 related to goodwill was
approximately $1,171,000, $1,208,000 and $1,207,000, respectively.
Other directly identifiable intangible assets, substantially all of
which are customer lists and covenants not to compete, are amortized
on the straight-line method over their estimated lives, no more than
<PAGE>
seven years. Amortization expense related to other intangible assets
was $1,772,000, $1,783,000 and $1,510,000 in 1996, 1997 and 1998,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are comprised principally of property and
equipment, goodwill and other intangible assets. BFI Medical Waste
periodically evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful lives of these
assets should be revised or the remaining balances of these assets
are not recoverable. When factors indicate that an evaluation should
be performed for possible impairment, BFI Medical Waste uses an
estimate of the future income from operations of the related asset
or business as a measure of future recoverability of these assets.
INCOME TAXES
Each of the different BFI subsidiaries that currently hold and
operate BFI Medical Waste also hold and operate various other
operations of BFI. Accordingly, BFI Medical Waste is not a
subsidiary. Therefore, in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes," income
taxes are not included in the accompanying financial statements.
NEW PLANT DEVELOPMENT AND PERMITTING COSTS
BFI Medical Waste expenses costs associated with the operation of
new plants prior to the commencement of services to customers.
Initial plant permit costs are capitalized as part of property,
plant, and equipment and are amortized using the straight-line
method over their useful lives up to 25 years. All ongoing permit
costs are expensed.
USE OF ESTIMATES
The preparation of these financial statements required management to
make estimates and assumptions that affected the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of these financial statements and the
reported amounts of revenues and expenses during the reported
periods.
Actual results may differ from those estimates.
5. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited statements of revenues and direct expenses for the
nine months ended June 30, 1998 and 1999, and the unaudited
statement of directly identifiable assets and liabilities as of June
30, 1999, include, in the opinion of management, all adjustments
necessary to present fairly BFI Medical Waste's directly
identifiable assets and liabilities and revenues and direct
expenses. In the opinion of management, all these adjustments are of
a normal and recurring nature. Operating results for the interim
periods are not necessarily indicative of the results that may be
expected for the fiscal year.
6. SUPPLEMENTARY CASH FLOW INFORMATION
As a service line of BFI, BFI Medical Waste does not maintain
separate cash flow information. Disbursements of BFI Medical Waste
for payroll, capital projects, operating supplies and operating
expenses are processed and funded by BFI through centrally managed
accounts. In addition, cash receipts from the collection of accounts
receivable and the sales of assets are remitted directly to bank
accounts controlled by BFI. In this type of centrally managed cash
system in which the cash receipts and disbursements of BFI's various
divisions and service lines are commingled, it is not feasible to
segregate cash received from BFI (e.g., financing for BFI Medical
Waste) from cash transmitted to BFI (e.g., distribution).
Accordingly, a statement of cash flows has not been prepared.
Selected supplemental cash flow information for BFI Medical Waste is
as follows:
<PAGE>
<TABLE>
Year Ended Nine Months Ended
(in Thousands) September 30, June 30,
---------------------------------------------- ------------------------------------
1996 1997 1998 1998 1999
-------------- -------------- ------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Capital Expenditures $10,794 $4,149 $6,847 $5,790 $6,456
Depreciation and Amortization 20,098 17,327 14,972 11,525 11,010
Acquisition of Businesses 6,023 400 1,000 186 11,927
</TABLE>
7. LEASE COMMITMENTS
BFI Medical Waste leases various plant equipment, office furniture
and equipment, motor vehicles and office and warehouse space under
lease agreements which expire at various dates over the next nine
years. The leases for most of the properties contain renewal
provisions.
Rent expense for 1996, 1997 and 1998 was $3,816,000, $3,769,000
and $3,526,000, respectively.
Minimum future rental payments under noncancellable leases that have
initial or remaining terms in excess of one year as of September 30,
1998, for each of the next five years and in the aggregate are as
follows (in thousands):
<TABLE>
Capitalized Leases Operating Leases
------------------ ----------------
<S> <C> <C>
1999 $ 994 $ 1,215
2000 805 1,179
2001 625 1,091
2002 460 965
2003 370 811
Thereafter 514 2,599
--------- -----------
Minimum rental payments $ 3,768 $ 7,860
Less: Amount representing interest 753 -
--------- -----------
Total minimum rental payments $ 3,015 $ 7,860
=========== ========
</TABLE>
<TABLE>
(in thousands)
1997 1998
-------------------- ----------------
<S> <C> <C>
Capital lease obligations, primarily trucks, trailers and other
operating equipment, weighted average interest rate of 6.6% for both
1997 and 1998 due in varying amounts through December 2008. $2,338 $4,088
Capital lease obligations, primarily office equipment, weighted
average interest rate of 8.06% and 7.05% for 1997 and 1998,
respectively, due in varying amounts through September 2003. 55 98
Accumulated Amortization (627) (1,171)
------- ---------
Total capital lease obligations $ 1,766 $ 3,015
=========== =========
</TABLE>
Leases at co-located facilities that benefit all operations at the
facility are not included in the above tables.
<PAGE>
8. EMPLOYEE BENEFIT PLAN
EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN
BFI sponsors an employee stock ownership and savings plan which
incorporates deferred savings features permitted under IRS Code
Section 401(k). The plan covers substantially all U.S. employees
(including Medical Waste employees) with one or more years of
service except for certain employees subject to collective
bargaining agreements. Eligible employees may make voluntary
contributions to one or more of six investment funds through payroll
deductions which, in turn, will allow them to defer income for
federal income tax purposes. BFI matches these voluntary
contributions at a rate of $0.50 per $1.00 on the first 5% of total
earnings contributed by each participating employee. BFI matches the
voluntary contributions through open market purchases or issuances
of shares of BFI's common stock. BFI expenses its contributions to
the employee stock ownership and savings plan. Included in the
statements of revenues and direct expenses are costs of $570,000,
$616,000 and $585,000 for fiscal years 1996, 1997 and 1998,
respectively, related to the employee stock ownership and savings
plan. These contribution amounts were allocated to BFI Medical Waste
based on the percentage of total payroll method. The costs are
included in costs of revenues or selling, general, and
administrative expense based on the percentage of employees included
in each expense type.
EMPLOYEE RETIREMENT PLANS
BFI and its domestic subsidiaries have two defined benefit
retirement plans covering substantially all U.S. employees except
for certain employees subject to collective bargaining agreements.
The benefits for these plans are based on years of service and the
employee's compensation. BFI's general funding policy for these
plans is to make annual contributions to the plans equal to or
exceeding the actuary's recommended contribution. During the second
quarter of fiscal 1998, BFI changed its method of accounting for
recognition of value changes in its employee retirement plan for
purposes of determining annual expense under SFAS No. 87 -
"Employers' Accounting for Pensions," effective October 1, 1997. The
impact of this accounting change decreased pension expense by
$315,000 in 1998. Included in the statements of revenues and direct
expenses are costs (income) of $668,000, $537,000 and $(86,000) for
fiscal years 1996, 1997 and 1998, respectively, related to the
employee retirement plans. These amounts were allocated to BFI
Medical Waste based on the percentage of total payroll method. The
costs are included in costs of revenues or selling, general, and
administrative expense based on the percentage of employees included
in each expense type. In connection with the Stericycle acquisition
of BFI Medical Waste, the assets and liabilities of these plans
remain with BFI.
OTHER POST-RETIREMENT BENEFITS
BFI maintains an unfunded post-retirement benefit plan which
provides for employees participating in its medical plan to receive
a monthly benefit after retirement based on years of service. As
permitted under SFAS No. 106 - "Employers' Accounting for
Postretirement Benefits Other Than Pensions," BFI chose to recognize
the transition obligation over a 20 year period. The
actuarially-determined accumulated postretirement benefit obligation
was historically amortized over a 20 year period, and the related
expense is not material to the statement of revenues and direct
expenses for any period presented.
During the fourth quarter of fiscal 1998, BFI restricted the
participation in its postretirement benefit plan to employees over
the age of 55 with 10 years of experience and individuals already
covered by the plan. The BFI Medical Waste portion of the
curtailment gain is $465,000 and was recognized in income in the
fourth quarter of fiscal 1998. In connection with the Stericycle
acquisition of BFI Medical Waste, the assets and liabilities of this
plan remain with BFI.
9. RELATED PARTY TRANSACTIONS
Related-party transactions with BFI not disclosed elsewhere in the
financial statements are as follows:
<PAGE>
SHARED SERVICES
BFI Medical Waste shares services of BFI employees for such items as
sales and marketing and certain general and administrative costs
including accounting. The cost of these shared services is not
allocated to BFI Medical Waste.
CORPORATE SERVICES
BFI provides certain support services to BFI Medical Waste
including, but not limited to, legal, accounting, information
systems, human resource and business development and building
services. The cost of these corporate services is not allocated to
BFI Medical Waste.
FINANCIAL ACCOMMODATIONS
Letters of credit and performance bonds have been provided by BFI
Medical Waste to customers and various states to support facility
closures. Total letters of credit and performance bonds outstanding
for this purpose aggregated approximately $1,084,000 as of June 30,
1999.
BFI is a guarantor and is jointly responsible for the various
performance bonds issued on behalf of BFI Medical Waste. The letters
of credit have been issued by BFI's financial institutions which are
guaranteed by amounts on deposit in BFI accounts.
WASTE DISPOSAL SERVICES
BFI provides BFI Medical Waste with waste disposal services for its
solid waste. Cost of revenues includes, $6,843,000, $6,355,000 and
$5,431,000 for the years ended September 30, 1996, 1997, and 1998,
respectively. These services were provided by BFI to BFI Medical
Waste on a basis management believes is consistent with third
parties.
INSURANCE MATTERS
BFI is self-insured for workers' compensation, auto liability and
general and comprehensive liability claims. Under its insurance
programs, BFI generally has self-insured retention limits ranging
from $500,000 to $5,000,000 and has obtained fully insured layers of
coverage above such self-retention limits. BFI provides for
self-insurance costs based upon estimates provided by a third-party
actuary. The actuary reviews BFI's actual claims activity and
estimates the ultimate exposure related to these aggregate claims.
BFI Medical Waste was allocated approximately $4,996,000,
$5,605,000, and $2,317,000 in the years ended September 30, 1996,
1997, and 1998, respectively, for insurance costs. Insurance
premiums are allocated based on the percent of BFI Medical Waste
revenues to total BFI revenues. Directly identifiable BFI Medical
Waste insurance claims are expensed at the plant level for amounts
up to $100,000 per claim.
10. LEGAL PROCEEDINGS
BFI Medical Waste operates in a highly regulated industry and is
subject to regulatory inquiries or investigations from time to time.
Investigations can be initiated for a variety of reasons.
BFI Medical Waste is involved in various administrative matters or
litigation, including personal injury and other civil actions, as
well as other claims and disputes that could result in additional
litigation or other adversary proceedings.
While the final resolution of any matter may have an impact on the
results of BFI Medical Waste for a particular reporting period,
management believes that the ultimate disposition of these matters
will not have a materially adverse effect upon the results of
operations or financial position of BFI Medical Waste.
<PAGE>
On January 23, 1998, BFI was notified by the DOJ that it was the
target of a federal grand jury investigation regarding possible
violations of the Clean Water Act with respect to a BFI Medical
Waste facility located in the District of Columbia. On May 29, 1998,
the DOJ and BFI filed a plea agreement styled United States of
America v. Browning-Ferris Inc. in the U.S. District Court for the
District of Columbia. On October 1, 1998, judgment was entered
pursuant to which BFI pled guilty to three violations under the
Clean Water Act and agreed to pay $1,500,000 in fines and make a
$100,000 community service contribution. All requirements of the
judgment have been completed. In fiscal 1997 this amount is included
in other accrued liabilities in the statement of directly
identifiable assets and liabilities and as an expense in the
statement of revenues and direct expenses.
In July 1995, BFI Medical Waste acquired the assets of Metro New
York Health Waste Processing, Inc. which included a facility and
incinerator in the Bronx, New York. BFI Medical Waste undertook
extensive retrofitting and improvements to the incinerator and its
emissions control equipment to meet the compliance requirements of
the two year permit issued by the New York Department of
Environmental Conservation ("NYDEC"). In July of 1997, BFI Medical
Waste voluntarily suspended operation of the incinerator and did not
seek renewal of its permit. In March of 1999, BFI Medical Waste
executed an agreement with NYDEC to dismantle the incinerator and
its emissions control equipment, pay a civil penalty of $50,000,
institute a pilot program for the use of natural gas powered trucks
within six months of the date of the order and establish and fund an
Environmental Benefit Program for projects benefiting the community
and the environment in the amount of $200,000 to be paid within two
years of the date of the agreement. The agreement also allows BFI
Medical Waste on an interim basis to continue to operate its
collection and transfer operation at the same site.
11. SPECIAL CHARGES
Special charges of $9,236,000 were reported in fiscal 1996. The
charges resulted from BFI Medical Waste's decision to divest certain
non-core business assets and close certain facilities. These
decisions were reached based on a review of the non-core business
assets and operations which were not expected to achieve BFI Medical
Waste's desired performance objectives. The special charges, which
included asset writedowns of $7,771,000 and related liabilities
recorded for certain contractual arrangements of $1,468,000, do not
consider future expenses associated principally with severance and
relocation costs which will occur as a result of these decisions.
The results of operations for these non-core business assets were
not material to BFI Medical Waste's financial statements. During
1997, BFI Medical Waste divested or closed the majority of these
facilities, with the remaining facilities divested or closed during
1998. A total of $366,000 and $227,000 of the special charge
liabilities were utilized during 1997 and 1998, respectively.
A special charge of $4,500,000 was reported in fiscal 1997. This
charge related to the closure of an incinerator. Except for the
special charge, the closure of the incinerator did not have a
material effect on BFI Medical Waste's financial statements. Of the
special charge, a $952,000 liability was established for the
dismantlement of the incinerator. None of this liability was
utilized during 1998.
A special charge of $257,000 was reported for 1998. This special
charge related to the write-down of an additional non-core business
asset. The aggregate total assets of this charge represented less
than 1% of BFI Medical Waste's total assets on a pre-special charge
basis.
12. BUSINESS COMBINATIONS
During the fiscal year ended September 30, 1998, BFI Medical Waste
paid approximately $1,000,000 to acquire three medical waste
businesses, which were accounted for as purchases. During the fiscal
years ended September 30, 1997 and September 30, 1996, BFI Medical
Waste paid approximately $400,000 and $6,023,000, respectively, to
acquire medical waste businesses, which were accounted for as
purchases. The results of these business combinations are not
material to the operating results or assets and liabilities of BFI
Medical Waste.
<PAGE>
13. SUBSEQUENT EVENTS - BUSINESS COMBINATIONS (UNAUDITED)
In April 1999, BFI Medical Waste acquired, as a result of an asset
swap transaction between BFI and Allied Waste Industries, Inc., all
of the assets of Medical Disposal Services for cash and other
consideration of approximately $7,123,000 and certain contingent
payment obligations. The acquisition was accounted for as a
purchase, with the excess of the purchase price over the fair market
value of net assets acquired being allocated to goodwill in the
amount of approximately $5,843,000. The goodwill is being amortized
over its estimated useful life of 40 years.
In November 1998, BFI Medical Waste acquired all of the assets of
Safety Medical Systems of Burlington, Vermont for cash of
approximately $2,860,000. The acquisition was accounted for as a
purchase, with the excess of the purchase price over the fair market
value of the net assets acquired being allocated to goodwill in the
amount of approximately $2,254,000. The goodwill is being amortized
over its estimated useful life of 40 years.
During the nine months ended June 30, 1999, BFI Medical Waste also
paid approximately $1,944,000 to acquire four other medical waste
businesses, which were accounted for as purchases. The results of
all of these business combinations are not material to the operating
results or assets and liabilities of BFI Medical Waste.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -BFI MEDICAL WASTE BUSINESS
The following discussion of the financial condition and results of
operations of the BFI Medical Waste Business should be read in conjunction with
BFI Medical Waste's Statements of Directly Identifiable Assets and Liabilities
and Statements of Revenues and Direct Expenses and related Notes.
FORWARD-LOOKING STATEMENTS
The following discussion and analysis of BFI Medical Waste's
operations, financial performance and results, as well as material set forth
elsewhere herein, includes statements that are not historical facts. Such
statements are "forward-looking statements" (as defined in the Private
Securities Litigation Reform Act of 1995) based on BFI Medical Waste's
expectations and as such, these statements are subject to uncertainty and risk.
BACKGROUND
On April 14, 1999, Stericycle entered into purchase agreements with
Allied, pursuant to which Stericycle will acquire all of the medical waste
operations of BFI in the United States, Canada, and Puerto Rico, for $440
million in cash. Allied completed its acquisition of BFI on July 30, 1999.
BFI Medical Waste provides medical waste collection, transportation,
treatment, and disposal services to hospitals, healthcare providers and other
small quantity generators in the United States, Canada, and Puerto Rico. BFI
Medical Waste is a service line of BFI.
BFI's operating organization is aligned along functional lines into
five groups: sales and marketing, collection, post-collection, business
development and business analysis. As a result, BFI does not maintain separate
books and records for the medical waste operations other than service line
revenues and direct operating costs. Therefore, the financial statements include
only those costs directly attributable for the medical waste operations and are
separately identifiable as such in BFI's accounting records. Significant
additional costs are performed by BFI on a shared service basis and have been
excluded because these costs have not been allocated to the various BFI service
lines. For a further description of the bases of the financial statements, see
the Notes to the financial statements. As a result, the accompanying financial
statements are not intended to be, and are not, a complete presentation of the
assets and liabilities and results of operations of BFI Medical Waste. Rather,
the accompanying financial statements were prepared for the purpose of complying
with rules and regulations of the Securities and Exchange Commission, which
indicate that certain financial statements are required for BFI Medical Waste.
All significant transactions among BFI Medical Waste units have been eliminated.
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
Revenues. Revenues for the nine months ended June 30, 1999 were
$152,266,000 representing an increase of $3,429,000 or 2.3% over revenues of
$148,837,000 for the nine months ended June 30, 1998. During the nine months
ended June 30, 1999, BFI Medical Waste completed six acquisition transactions
which contributed approximately $3,000,000 in revenue for the nine-month period.
The estimated annual revenues for the six acquisitions are approximately
$9,800,000. The remaining increase in revenues is attributable to internal
growth in other marketplaces.
Direct Operating Costs. Direct operating costs increased $1,108,000
or 1.2% to $91,568,000 for the nine months ended June 30, 1999 from $90,460,000
for the nine months ended June 30, 1998, primarily as a result of the
acquisition transactions completed during the period. However, as a percentage
of revenues, direct operating costs decreased from 60.8% to 60.1%, primarily as
a result of the continuing implementation of additional safety training which
reduced costs associated with accidents and injuries, and the consolidation of
certain small collection operations into nearby larger collection facilities.
Selling, general and administrative expense. Selling, general and
administrative expense decreased $281,000 to $6,077,000 for the nine months
ended June 30, 1999 from $6,358,000 for the nine months ended June 30, 1998. The
nine month period ended June 30, 1998 includes the January 1, 1998 conversion
date of BFI to its SAP management software system. Therefore, for three months
of this nine month period, BFI Medical Waste was charged for shared SG&A costs.
After the conversion, only directly related SG&A costs are charged to BFI
Medical Waste.
Depreciation and amortization expense. Total depreciation and
amortization expense decreased $515,000 to $11,010,000 for the nine months ended
June 30, 1999 from $11,525,000 for the nine months ended June 30, 1998 and as a
<PAGE>
percentage of revenues, decreased from 7.7% to 7.2%. These decreases are
primarily due to assets becoming fully depreciated in 1998, and longer useful
lives of assets acquired in the nine months ended June 30, 1999 than in the
prior period.
Special Charge. During the nine months ended June 30, 1999, BFI
Medical Waste recorded special credits of $469,000 relating to a gain on the
sale of customer lists totaling $480,000, offset by a write-down of a non-core
business asset totaling $11,000. During the nine months ended June 30, 1998, BFI
Medical Waste recorded special charges of $257,000 relating to the write-down of
a non-core business asset.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
Revenues. Revenues remained relatively flat between periods,
$198,222,000 for the year ended September 30, 1998 compared to $199,060,000 for
the year ended September 30, 1997. In December, 1997, BFI Medical Waste divested
its Arizona collection and processing operations representing approximately
$3,000,000 or 1.5% of revenues in fiscal 1997. However, internal growth and
acquisitions in other markets largely offset the reduction in revenue resulting
from the Arizona divestiture. BFI Medical Waste completed three acquisition
transactions during the year ended September 30, 1998, which collectively
contributed approximately $1,000,000 million in revenues.
Direct Operating Costs. Direct operating costs decreased $3,060,000,
or 2.5%, to $121,096,000 for the year ended September 30, 1998, from
$124,156,000 during the year ended September 30, 1997. As a percentage of
revenues, direct operating costs decreased from 62.4% to 61.1%. These decreases
were primarily due to the implementation of cost control measures at all of the
processing facilities, and a reduction of accident and injury costs due to
continuing implementation of additional safety training. Costs were also reduced
by $800,000 as a result of the divestiture of the Arizona operation.
Selling, general and administrative expense. Selling, general and
administrative expense, as reported on the Statements of Revenues and Direct
Expenses, decreased $7,631,000, or 43.7%, to $9,834,000 for the year ended
September 30, 1998, from $17,465,000 during the year ended September 30, 1997.
As indicated elsewhere herein, selling, general and administrative expense
include only those costs which are incurred solely for the medical waste
operations and are separately identified as such in BFI's accounting records. In
connection with the installation of a new general ledger system in January 1998,
certain selling, general and administrative costs assigned directly to medical
waste operations through December 1997 were no longer accounted for in this
manner. Beginning in January 1998, these costs were pooled with similar costs
related to BFI's other business operations by marketplace so that only the
selling, general and administrative costs related to medical waste only
geographic locations could be specifically charged to medical waste in fiscal
year 1998 and subsequent periods. Also, in May 1998, BFI announced that its
corporate office and marketplace level offices which provide shared selling,
general and administrative expenses had undertaken various cost-cutting
measures. Further, 1997 included $1,500,000 in costs related to the fines paid
for the violations of the Clean Water Act.
Depreciation and amortization expense. Total depreciation and
amortization expense decreased $2,355,000, to $14,972,000 for the year ended
September 30, 1998, from $17,327,000 during the year ended September 30, 1997
and as a percentage of revenues decreased from 8.7% to 7.6%. These decreases
were due primarily to the divestiture of the Arizona operation in December,
1997, and due to a significant number of medical waste containers becoming fully
depreciated.
Special Charge. In the year ended September 30, 1998, BFI Medical
Waste recorded special charges of $257,000 relating to the write-down of one
non-core business asset. In 1997 BFI Medical Waste recorded special charges of
$4,500,000 relating to the closure of an incinerator at Bronx, New York.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Revenues. Revenues remained relatively flat between periods,
decreasing slightly to $199,060,000 for the year ended September 30, 1997
compared to $199,886,000 for the year ended September 30, 1996. BFI Medical
Waste completed one acquisition transaction during the year ended September 30,
1997 which contributed approximately $300,000 in revenues.
The closure of the Bronx, NY processing operation in July 1997 resulted in a
reduction in revenue of approximately $500,000.
<PAGE>
Direct Operating Costs. Direct operating costs remained relatively
flat at $124,156,000 during the year ended September 30, 1997 compared to
$123,801,000 for the year ended September 30, 1996. As a percentage of revenues
direct operating costs increased from 61.9% to 62.4%. Increased costs for repair
and maintenance of equipment of approximately $604,000 were incurred in the
Arizona operations prior to its divestiture. However, these cost increases were
offset by cost reduction programs instituted in the year ended September 30,
1997. These cost reduction programs include centralized purchasing of materials
and supplies, re-routing of collection operations, and a balancing of the
volumes of waste processed among the various processing facilities.
Selling, general and administrative expense. Selling, general and
administrative expense decreased $1,586,000 during the year ended September 30,
1997 to $17,465,000 compared to $19,051,000 for the year ended September 30,
1996. This decrease is due primarily to the internal reorganization within BFI
of the corporate sales, marketing, and accounting service groups during fiscal
1997. Selling, general and administrative expense includes certain directly
charged shared services provided by BFI's corporate and district level offices.
Further, 1997 included $1,500,000 in costs related to fines paid for violation
of the Clean Water Act.
Depreciation and amortization expense. Total depreciation and
amortization expense decreased $2,771,000 to $17,327,000 in 1997 from
$20,098,000 in 1996 and as a percentage of revenues decreased from 10.0% to
8.7%. These decreases are primarily due to a significant number of medical waste
containers becoming fully depreciated, due primarily to a change in the useful
life of medical waste containers. This change retired the containers which had
been in service in excess of three years and accordingly reduced the following
year's depreciation and amortization. These decreases were also due to the
curtailment of acquisitions in that only one acquisition transaction was
completed during the year ended September 30, 1997, adding less than $200,000 in
assets. Additionally, capital expenditures decreased due to BFI's reduction of
capital spending.
Special charge. In 1997 BFI Medical Waste recorded special charges
of $4,500,000 relating to the closure of an incinerator at Bronx, New York. In
1996, BFI Medical Waste recorded $9,236,000 in special charges related to the
future closures of processing facilities at Rancho Cordova, CA, Washington,
D.C., Bartow, FL and Vancouver, Washington. Waste processed at these locations
was redirected to other BFI Medical Waste facilities after such facilities were
closed. Collection operations continued at each of these locations.
LIQUIDITY AND CAPITAL RESOURCES
All treasury related activities, including cash payments, receipts,
and borrowings are performed by BFI's corporate headquarters and are not
separately identifiable with the BFI Medical Waste business. BFI does not
separately identify intercompany loans receivable or payable associated with
different service lines. Accordingly, all treasury related assets and
liabilities (cash and debt and the related interest income and expense) and
intercompany loans receivable and payable have been excluded from the financial
statements.
BFI Medical Waste anticipates capital expenditures of approximately
$12,600,000 for fiscal 1999 ($6,500,000 has been incurred for the nine months
ended June 30, 1999). BFI Medical Waste expects that Allied will make the
necessary arrangements to deal with the ongoing liquidity and capital resource
needs of BFI Medical Waste.
ENVIRONMENTAL MATTERS
The operations of BFI Medical Waste are described above and include
the collection, transportation, treatment, and disposal of medical waste. BFI
Medical Waste is required by the applicable local regulatory authority to obtain
permits to operate its treatment facilities, and must maintain its operations at
all times within those permit requirements.
In 1998, BFI Medical Waste filed a plea agreement with the DOJ
regarding possible violations of the Clean Water Act arising from its
Washington, D.C. treatment facility. The possible violations arose from the
wastewater treatment system used to contain and treat all wastewater produced by
the facility. BFI Medical Waste pled guilty to three violations under the Clean
Water Act and agreed to pay $1,500,000 in fines and make a $100,000 community
service contribution. The Washington, D.C. facility was closed in 1997.
<PAGE>
In 1997, BFI Medical Waste voluntarily ceased operating its
incinerator at the Bronx, New York facility due to its inability to consistently
meet its permit requirements. In 1999, BFI Medical Waste executed an agreement
with the New York Department of Environmental Conservation to dismantle and
dispose of its incinerator located in the Bronx, New York, pay a civil penalty
of $50,000, institute a pilot program for the use of natural gas powered trucks
within six months of the date of the order, and establish and fund an
Environmental Benefit Program for project benefitting the community and the
environment in the amount of $200,000 to be paid within two years of the date of
the agreement. The agreement also allows BFI Medical Waste on an interim basis
to continue to operate its collection and transfer operation at the same site.
BFI Medical Waste does not own or operate any landfills or any other
type of disposal site. After treatment, all waste materials are transported to
BFI landfills (or in some cases a non-BFI landfill) or to waste-to-energy
facilities for permanent disposal.
BFI Medical Waste believes that all of its current operations are in
material compliance with all required laws, regulations and operating permits.
Due to the nature of BFI Medical Waste's business and the continuing emphasis of
government in all jurisdictions and the public on environmental issues relating
to the waste disposal industry, it can be reasonably expected that BFI Medical
Waste may become involved in various actions in the future. However, BFI Medical
Waste attempts to anticipate future changes in laws, regulations and operation
permit requirements which may affect BFI Medical Waste's operations, however
there is no assurance that such future changes will not significantly affect
such operations.
YEAR 2000 ISSUES
In fiscal 1995, BFI initiated a project to implement the SAP suite
of business systems software (which is year 2000 compliant) to replace
essentially all of its existing business systems. The first phase of this
project, implemented in January 1998, replaced approximately 45% of the existing
business systems of BFI. Due to timing related to implementation of the second
phase of this project, BFI commenced a Year 2000 Project to ensure compliance of
remaining legacy systems. BFI does not expect additional costs related to these
systems to be material to its consolidated results of operations or financial
position.
BFI Medical Waste utilizes BFI's SAP suite of business systems
software as well as BFI's legacy system known as CMS. Both SAP and CMS are
already year 2000 compliant systems. As of June 30, 1999 nearly all of the
facilities and operations of BFI Medical Waste utilize BFI's systems.
Conversions of the remaining facilities and operations are planned for
completion before December, 1999. The costs related to the conversions is not
material to the results of operations or financial position of BFI Medical
Waste.
The risk to BFI Medical Waste of not completing the conversions of
the remaining facilities and operations are that customer invoices from those
facilities may have to be prepared manually and therefore may be delayed. The
contingency plan of BFI Medical Waste is to enter all customer information into
CMS so as to produce invoices in a timely manner.
This entry may have to be performed manually which may cause a short delay in
customer invoices.
In addition, BFI has initiated a process to (1) identify critical
supplier and customer related issues, (2) assess the year 2000 readiness of
equipment located at all of its operating facilities and (3) determine what
contingency plans may be required. At this time, the potential effects in the
event that BFI and/or third parties are unable to resolve year 2000 problems
timely are not determinable. However, BFI believes it will be able to resolve
its own year 2000 issues.
FUTURE ACCOUNTING PRONOUNCEMENTS
In April 1998, Statement of Position No. 98-5- "Reporting on the
Costs of Start-Up Activities" ("SOP No. 98-5") was issued by the American
Institute of Certified Public Accountants. The statement requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
application of the statement, which is effective for BFI Medical Waste's fiscal
year 2000, is to be reported as a cumulative effect of a change in accounting
principle. Management of BFI Medical Waste believes that the future adoption of
SOP No.98-5 will not have a material effect on its results of operation or
financial position.
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS OF STERICYCLE AND
THE BFI MEDICAL WASTE BUSINESS
The unaudited pro forma condensed combined balance sheet as of June
30, 1999 gives effect to the acquisition of the BFI Medical Waste Business and
the related financing, as if each had occurred on June 30, 1999. The unaudited
pro forma condensed combined statements of operations for the six months ended
June 30, 1999 and for the year ended December 31, 1998 give effect to these
transactions as if each occurred on January 1, 1998. In addition, the unaudited
pro forma condensed combined statements of operations include the Stericycle
acquisitions of Waste Systems, Inc. ("WSI"), the majority owner of 3CI Complete
Compliance Corporation ("3CI"), which closed on October 1, 1998, the acquisition
and related transactions of Med-Tech Environmental Limited ("Med-Tech"), closed
in late December 1998, and the BFI Medical Waste Business acquisition of Medical
Disposal Services ("MDS"), closed in April 1999, as if each had occurred as of
January 1, 1998.
The unaudited pro forma condensed combined financial statements do
not purport to be indicative of the combined results of operations of Stericycle
and the BFI Medical Waste Business that might have occurred had the BFI Medical
Waste Business acquisition been completed on such dates, nor are they indicative
of future results of operations. The pro forma adjustments related to the
purchase price allocation and financing of the BFI Medical Waste Business
acquisition are preliminary, based on information obtained to date that is
subject to revision as additional information becomes available. Revision to the
preliminary purchase price allocation and financing may have a significant
impact on total assets, total liabilities and shareholders' equity, cost of
revenues, selling, general and administrative expense, depreciation and
amortization, and interest expense.
The unaudited pro forma condensed combined financial statements
should be read in conjunction with the notes to the unaudited pro forma
condensed combined financial statements, the historical consolidated financial
statements of Stericycle and related notes included in its Forms 10-K and 10-Q,
and the historical financial statements of the BFI Medical Waste Business and
related notes included elsewhere herein. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Disclosure Regarding
Forward-Looking Statements" included elsewhere herein.
<PAGE>
<TABLE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
BFI MEDICAL
STERICYCLE WASTE PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS
(NOTE 1) (NOTE 2) (NOTE 3) PRO FORMA
-------- -------- -------- ---------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $19,562 $- $(12,396) (a) $7,166
Other current assets 20,695 18,152 (16,552) (b) 22,295
------ ------ ------- ------
Total current assets 40,257 18,152 (28,948) 29,461
Property and equipment, net 23,115 60,548 - (c) 83,663
Other assets 3,987 3,061 16,539 (c) 23,587
Goodwill, net 55,438 53,100 323,752 (d) 432,290
====== ====== ======= =======
Total assets $122,797 $134,861 $311,343 $569,001
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other current liabilities $9,342 $3,198 $ 602 (b) $13,142
Current portion of long-term debt 1,549 970 4,280 (e) 6,799
===== === ===== =====
Total current liabilities 10,891 4,168 4,882 19,941
Long-term debt, net of current portion 4,383 4,162 364,517 (e) 373,062
Other long-term liabilities - 938 (938) (b) -
Convertible redeemable preferred stock - - 70,275 (f) 70,275
Shareholders' equity 107,523 125,593 (127,393) (g) 105,723
======= ======= ======== =======
Total liabilities and shareholders' equity $122,797 $134,861 $311,343 $569,001
======== ======== ======== ========
The accompanying notes are an integral part of this pro forma condensed combined balance sheet.
</TABLE>
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
(unaudited)
1. STERICYCLE HISTORICAL
The historical balances represent the consolidated balance sheet of Stericycle
as of June 30, 1999 as reported in the historical consolidated financial
statements of Stericycle.
2. BFI MEDICAL WASTE BUSINESS HISTORICAL STATEMENT OF DIRECTLY IDENTIFIABLE
ASSETS AND LIABILITIES
The amounts related to the BFI Medical Waste Business acquisition in the pro
forma condensed combined balance sheet represent the historical assets and
liabilities of BFI Medical Waste Business which includes the MDS acquisition as
of June 30, 1999 as reported in the historical financial statements of BFI
Medical Waste Business.
The amount included in shareholders' equity in the pro forma condensed combined
balance sheet for the BFI Medical Waste Business is its Directly Identifiable
Assets in excess of its Directly Identifiable Liabilities.
3. PRO FORMA ADJUSTMENTS
The pro forma adjustments reflected in the pro forma condensed combined balance
sheet give effect to the following (in thousands, except share data):
(a) The following represents the expected sources and uses of funds associated
with the acquisition and financing of the BFI Medical Waste Business:
<TABLE>
Sources Uses
--------------------------------------------- -------------------------------------
<S> <C> <C> <C>
Senior secured credit facility $225,000 Purchase price $ 440,000
Senior subordinated notes 150,000
Financing and direct
Convertible preferred stock 75,000 acquisition costs 21,325
Cash on hand 12,396 Repay existing debt 1,071
--------- ---------
$ 462,396 $ 462,396
========= =========
</TABLE>
(b) Adjustment to exclude the historical book value of the BFI Medical Waste
Business accounts receivable of $16,552, accrued liabilities of $3,198, and
other long-term liabilities of $938 which are not included in the net
assets acquired. Included in other current liabilities is an accrued
liability of $2,000 in accordance with EITF Issue 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination" and an
accrued liability of $1,800, net of tax, in accordance with EITF Issue
94-3, "Liability Recognition of Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)".
(c) To record the increase in fair value of $4,939 for property and equipment
($60,548 total fair value) and intangible assets ($8,000 total fair value)
based on preliminary appraisal information and the payment of fees and
direct costs associated with the debt financing of $11,600.
(d) The cost of the acquisition of the BFI Medical Waste Business in excess of
the fair value of the net assets acquired in the amount of $376,852.
(e) The draw down of funds under the senior secured credit facility of $225,000
and the issuance of the senior subordinated notes of $150,000, less the
repayment of $1,071 of Stericycle existing indebtedness and capital lease
obligations of the BFI Medical Waste Business of $5,132 which will not be
assumed in the acquisition.
<PAGE>
(f) The issuance of 75,000 shares of 3.375% PIK convertible preferred stock for
$75,000 less payment of fees and costs of $4,725.
(g) The elimination of the historical stockholders' equity of the BFI Medical
Waste Business of $125,593 and a restructuring charge of $1,800, net of
tax, accrued in accordance with EITF 94-3.
<PAGE>
<TABLE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<CAPTION>
BFI MEDICAL
STERICYCLE WASTE PRO FORMA
HISTORICAL PRO FORMA ADJUSTMENTS
(NOTE 1) (NOTE 2) (NOTE 4) PRO FORMA
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues $48,887 $102,923 $ -- $151,810
Cost of revenues (32,340) (67,477) 9,232 (a)(b) (90,585)
Selling, general and administrative
expense (10,270) (15,056) (3,038) (a)(b) (28,364)
------- ------- ------ -------
Unusual costs - 469 - 469
Operating income 6,277 20,859 6,194 33,330
Interest income 272 - - 272
Interest expense (535) - (18,838) (c) (19,373)
Other income 389 - - 389
------- ------- ------ -------
Income before income taxes 6,403 20,859 (12,644) 14,618
Income tax expense (1,416) - (3,286) (d) (4,702)
------- ------- ------ -------
Net income 4,987 20,859 (15,930) 9,916
Dividends on convertible preferred stock - - (1,266) (e) (1,266)
------- ------- ------ -------
Net income to common shareholders $4,987 $ 20,859 $(17,196) $ 8,650
====== ======== ======== =======
Basic earnings per share $0.36 $0.63
====== ======
Weighted average common shares
outstanding 13,812 13,812
====== ======
Diluted earnings per share $0.35 $0.54
===== =====
Weighted average common and common
equivalent shares outstanding 14,210 4,286 (f) 18,496
====== ===== ======
Depreciation and amortization $3,545 $7,920 $314 (b) $11,779
====== ====== ==== =======
The accompanying notes are integral part of this pro forma condensed combined statement of operations.
</TABLE>
<PAGE>
<TABLE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<CAPTION>
BFI
MEDICAL OTHER
STERICYCLE WASTE STERICYCLE PRO FORMA
HISTORICAL PRO FORMA ACQUISITIONS ADJUSTMENTS
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4) PRO FORMA
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $66,681 $ 201,428 $22,166 $ -- $ 290,275
Cost of revenues (45,328) (134,732) (17,178) 18,736 (a)(b) (178,502)
Selling, general and administration expense (14,929) (30,899) (4,428) (6,394) (a)(b) (56,650)
Unusual costs - (435) - - (435)
-------- -------- -------- -------- ---------
Operating income 6,424 35,362 560 12,342 54,688
Interest income 714 - - - 714
Interest expense (777) - (1,619) (37,536) (c) (39,932)
-------- -------- -------- -------- ---------
Income before income taxes 6,361 35,362 (1,059) (25,194) 15,470
Income tax expense (648) - - (3,501) (d) (4,149)
Minority interest - - 43 - 43
-------- -------- -------- -------- ---------
Net income 5,713 35,362 (1,016) (28,695) 11,364
Dividends on convertible preferred stock - - - (2,531) (e) (2,531)
-------- -------- -------- -------- ---------
Net income to common shareholders $5,713 $35,362 $(1,016) $ (31,226) $ 8,833
======== ======== ======== ======== =========
Basic earnings per share $0.54 $ 0.83
======== =========
Weighted average common shares
outstanding 10,647 37 10,684
======== ======== =========
Diluted earnings per share $0.51 $0.73
======== =========
Weighted average common and common
equivalent shares outstanding 11,264 37 4,286 (f) 15,587
======== ======== ======== =========
Depreciation and amortization $4,064 $15,847 $1,820 $621 (b) $22,352
======== ======== ======== ======== =========
The accompanying notes are integral part of this pro forma condensed combined statement of operations.
</TABLE>
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
1. STERICYCLE HISTORICAL
The historical balances represent the consolidated results of operations of
Stericycle for each of the indicated periods as reported in the historical
consolidated financial statements of Stericycle.
2. BFI MEDICAL WASTE BUSINESS PRO FORMA STATEMENTS OF REVENUES IN EXCESS OF
DIRECT EXPENSES
The amounts related to the BFI Medical Waste Business in the pro forma condensed
combined statements of operations represent the historical Revenues in Excess of
Direct Expenses of the BFI Medical Waste Business for the six months ended June
30, 1999 and for the year ended September 30,1998 as reported in the historical
financial statements of the BFI Medical Waste Business adjusted to give effect
to the MDS acquisition and the allocation of BFI Corporate and Shared Services
historical costs. The BFI Medical Waste Business' fiscal year ended on September
30, 1998, therefore, the pro forma condensed combined statements of operations
do not include the BFI Medical Waste Business' operating results for the three
months ended December 31, 1998. Revenues and Revenues in Excess of Direct
Expenses were $50.6 million and $14.3 million, respectively, for the three
months ended December 31, 1998. The historical Statements of Revenues and Direct
Expenses for the BFI Medical Waste Business exclude certain costs for selling,
general and administrative efforts which are performed by BFI on a shared
service basis. The allocation of BFI Corporate and Shared Services historical
costs (collectively "BFI Costs") were determined in accordance with the SEC's
Staff Accounting Bulletin No. 55. These costs were allocated by BFI to the BFI
Medical Waste Business based on various formulas which reasonably approximate
the actual costs incurred. The incremental increases in expenses recorded by the
BFI Medical Waste Business as a result of these allocations were approximately
$17.1 million and $8.9 million for the year ended September 30, 1998 and the six
months ended June 30, 1999, respectively, and are included in general and
administrative expense in the accompanying pro forma condensed combined
statements of operations. The amounts allocated by BFI are not necessarily
indicative of the actual costs that would have been incurred had the BFI Medical
Waste Business operated as an entity unaffiliated with BFI. However, the
management of the BFI Medical Waste Business believes that the allocation is
reasonable and in accordance with the Securities and Exchange Commission's Staff
Accounting Bulletin No. 55.
The following tables represent the historical Statement of Revenues in Excess of
Direct Expenses of the BFI Medical Waste Business for the periods indicated,
giving pro forma effect to the MDS acquisition and the BFI Costs (amounts in
thousands):
<TABLE>
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<CAPTION>
CORPORATE AND SHARED BFI MEDICAL
BFI MEDICAL WASTE SERVICES HISTORICAL WASTE
HISTORICAL MDS (a) COST ALLOCATIONS PRO FORMA
-------------------- ------------------ ---------------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 101,621 $ 1,302 $ - $ 102,923
Cost of revenues (66,413) (1,064) - (67,477)
Selling, general and administration expense (5,879) (258) (8,919) (15,056)
Unusual costs 469 - - 469
-------------------- ------------------ -------------- ---------------------
Revenues in excess of direct expenses $ 29,798 $ (20) $(8,919) $ 20,859
=========== ============== ======== ========
(a) The statement of operations data of MDS include the historical
results of operations of MDS for the three months ended March 31,
1999, the period prior to its acquisition by the BFI Medical Waste
<PAGE>
Business. This information excludes pro forma purchase accounting
adjustments as they were deemed immaterial to the BFI Medical Waste
Business.
</TABLE>
<TABLE>
YEAR ENDED SEPTEMBER 30, 1998
<CAPTION>
CORPORATE AND SHARED BFI MEDICAL
BFI MEDICAL WASTE SERVICES HISTORICAL WASTE
HISTORICAL MDS (a) COST ALLOCATIONS PRO FORMA
--------------------- ----------------- ---------------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 198,222 $ 3,206 $ - $ 201,428
Cost of revenues (132,629) (2,103) - (134,732)
Selling, general and administration expense (13,273) (536) (17,090) (30,899)
Unusual Costs (257) (178) - (435)
--------------------- ----------------- --------------- --------------------
Revenues in excess of direct expenses $52,063 $ 389 $ (17,090) $ 35,362
======== ======== ========== ========
(a) The statement of operations data of MDS reflect the historical
results of operations of MDS for the six months ended December 31,
1998, since the actual operating results of MDS for the year ended
September 30, 1998 are not available. We believe the inclusion of
the operating results of MDS for the six months ended December 31,
1998 is reasonable for pro forma purposes, as the MDS acquisition is
not material to the BFI Medical Waste Business.
</TABLE>
3. OTHER STERICYCLE ACQUISITIONS
Reflects the unaudited pro forma condensed combined results of operations for
the year ended December 31, 1998 of WSI, acquired by Stericycle on October 1,
1998 and Med-Tech, acquired by Stericycle in December 1998 and the related
purchase price allocations and financing, all to give effect to these
transactions as if each had occurred on January 1, 1998. The results of
operations of Med-Tech for the year ended December 31, 1998 have been adjusted
to exclude $803,000 of direct acquisition costs, principally professional fees,
incurred by Med-Tech as a result of its sale to Stericycle.
4. PRO FORMA ADJUSTMENTS
The pro forma adjustments reflected in the pro forma condensed combined
statements of operations give effect to the following (in thousands, except per
share data):
(a) Elimination of duplicative personnel and facilities costs related to both
Stericycle and the BFI Medical Waste. We are currently assessing and
formulating our transition plans and plan to accrue liabilities upon
consummation of the acquisition pursuant to EITF Issue 95-3, "Recognition
of Liabilities in Connection with a Purchase Business Combination", and
EITF Issue 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)". We expect to approve and communicate these
plans upon consummation of the acquisition, and finalization of our plans
is expected within one year. These adjustments represent the pro forma
effect of commencing these transition plans as of the beginning of the
pro forma period. The cost amounts eliminated are as follows:
<TABLE>
Six Months Year
Ended Ended
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Transportation, plant and operations costs $ 4,498 $ 8,888
Facilities costs 2,010 4,075
-------- ----------
$ 6,508 $ 12,963
======= ========
</TABLE>
<PAGE>
(b) A decrease in depreciation expense of $3,877 for the six months ended June
30, 1999 and $7,955 for the year ended December 31, 1998 related to the
fair value of acquired property and equipment based on their estimated
lives and appraised values. An increase in amortization expense of $4,191
for the six months ended June 30, 1999 and $8,576 for the year ended
December 31, 1998 related to the fair value of acquired intangibles based
on their estimated lives an appraised values and goodwill based on a 40
year life.
(c) An adjustment to interest expense as follows: (a) an increase in interest
expense of $18,103 for the six months ended June 30, 1999 and $ 36,065 for
the year ended December 31, 1998, reflecting the draw down of the senior
secured credit facility and issuance of the senior subordinated notes and
the repayment of existing indebtedness; and (b) amortization of deferred
financing costs of $735 for the six months ended June 30, 1999 and $1,471
for the year ended December 31, 1998. For pro forma purposes, the interest
rates on the senior secured credit facility and the senior subordinated
notes have been assumed at a weighted average rate of 9.60%. Each
one-eighth percentage point change collectively in the assumed
weighted-average interest rate would increase or decrease interest expense
by $235 for the six months ended June 30, 1999 and by $469 for the year
ended December 31, 1998.
(d) Income tax expense at Stericycle's tax rate of 40% applied to deductible
items.
(e) Dividends at the annual rate of 3.375% on the convertible redeemable
preferred stock.
(f) Incremental issuance of common shares on an if converted basis for each
$1,000 per share of convertible redeemable preferred shares at a conversion
price of $17.50 per share.
<PAGE>
SELECTED FINANCIAL DATA
STERICYCLE
The following selected historical financial data of Stericycle have
been derived from its audited historical financial statements. Refer to the
notes to the audited historical financial statements of Stericycle for
information concerning Stericycle's acquisitions during the three years ended
December 31, 1998.
<TABLE>
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 16,141 $ 21,339 $24,542 $46,166 $ 66,681
Income (loss) from operations (5,708) (4,276) (2,437) 1,386 6,424
Net income (loss) (5,812) (4,544) (2,389) 1,430 5,713
Net income (loss) applicable to common stock
(10,293) (4,544) (2,389) 1,430 5,713
Diluted earnings (loss) per share of common
stock (14.38) (0.81) (0.32) 0.13 0.51
Total assets 27,809 23,491 55,155 61,226 97,755
Long-term debt, net of current maturities
4,838 5,622 4,591 3,475 23,460
Convertible redeemable preferred stock (a)
62,909 -- -- -- --
Shareholders' equity (net capital deficiency)
$ (45,363) $ 12,574 $40,014 $45,026 $53,651
Cash dividends per common share -- -- -- -- --
(a) In August 1995, the Board of Directors of Stericycle adopted a
plan of recapitalization which was approved by Stericycle's
stockholders in September 1995, pursuant to which Stericycle
reclassified its previously outstanding convertible redeemable
preferred stock as common stock. As part of the plan of
recapitalization, all conversion, redemption and liquidation
rights associated with the convertible redeemable preferred
stock were terminated in exchange for the issuance of shares
of common stock.
</TABLE>
BFI MEDICAL WASTE
The following selected historical financial data of the BFI Medical
Waste Business for the years ended September 30, 1996, 1997 and 1998 and as of
September 30, 1997 and 1998 have been derived from its audited historical
financial statements. The other information has been derived from its unaudited
historical financial statements. These selected data have been presented for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission. Because BFI Medical Waste was operated as a service line of
Browning-Ferris Industries, Inc., without separate books and records, some of
the data specified in the rules and regulations of the Securities and Exchange
Commission are not available or are not meaningful.
<TABLE>
(IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues 162,422 188,676 199,886 199,060 198,222
Revenues in excess of direct expenses NA NA 27,700 35,612 52,063
Directly identifiable assets NA NA NA 129,503 125,632
Long-term obligations NA NA NA 3,787 4,569
</TABLE>
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth certain of our earnings per share and
book value per share data on a historical basis and on a pro forma condensed
combined basis after giving effect to the BFI Transaction and the related
financing based on the same assumptions as those described under "Pro Forma
Condensed Combined Financial Statements of Stericycle and the BFI Medical Waste
Business." This data should be read in conjunction with that section and the
historical audited and unaudited consolidated financial statements of Stericycle
and the BFI Medical Waste Business and the notes thereto that are included
elsewhere herein or incorporated herein by reference. The unaudited pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the combined financial position or results of operations of future
periods or the results that actually would have been realized had we owned the
BFI Medical Waste Business during the periods presented. Neither we nor the BFI
Medical Waste Business paid any cash dividends during any of the periods
presented.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
Basic Earnings Per Share:
Stericycle historical................. $0.54 $0.36
Pro forma combined.................... $0.83 $0.63
Diluted Earnings Per Share:
Stericycle historical................. $0.51 $0.35
Pro forma combined.................... $0.73 $0.54
Book Value Per Share:
Stericycle historical................. $4.76 $7.57
Pro forma combined.................... -- $9.64
ITEM 4
RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
We have appointed Ernst & Young LLP as our independent public
accountants for the fiscal year ending December 31, 1999. Ernst & Young LLP has
served as our independent public accountants since our incorporation in March
1989. Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting to respond to appropriate questions and will have the opportunity
to make a statement if they desire to do so.
Ratification of the appointment of Ernst & Young LLP as our independent
public accountants will require the affirmative vote of a majority of the shares
of Common Stock represented in person or by proxy and entitled to vote at the
Annual Meeting. In the event that our stockholders do not ratify the appointment
of Ernst & Young LLP, the Board of Directors may reconsider the appointment.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION OF
THE APPOINTMENT OF ERNST & YOUNG LLP AS OUR INDEPENDENT PUBLIC ACCOUNTANTS FOR
THE FISCAL YEAR ENDING DECEMBER 31, 1999.
OTHER MATTERS
As of the date of this Proxy Statement, our Board of Directors knows of
no other business to come before the Annual Meeting for consideration by our
stockholders. If any other business properly comes before the meeting, the
persons named as proxies in the accompanying proxy card will vote the shares of
Common Stock represented by the proxy in accordance with their judgment.
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Any stockholder who wishes to present a proposal to be considered at
our Annual Meeting of Stockholders in 2000 and who, pursuant to Rule 14a-8 of
the Securities and Exchange Commission, wishes to have his or her proposal
included in our proxy statement and form of proxy for that meeting, must submit
the proposal in writing to us so that it is received by ______, 1999. Any
stockholder who wishes to present a proposal to be considered at our Annual
Meeting of Stockholders in 2000, but to do so outside of the processes of Rule
14a-8, must submit his or her proposal in writing to us so that it is received
by ______, 2000.
Stockholder proposals for inclusion in our proxy statement and form of
proxy must satisfy the requirements of the rules of the Securities and Exchange
Commission in order to be included. Stockholder proposals should be sent to our
Corporate Secretary at 28161 North Keith Drive, Lake Forest, Illinois 60045.
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act requires our directors,
executive officers and persons beneficially owning more than 10% of our
outstanding Common Stock to file periodic reports of stock ownership and stock
transactions with the Securities and Exchange Commission. On the basis solely of
a review of copies of these reports, we believe that all filing requirements for
1998 were satisfied in a timely manner.
ADDITIONAL INFORMATION
The cost of soliciting proxies on the accompanying proxy card will be
borne by us. Some of our officers and regular employees may solicit proxies in
person or by mail, telephone or telecopier, but will not receive any additional
compensation for their services. We may retain a proxy solicitor to assist in
the solicitation of proxies. If we retain a proxy solicitor that firm may
solicit proxies in person or by mail, telephone or telecopier. We estimate that
the fees of any proxy solicitor that we may retain will not exceed $25,000, plus
reimbursement of customary out-of-pocket expenses. We may reimburse brokers and
others for their reasonable expenses in forwarding proxy solicitation material
to the beneficial owners of shares of our Common Stock.
We have previously furnished to all stockholders of record as of March
31, 1999 a copy of our Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the Securities and Exchange Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We incorporate herein by reference the following documents filed by us
with the Commission (File No. 0-21229) pursuant to the Exchange Act:
(i) our Annual Report on Form 10-K for the year ended December 31,
1998;
(ii) our Quarterly Report on Form 10-Q for the quarter ended March 31,
1999;
(iii) our Quarterly Report on Form 10-Q for the quarter ended June 30,
1999;
(iv) our Current Report on Form 8-K dated April 14, 1999; and
(v) our Current Report on 8-K dated August 20, 1999.
All documents filed by us pursuant to Section 13(a), 13(c), 14, or
15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the date of the Annual Meeting shall be deemed to be incorporated by
reference in this Proxy Statement and to be part hereof from the date of filing
of such documents. All information appearing in this Proxy Statement is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated by reference herein.
Any statement contained in a document incorporated by reference herein
shall be modified or superseded, for purposes of this Proxy Statement, to the
extent that a statement contained herein or in any subsequently filed document
that is deemed to be incorporated herein modifies or supersedes any such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Proxy Statement.
This Proxy Statement incorporates documents by reference that are not
presented herein or delivered herewith. We hereby undertake to provide, by first
class mail or other equally prompt means within one business day of receipt of a
request, without charge, to each person to whom a copy of this Proxy Statement
has been delivered, upon the written or oral request of any such person, a copy
of any and all of the documents referred to above that have been or may be
incorporated into this Proxy Statement by reference, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference into
such documents). These documents are available upon request from Stericycle,
Inc., 28161 North Keith Drive, Lake Forest, Illinois 60045, Attention: Corporate
Secretary, Telephone Number (847) 367-5910. In order to ensure timely delivery
of the documents, any request should be made by __________, 1999.
______________________________
<PAGE>
EXHIBIT I
FIRST AMENDMENT TO
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
STERICYCLE, INC.
Article 4 of the Corporation's Amended and Restated Certificate of
Incorporation shall be amended to read as follows:
ARTICLE 4
CAPITAL STOCK
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 31,000,000 shares, divided into two
classes as follows: (i) 30,000,000 shares of Common Stock, with a par value of
$.01 per share, and (ii) 1,000,000 shares of Preferred Stock, with a par value
of $.01 per share.
Shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is expressly authorized to fix by resolution
the powers, designations, preferences and relative, participating, optional and
other rights, and qualifications, limitations and restrictions, of each series
of Preferred Stock, including, without limitation, the dividend rate, conversion
rights, voting rights, liquidation preference and redemption price of the
series.
<PAGE>
PROXY PROXY
STERICYCLE, INC.
28161 North Keith Drive
Lake Forest, Illinois 60045
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STERICYCLE, INC.
I or we hereby appoint each of Jack W. Schuler, Mark C. Miller and
Frank J.M. ten Brink (the "proxies") as my or our proxy, each with the power to
appoint his substitute, and authorize each of them acting alone to vote all of
the shares of Common Stock, par value $.01 per share, of Stericycle, Inc. (the
"Company") held of record by me or us on __________, 1999 at the 1999 Annual
Meeting of Stockholders to be held on __________, 1999 (the "Annual Meeting"),
and at any adjournment of the Annual Meeting.
If properly completed and returned, this Proxy will be voted as
directed. If no direction is given, this Proxy will be voted in accordance with
the recommendations of the Company's Board of Directors: FOR each of the seven
nominees for election as a director (Item 1); FOR approval of a proposal to
amend the Company's certificate of incorporation to authorize a class of
preferred stock (Item 2); and FOR approval of a proposal to authorize, issue and
sell 75,000 shares of Series A Convertible Preferred Stock, of up to 5,000,000
shares of the Company's Common Stock. It will be voted in the best judgment of
the proxies in respect of any other business that properly comes before the
Annual Meeting.
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED REPLY ENVELOPE
(Continued and to be signed on the reverse side.)
<PAGE>
STERICYCLE, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / /
1. ELECTION OF DIRECTORS--
Nominees: Jack W. Schuler, Mark C. Miller, Patrick F. Graham, Rod F.
Dammeyer, John Patience, Peter Vardy, L. John Wilkerson, Ph.D.
FOR ALL / / WITHHOLD ALL / / FOR ALL EXCEPT / /
______________________________________
(Except Nominee(s) written above
2. Proposal to amend the Company's Certificate of Incorporation to create
a class of preferred stock
FOR / / AGAINST / / ABSTAIN / /
3. Proposal to authorize, issue and sell 75,000 shares of Series A
Convertible Preferred Stock
FOR / / AGAINST / / ABSTAIN / /
4. Ratification of appointment of Ernst &Young LLP as the Company's
independent public accountants for the year ending December 31, 1999.
FOR / / AGAINST / / ABSTAIN / /
Date: _______________________________, 1999
Signature: ________________________________
Signature: ________________________________
Title or Capacity: __________________________
Instruction: Please sign exactly as your name appears immediately to
the left. If signing as a fiduciary (for example, as a trustee), please
indicate your fiduciary capacity. If signing on behalf of a
corporation, partnership or other entity, please indicate your title or
other authorized capacity. If the shares for which this Proxy is given
are held jointly, both joint tenants must sign.
