<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 2)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-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.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
[LOGO]
------------------------
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 15, 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 October 15, 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;
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 16.
Only stockholders of record at the close of business on the record date of
September 15, 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
<TABLE>
<S> <C>
/s/ Jack W. Schuler /s/ Mark C. Miller
---------------------------- ----------------------------
Jack W. Schuler Mark C. Miller
CHAIRMAN OF THE BOARD PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
September 20, 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 OCTOBER 15, 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 October 15, 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;
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 16.
This Proxy Statement and the accompanying materials are being mailed to
stockholders beginning on or about September 20, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
GENERAL.................................................................................................... 1
STOCK OWNERSHIP............................................................................................ 2
Stock Ownership of Certain Beneficial Owners............................................................. 2
Stock Ownership of Directors and Executive Officers...................................................... 2
ITEM 1 ELECTION OF DIRECTORS............................................................................... 4
Nominees for Director.................................................................................... 4
Committees of the Board.................................................................................. 5
Meetings................................................................................................. 5
Compensation of Directors................................................................................ 6
Certain Transactions..................................................................................... 7
EXECUTIVE COMPENSATION..................................................................................... 8
Summary Compensation Table............................................................................... 8
1998 Stock Option Grants................................................................................. 9
1998 Option Exercises and Year End Option Values......................................................... 10
Stock Option Plans....................................................................................... 10
Other Plans.............................................................................................. 11
Employment Agreements.................................................................................... 11
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION............................................. 12
Executive Compensation Policies.......................................................................... 12
Compensation of Chief Executive Officer.................................................................. 13
PERFORMANCE GRAPH.......................................................................................... 14
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS............................................................ 15
THE BFI TRANSACTION........................................................................................ 16
Description of the Acquired Businesses................................................................... 16
Background of the BFI Transaction........................................................................ 16
Our Reasons for the BFI Transaction...................................................................... 18
Certain Federal Income Tax Consequences.................................................................. 18
Accounting Treatment..................................................................................... 19
Government and Regulatory Approvals...................................................................... 19
THE ACQUISITION AGREEMENTS................................................................................. 20
General.................................................................................................. 20
Conditions to Closing.................................................................................... 20
Representations and Warranties........................................................................... 21
Covenants................................................................................................ 21
Termination or Amendment................................................................................. 22
Expenses and Termination Fees............................................................................ 23
Other Agreements......................................................................................... 23
FINANCING FOR THE BFI TRANSACTION.......................................................................... 24
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ITEM 2 PROPOSAL TO AMEND OUR CERTIFICATE OF INCORPORATION TO AUTHORIZE AND CREATE A CLASS OF PREFERRED
STOCK.................................................................................................... 24
ITEM 3 PROPOSAL TO AUTHORIZE, ISSUE AND SELL 75,000 SHARES OF
SERIES A CONVERTIBLE PREFERRED STOCK..................................................................... 26
Dividends................................................................................................ 27
Liquidation.............................................................................................. 27
Voting; Election of Directors............................................................................ 27
Conversion............................................................................................... 27
Redemption at Our Option................................................................................. 28
Redemption Upon a Change of Control...................................................................... 28
Conditions to Closing.................................................................................... 29
Representations and Warranties........................................................................... 29
Covenants and Restrictions............................................................................... 30
Expenses................................................................................................. 30
Indemnification.......................................................................................... 31
Registration Rights Agreement............................................................................ 31
Corporate Governance Agreement........................................................................... 31
Relationship of Proposals in Items 2 and 3............................................................... 32
FINANCIAL STATEMENTS OF THE BFI MEDICAL WASTE BUSINESS..................................................... 33
Report of Independent Public Accountants................................................................. 33
Statements of Directly Identifiable Assets and Liabilities of BFI Medical Waste
as of September 30, 1997 and 1998 and June 30, 1999.................................................... 34
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..................................... 35
Notes to Financial Statements............................................................................ 36
FINANCIAL STATEMENTS OF STERICYCLE......................................................................... 47
Condensed Consolidated Balance Sheet as of June 30, 1999 (unaudited)..................................... 48
Condensed Consolidated Statements of Income for the Six Months Ended
June 30, 1998 and 1999 (unaudited)..................................................................... 49
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1999 (unaudited)..................................................................... 50
Notes To Condensed Consolidated Financial Statements..................................................... 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--BFI MEDICAL WASTE
BUSINESS................................................................................................. 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--STERICYCLE.......... 58
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF
STERICYCLE AND THE BFI MEDICAL WASTE BUSINESS............................................................ 61
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Pro Forma Condensed Combined Balance Sheet as of June 30, 1999........................................... 62
Notes to Pro Forma Condensed Combined Balance Sheet...................................................... 63
Pro Forma Condensed Combined Statement of Operations for the Six Months
Ended June 30, 1999.................................................................................... 65
Pro Forma Condensed Combined Statement of Operations for the Year Ended
December 31, 1998...................................................................................... 66
Notes to Pro Forma Condensed Combined Statements of Operations........................................... 67
SELECTED FINANCIAL DATA.................................................................................... 70
COMPARATIVE UNAUDITED PER SHARE DATA....................................................................... 71
ITEM 4 RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... 71
OTHER MATTERS.............................................................................................. 71
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING.......................................................... 72
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................................................... 72
ADDITIONAL INFORMATION..................................................................................... 72
EXHIBIT I--FIRST AMENDMENT TO AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION.................................................................... 73
EXHIBIT II--CERTIFICATE OF DESIGNATION..................................................................... 74
</TABLE>
iii
<PAGE>
GENERAL
COMMON STOCK. Our authorized capital stock consists of Common Stock, par
value $0.01 per share ("Common Stock"). As of September 15, 1999, there were
14,646,464 shares of Common Stock outstanding.
STOCKHOLDERS ENTITLED TO VOTE. Only stockholders of record at the close of
business on the record date of September 15, 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.
1
<PAGE>
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 (the "SEC"), 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.
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:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME AND ADDRESS OWNED PERCENTAGE
- --------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
The TCW Group, Inc.(1)............................................... 1,043,700 7.2%
865 South Figueroa Street
Los Angeles, California 90017
</TABLE>
- ------------------------
(1) The shares shown as beneficially owned by The TCW Group, Inc., are derived
from a Schedule 13F, filed by The TCW Group, Inc. on June 30, 1999. Schedule
13G filings are more comprehensive than Schedule 13F filings but filed less
frequently. A Schedule 13G 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., reported that, as of December 31, 1998, for reporting
purposes, each of them held sole voting and dispositive power over 785,300
shares. The Schedule 13G indicated that: (a) no shares are held directly by
The TCW Group, Inc.; (b) The TCW Group, Inc. indirectly held 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 did not directly or indirectly hold any of
these shares.
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
2
<PAGE>
listed in the Summary Compensation Table on page 8 and (3) all of our directors
and executive officers as a group:
<TABLE>
<CAPTION>
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%
</TABLE>
- ------------------------
* 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.
3
<PAGE>
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. In addition, as provided by the Preferred Stock
Purchase Agreement (see Item 3 Proposal to Authorize, Issue and Sell 75,000
Shares of Series A Convertible Preferred Stock and specifically "Voting;
Election of Directors") the proposed purchasers of our Series A Convertible
Preferred Stock (the "Investors") will have the right to elect up to two
directors to our Board of Directors. Consequently, after the closing of the sale
of our Series A Convertible Preferred Stock to the Investors, we anticipate that
our Board of Directors will increase from seven to nine members.
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>
<CAPTION>
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,
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.
4
<PAGE>
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 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
5
<PAGE>
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.
6
<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.
7
<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:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
FISCAL --------------------- 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 Chief 1997 150,000 -- 20,972 300
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 Chief 1997 70,619 -- 55,000 300
Financial Officer 1996 -- -- -- --
Linda D. Lee(6) .......................... 1998 130,000 13,400 11,286 300
Vice President, Regulatory Affairs and 1997 130,000 -- 16,830 300
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
</TABLE>
- ------------------------
(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
8
<PAGE>
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.
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 SEC, 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.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM(4)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ----------------------
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
</TABLE>
- ------------------------
(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
9
<PAGE>
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.
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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES FISCAL YEAR END FISCAL YEAR END(2)
ACQUIRED VALUE ---------------------- ------------------------
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
</TABLE>
- ------------------------
(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.
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
10
<PAGE>
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
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.
11
<PAGE>
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.
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
12
<PAGE>
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 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.
13
<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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
8/23/96 12/31/96 12/31/97 12/31/98
<S> <C> <C> <C> <C>
Stericycle, Inc. $100.00 $124.32 $151.49 $161.00
Nasdaq NMS Composite Index $100.00 $113.04 $136.18 $175.00
Russell 3000 Index $100.00 $111.65 $144.29 $167.00
Peer Group Index $100.00 $106.53 $138.03 $130.00
</TABLE>
14
<PAGE>
DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements under the captions "The BFI Transaction," "Financing For
the BFI Transaction," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Condensed Combined
Financial Statements of Stericycle and the BFI Medical Waste Business" and
elsewhere in this Proxy Statement constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance, or achievements
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
important assumptions and other important factors that could cause actual
results to differ materially from those in the forward-looking statements.
Important assumptions and other important factors that could cause actual
results to differ materially from those in the forward-looking statements
include, but are not limited to: uncertainty as to our future profitability; our
ability to develop and implement operational and financial systems to manage the
combined and significantly larger operations after the BFI Transaction; our
ability to service the substantial indebtedness we intend to incur in order to
finance the BFI Transaction and any future indebtedness we may incur; our
ability to operate within the limits of the anticipated covenant restrictions of
this indebtedness; our ability to integrate and successfully operate acquired
businesses, particularly the BFI Medical Waste Business (as herein defined), and
the risks associated with those businesses; trends in the medical waste
management industry; competitive pressures; changes in relationships with
customers; changes in the regulatory environment; difficulties and delays
relating to marketing and sales activities; general uncertainties accompanying
the expansion into new geographic service areas; and the impact of accounting
policies required to be adopted in the near future. Other factors and
assumptions not identified above were also involved in the derivation of these
forward-looking statements, and the failure of such other assumptions to be
realized as well as other factors may also cause actual results to differ
materially from those projected. Stericycle does not assume any obligation to
update these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
15
<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,
all of the medical waste management operations of Browning-Ferris Industries,
Inc. ("BFI") 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
The BFI Medical Waste Business 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 24 treatment facilities. 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.
BACKGROUND OF THE BFI TRANSACTION
On several occasions during the past several years our Chief Executive
Officer, Mark C. 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
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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.
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
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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
larger operational and revenue base. They also believe the BFI Transaction will
significantly increase our customer density in many of our largest markets, 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
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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") are responsible for
reviewing the legality under the antitrust laws of transactions such as the BFI
Transaction. 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. We and Allied each received a
second request with respect to the BFI Transaction from the DOJ and we each
certified compliance with those requests. On September 16, 1999 the DOJ notified
us that it had terminated its investigation of the BFI Transaction. All
applicable waiting periods to which the BFI Transaction is subject to have
expired. Private parties or 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 by private parties or state attorneys general
on antitrust grounds will not be made or, if such a challenge is made, of the
result.
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.
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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 prior to the closing
date for any businesses or assets 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 with the SEC as
exhibits to our Current Report on Form 8-K dated April 14, 1999.
CONDITIONS TO CLOSING
CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CONSUMMATE THE MERGER. The
respective obligations of Allied and us to effect the BFI Transaction are
subject to the satisfaction or waiver of the following conditions on or prior to
the closing date:
- 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;
- the waiting period under the HSR Act shall have expired (which happened on
September 16, 1999) or been terminated;
- Allied's acquisition by merger of BFI shall have occurred (which happened
on July 30, 1999);
- 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:
- 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;
- 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
- Allied receiving a solvency letter.
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ADDITIONAL CONDITIONS TO OUR OBLIGATIONS. Our obligations to effect the BFI
Transaction are subject to the satisfaction or waiver of the following
additional conditions:
- 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;
- the receipt of all material statutory approvals required in order to
permit the consummation of the BFI Transaction;
- 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
- 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,
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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;
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
Allied and us 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 20, 1999) and the date shall
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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 (which did
not occur until September 16, 1999), (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 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 Allied and us
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 Allied and
us 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.
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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 (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.
Our authorized stock currently consists of 30,000,000 shares of Common
Stock, of which, as of September 15, 1999, 14,646,464 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
granted under our stock option plans. Accordingly, under the laws of Delaware,
our state of incorporation, we could issue approximately 13,053,000 shares of
Common Stock, or debt securities convertible into approximately 13,053,000
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 13,053,000 additional shares of Common Stock, or debt
securities convertible into approximately 13,053,000 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 29% of our Common Stock currently outstanding.
For a more complete description of the Series A Convertible Preferred Stock,
see "Item 3-- Proposal to Authorize, 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
Stericycle 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.
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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.
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
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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 75,000 shares of Series A Convertible Preferred Stock we propose to
issue in connection with the BFI Transaction. However, depending upon conditions
in the debt and equity markets and the terms of financing available for the BFI
Transaction, the Board of Directors may determine, if Item 2 is approved, to
designate and issue additional shares of preferred stock as part of the
financing for the BFI Transaction, particularly if the Board determines that it
would be desirable for Series A Convertible Preferred Stock to be held by
additional equity investors. Any such additional preferred stock could consist
of additional shares of Series A Convertible Preferred Stock or another series
of preferred stock. In either event, we would be required, under the Preferred
Stock Purchase Agreement, to obtain approval of the holders of the Investors (as
herein defined) to do so and, under the rules of the Nasdaq Stock Market we
could not, without stockholder approval, issue additional preferred stock
convertible into more than 2,929,292 shares of common stock (20% of the shares
of common stock currently outstanding).
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.
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 certain
investment funds (collectively, the "Investors"), managed by Bain Capital, Inc.
("Bain") providing for the issuance by us to the Investors 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.
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. We and Bain are discussing the
possibility of amending the Preferred Stock Purchase Agreement to provide for
another equity investor, Madison Dearborn Capital Partners III, purchasing up to
50% of the Series A Convertible Preferred Stock and becoming an Investor under
the Preferred Stock Purchase Agreement. We and Bain may also agree to amendments
to the Preferred Stock Purchase Agreement to provide for the purchase of some of
the Series A Convertible Preferred Stock by other equity investors although we
have no current intention to do so.
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
26
<PAGE>
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 Convertible Preferred Stock pursuant to
a Certificate of Designation in the form attached hereto as Exhibit II (the
"Certificate of Designation") and to issue and sell that stock to the Investors,
including any Investors who may be added by amendment of the Preferred Stock
Purchase Agreement. 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 with the SEC 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 (subject to adjustment pursuant to the terms of the
Preferred Stock Purchase Agreement depending on the terms of the debt financing
for the BFI Transaction) from the date of issuance. Dividends accrue daily at
such rate 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 (the "Liquidation Value") and
(ii) the amount that would be payable if the Series A Convertible Preferred
Stock had been converted into Common Stock.
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 the Investors and their 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 the Investors and their 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.
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 or are deemed to
issue additional shares of Common
27
<PAGE>
Stock for a price per share less than the Conversion Price or the Market Price
(as defined below); or (ii) we (a) issue or are deemed to 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 the
Conversion Price as the case may be, (or in the case of options and convertible
securities, received an amount equal to the Market Price or the Conversion Price
as the case may be, 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
the Investors will be initially convertible into 4,285,715 shares of our Common
Stock, or approximately 29% 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.
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<PAGE>
CONDITIONS TO CLOSING
CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of we
and the Investors 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:
- the BFI Transaction shall have closed or be closing simultaneously;
- the waiting period under the HSR Act with respect to the Investors'
acquisition of the Series A Convertible Preferred Stock shall have expired
or been terminated; and
- our stockholders shall have approved Items 2 and 3 included in this proxy
statement.
ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF THE INVESTORS. The obligations
of the Investors to consummate the Preferred Stock Purchase Agreement are
subject to satisfaction or waiver of the following additional conditions:
- 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 the Investors;
- our not having amended the Acquisition Agreements in any manner that
materially changes the benefits to or financial or other obligations of
us;
- 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;
- the absence of any material adverse change to us and are subsidiaries and
the Acquired Businesses taken as a whole or our ability to consummate the
transactions contemplated by the Preferred Stock Purchase Agreement;
- The Investors' receipt of an opinion of our counsel as to specified
matters;
- we shall have appointed two of the Investors' representatives to our
Board; and
- 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:
- The Investors having performed its obligations provided in the Preferred
Stock Purchase Agreement, its representations and warranties being true
and correct in all material respects, and the Investors delivering a
certificate to those effects to us; and
- our receipt of an opinion of the Investors' counsel as to specified
matters.
REPRESENTATIONS AND WARRANTIES
In the Preferred Stock Purchase Agreement, we and the Investors 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.
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<PAGE>
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.
The Preferred Stock Purchase Agreement also contains representations and
warranties of the Investors 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:
- 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;
- 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;
- we agree to cooperate with the Investors and provide information to the
Investors in order to enable them to obtain HSR approval for their
purchase of the Series A Convertible Preferred Stock;
- we agree to give the Investors and their representatives reasonable access
to our properties, offices, personnel, accountants, advisors, and records;
- 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
- we agree not to initiate, solicit or encourage inquiries related to, or
engage in negotiations or discussions with anyone other than the
Investors, 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
The Investors 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 the Investors' 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 the
Investors 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.
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<PAGE>
INDEMNIFICATION
Pursuant to the Preferred Stock Purchase Agreement, we and the Investors
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 the Investors 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 the Investors 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
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 the Investors and us to
enter into a corporate governance agreement at the closing. The corporate
governance agreement will contain certain provisions intended to implement the
right of the Investors to elect directors to our Board. The corporate governance
agreement will also provide that until the earlier of (i) the date on which the
Investors and their Permitted Transferees (as defined in the corporate
governance agreement) cease to own any Series A Convertible Preferred Stock,
(ii) the date on which the Investors have completed a distribution of the Series
A Convertible Preferred Stock to their partners or (iii) the first anniversary
of the closing, the Investors and their 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 the Investors, 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 the Investors' ability to transfer
the Series A Convertible Preferred Stock (but not the Common Stock issuable upon
conversion) 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).
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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 and purchased 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.
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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.
Arthur Anderson LLP
Chicago, Illinois
July 30, 1999
33
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
STATEMENTS OF DIRECTLY IDENTIFIABLE ASSETS AND LIABILITIES OF BFI MEDICAL WASTE
AS OF SEPTEMBER 30, 1997 AND 1998 AND JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------- AS OF
1997 1998 JUNE 30, 1999
---------- ---------- -------------
(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
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
34
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
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)
<TABLE>
<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>
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<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.
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.
36
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BASIS OF PRESENTATION (CONTINUED)
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 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 corporate and shared service basis.
Such costs have been excluded from the statements of revenues and direct
expenses of BFI Medical Waste because an allocation of these costs in accordance
with Staff Accounting Bulletin No. 55 ("SAB No. 55") could not be obtained for
the years ended September 30, 1996 and 1997. 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. This allocation could not be obtained due to the fact that
37
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BASIS OF PRESENTATION (CONTINUED)
information flow at BFI was re-engineered which resulted in the consolidation of
several hundred administrative locations into 26 administrative locations. In
addition, many of the employees needed to assist in the preparation of the
allocation of shared service expenses for 1996 and 1997 are no longer employed
by BFI. However, an allocation of corporate and shared service expense was
prepared for the year ended September 30, 1998 and for the nine months in the
periods ended June 30, 1998 and 1999, respectively. The allocation of BFI
corporate and shared services historical costs were determined in accordance
with SAB No. 55. These costs were allocated by BFI to BFI Medical Waste based on
various formulas which reasonably approximate the actual costs incurred.
The incremental increases in expenses recorded by BFI Medical Waste as a
result of these allocations were approximately:
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
YEAR ENDED ----------------------------
SEPTEMBER 30, 1998 1998 1999
------------------ ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Approximate incremental increase in
expenses as a result of allocations in
accordance with SAB No. 55............... $ 17,090,000 $ 13,861,000 $ 13,298,000
</TABLE>
The amounts allocated by BFI are not necessarily indicative of the actual
costs that would have been incurred had BFI Medical Waste operated as an entity
unaffiliated with BFI.
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.
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.
38
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
<TABLE>
<CAPTION>
ASSET DESCRIPTION LIFE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Buildings and improvements.................................................. 10 to 30 years
Machinery and equipment..................................................... 5 to 12 years
Office furniture and equipment.............................................. 3 to 10 years
</TABLE>
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.
39
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, which is no more than 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.
40
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
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>
<CAPTION>
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>
41
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LEASE COMMITMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
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.
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.
42
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN (CONTINUED)
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:
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.
43
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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
44
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. LEGAL PROCEEDINGS (CONTINUED)
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
45
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. BUSINESS COMBINATIONS (CONTINUED)
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.
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.
46
<PAGE>
FINANCIAL STATEMENTS OF STERICYCLE
Our audited consolidated financial statements for each of the years in the
three year period ended December 31, 1998 and as of December 31, 1997 and 1998
are included in our Annual Report on Form 10-K which was previously mailed to
all stockholders of record as of March 31, 1999 and filed with SEC (File No.
0-21229) pursuant to the Exchange Act. Those financial statements and the
information in that report under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are incorporated
herein by reference. The following condensed consolidated financial statements
as of and for the six months ended June 30, 1999 are unaudited and should be
read in conjunction with unaudited consolidated financial statements.
47
<PAGE>
STERICYCLE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999
(UNAUDITED IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30
1999
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................................ $ 19,562
Short-term investments............................................................................... 76
Accounts receivable, less allowance for doubtful
accounts of $672................................................................................... 17,205
Parts and supplies................................................................................... 886
Prepaid expenses..................................................................................... 1,239
Other................................................................................................ 1,289
Total current assets................................................................. 40,257
-----------
Property, plant and equipment:
Land................................................................................................. 731
Buildings and improvements........................................................................... 10,923
Machinery and equipment.............................................................................. 20,118
Office equipment and furniture....................................................................... 1,592
Construction in progress............................................................................. 1,062
-----------
34,426
Less accumulated depreciation........................................................................ (11,311)
-----------
Property, plant and equipment, net................................................................. 23,115
-----------
Other assets:
Goodwill, less accumulated amortization of $4,958.................................................... 55,438
Other................................................................................................ 3,987
-----------
Total other assets................................................................................. 59,425
-----------
Total assets................................................................................... $ 122,797
-----------
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt.................................................................... $ 1,549
Accounts payable..................................................................................... 3,257
Accrued liabilities.................................................................................. 5,859
Deferred revenue..................................................................................... 226
-----------
Total current liabilities...................................................................... 10,891
-----------
Long-term debt, net of current portion............................................................... 4,383
Shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares
authorized, 14,559,417 issued and outstanding)..................................................... 145
Additional paid-in capital........................................................................... 134,743
Accumulated deficit.................................................................................. (27,365)
-----------
Total shareholders' equity......................................................................... 107,523
-----------
Total liabilities and shareholders' equity..................................................... $ 122,797
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND 1999
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Revenues........................................................................... $ 28,018 $ 48,887
Costs and expenses:
Cost of revenues................................................................. 19,629 32,340
Selling, general and administrative expenses..................................... 6,358 10,270
------------- -------------
Total costs and expenses....................................................... 25,987 42,610
------------- -------------
Income from operations............................................................. 2,031 6,277
Other income (expense):
Interest income.................................................................. 239 272
Interest expense................................................................. (124) (535)
Other income..................................................................... -- 389
------------- -------------
Total other income (expense)................................................... 115 126
------------- -------------
Income before income taxes......................................................... $ 2,146 $ 6,403
Income tax expense................................................................. 278 1,416
------------- -------------
Net income......................................................................... $ 1,868 $ 4,987
------------- -------------
------------- -------------
Earnings per share--Basic.......................................................... $ 0.18 $ 0.36
------------- -------------
------------- -------------
Earnings per share--Diluted........................................................ $ 0.17 $ 0.35
------------- -------------
------------- -------------
Weighted average number of common shares outstanding--Basic........................ 10,511,297 13,811,646
Weighted average number of common shares outstanding--Diluted...................... 11,167,492 14,209,693
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------
1998 1999
--------- ----------
<S> <C> <C>
OPERATING ACITIVITES:
Net Income.................................................................................. $ 1,868 $ 4,987
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................... 1,733 3,545
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable..................................................................... (1,152) (516)
Parts and supplies...................................................................... (135) 555
Prepaid expenses........................................................................ (45) 44
Other assets............................................................................ (115) (16)
Accounts payable........................................................................ 198 (3,245)
Accrued liabilities..................................................................... (1,429) (606)
Deferred revenue........................................................................ (30) (1,952)
--------- ----------
Net cash provided by operating activities................................................... 893 2,796
--------- ----------
INVESTING ACTIVITIES:
Payments for acquisitions and international investments, net of cash acquired............. (1,163) (7,287)
Proceeds from maturity of short-term investments.......................................... -- 460
Capital expenditures...................................................................... (984) (1,879)
--------- ----------
Net cash used in investing activities....................................................... (2,147) (8,706)
--------- ----------
FINANCING ACTIVITIES:
Net payments on line of credit............................................................ -- (16,359)
Proceeds from subordinated debt........................................................... -- 2,750
Repayment of subordinated debt............................................................ -- (5,500)
Repayment of long term debt............................................................... (788) (3,912)
Payments of deferred financing costs...................................................... -- (40)
Principal payments on capital lease obligations........................................... (57) (80)
Net proceeds from secondary public offering............................................... -- 47,158
Proceeds from issuance of common stock.................................................... 83 172
--------- ----------
Net cash (used in) provided by financing activities......................................... (762) 24,189
--------- ----------
Net (decrease) increase in cash and cash equivalents........................................ (2,016) 18,279
Cash and cash equivalents at beginning of period............................................ 5,374 1,283
--------- ----------
Cash and cash equivalents at end of period.................................................. $ 3,358 $ 19,562
--------- ----------
--------- ----------
Non-cash activities:
Net issuances of common stock for certain acquisitions.................................... $ 697 $ 1,452
Net issuances of notes payable for certain acquisitions................................... $ 195 $ 73
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Stericycle,
Inc. (the "Company") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations; but the Company
believes the disclosures in the accompanying condensed consolidated financial
statements are adequate to make the information presented not misleading. In the
opinion of management, all adjustments necessary for a fair presentation for the
periods presented have been reflected and are of a normal recurring nature.
These condensed consolidated financial statements should be read in conjunction
with the Consolidated Financial Statements and notes thereto for the three years
ended December 31, 1998, as filed with the Company's Annual Report on Form 10-K
for 1998. The results of operations for the six-month period ended June 30, 1999
are not necessarily indicative of the results that may be achieved for the
entire year ending December 31, 1999.
2. ACQUISITIONS
In June 1999, the Company acquired the customer lists and selected other
assets of Environmental Guardian Inc. in Wisconsin and Foster Environmental
Service Corporation in New York. The aggregate purchase price of these
acquisitions was immaterial and was paid in a combination of cash and notes
payable.
3. STOCK OPTIONS
During the quarter ended June 30, 1999, options to purchase 20,085 shares of
common stock were granted to key employees. These options will vest ratably over
a five year period and have an average exercise price of approximately $12.69
per share. The grant of options was made under the Company's 1997 Stock Option
Plan, which authorized the grant of options for a total of 1,500,000 shares of
the Company's common stock. The 1997 Stock Option Plan was approved by the
Company's stockholders in April 1997.
4. STOCK ISSUANCES
During the quarter ending June 30, 1999, options to purchase 16,037 shares
of common stock were exercised at prices ranging from $.53-$13.625 per share.
The Company also issued 43,276 shares of common stock in connection with certain
acquisitions made in prior quarters.
5. INCOME TAXES
Prior to 1997, the Company had generated net operating losses for income tax
purposes. Any benefit resulting from these net operating losses has been offset
by a valuation allowance. Annual utilization of the Company's net operating loss
carryforward is limited by Internal Revenue Code Section 382. The Company's
income tax expense reflects federal taxable income expected in excess of the
Section 382 limitation and income taxes in states where the Company has no
offsetting net operating losses.
51
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PENDING BROWNING FERRIS ACQUISITION
On April 14, 1999, the Company entered into agreements with Allied Waste
Industries, Inc. ("Allied") to acquire, 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, and, in
addition, all of Allied's own medical waste management operations, for $440
million in cash. Allied acquired BFI pursuant to a merger agreement on August 2,
1999.
The Company's acquisition of BFI's and Allied's medical waste management
operations is expected to close late in the third quarter or in the fourth
quarter of 1999. The Company's acquisition is subject to a number of conditions,
including, among others, regulatory clearance and receipt of the financing
necessary to complete the acquisition.
7. SUBSEQUENT EVENT
On August 31, 1999, the Company entered into an agreement with certain
investment funds managed by Bain Capital, Inc., under which the Bain funds will
purchase 75,000 unregistered shares of a new class of stock from the Company for
$75 million. The transaction is intended to provide the Company with a portion
of the financing necessary to complete its pending acquisition of the BFI and
Allied medical waste management operations. See Note 6.
The new class of stock will be convertible preferred stock. It will accrue
dividends at the rate of 3.375% per annum, payable in additional shares of
convertible preferred stock, and will be convertible into common stock at a
conversion price of $17.50 per share. It will also have voting rights on an
as-if-converted basis, with special class voting rights on certain matters, and
will possess certain demand and piggyback registration rights. The convertible
preferred stock will have a liquidation preference over the Company's common
stock in an amount equal to the purchase price of the convertible preferred
stock plus accumulated and accrued dividends. Under the agreement, the Company
will increase the size of its board of directors from seven to nine members, and
the Bain funds will be entitled to designate two individuals to serve as
directors of the Company.
Closing of the Company's issuance and sale of the convertible preferred
stock to the Bain funds is subject to a number of conditions. These conditions
include the Company's obtaining the necessary approval of its stockholders to
authorize the creation of the new class of stock and the Company's closing of
its pending acquisition of the BFI and Allied medical waste management
operations.
52
<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
the financial statements of the BFI Medical Waste Business and related Notes
included elsewhere herein.
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.
The BFI Medical Waste Business 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. The BFI Medical Waste Business 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 incurred 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 the BFI Medical Waste Business. 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 the BFI Medical
Waste Business. All significant transactions among units of the BFI Medical
Waste Business have been eliminated.
The BFI Medical Waste Business derives its revenues from services to two
principal types of customers: (i) small account customers, including outpatient
clinics, medical and dental offices, long-term and sub-acute care facilities,
biomedical companies and municipal entities; and (ii) large account customers,
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 specifying either scheduled or on-call services, or
both. Contracts with small accounts are generally two to three years in length,
usually can be terminated only for cause, generally provide for annual price
increases and have an automatic renewal provision unless the customer notifies
the BFI Medical Waste Business prior to completion of the contract. Contracts
with hospitals and other large accounts, which generally run for one to five
years, typically include price escalator provisions which allow for price
increases, generally tied to an inflation index or to a fixed percentage. As of
June 30, 1999, the BFI Medical Waste Business served over 150,000 customers.
For processing activities, the BFI Medical Waste Business 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, the BFI Medical Waste Business recognizes revenue when
regulated medical waste is collected from its customers.
The BFI Medical Waste Business 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
53
<PAGE>
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.
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, the BFI Medical Waste Business 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,
the direct gross operating margin increased from 39.2% to 39.9%, 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, the BFI Medical Waste Business was charged for shared
SG&A costs. After the conversion, only directly related SG&A costs are charged
to the BFI Medical Waste Business.
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
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, the BFI Medical
Waste Business 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, the
BFI Medical Waste Business 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, the BFI Medical Waste Business
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. The BFI Medical Waste Business completed
three acquisition transactions during the year ended September 30, 1998, which
collectively contributed approximately $1,000,000 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, the
direct operating margin increased from 37.6% to 38.9%, primarily due to the
implementation of cost control measures at all of the processing facilities, and
a reduction of
54
<PAGE>
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, the BFI Medical Waste
Business recorded special charges of $257,000 relating to the write-down of one
non-core business asset. In 1997 the BFI Medical Waste Business 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. The BFI Medical Waste
Business 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.
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.
55
<PAGE>
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 the BFI Medical Waste Business recorded special
charges of $4,500,000 relating to the closure of an incinerator at Bronx, New
York. In 1996, the BFI Medical Waste Business 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 facilities of the BFI
Medical Waste Business 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.
The BFI Medical Waste Business 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). The BFI Medical Waste Business expects that
Allied will make the necessary arrangements to deal with the ongoing liquidity
and capital resource needs of the BFI Medical Waste Business.
ENVIRONMENTAL MATTERS
The operations of the BFI Medical Waste Business are described above and
include the collection, transportation, treatment, and disposal of medical
waste. The BFI Medical Waste Business 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, the BFI Medical Waste Business 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. The BFI Medical Waste Business 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. These obligations have been satisfied
and the Washington, D.C. facility was closed in 1997.
In 1997, the BFI Medical Waste Business voluntarily ceased operating its
incinerator at the Bronx, New York facility due to its inability to consistently
meet its permit requirements. In 1999, the BFI Medical Waste Business 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
56
<PAGE>
of the date of the agreement. The agreement also allows the BFI Medical Waste
Business on an interim basis to continue to operate its collection and transfer
operation at the same site.
The BFI Medical Waste Business 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.
The BFI Medical Waste Business believes that all of its current operations
are in material compliance with all required laws, regulations and operating
permits. Due to the nature of the BFI Medical Waste 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 the BFI Medical Waste Business may become involved in various actions in
the future. However, the BFI Medical Waste Business attempts to anticipate
future changes in laws, regulations and operation permit requirements which may
affect its 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.
The BFI Medical Waste Business 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 the BFI medical waste business utilize BFI's
systems. Conversions of the remaining facilities and operations are planned for
completion before December, 1999. The costs related to these conversions are not
material to the results of operations or financial position of the BFI Medical
Waste Business.
The risk to the BFI Medical Waste Business 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 the BFI Medical Waste Business 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 the BFI Medical Waste
Business's fiscal year 2000, is to be reported as a cumulative effect of a
change in accounting principle. Management of the BFI Medical Waste Business
believes that the future adoption of SOP No. 98-5 will not have a material
effect on its results of operation or financial position.
57
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--STERICYCLE
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
The following summarizes (in thousands) the Company's operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------------
1998 1999
-------------------- --------------------
$ % $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues............................................... $ 28,018 100.0 $ 48,887 100.0
Cost of revenues....................................... 19,629 70.1 32,340 66.2
Gross profit........................................... 8,389 29.9 16,547 33.8
Selling, general and administrative expenses........... 6,358 22.7 10,270 21.0
Income from operations................................. 2,031 7.2 6,277 12.8
Net income............................................. 1,868 6.7 4,987 10.2
Depreciation and amortization.......................... 1,733 6.2 3,545 7.3
EBITDA................................................. 3,764 13.4 10,211 20.9
</TABLE>
REVENUES. Revenues increased $20,869,000, or 74.5%, to $48,887,000 during
the six months ended June 30, 1999 from $28,018,000 during the comparable period
in 1998 as the Company continued to implement its strategy of acquiring selected
businesses and focusing on sales to higher-margin alternate care generators
while simultaneously paring certain higher-revenue but lower-margin accounts
with large quantity generators. The increase in revenues also reflects
$2,949,000 from the sale of machinery internationally. During the six months
ended June 30, 1999, acquisitions made during the preceding 12 months
contributed approximately $17,138,000 to the increase in revenues.
COST OF REVENUES. Cost of revenues increased $12,711,000, or 64.8%, to
$32,340,000 during the six months ended June 30, 1999 from $19,629,000 during
the comparable period in 1998. This increase was primarily due to the
substantial increase in revenues during 1999 compared to the same period in 1998
and the cost of equipment sold internationally. The gross margin percentage
increased to 33.8% during the six months ended June 30, 1999 from 29.9% during
the comparable period in 1998 due to further integration of new acquisitions
into the existing infrastructure, lower relative costs relating to the changing
mix of alternate care versus large quantity customers, increased utilization of
treatment capacity and sales of equipment internationally.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $10,270,000 for the six months ended June
30, 1999 from $6,358,000 for the comparable period in 1998. The increase was
largely the result of increases in selling and marketing expenses as a result of
the Company's acquisitions, higher amortization of goodwill, expansion of the
sales network, and increased administrative expenses related to the higher
volume. Selling, general and administrative expenses as a percentage of revenues
decreased to 21.0% during the six months ended June 30, 1999 from 22.7% during
the comparable period in 1998. Excluding amortization, selling, general and
administrative expenses as a percent of revenue decreased to 18.6% during the
six months ended June 30, 1999 from 20.4% during the comparable period in 1998.
EBITDA. Earnings before interest, income taxes, depreciation and
amortization ("EBITDA") increased by 171% to $10,211,000 or 20.9% of revenues
for the six months ended June 30, 1999 as compared to $3,764,000 or 13.4% of
revenues for the comparable period in 1998. The increase in EBITDA is primarily
due to the factors described above and an increase in depreciation and
amortization expense as a result of acquisitions completed since June 30, 1998.
58
<PAGE>
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to
$535,000 during the six months ended June 30, 1999, from $124,000 during the
comparable period in 1998, primarily due to increased interest expense related
to borrowings associated with acquisitions completed prior to the completion of
the issuance of common stock in a public offering in February 1999. Interest
income also increased to $272,000 during the six months ended June 30, 1999,
from $239,000 during the comparable period in 1998, primarily due to the
investment of proceeds from the public offering offset by lower cash balances
prior to the stock issuance.
OTHER INCOME AND EXPENSE. A one-time gain of $656,000 on the sale of routes
by Stericycle's subsidiary, 3CI Complete Compliance Corporation, was partially
offset by a one-time non-cash expense of $192,000 in the 1999 period for
warrants issued in connection with bridge loan borrowings in December 1998 and
January 1999.
INCOME TAX EXPENSE. The estimated effective tax rates of approximately
22.1% for the six months ended June 30, 1999 and 13.0% for the six months ended
June 30, 1998 reflect utilization of Stericycle's net operating losses and state
income taxes in states where it has no offsetting net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company's working capital was $29,366,000 compared to
working capital of $1,166,000 at December 31, 1998. The increase in working
capital is primarily due to higher cash balances and lower current liabilities
as a result of the public offering completed in February 1999. The Company has
available, beginning in October 1998, a $25,000,000 revolving line of credit
secured by the Company's accounts receivable and all of its other assets. At
June 30, 1999 the Company did not have any borrowings under this line. In
February 1999, the Company successfully completed a second public offering of
common stock and raised $47,158,000 net of offering costs.
Net cash provided by operating activities was $2,796,000 during the six
months ended June 30, 1999 compared to $893,000 for the comparable period in
1998. This increase primarily reflects higher net income, depreciation and
amortization expense offset by a reduction of accounts payable, deferred revenue
and accrued liabilities.
Net cash used in investing activities for the six months ended June 30, 1999
was $8,706,000 compared to $2,147,000 for the comparable period in 1998. The
change is primarily attributable to the increase in cash used for funding
acquisitions completed in 1999 and an increase in capital expenditures. Capital
expenditures were $1,879,000 for the six months ended June 30, 1999 compared to
$984,000 for the same period in 1998. The increase in capital spending is a
result of improvements made to existing treatment facilities, the movement of
the corporate office to a new facility and facility improvements made by the
Company's subsidiaries, 3CI and Med Tech Environmental Limited. Payments for
acquisitions and international investments amounted to $7,287,000 during 1999.
Net cash provided by financing activities was $24,189,000 during the six
months ended June 30, 1999 compared to net cash used in financing activities of
$762,000 for the comparable period in 1998. The difference between the two
periods results primarily from the completion of the Company's second public
offering of common stock, which raised $47,158,000 net of offering costs,
partially offset by the repayment of $25,851,000 in debt in the first half of
1999.
YEAR 2000 ISSUES
The Company has developed a plan to modify its information systems in
anticipation of the year 2000. The Company currently has substantially
implemented this plan at a cost of less than $200,000. In light of the Company's
progress to date and the fact that the Company's business is not significantly
affected by the software employed by its vendors and customers, the Company does
not anticipate that
59
<PAGE>
the year 2000 will present any material problems in respect of the Company's key
products and services. The Company is continuously making acquisitions and in
the course of an acquisition may acquire software or hardware that is not year
2000 compliant. In the event that this situation arises, the Company will take
the necessary steps to correct the compliance issues in a timely manner.
The Company's plan for the year 2000 comprises both remediating the
Company's existing hardware and software and upgrading the Company's business
information systems generally. The Company initiated the upgrading process in
1998, for reasons unrelated to year 2000 issues, in order to respond to the
growth in size of the Company's business and the inefficiencies caused by
disparate hardware and software systems. The Company's upgrading of its business
information systems has the benefit of enabling the Company to become year 2000
compliant in the course of the upgrade.
The Company has conducted an extensive review of potential year 2000 issues.
The Company's assessment of its treatment facilities and equipment concluded
that there was no risk that the Company would be unable to treat regulated
medical waste as a result of year 2000 issues. The new software that the Company
adopted in 1998 for accounting and related purposes is already year 2000
compliant. The Company's other software and computer hardware have been tested,
and upgrades or appropriate adjustments have been or will be made in accordance
with the Company's upgrade plans or as required. The Company is also in the
process of reviewing the year 2000 compliance status of its significant vendors.
The Company believes that it has an effective plan in place to resolve year
2000 issues in a timely manner. As of August 1999, and in the event that the
Company were unable to complete the remaining phases of its year 2000 plan, the
Company believes that, as a result of year 2000 issues solely affecting the
Company, the principal effect on the Company would be an inability to invoice a
small portion of its customers for the Company's services.
The Company is also developing contingency plans to take into account any
inability of the Company itself and others to become fully year 2000 compliant
in time. These plans involve, among other actions, implementing manual systems,
increasing inventories of parts and supplies and adjusting staffing strategies.
60
<PAGE>
UNAUDITED 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" and "Disclosure Regarding
Forward-Looking Statements" included elsewhere herein.
61
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BFI MEDICAL
STERICYCLE WASTE PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO
(NOTE 1) (NOTE 2) (NOTE 3) FORMA
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
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
---------- ----------- ----------- --------
---------- ----------- ----------- --------
</TABLE>
The accompanying notes are an integral part of this pro forma condensed combined
balance sheet.
62
<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>
<CAPTION>
SOURCES USES
- ------------------------------------------- -------------------------------------------
<S> <C> <C> <C>
Senior secured credit facility............. $ 225,000 Purchase price............................. $ 440,000
Senior subordinated notes.................. 150,000
Convertible preferred stock................ 75,000 Financing and direct 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
($323,752 in excess of the goodwill previously recorded by the BFI
Medical Waste Business).
63
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
3. PRO FORMA ADJUSTMENTS (CONTINUED)
(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.
(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.
64
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BFI MEDICAL OTHER
STERICYCLE WASTE ACQUISITION PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4) (NOTE 5)
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ 48,887 $ 101,621 $ 1,302 $ -- $ 151,810
Cost of revenues......................... (32,340) (66,413) (1,064) 3,311 (a) (96,506)
Selling, general and administrative
Expense................................ (10,270) (5,879) (258) (3,961) (a) (20,368)
Unusual costs............................ -- 469 -- -- 469
---------- ----------- ----------- ----------- -----------
Operating income......................... 6,277 29,798 (20) (650) 35,405
Interest income.......................... 272 -- -- -- 272
Interest expense......................... (535) -- -- (18,838) (b) (19,373)
Other income............................. 389 -- -- -- 389
---------- ----------- ----------- ----------- -----------
Income before income taxes............... 6,403 29,798 (20) (19,488) 16,693
Income tax expense....................... (1,416) -- -- (4,116) (c) (5,532)
---------- ----------- ----------- ----------- -----------
Net income............................... 4,987 29,798 (20) (23,604) 11,161
Dividends on convertible preferred
stock.................................. -- -- -- (1,266) (d) (1,266)
---------- ----------- ----------- ----------- -----------
Net income to common
shareholders........................... $ 4,987 $ 29,798 $ (20) $ (24,870) $ 9,895
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Basic earnings per share................. $ 0.36 $ 0.72
---------- -----------
---------- -----------
Weighted average common shares
Outstanding............................ 13,812 13,812
---------- -----------
---------- -----------
Diluted earnings per share............... $ 0.35 $ 0.60
---------- -----------
---------- -----------
Weighted average common and common
Equivalent shares outstanding.......... 14,210 4,286 (e) 18,496
---------- ----------- -----------
---------- ----------- -----------
Depreciation and amortization............ $ 3,545 $ 7,465 $ 119 $ 650 (a) $ 11,779
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are integral part of this pro forma
condensed combined statement of operations.
65
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BFI MEDICAL OTHER
STERICYCLE WASTE ACQUISITION PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4) (NOTE 5)
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 66,681 $ 198,222 $ 25,372 $ -- $ 290,275
Cost of revenues........................ (45,328) (132,629) (19,282) 6,895 (a) (190,344)
Selling, general and administration
expense............................... (14,929) (13,273) (4,964) (8,157) (a) (41,323)
Unusual costs........................... -- (257) (178) -- (435)
---------- ----------- ----------- ----------- -----------
Operating income........................ 6,424 52,063 948 (1,262) 58,173
Interest income......................... 714 -- -- -- 714
Interest expense........................ (777) -- (1,619) (37,536) (b) (39,932)
---------- ----------- ----------- ----------- -----------
Income before income taxes.............. 6,361 52,063 (671) (38,798) 18,955
Income tax expense...................... (648) -- -- (4,895) (c) (5,543)
Minority interest....................... -- -- 43 -- 43
---------- ----------- ----------- ----------- -----------
Net income.............................. 5,713 52,063 (628) (43,693) 13,455
Dividends on convertible preferred
stock................................. -- -- -- (2,531) (d) (2,531)
---------- ----------- ----------- ----------- -----------
Net income to common shareholders....... $ 5,713 $ 52,063 $ (628) $ (46,224) $ 10,924
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Basic earnings per share................ $ 0.54 $ 1.02
---------- -----------
---------- -----------
Weighted average common shares
outstanding........................... 10,647 37 10,684
---------- ----------- -----------
---------- ----------- -----------
Diluted earnings per share.............. $ 0.51 $ 0.86
---------- -----------
---------- -----------
Weighted average common and common
Equivalent shares outstanding......... 11,264 37 4,286 (e) 15,587
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Depreciation and amortization........... $ 4,064 $ 14,972 $ 2,054 $ 1,262 (a) $ 22,352
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are integral part of this pro forma
condensed combined statement of operations.
66
<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 HISTORICAL
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. 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.
3. ACQUISITION ADJUSTMENTS
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. Also reflects the
unaudited pro forma condensed combined results of operations for the six months
ended June 30, 1999 and for the year ended December 31, 1998 of MDS, acquired by
BFI in April 1999, and the related purchase price allocations.
4. OTHER 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) A decrease in depreciation expense of $3,541 for the six months ended
June 30, 1999 and $7,314 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. The preliminary appraised values of
the acquired property and equipment are not materially different from the
BFI historical net book value. The following table indicates the
components of the adjustments by
67
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
4. OTHER PRO FORMA ADJUSTMENTS (CONTINUED)
asset class and the amount by which current estimates of average useful
lives differ from the average remaining lives in the depreciation
accounts of BFI:
<TABLE>
<CAPTION>
DEPRECIATION EXPENSE
CURRENT APPROXIMATE ------------------------
PRELIMINARY ESTIMATED BFI SIX MONTHS
APPRAISED AVERAGE REMAINING YEAR ENDED ENDED
ACQUIRED PROPERTY AND EQUIPMENT FAIR VALUE LIFE AVERAGE LIFE 12/31/98 6/30/99
- ------------------------------------------------- ----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Land............................................. $ 3,308 N/A N/A $ -- $ --
Buildings and improvements....................... 25,982 30 21 866 433
Machinery and equipment.......................... 30,455 7.5 3 4,061 2,030
Office equipment and furniture................... 599 5 2 120 60
Construction in process.......................... 204 N/A N/A -- --
----------- ----------- -----------
$ 60,548 5,047 2,523
-----------
-----------
BFI Medical Waste Business depreciation expense
(including MDS)................................ 12,361 6,064
----------- -----------
Decrease in depreciation expense................. $ 7,314 $ 3,541
----------- -----------
----------- -----------
</TABLE>
The decrease in depreciation expense is due to our belief that the assets
acquired will have an average useful life longer than that originally
determined by BFI. The expected remaining useful lives added to the
current age of such assets is consistent with the useful lives Stericycle
assigns to its other similar assets, when acquired.
Also includes 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 and appraised values and goodwill based on a 40 year
life.
(b) 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, 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.
(c) Income tax expense at Stericycle's tax rate of 40% applied to deductible
items.
(d) Dividends at the annual rate of 3.375% on the convertible redeemable
preferred stock, payable in additional shares of the convertible
redeemable preferred stock.
(e) 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.
68
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
5. EXCLUDED COSTS AND EXPECTED COST SAVINGS (IN THOUSANDS, EXCEPT PER SHARE
DATA)
The statements of operations data for the BFI Medical Waste Business and the
pro forma condensed combined statements of operations exclude indirect selling,
general and administrative expenses of the BFI Medical Waste Business of $8,919
and $17,090 for the six months ended June 30, 1999 and the year ended September
30, 1998, respectively. See note 3 to the Notes to Financial Statements of the
BFI Medical Waste Business. The pro forma condensed combined statements of
operations also do not reflect the effect of the expected elimination of
duplicative personnel and facilities costs related to both Stericycle and the
BFI Medical Waste Business. Based upon our detailed transition plans, we
estimate that if these expected eliminations had been in effect on January 1,
1998, they would have had the effect of reducing transportation, plant,
operations and facilities costs by $6,508, during the six months ended June 30,
1999 and by $12,963, during the year ended December 31, 1998. Adjusting for the
indirect selling, general and administrative expenses mentioned above, the
reduction in transportation, plant, operations and facilities costs, and the
related tax effects of each, would result in net income to common shareholders,
basic earnings per share, and diluted earnings per share of $8,650, $0.63, and
$0.54 for the six months ended June 30, 1999 and $8,833, $0.83 and $0.73 for the
year ended December 31, 1998, respectively.
69
<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>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
(IN THOUSANDS) 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........................... -- -- -- -- --
</TABLE>
- ------------------------
(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.
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 the BFI Medical Waste Business was operated as a
service line of BFI, 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>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS) ----------- ----------- --------- --------- ---------
(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>
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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 other Transactions
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. 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.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
------------------- -------------------
<S> <C> <C>
Basic Earnings Per Share:
Stericycle historical................................. $ 0.54 $ 0.36
Pro forma combined.................................... $ 1.02 $ 0.72
Diluted Earnings Per Share:
Stericycle historical................................. $ 0.51 $ 0.35
Pro forma combined.................................... $ 0.86 $ 0.60
Book Value Per Share:
Stericycle historical................................. $ 4.76 $ 7.57
Pro forma combined.................................... -- $ 5.72
</TABLE>
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.
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STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Any proposal of a stockholder intended to be presented for consideration at
our Annual Meeting of Stockholders in 2000 must be received by us no later than
January 1, 2000 in order to be eligible for inclusion in our proxy statement for
the meeting. Stockholder proposals for inclusion in our proxy statement and form
of proxy must satisfy the requirements of the rules of the SEC in order to be
included. Stockholder proposals should be sent to our Corporate Secretary at
28161 North Keith Drive, Lake Forest, Illinois 60045.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 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 SEC. 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 $15,000, 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 SEC (File No. 0-21229) pursuant to the Exchange Act.
------------------------
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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.
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EXHIBIT II
STERICYCLE, INC.
CERTIFICATE OF DESIGNATION RELATING TO
SERIES A CONVERTIBLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE
------------------------
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
------------------------
Stericycle, Inc., a Delaware corporation (the "Corporation"), hereby
certifies that pursuant to the authority contained in Article Four of the
Corporation's Amended and Restated Certificate of Incorporation, as amended by
the First Amendment (as amended, the "Restated Certificate of Incorporation"),
and in accordance with the provisions of Section 151 of the General Corporation
Law of the State of Delaware, the following resolution was duly adopted by the
Board of Directors of the Corporation creating a series of its Preferred Stock
designated as "Series A Convertible Preferred Stock":
RESOLVED, that there is hereby created a series of the Preferred Stock of
the Corporation designated as Series A Convertible Preferred Stock, par value
$.01 per share (the "Series A Preferred Stock"), consisting of 100,000 shares
(25,000 of which shall be available solely for the payment of preferential
dividends pursuant to the following Section 1A) and having the following voting
powers, preferences and relative, participating, optional, conversion and other
special rights, and qualifications, limitations and restrictions:
1. DIVIDENDS.
1A. PREFERENTIAL DIVIDENDS
Preferential dividends on each share of Series A Preferred Stock shall
accrue daily (whether or not there are profits or surplus available therefor) at
the rate of 3.375% per annum of the Liquidation Preference thereof from the date
of issuance of such share until the earliest of (i) the date on which the
Liquidation Value of such share of Series A Preferred Stock is paid to the
holder thereof in connection with the liquidation of the Corporation or the
Corporation's redemption of such share of Series A Preferred Stock, (ii) the
date on which such share of Series A Preferred Stock is converted into shares of
Common Stock or (iii) the date on which such share of Series A Preferred Stock
is otherwise acquired by the Corporation. Accrued preferential dividends on each
share of Series A Preferred Stock shall accumulate annually on the anniversary
of the date of initial issuance of such share. When and as declared,
preferential dividends shall be paid only by the issuance of additional shares
of Series A Preferred Stock (including fractional shares thereof) having an
aggregate Liquidation Value at the time of such payment equal to the amount of
the dividend to be paid. If and when any shares of Series A Preferred Stock are
issued under this Section 1A for the payment of accumulated dividends and
accrued dividends which have not yet been accumulated, such shares of Series A
Preferred Stock shall be deemed to be validly issued and outstanding and fully
paid and nonassessable.
1B. PARTICIPATING DIVIDENDS
In addition to preferential dividends payable under Section 1A, holders of
Series A Preferred Stock shall share pro rata with holders of Common Stock, on
the basis of the number of shares of Common Stock which each holder of Preferred
Stock would be entitled to receive upon conversion of the holder's Preferred
Stock into Common Stock as of the record date for the dividend or distribution,
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in all other dividends and distributions, if any, that the Corporation's board
of directors may declare from time to time.
2. LIQUIDATION.
Upon any liquidation, dissolution or winding up of the Corporation (a
"Liquidation"), each holder of Series A Preferred Stock shall be entitled to be
paid, before any distribution or payment is made in respect of any Junior
Securities, an amount in cash equal to the greater of the following amounts (the
"Liquidation Distribution"): (i) the product obtained by multiplying the
Liquidation Value of each share by the number of shares of Series A Preferred
Stock held by the holder or (ii) the amount that would be payable to the holder
in respect of the Common Stock issuable upon conversion of the holder's shares
of Series A Preferred Stock if all outstanding Series A Preferred Stock were
converted into Common Stock immediately prior to the Liquidation. If upon a
Liquidation the Corporation's assets available for distribution to its
stockholders are insufficient to permit payment to holders of Series A Preferred
Stock of the aggregate Liquidation Value of their Series A Preferred Stock, then
the entire assets available for distribution shall be distributed among holders
of Series A Preferred Stock pro rata on the basis of the aggregate Liquidation
Value of the Series A Preferred Stock held by each holder. After payment in full
has been made to holders of Series A Preferred Stock of the aggregate
Liquidation Distributions in respect of their Series A Preferred Stock, holders
of Series A Preferred Stock shall not share in any remaining assets of the
Corporation available for distribution. The Corporation shall mail written
notice of a Liquidation to each holder of record of Series A Preferred Stock at
least 30 days prior to the date for payment or distribution to stockholders
stated in the Corporation's notice; and at any time prior to the date stated in
the Corporation's notice, a holder of Series A Preferred Stock may, at its
option, convert its Series A Preferred Stock into Common Stock in accordance
with Section 4.
3. VOTING RIGHTS.
3A. ORDINARY VOTING.
Except as otherwise required by law, the Corporation's Restated Certificate
of Incorporation or this Certificate of Designation, holders of Series A
Preferred Stock shall be entitled to vote with holders of Common Stock as a
single class on each matter submitted to a vote of the Corporation's
stockholders. Each share of Series A Preferred Stock shall have a number of
votes equal to the number of votes possessed by the number of shares of Common
Stock into which the share of Series A Preferred Stock is convertible as of the
record date for determining the stockholders entitled to vote on the matter. Any
fractional voting rights that result (after aggregating, in the case of each
holder of Series A Preferred Stock, all shares of Common Stock into which all of
the holders' shares of Series A Preferred Stock could be converted) shall be
rounded upwards or downwards to the nearest whole number (with one-half being
rounded upwards).
3B. ELECTION OF DIRECTORS.
So long as the initial purchasers of Series A Preferred Stock and their
affiliates hold at least 50% of the Underlying Common Stock (determined as of
the date of the initial issuance of Series A Preferred Stock), holders of Series
A Preferred Stock, voting separately as a single class to the exclusion of all
other classes of the Corporation's capital stock and with each share of Series A
Preferred Stock entitled to one vote, shall be entitled, in the election of
directors of the Corporation, to elect two directors to serve on the
Corporation's board of directors. Each director so elected shall serve until his
successor is duly elected by holders of Series A Preferred Stock or he is
removed from office by holders of Series A Preferred Stock. If holders of Series
A Preferred Stock for any reason fail to elect anyone to fill any such
directorship, the position shall remain vacant until such time as holders of
Series A Preferred Stock elect a director to fill the position, and it shall not
be filled by resolution or vote of the Corporation's board of directors or its
other stockholders. In the event that the initial
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purchasers of Series A Preferred Stock and their affiliates cease to hold at
least 50% of the Underlying Common Stock but continue to hold at least 25% of
the Underlying Common Stock (determined as of the date of the initial issuance
of Series A Preferred Stock), the right and power provided to holders of Series
A Preferred Stock by this Section 3B shall be limited to the election of only
one director. In the event that the initial purchasers of Series A Preferred
Stock and their affiliates cease to hold at least 25% of the Underlying Common
Stock (determined as of the date of the initial issuance of Series A Preferred
Stock), the right and power provided to holders of Series A Preferred Stock by
this Section 3B shall terminate.
4. CONVERSION.
4A. CONVERSION PROCEDURE.
(a) At any time and on more than one occasion, a holder of Series A
Preferred Stock may convert all or any portion of the holder's shares of Series
A Preferred Stock (including any fraction of a share) into a number of shares of
Common Stock computed by dividing (i) the aggregate Liquidation Value of the
shares of Series A Preferred Stock to be converted by (ii) the Conversion Price
then in effect.
(b) Each conversion of Series A Preferred Stock shall be deemed to have been
effected as of the close of business on the date on which the certificate or
certificates representing the Series A Preferred Stock to be converted have been
surrendered for conversion at the Corporation's principal office. When the
conversion has been effected, the rights of the converting holder of Series A
Preferred Stock as such holder shall cease, and the Person or Persons in whose
name or names any certificate or certificates for shares of Common Stock are to
be issued upon the conversion shall be deemed to have become the holder or
holders of record of the shares of Common Stock represented thereby.
(c) As soon as possible but in any event within 10 business days after a
conversion has been effected, the Corporation shall deliver to the converting
holder: (i) a certificate or certificates representing the number of shares of
Common Stock issuable by reason of the conversion in such name or names and such
denomination or denominations as the converting holder has specified; and (ii) a
certificate representing any shares of Series A Preferred Stock which were
represented by the certificate or certificates delivered to the Corporation in
connection with the conversion but which were not converted.
(d) The issuance of a certificate or certificates for shares of Common Stock
upon the conversion of Series A Preferred Stock shall be made without charge to
the converting holder for any issuance tax in respect of the conversion or other
cost incurred by the Corporation in connection with the conversion and the
related issuance of shares of Common Stock. Upon conversion of each share of
Series A Preferred Stock, the Corporation shall take all actions that may be
necessary in order to insure that the Common Stock issued as a result of the
conversion is validly issued, fully paid and nonassessable.
(e) The Corporation shall not close its books against the transfer of Series
A Preferred Stock or of Common Stock issued or issuable upon conversion of
Series A Preferred Stock in any manner which interferes with the timely
conversion of Series A Preferred Stock.
(f) If any fractional interest in a share of Common Stock would, except for
the provisions of this Section 4A(f), be issuable upon any conversion of Series
A Preferred Stock, the Corporation, in lieu of issuing the fractional share
otherwise issuable, may pay an amount to the holder of the fractional interest
equal to the Market Price of the fractional interest as of the date of
conversion.
4B. CONVERSION PRICE. The initial conversion price for Series A Preferred
Stock (the "Conversion Price") shall be $17.50. In order to prevent dilution of
the conversion rights granted under
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Section 4A, the initial Conversion Price for Series A Preferred Stock shall be
subject to adjustment from time to time pursuant to Sections 4C, 4D, 4E and 4F.
4C. COMMON STOCK SUBDIVISION OR COMBINATION. If the Corporation at any
time subdivides (by a stock split, stock dividend, recapitalization or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to the subdivision
shall be proportionately reduced; and if the Corporation at any time combines
(by reverse stock split or otherwise) its outstanding shares of Common Stock
into a smaller number of shares, the Conversion Price in effect immediately
prior to the combination shall be proportionately increased. Any adjustment of
the Conversion Price under this Section 4C shall become effective as and when
the subdivision or combination becomes effective.
4D. CORPORATE CHANGE. Prior to the consummation of any Corporate Change,
the Corporation shall make appropriate provisions (in form and substance
satisfactory to holders of a majority of the shares of Series A Preferred Stock
then outstanding) to insure that each holder of Series A Preferred Stock shall
have the right to receive upon conversion of the holder's Series A Preferred
Stock, in lieu of the shares of Common Stock that the holder otherwise would
have been entitled to receive upon conversion, the stock, securities or assets
that the holder would have received in connection with the Corporate Change if
the holder had converted the holder's Series A Preferred Stock immediately prior
to the Corporate Change. The Corporation shall also make appropriate provisions
(in form and substance satisfactory to holders of a majority of the shares of
Series A Preferred Stock then outstanding) to insure that the provisions of this
Section 4 and Section 5 will continue to be applicable to the Series A Preferred
Stock (including, in the case of any Corporate Change in which the successor or
purchasing corporation is other than the Corporation, an immediate adjustment of
the Conversion Price to the value of the Common Stock reflected by the terms of
the Corporate Change, if the value so reflected is less than the Conversion
Price in effect immediately prior to the Corporate Change). The Corporation
shall not effect any Corporate Change unless, prior to the consummation of the
Corporate Change, the successor corporation (if other than the Corporation) or
the purchasing corporation assumes by written instrument (in form and substance
reasonably satisfactory to holders of a majority of the shares of Series A
Preferred Stock then outstanding) the obligation to deliver to each holder of
Series A Preferred Stock such shares of stock, securities or assets that the
holder is entitled to receive in accordance with this Section 4D.
4E. WEIGHTED AVERAGE ANTI-DILUTION PROTECTION. If and whenever on or after
the date of the initial issuance of Series A Preferred Stock the Corporation
issues or sells, or in accordance with Section 4F is deemed to have issued or
sold, any shares of the Common Stock for a consideration per share less than (i)
the Conversion Price in effect immediately prior to the time of such issue or
sale or (ii) the Market Price of the Common Stock determined as of the date of
such issue or sale, then immediately upon such issue or sale the Conversion
Price shall be reduced to whichever of the following Conversion Prices is lower:
(1) the Conversion Price determined by dividing (i) the sum of (x) the
product derived by multiplying the Conversion Price in effect immediately
prior to such issue or sale by the number of shares of Common Stock Deemed
Outstanding immediate prior to such issue or sale plus (y) the
consideration, if any, received by the Corporation upon such issue or sale,
by (ii) the number of shares of Common Stock Deemed Outstanding immediately
after such issue or sale; or
(2) the Conversion Price determined by multiplying the Conversion Price
in effect immediately prior to such issue or sale by a fraction, the
numerator of which shall be the sum of (i) the number of shares of Common
Stock Deemed Outstanding immediately prior to such issue or sale multiplied
by the Market Price of the Common Stock determined as of the date of such
issuance or sale plus (ii) the consideration, if any, received by the
Corporation upon such issue or sale, and the denominator of which shall be
the product derived by multiplying the Market Price of
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the Common Stock by the number of shares of Common Stock deemed outstanding
immediately after such issue or sale.
Notwithstanding the foregoing, there shall be no adjustment in the Conversion
Price as a result of:
(i) the issue of shares of Common Stock upon the exercise of Options
outstanding as of the date of filing this Certificate of Designation; and
(ii) for each fiscal year of the Corporation, the issue or sale (or
deemed issue or sale) (occurring on or after August 13, 1999, in the case of
the fiscal year ended December 31, 1999) of up to the Permissible Number of
Shares for such fiscal year by reason of any one or combination of the
following:
(A) the grant or repricing of Options which are authorized to be
granted or repriced under the Corporation's existing stock option plans
as of the date of filing this Certificate of Designation and which are
granted or repriced after the date of filing this Certificate of
Designation at an exercise price not less than the Market Price on the
date of grant or repricing; and
(B) the grant or repricing of Options which are authorized to be
granted or repriced under any new stock option plan which is adopted by
the Corporation and approved by its stockholders after the date of filing
this Certificate of Designation and which are granted or repriced at an
exercise price not less than the Market Price on the date of grant or
repricing;
(C) the issuance of Common Stock as consideration for (either in
whole or in part) the Corporation's acquisition of the assets or stock of
any other Person or Persons in one or more transactions approved by the
Corporation's board of directors.
As used in the preceding clause (ii), "Permissible Number of Shares" means, with
respect to any fiscal year, the number of shares of Common Stock equal to the
product of (i) the number of shares of Common Stock outstanding as of 4:00 p.m.
on the last trading day prior to the start of such fiscal year multiplied by
(ii) 0.04 (rounding any resulting fractional share to the nearest whole share).
The Permissible Number of Shares for any fiscal year shall be proportionately
adjusted for stock splits, combinations and dividends on the Common Stock during
such year.
4F. EFFECT ON CONVERSION PRICE OF CERTAIN EVENTS. For purposes of
determining the adjusted Conversion Price under Section 4E, the following shall
be applicable:
(a) If the Corporation in any manner grants or sells any Options and the
price per share for which Common Stock is issuable upon the exercise of such
Options, or upon conversion or exchange of any Convertible Securities issuable
upon exercise of such Options, is less than (i) the Conversion Price in effect
immediately prior to the time of the granting or sale of such Options or (ii)
the Market Price of the Common Stock determined as of such time, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to be outstanding and to have been issued and sold by the Corporation at
the time of the granting or sale of such Options for such price per share. For
purposes of this paragraph the "price per share for which Common Stock is
issuable" shall be determined by dividing (A) the total amount, if any, received
or receivable by the Corporation as consideration for the granting or sale of
such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon exercise of all such Options, plus in the case
of such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable to the Corporation upon the
issuance or sale of such Convertible Securities and the conversion or exchange
thereof, by (B) the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the
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exercise of such Options. No further adjustment of the Conversion Price shall be
made when Convertible Securities are actually issued upon the exercise of such
Options or when Common Stock is actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities.
(b) If the Corporation in any manner issues or sells any Convertible
Securities and the price per share for which Common Stock is issuable upon
conversion or exchange thereof is less than (i) the Conversion Price in effect
immediately prior to the time of such issue or sale or (ii) the Market Price of
the Common Stock determined as of such time, then the maximum number of shares
of Common Stock issuable upon conversion or exchange of such Convertible
Securities shall be deemed to be outstanding and to have been issued and sold by
the Corporation at the time of the issuance or sale of such Convertible
Securities for such price per share. For the purposes of this paragraph, the
"price per share for which Common Stock is issuable" shall be determined by
dividing (A) the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No further adjustment of the Conversion Price shall
be made when Common Stock is actually issued upon the conversion or exchange of
such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustments of the
Conversion Price had been or are to be made pursuant to other provisions of this
Section 6, no further adjustment of the Conversion Price shall be made by reason
of such issue or sale.
(c) If the purchase price provided for in any Options, the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities or the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock changes at any time, a
corresponding number of shares of Common Stock shall be deemed to have been
issued and the Conversion Price in effect at the time of such change shall be
immediately adjusted to the Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold. If such
adjustment would result in an increase of the Conversion Price then in effect,
however, such adjustment shall not be effective until 30 days after written
notice thereof has been given by the Corporation to all holders of Series A
Preferred Stock. For purposes of this Section 4E, if the terms of any Option or
Convertible Security which was outstanding as of the date of issuance of the
Series A Preferred Stock are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change; but no such change
shall at any time cause the Conversion Price hereunder to be increased.
(d) Upon the expiration of any Option or the termination of any right to
convert or exchange any Convertible Security without the exercise of any such
Option or right, the Conversion Price then in effect hereunder shall be adjusted
immediately to the Conversion Price which would have been in effect at the time
of such expiration or termination had such Option or Convertible Security, to
the extent outstanding immediately prior to such expiration or termination,
never been issued. If such expiration or termination would result in an increase
in the Conversion Price then in effect, however, such increase shall not be
effective until 30 days after written notice thereof has been given to all
holders of Series A Preferred Stock. For purposes of this Section 4E, the
expiration or termination of any Option or Convertible Security which was
outstanding as of the date of issuance of the Series A Preferred Stock shall not
cause the Conversion Price hereunder to be adjusted unless, and only to the
extent that, a change in the terms of such Option or Convertible Security caused
it to be deemed to have been issued after the date of issuance of the Series A
Preferred Stock.
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(e) If any Common Stock, Option or Convertible Security is issued or sold or
deemed to have been issued or sold for cash, the Consideration received therefor
shall be deemed to be the amount received by the Corporation therefor (net of
discounts, commissions and related expenses). If any Common Stock, Option or
Convertible Security is issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Corporation shall be
the fair value of such consideration, except where such consideration consists
of securities, in which case the amount of consideration received by the
Corporation shall be the Market Price thereof as of the date of receipt. If any
Common Stock, Option or Convertible Security is issued to the owners of the
non-surviving entity in connection with any merger in which the Corporation is
the surviving corporation, the amount of consideration therefor shall be deemed
to be the fair value of such portion of the net assets and business or the
non-surviving entity as is attributable to such Common Stock, Option or
Convertible Security, as the case may be. The fair value of any consideration
other than cash and securities shall be determined jointly by the Corporation
and the holders of a majority of the outstanding shares of Series A Preferred
Stock. If such parties are unable to reach agreement within a reasonable period
of time, the fair value of such consideration shall be determined by an
independent appraiser experienced in valuing such type of consideration jointly
selected by the Corporation and the holders of a majority of the outstanding
shares of Series A Preferred Stock. The determination of such appraiser shall be
final and binding upon the parties, and the fees and expenses of such appraiser
shall be borne by the Corporation.
(f) In case any Option is issued in connection with the issue or sale of
other securities of the Corporation, together comprising one integrated
transaction in which no specific consideration is allocated to such Option by
the parties thereto, the Option shall be deemed to have been issued for a
consideration of $.01.
(g) The number of shares of Common Stock outstanding at any given time shall
not include shares owned or held by or for the account of the Corporation or any
Subsidiary, and the disposition of any shares so owned or held shall be
considered an issue or sale of Common Stock.
(h) If the Corporation takes a record of the holders of Common Stock for the
purpose of entitling them (i) to receive a dividend or other distribution
payable in Common Stock, Options or in Convertible Securities or (ii) to
subscribe for or purchase Common Stock, Options or Convertible Securities, then
such record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or upon the making of such other distribution or the date of
the granting of such right of subscription or purchase, as the case may be.
4G. NOTICES. Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice of the adjustment to all holders of Series
A Preferred Stock.
The Corporation shall also give written notice to all holders of Preferred
Stock at least 20 days prior to the date on which the Corporation closes its
books or takes a record (i) with respect to the payment of any dividend or
distribution to stockholders, (ii) with respect to any pro rata subscription
offer to holders of Common Stock or (iii) for determining rights to vote with
respect to any Liquidation or Corporate Change.
5. REDEMPTIONS.
5A. REDEMPTION AT HOLDER'S OPTION. At any time on or after (i) a Change in
Control or (ii) a Bankruptcy Event has occurred and has continued for 60 days,
each holder of Series A Preferred Stock shall have the right to require the
Corporation to redeem all or a portion of the holder's Series A Preferred Stock
at a redemption price equal to the aggregate Liquidation Value of the shares to
be redeemed. Any holder of Series A Preferred Stock may exercise the holder's
redemption right under this Section 5A by delivering to the Corporation at its
principal office a written notice stating the
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holder's intention to exercise the holder's redemption right and the number of
the holder's shares of Series A Preferred Stock to be redeemed. The Corporation
shall be obligated to redeem the total number of shares of Series A Preferred
Stock specified in the holder's redemption notice on the 15th business day
following its receipt of the holder's notice. Within five days following receipt
of a redemption notice from any holder of Series A Preferred Stock, the
Corporation shall give written notice of the contemplated redemption to all
other holders of Series A Preferred Stock, and each of them shall have the
right, exercisable by written notice delivered to the Corporation at its
principal office within 10 business days after receipt of the Corporation's
notice, to request that all or a portion of the holder's shares of Series A
Preferred Stock also be redeemed at the same time as the contemplated
redemption. Redemptions under this Section 5A shall be subject to the terms of
the Corporation's outstanding indebtedness, and the Corporation shall have no
obligation to redeem any shares of Series A Preferred Stock in violation of the
terms of its outstanding funded indebtedness.
5B. REDEMPTION AT COMPANY'S OPTION. Beginning on the 30th-month
anniversary of the date of initial issuance of Series A Preferred Stock, the
Corporation shall have the right to redeem all (but not less than all) of the
outstanding shares of Series A Preferred Stock at a redemption price equal to
the aggregate Liquidation Value of the shares to be redeemed, upon written
notice of the proposed redemption to all holders of Series A Preferred Stock
given at least 30 days prior to the proposed redemption date, if both of the
following conditions are satisfied:
(1) the Market Price of a share of Common Stock for the 20 consecutive
trading days immediately preceding the date of the Corporation's redemption
notice is at least 150% of the Conversion Price then in effect; and
(2) as of the redemption date, a registration statement covering all of
the shares of Common Stock issued or issuable upon the conversion of all of
the shares of Series A Preferred Stock delivered for conversion pursuant to
Section 4A after the date of the Corporation's redemption notice and at
least five business days prior to the redemption date, and providing for an
offering on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, has been declared effective by the Securities and
Exchange Commission.
The Corporation's exercise of its redemption rights under this Section 5B shall
be subject to the conversion rights under Section 4A of each holder of Series A
Preferred Stock, who may exercise those rights at any time prior to the
redemption date. Redemptions under this Section 5B shall be subject to the terms
of the Corporation's outstanding indebtedness, and the Corporation may not
exercise its redemption rights under this Section 5B in violation of the terms
of its outstanding funded indebtedness.
5C. PAYMENT OF REDEMPTION PRICE. For each share of Series A Preferred
Stock which is to be redeemed pursuant to Sections 5A or 5B, the Corporation
shall be obligated on the redemption date to pay to the holder, upon the
holder's surrender at the Corporation's principal office of the certificate
representing the share to be redeemed, the full redemption price of the share in
immediately available funds. In the case of a redemption pursuant to Section 5A,
if the funds of the Corporation legally available for the redemption of Series A
Preferred Stock on the redemption date are insufficient to redeem the total
number of shares of Series A Preferred Stock that the Corporation is required to
redeem, those funds which are legally available shall be used to redeem the
maximum possible number of shares of Series A Preferred Stock pro rata among the
holders of the shares to be redeemed on the basis of the number of shares held
by each holder. As and when following the redemption date additional funds of
the Corporation become legally available for the redemption of Series A
Preferred Stock, the Corporation shall immediately use such funds to redeem the
balance of the shares of Series A Preferred Stock which the Corporation became
obligated to redeem on the redemption date but which it has not redeemed. In the
case of a redemption pursuant to Section 5B, the Corporation may not redeem any
shares of Series A Preferred Stock unless the funds of the Corporation legally
available
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for the redemption of Series A Preferred Stock are sufficient to redeem all of
the outstanding shares of Series A Preferred Stock.
5D. REISSUANCE OF CERTIFICATES. In the event that fewer than the total
number of shares of Series A Preferred Stock represented by any certificate are
redeemed upon a redemption pursuant to Sections 5A or 5B, the Corporation shall
issue a new certificate representing the number of unredeemed shares of Series A
Preferred Stock to the holder of those shares without cost to the holder
promptly after the holder's surrender of the certificate representing the
redeemed shares of Series A Preferred Stock.
5E. REDEEMED SHARES. Any shares of Series A Preferred Stock which are
redeemed by the Corporation shall be canceled and shall not be reissued, sold or
transferred.
6. RESTRICTIONS AND LIMITATIONS.
As long as any shares of Series A Preferred Stock remain outstanding, the
Corporation shall not amend or restate this Certificate of Designation or its
Restated Certificate of Incorporation or by-laws in any manner that adversely
affects the powers, preferences and rights of Series A Preferred Stock as
designated in this Certificate of Designation. As long as any of the initial
number of shares of Series A Preferred Stock remain outstanding, the Corporation
shall not take any of the following actions without the affirmative vote or
written consent of holders of a majority of the shares of Series A Preferred
Stock then outstanding:
(1) file any other certificate of designation or amend or restate this
Certificate of Designation or the Corporation's Restated Certificate of
Incorporation or by-laws (as each of them may be amended in compliance with
this Section 6) in any manner that adversely affects the powers, preferences
and rights of Series A Preferred Stock as designated in this Certificate of
Designation (as it may be amended in compliance with this Section 6);
(2) declare or pay any dividends on or declare or make any other direct
or indirect distribution on account of any Junior Securities, or set apart
any sum for any such purpose, except in accordance with Section 1;
(3) redeem, purchase or otherwise acquire for value any shares of Series
A Preferred Stock except in accordance with Section 5; or
(4) fix the size of the Corporation's board of directors at any number
in excess of nine except in accordance with Section 7.
7. SPECIAL VOTING RIGHTS.
7A. ADDITIONAL DIRECTORS. If a Bankruptcy Event has occurred and has
continued for 60 days, and if at the time there are at least 25% of the initial
number of shares of Series A Preferred Stock outstanding, the number of
directors constituting the Corporation's board of directors shall be increased,
at the request of holders of a majority of the shares of Series A Preferred
Stock then outstanding, by the minimum number that, taking into account the
number of incumbent directors, if any, already serving as nominees of holders of
Series A Preferred Stock, shall constitute a majority of the board of directors.
Holders of Series A Preferred Stock shall have the special right, voting
separately as a single class (with each share of Series A Preferred Stock being
entitled to one vote) and to the exclusion of all other classes of the
Corporation's stock, to elect individuals to fill the newly-created
directorships, to remove any individuals elected to these directorships and to
fill any vacancies in these directorships. The special right of the holders of
Series A Preferred Stock to elect or remove members of the board of directors
may be exercised at the special meeting called pursuant to Section 7B, at any
annual or special meeting of stockholders or by written consent in lieu of a
stockholders meeting. This special right of holders of Series A Preferred Stock
shall continue until such time as the Bankruptcy Event has ceased to exist, at
which time the special right shall terminate subject to
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revesting upon the occurrence and continuation of any other Bankruptcy Event
giving rise to the special right under this Section 7A.
7B. SPECIAL MEETING. At any time when the special right under Section 7A
has vested in the holders of Series A Preferred Stock, a proper officer of the
Corporation shall, upon the written request of holders of at least 20% of the
shares of Series A Preferred Stock then outstanding, addressed to the secretary
of the Corporation, call a special meeting of holders of Series A Preferred
Stock for the purpose of electing directors pursuant to this Section 7B. This
special meeting shall be held at the earliest legally permissible date at the
Corporation's principal office or at any other place designated by the holders
of at least 20% of the shares of Series A Preferred Stock then outstanding. If
the special meeting has not been called by a proper officer of the Corporation
within 10 days after personal service of the written request upon the secretary
of the Corporation or within 20 days after mailing the written request to the
secretary of the Corporation at the Corporation's principal office, holders of
at least 20% of the shares of Series A Preferred Stock then outstanding may
designate in writing one of their number to call such special meeting at the
Corporation's expense. The special meeting may be called by such Person so
designated upon the shortest legally permissible notice and shall be held at the
Corporation's principal office or at any other place designated by the holders
of at least 20% of the shares of Series A Preferred Stock then outstanding. Any
holder of Series A Preferred Stock so designated shall be given access to the
Corporation's stock register for its Series A Preferred Stock for the purpose of
causing a special meeting of holders of Series A Preferred Stock to be called
pursuant to this Section 7B.
7C. QUORUM AND VOTING.
At any meeting or at any adjournment of a meeting at which holders of Series
A Preferred Stock have the special right to elect directors, the presence, in
person or by proxy, of holders of a majority of the shares of Series A Preferred
Stock then outstanding shall be required to constitute a quorum for the election
or removal of any director by holders of the Series A Preferred Stock. The vote
of a majority of the quorum shall be required to elect or remove any such
director.
7D. TERM. Any director elected by holders of Series A Preferred Stock
shall continue to serve as a director until the expiration of the lesser of (i)
a period of 90 days following the date on the Bankruptcy Event has ceased to
exist or (ii) the remaining period of the full term for which the director has
been elected. After the expiration of this 90-day period, or when the full term
for which the director has been elected expires (provided that the special right
to elect directors has terminated), as the case may be, the number of directors
constituting the board of directors of the Corporation shall decrease to the
number that constituted the whole board of directors of the Corporation
immediately prior to the occurrence of the Bankruptcy Event giving rise to the
special right to elect directors.
8. PURCHASE RIGHTS.
If at any time the Corporation distributes, grants or sells any options,
convertible securities or rights to stock, warrants, securities or other
property to all holders of Common Stock (the "Purchase Rights"), each holder of
Series A Preferred Stock shall be entitled to acquire, upon the terms applicable
to the Purchase Rights, the aggregate Purchase Rights which the holder could
have acquired if the holder had held the number of shares of Common Stock
issuable upon conversion of the holder's Series A Preferred Stock immediately
before the date on which a record is taken for the grant, issuance or sale of
the Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the distribution, issue
or sale of the Purchase Rights.
9. REGISTRATION OF TRANSFER.
The Corporation shall keep at its principal office a register for the
registration of Series A Preferred Stock. Upon the surrender of any certificate
representing Series A Preferred Stock at the Corporation's principal office, the
Corporation shall, at the request of the record holder of the
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certificate, execute and deliver (at the Corporation's expense) a new
certificate or certificates in exchange representing in the aggregate the number
of shares of Series A Preferred Stock represented by the surrendered
certificate. Each new certificate shall be registered in the name and represent
the number of shares of Series A Preferred Stock requested by the holder of the
surrendered certificate and shall be substantially identical in form to the
surrendered certificate. Any transfer of Series A Preferred Stock shall be
subject, however, to any applicable contractual or other restrictions on
transfer and the payment of any applicable transfer taxes by the transferring
holder.
10. REPLACEMENT.
Upon receipt of evidence reasonably satisfactory to the Corporation (e.g.,
an affidavit of the registered holder) of the ownership and the loss, theft,
destruction or mutilation of any certificate evidencing shares of Series A
Preferred Stock, and in the case of any such loss, theft or destruction, upon
receipt of indemnity reasonably satisfactory to the Corporation, or, in the case
of any such mutilation, upon surrender of the mutilated certificate, the
Corporation shall (at its expense) execute and deliver in replacement a new
certificate of like kind representing the number of shares of Series A Preferred
Stock represented by the lost, stolen, destroyed or mutilated certificate and
dated the date of the lost, stolen, destroyed or mutilated certificate.
11. AMENDMENT AND WAIVER.
No amendment, modification or waiver will be binding or effective with
respect to any provision of this Certificate of Designation without the prior
written consent of holders of not less than a majority of the shares of Series A
Preferred Stock outstanding at the time that the action is taken. No change in
the terms of this Certificate of Designation may be accomplished by merger or
consolidation of the Corporation with another corporation unless the Corporation
has obtained the prior affirmative vote or written consent of holders of not
less than a majority of the shares of Series A Preferred Stock then outstanding.
12. NOTICES.
All notices given pursuant to in this Certificate of Designation shall be in
writing and shall be delivered by a national overnight courier service or by
certified or registered mail, return receipt requested, and shall be deemed to
have been delivered one business day after being given to the courier service
for delivery, or three business days after being deposited in the mail (proper
postage paid), if sent (i) to the Corporation at its principal executive offices
and (ii) to any holder of Series A Preferred Stock at the holder's address as it
appears in the Corporation's stock register (unless the holder has otherwise
indicated in writing).
13. DEFINITIONS.
BANKRUPTCY EVENT means one of the following events: (i) the Corporation
makes an assignment for the benefit of creditors or admits in writing its
inability to pay its debts generally as they become due; (ii) an order, judgment
or decree is entered adjudicating the Corporation bankrupt or insolvent; or
(iii) any order for relief with respect to the Corporation is entered under the
federal Bankruptcy Code; or (iv) the Corporation petitions or applies to any
court for the appointment of a custodian, trustee, receiver or liquidator of the
Corporation or of any substantial part of its assets or commences any proceeding
relating to the Corporation under any bankruptcy, reorganization, arrangement or
insolvency law of any jurisdiction; or (v) any such petition or application is
filed, or any such proceeding is commenced, against the Corporation and either
(a) the Corporation by any act indicates its approval of, consent to or
acquiescence in the petition, application or proceeding or (b) the petition,
application or proceeding is not dismissed within 90 days after being filed or
commenced.
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CHANGE OF CONTROL means:
(i) the acquisition (including by way of merger, consolidation or
otherwise), directly or indirectly, by any person or related group of persons of
beneficial ownership (within the meaning of Rule 13d-3 of the Securities
Exchange Act of 1934) of securities possessing more than 50% of the total
combined voting power of the Corporation's outstanding securities; or (ii) a
change in the composition of the Corporation's board of directors over a period
of 36 consecutive months or less such that, by reason of one or more contested
elections for directorships, a majority of the incumbent directors ceases to be
comprised of individuals who either (A) have been directors continuously since
the beginning of the 36-month period or (B) have been elected or nominated for
election as directors during the 36-month period by at least a majority of the
directors described in clause (A) who were still in office at the time that the
board approved such election or nomination.
COMMON STOCK means the Corporation's common stock, par value $.01 per share.
COMMON STOCK DEEMED OUTSTANDING means, at any given time, (i) the number of
shares of Common Stock actually outstanding at such time, plus (ii) the number
of shares of Common Stock issuable upon conversion at such time of the shares of
Series A Preferred Stock then outstanding, plus (iii) the number of shares of
Common Stock deemed to be outstanding pursuant to Sections 4F(a) and 4F(b),
whether or not the Options or Convertible Securities are actually exercisable at
such time.
CONVERSION PRICE is defined in Section 4B.
CONVERTIBLE SECURITIES means any stock or securities directly or indirectly
convertible into or exchangeable for Common Stock.
CORPORATE CHANGE means any capital reorganization, reclassification,
consolidation, merger or sale of all or substantially all of the Corporation's
assets to another Person which is effected in such a way that holders of Common
Stock are entitled to receive (either directly or upon a subsequent liquidation
of the Corporation) stock, securities or assets in respect of or in exchange for
Common Stock.
JUNIOR SECURITIES means any capital stock of the Corporation other than
Series A Preferred Stock.
LIQUIDATION is defined in Section 2A.
LIQUIDATION DISTRIBUTION is defined in Section 2.
LIQUIDATION PREFERENCE means, with respect to a share of Series A Preferred
Stock, the sum of (i) $1,000 plus (ii) all accumulated preferential dividends on
such share.
LIQUIDATION VALUE means, with respect to a share of Series A Preferred
Stock, the sum of (i) $1,000 plus (ii) all accumulated preferential dividends on
such share plus (iii) all accrued and unpaid dividends on such share which have
not yet been accumulated.
MARKET PRICE of any security means the average of the closing prices of such
security's sales on all securities exchanges on which such security may be
listed at the time, or, if there has been no sales on any such exchange on any
day, or, if on any day such security is not so listed, the average of the
representative bid and asked prices quoted in the NASDAQ system as of 4:00 P.M.,
New York time, or, if on any day such security is not quoted in the NASDAQ
System, the average of the highest bid and lowest asked prices on such day in
the domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated or any similar successor organization, in each such case
(except when the "Market Price" is being determined for purposes of Section
5B(1)) averaged over a period of 20 days consisting of the day as of which the
"Market Price" is being determined and the 19 consecutive business days prior to
such day. If at any time such security is not listed on any securities exchange
or quoted in the NASDAQ System or the over-the-counter market, the "Market
Price" shall be the fair value thereof determined jointly by the Corporation and
the holders of a majority of the shares of Series A Preferred Stock. If such
parties are unable to reach agreement within a reasonable period of
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time, such fair value shall be determined by an independent appraiser
experienced in valuing securities jointly selected by the Corporation and the
holders of a majority of the shares of Series A Preferred Stock. The
determination of such appraiser shall be final and binding upon the parties, and
the Corporation shall pay the fees and expenses of such appraiser.
Notwithstanding the preceding: (i) an Option which is granted or repriced at an
exercise price equal to the last reported sales price of a share of Common Stock
on the Nasdaq National Market on the date of grant or repricing shall be
considered to have been granted or repriced at the Market Price on the date of
grant or repricing; and (ii) shares of Common Stock which are issued and sold in
an underwritten registered public offering shall be considered to have been
issued and sold at the Market Price.
OPTIONS means any rights, warrants or options to subscribe for or purchase
Common Stock or Convertible Securities.
PERSON means an individual, partnership, corporation, limited liability
company, association, trust, unincorporated organization, or other entity.
PURCHASE RIGHTS is defined in Section 8.
UNDERLYING COMMON STOCK means all shares of Common Stock issued or issuable
upon conversion of the Series A Preferred Stock (which number shall be
determined, with respect to any given date, based upon the Conversion Price in
effect as of such date).
In witness, Stericycle, Inc. has caused this Certificate of Designation to
be duly executed on , 1999.
STERICYCLE, INC.,
a Delaware corporation
By:
Name:
Title:
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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 September 15, 1999 at the 1999
Annual Meeting of Stockholders to be held on October 15, 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); FOR approval of a proposal to authorize,
issue and sell 75,000 shares of Series A Convertible Preferred Stock (Item
3); and FOR ratification of appointment of the Company's independent public
accountants (Item 4). 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>
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
FOR ALL
(EXCEPT
FOR WITHHOLD NOMINEE(S)
ALL ALL WRITTEN BELOW)
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 Against Abstain
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.
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.
Date: ____________________________, 1999
Signature: _____________________________
Signature: _____________________________
Title or Capacity: _____________________
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Stericycle, Inc.
We have audited the consolidated balance sheets of Stericycle, Inc. and
Subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Stericycle, Inc. and Subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 16, 1999
