UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT (AMENDED)
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): November 12, 1999
STERICYCLE, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-21229 36-3640402
(State or other (Commission file (IRS employer
jurisdiction of incorporation) number) identification number)
28161 North Keith Road
Lake Forest, Illinois 60045
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 367-5910
<PAGE>
ITEM 2. ACQUISITION OF ASSETS
On November 29, 1999, Stericycle, Inc. (the "Company") filed a Form 8-K
to report its acquisition from Allied Waste Industries, Inc. ("Allied") of the
medical waste business of Browning-Ferris Industries, Inc. ("BFI") for $410.5
million in cash. Pursuant to Item 7 of such Form 8-K, the Company indicated that
it would file certain financial information no later than the date required by
Item 7 of Form 8-K. This Form 8-K/A is filed to provide the required financial
information.
Item 7 of the Company's Current Report on Form 8-K filed November 29,
1999 is amended to read in its entirety as follows:
ITEM 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
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 ANDERSEN LLP
Chicago, Illinois
July 30, 1999
<PAGE>
<TABLE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
STATEMENTS OF DIRECTLY IDENTIFIABLE ASSETS AND LIABILITIES
AS OF SEPTEMBER 30, 1997 AND 1998 AND JUNE 30, 1999
IN THOUSANDS)
<CAPTION>
AS OF
AS OF SEPTEMBER 30, JUNE 30,
------------------- --------
1997 1998 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
=============== ============= ==============
The accompanying notes are an integral part of these Financial Statements.
</TABLE>
<PAGE>
<TABLE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
STATEMENTS OF REVENUES AND DIRECT EXPENSES
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND
1998 AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------ --------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues ..................... $ 199,886 $ 199,060 $ 198,222 $ 148,837 $ 152,266
Cost of Revenues:
Direct Operating Costs ....... 123,801 124,156 121,096 90,460 91,568
Depreciation ................. 16,681 13,844 11,533 8,946 8,263
--------- --------- --------- --------- ---------
Total Cost of Revenues . 140,482 138,000 132,629 99,406 99,831
Other Expenses:
Selling, General and
Administrative ............. 19,051 17,465 9,834 6,358 6,077
Depreciation and
Amortization ............... 3,417 3,483 3,439 2,579 2,747
Special Charge (Credit) ...... 9,236 4,500 257 257 (469)
--------- --------- --------- --------- ---------
Total Other Expenses ... 31,704 25,448 13,530 9,194 8,355
--------- --------- --------- --------- ---------
Revenues in excess of
Direct Expenses ............ $ 27,700 $ 35,612 $ 52,063 $ 40,237 $ 44,080
The accompanying notes are an integral part of these Financial Statements.
</TABLE>
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
The accompanying financial statements include certain assets and
liabilities and revenues and direct expenses of the Medical Waste Business of
Browning-Ferris Industries, Inc. ("BFI Medical Waste"). For the periods
presented herein, BFI Medical Waste is a service line of Browning-Ferris
Industries, Inc. ("BFI"), a Delaware corporation. BFI Medical Waste provides
medical waste collection, transportation, treatment, and disposal services to
hospitals, healthcare providers and other small account customers 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. The purchase price for these operations is $410.5 million in
cash, subject to post-closing adjustment. 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 $410.5 million in cash, subject to
closing adjustments as provided for in the purchase agreements. The purchase
agreements are subject to a number of conditions including Stericycle obtaining
the necessary financing to fund the acquisition and the U.S. Department of
Justice ("DOJ") approval among other items. The purchase agreements also contain
clauses regarding shared assets, employee benefits, transition services and
assumed liabilities, among other items.
3. BASIS OF PRESENTATION
BFI's operating organization is aligned along functional lines into
five groups: sales and marketing, collection, post-collection, business
development and business analysis. As a result of this and other factors, BFI
does not maintain separate books and records for its medical waste operations
other than service line revenues and direct operating costs. The basis upon
which these financial statements have been prepared is described further below
and in Note 4. As a result, the accompanying financial statements are not
intended to be a complete presentation of the assets and liabilities and results
of operations and cash flows of BFI Medical Waste. Rather, these financial
statements were prepared for the purpose of complying with rules and regulations
of the Securities and Exchange Commission, which indicate that certain financial
statements are required for BFI Medical Waste. All significant transactions
among BFI Medical Waste units have been eliminated. Significant transactions
with other BFI business units are disclosed in Note 9.
STATEMENTS OF DIRECTLY IDENTIFIABLE ASSETS AND LIABILITIES OF BFI MEDICAL WASTE
Service line balance sheet information is not prepared by BFI. However,
certain assets and liabilities, which are specific to the medical waste
operations, are directly identifiable. Assets and liabilities included in the
accompanying financial statements of BFI Medical Waste include accounts
receivable, parts and supplies, prepaid expenses, property, plant and equipment,
intangibles, compensation accruals and other accruals specifically related to
and identified with BFI Medical Waste.
All treasury related activities including cash payments, receipts, and
borrowings are performed by BFI's corporate headquarters and are not separately
directly identifiable with BFI Medical Waste. BFI does not separately identify
intercompany loans receivable or payable associated with different service
lines. Accordingly, all 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 expenses 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
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 Staff Accounting Bulletin No. 55 ("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>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
1998 1998 1999
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
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>
Depreciated 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.
ACCOUNTS RECEIVABLE
The financial statements include only those accounts receivable
directly attributable to the medical waste operations. Accounts receivable at
certain facilities co-located with other BFI operations are not separately
directly identifiable. BFI Medical Waste grants credit to the majority of its
customers on terms of up to 60 days. It is not the policy of BFI Medical Waste
to require collateral from its customers in order to obtain credit. Management
does not believe a significant credit risk exists as of June 30, 1999.
PARTS AND SUPPLIES
Parts and supplies consist of containers and vehicle and processing
facility replacement parts and are carried at the lower of cost ("first in,
first out") or market. The amounts presented in the financial statements reflect
parts and supplies at medical waste only operations. Parts and supplies at
facilities co-located with other BFI operations are not separately directly
identifiable.
PREPAID EXPENSES
Prepaid expenses consist of prepaid licenses, insurance and permits.
The amounts presented in the financial statements reflect prepaid expenses at
medical waste only operations. Prepaid expenses at facilities co-located with
other BFI operations are not separately directly identifiable.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation
expense, which includes the depreciation of assets recorded under capital
leases, is computed using the straight-line method over the estimated useful
lives (or life of lease if shorter) of the assets as follows:
ASSET DESCRIPTION LIFE
----------------- ----
Buildings and improvements 10 to 30 years
Machinery and equipment 5 to 12 years
Office furniture and equipment 3 to 10 years
Expenditures for major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as incurred.
During fiscal years 1996, 1997 and 1998, maintenance and repairs charged to
expense were $12,822,000, $13,388,000 and $12,745,000, respectively.
When property and equipment is retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operating expenses.
INTANGIBLE ASSETS
Goodwill is amortized using the straight-line method over 40 years.
Amortization expense for 1996, 1997 and 1998 related to goodwill was
approximately $1,171,000, $1,208,000 and $1,207,000, respectively.
Other directly identifiable intangible assets, substantially all of
which are customer lists and covenants not to compete, are amortized on the
straight-line method over their estimated lives, 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.
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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------- --------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<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:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
------ ------
(IN THOUSANDS)
<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
=============== ==================
1997 1998
---- ----
(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. 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.
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 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 specific facilities. These decisions were reached based on a
review of the non-core business assets and operations which were not expected to
achieve BFI Medical Waste's desired performance objectives. The special charges,
which included asset writedowns of $7,771,000 and related liabilities recorded
for certain contractual arrangements of $1,468,000, do not consider future
expenses associated principally with severance and relocation costs which will
occur as a result of these decisions. The results of operations for these
non-core business assets were not material to BFI Medical Waste's financial
statements. During 1997, BFI Medical Waste divested or closed the majority of
these facilities, with the remaining facilities divested or closed during 1998.
A total of $366,000 and $227,000 of the special charge liabilities were utilized
during 1997 and 1998, respectively.
A special charge of $4,500,000 was reported in fiscal 1997. This charge
related to the closure of an incinerator. Except for the special charge, the
closure of the incinerator did not have a material effect on BFI Medical Waste's
financial statements. Of the special charge, a $952,000 liability was
established for the dismantlement of the incinerator. None of this liability was
utilized during 1998.
A special charge of $257,000 was reported for 1998. This special charge
related to the write-down of an additional non-core business asset. The
aggregate total assets of this charge represented less than 1% of BFI Medical
Waste's total assets on a pre-special charge basis.
12. BUSINESS COMBINATIONS
During the fiscal year ended September 30, 1998, BFI Medical Waste paid
approximately $1,000,000 to acquire three medical waste businesses, which were
accounted for as purchases. During the fiscal years ended September 30, 1997 and
September 30, 1996, BFI Medical Waste paid approximately $400,000 and
$6,023,000, respectively, to acquire medical waste businesses, which were
accounted for as purchases. The results of these business combinations are not
material to the operating results or assets and liabilities of BFI Medical
Waste.
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.
(b) Pro Forma Financial Information
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
September 30, 1999 gives effect to the following, as if each had occurred on
September 30, 1999:
(i) the acquisition of the BFI medical waste business;
(ii) the offering of our series A notes;
(iii)$225 million of borrowings under our credit facility with various
financial institutions, DLJ Capital Funding, Inc., as syndication
agent for the financial institutions, lead arranger and sole book
running manager, Bank of America, N.A., as administrative agent
for the financial institutions, and Bankers Trust Company, as
documentation agent for the financial institutions;
(iv) $75.0 million of gross proceeds from the sale by us on November
12, 1999 of our convertible preferred stock to investment funds
associated with Bain Capital, Inc. and with Madison Dearborn
Partners, Inc., which represents approximately 22.6% of our
outstanding common stock on an as-if converted basis;
(v) the application of the net proceeds received from (ii), (iii) and
(iv) above; and
(vi) the costs and expenses associated with (i)-(iv) above.
The unaudited pro forma condensed combined statements of operations for
the year ended December 31, 1998 and for the nine months ended September 30,
1999 give effect to these transactions as if each occurred at the beginning of
the period presented. In addition, the unaudited pro forma condensed combined
statements of operations include our acquisition of Waste Systems, Inc., the
majority owner of 3CI Complete Compliance Corporation, which closed in October
1998, the acquisition of Med-Tech Environmental Limited and related
transactions, which closed in December 1998, and the acquisition of Medical
Disposal Systems, which closed in April 1999, as if each had occurred at the
beginning of the period presented.
The unadited pro forma condensed combined financial statements do not
include adjustments to reflect (a) cost savings that we expect to realize over
the year following the BFI acquisition or (b) an increase in selling, general
and administrative expense to reflect the allocation of historical BFI corporate
and shared services costs to the BFI medical waste business. See Note 5 of Notes
to Pro Forma Condensed Combined Statements of Operations. The unaudited pro
forma financial data do not purport to represent what our financial position and
results of operations would have been if the transactions listed above and the
other acquisitions had actually occurred as of the dates indicated and are not
intended to project our financial position or results of operations for any
future period.
The pro forma adjustments to the purchase price allocation and
financing of the BFI medical waste business acquisition are preliminary and
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 revenue, selling, general and
administrative expenses, depreciation and amortization and interest expense.
The unaudited pro forma condensed combined financial statements should
be read in conjunction with the notes thereto, the historical consolidated
financial statements of Stericycle and related notes thereto included herein,
and the historical financial statements of the BFI medical waste business and
related notes thereto included herein.
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
<CAPTION>
BFI MEDICAL
STERICYCLE WASTE PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
(NOTE 1) (NOTE 2) (NOTE 3)
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents................... $ 16,017 $ -- $ (3,669) (a) $ 12,348
Other current assets........................ 25,213 18,152 (16,552) (b) 26,813
------------- ------------ -------------- -------------
Total current assets........................ 41,230 18,152 (20,221) 39,161
Property and equipment, net................. 22,435 60,548 (6,001) (c) 76,982
Other assets................................ 5,539 3,061 16,359 (d) 24,959
Goodwill, net............................... 59,524 53,100 301,708 (e) 414,332
------------- ------------ ------------- -------------
Total assets................................ $ 128,728 $ 134,861 $ 291,845 $ 555,434
============= ============ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Other current liabilities................... $ 11,138 $ 3,198 $ (99) (f) $ 14,237
Current portion of long-term debt........... 1,900 970 3,375 (g) 6,245
------------- ------------ ------------- -------------
Total current liabilities................... 13,038 4,168 3,276 20,482
Long-term debt, net of current
portion..................................... 3,878 4,162 346,625 (g) 354,665
Other long-term liabilities................. -- 938 (938) (h) --
Convertible preferred stock................. -- -- 70,275 (i) 70,275
Common shareholders' equity................. 111,812 125,593 (127,393) (j) 110,012
------------- ------------ -------------- -------------
Total liabilities and
shareholders' equity.................... $ 128,728 $ 134,861 $ 291,845 $ 555,434
============= ============ ============= =============
The accompanying notes are an integral part of this unaudited pro forma
condensed combined balance sheet.
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
1. STERICYCLE HISTORICAL
The historical balances represent the consolidated balance sheet of
Stericycle as of September 30, 1999 as reported in the unaudited 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 balance sheet represent the historical assets and liabilities
of the BFI medical waste business (which includes the Medical Disposal Systems
acquisition) as of June 30, 1999, as reported in the unaudited historical
financial statements of the BFI medical waste business. The amount included in
common shareholders' equity in the unaudited 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 unaudited pro forma
condensed combined balance sheet give effect to the following (in thousands,
except share data):
(a) The use of Stericycle cash on hand to fund a portion of the cash
required in connection with the BFI acquisition and related financing
transactions, as follows:
Total Stericycle cash required................................ $ 6,475
Transaction costs paid by September 30, 1999.................. (2,806)
------------
$ 3,669
(b) The elimination of the historical book value of the BFI medical
waste business accounts receivable of $16,552, which is not included in
the net assets acquired.
(c) Based on preliminary appraisal information, the historical net book
values of the acquired property and equipment exceed the fair market
values of these assets by approximately $6,001.
(d) The increase in the fair value of intangible assets and the
capitalization of deferred financing fees and costs, as follows:
Increase in fair value of intangible assets.................. $ 5,109
Payment of deferred financing fees and costs................. 11,250
----------
$ 16,359
(e) The incremental increase in goodwill resulting from the BFI
acquisition, as follows:
Cost in excess of the estimated fair value of the acquired net assets..$358,315
Elimination of historical goodwill of the BFI medical waste business... (53,100)
Transaction costs incurred by September 30, 1999....................... (3,507)
---------
$301,708
(f) Adjustments to exclude the historical book value of accrued
liabilities which are not included in the net assets acquired and to
record liabilities in accordance with EITF Issue 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination" and
EITF Issue 94-3, "Liability Recognition of Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)." The liabilities recognized in accordance
with EITF 95-3 and EITF 94-3 represent severance and closure costs
estimated to be incurred in the expected elimination of duplicative
personnel and closing of certain duplicative facilities of both
Stericycle and the BFI medical waste business. The adjustments are as
follows:
Liabilities relating to the BFI medical waste business severance and
facility closings.................................................$ 2,000
Liabilities relating to Stericycle severance and facility closings,
net of tax........................................................ 1,800
Elimination of historical accrued liabilities of the BFI medical
waste business.................................................... (3,198)
Transaction costs accrued at September 30, 1999....................... (701)
----------
$ (99)
(g) The offering of series A notes and borrowings under our credit
facility calculated as follows:
Proceeds from our credit facility.......................................$225,000
Proceeds from the series A notes........................................ 125,000
--------
$350,000
The net increase in long-term debt has been classified as follows:
Current portion of long-term debt.......................................$ 3,375
Long-term debt, net of current portion.................................. 346,625
--------
$350,000
(h) The elimination of other long-term liabilities of $938, which were
not assumed in the BFI acquisition.
(i) The issuance of 75,000 shares of 3.375% payment-in-kind series A
convertible preferred stock and payment of the related financing fees
and costs, as follows:
Issuance of Convertible Preferred Stock................................$ 75,000
Payment of financing fees and costs.................................... (4,725)
--------
$ 70,275
(j) The elimination of the historical shareholders' equity of the BFI
medical waste business and an accrual for a Stericycle restructuring
charge in accordance with EITF 94-3, as follows:
Elimination of historical shareholders' equity....................... $(125,593)
Liabilities relating to Stericycle severance and facility closings,
net of tax........................................................ (1,800)
---------
$(127,393)
=========
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<CAPTION>
BFI ADJUSTMENTS OTHER
STERICYCLE MEDICAL WASTE FOR PRIOR PRO FORMA
HISTORICAL HISTORICAL ACQUISITIONS ADJUSTMENTS PRO FORMA
---------- ---------- ------------ ----------- ---------
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4)
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 66,681 $ 198,222 $ 25,372 $ -- $ 290,275
Cost of revenues............. (45,328) (132,629) (19,282) 6,884 (a) (190,355)
Selling, general
and administrative
expense.................... (14,929) (13,273) (4,964) (7,553)(b) (40,719)
Special charges.............. -- (257) (178) -- (435)
----------- ----------- ----------- ----------- ------------
Operating income............. 6,424 52,063 948 (669) 58,766
Interest income.............. 714 -- -- -- 714
Interest expense............. (777) -- (1,619) (36,770)(d) (39,166)
----------- ----------- ----------- ------------ ------------
Income before
income taxes................ 6,361 52,063 (671) (37,439) 20,314
Income tax expense........... (648) -- -- (5,438)(e) (6,086)
Minority interest............ -- -- 43 -- 43
----------- ----------- ----------- ----------- ------------
Net income................... 5,713 52,063 (628) (42,877) 14,271
Dividends on convertible
preferred stock............ -- -- -- (2,531)(f) (2,531)
----------- ----------- ----------- ------------ ------------
Net income applicable
to common shareholders..... $ 5,713 $ 52,063 $ (628) $ (45,408) $ 11,740
=========== =========== =========== ============ ============
Basic earnings per
share...................... $ 0.54 -- -- -- $ 1.10
=========== ============
Weighted average
common shares outstanding.. 10,647 -- 37 -- 10,684
=========== =========== ============
Diluted earnings
per share.................. $ 0.51 -- -- -- $ 0.92
=========== ============
Weighted average
common and common equivalent
shares outstanding......... 11,264 -- 37 4,286(g) 15,586
=========== =========== =========== ============
OTHER DATA:
Ratio of earnings to
fixed charges............. 1.5x
The accompanying notes are an integral part of this unaudited pro forma
condensed combined statement of operations.
</TABLE>
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<CAPTION>
BFI ADJUSTMENTS OTHER
STERICYCLE MEDICAL WASTE FOR PRIOR PRO FORMA
HISTORICAL HISTORICAL ACQUISITIONS ADJUSTMENTS PRO FORMA
---------- ---------- ------------ ----------- ---------
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4)
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 74,285 $ 152,266 $ 2,887 $ -- $ 229,438
Cost of revenues............. (48,998) (99,831) (2,137) 4,842 (a) (146,124)
Selling, general
administrative
expense.................... (15,541) (8,824) (525) (5,564)(b) (30,454)
Special (charges)
credit..................... -- 469 (178) (480)(c) (189)
----------- ----------- ------------ ----------- ------------
Operating income............. 9,746 44,080 47 (1,202) 52,671
Interest income.............. 576 -- -- -- 576
Interest expense............. (689) -- -- (27,632)(d) (28,321)
Other income................. 404 -- -- -- 404
----------- ----------- ----------- ----------- ------------
Income before
income taxes............... 10,037 44,080 47 (28,834) 25,330
Income tax expense........... (2,168) -- -- (6,117)(e) (8,285)
----------- ----------- ----------- ----------- ------------
Net income................... 7,869 44,080 47 (34,951) 17,045
Dividends on convertible
preferred stock............ -- -- -- (1,898)(f) (1,898)
----------- ----------- ----------- ----------- ------------
Net income applicable
to common shareholders..... $ 7,869 $ 44,080 $ 47 $ (36,849) $ 15,147
=========== =========== =========== =========== ============
Basic earnings
per shares................. $ 0.56 -- -- -- $ $1.08
=========== ============
Weighted average
common shares outstanding.. 14,073 -- -- -- $ 14,073
=========== ============
Diluted earnings
per shares................. $ 0.54 -- -- -- $ 0.91
=========== ============
Weighted average
common and common equivalent
shares outstanding......... 14,482 -- -- 4,286 (g) 18,768
=========== =========== ============
OTHER DATA:
Ratio of earnings to
fixed charges............. 1.8x
The accompanying notes are an integral part of this unaudited pro forma
condensed combined statement of operations.
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENTS OF OPERATIONS
1. STERICYCLE HISTORICAL
The historical balances in this column 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 this column
represent the historical revenues and direct expenses of the BFI medical waste
business for its fiscal year ended September 30, 1998 and the nine months ended
June 30, 1999 as reported in the historical financial statements of the BFI
medical waste business. The historical statements of revenues and direct
expenses for the BFI medical waste business exclude specific costs for selling,
general and administrative efforts which were performed by BFI on a shared
service basis.
3. ADJUSTMENTS FOR PRIOR ACQUISITIONS
The pro forma adjustments in this column reflect, in accordance with
SEC regulations, the unaudited pro forma condensed combined results of
operations for the year ended December 31, 1998 of Waste Systems, Inc., acquired
by Stericycle in October 1998, and Med-Tech Environmental Limited, 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 at
the beginning of the period presented. 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. This column also reflects the unaudited pro
forma condensed combined results of operations for the year ended September 30,
1998, and the nine months ended June 30, 1999 of Medical Disposal Systems,
acquired by BFI in April 1999, and the related purchase price allocations.
4. OTHER PRO FORMA ADJUSTMENTS
The pro forma adjustments in this column reflect the following:
(a) A decrease in depreciation expense relating to acquired property
and equipment based on estimated useful lives and appraised values. The
preliminary appraised values of the acquired property and equipment are
not less than the BFI historical net book value. The following table
indicates the components of the adjustments by 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 (in
thousands, except lives in years):
<PAGE>
<TABLE>
<CAPTION>
DEPRECIATION EXPENSE
--------------------
PRELIMINARY CURRENT APPROXIMATE YEAR NINE MONTHS
ESTIMATED AVERAGE BFI AVERAGE ENDED ENDED
FAIR VALUE ESTIMATED LIFE REMAINING LIFE 12/31/98 9/30/99
---------- -------------- -------------- -------- -------
<S> <C> <C> <C> <C> <C>
Land....................................... $ 7,222 N/A N/A $ -- $ --
Buildings and improvements................. 19,782 28.2 21 701 526
Machinery and equipment.................... 26,284 6.3 3 4,146 3,110
Office equipment and
furniture................................ 1,055 5 2 211 158
Construction in process.................... 204 N/A N/A -- --
------------ --------- --------
$ 54,547 5,058 3,794
------------
BFI medical waste business depreciation expense
(including Medical Disposal Systems).......................................... 12,361 8,982
--------- --------
Decrease in depreciation expense................................................ 7,303 5,188
Less: decrease allocated to selling, general
and administrative expense.................................................... (419) (346)
--------- --------
Decrease in cost of revenues.................................................... $ 6,884 $ 4,842
========= ========
</TABLE>
The decrease in depreciation expense is due to a decrease in
the fair value of the acquired assets compared to their net book value
and 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 the assets is
consistent with the useful lives Stericycle assigns to its other
similar assets when acquired.
(b) An increase in amortization expense relating to acquired intangible
assets and goodwill based on estimated lives, net of a decrease in
depreciation expense as computed in Note 4(a) above and the
reclassification of interest expense which has been included in the
historical selling, general and administrative expense of the BFI
medical waste business, on capital leases which are being assumed, as
follows (in thousands, except estimated lives in years):
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
--------------------
PRELIMINARY CURRENT YEAR NINE MONTHS
ESTIMATED ESTIMATED ENDED ENDED
FAIR VALUE AVERAGE LIFE 12/31/98 9/30/99
---------- ------------ -------- -------
<S> <C> <C> <C> <C>
Non-compete agreement................ $ 5,300 5 $ 1,060 $ 795
Employee work force.................. 2,870 3 957 718
Goodwill............................. 358,315 40 8,958 6,718
--------- ---------
10,975 8,231
BFI medical waste business amortization expense
(including Medical Disposal Systems).......................................... 2,845 2,148
--------- ---------
Increase in amortization expense................................................ 8,130 6,083
Reclassification of interest expense on capital
leases assumed................................................................ (158) (173)
Decrease in depreciation expense................................................ (419) (346)
--------- ---------
Increase in selling, general, and administrative
expense....................................................................... $ 7,553 $ 5,564
========= =========
</TABLE>
(c) The elimination of a gain on the sale of customer lists to
Stericycle of $480,000 for the nine months ended June 30, 1999, which
is included in the historical financial statements of the BFI medical
waste business during this period.
(d) A net increase in interest expense reflecting the draw down of our
credit facility, issuance of the notes, amortization of deferred
financing costs and a reclassification of interest expense which has
been included in the historical selling, general and administrative
expenses of the BFI medical waste business on capital leases which are
being assumed, calculated as follows (in thousands, except interest
rates):
<TABLE>
<CAPTION>
INTEREST EXPENSE
----------------
YEAR NINE MONTHS
AMOUNT INTEREST ENDED ENDED
BORROWED RATE 12/31/98 9/30/99
-------- ---- -------- -------
<S> <C> <C> <C> <C>
Credit facility:
Term loan A............................ $ 75,000 8.25% $ 6,188 $ 4,641
Term loan B............................ 150,000 9.00% 13,500 10,125
Series A notes............................ 125,000 12.375% 15,469 11,602
Amortization of deferred
financing costs......................... 1,455 1,091
Reclassification of interest
expense on capital leases assumed....... 158 173
--------- ---------
Increase in interest expense.............. $ 36,770 $ 27,632
========= =========
</TABLE>
(e) Income tax expense resulting from a pro forma increase in taxable
income at an effective rate of 40%, net of an elimination of
alternative minimum taxes of $143 for the year ended December 31, 1998.
(f) Payment-in-kind dividends at an annual rate of 3.375% on the $75
million liquidation value of our convertible preferred stock.
(g) Incremental issuance of common shares on an as if converted basis
for the convertible preferred shares at a conversion price of $17.50
per share.
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 $13,298 for the nine months ended September 30, 1999 and $17,090 for the year
ended September 30, 1998. 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 $9,581, during the nine months ended
September 30, 1999 and by $12,805, 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 $13,213, $0.94, and $0.81 for the nine months ended September 30, 1999
and $9,554, $0.89 and $0.78 for the year ended December 31, 1998, respectively.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 29, 1999.
STERICYCLE, INC.
By /s/ Frank J.M. ten Brink
----------------------------------
Frank J.M. ten Brink
Vice President, Finance
and Chief Financial Officer
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
on the statements of directly identifiable assets and liabilities of the Medical
Waste Business of Browning-Ferris Industries, Inc. (BFI Medical Waste) and the
related statements of revenues and direct expenses of BFI Medical Waste dated
July 30, 1999 and to all references to our Firm, included in this Current Report
on Form 8-K/A.
/s/ Arthur Andersen LLP
Chicago, Illinois
December 29, 1999
