<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ONJANUARY 8, 1999
REGISTRATION NO.
333-60591
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STERICYCLE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-3640402
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
1419 LAKE COOK ROAD, SUITE 410
DEERFIELD, ILLINOIS 60015
(847) 945-6550
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARK C. MILLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STERICYCLE, INC.
1419 LAKE COOK ROAD, SUITE 410
DEERFIELD, ILLINOIS 60015
(847) 945-6550
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
CRAIG P. COLMAR, ESQ. GEOFFREY E. LIEBMANN, ESQ.
MICHAEL BONN, ESQ. CAHILL GORDON & REINDEL
JOHNSON AND COLMAR 80 PINE STREET
300 SOUTH WACKER DRIVE NEW YORK, NEW YORK 10005
CHICAGO, ILLINOIS 60606
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being offered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, other
than securities offered only in connection dividend or interest reinvestment
plans, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS Subject To Completion, Dated January 8, 1999
- --------------------------------------------------------------------------------
3,000,000 Shares
STERICYCLE LOGL
Common Stock
- --------------------------------------------------------------------------------
The 3,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being offered by Stericycle, Inc.
("Stericycle" or the "Company").
The Common Stock is quoted on the Nasdaq National Market under the symbol
"SRCL." On January 7, 1999, the last reported sale price of the Common Stock was
$17.88 per share. See "Price Range of Common Stock."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 7-14.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company estimated
at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 shares of Common Stock on the same terms per share solely to cover
over-allotments, if any. If such option is exercised in full, the total
purchase price to the public will be $ , the total underwriting
discounts and commissions will be $ and the total proceeds to the
Company will be $ . See "Underwriting."
The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of the certificates
therefor will be made at the offices of Warburg Dillon Read LLC, New York, New
York, on or about , 1999. The Underwriters include:
WARBURG DILLON READ LLC
CREDIT SUISSE FIRST BOSTON
WILLIAM BLAIR & COMPANY
<PAGE> 3
[STERICYCLE LOGO]
USA MAP
Founded in 1989, Stericycle is the second largest provider of regulated
medical waste management services in the United States. Operating in 40 states,
the District of Columbia and four Canadian provinces, Stericycle and its
subsidiaries serve over 77,000 customers in the United States and Canada. The
regulated medical waste management market in the United States is estimated to
be more than $1.3 billion. Stericycle and its subsidiaries operate 13 treatment
centers, four of which utilize Stericycle's proprietary Electro-
Thermal-Deactivation treatment technology, 19 transfer stations and 20 customer
service centers.
Steri-Cement(R), Steri-Fuel(R), Steri-Plastic(R) and Steri-Tub(R) are
registered trademarks and Stericycle(R) is a registered service mark of the
Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN THE COMMON STOCK AND THE IMPOSITION OF A PENALTY BID, DURING AND
AFTER THE UNDERWRITING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, Condensed Financial
Statements and related Notes thereto appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised. See "Underwriting." Unless
the context requires otherwise, references to "Stericycle" or the "Company"
refer to Stericycle, Inc. and its subsidiaries. Prospective investors should
carefully consider the information under "Risk Factors" in evaluating an
investment in the Common Stock offered by this Prospectus.
Stericycle is the second largest provider of regulated medical waste
management services in the United States, providing regulated medical waste
collection, transportation, treatment and disposal services to over 77,000
customers in 40 states, the District of Columbia and four Canadian provinces.
Combining proprietary treatment technology with a health care orientation, the
Company believes that it is in a unique position to manage regulated medical
waste in a safe and cost-effective manner and to capitalize on the current
consolidation trend in the regulated medical waste management industry. Since
1991, the Company has completed 29 acquisitions, of which 21 were completed
since the Company's initial public offering in August 1996. These acquisitions,
combined with growth from its existing operations, have increased the Company's
revenues from $1.6 million in 1991 to $46.2 million in 1997 and to $57.5 million
for the 12 months ended September 30, 1998.
The Company's integrated services include regulated medical waste
collection, transportation, treatment, disposal, reduction, re-use and recycling
services, together with related training and education programs, consulting
services and product sales. The Company markets its services to two principal
types of customers: (i) long-term and sub-acute care facilities, outpatient
clinics, medical and dental offices, biomedical companies, municipal entities
and other smaller-quantity generators of regulated medical waste ("Alternate
Care" generators); and (ii) hospitals, blood banks, pharmaceutical manufacturers
and other larger-quantity generators of regulated medical waste ("Large
Quantity" generators). The Company's revenues for 1997 were divided
approximately equally between Alternate Care and Large Quantity generators, but
the Company anticipates that a greater proportion of its future revenues will be
derived from Alternate Care generators as the Company continues to focus its
marketing efforts on the more rapidly growing, higher-margin Alternate Care
market. The Company's current operations are comprised of 13 treatment centers,
19 transfer stations and 20 customer service centers.
The acquisition of other regulated medical waste management businesses,
including both independent haulers and integrated competitors, is a key element
of the Company's strategy to increase its penetration of its current markets and
to expand its operations geographically. The Company believes that it is an
attractive buyer to many potential acquisition candidates because of its
exclusive focus on the regulated medical waste management industry, its
customer-service orientation and its expansion strategy. The Company's senior
management is actively involved in identifying acquisition candidates and
consummating acquisitions, and the Company has proven procedures for efficiently
integrating newly-acquired companies into its business. In October 1998, the
Company indirectly acquired approximately 52.2% of the outstanding common stock
and all of the outstanding preferred stock of 3CI Complete Compliance
Corporation ("3CI"), a publicly-traded company which provides regulated medical
waste management services in the southeastern United States. In December 1998,
the Company acquired approximately 94% of the outstanding stock of Med-Tech
Environmental Limited ("Med-Tech"), which provides regulated medical waste
management services in Canada and the northeastern United States. The Company's
revenues for the nine months ended September 30, 1998 were $44.8 million and
$64.9 million on a pro forma basis, giving effect to the acquisitions of 3CI and
Med-Tech as if the acquisitions had occurred on January 1, 1998. See
"Business -- Growth Strategy" and "Unaudited Pro Forma Consolidated Financial
Statements."
Regulated medical waste is generally described as any waste that can cause
an infectious disease or that can reasonably be suspected of harboring human
pathogenic organisms. Regulated medical waste includes single-use disposable
items such as needles, syringes, gloves and laboratory, surgical and emergency
room and other supplies which have been in contact with blood or bodily fluids;
cultures and stocks of infectious agents;
3
<PAGE> 5
and blood and blood products. An independent study published in 1997 estimated
that the size of the regulated medical waste management market in the United
States in 1999 would be more than $1.3 billion.
The Company believes that its regulated medical waste management system
using its proprietary Electro-Thermal-Deactivation ("ETD") treatment process is
the only commercially-proven system that: (i) kills human pathogens in regulated
medical waste without generating liquid effluents or regulated air emissions;
(ii) affords certain operating cost advantages over the principal competing
treatment methods; (iii) reduces the volume of regulated medical waste by up to
85%; (iv) renders regulated medical waste unrecognizable; (v) permits the
recovery and recycling of usable plastics from regulated medical waste; and (vi)
enables the remaining regulated medical waste to be safely landfilled or used as
an alternative fuel in energy production.
The Company believes that its business has grown and will continue to grow
as a consequence of the following trends in the health care and regulated
medical waste industries:
- The handling and disposal of the large quantities of regulated medical
waste generated by the health care industry has attracted significant
public awareness and regulatory attention. The Occupational Safety and
Health Administration ("OSHA") has issued regulations concerning employee
exposure to bloodborne pathogens and other potentially infectious
materials that require, among other things, special procedures for
handling regulated medical waste.
- Alternate Care generators have become an increasing source of revenues in
the regulated medical waste industry. Alternate Care generators, however,
typically do not produce a sufficient volume of regulated medical waste
to justify substantial capital expenditures on their own waste treatment
facilities or the expense of hiring regulatory compliance personnel.
- Governmental clean air regulations and public opposition are combining to
increase the cost and difficulty of obtaining permits to build and
operate incinerators. This trend is expected to accelerate in response to
regulations which the U.S. Environmental Protection Agency ("EPA")
adopted in September 1997. The EPA expects that these regulations will
result in the closing of many of the hospital medical waste incinerators
currently in operation as hospitals seek alternative, less expensive
methods of regulated medical waste disposal. The Company expects to
benefit from this anticipated movement by hospitals to outsource
regulated medical waste disposal.
- The regulated medical waste management industry is rapidly consolidating.
The Company has demonstrated the ability to identify and acquire
companies that add revenues and profits to its business.
- The health care industry continues to be under pressure to reduce costs
and improve efficiency, which the Company believes that it can help to
achieve for its clients in the management of regulated medical waste.
The Company believes that it has many opportunities to grow and to increase
its profitability by improving its penetration of existing geographic service
areas, expanding into new product and service areas, acquiring selected
businesses, focusing its marketing efforts on higher-margin Alternate Care
generators and maximizing operating efficiencies. By improving its penetration
of existing geographic service areas and expanding into new areas, the Company
expects to increase both its customer density and market share. By acquiring
selected regulated medical waste management businesses, the Company expects to
augment both growth and operating efficiencies through "tuck-in" acquisitions
that can be integrated into the Company's existing operations and acquisitions
in new service areas that can be assembled in a "hub and spoke" configuration of
treatment facilities and transfer stations. By focusing its marketing efforts on
Alternate Care generators, the Company expects to benefit from the higher
margins generally available from this large and growing class of customers. By
continuing to refine its logistics through the optimization of route structures
and greater exploitation of the Company's existing infrastructure, the Company
expects to improve its operating efficiencies.
The Company also seeks to expand beyond the United States and Canada by
entering into joint ventures with foreign regulated waste management companies
and by licensing its proprietary technology to foreign companies who may also
purchase ETD processing equipment. In 1998, the Company announced the
4
<PAGE> 6
formation of a joint venture in Mexico for the collection, treatment and
disposal of regulated medical waste in the Mexico City market, and also
announced a supply and license agreement with a Brazilian company for ETD
technology and equipment to use in the treatment of regulated medical waste in
the Sao Paulo, Brazil metropolitan area.
Through a strategy combining market penetration, expansion, acquisitions,
focused marketing and logistical efficiencies, the Company believes that it is
in a unique position to grow and to lead the consolidation of the fragmented
regulated medical waste management industry.
Stericycle, Inc. is a Delaware corporation with its principal executive
offices located at 1419 Lake Cook Road, Suite 410, Deerfield, Illinois 60015.
Its telephone number is (847) 945-6550.
THE OFFERING
Common Stock offered by the Company..... 3,000,000 shares
Common Stock to be outstanding after the
Offering................................ 13,741,603 shares (1)
Use of proceeds......................... To repay bank and other debt and
for future acquisitions and general
corporate purposes, including
working capital and capital
expenditures. See "Use of
Proceeds."
Nasdaq National Market symbol........... SRCL
- -------------------------
(1) Based on the number of shares outstanding as of September 30, 1998. This
figure excludes 406,807 shares issuable upon the exercise of outstanding
stock options exercisable as of or within 60 days after September 30, 1998,
at a weighted average exercise price of $5.09 per share, and 286,619 shares
issuable upon the exercise of outstanding warrants all of which were
exercisable as of September 30, 1998 at a weighted average exercise price of
$8.21 per share. This figure also excludes 579,939 shares issuable upon the
exercise of outstanding stock options, at a weighted average exercise price
of $10.40 per share, which were not exercisable within 60 days after
September 30, 1998.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
(1):
Revenues...................... $ 9,141 $ 16,141 $21,339 $24,542 $46,166 $33,475 $44,759
Cost of revenues.............. 9,137 13,922 17,478 19,423 34,109 25,113 30,492
Selling, general and
administrative expenses..... 5,988 7,927 8,137 7,556 10,671 7,725 10,151
------- -------- ------- ------- ------- ------- -------
Income (loss) from
operations.................. (5,984) (5,708) (4,276) (2,437) 1,386 637 4,116
Interest income (expense),
net......................... (44) (104) (268) 48 190 192 66
Other income.................. -- -- -- -- -- -- 20
------- -------- ------- ------- ------- ------- -------
Income (loss) before income
taxes....................... (6,028) (5,812) (4,544) (2,389) 1,576 829 4,202
Income tax expense............ -- -- -- -- 146 18 781
------- -------- ------- ------- ------- ------- -------
Net income (loss)............. (6,028) (5,812) (4,544) (2,389) 1,430 811 3,421
Less cumulative preferred
dividends (2)............... (3,733) (4,481) -- -- -- -- --
------- -------- ------- ------- ------- ------- -------
Net income (loss) applicable
to common stock............. $(9,761) $(10,293) $(4,544) $(2,389) $ 1,430 $ 811 $ 3,421
======= ======== ======= ======= ======= ======= =======
Diluted net income (loss) per
common share (3)............ $(13.64) $ (14.38) $ (0.81) $ (0.32) $ 0.13 $ 0.08 $ 0.30
======= ======== ======= ======= ======= ======= =======
Weighted average number of
common shares and common
stock equivalent shares
outstanding................. 716 716 5,582 7,471 10,766 10,480 11,234
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
ACTUAL AS ADJUSTED (4)
------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 3,110 $ 48,785
Total assets................................................ 68,183 113,858
Current portion of long-term debt........................... 6,281 2,156(5)
Long-term debt, net of current maturities................... 3,246 3,246
Shareholders' equity........................................ $50,550 $100,350
</TABLE>
- -------------------------
(1) See "Business -- Growth Strategy -- Pursue Selected Acquisitions," Note 5 to
the Consolidated Financial Statements and Note 3 to the Condensed
Consolidated Financial Statements for information concerning the Company's
acquisitions during the five years and the three years ended December 31,
1997 and the nine months ended September 30, 1998. The comparability of the
information for the periods presented has been affected by these
acquisitions.
(2) In August 1995 and in conjunction with a recapitalization of the Company,
the liquidation preference on the Company's preferred stock was eliminated
and the Company's preferred stock was reclassified as common stock. See Note
8 to the Consolidated Financial Statements.
(3) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"), during the fourth quarter of 1997. FAS 128
replaced the calculation of primary and fully diluted net income (loss) per
common share with basic and diluted net income (loss) per common share. Net
income (loss) per common share amounts have been restated where appropriate.
See Note 2 to the Consolidated Financial Statements.
(4) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered by the Company hereby (at an assumed public offering price of $17.88
per share, and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company). See "Use of Proceeds."
(5) Both the Company's credit facility with LaSalle National Bank and its
subordinated loan agreement with certain lenders require the repayment of
the Company's indebtedness upon completion of this Offering. See "Use of
Proceeds." As of December 31, 1998, the Company's indebtedness under its
credit facility was approximately $16,389,000, and its indebtedness under
its subordinated loan agreement was approximately $2,750,000. No adjustment
has been made to give effect to the repayment of this indebtedness, which
was incurred after September 30, 1998, except for repayment of the Company's
indebtedness under its prior credit facility, which was $4,125,000 as of
September 30, 1998.
6
<PAGE> 8
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following factors in
evaluating an investment in the Common Stock offered by this Prospectus.
Prospective investors are cautioned that the statements in this Prospectus that
are not descriptions of historical facts may be forward-looking statements that
are subject to risks and uncertainties. The Company's actual results and the
timing of events could differ materially from those contemplated by such
forward-looking statements due to a number of factors. These factors include,
but are not limited to, those discussed below and elsewhere in this Prospectus.
GROWTH STRATEGY DEPENDENT UPON ACQUISITIONS
The Company's growth strategy depends significantly upon its ability to
acquire other regulated medical waste management businesses. There can be no
assurance that the Company will be able to identify suitable businesses to
acquire, successfully negotiate their acquisition, improve the productivity of
their operations or integrate their operations into the Company's business. The
trend toward consolidation in the regulated medical waste management industry
may increase competition for the acquisition of existing businesses and result
in fewer acquisition opportunities and higher purchase prices. Some of the
Company's competitors for acquisitions continue to have greater financial
resources than the Company and may be willing to pay higher prices than the
Company is willing to pay to complete acquisitions or may be more capable of
completing larger transactions. If the Company is successful both in identifying
suitable regulated medical waste management businesses to acquire and in
negotiating terms of acquisition acceptable to the Company, the size of the
Company's acquisitions may nevertheless vary widely and the timing of their
completion may be irregular. The Company's completion of acquisitions on an
irregular basis, either because of protracted negotiations, delays in obtaining
necessary regulatory approvals or other factors, could have an adverse effect on
the Company's profits on a quarter-to-quarter basis and result in lower than
expected earnings. There can be no assurance that any debt or equity financing
which may be necessary to complete the Company's acquisitions will be able to be
obtained on terms satisfactory to the Company. Any additional equity financing
and the issuance of equity securities as purchase consideration may be dilutive
to the Company's existing stockholders. Debt financing, if available, and the
issuance of debt as purchase consideration, may significantly increase the
Company's debt and involve restrictive covenants which limit the Company's
operations. In addition, future acquisitions by the Company may result in large
one-time write-offs and the creation of goodwill or other intangible assets that
could result in significant amortization expense. The Company's failure to
implement its growth strategy successfully could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Use of Proceeds" and "Business -- Growth Strategy."
If the Company is successful in acquiring additional regulated medical
waste management businesses, the Company may continue to experience a period of
rapid growth which could place substantial additional demands on the Company's
management, resources and management information systems. To the extent that any
businesses acquired in the future operate in markets where the Company has not
previously operated, it is likely that higher initial costs will be incurred by
the Company in connection with the expansion of operations into these new
markets. The Company's failure to manage any such further rapid growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.
IMPACT OF GOVERNMENT REGULATION
The regulated medical waste management industry is subject to extensive
federal, state, local and applicable foreign laws and regulations. The
collection, transportation, treatment and disposal of regulated medical waste
require applicable government permits, authorizations and approvals ("permits"),
the nature of which may vary from jurisdiction to jurisdiction, and continuing
compliance with required packaging, labeling, handling, treatment, disposal and
documentation procedures and notice and reporting obligations. In certain
states, the Company is required to obtain government approval of its pricing and
to obtain and operate in compliance with a certificate of public convenience and
necessity. The Company believes that it is currently in compliance in all
material respects with its permits and applicable laws and regulations. State
and local laws and regulations change with some frequency, and the amendment of
existing laws or regulations, the adoption
7
<PAGE> 9
of new laws or regulations, or the imposition of new requirements under existing
laws or regulations, could require the Company to obtain new government permits
or to modify its current methods of operation in order to comply with these
changes. There can be no assurance that the Company would be able to obtain any
such new permits or that the cost of compliance with any such changes would not
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Governmental Regulation."
The Company's failure to operate in compliance with the requirements and
limitations of any permit, or with the laws and regulations pursuant to which
the permit was issued or otherwise governing the Company's operations, could
jeopardize the permit. Routine compliance inspections by regulatory agencies, as
well as complaints filed or anonymously sponsored by the Company's competitors
or others alleging that the Company is not operating in compliance with
applicable law, could result in administrative proceedings to modify, suspend or
revoke the permit. Any such modification, suspension or revocation could have a
material adverse effect on the Company's business, financial condition and
results of operations. Some permits have to be renewed periodically, and there
can be no assurance that any existing or future permit which must be renewed
will be renewed by the issuing regulatory agency or that changes in operating
methods or facilities will not be required as a condition to renewal. The
failure to obtain any such renewal or the imposition of new permit conditions
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Governmental Regulation."
The permits that the Company requires, and in particular the permits that
it requires to build and operate treatment and transfer facilities and transport
regulated medical waste, are difficult and time-consuming to obtain and, if and
when issued, may be subject to conditions or restrictions which limit the
Company's ability to operate efficiently in the applicable jurisdiction. There
can be no assurance that the Company will be successful in obtaining the permits
necessary to expand the scope of the geographic service areas in which it
operates or the products and services that it offers, or that any such permits
will be obtained when contemplated by the Company's expansion plans or under
conditions or with restrictions acceptable to the Company. The Company's
inability to expand the scope of the geographic service areas in which it
operates, or the products and services that it offers, either because it is
unable to obtain the necessary permits or because they are issued under
conditions or with restrictions that are not acceptable to the Company, could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's applications for treatment and transfer
facility permits are frequently subject to opposition by elected officials,
local residents or citizen groups, and public opposition could force the Company
to delay or withdraw its application and abandon its plans to expand into a
particular geographic service area or to locate a treatment or transfer facility
at a particular site. Even after a permit is issued, opponents may initiate
administrative proceedings or litigation to compel the applicable regulatory
agency to modify the conditions under which the permit was granted or to revoke
the issuance of the permit. The Company's withdrawal of a permit application,
after incurring substantial costs in the preparation and prosecution of the
application and underlying market studies, site selection, facility design and
pre-marketing activities, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's proprietary treatment technology,
Electro-Thermal-Deactivation ("ETD"), is an alternative to the conventional
treatment technologies of incineration and autoclaving and has not been approved
in all states for the treatment of regulated medical waste. The Company has
received permits or legislative approval to operate its proprietary treatment
technology in 15 states with additional applications pending. There can be no
assurance, however, that the Company's treatment technology will be approved for
the treatment of regulated medical waste in each state or other jurisdiction
where the Company may seek regulatory approval in the future to construct and
operate a treatment facility. The Company's inability to obtain any such
regulatory approval could have a material adverse effect on the Company's
business, financial condition and results of operations. Like any technology,
the Company's treatment process may be subject to certain technological
limitations. The Company's ETD process involves grinding medical waste within a
containment room, which may result in the aerosolization of pathogens. While the
Company believes that its containment and other safety systems fully protect its
employees through multiple protective measures, equipment failure or human error
possibly could result in exposure of the Company's employees to pathogens that
may be present in medical waste. Although the Company has never been denied
regulatory approval
8
<PAGE> 10
because of any technological limitation on its treatment process, there can be
no assurance that specific limitations will not be identified by a regulatory
agency as a sufficient reason to withhold, modify or revoke a necessary permit
in a particular jurisdiction or used by competitors to encourage customers or
potential customers to engage their services rather than those of the Company.
There can be no assurance that any such actions would not have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company currently employs autoclaving, incineration, chemclaving and
microwaving in addition to its proprietary ETD treatment process. Incineration
is subject to more stringent regulation than the ETD treatment process and may
expose the Company to greater risk of the adverse effect of government
regulation. See "Business -- Treatment Technologies" and "-- Governmental
Regulation."
As the Company expands its international operations, it will become subject
in the countries where it operates to regulation by foreign governments,
including the possibility of pricing tariffs, controls over the location and
operation of treatment facilities and various permit requirements similar to
those imposed by United States federal, state and local authorities. See
"Business -- Governmental Regulation" and "-- Growth Strategy."
GOVERNMENTAL ENFORCEMENT PROCEEDINGS
The Company has been and may continue to be subject from time to time to
governmental enforcement proceedings and has been and may be required to pay
fines and penalties or undertake remedial work at its facilities. The amount of
any such fines and penalties and the cost of any such remedial work could be
substantial and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Governmental enforcement actions also may be initiated against the Company
for the purpose of revoking or modifying one of the Company's permits. The cost
of defense and the costs incurred as a result of the revocation or modification
of a permit could be substantial and could have a material adverse effect on the
Company's business, financial condition and results of operations.
In April 1997, a worker at the Company's Morton, Washington treatment
facility was diagnosed with active tuberculosis. Testing revealed two additional
cases of active tuberculosis and 15 additional workers who tested positive for
exposure to tuberculosis. Officials of the Washington Departments of Health and
of Labor and Industries have concluded that the Company's workers were probably
exposed to tuberculosis bacteria through regulated medical waste being processed
at the Company's treatment facility. The Company believes that other sources of
exposure are possible and that the actual source of exposure has yet to be
conclusively determined. However, the Company has implemented the
recommendations of all federal, state and local regulatory authorities regarding
outfitting its workers with personal protective equipment and has implemented or
is implementing additional recommendations regarding the modification of
equipment at the Morton facility. The measures taken at the Morton facility have
been extended to the Company's other treatment facilities. The safety measures
being taken include certain measures recommended by the National Institute for
Occupational Safety and Health ("NIOSH") in a report issued in December 1998.
While future claims are possible, to date the Company has not been subject to
any civil proceedings by the affected employees as a result of this incident,
which the Washington Department of Labor and Industries has determined is
covered by the state workers' compensation program. This or a similar incident
in the future at one of the Company's facilities could result in adverse
publicity and could cause governmental authorities to require the Company to
adopt additional safety measures, impose fines or other penalties, initiate
permit modification or revocation proceedings or deny future permit
applications, or could result in litigation by the affected employees. The cost
of complying with any additional measures, the payment of a significant fine or
penalty, the modification or revocation of an operating permit, adverse
publicity, or the expense of defending or settling employee litigation or paying
an adverse judgment, could have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that the Company will be successful in its
defense of any future government enforcement proceeding or in obtaining a
settlement on terms acceptable to the Company of any fines or
9
<PAGE> 11
penalties sought to be imposed. The expense and time involved in defending
against any such enforcement proceeding, the cost of any fines or penalties
imposed or paid in settlement, the cost of any changes in operations that may be
necessary because of the modification, suspension or revocation of a permit, and
the adverse publicity, loss of customers and additional investigations or
inquiries associated with any proceeding, could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Legal and Other Proceedings" and "-- Governmental Regulation."
COMPETITION WITHIN INDUSTRY
The Company operates within the highly competitive regulated medical waste
management industry. Historically, competition in the industry resulted in
substantial price reductions to Large Quantity generators in virtually all
geographic areas. While prices have stabilized in most areas, there can be no
assurance that competitive pressures within the regulated medical waste
management industry will not result in further price reductions. Substantial
further price reductions would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company faces competition from one national waste management company
and many regional and local businesses in its present locations, and will be
confronted with such competition in each location where it seeks to expand in
the future. Some of the Company's competitors have greater capital resources,
regulatory experience, sales and marketing capabilities and broader product and
service offerings than the Company and are well established in their respective
markets. The Company's primary competitor is Browning-Ferris Industries, Inc.
("BFI"). BFI and other competitors could engage in a variety of actions that
have the effect of delaying or preventing implementation of the Company's growth
strategy, including lobbying or support of legislative or regulatory initiatives
designed to impede the Company's ability to obtain or maintain necessary permits
and approvals and financial support of citizens' groups that oppose the
Company's plans to locate a treatment or transfer facility at a particular site.
There can be no assurance that the Company's competitors will not substantially
increase their commitment of resources devoted to competing aggressively with
the Company or that the Company will be able to compete profitably with BFI or
other competitors. To the extent that the Company's competitors are able to
secure significant numbers of long-term customer agreements with penalties for
early termination in geographic service areas that the Company targets for
growth, the Company may be unable to meet its growth objectives. See "Business
- -- Competition."
BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use approximately $19,139,000 of the net proceeds of
this Offering for debt repayment. The Company intends to use the remaining net
proceeds of the Offering for future acquisitions of other regulated medical
waste management businesses and for general corporate purposes, including
working capital and capital expenditures. With the exception of three letters of
intent, the Company has no pending agreements, commitments or understandings as
of the date of this Prospectus to acquire other regulated medical waste
management businesses. The Company's management will have broad discretion in
determining the amount and timing of expenditures and in allocating the net
proceeds of this Offering received by the Company. See "Use of Proceeds."
UNCERTAINTY OF CONTINUED PROFITABILITY
Until 1997, the Company incurred substantial losses each year since it
began operations in 1989, and as of December 31, 1997, had an accumulated
deficit of approximately $38,061,000. While the Company had net income of
$1,430,000 for the year ended December 31, 1997 and net income of $3,421,000 for
the nine months ended September 30, 1998, there can be no assurance that the
Company will be able to continue to operate profitably in the future. The
Company is subject to the risks and uncertainties inherent in the growth of a
developing business in the regulated medical waste management industry, and
prospective investors have only a limited history of profitability to review.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
<PAGE> 12
IMPORTANCE OF GOVERNMENTAL ENFORCEMENT OF ENVIRONMENTAL REGULATIONS
The Company believes that its business prospects are enhanced by the
enforcement of stringent statutory and regulatory requirements relating to the
collection, transportation, treatment and disposal of regulated medical waste.
These laws and regulations are, and will continue to be, a principal factor
affecting demand for the Company's regulated medical waste management services.
In addition, the Company views as generally advantageous to its business
prospects laws and regulations that make it more difficult or expensive to use
regulated medical waste treatment technologies that compete with the ETD
treatment process, such as incineration and autoclaving. These advantages have
diminished, however, to the extent that the Company itself has recently begun to
use incineration and autoclaving. The Company estimates that during 1997, the
Company used incineration or autoclaving at its own facilities or those of third
parties for approximately 43% of the regulated medical waste that it treated.
This percentage is likely to increase as a result of recent and future
acquisitions. See "Business -- Treatment Technologies."
The Company believes that legislative initiatives offering financial
incentives for or otherwise encouraging the recycling of treated medical waste
similarly enhance the Company's business prospects. Changes in the law or
regulations that relax the requirements governing regulated medical waste,
including changes that reduce incentives to landfill diversion and resource
recovery or that remove obstacles to the use of incineration and autoclaving for
the treatment of regulated medical waste, could have a material adverse effect
on the Company's business, financial condition and results of operations. The
level of future enforcement of existing and new laws and regulations, the scope
of future laws and regulations and the impact of technological changes on
existing or future laws and regulations cannot be predicted. The level of
enforcement in each jurisdiction is subject to changing political and budgetary
pressures. A significant reduction in government enforcement in one or more
jurisdictions could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON PATENTS AND PROPRIETARY INFORMATION
The Company holds nine United States patents relating to the ETD treatment
process and other aspects of processing regulated medical waste. The Company has
filed or has been assigned counterpart patent applications in several foreign
countries and has received patents in five of them. The Company also holds one
United States patent for its reusable container, which is used under the
trademark Steri-Tub(R). The Company believes that its patents are important to
its prospects for success. There can be no assurance, however, that the
Company's patent applications will issue as patents or that any issued patents
will provide competitive advantages to the Company or will not be successfully
challenged or circumvented by competitors or other third parties. In addition,
there can be no assurance that the Company's regulated medical waste treatment
processes do not infringe the patent or other proprietary rights of third
parties. Litigation may be required to enforce the Company's patents, to defend
the Company against claims of infringement by third parties, and to determine
the enforceability, validity and scope of third parties' proprietary rights. Any
such litigation could involve a substantial expense to the Company and require
significant time and attention of the Company's management. The Company also
could be required to participate in interference proceedings declared by the
U.S. Patent and Trademark Office to determine the priority of inventions, which
also could involve a substantial expense. A determination adverse to the Company
in any such litigation or interference proceedings could result in a substantial
liability to the Company or prevent the Company from continuing to use its
regulated medical waste treatment processes. In the former event, the liability
could have a material adverse effect on the Company's business, financial
condition and results of operations. In the latter event, the Company could seek
a license from the third party or attempt to redesign its regulated medical
waste treatment processes to avoid infringement. The Company's failure to obtain
such a license on terms acceptable to the Company, or its failure to redesign
its processes to avoid infringement, similarly could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Patents and Proprietary Rights."
In addition to patent protection, the Company seeks to protect its
proprietary information through confidentiality agreements with its employees,
consultants and collaborators. There can be no assurance that such agreements
will not be breached, that the Company will have adequate remedies for any such
breach or
11
<PAGE> 13
that the Company's proprietary information will not otherwise become known to or
be independently developed by the Company's competitors. See "Business --
Patents and Proprietary Rights."
The Company holds federal registrations of the trademarks Steri-Fuel(R),
Steri-Plastic(R), Steri-Tub(R) and Steri-Cement(R), the service mark
Stericycle(R) and a service mark consisting of a graphic that the Company uses
in association with its name and services in the United States. There can be no
assurance that the registered or unregistered trademarks or service marks of the
Company will not infringe upon the rights of third parties. The requirement to
change any trademark, service mark or trade name of the Company could result in
the loss of any goodwill associated with that trademark, service mark or trade
name, could entail significant expense and could have a material adverse effect
on the Company's business, financial condition and results of operation. See
"Business -- Patents and Proprietary Rights."
POTENTIAL RISK OF LIABILITY AND POTENTIAL UNAVAILABILITY OF INSURANCE
The regulated medical waste management industry involves potentially
significant risks of statutory, contractual, tort and common law liability. The
Company's failure to comply with applicable laws and regulations or to manage
regulated medical waste or its byproducts in an environmentally safe manner
could result in environmental contamination, personal injury and property
damage. The Company maintains pollution liability, general liability and
workers' compensation insurance which the Company considers adequate to protect
its business and employees. An uninsured or partially insured claim against the
Company, however, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), and similar state laws, impose
strict, joint and several liability on current and former owners and operators
of facilities from which releases of hazardous substances have occurred and on
generators and transporters of the hazardous substances that come to be located
at such facilities. Responsible parties may be liable for substantial site
investigation and clean-up costs and natural resource damages, regardless of
whether they exercised due care or complied with applicable laws and
regulations. If the Company were found to be a responsible party for a
particular site, it could be required to pay the entire cost of the site
investigation and clean-up, even though other parties also may be liable. The
Company's ability to obtain contribution from other responsible parties may be
limited by the Company's inability to identify those parties and by their
financial inability to contribute to investigation and clean-up costs. There can
be no assurance that the Company will not face claims under CERCLA or similar
state laws, or under other laws, resulting in a substantial liability for which
the Company is unable to obtain contribution from other responsible parties and
for which the Company is uninsured or only partially insured. The Company's
pollution liability insurance excludes liabilities under CERCLA. The Company may
experience difficulty in the future in obtaining adequate insurance coverage on
acceptable terms. A successful claim against the Company for which it is
uninsured or only partially insured, and for which it is unable to obtain
contribution from other responsible parties, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Potential Liability and Insurance."
ALTERNATIVE TECHNOLOGIES; TECHNOLOGICAL OBSOLESCENCE
The regulated medical waste management industry presents continuing
opportunities for the development of alternative treatment and disposal
technologies. These alternative technologies may emphasize operating cost
efficiencies, reductions in the volume of regulated medical waste generated or
other environmental factors. The development and commercialization of
alternative treatment or disposal technologies that are more cost-effective than
the Company's technologies or that reduce the volume of regulated medical waste
generated or afford other environmental benefits could place the Company at a
competitive disadvantage.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon a limited number of key management, technical
and sales personnel. The Company's future success will depend, in part, upon its
ability to attract and retain highly qualified
12
<PAGE> 14
personnel. The Company faces competition for such personnel from other companies
and organizations, and there can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. The Company does not have
written employment agreements with its officers providing for specific terms of
employment, and officers and other key personnel could leave the Company's
employ with little or no prior notice. The Company's loss of key personnel,
especially if the loss is without advance notice, or the Company's inability to
hire or retain key personnel, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not carry any key man life insurance.
INTERNATIONAL OPERATIONS
The Company plans to grow both domestically and internationally and has
begun penetrating regulated medical waste management markets in foreign
countries. The Company's international activities may include the export of ETD
technology, associated know-how and ETD equipment. A number of risks are
inherent in international operations. International operations may be limited or
disrupted by the imposition of government controls, export license requirements,
political or economic instability, trade restrictions, changes in tariffs,
restrictions on repatriating profits, taxation, or difficulties in staffing and
managing international operations. Foreign regulatory agencies often establish
permit and compliance standards different from those in the United States, and
an inability to obtain foreign regulatory approvals on a timely basis could have
an adverse effect on the Company's international business and its financial
condition and results of operations. In addition, the Company's business,
financial condition and results of operations may be adversely affected by
fluctuations in currency exchange rates as well as increases in duty rates for
ETD equipment. There can be no assurance that the Company will be able to
successfully operate in any foreign market. See "Business -- Growth Strategy"
and "-- Marketing and Sales."
VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be adversely affected by
fluctuations in the Company's operating results or the operating results of the
Company's competitors, the failure of the Company's operating results to meet
the expectations of research analysts and investors, delays in consummating
acquisitions, changes in regulated medical waste management laws and
regulations, actions by governmental authorities, developments in respect of
patents or proprietary rights, changes in research analysts' recommendations
regarding the Company or the regulated medical waste management industry
generally, general market conditions, adverse publicity, or other events and
factors. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
following this Offering could adversely affect the market price of the Common
Stock.
Upon completion of this Offering, the Company will have 13,741,603 shares
of Common Stock outstanding (based upon shares outstanding as of September 30,
1998). Of these shares, approximately 11,035,496 shares, including the 3,000,000
shares offered hereby (or approximately 11,485,496 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act. The remaining
2,706,107 shares may be sold in the public market only if they are registered
under the Securities Act or if they qualify for an exemption from registration
under Rule 144. Approximately 2,585,736 of these shares will be eligible for
sale under Rule 144 on the date of this Offering.
The Company's executive officers and directors, who together hold 2,210,150
shares of Common Stock (all of which are eligible for sale under Rule 144 on the
date of this Offering), have entered into lock-up agreements with the Managing
Underwriters pursuant to which the holders have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, directly
or indirectly, any of their shares of Common Stock, or any shares that they may
acquire through the exercise of stock options or warrants, or to exercise any of
their registration rights in respect of their shares of Common Stock, for a
period of 90 days
13
<PAGE> 15
beginning on the date of this Offering without the prior written consent of
Warburg Dillon Read LLC on behalf of the Managing Underwriters. See "Shares
Eligible for Future Sale" and "Underwriting."
As of September 30, 1998, options to purchase a total of 986,746 shares of
Common Stock were outstanding under the Company's stock option plans, of which
options for a total of 377,175 shares were then exercisable. Of the total
options exercisable, options for 286,809 shares were held by executive officers
and directors subject to the lock-up agreements described above.
As of September 30, 1998, there were outstanding warrants to purchase
286,619 shares of Common Stock, all of which were then exercisable. Holders of
warrants to purchase 178,794 shares of Common Stock are subject to the lock-up
agreements described above.
After completion of this Offering, the Company may issue unregistered
shares of Common Stock as full or partial consideration for future business
acquisitions and may grant registration rights to the holders of such shares.
See "Business -- Growth Strategy -- Pursue Selected Acquisitions."
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $49.8 million ($57.4 million if
the Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $17.88 per share, and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company.
The Company's outstanding indebtedness under its credit facility with
LaSalle National Bank is required to be repaid from the net proceeds of this
Offering. As of December 31, 1998, the Company's indebtedness under its credit
facility was approximately $16,389,000. The Company's indebtedness was incurred
in connection with (i) the repayment of the lender under the Company's previous
credit facility, (ii) the Company's purchase of the outstanding common stock of
Waste Systems, Inc. ("WSI"), (iii) the Company's purchase of the junior secured
indebtedness and approximately 94% of the outstanding common stock of Med-Tech
Environmental Limited ("Med-Tech") and (iv) a loan to WSI to fund a loan by it
to its majority-owned subsidiary, 3CI Complete Compliance Corporation ("3CI").
The Company's credit facility provides for a five-year $5,000,000 revolving
line of credit for working capital purposes and a one-year $20,000,000 revolving
line of credit for acquisition purposes. Upon the maturity of this latter line
of credit, the outstanding balance, if any, will convert into a four-year term
loan repayable in quarterly installments. If the principal amount of the term
loan upon conversion is less than $15,000,000, however, a further one-year line
of credit in the amount of the difference will be available for acquisition
purposes, and upon the maturity of this further line of credit, the outstanding
balance, if any, will convert into a three-year term loan repayable in quarterly
installments. The credit facility is subject to certain limitations based on
eligible accounts receivable and had a weighted average interest rate of 7.3%
per annum at December 31, 1998.
The Company's outstanding indebtedness under a subordinated loan agreement
that the Company entered into in December 1998 to obtain short-term financing is
required to be repaid from the net proceeds of this Offering. As of December 31,
1998, the Company's indebtedness under this loan agreement was approximately
$2,750,000. The subordinated loans bear interest at 6.0% per annum and are due
within 10 days after completion of the Offering. In connection with these loans,
the Company issued warrants to the lenders 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 9,091 shares of Common Stock at $16.50 per share. See
"Certain Transactions."
The Company intends to use the remainder of the net proceeds of the
Offering for potential future acquisitions of other regulated medical waste
management businesses and for general corporate purposes, including working
capital and capital expenditures. The Company is continuously evaluating
possible acquisitions candidates as part of its growth strategy. The Company has
signed letters of intent with three companies for the acquisition of their
regulated medical waste management businesses and is in various stages of
discussion with other companies. With the exception of these three letters of
intent, the Company presently has no binding agreements or commitments to effect
any mergers or acquisitions. Pending these uses, the Company intends to invest
the net proceeds of the Offering in short-term, interest-bearing, investment
grade securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
15
<PAGE> 17
PRICE RANGE OF COMMON STOCK
Since August 23, 1996, the Company's Common Stock has traded on the Nasdaq
National Market under the symbol "SRCL." The following table sets forth, for the
periods indicated, the high and low bid prices of the Common Stock as reported
on the Nasdaq National Market:
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
---- ---
<S> <C> <C>
1996:
Third Quarter (1)........................................... $10.63 $ 8.50
Fourth Quarter.............................................. 11.25 7.00
1997:
First Quarter............................................... 11.38 8.00
Second Quarter.............................................. 9.00 7.00
Third Quarter............................................... 10.25 7.63
Fourth Quarter.............................................. 15.75 9.00
1998:
First Quarter............................................... 16.88 11.00
Second Quarter.............................................. 17.25 10.75
Third Quarter............................................... 19.50 12.50
Fourth Quarter.............................................. 21.25 12.63
1999:
First Quarter(2)............................................ 18.00 16.50
</TABLE>
- -------------------------
(1) From August 23 through September 30, 1996.
(2) From January 1 through January 7, 1999.
On January 7, 1999, the last reported sale price of the Common Stock on the
Nasdaq National Market was $17.88 per share.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth, as of September 30, 1998, the
capitalization of the Company and the capitalization of the Company as adjusted
to give effect to the receipt and application by the Company of the estimated
net proceeds from the sale of the 3,000,000 shares of Common Stock offered by
the Company hereby (at an assumed public offering price of $17.88 per share, and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of long-term debt......................... $ 6,281 $ 2,156(1)
Long-term debt:
Industrial development revenue bonds and other............ 1,341 1,341
Notes payable............................................. 1,905 1,905
-------- --------
Total long-term debt................................... 3,246 3,246
Shareholders' equity:
Common Stock, $.01 par value; 30,000,000 shares
authorized; 10,741,603 shares issued and outstanding,
13,741,603 shares issued and outstanding, as
adjusted............................................... 107 137
Additional paid-in capital................................ 85,087 134,857
Notes receivable for common stock purchases............... (4) (4)
Accumulated deficit....................................... (34,640) (34,640)
-------- --------
Total shareholders' equity............................. 50,550 100,350
-------- --------
Total capitalization................................. $ 60,077 $105,752
======== ========
</TABLE>
- -------------------------
(1) Both the Company's credit facility with LaSalle National Bank and its
subordinated loan agreement with certain lenders require the repayment of
the Company's indebtedness upon completion of this Offering. See "Use of
Proceeds." As of December 31, 1998, the Company's indebtedness under its
credit facility was approximately $16,389,000, and its indebtedness under
its subordinated loan agreement was approximately $2,750,000. No adjustment
has been made to give effect to the repayment of this indebtedness, which
was incurred after September 30, 1998, except for repayment of the Company's
indebtedness under its prior credit facility, which was $4,125,000 as of
September 30, 1998.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The Company
currently expects that it will retain future earnings for use in the operation
and expansion of its business and does not anticipate paying any cash dividends
in the foreseeable future. The Company is prohibited from paying cash dividends
under the terms of its revolving credit facility with LaSalle National Bank and
is restricted from paying cash dividends under an agreement in connection with
the industrial development revenue bonds issued to finance the Company's
construction of its treatment facility at Woonsocket, Rhode Island. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The statements of operations data for the years ended December 31,
1995, 1996 and 1997 and the balance sheet data at December 31, 1996 and 1997
have been derived from the consolidated financial statements of the Company (the
"Consolidated Financial Statements"), which are included elsewhere in this
Prospectus and which have been audited by Ernst & Young LLP, independent
auditors. The statements of operations data for the years ended December 31,
1993 and 1994 and the balance sheet data at December 31, 1993, 1994 and 1995
have been derived from the audited consolidated financial statements of the
Company which are not included in this Prospectus. The statements of operations
data for the nine months ended September 30, 1997 and 1998 and the balance sheet
data at September 30, 1998 are derived from the unaudited condensed consolidated
financial statements of the Company (the "Condensed Consolidated Financial
Statements") included elsewhere in this Prospectus. The Condensed Consolidated
Financial Statements include all adjustments, consisting of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for that period. Operating results
for the nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1998.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA (1):
Revenues.................................... $ 9,141 $ 16,141 $21,339 $24,542 $46,166 $33,475 $44,759
Cost of revenues............................ 9,137 13,922 17,478 19,423 34,109 25,113 30,492
Selling, general and administrative
expenses.................................. 5,988 7,927 8,137 7,556 10,671 7,725 10,151
------- -------- ------- ------- ------- ------- -------
Income (loss) from operations............... (5,984) (5,708) (4,276) (2,437) 1,386 637 4,116
Interest income (expense), net.............. (44) (104) (268) 48 190 192 66
Other income................................ -- -- -- -- -- -- 20
------- -------- ------- ------- ------- ------- -------
Income (loss) before income taxes........... (6,028) (5,812) (4,544) (2,389) 1,576 829 4,202
Income tax expense.......................... -- -- -- -- 146 18 781
------- -------- ------- ------- ------- ------- -------
Net income (loss)........................... (6,028) (5,812) (4,544) (2,389) 1,430 811 3,421
Less cumulative preferred dividends (2)..... (3,733) (4,481) -- -- -- -- --
------- -------- ------- ------- ------- ------- -------
Net income (loss) applicable to common
stock..................................... $(9,761) $(10,293) $(4,544) $(2,389) $ 1,430 $ 811 $ 3,421
======= ======== ======= ======= ======= ======= =======
Diluted net income (loss) per common share
(3)....................................... $(13.64) $ (14.38) $ (0.81) $ (0.32) $ 0.13 $ 0.08 $ 0.30
======= ======== ======= ======= ======= ======= =======
Weighted average number of common shares and
common stock equivalent shares
outstanding............................... 716 716 5,582 7,471 10,766 10,480 11,234
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.............................. $ 7,690 $ 1,206 $ 138 $17,749 $ 7,709 $ 3,110
Total assets............................... 21,355 27,809 23,491 55,155 61,226 68,183
Long-term debt, net of current
maturities............................... 2,293 4,838 5,622 4,591 3,475 3,246
Convertible, redeemable preferred stock
(2)...................................... 52,078 62,909 -- -- -- --
Shareholders' equity (net capital
deficiency).............................. $(35,106) $(45,363) $12,574 $40,014 $45,026 $50,550
</TABLE>
- -------------------------
(1) See "Business -- Growth Strategy -- Pursue Selected Acquisitions," Note 5 to
the Consolidated Financial Statements and Note 3 to the Condensed
Consolidated Financial Statements for information concerning the Company's
acquisitions during the five years and the three years ended December 31,
1997 and the nine months ended September 30, 1998. The comparability of the
information for the periods presented has been affected by these
acquisitions.
(2) In August 1995 and in conjunction with a recapitalization of the Company,
the liquidation preference on the Company's preferred stock was eliminated
and the Company's preferred stock was reclassified as common stock. See Note
8 to the Consolidated Financial Statements.
(3) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"), during the fourth quarter of 1997. FAS 128
replaced the calculation of primary and fully diluted net income (loss) per
common share with basic and diluted net income (loss) per common share. Net
income (loss) per common share amounts have been restated where appropriate.
See Note 2 to the Consolidated Financial Statements.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements, Condensed Consolidated Financial Statements
and the related Notes included elsewhere in this Prospectus.
BACKGROUND
The Company was incorporated in March 1989. The Company provides regulated
medical waste collection, transportation, treatment, disposal, reduction, re-use
and recycling services to its customers, together with related training and
education programs and consulting services. The Company also sells ancillary
supplies and transports pharmaceuticals, photographic chemicals, lead foil and
amalgam for recycling in selected geographic service areas. The Company is also
expanding into international markets through joint ventures or by licensing its
proprietary technology and selling associated equipment.
The Company's revenues have increased from $1,563,000 in 1991 to
$46,166,000 in 1997 and to $57,450,000 for the 12 months ended September 30,
1998. The Company derives its revenues from services to two principal types of
customers: (i) long-term and sub-acute care facilities, outpatient clinics,
medical and dental offices, biomedical companies, municipal entities and other
smaller-quantity generators of regulated medical waste ("Alternate Care"
generators); and (ii) hospitals, blood banks, pharmaceutical manufacturers and
other larger-quantity generators of regulated medical waste ("Large Quantity"
generators). Substantially all of the Company's services are provided pursuant
to customer contracts specifying either scheduled or on-call regulated medical
waste management services, or both. Contracts with Alternate Care generators
generally provide for annual price increases and have an automatic renewal
provision unless the customer notifies the Company prior to completion of the
contract. Contracts with hospitals and other Large Quantity generators, which
may run for more than one year, typically include price escalator provisions
which allow for price increases generally tied to an inflation index or set at a
fixed percentage. As of September 30, 1998, the Company served over 50,000
customers.
The Company currently expenses as incurred all permitting, design and
start-up costs associated with its facilities. The Company elects to expense
rather than to capitalize the costs of obtaining permits and approvals for each
proposed facility regardless of whether the Company is ultimately successful in
obtaining the desired permits and approvals and developing the facility. The
Company currently recognizes as a current expense all legal fees and other costs
related to obtaining and maintaining permits and approvals. In addition, the
Company currently expenses all costs related to research and development as
incurred.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues. Revenues increased $11,284,000, or 33.7%, to $44,759,000 during
the nine months ended September 30, 1998 from $33,475,000 during the comparable
period in 1997 as the Company continued to focus on sales to higher-margin
Alternate Care generators while simultaneously paring certain lower-margin
accounts with Large Quantity generators. The increase also reflects $3,802,000
in revenues from the sale of equipment to a Brazilian company, Companhia
Auxiliar de Viacao e Obra ("CAVO"), and to a Mexican joint venture, Medam S.A.
de C.V. ("Medam"), that the Company and others formed for the collection,
treatment and disposal of regulated medical waste in the Mexico City
metropolitan market utilizing the Company's ETD treatment technology. During the
nine months ended September 30, 1998, acquisitions contributed approximately
$6,456,000 to the increase in revenues when compared to the same period in 1997.
Cost of revenues. Cost of revenues increased $5,379,000, or 21.4%, to
$30,492,000 during the nine months ended September 30, 1998, from $25,113,000
during the comparable period in 1997. The increase was primarily due to the
substantial increase in revenues during 1998 compared to 1997 and to the cost of
equipment supplied to CAVO and Medam. The gross margin percentage increased to
31.9% during the nine months ended September 30, 1998, from 25.0% during the
comparable period in 1997 as a result of the further integration of new
acquisitions into the Company's existing infrastructure, lower costs relating to
the changing
19
<PAGE> 21
mix of Alternate Care and Large Quantity generators, increased utilization of
existing treatment capacity and the sale of equipment to CAVO.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $10,151,000 during the nine months ended
September 30, 1998, from $7,725,000 during the comparable period in 1997, due to
the Company's continued progress in strengthening its sales and administrative
organizations and to the increase in the amortization of goodwill associated
with acquisitions. Selling, general and administrative expenses as a percentage
of revenues decreased to 22.7% during the nine months ended September 30, 1998
from 23.1% during the comparable period in 1997.
Interest expense and interest income. Interest expense decreased to
$242,000 during the nine months ended September 30, 1998, from $336,000 during
the comparable period in 1997, primarily due to the repayment of certain debt
issued in connection with one of the Company's acquisitions offset by borrowings
on the Company's revolving line of credit. Interest income also decreased to
$308,000 during the nine months ended September 30, 1998, from $528,000 during
the comparable period in 1997, primarily due to lower cash balances as a result
of acquisitions and the repayment of debt.
Income tax expense. The estimated effective tax rate of approximately 18.6%
for the nine months ended September 30, 1998 reflects federal taxable income
expected in excess of Internal Revenue Code Section 382 limitations on the
annual utilization of the Company's net operating loss carryforwards and state
income taxes in states where the Company has no offsetting net operating losses.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased $21,624,000, or 88.1%, to $46,166,000 during
the year ended December 31, 1997 from $24,542,000 during the year ended December
31, 1996 as the Company continued to implement its strategy of focusing on
higher-margin Alternate Care generators while simultaneously paring certain
higher-revenue but lower-margin accounts with Large Quantity generators. This
increase also reflects the inclusion of a full year's revenues from the
acquisition of a major portion of the regulated medical waste business of Waste
Management, Inc. ("WMI"), which was completed in December 1996, eight months of
revenues from the Environmental Control Co., Inc. ("ECCO") acquisition completed
in May 1997, and partial years' revenues from various other smaller
acquisitions. For the year, internal sales growth for Alternate Care generators
was 13.0%, while sales to Large Quantity generators decreased by 4.0%.
Incremental revenues during 1997 attributable to acquisitions completed in 1997
and late 1996 were $20,975,000. Excluding these incremental revenues from
acquisitions, revenues increased from $24,542,000 in 1996 to $25,191,000 in
1997, or 2.6%.
Cost of revenues. Cost of revenues increased $14,686,000, or 75.6%, to
$34,109,000 during the year ended December 31, 1997 from $19,423,000 during the
year ended December 31, 1996. The principal reasons for the increase were higher
transportation, treatment and disposal costs as a result of the higher volume
attributable to the Company's acquisitions and integration expenses related to
the Company's expansion into new geographic service areas. The gross margin
percentage increased to 26.1% during 1997 from 20.9% during 1996, due to the
continuing shift to Alternate Care customers and increased utilization of the
Company's treatment capacity.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $10,671,000 during the year ended December
31, 1997 from $7,556,000 during the year ended December 31, 1996. The increase
was largely the result of increases in selling and marketing expenses as a
result of the Company's acquisitions and expansion of the sales network, and
increased administrative costs related to the higher volume. Selling, general
and administrative expenses as a percentage of revenues decreased to 23.1%
during 1997 from 30.8% during 1996 due to improved leverage of the
administrative structure versus the sales growth.
Interest expense and interest income. Interest expense increased to
$428,000 during the year ended December 31, 1997 from $373,000 during the year
ended December 31, 1996. This increase was primarily attributable to higher
indebtedness related to the WMI and ECCO acquisitions. Interest income increased
to
20
<PAGE> 22
$618,000 during 1997 from $421,000 during 1996 due to interest earned on the
invested cash proceeds from the Company's initial public offering ("IPO") in
August 1996.
Income Tax Expense. The effective tax rate of 9.3% for the year ended
December 31, 1997 reflects the utilization of the Company's net operating losses
for income tax purposes, offset by alternative minimum tax and state income
taxes in states where the Company has no offsetting net operating losses. The
Company did not pay any income taxes during the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased $3,203,000, or 15.0%, to $24,542,000 during
the year ended December 31, 1996 from $21,339,000 during the year ended December
31, 1995 as the Company continued to implement its strategy of focusing on
higher-margin Alternate Care generators while simultaneously paring certain
higher-revenue but lower-margin accounts with Large Quantity generators. This
increase also reflects the inclusion of a full year's revenues from the Safetech
Health Care, Inc. ("Safetech") acquisition, which was completed in June 1995,
eleven months of revenues from the WMI Medical Services of New England, Inc.
("WMI-NE") acquisition, which was completed in January 1996, and eight months of
revenues from the Doctors Environmental Control, Inc. ("DEC") and Sharps
Incinerator of Fort, Inc. ("Sharps") acquisitions, both of which were completed
in May 1996, and the inclusion of revenues for the last 10 days of 1996
resulting from the Company's purchase in December 1996 of a major portion of
WMI's regulated medical waste business. The increase in revenues was partially
offset by a decline in revenues attributable to a lack of any miscellaneous
product sales during 1996 and the sale in April 1995 of certain unprofitable
customer accounts and related assets obtained through acquisitions. Incremental
revenues during 1996 attributable to acquisitions completed in 1995 and 1996
were $2,332,000. Excluding these incremental revenues from acquisitions,
revenues increased from $21,339,000 in 1995 to $22,210,000 in 1996, or 4.1%.
Cost of revenues. Cost of revenues increased $1,945,000, or 11.1%, to
$19,423,000 during the year ended December 31, 1996 from $17,478,000 during the
year ended December 31, 1995. The principal reasons for the increase were higher
transportation, treatment and disposal costs as a result of the Safetech,
WMI-NE, DEC, Sharps and WMI acquisitions and start-up expenses related to the
Company's expansion into new geographic service areas. The gross margin
percentage increased to 20.9% during 1996 from 18.1% during 1995, due to the
continued increase in Alternate Care customers and increased utilization of the
Company's treatment capacity.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $7,556,000 during the year ended December
31, 1996 from $8,137,000 during the year ended December 31, 1995. This decrease
was primarily attributable to a reduction in expenditures to develop treated
medical waste as an alternate fuel for the production of cement and to savings
from the integration into the Company's operations of the Safe Way Disposal
Systems, Inc. ("Safe Way") acquisition in 1994. These savings resulted from the
elimination of redundant employee and staff positions and the reallocation of
resources to Alternate Care generators. In addition, corporate costs and
permitting expenses were at lower levels during 1996 than they were during 1995.
Selling, general and administrative expenses as a percentage of revenues
decreased to 30.8% during 1996 from 38.1% during 1995.
Interest expense and interest income. Interest expense increased to
$373,000 during the year ended December 31, 1996 from $277,000 during the year
ended December 31, 1995. This increase was primarily attributable to higher
indebtedness under the Company's revolving credit facility and interest expense
on notes issued for acquisitions. Interest income increased to $421,000 during
1996 from $9,000 during 1995 due to interest earned on the invested cash
proceeds from the Company's IPO in August 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been financed principally through the sale of stock to
investors. Prior to the Company's IPO, purchasers of stock invested more than
$50,137,000 in capital which was used to fund research and development,
acquisitions, capital expenditures, operating losses and working capital
requirements. The Company's IPO in August 1996 raised $31,050,000, excluding
offering costs, which has been used primarily to
21
<PAGE> 23
fund acquisitions and for general working capital. The Company has also been
able to secure plant and equipment leasing or financing in connection with some
of its facilities. These debt facilities are secured by security interests in
the financed assets. In addition, as of September 30, 1998, the Company had
available a $7,500,000 revolving line of credit secured by the Company's
accounts receivable and all of its other assets, and at September 30, 1998, the
Company had borrowed $4,125,000 under this line of credit.
In October 1998, the Company established a new $25,000,000 credit facility
at a different bank, replacing its existing line of credit. As amended, the
Company's new credit facility provides for a five-year $5,000,000 revolving line
of credit for working capital purposes and a one-year $20,000,000 revolving line
of credit for acquisition purposes. Upon the maturity of this latter line of
credit, the outstanding balance, if any, will convert into a four-year term loan
repayable in 16 equal quarterly payments of principal. If the principal amount
of the term loan upon conversion is less than $15,000,000, however, a further
one-year line credit in the amount of the difference will be available for
acquisition purposes, and upon the maturity of this further line of credit, the
outstanding balance, if any, will convert into a three-year term loan repayable
in 12 equal quarterly payments of principal. The Company's borrowings bear
interest at either the bank's prime rate, plus 0.25%, or an adjusted LIBOR rate,
as elected by the Company at the time of each borrowing. Interest is payable
quarterly (or at the end of the interest period, if the Company selects an
interest period of less than three months in the case of a borrowing bearing
interest at the adjusted LIBOR rate). As security for the Company's borrowings,
the Company granted the bank a security interest in all of the Company's
tangible and intangible assets and pledged all of the capital stock of its
subsidiaries, and the Company's subsidiaries granted the bank a security
interest in all of their respective assets.
The Company's other financial obligations include industrial development
revenue bonds issued on behalf of and guaranteed by the Company to finance its
Woonsocket, Rhode Island treatment facility and equipment. These bonds, which
had an outstanding aggregate balance of $1,127,000 as of September 30, 1998 at
fixed interest rates ranging from 6.000% to 7.375%, are due in various amounts
through June 2017. In addition, the Company has issued various promissory notes
in connection with acquisitions during 1996, 1997 and 1998, consisting primarily
of a 10-year note for $2,300,000 as part of the ECCO acquisition and a
$1,797,000 note due (and paid) in December 1998 as part of the WMI acquisition.
At September 30, 1998, the Company's working capital was $3,298,000. At
December 31, 1997, the Company's working capital was $7,214,000 compared to
$14,617,000 and $439,000 at December 31, 1996 and 1995, respectively. The
decrease in working capital at September 30, 1998 compared to December 31, 1997
was primarily due to lower cash balances and higher current liabilities as a
result of the debt issued in connection with certain acquisitions partially
offset by higher receivables and other current assets. The decrease at December
31, 1997 compared to 1996 was primarily due to lower balances of cash, cash
equivalents and short-term investments, which decreased by $10,040,000 to
finance acquisitions partially offset by other working capital growth. The
increase in working capital in 1996 compared to 1995 was due to higher cash
balances shortly after the Company's IPO offset by an increase in debt as a
result of the WMI acquisition in December 1996.
Net cash provided by operating activities was $1,346,000 during the nine
months ended September 30, 1998 compared to $536,000 for the comparable period
in 1997. This increase primarily reflects an increase in the Company's
profitability offset by an increase in other assets and a decrease in accrued
liabilities. Cash used in operations was $100,000 during the year ended December
31, 1997, compared to cash provided by operations of $57,000 during the year
ended December 31, 1996 and cash used in operations of $871,000 during the year
ended December 31, 1995. The change primarily reflects the Company's
profitability in 1997 offset by a higher working capital investment in
receivables.
Net cash used in investing activities for the nine months ended September
30, 1998 was $8,955,000 compared to $3,364,000 for the comparable period in
1997. This increase primarily reflects an increase in cash used for acquisitions
and capital expenditures and to the maturity in 1997 of temporary investments of
the net proceeds of the Company's IPO. Capital expenditures were $1,825,000 for
the nine months ended September 30, 1998 compared to $1,124,000 for the
comparable period in 1997. The increase in capital spending is a result of
continued improvements to the Company's existing treatment facilities. Payments
for acquisitions
22
<PAGE> 24
accounted for $7,130,000 of the cash used in investing activities in the first
nine months of 1998. Net cash used in investing activities was $3,323,000 during
the year ended December 31, 1997 compared to $13,310,000 during the year ended
December 31, 1996. The decrease in 1997 was the result of a $5,552,000 payment
for the acquisition of ECCO as well as several smaller acquisitions and joint
ventures, offset by net proceeds from short-term investments of $3,464,000 in
1997 versus purchases of $5,799,000 in short-term investments in 1996. Capital
expenditures for the year ended December 31, 1997 were $1,235,000, primarily for
improvements to existing facilities, containers and transportation equipment.
Capital expenditures were $995,000 in 1996 and $726,000 in 1995. The Company may
decide to build additional treatment facilities as volumes increase in the
Company's current geographic service areas or as the Company enters new areas.
The Company also may elect to increase the capacity of its existing treatment
facilities, which would require additional capital expenditures. In addition,
capital requirements for transportation equipment will continue to increase as
the Company grows. The amount and level of these expenditures cannot be
determined currently as they will depend upon the nature and extent of the
Company's growth and acquisition opportunities. The Company believes that its
cash, cash equivalents, short-term investments, bank credit facility, cash from
operations and proceeds from this Offering will fund its capital requirements
through 1999.
Net cash provided by financing activities was $3,010,000 during the nine
months ended September 30, 1998 compared to net cash used in financing
activities of $1,141,000 during the comparable period in 1997. The difference
between the two periods results primarily from additional borrowings to finance
acquisitions during the first nine months of 1998. Net cash used in financing
activities was $3,153,000 during the year ended December 31, 1997 compared to
net cash provided by financing activities of $25,065,000 during the year ended
December 31, 1996. The change was the result of $28,535,000 of proceeds received
in 1996 primarily from the Company's IPO and repayments in 1997 of $2,905,000 of
long-term debt relating primarily to a note issued in connection with the
December 1996 WMI acquisition.
In 1997, cash and cash equivalents decreased by $6,576,000 primarily due to
investment and acquisition activities of $3,323,000 and repayments of notes and
leases of $3,153,000.
As a consequence of the Offering, together with other changes in stock
ownership, it is expected that the Company's annual utilization of net operating
loss carryforwards permitted by Internal Revenue Code Section 382 will be
limited and that, as a result, the Company's effective tax rate will increase.
YEAR 2000 ISSUES
The Company has developed a plan to modify its information systems in
anticipation of the year 2000. The Company currently expects that this plan will
be substantially implemented by June 1999 at a cost not to exceed $100,000. 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 the year 2000 will present any
material problems in respect of the Company's key products and services.
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 in order to respond to the growth in size of the Company's business and the
inefficiencies caused by disparate hardware and software. Undertaken for reasons
unrelated to year 2000 issues, 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 are currently
being 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.
23
<PAGE> 25
The Company believes that it has an effective plan in place to resolve year
2000 issues in a timely manner. As of January 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
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.
24
<PAGE> 26
BUSINESS
INTRODUCTION
Stericycle is the second largest provider of regulated medical waste
management services in the United States, providing regulated medical waste
collection, transportation, treatment and disposal services to over 77,000
customers in 40 states, the District of Columbia and four Canadian provinces.
Combining proprietary treatment technology with a health care orientation in
both the scope of its services and the experience of its management, the Company
believes that it is in a unique position to manage regulated medical waste in a
safe and cost-effective manner and to capitalize on the current consolidation
trend in the regulated medical waste management industry. Since 1991, the
Company has completed 29 acquisitions, of which 21 were completed since the
Company's initial public offering in August 1996. These acquisitions, combined
with growth from its existing operations, have increased the Company's revenues
from $1.6 million in 1991 to $46.2 million in 1997 and to $57.5 million for the
12 months ended September 30, 1998.
The Company's integrated services include regulated medical waste
collection, transportation, treatment, disposal, reduction, re-use and recycling
services, together with related training and education programs, consulting
services and product sales. The Company has historically operated in seven
geographic service areas: (i) California, Nevada and Arizona; (ii) Oregon,
Washington, Idaho and British Columbia; (iii) Illinois, Indiana, Minnesota and
Wisconsin; (iv) Ohio, Michigan, Kentucky and Tennessee; (v) Texas and New
Mexico; (vi) Connecticut, Massachusetts, Maine, New Hampshire, Rhode Island and
Vermont; and (vii) Alabama, Delaware, Georgia, Maryland, New Jersey, New York,
North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia and the
District of Columbia. The Company's subsidiary, Med-Tech Environmental Limited
("Med-Tech"), operates in the Canadian provinces of Quebec, Ontario, Alberta and
British Columbia, as well as the northeast United States. The Company's
majority-owned subsidiary, 3CI Complete Compliance Corporation ("3CI"), operates
in Alabama, Arkansas, Georgia, Florida, Missouri, Kansas, Louisiana,
Mississippi, Oklahoma, Tennessee and Texas. The Company markets its services to
two principal types of customers: (i) long-term and sub-acute care facilities,
outpatient clinics, medical and dental offices, biomedical companies, municipal
entities and other smaller-quantity generators of regulated medical waste
("Alternate Care" generators); and (ii) hospitals, blood banks, pharmaceutical
manufacturers and other larger-quantity generators of regulated medical waste
("Large Quantity" generators). The Company's revenues for 1997 were divided
approximately equally between Alternate Care and Large Quantity generators, but
the Company anticipates that a greater proportion of its future revenues will be
derived from Alternate Care generators as the Company continues to focus its
marketing efforts on the rapidly growing, higher-margin Alternate Care market.
Regulated medical waste is generally described as any waste that can cause
an infectious disease or that can reasonably be suspected of harboring human
pathogenic organisms. Regulated medical waste includes single-use disposable
items such as needles, syringes, gloves and laboratory, surgical and emergency
room and other supplies which have been in contact with blood or bodily fluids;
cultures and stocks of infectious agents; and blood and blood products. An
independent study published in 1997 estimated that the size of the regulated
medical waste management market in the United States in 1999 would be more than
$1.3 billion.
The Company believes that its regulated medical waste management system
using its proprietary Electro-Thermal-Deactivation ("ETD") treatment process is
the only commercially-proven system that: (i) kills human pathogens in regulated
medical waste without generating liquid effluents or regulated air emissions;
(ii) affords certain operating cost advantages over the principal competing
treatment methods; (iii) reduces the volume of regulated medical waste by up to
85%; (iv) renders regulated medical waste unrecognizable; (v) permits the
recovery and recycling of usable plastics from regulated medical waste; and (vi)
enables the remaining regulated medical waste to be safely landfilled or used as
an alternative fuel in energy production.
TRENDS IN THE HEALTH CARE AND MEDICAL WASTE INDUSTRIES
The Company believes that its business has grown and will continue to grow
as a consequence of certain trends in the health care and regulated medical
waste industries.
25
<PAGE> 27
Increased Awareness of Regulated Medical Waste
The handling and disposal of the large quantities of regulated medical
waste generated by the health care industry has attracted increased public
awareness and regulatory attention. The proper management of potentially
infectious medical waste gained national attention in 1988 when disposable
syringes and other medical waste washed ashore on New Jersey and New York
coastlines.
These events raised concerns about the potential transmission of hepatitis
B, HIV and other infectious diseases. The Medical Waste Tracking Act of 1988
("MWTA") was enacted in response to this problem and established a multi-year
demonstration program for the proper tracking and treatment of medical waste.
Many states have enacted legislation modeled on MWTA's requirements.
In addition, the Occupational Safety and Health Administration ("OSHA") has
issued regulations concerning employee exposure to bloodborne pathogens and
other potentially infectious material that require, among other things, special
procedures for the handling and disposal of regulated medical waste and annual
training of all personnel who are potentially exposed to blood and other bodily
fluids. The Company believes that the scope of these regulations will help to
expand the market for the Company's services beyond traditional providers of
health care.
As a consequence of these legislative and regulatory initiatives, the
Company believes that health care providers and other generators of regulated
medical waste continue to be concerned about the handling, treatment and
disposal of regulated medical waste. These concerns are reflected by their
desire to: (i) reduce on-site handling of regulated medical waste in order to
minimize employee contact; (ii) assure safe transportation of regulated medical
waste to treatment sites; (iii) assure destruction of potentially infectious
human pathogens; (iv) render the treated regulated medical waste
non-recognizable in order to reduce liability and to increase disposal options;
and (v) minimize the impact of the treatment process on the environment and the
volume of solid waste deposited in landfills.
Growing Importance of Alternate Care Generators
The Company believes that in response to managed care and other health care
cost-containment pressures, patient care continues increasingly to shift from
higher-cost acute-care settings to less expensive off-site treatment
alternatives. Many common diseases and conditions are now being treated in
alternate-site settings. According to a report published by the U.S. Health Care
Financing Administration, total alternate-site health care expenditures in the
United States increased from approximately $6 billion in 1985 to approximately
$28 billion in 1996. The Company believes that alternate-site health care
expenditures will continue to grow in response to governmental and private
cost-containment initiatives.
Alternate Care generators are an increasingly important source of revenues
in the regulated medical waste industry. An independent report estimated that in
1990 (the most recent year for which the Company has information from published
sources) approximately 23% (by weight) of regulated medical waste was produced
by Alternate Care generators. The Company believes on the basis of its
experience both that this percentage has increased significantly and that
Alternate Care generators account for a greater percentage of regulated medical
waste treatment revenues than the percentage of regulated medical waste volume
that they generate. Individual Alternate Care generators typically do not
produce a sufficient volume of regulated medical waste to justify substantial
capital expenditures on their own waste treatment facilities or the expense of
hiring regulatory compliance personnel. The Company believes that Alternate Care
generators are accordingly extremely service-sensitive, relying on their
regulated medical waste management provider for timely waste removal, creative
solutions for safer regulated medical waste handling, establishment of regulated
medical waste management protocols, education on regulated medical waste
reduction techniques and assistance with compliance and recordkeeping. The
Company believes that growth in the number of Alternate Care generators will
generate growth in the overall regulated medical waste management market and
will continue to provide growth opportunities for the Company.
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<PAGE> 28
Shift from On-Site Incineration to Off-Site Treatment
The Company believes that during the past five years, government clean air
regulations have increased both the capital costs required to bring many
existing incinerators into compliance with such regulations and the operating
costs of continued compliance. As a result, many hospitals have shut down their
incinerators. This trend is expected to accelerate in response to regulations
which the U.S. Environmental Protection Agency ("EPA") adopted in September 1997
limiting the discharge into the atmosphere of pollutants released by medical
waste incineration. The EPA estimates that of the approximately 1,100 small, 690
medium and 460 large medical waste incinerators in operation in May 1996,
approximately 93-100% of the small incinerators, 60-95% of the medium
incinerators and up to 35% of the large incinerators will be closed. The Company
believes that these closures will occur over a period of several years and
expects to benefit from this anticipated movement by hospitals to outsource
regulated medical waste disposal rather than incur the cost of installing the
air pollution control systems necessary to comply with the EPA's regulations.
Industry Consolidation
Although the regulated medical waste management industry remains
fragmented, the number of competitors is rapidly decreasing as a result of
industry consolidation. National attention on regulated medical waste in the
late 1980s led to rapid growth in the industry and a highly-fragmented
competitive structure. Entrants into the industry included several large
municipal waste companies and many independent haulers and incinerator
operators. Since 1990, however, government clean air regulations and public
concern about the environment have increased the costs and public opposition to
both on- and off-site regulated medical waste incineration. As a result, the
Company believes that independent haulers and incinerator operators have
encountered increasing difficulty competing with integrated companies like the
Company, which typically have their own low-cost treatment plants located within
the geographic areas that they serve. The Company believes that many of these
independent haulers are withdrawing from the regulated medical waste industry.
As a result of industry consolidation, the Company believes that it has
increasing opportunities to acquire medical waste management businesses.
Health Care Cost and Liability Containment Initiatives
The health care industry continues to be under pressure to reduce costs and
improve efficiency. In part, this has been accomplished through the outsourcing
of certain services, including regulated medical waste management. The Company
believes that its regulated medical waste management services facilitate cost
containment by health care providers by reducing their medical waste tracking,
handling and compliance costs, reducing their potential liability related to
employee exposure to bloodborne pathogens and other potentially infectious
material, and significantly reducing the amount of capital invested in on-site
treatment of regulated medical waste.
GROWTH STRATEGY
The Company plans to increase its revenue and profitability through
improved penetration of existing geographic service areas, expansion into new
areas and selected acquisitions.
Increase Customer Density In Existing Service Areas
The Company continues to implement a number of programs to increase
customer density, including targeted telemarketing and direct sales efforts and
alliances with entities that provide access to new customers within existing
geographic service areas. Due to the high fixed costs associated with the
collection and treatment of regulated medical waste, significant economies of
scale result from increased customer density in existing service areas, and
accordingly, the Company's telemarketing and direct sales efforts target
securing new customer agreements within its existing service areas. The Company
markets to both Large Quantity and Alternate Care generators, focusing on
Alternate Care generators. The Company also reviews potential marketing
alliances with various hospitals, health maintenance organizations, medical
suppliers and others as a way to access primarily Alternate Care customers.
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<PAGE> 29
Expand Geographically
The Company estimates that its existing transportation and treatment system
enables it to serve effectively an area encompassing approximately half of the
U.S. population. In order to expand its geographic coverage, the Company plans,
among other things, to develop additional transfer stations, acquire independent
haulers and integrated competitors, expand its telemarketing and direct sales
efforts and, where appropriate, construct new treatment facilities.
The Company plans to continue to expand its "hub and spoke" transportation
strategy by acquiring or developing additional transfer stations. Channeling
waste through additional transfer stations allows the Company to maximize the
utilization of existing treatment facilities. Selective development of transfer
stations would enable the Company to serve effectively an area encompassing
approximately 60-70% of the U.S. population. The Company believes that expanded
telemarketing and direct sales efforts will help develop new geographic service
areas. As soon as contracts for managing a critical mass of regulated medical
waste are obtained, the Company reviews whether the construction of additional
treatment or transfer facilities is economically justified.
The Company is also expanding beyond the United States and Canada. In 1996,
the Company entered into an agreement with a Brazilian company to assist in
exploring opportunities for the commercialization of the Company's medical waste
management technology in certain territories in South America. This relationship
was expanded in July 1998, when the Company entered into an agreement for an
exclusive license to use the Company's ETD technology in Brazil and for the sale
to the Brazilian company, Companhia Auxiliar de Viacao e Obras -- CAVO, of two
fully-integrated ETD processing lines for use in treating medical waste in the
Sao Paulo, Brazil metropolitan market. In February 1998, the Company announced
the formation of a Mexican joint venture company, Medam S.A. de C.V. ("Medam"),
to utilize the Company's ETD technology to treat medical and infectious waste
primarily in the Mexico City market. Medam, which was formed with an established
Mexican company and an American firm of international consulting engineers, has
obtained the appropriate permits to construct and operate a treatment facility
with a 150-ton per day capacity. This facility, which is the largest medical
waste treatment facility permitted to date in Mexico, became operational in June
1998. There can be no assurance, however, that the Company will be successful in
expanding profitably into foreign markets. See "Risk Factors -- International
Operations."
Pursue Selected Acquisitions
The acquisition of other regulated medical waste management businesses,
including both independent haulers and integrated competitors, is a key element
of the Company's strategy to increase the number of customers in its current
markets and to expand its operations geographically. Many of these potential
acquisition candidates participate in both the solid waste industry as well as
the regulated medical waste industry. The Company believes that its exclusive
focus on, and leadership position in, the regulated medical waste industry, its
successful expansion strategy and its customer-service focus make it an
attractive buyer to sellers who are interested in participating in the growth
potential inherent in an industry consolidation.
Since the Company's initial public offering in August 1996, the Company has
completed 21 acquisitions of other regulated medical waste management
businesses. The Company's acquisitions have typically involved the purchase of
selected assets consisting principally of customer lists and contracts, vehicles
and related equipment and supplies.
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<PAGE> 30
ACQUISITIONS SINCE IPO IN AUGUST 1996
<TABLE>
<CAPTION>
SELLER DATE MARKETS SERVED
------ ---- --------------
<S> <C> <C>
Med-Tech Environmental Limited December 1998 Alberta, British Columbia,
Ontario, Quebec, Connecticut,
Maine, Massachusetts, New
Hampshire, New York, Rhode
Island and Vermont
Mid-America Environmental, Inc. December 1998 Indiana
Waste Systems, Inc. (3CI) October 1998 Alabama, Arkansas, Florida,
Georgia, Kansas, Louisiana,
Mississippi, Missouri,
Oklahoma, Tennessee and Texas
Medical Compliance Services, Inc. August 1998 New Mexico and Texas
Regional Recycling, Inc. July 1998 New Jersey
Allegro Carting and Recycling, Inc. July 1998 New York
Mediwaste Disposal Services LLC June 1998 Texas
Superior of Wisconsin, Inc. June 1998 Wisconsin
Controlled Medical Disposal, Inc. June 1998 New Jersey
Arizona Hazardous Waste Disposal June 1998 Arizona
Medisin, Inc. April 1998 Kentucky and Ohio
Bridgeview, Inc. February 1998 Pennsylvania
Browning-Ferris Industries, Inc. December 1997 Arizona
Phoenix Services, Inc. November 1997 Maryland
Cal-Va, Inc. November 1997 Virginia and Washington, D.C.
Envirotech Enterprises, Inc. August 1997 Arizona
Rumpke Container Service, Inc. July 1997 Ohio
Regional Carting, Inc. July 1997 New Jersey
Waste Management, Inc. July 1997 Wisconsin
Environmental Control Co., Inc. May 1997 Connecticut, New Jersey and
New York
Waste Management, Inc. December 1996 Arizona, Colorado, Indiana,
Kentucky, Maryland, North
Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee,
Utah, Washington and
Washington, D.C.
</TABLE>
As shown in the preceding table, the Company acquired Med-Tech in December
1998. It purchased approximately 94% of Med-Tech's outstanding stock and
approximately 56% of its outstanding warrants. Med-Tech, which is located in
Toronto, Canada, provides medical waste management services in Canada and the
northeastern United States. The Company paid a total of approximately $2,725,000
in cash and approximately 8,500 shares of the Company's Common Stock for the
Med-Tech shares and warrants that it acquired. In October 1998, the Company had
purchased Med-Tech's junior secured indebtedness of approximately $3,576,000,
paying the face value of the acquired debt, in the form of $2,920,000 in cash
and 36,940 shares of Common Stock, and replacing a letter of credit of
approximately $1,641,000.
In October 1998, the Company acquired all of the outstanding capital stock
of Waste Systems, Inc. ("WSI"). The purchase price was (i) $10,000,000 in cash
and (ii) the grant of certain exclusive negotiation and first refusal rights to
the sellers in respect of the purchase, for installation and operation in the
Federal
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<PAGE> 31
Republic of Germany, of medical waste treatment units incorporating the
Company's proprietary ETD technology. WSI owns 52.2% of the common stock and all
of the preferred stock of 3CI, which provides regulated medical waste management
services in the southeastern United States. 3CI's common stock is traded on the
Nasdaq SmallCap Market under the symbol "TCCC." WSI also owns a secured
promissory note from 3CI which, as amended in December 1998, is payable to WSI
in the principal amount of approximately $6,237,000 on or before September 30,
1999.
The purchase price for the Company's 27 other acquisitions to date
(including the eight acquisitions completed in the three years prior to its
initial public offering) has been paid by a combination of cash, promissory
notes, shares of the Company's Common Stock and assumption of liabilities (or,
in one case, the forgiveness of indebtedness). The Company anticipates that its
future acquisitions of other regulated medical waste management businesses will
be made by the payment of cash, the issuance of debt or equity securities or a
combination of these methods. The Company believes that its acquisition strategy
is enhanced by the fact that the Company's Common Stock is publicly traded.
The Company believes that its management team has substantial experience in
evaluating potential acquisition candidates and determining whether a particular
medical waste management business can be successfully integrated into the
Company. In determining whether to proceed with a business acquisition, the
Company evaluates a number of factors including: (i) the effect of the proposed
acquisition on the Company's earnings per share; (ii) the composition and size
of the seller's customer base; (iii) the efficiencies that may be obtained when
the acquisition is integrated with one or more of the Company's existing
operations; (iv) the potential for enhancing or expanding the Company's
geographic service area and allowing the Company to make other acquisitions in
the same service area; (v) the seller's historical and projected financial
results; (vi) the purchase price negotiated with the seller and the Company's
expected internal rate of return; (vii) the experience, reputation and
personality of the seller's management; (viii) the seller's customer service
reputation and relationships with the communities that it serves; (ix) if the
acquisition involves the assumption of liabilities, the extent and nature of the
seller's liabilities, including environmental liabilities; and (x) whether the
acquisition gives the Company any strategic advantages over its competition.
The Company has established a procedure for efficiently integrating
newly-acquired companies into its business while minimizing disruption of the
continuing operations of both the Company and the acquired business. Once a
medical waste management business is acquired, the Company makes plans to
implement programs designed to improve customer service, sales, marketing,
routing, equipment utilization, employee productivity, operating efficiencies
and overall profitability.
Expand Range of Products and Services
The Company believes that it has the opportunity to expand its business by
increasing the range of products and services that it offers to its existing
customers and by adding new customer categories. For example, the Company may
expand its collection, treatment, disposal and recycling of regulated medical
waste generated by health care providers to include wastes that are currently
handled by the Company only on a limited basis, such as photographic chemicals,
lead foils, and amalgam used in dental and radiology laboratories. In addition,
the Company may decide to offer single-use disposable medical supplies to its
customers.
TREATMENT TECHNOLOGIES
The three most common off-site commercial technologies for treating
regulated medical waste are incineration, autoclaving and the Company's
proprietary ETD treatment process. See "Patents and Proprietary Rights."
Additional alternative technologies and methods, which have not gained wide
commercial acceptance, include chemical treatment, chemclaving (a combination of
chemical treatment and auto-claving), microwaving and certain specialized or
experimental technologies, including the development and marketing of reusable
or degradable medical products designed to reduce the generation of regulated
medical waste.
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<PAGE> 32
Historically, the Company treated all of the regulated medical waste that
it collected using its proprietary ETD treatment process. As a result of recent
acquisitions, however, the Company and its subsidiaries now operate, in addition
to four ETD treatment facilities, seven facilities that use either incineration
or autoclaving to treat regulated medical waste, as well as one chemclave and
one microwave unit. The Company estimates that during 1997, the Company used
incineration or autoclaving at its own facilities or those of third parties for
approximately 43% of the regulated medical waste that it treated. This
percentage is likely to increase as a result of recent and future acquisitions.
The Company varies its treatment of regulated medical waste among available
treatment technologies based on capacity and pricing considerations in each
service area in order to minimize operating costs.
Principal Treatment Technologies
Incineration. The Company estimates that incineration accounts for
approximately 65-70% of United States permitted off-site capacity to treat
regulated medical waste. Incineration burns regulated medical waste at elevated
temperatures and reduces it to ash. Like ETD, incineration significantly reduces
the volume of waste, and it is the recommended treatment and disposal option for
certain types of regulated medical waste such as anatomical waste or residues
from chemotherapy procedures. Incineration has come under increasing criticism
from the public and from federal, state and local regulators, however, because
of the airborne emissions that it generates. Emissions from incinerators can
contain pollutants such as dioxins, furans, carbon monoxide, mercury, cadmium,
lead and other toxins which are subject to federal, state and, in some cases,
local regulation. The ash byproduct of incineration may also constitute a
hazardous substance. As a result, there is a significant cost to construct new
incineration facilities, and there may be a substantial additional expense to
improve existing facilities, in order to insure that their operation is in
compliance with regulatory standards.
Autoclaving. The Company estimates that autoclaving accounts for
approximately 20-25% of United States permitted off-site capacity to treat
regulated medical waste. Autoclaving treats regulated medical waste with steam
at high temperature and pressure to kill pathogens. The technology is most
effective if all surfaces are uniformly exposed to the steam, but uniform
exposure may not always occur, potentially leaving some pathogens untreated. In
addition, autoclaving alone does not change the appearance of waste, and
recognizable regulated medical waste may not be accepted by landfill operators.
To compensate for this disadvantage, autoclaving may be combined with a
shredding or grinding process to render the regulated medical waste non-
recognizable. The high temperatures generated in the autoclaving process
occasionally change the physical properties of plastic waste, prohibiting its
recycling.
ETD Treatment Process. The Company estimates that its patented ETD
treatment process accounts for approximately 8% of United States permitted
off-site capacity to treat regulated medical waste. ETD also includes a system
for grinding regulated medical waste. After grinding, ETD uses an oscillating
energy field of low-frequency radio waves to heat regulated medical waste to
temperatures that destroy pathogens such as viruses, vegetative bacteria, fungi
and yeast without melting the plastic content of the waste. ETD is most
effective on materials with low electrical conductivity that contain polar
molecules, including all human pathogens. Polar molecules are molecules that
have an asymmetric electronic structure and tend to align themselves with an
imposed electric field. When the polarity of the applied field changes rapidly,
the molecules try to keep pace with the alternating field direction, thus
vibrating and in the process dissipating energy as heat. The Company believes
that, among other possible explanations for the efficacy of the ETD treatment
process, the electric field created by ETD produces high molecular agitation and
as a result rapidly generates high temperatures, and that all of the molecules
exposed to the field are agitated simultaneously, producing heat throughout the
waste instead of being imposed from the surface as in conventional heating. The
Company believes that this phenomenon, called volumetric heating, transfers
energy directly to the waste, resulting in heating throughout the entire waste
material and eliminating the inherent inefficiency of transferring heat first
from an external source to the surface of the waste and then from the surface to
the interior of the waste. ETD employs low-frequency radio waves because they
can penetrate deeper than high-frequency waves, such as microwaves, which can
penetrate regulated medical waste of a typical density only to a depth of
approximately five inches. ETD uses specific frequencies that match the physical
properties of
31
<PAGE> 33
regulated medical waste, generally enabling the ETD treatment process to kill
pathogens at temperatures as low as 90 degreesC. Although ETD is effective in
destroying pathogens present in anatomical waste, the Company does not currently
treat anatomical waste using the ETD process.
Advantages of the Company's ETD Treatment Process
The Company believes that its proprietary ETD treatment process provides
certain advantages over both incineration and autoclaving.
Permitting. It is difficult and time-consuming to obtain the permits
necessary to construct and operate any regulated medical waste treatment
facility, regardless of the treatment technology to be employed at the proposed
facility. Local residents, citizen groups and elected officials frequently
object to the construction and operation of proposed regulated medical waste
treatment facilities solely because regulated medical waste will be transported
to and stored and handled at the facility. The Company believes, however, that
the fact that the ETD treatment process does not generate liquid effluents or
regulated air emissions may enable the Company to locate treatment facilities
near dense population centers, where greater numbers of potential customers are
found, with less difficulty than would be encountered by a competitor attempting
to locate an incinerator in the same area.
Cost. The Company believes that it is less expensive to construct and
operate an ETD treatment facility than to construct and operate either a
like-capacity incinerator or a like-capacity autoclave with shredding
capability, which may enable the Company to price its treatment services
competitively. The Company believes that the comparative advantage that it
possesses in its ability to locate treatment facilities near dense population
centers may also provide transportation and operating efficiencies.
Volume Reduction and Unrecognizability. The Company's regulated medical
waste management program reduces the overall volume of regulated medical waste
in several ways. The Company's patented reusable container, used under the
trademark Steri-Tub(R), replaces the use of corrugated containers for many Large
Quantity and Alternate Care generators of large amounts of regulated medical
waste, thus reducing waste volume by as much as 10-15%. Once medical waste has
undergone the ETD treatment process, the original cubic volume of the waste is
reduced by approximately 85%. This reduction in the volume of regulated medical
waste is comparable to the volume reduction obtained by incineration.
Autoclaving alone does not reduce the volume of regulated medical waste or
render it unrecognizable. To reduce waste volume and to overcome the
unwillingness of many landfill operators to accept recognizable treated
regulated medical waste, autoclaving must be combined with a shredding or
grinding operation, adding to its cost. A proprietary size reduction feature is
a component of the ETD treatment process. As a result of grinding, re-use and
recycling, the cubic volume of treated regulated medical waste disposed of by
the Company in landfills during 1997 was only approximately 8% of the original
cubic volume of the waste received by the Company for treatment. The Company
believes that the ability of its ETD treatment process both to reduce the volume
of regulated medical waste and to render it unrecognizable gives ETD an
advantage over autoclave operations that do not include shredding or grinding.
Re-use and Recycling. The Company is presently in the process of relocating
its recycling facility. Pending regulatory approval and necessary permitting,
the Company expects to reopen its recycling facility in late 1999. When the
Company reopens its recycling facility, the Company's customers will be able to
participate in a voluntary recycling program by source-segregating their
regulated medical waste. The source-segregated regulated medical waste can be
treated by the ETD treatment process and, in certain geographic service areas,
can then be processed through the Company's proprietary systems for the
automatic recovery of polypropylene plastics. The recovered polypropylene
plastics may be used by a third party to manufacture a line of "sharps"
containers which are used by health care providers to dispose of sharp objects
such as needles and blades. In addition, in three of the Company's geographic
service areas, the Company's treated regulated medical waste is transported to
resource recovery facilities owned by third parties where it is used as refuse-
derived fuel in "waste-to-energy" plants to produce electricity. The Company has
worked to develop a process in conjunction with a cement manufacturer to utilize
treated regulated medical waste as a fossil fuel substitute in cement kilns, but
this process has not been implemented by the Company on a commercial scale.
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<PAGE> 34
The Company believes that its re-use and recycling capabilities provide a
marketing advantage with customers who prefer to use a regulated medical waste
management provider with a commitment to resource conservation.
Company's Use of Other Technologies
While the Company continues to believe that ETD offers considerable
advantages over other methods of treating regulated medical waste, the Company
expects for various reasons to continue to operate facilities that use either
incineration, autoclaving, microwaving or chemclaving. For example, as part of
the terms of an acquisition, the Company may be required to continue to use the
seller's existing treatment facilities for a specified period of time. In
addition, after making an acquisition, it may not be cost-effective for the
Company to replace the current treatment method with ETD, especially if the
customers acquired are located outside of the service area of one of the
Company's ETD treatment facilities. The Company anticipates that its newly-
acquired subsidiaries, Med-Tech and 3CI, will continue to use treatment
technologies other than ETD for the foreseeable future. Finally, other treatment
methods may provide the Company with additional flexibility to treat certain
types of regulated medical waste, e.g., anatomical waste, for which incineration
is required in certain jurisdictions. Other treatment methods can also be more
cost-effective in treating small bulk regulated medical waste in less populated
areas.
MARKETING AND SALES
Marketing Strategy
The Company's marketing strategy is to provide customers with a complete
cost management and compliance program for their regulated medical waste. The
Company recognizes that its potential customers are generally health care
providers, who approach the problem of regulated medical waste management from a
different perspective than typical generators of solid or municipal waste.
Health care personnel have become increasingly sensitive to the risk of
contracting diseases such as AIDS and hepatitis through accidental contact with
infected patient blood. In addition, patients are increasingly demanding that
practitioners demonstrate continual vigilance against such risks. Regulations
which have been adopted by OSHA require annual training of all personnel who
potentially can come into contact with bloodborne pathogens and other
potentially infectious materials. These regulations also require documentation
of handling procedures and detailed clean-up plans. As a result, there is a
heightened awareness by health care providers of the need to implement
safeguards against such risks.
The Company has developed programs to help train employees of customers on
the proper methods of handling, segregating and containing regulated medical
waste in order to reduce their potential exposure. The Company also advises
health care providers on the proper methods of recording and documenting their
regulated medical waste management in order to comply with federal, state and
local regulations. In addition, the Company offers consulting and review
services to such providers regarding their internal collection and control
systems and assists them in developing systems to provide for the efficient
management of their regulated medical waste from the point of generation through
treatment and disposal. The Company also offers consulting services to its
health care customers to assist them in reducing the amount of regulated medical
waste at the point of generation.
Alternate Care Generators
The Company has specifically targeted higher-margin Alternate Care
generators as a growth area. Typical Alternate Care customers are individual or
small groups of doctors, dentists and other health care providers who are widely
dispersed and generate only a small amount of regulated medical waste. A
significant concern of these customers is having the regulated medical waste
picked up and disposed of in compliance with applicable state and federal
regulations. The Company has telemarketers who use the Company's proprietary
database to identify and qualify these Alternate Care generators and arrange
appointments for the
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<PAGE> 35
Company's trained field sales representatives. The Company believes that its
telemarketing program is a cost-effective means to reach the numerous but
diffuse Alternate Care generators.
The Company has recently introduced a "mail-back" service through which the
Company can reach Alternate Care customers located in outlying areas that would
be inefficient to serve using the Company's regular route structure. In
addition, the Company has introduced a regulated medical waste management and
compliance program specifically targeted to Alternate Care customers who are
required to comply with the OSHA bloodborne pathogens regulations but who lack
the internal personnel and systems to assure compliance.
Large Quantity Generators
The Company believes that it has been successful in servicing its Large
Quantity generator customers and plans to continue to service its current
account base as long as satisfactory levels of profitability can be maintained.
The Company's marketing and sales efforts to Large Quantity generators are
conducted by account executives whose responsibilities include identifying and
attracting new customers and servicing the existing account base of
approximately 750 Large Quantity customers. In addition to securing new
contracts, the Company's marketing and sales personnel provide consulting
services to its health care customers assisting them in reducing the amount of
regulated medical waste they generate, training their employees on safety issues
and implementing programs to audit, classify and segregate regulated medical
waste in a proper manner. The Company has several strategic alliances to
supplement its marketing and sales efforts to Large Quantity generators.
Service Agreements
The Company negotiates individual service agreements with each Large
Quantity and Alternate Care generator customer. Although the Company has a
standard form of agreement, terms vary depending upon the customer's service
requirements and volume of regulated medical waste generated and, in some
jurisdictions, requirements imposed by statute or regulation. Service agreements
typically include provisions relating to types of containers, frequency of
collection, pricing, treatment, and documentation for tracking purposes. Each
agreement also specifies the customer's obligation to pack its regulated medical
waste in approved containers. Service agreements are generally for a period of
one to five years and include renewal options, although customers may terminate
on written notice and, in most service areas, upon payment of a penalty. Many
payment options are available including flat monthly or quarterly charges. The
Company may set its prices on the basis of the number of containers that it
collects, the weight of the regulated medical waste that it collects and treats,
the number of collection stops that it makes on the customer's route, the number
of collection stops that it makes for a particular multi-site customer, and
other factors.
The Company has a diverse customer base, with no single regulated medical
waste customer accounting for more than 3% of the Company's 1997 revenues. The
Company does not believe that the loss of any single customer would have a
material adverse effect on its business, financial condition or results of
operations.
LOGISTICS
An important element of the Company's business strategy is to maximize the
efficiency with which it collects and transports a large volume of regulated
medical waste and directs the deployment of many collection vehicles. This
aspect of the Company's operations -- referred to as logistics -- represents the
Company's single largest operating cost. Accordingly, the Company considers
logistics to be a critical component of its operating plan. The Company's
integrated approach to regulated medical waste management is designed to provide
it with numerous logistic advantages in the process of managing regulated
medical waste.
Pre-Collection
Before regulated medical waste is collected, the Company's integrated waste
management approach can "build in" efficiencies that will yield logistic
advantages. For example, the Company's consulting services can
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<PAGE> 36
assist its customers in minimizing their regulated medical waste volume at the
point of generation. In addition, the Company provides customers with the
documentation necessary for regulatory compliance which, if properly completed,
will minimize interruptions in the regulated medical waste treatment cycle for
verification of regulatory compliance.
Containers
A key element of the Company's pre-collection measures is the use of
specially designed containers by most of the Company's Large Quantity and
Alternate Care generators of large volumes of regulated medical waste. The
Company has developed and patented a reusable leak- and puncture-resistant
container, made from recycled plastic and used under the registered trademark
Steri-Tub(R). The plastic container enables regulated medical waste generators
to reduce costs by reducing the number of times that regulated medical waste is
handled, eliminating the cost (and weight) of corrugated boxes and potentially
reducing workers' compensation liability resulting from human contact with
regulated medical waste. The plastic containers are designed to maximize the
loads that will fit within the cargo compartments of standard trucks and
trailers. The Company believes these features to be an improvement over its
competitors' reusable "point-of-generation" containers. If a customer generates
a large volume of waste, the Company will place a large temporary storage
container or trailer on the customer's premises. In order to maximize regulatory
compliance and minimize potential liability, the Company will not accept medical
waste unless it is properly packaged by customers in Company-supplied or
- -approved containers.
Collection and Transportation
Efficiency of collection and transportation is a critical element of the
Company's logistics. The Company seeks to maximize route density and the number
of stops on each route. The Company employs a tracking system for its collection
vehicles which is designed to maximize logistic efficiency. The Company deploys
dedicated collection vehicles of different capacities depending upon the amount
of regulated medical waste to be collected at a particular stop or on a
particular route. The Company collects containers or corrugated boxes of
regulated medical waste from its customers at intervals depending upon customer
requirements, terms of the service agreement and the volume of regulated medical
waste produced. The containers or boxes are inspected at the customer's site
prior to pickup. The waste is then transported directly to one of the Company's
treatment facilities or to one of the Company's transfer stations where it is
aggregated with other regulated medical waste and then transported to a
treatment facility. In certain circumstances, the Company transports waste to
other specially-licensed regulated medical waste treatment facilities. The
Company transports small quantities of hazardous substances, such as
photographic fixer, lead foils and amalgam, from certain of its customers to a
metals recycling operation.
Transfer Stations
The use of transfer stations is another important component of the
Company's logistics. The Company utilizes transfer stations in a "hub and spoke"
configuration which allows the Company to expand its geographic service area and
increase the volume of regulated medical waste that can be treated at a
particular facility. Smaller loads of waste containers are stored at the
transfer stations until they can be consolidated into full truckloads and
transported to a treatment facility.
Inspection, Treatment and Disposal
Upon arrival at a treatment facility, containers or boxes of regulated
medical waste are scanned to verify that they do not contain any unacceptable
substances such as radioactive material. Any container or box which is
discovered to contain unacceptable waste is returned to the customer. In some
cases the Company's operating permits require that unacceptable waste be
reported to the appropriate regulatory authorities. After inspection, the
regulated medical waste is either loaded into the processing system and ground,
compacted and treated using the Company's ETD treatment process or incinerated
or autoclaved at facilities operated by the Company or third parties. Upon
completion of the particular process, the treated medical waste or incinerator
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ash is transported for resource recovery, recycling or disposal in a
nonhazardous waste landfill. After the Steri-Tub(R) plastic containers have been
emptied, they are washed, sanitized and returned to customers for re-use.
Documentation
The Company provides complete documentation to its customers for all
regulated medical waste that it collects, including the name of the generator,
date of pick-up and date of delivery to a treatment facility. The Company
believes that its documentation system meets all applicable federal, state and
local regulations regarding the packaging and labeling of regulated medical
waste, including, but not limited to, all relevant regulations issued by the
U.S. Department of Transportation ("DOT"), OSHA and state and local authorities.
COMPETITION
The regulated medical waste services industry is highly competitive,
fragmented, and requires substantial labor and capital resources. Intense
competition exists within the industry, not only for customers but also for
businesses to acquire. The Company's largest competitor is Browning-Ferris
Industries, Inc. A large number of regional and local companies also compete in
the industry. In addition, the Company faces competition from businesses and
other organizations that are attempting to commercialize alternate treatment
technologies or products designed to reduce or eliminate the generation of
regulated medical waste, such as reusable or degradable medical products, and
from on-site treatment of regulated medical waste by certain Large Quantity
generators.
The Company competes for service agreements primarily on the basis of
cost-effectiveness, quality of service, geographic location and
generator-perceived liability risks. The Company's ability to obtain new service
agreements may be limited by the fact that a potential customer's current vendor
may have an excellent service history or a long-term service contract or may
reduce its prices to the potential customer.
GOVERNMENTAL REGULATION
The Company operates within the regulated medical waste management
industry, which is subject to extensive and frequently changing federal, state
and local laws and regulations. This statutory and regulatory framework imposes
compliance burdens and risks on the Company, including requirements to obtain
and maintain government permits. These permits grant the Company the authority,
among other things, to construct and operate treatment and transfer facilities,
to transport regulated medical waste within and between relevant jurisdictions
and to handle particular regulated substances. The Company's permits must be
periodically renewed and are subject to modification or revocation by the
issuing regulatory authority. In addition to the requirement that it obtain and
maintain permits, the Company is subject to extensive federal, state and local
laws and regulations that, among other things, govern the definition,
generation, segregation, handling, packaging, transportation, treatment, storage
and disposal of regulated medical waste. The Company is also subject to
extensive regulation designed to minimize employee exposure to regulated medical
waste. In addition, the Company is subject to certain foreign laws and
regulations. See "Risk Factors -- Impact of Government Regulation."
Federal Regulation
There are at least four federal agencies that have authority over medical
waste. These agencies are the EPA, OSHA, DOT and Postal Service. These agencies
regulate medical waste under a variety of statutory and regulatory authorities.
Medical Waste Tracking Act of 1988. In the late 1980s, the EPA outlined a
two-year demonstration program pursuant to the Medical Waste Tracking Act of
1988 ("MWTA"), which was added to the Resource Conservation and Recovery Act of
1976 ("RCRA"). The MWTA was adopted in response to health and environmental
concerns over infectious medical waste after medical waste washed ashore on
beaches, particularly in New York and New Jersey during the summer of 1988.
Public safety concerns were amplified by media reports of careless management of
medical waste. The MWTA was intended to be the first step in
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addressing these problems. The primary objective of the MWTA was to ensure that
regulated medical wastes which were generated in a covered state and which posed
environmental (including aesthetic) problems were delivered to disposal or
treatment facilities with minimum exposure to waste management workers and the
public. The MWTA's tracking requirements included accounting for all waste
transported and imposed civil and criminal sanctions for violations.
In regulations implementing the MWTA, the EPA defined regulated medical
waste and established guidelines for its segregation, handling, containment,
labeling and transport. Under the MWTA, the EPA was to deliver three reports to
Congress on different aspects of regulated medical waste management and the
success of the demonstration program for tracking regulated medical waste. Two
of these reports were completed; the third report has not yet been issued. The
third report is expected to cover the use of alternative medical waste treatment
technologies, including the Company's ETD technology. There can be no assurance
that if and when the third report is issued, it will not contain findings or
make recommendations that are adverse to the Company's medical waste treatment
technology. Any such adverse findings or recommendations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The MWTA demonstration program expired in 1991, but the MWTA established a
model followed by many states in developing their specific medical waste
regulatory frameworks.
Clean Air Act Regulations. In September 1997, the EPA adopted regulations
under the Clean Air Act Amendments of 1990 that, among other things, limit the
discharge into the atmosphere of pollutants released by medical waste
incineration. These regulations require that by September 1998, every state must
submit to the EPA for approval a comprehensive plan to meet certain minimum
emission standards for these pollutants. In addition, each state compliance plan
will impose training and recordkeeping requirements on incinerator operators,
mandate the development of a site-specific waste management plan and require
regular monitoring and testing of emissions. See "-- State and Local
Regulations." The EPA estimates that of the approximately 1,100 small, 690
medium and 460 large medical waste incinerators in operation in May 1996,
approximately 93-100% of the small incinerators, 60-95% of the medium
incinerators and up to 35% of the large incinerators will be closed as hospitals
seek alternative, less expensive methods of regulated medical waste disposal
rather than incur the cost of installing the necessary air pollution control
systems to comply with the EPA's regulations. The Company currently operates two
incinerators and believes that it will be successful in obtaining all necessary
federal and state permits to continue operation of these incinerators without
material expenditure on emissions control systems. The Natural Resources Defense
Council, an environmental organization, has sued the EPA challenging the
validity of its regulations on the grounds that the minimum emissions standards
are too lenient. If successful, this lawsuit could result in the EPA's adoption
of stricter air emissions standards for medical waste incinerators. Stricter
emissions standards could benefit the Company to the extent that the rate of
outsourcing of regulated medical waste management by hospitals is accelerated.
Stricter emissions standards could also have an adverse effect on the Company to
the extent that the Company incurs increased costs to bring its leased
incinerators into compliance with the more stringent standards or faces a
significant price increase in the charges for treatment of regulated medical
waste that the Company delivers to third parties for incineration.
Occupational Safety and Health Act of 1970. The Occupational Safety and
Health Act of 1970 authorizes OSHA to promulgate occupational safety and health
standards. Various standards apply to certain aspects of the Company's
operations. These standards include rules governing exposure to bloodborne
pathogens and other potentially infectious materials, lock out/tag out
procedures, medical surveillance requirements, use of respirators and personal
protective equipment, emergency planning, hazard communication, noise,
ergonomics, and forklift safety, among others. OSHA regulations are designed to
minimize the exposure of employees to hazardous work environments. The Company
is subject to unannounced safety inspections at any time. Employees are required
by Company policy to receive new employee training, annual refresher training
and training in their specific tasks. As part of the Company's medical
surveillance program, employees receive pre-employment physicals, including drug
testing, annually-required medical surveillance and exit physicals. The Company
also subscribes to a drug-free workplace policy.
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Resource Conservation and Recovery Act of 1976. In 1976, Congress passed
RCRA as a response to growing public concern about problems associated with the
handling and disposal of solid and hazardous waste. RCRA required the EPA to
promulgate regulations identifying hazardous wastes. RCRA also created standards
for the generation, transportation, treatment, storage and disposal of solid and
hazardous wastes, including a manifest program for the transportation of
hazardous wastes and a permit system for solid and hazardous waste disposal
facilities. Regulated medical wastes are currently considered non-hazardous
solid wastes under RCRA. However, certain substances collected by the Company
from some of its customers, including photographic fixer developer solutions,
lead foils and amalgam, are considered hazardous wastes, for which the Company
provides transportation services for metals recycling.
The Company utilizes landfills for the disposal of treated regulated
medical waste from two of its ETD facilities and for the disposal of incinerator
ash and autoclaved waste from its facilities using incineration or autoclaving.
Waste is not regulated as hazardous under RCRA unless it contains hazardous
substances exceeding certain quantities or concentration levels or exhibits
certain hazardous characteristics. Following treatment, waste from the Company's
ETD and autoclave facilities is disposed of as nonhazardous waste. At the
Company's incineration facilities, the Company tests ash from the incineration
process to determine whether it must be disposed of as hazardous waste and
disposes of it accordingly.
The Company employs quality control measures to check incoming regulated
medical waste for certain types of hazardous substances. Customer contracts also
require the exclusion of hazardous substances or radioactive materials from the
regulated medical waste. Separate customer contracts govern the Company's
transportation for recycling of limited quantities of its customers' hazardous
wastes.
DOT Regulations. The DOT has implemented regulations under the Hazardous
Materials Transportation Authorization Act of 1994 governing the transportation
of hazardous materials, regulated medical waste and infectious substances. Under
these regulations, the Company is required to package regulated medical waste in
compliance with the bloodborne pathogens standards issued by OSHA. Under these
standards, the Company must identify its packaging with a "biohazard" marking on
the outer packaging, and its regulated medical waste container must be rigid,
puncture-resistant, leak-resistant, properly sealed and impervious to moisture.
DOT regulations also require that a transporter of hazardous substances be
capable of responding on a 24 hour-per-day basis in the event of an accident,
spill or release to the environment of a hazardous material. The Company has
entered into an agreement with CHEMTREC, an organization that provides 24-hour
emergency spill notification in the United States and Canada, and has entered
into agreements with several emergency response organizations to provide spill
cleanup services in certain of the Company's service areas.
The Company's drivers are specifically trained on topics such as safety,
hazardous materials, specifically-regulated medical waste, hazardous chemicals
and infectious substances. Employees are trained to deal with emergency
situations including spills, accidents and releases in to the environment, and
the Company has a written contingency plan for these events. The Company's
vehicles are outfitted with spill control equipment and the drivers are trained
in its use.
The Company expects that the DOT will issue a proposed rule in 1999
regulating the transportation of infectious substances. While the Company does
not expect that the rule will impose significant costs on the Company, the
precise terms of the rule, and hence the associated costs, if any, cannot be
determined at this time.
Comprehensive Environmental Response, Compensation and Liability Act of
1980. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA") established a regulatory and remedial program to provide for
the investigation and clean-up of facilities from which there has been an actual
or threatened release of hazardous substances into the environment. CERCLA and
similar state laws impose strict, joint and several liability on the current and
former owners and operators of facilities from which releases of hazardous
substances have occurred and on the generators and transporters of the hazardous
substances that come to be located at such facilities. Responsible parties may
be liable for substantial site investigation and clean-up costs and natural
resource damages, regardless of whether they exercised due care
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and complied with applicable laws and regulations. If the Company were found to
be a responsible party for a particular site, it could be required to pay the
entire cost of site investigation and clean-up, even though other parties also
may be liable. The Company's ability to obtain contribution from other
responsible parties may be limited by the Company's inability to identify those
parties and by their financial inability to contribute to investigation and
clean-up costs.
United States Postal Service. The Company has obtained a permit from the
U.S. Postal Service to conduct its "mail-back" program, pursuant to which
customers mail appropriately packaged sharps containers directly to the
Company's treatment facilities.
State and Local Regulation
The Company currently conducts some type of business activity in 40 states.
These activities include the collection, transportation, processing,
transferring or recycling of regulated medical waste and, in some cases,
hazardous substances. Each state has its own regulations related to the
handling, treatment and storage of regulated medical waste. Although there are
many differences among the various state laws and regulation, many states have
followed the regulated medical waste model under the MWTA and are implementing
programs under RCRA. Regulations cover the Company's transportation of regulated
medical waste both intrastate and interstate. In each of the states where the
Company operates a treatment facility or transfer station, it is required to
comply with numerous state and local laws and regulations as well as its
site-specific operating plan. Agencies writing regulations at the state level
typically include departments of health and state environmental protection
agencies. In addition, many local governments have ordinances, local laws and
regulations affecting the Company's operations, including but not limited to
zoning and health measures.
In recent years, a number of communities have instituted "flow control"
requirements, which typically require that waste collected within a particular
area be deposited at a designated facility. In May 1994, the U.S. Supreme Court
ruled that a flow control ordinance was inconsistent with the Commerce Clause of
the Constitution of the United States. A number of lower federal courts have
struck down similar measures. The U.S. Congress has considered, and could in the
future consider, legislation that would at least partially overturn these court
decisions and immunize particular state and local flow control requirements from
Commerce Clause scrutiny.
Similarly, the U.S. Supreme Court has consistently held that state and
local measures that seek to restrict the importation of extraterritorial waste
or tax imported waste at a higher rate are unconstitutional. To date,
congressional efforts to enable states, under certain circumstances, to impose
differential taxes on out-of-state waste or restrict waste importation have been
unsuccessful.
In the absence of federal legislation, certain local laws that direct waste
flows to designated facilities may be unenforceable, and discriminatory taxes
and waste importation restrictions should continue to be subject to judicial
invalidation. If the U.S. Congress adopts legislation allowing for certain types
of flow control or restricting the importation of waste, or if legislation
affecting interstate transportation of waste is adopted at the federal or state
level, such legislation could adversely affect the Company's medical waste
collection, transport, treatment and disposal operations and hence would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, there can be no assurance that
municipalities will not attempt to pass ordinances which effectively block or
discourage the Company from locating a treatment or transfer facility within
their limits, although the Company ultimately may prevail in challenging the
legality of such ordinances.
States predominantly regulate medical waste as a solid or "special" waste
and not as a hazardous waste under RCRA. State definitions of medical waste
include, but are not limited to: microbiological waste (cultures and stocks of
infectious agents); pathology waste (human body parts from surgical and autopsy
waste); blood and blood products; and sharps.
Most states require segregation of different types of regulated medical
waste at the point of generation. A majority of states require that the
universal biohazard symbol or related label appear on medical waste containers.
Storage regulations may apply to the generator, the treatment facility, the
transport vehicle, or all
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three. Storage rules center on identifying and securing the storage area for
public safety as well as setting standards for the manner and length of storage.
Many states mandate employee training for safe environmental clean-up through
emergency spill and decontamination plans. Many states mandate that transporters
carry spill equipment in their vehicles. Those states whose regulatory framework
relies on the MWTA model have tracking document systems in place.
In the State of Washington, the Company is subject to regulation by the
Washington Utilities and Transportation Commission. As a regulated business, the
Company must receive approval from the Utilities and Transportation Commission
for the prices that it charges for its services in Washington.
The Company maintains numerous permits and licenses to conduct its business
from various state and local authorities. The Company's permits vary from state
to state based upon the Company's activities within that state and on the
applicable state and local laws and regulations. These permits include transport
permits for solid waste, regulated medical waste and hazardous substances,
permits to construct and operate treatment facilities, permits to construct and
operate transfer stations, permits governing discharge of sanitary water and
registration of equipment under air regulations, specific approval for the use
of ETD to treat regulated medical waste, and various business operator's
licenses. The Company believes that it is currently in compliance in all
material respects with its permits and applicable laws and regulations.
The Company has submitted an application to the New York State Department
of Environmental Conservation for a consent order that would provide the
Company's subsidiary, Environmental Control Co., Inc., with temporary authority
to operate its Bronx, New York, transfer station in place of the facility's
former owner. While the Company believes that it will receive this temporary
authority followed by an operating permit, there can be no assurance that the
Company will in fact receive temporary authority to operate or an operating
permit for the transfer station. Denial of authority to operate or an operating
permit for the transfer station could result in significant additional costs to
the Company.
Pursuant to medical waste incinerator regulations adopted by the EPA in
1997, every state was required by September 1998 to adopt a plan to comply with
federal guidelines which, among other things, limit the release of specified
airborne pollutants from medical waste incinerators to levels prescribed by the
EPA. Each state's implementation plan must be at least as restrictive as the
federal emissions standards. If a state in which the Company operates an
incinerator adopts more stringent limits than the federal emissions standards,
the Company could incur significant costs to bring its incinerator into
compliance with the state's requirements. See "-- Governmental Regulation --
Federal Regulation -- Clean Air Act Regulations."
Subsequent to the issuance of the Company's original license for its
Woonsocket, Rhode Island treatment facility, the State of Rhode Island enacted
legislation that required the Company to obtain an additional license for its
regulated medical waste management operations. The Company has applied for but
has not yet received this additional license. Until regulatory action is taken
in respect of this additional license, the Company is permitted to continue to
operate under its current license. Denial of this additional license could
result in the Company being required to cease operations in Rhode Island and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's ETD treatment technology is an alternative to the
conventional treatment technologies of incineration and autoclaving and has not
been approved in all states for the treatment of regulated medical waste. The
Company has received permits or been granted legislative approval to operate its
ETD treatment technology in 15 states, with additional applications pending.
There can be no assurance, however, that the Company's treatment technology will
be approved for the treatment of regulated medical waste in each state or other
jurisdiction where the Company may seek regulatory approval in the future to
construct and operate a treatment facility. The Company's inability to obtain
any such regulatory approval could have a material adverse effect on the
Company's business, financial condition and results of operations.
Foreign Regulation
The Company presently conducts business in British Columbia, Canada, where
it collects regulated medical waste in the Vancouver area and transports it to
the Company's Morton, Washington, treatment
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facility. The Company's activities in British Columbia are governed at the
federal level by the Canadian Transportation of Dangerous Goods Act, 1992, and
the Canadian Environmental Protection Act and at the provincial level by the
British Columbia Waste Management Act. The Canadian Environmental Protection Act
regulates, among other things, the trans-border movement of medical waste and
deals primarily with notification requirements. The federal Transportation of
Dangerous Goods Act, 1992, regulates the movement of dangerous goods, including
infectious substances and other "specified dangerous goods," by all modes of
transportation, and imposes joint and several liability on all persons who are
responsible for, or who caused or contributed to, among other things, the
release of any dangerous good into the environment. Any business engaged in a
regulated activity is presumed to be liable for any such release, unless the
business can demonstrate that it acted reasonably. The provincial Waste
Management Act regulates the storage, transportation and disposal of waste,
including biomedical waste, and imposes strict, joint and several liability for
all clean-up costs associated with remediation of contaminated sites. The
Company believes that it has obtained all permits required by these acts.
The Company's subsidiary, Med-Tech, operates in the Canadian provinces of
Quebec, Ontario, Alberta and British Columbia, and is subject to the same
federal Canadian regulation and to the same or comparable provincial regulation.
The Company believes that Med-Tech has obtained all necessary permits required
by relevant federal and provincial legislation.
There can be no assurance, however, that the Company or its subsidiary will
not be required in the future to pay for waste clean-up costs incurred under
Canadian environmental laws or will not incur additional operating or capital
costs required by changes to laws, regulations or permits.
The Company also conducts business in Mexico through its joint venture,
Medam, collects regulated medical waste and transports it for treatment to a new
facility close to Mexico City. Medical waste is regulated in Mexico as a
category of waste distinct from solid or "municipal" waste. Mexican regulations
have established collection schedules that are specific to the type and size of
generator. The Secretariat of the Environment, Natural Resources and Fisheries
is responsible for the enforcement of Mexico's regulated medical waste law. The
Company believes that its joint venture operations in Mexico are in compliance
with all applicable laws, rules and regulations affecting regulated medical
waste collection, transport, treatment and disposal. See "-- Growth
Strategy -- Expand Geographically."
If the Company expands its operations into other foreign jurisdictions, it
will be required to comply with the laws and regulations of each such
jurisdiction.
Permitting Process
Each state in which the Company currently operates, and each state in which
the Company may operate in the future, has a specific permitting process. After
the Company has identified a geographic area in which it wishes to locate a
treatment or transfer facility, the Company identifies one or more locations for
a potential new site. Typically, the Company will develop a site contingent on
obtaining zoning approval and local and state operating authority. Most
communities rely on state authorities to provide operating rules and safeguards
for their community. Usually the state provides public notice of the project
and, if a sufficient threshold of public interest is shown, a public hearing may
be held. If the Company is successful in meeting all regulatory requirements,
the state may issue a permit to construct the treatment facility or transfer
station. Once the facility is constructed, the state may again issue public
notice of its intent to issue an operating permit and provide an opportunity for
public opposition or other action that may impede the Company's ability to
construct or operate the planned facility. Permitting for transportation
operations frequently involves registration of vehicles, inspection of equipment
and background investigations on the Company's officers and directors.
The Company has been successful in obtaining permits for its current
regulated medical waste transfer, treatment and processing facilities and for
its transportation operations. Several of the Company's past attempts to
construct and operate regulated medical waste treatment facilities, however,
have met with significant community opposition. In some of these cases, the
Company has withdrawn from the permitting process.
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POTENTIAL LIABILITY AND INSURANCE
The regulated medical waste management industry involves potentially
significant risks of statutory, contractual, tort and common law liability.
Potential liability could involve, for example, claims for clean-up costs,
personal injury or damage to the environment, claims of employees, customers or
third parties for personal injury or property damages occurring in the course of
the Company's operations, or claims alleging negligence or professional errors
or omissions in the planning or performance of work. The Company could also be
subject to fines or penalties in connection with violations of regulatory
requirements.
The Company carries $7,000,000 of liability insurance (including umbrella
coverage), which it considers sufficient to meet regulatory and customer
requirements and to protect the Company's employees, assets and operations. The
availability of liability insurance within the regulated medical waste industry
has been adversely affected by the constrained market for environmental
liability and other insurance. More aggressive enforcement of environmental and
management regulations, as well as legal decisions and judgments adverse to
companies exposed to pollution damage claims, could lead to a substantial
reduction in the availability and extent of insurance coverage. In the future,
insurance may be available only at significantly increased premiums with less
extensive coverage. If the Company is unable to obtain adequate insurance
coverage at a reasonable cost, it may become exposed to potential liability
claims. In this event, a successful claim of sufficient magnitude could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's pollution liability insurance excludes liabilities under
CERCLA. There can be no assurance that the Company will not face claims under
CERCLA or similar state laws resulting in substantial liability for which the
Company is uninsured and which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Potential Risk of Liability and Potential Unavailability of
Insurance."
PATENTS AND PROPRIETARY RIGHTS
The Company considers the protection of its technology relating to the
processing of regulated medical waste to be material to its business. The
Company's policy is to protect its technology by a variety of means, including
applying for patents in the United States and in appropriate foreign countries.
The Company holds nine United States patents relating to the ETD treatment
process and other aspects of processing regulated medical waste. The Company has
filed or has been assigned counterpart patent applications in several foreign
countries and has received patents in Russia, Hungary, Canada, Mexico and
Australia. The Company also holds one United States patent for its reusable
container, which is used under the registered trademark Steri-Tub(R).
In November 1995, the Company entered into a cross-license agreement with
IIT Research Institute ("IITRI"). Under this agreement, IITRI granted to the
Company a royalty-free exclusive license in North America, portions of Europe
(including all 15 member countries of the European Union), Japan and other
industrialized countries throughout the world to use and commercialize certain
patent rights and know-how held by IITRI relating to the use of radio-frequency
technology in the treatment of medical waste, and the Company granted to IITRI a
royalty-free exclusive license in the remaining countries of the world to use
and commercialize certain corresponding patent rights and know-how held by the
Company. The agreement continues until the expiration of the last-to-expire of
any of the subject patents held by either IITRI or the Company.
An issued United States patent grants to the owner the right to exclude
others from making, using, offering to sell or selling within the United States
or importing into the United States the inventions claimed in the patent. In the
United States, a patent filed before June 8, 1995 is enforceable for 17 years
from the date of issuance or 20 years from the effective date of filing,
whichever is longer. Patents issued on applications filed on or after June 8,
1995 have a term which ends 20 years from the effective date of filing. The term
of the first-to-end of the Company's existing United States patents relating to
its ETD treatment process will end in
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October 2009 at the earliest or in September 2010 at the latest, and the term of
the last-to-end of such patents will end in January 2015.
In addition, the Company has additional proprietary technology relating to
the processing of regulated medical waste and other health care waste that the
Company believes is patentable. The Company is evaluating the technology to
determine whether to file for patent protection for this technology in the
future.
There can be no assurance that any claims which are included in pending or
future patent applications will be issued, that any issued patents will provide
the Company with competitive advantages or will not be challenged by third
parties or that the existing or future patents of third parties will not have an
adverse effect on the ability of the Company to carry out its business. In
addition, there can be no assurance that other companies will not independently
develop similar processes or engineer around patents that may have been issued
to the Company. Litigation or administrative proceedings may be necessary to
enforce the patents issued to the Company or to determine the scope and validity
of others' proprietary rights. Any litigation or administrative proceeding could
result in substantial cost to the Company and distraction of the Company's
management. An adverse ruling in any litigation or administrative proceeding
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The commercial success of the Company will also depend in part upon the
Company's not infringing patents issued to third parties. There can be no
assurance that patents belonging to third parties will not require the Company
to alter its processes, pay licensing fees or cease development of its current
or future processes. Litigation or administrative proceedings may be necessary
to enforce the patents issued to the Company or to determine the scope and
validity of others' proprietary rights. Any litigation or administrative
proceeding could result in substantial cost to the Company and distraction of
the Company's management. An adverse ruling in any litigation or administrative
proceeding could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that the Company would be able to license the technology rights that
it may require at a reasonable cost or at all. Failure by the Company to obtain
a license to any technology that the Company currently uses to process regulated
medical waste would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, to determine the
priority of inventions or patent applications the Company may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office or in proceedings before foreign agencies, any of which would
result in substantial costs to the Company and distraction of the Company's
management.
The Company holds federal registrations of the trademarks Steri-Fuel(R),
Steri-Plastic(R), Steri-Tub(R) and Steri-Cement(R), the service mark
Stericycle(R) and a service mark consisting of a graphic that the Company uses
in association with its name and services in the United States. There can be no
assurance that the registered or unregistered trademarks or service marks of the
Company will not infringe upon the rights of third parties. The requirement to
change any trademark, service mark or trade name of the Company could result in
the loss of any goodwill associated with that trademark, service mark or trade
name and could entail significant expense.
The Company also relies on unpatented and unregistered trade secrets,
trademarks, proprietary know-how and continuing technological innovation that it
seeks to protect, in part, by confidentiality agreements with its employees,
vendors and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets or know-how will not otherwise become known or
independently discovered by third parties.
EMPLOYEES
At September 30, 1998, the Company employed 468 full-time employees and 96
part-time employees engaged primarily in sales and marketing. At September 30,
1998, 3CI and Med-Tech employed 213 and 66 full-time employees, respectively.
Drivers and transportation helpers at the Company's New York City
facilities and drivers at Med-Tech's Montreal, Quebec facility are covered by
collective bargaining agreements between the Company and Med-
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Tech, respectively, and the International Brotherhood of Teamsters. The
Company's production and maintenance employees at its Morton, Washington
facility were previously represented by the International Brotherhood of
Teamsters, AFL-CIO, but voted in April 1998 to decertify the union. None of the
Company's other employees is covered by a collective bargaining agreement. The
Company considers its employee relations generally to be satisfactory.
FACILITIES
The Company currently leases office space for its corporate offices in
Deerfield, Illinois, and has entered into a lease for new space in Lake Forest,
Illinois, where it plans to relocate its corporate offices during the first
quarter of 1999. The Company owns and operates ETD treatment facilities in
Morton, Washington and Yorkville, Wisconsin. It leases sites in Woonsocket,
Rhode Island and Loma Linda, California which it operates as ETD treatment
facilities, and subleases incineration or autoclave facilities from WMI in
Chandler, Arizona, Baltimore, Maryland and Terrell, Texas.
The Company leases transfer stations in: Anaheim, San Leandro and Valencia,
California; Stickney, Illinois; Valparaiso, Indiana; Albuquerque, New Mexico;
New York, New York; Columbus and Middletown, Ohio; and El Paso, Texas. In
Prestonburg, Kentucky, Haverhill, Massachusetts and Vancouver, British Columbia,
the Company utilizes facilities owned by third parties licensed to operate
transfer stations. In addition, all of the Company's treatment facilities are
authorized to transfer regulated medical waste. The Company also leases sales
and customer service centers in: Middletown, Connecticut; Deerfield and Lombard,
Illinois; Salem, New Hampshire; Garden City, New York; Charlotte, North
Carolina; and Kirkland, Washington. The Company also utilizes several truck
domiciles in Pennsylvania and Washington.
The Company's lease of its treatment facility at Woonsocket, Rhode Island
expires in June 2017 upon the maturity of the last to mature of the industrial
development revenue bonds which were issued to finance the acquisition and
equipping of the facility. The Company's leasehold interest in the facility and
the Company's machinery and equipment at the facility are pledged as collateral
to secure the Company's obligations in connection with these bonds. The Company
has an option to purchase the facility for $2,000 upon the repayment of all of
the bonds. The Company's machinery and equipment at its Yorkville, Wisconsin
treatment facility are leased under an equipment lease expiring in February 1999
and are pledged as collateral to secure the Company's obligations under the
lease. Substantially all of the Company's property and equipment provide
collateral for the Company's obligations under its revolving credit facility
with Silicon Valley Bank. The Company believes that its existing facilities are
generally adequate for its current needs.
The Company's subsidiary, Med-Tech, leases a treatment facility and sales
office in Brompton, Ontario; transfer stations and sales offices in Montreal,
Quebec and Haverhill, Massachusetts; and a truck domicile in Calgary, Alberta.
The Company's majority-owned subsidiary, 3CI, leases sales offices and
truck domiciles in Shreveport and Kenner, Louisiana; Carthage, Grand Prarie and
San Marcos, Texas; Birmingham, Alabama; and Bismark, Arkansas. 3CI owns sales
offices and truck domiciles in Springhill, Louisiana, Fresno, Texas and Jackson,
Mississippi, the latter two of which also serve as transfer stations. It owns
treatment facilities in Springhill, Louisiana and Birmingham, Alabama, and
operates an incinerator in Carthage, Texas.
LEGAL AND OTHER PROCEEDINGS
The Company operates in a highly regulated industry and is exposed to
regulatory inquiries or investigations from time to time. Investigations can be
initiated for a variety of reasons. The Company has been involved in several
legal and administrative proceedings that have been settled or otherwise
resolved on terms acceptable to the Company, without having a material adverse
effect on the Company's business, financial condition or results of operations.
From time to time, the Company may consider it more cost-effective to settle
such proceedings than to involve itself in costly and time-consuming
administrative actions or litigation. The Company is also a party to various
legal proceedings arising in the ordinary course of its business. The Company
believes that the resolution of these other matters will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
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<PAGE> 46
In April 1997, a worker at the Company's Morton, Washington treatment
facility was diagnosed with active tuberculosis. Testing revealed two additional
cases of active tuberculosis and 15 additional workers who tested positive for
exposure to tuberculosis. Officials of the Washington Departments of Health and
of Labor and Industries have concluded that the Company's workers were probably
exposed to tuberculosis bacteria through regulated medical waste being processed
at the Company's treatment facility. The Company believes that other sources of
exposure are possible and that the actual source of exposure has yet to be
conclusively determined. However, the Company has implemented the
recommendations of all federal, state and local regulatory authorities regarding
outfitting its workers with personal protective equipment and has implemented or
is implementing additional recommendations regarding the modification of
equipment at the Morton facility. The measures taken at the Morton facility have
been extended to the Company's other treatment facilities. The safety measures
being taken include certain measures recommended by the National Institute for
Occupational Safety and Health ("NIOSH") in a report issued in December 1998.
While future claims are possible, to date the Company has not been subject to
any civil proceedings by the affected employees as a result of this incident,
which the Washington Department of Labor and Industries has determined is
covered by the state workers' compensation program. This or a similar incident
in the future at one of the Company's facilities could result in adverse
publicity and could cause governmental authorities to require the Company to
adopt additional safety measures, impose fines or other penalties, initiate
permit modification or revocation proceedings or deny future permit
applications, or could result in litigation by the affected employees. The cost
of complying with any additional measures, the payment of a significant fine or
penalty, the modification or revocation of an operating permit, adverse
publicity, or the expense of defending or settling employee litigation or paying
an adverse judgment, could have a material adverse effect on the Company's
business, financial condition and results of operations.
As a result of the incident in Morton, Washington, the State of California
has recently requested NIOSH's assistance in conducting an assessment of health
and safety at the Company's Loma Linda treatment facility. While the Company
believes that it is currently in compliance with applicable health and safety
requirements, there can be no assurance that this assessment will not result in
the imposition of additional safety precautions requiring associated
expenditures.
In August 1995, the Company entered into a voluntary settlement with the
Rhode Island Department of Environmental Management ("RIDEM") pursuant to which,
without admitting liability, the Company agreed to pay $400,000 over a
seven-year period and to perform community services and conduct informational
seminars over a five-year period. The settlement arose from certain notices of
violation that RIDEM issued in September 1994 and April 1995 pursuant to which
RIDEM sought penalties of $3,356,000, claiming that the Company had violated
state medical waste and solid waste regulations by, among other things,
mishandling and improperly treating medical waste and endangering its employees'
health by failing to provide proper training and protective clothing. The
Company believes that it is currently in compliance with RIDEM's requirements.
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<PAGE> 47
MANAGEMENT
THE EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY ARE AS FOLLOWS:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark C. Miller............................... 43 President, Chief Executive Officer and a
Director
Richard T. Kogler............................ 39 Executive Vice President, Domestic Operations
and Chief Operating Officer
Anthony J. Tomasello......................... 52 Vice President, Operations
Linda D. Lee................................. 42 Vice President, Regulatory Affairs and Quality
Assurance
Frank J.M. ten Brink......................... 42 Vice President, Finance and Chief Financial
Officer
Michael J. Bernert........................... 45 Vice President, Eastern Region
Joel P. Wilson............................... 38 Vice President, Central Region
Jack W. Schuler.............................. 58 Chairman of the Board of Directors
Rod F. Dammeyer.............................. 58 Director
Patrick F. Graham............................ 58 Director
John Patience................................ 51 Director
Peter Vardy.................................. 68 Director
L. John Wilkerson, Ph.D. .................... 55 Director
</TABLE>
Mark C. Miller has served as President and Chief Executive Officer and a
director since joining the Company in May 1992. From May 1989 until he joined
the Company, 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.
Richard T. Kogler joined the Company as Executive Vice President, Domestic
Operations and Chief Operating Officer in December 1998. From May 1995 through
October 1998, Mr. Kogler was Vice President and Chief Operating Officer of
American Disposal Services, Inc., a solid waste management company. From October
1984 through May 1995, Mr. Kogler served in a variety of management positions
with Waste Management, Inc. Mr. Kogler received a B.A. degree in chemistry from
St. Louis University.
Anthony J. Tomasello has served as the Company's Vice President, Operations
since August 1990. For eight years prior to joining the Company, Mr. Tomasello
was President and Chief Operating Officer of Pi Enterprises and Orbital Systems,
companies providing process and automation services. From 1980 to 1982, he
served as Vice President of Operations for Spang and Company, an operating
service firm specializing in resource recovery and recycling for manufacturing
and process industries. Mr. Tomasello received a B.S. degree in mechanical
engineering from the University of Pittsburgh.
Linda D. Lee has served as the Company's Vice President, Regulatory Affairs
and Quality Assurance since June 1990. She previously served as the Company's
Executive Director for Regulatory Compliance. Prior to joining the Company in
November 1989, she served for six years as Director of Environmental Health and
Safety for Medical Services at the University of Arkansas. Ms. Lee has served as
the chairperson of the American Hospital Association's Environmental Advocacy
Committee and on the American Society for Hospital Engineers' Safety Committee.
She has also served on a number of government committees, including the Arkansas
Governor's Task Force on Medical Waste, and has written several books and
articles on safety and waste disposal. Ms. Lee received a B.S. degree in
environmental health sciences from Indiana State University and a M.S. degree in
operations management from the University of Arkansas.
Frank J.M. ten Brink has served as the Company's Vice President, Finance
and Chief Financial Officer since June 1997. From 1991 until 1996 he served as
Chief Financial Officer of Hexacomb Corporation, and from 1996 until joining the
Company, he served as Chief Financial Officer of Telular Corporation. Prior to
1991, he held various financial management positions with Interlake Corporation
and Continental Bank of Illinois. Mr. ten Brink received a B.B.A. degree in
international business and a M.B.A. degree in finance from the University of
Oregon.
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<PAGE> 48
Michael J. Bernert has served as the Company's Vice President, Eastern
Region, with responsibility for sales and service in New England and portions of
the Midwest, since February 1992. Prior to joining the Company in 1992, he held
a series of management positions with Abbott Laboratories. Mr. Bernert received
a B.A. degree in economics from Brown University and a M.B.A. degree from the
University of Dallas.
Joel P. Wilson has served as the Company's Vice President, Central Region,
with responsibility for sales and service in portions of the Midwest and Texas,
since October 1997. Since joining the company in 1991, Mr. Wilson has held the
positions of Director of Engineering, General Manager of the Midwest Region,
General Manager of Operations and District Manager of Wisconsin. Prior to
joining Stericycle, he held several management positions with Orbital Systems
and Orbital Engineering. Mr. Wilson received a B.S. degree in civil engineering
from Brigham Young University.
Jack W. Schuler has served as Chairman of the Board of Directors of the
Company 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, Medtronic, Inc.
and Ventana Medical Systems, Inc. He is a co-founder of Crabtree Partners LLC, a
private investment firm in Deerfield, 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.
Rod F. Dammeyer has served as a director of the Company 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., Metal Management, Inc., TeleTech Holdings, Inc. and Transmedia Network,
Inc., and a trustee of Van Kampen American Capital, Inc. closed-end funds. He
received a B.S. degree from Kent State University and serves as a trustee of the
Kent State University Foundation.
Patrick F. Graham has served as a director of the Company 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 as a director of the Company since its
incorporation in March 1989. He is a co-founder and partner of Crabtree Partners
LLC, a private investment firm in Deerfield, Illinois, which was formed in June
1995. From January 1988 to March 1995, Mr. Patience was an indirect general
partner of Marquette Venture Partners, L.P., a venture capital fund which he
co-founded and which participated in the Company's 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 as a director of the Company 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 as a director of the Company since
July 1992. He is Chief Executive Officer and 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.
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<PAGE> 49
CERTAIN TRANSACTIONS
In December 1998, the Company entered into a subordinated loan agreement
with a group of lenders consisting of six of the Company's seven directors
(Patrick F. Graham being the only director not participating) pursuant to which
the lenders agreed to provide the Company with up to $5,500,000 of short-term
financing upon the Company's request. Each loan bears interest at 6.0% per annum
and is due within 10 days after completion of this Offering. Under the terms of
the subordinated loan agreement, the lenders have been or may be granted
five-year warrants to purchase shares of the Company's Common Stock exercisable
at any time after the first anniversary of the grant date. Upon entering into
the loan agreement, each lender was granted a warrant for 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 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 the warrant. In
addition, at the time of each loan, each lender is granted a warrant for a
number of shares of 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 date of disbursement of the lender's loan. This
closing price is also the exercise price of the warrant. As of December 31,
1998, the Company had borrowed $2,275,000 under the subordinated loan agreement
and had 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 9,091 shares of Common Stock at $16.50 per share. The loans
to the Company pursuant to the subordinated loan agreement are unsecured and are
subordinated to the Company's obligations under its credit facility with LaSalle
National Bank.
48
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $.01 per share.
COMMON STOCK
As of September 30, 1998, there were 10,741,603 shares of Common Stock
outstanding, which were held of record by approximately 190 stockholders.
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders but do not have cumulative voting rights in
respect of the election of directors. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Company's Board of Directors out of legally available funds. In the event of
the liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in all of the assets of the Company
remaining after payment or provision for payment of the Company's liabilities.
Holders of Common Stock have no preemptive or other subscription rights to
purchase any securities of the Company, and there are no conversion rights or
redemption or sinking fund provisions in respect the Common Stock. All shares of
Common Stock to be outstanding upon completion of this Offering will be fully
paid and nonassessable.
WARRANTS
As of September 30, 1998, there were outstanding warrants to purchase
286,619 shares of Common Stock, all of which were then exercisable at a weighted
average exercise price of $8.21 per share. Of these outstanding warrants,
warrants for 6,773 shares of Common Stock, at an exercise price of $69.02 per
share, expire in March 1999; warrants for 53,810 shares of Common Stock, at an
exercise price of $1.59 per share, expire in July 2000, and warrants for 226,036
shares of Common Stock, at an exercise price of $7.96 per share, expire in May
2001. Holders of warrants to purchase 178,794 shares of Common Stock are subject
to 90-day lock-up agreements with the Managing Underwriters. See "Underwriting."
OPTIONS
As of September 30, 1998, options to purchase a total of 986,746 shares of
Common Stock were outstanding under the Company's stock option plans, of which
options for a total of 377,175 shares were then exercisable at a weighted
average exercise price of $4.81. Of the total options exercisable, options for
286,809 shares were held by executive officers and directors subject to 90-day
lock-up agreements with the Managing Underwriters. See "Underwriting."
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Holders of certain shares of Common Stock (the "Registrable Shares") are
entitled to certain rights in respect of the registration of the Registrable
Shares under the Securities Act of 1933, as amended (the "Securities Act"). All
of the Registrable Shares are already freely tradeable without restriction
except for 1,055,302 Registrable Shares held by the Company's executive officers
and directors, which may be sold subject to the volume limitation and other
conditions of Rule 144. The Company is unable to determine the number of
Registrable Shares that are currently issued and outstanding because it is
unable to identify the beneficial owners of shares of Common Stock held in the
names of brokers and other nominees. The Company estimates that in addition to
the Registrable Shares held by the Company's executive officers and directors,
there may be as many as a further 1,600,000 Registrable Shares issued and
outstanding. Under the agreement by which registration rights were granted in
respect of the Registrable Shares, no registration rights may be exercised for a
period of 180 days after the date of this Offering without the prior written
consent of Warburg Dillon Read LLC on behalf of the Managing Underwriters. See
"Underwriting."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.
49
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 13,741,603 shares
of Common Stock outstanding (based upon shares outstanding as of September 30,
1998). Of these shares, approximately 11,035,496 shares, including the 3,000,000
shares offered hereby (or approximately 11,485,496 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act. The remaining
2,706,107 shares may be sold in the public market only if they are registered
under the Securities Act or if they qualify for an exemption from registration
under Rule 144. Approximately 2,585,736 of these shares will be eligible for
sale under Rule 144 on the date of this Offering.
The Company's executive officers and directors, who together hold 2,210,150
shares of Common Stock (all of which are eligible for sale under Rule 144 on the
date of this Offering), have entered into lock-up agreements with the Managing
Underwriters pursuant to which the holders have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, directly
or indirectly, any of their shares of Common Stock, or any shares that they may
acquire through the exercise of stock options or warrants, or to exercise any of
their registration rights in respect of their shares of Common Stock, for a
period of 90 days beginning on the date of this Offering without the prior
written consent of Warburg Dillon Read LLC on behalf of the Managing
Underwriters. See "Underwriting."
In addition, certain holders of Common Stock have registration rights in
respect of their shares. Under the registration agreement by which these
registration rights were granted, no registration rights may be exercised for a
period of 180 days after the date of this Offering without the prior written
consent of Warburg Dillon Read LLC on behalf of the Managing Underwriters. See
"Description of Capital Stock -- Registration Rights of Certain Holders."
50
<PAGE> 52
UNDERWRITING
The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares of Common Stock which each has severally
agreed to purchase from the Company, subject to the terms and conditions
specified in the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Warburg Dillon Read LLC ....................................
Credit Suisse First Boston Corporation......................
William Blair & Company, L.L.C. ............................
---------
Total.................................................. 3,000,000
=========
</TABLE>
The Managing Underwriters are Warburg Dillon Read LLC, Credit Suisse First
Boston Corporation and William Blair & Company, L.L.C.
If any shares of Common Stock offered hereby are purchased by the
Underwriters, all such shares will be so purchased. The Underwriting Agreement
contains certain provisions whereby, if any Underwriter defaults in its
obligation to purchase such shares, and the aggregate obligations of the
Underwriters so defaulting do not exceed 10% of the shares offered hereby, the
remaining Underwriters, or some of them, must assume such obligations.
The Underwriters propose to offer the shares of Common Stock to the public
initially at the offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not to exceed $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not to exceed $ per share on sales to certain other dealers. The offering of
the shares of Common Stock is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any order for the purchase of the shares. After the shares are released
for sale to the public, the public offering price, the concession and the
reallowance may be changed by the Managing Underwriters.
The Company has granted to the Underwriters an option to purchase up to an
additional 450,000 shares of Common Stock at the offering price less the
underwriting discount set forth on the cover page of this Prospectus. Such
option is exercisable during the 30 days beginning on the date of the
Underwriting Agreement. The Underwriters may exercise such option only to cover
over-allotments made of the shares in connection with the Offering. To the
extent the Underwriters exercise this option, each of the Underwriters will be
obligated, subject to certain conditions, to purchase the number of additional
shares proportionate to such Underwriter's initial commitment.
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and each of its officers and directors have agreed prior to
this Offering not to offer, sell, contract to sell, grant any option to sell, or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or
securities convertible into or exercisable or exchangeable for, any shares of
Common Stock or warrants or other rights to purchase shares of Common Stock, or
permit the registration of any shares of Common Stock for a period of 90 days
after the date of this Prospectus, without the prior consent of Warburg Dillon
Read LLC acting on behalf of the Managing Underwriters (with the exception that,
without such consent, the Company may sell the shares of Common Stock offered
hereby).
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<PAGE> 53
The Managing Underwriters, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate cover transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the Offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Managing Underwriters to reclaim a selling concession
from a syndicate member when the Common Stock originally sold by the syndicate
member is purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The Managing Underwriters, on behalf of the Underwriters, may engage in
passive market making on the Nasdaq National Market in accordance with Rule 103
of Regulation M under the Exchange Act during the one-day period before the
commencement of offers or sales of Common Stock. The passive market making
transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid for such security; if all
independent bids are lowered before the passive market maker's bid, however,
such bid must then be lowered when certain purchase limits are exceeded. Passive
market making may stabilize the market price of the Common Stock above
independent market levels and, if commenced, may be discontinued at any time.
The Underwriters do not expect to confirm sales to accounts over which they
exercise discretionary authority.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
are being passed upon for the Company by Johnson and Colmar, Chicago, Illinois
and for the Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.
EXPERTS
The consolidated financial statements of Stericycle, Inc. and Subsidiaries
at December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and in the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Waste System, Inc. and Subsidiary at December
31, 1996 and 1997, and for each of the years then ended, appearing in this
Prospectus and in the Registration Statement have been audited by Heard McElroy
& Vestal, L.L.P., independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of Med-Tech Environmental Limited at December 31,
1996 and 1997, and for each of the years then ended, appearing in this
Prospectus and in the Registration Statement have been audited by Collins
Barrow, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
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<PAGE> 54
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act , and in accordance with such requirements files reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). The Company's filings can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of this material can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W, Washington, D.C. 20549 at
prescribed rates. In addition, the Commission maintains a site on the World Wide
Web at http://www.sec.gov, and copies of the reports, proxy statements and other
information that the Company has filed electronically may be accessed at this
Web site.
This Prospectus forms part of a Registration Statement on Form S-3 (the
"Registration Statement") which the Company has filed with the Commission under
the Securities Act. In accordance with the Commission's rules and regulations,
this Prospectus omits certain of the information in the Registration Statement
and all of its exhibits, and reference is made to the Registration Statement and
its exhibits for further information relating to the Company and the Common
Stock offered hereby. Copies of the Registration Statement and its exhibits may
be obtained from the Commission upon payment of the prescribed fee or may be
inspected without charge at the Commission's public reference facilities
described above. Statements in this Prospectus concerning the provisions of any
document are not necessarily complete, and each such statement is qualified in
its entirety by reference to the copy of the relevant document filed as an
exhibit to the Registration Statement.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents that the Company has filed with the Commission are
incorporated in this Prospectus by reference: (i) the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-21229); (ii)
the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, June 30, and September 30, 1998; and (iii) the description of the
Company's Common Stock contained in the Registration Statement on Form 8-A which
the Company filed on August 21, 1996; and (iv) the Company's Current Reports and
Current Reports (Amended) on Forms 8-K and 8-K/A filed on October 15, November 4
and December 14, 1998 and January 4 and 7, 1999.
All documents that the Company files with the Commission pursuant to
sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus but prior to the termination of the Offering to which this Prospectus
relates shall be deemed to be incorporated in this Prospectus by reference from
their respective dates of filing.
Any statement in a document incorporated or deemed to be incorporated in
this Prospectus by reference shall be deemed to be modified or superseded for
purposes of this Prospectus and the Registration Statement to the extent that a
statement in this Prospectus or the Registration Statement, or in any document
filed after the date of this Prospectus which is deemed to be incorporated in
this Prospectus by reference, modifies or supersedes such statement. Any
statement so modified or superseded shall be incorporated or deemed to be
incorporated in this Prospectus only as so modified or superseded.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, at his or her written or oral request, copies of
all or any of the documents that have been or may be incorporated in this
Prospectus by reference (excluding the exhibits to any such documents, however,
unless the exhibits are specifically incorporated in this Prospectus). Requests
for copies should be directed to Investor Relations, Stericycle, Inc., at the
Company's offices at 1419 Lake Cook Road, Deerfield, Illinois 60015 (telephone
number: (847) 945-6550).
53
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STERICYCLE, INC. AND SUBSIDIARIES
Report of Independent Auditors, Ernst & Young LLP........... F-2
Consolidated Balance Sheets at December 31, 1996 and 1997... F-3
Consolidated Statements of Operations for Each of the Years
in the Three-Year Period Ended December 31, 1997.......... F-4
Consolidated Statements of Cash Flows for Each of the Years
in the Three-Year Period Ended December 31, 1997.......... F-5
Consolidated Statements of Changes in Shareholders' Equity
for Each of the Years in the Three-Year Period Ended
December 31, 1997......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance Sheets at December 31, 1997
and September 30, 1998 (Unaudited)........................ F-20
Condensed Consolidated Statements of Operations for the Nine
Months Ended September 30, 1997 and 1998 (Unaudited)...... F-21
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1998 (Unaudited)...... F-22
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-23
WASTE SYSTEM, INC. AND SUBSIDIARY
Independent Auditor's Report, Heard McElroy & Vestal LLP.... F-27
Consolidated Balance Sheets at December 31, 1997 and 1996... F-28
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996................................ F-29
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended December 31, 1996 and 1997............ F-30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996................................ F-31
Notes to Consolidated Financial Statements.................. F-32
Consolidated Balance Sheets at September 30, 1998 and 1997
(Unaudited)............................................... F-47
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1998 and 1997 (Unaudited)............. F-48
Consolidated Statements of Shareholders' Equity (Deficit)
for the Nine Months Ended September 30, 1998 and 1997
(Unaudited)............................................... F-49
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (Unaudited)............. F-50
Selected Information........................................ F-51
MED-TECH ENVIRONMENTAL LIMITED
Auditor's Report, Collins Barrow, Chartered Accountants..... F-53
Consolidated Balance Sheets at March 31, 1998 and 1997...... F-54
Consolidated Statements of Deficit for the Years Ended March
31, 1998 and 1997......................................... F-55
Consolidated Statements of Income for the Years Ended March
31, 1998 and 1997......................................... F-56
Consolidated Statements of Changes in Financial Position for
the Years Ended March 31, 1998 and 1997................... F-57
Notes to Consolidated Financial Statements.................. F-58
Consolidated Balance Sheets at June 30, 1998 and 1997
(Unaudited)............................................... F-65
Consolidated Statements of Income for the Three Months Ended
June 30, 1998 and 1997 (Unaudited)........................ F-66
Consolidated Statements of Changes in Financial Position for
the Three Months Ended June 30, 1998 and 1997
(Unaudited)............................................... F-67
Notes to Consolidated Financial Statements (Unaudited)...... F-68
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Consolidated Financial
Statements................................................ F-69
Unaudited Pro Forma Consolidated Statement of Operations for
the Year Ended December 31, 1997.......................... F-70
Unaudited Pro Forma Consolidated Statement of Operations for
the Nine Months Ended September 30, 1998.................. F-72
Unaudited Pro Forma Consolidated Balance Sheet at September
30, 1998.................................................. F-74
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Stericycle, Inc.
We have audited the accompanying consolidated balance sheets of Stericycle,
Inc. and Subsidiaries as of December 31, 1996 and 1997, 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, 1997.
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, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 6, 1998
F-2
<PAGE> 57
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,950 $ 5,374
Short-term investments.................................... 5,799 2,335
Accounts receivable, less allowance for doubtful accounts
of $178 in 1996 and $361 in 1997....................... 4,756 10,286
Parts and supplies........................................ 360 660
Prepaid expense........................................... 426 440
Other..................................................... 490 392
-------- --------
Total current assets................................. 23,781 19,487
-------- --------
Property, plant and equipment:
Land...................................................... 90 90
Buildings and improvements................................ 5,598 5,561
Machinery and equipment................................... 10,702 11,469
Office equipment and furniture............................ 463 746
Construction in progress.................................. 362 614
-------- --------
17,215 18,480
Less accumulated depreciation............................... (5,208) (7,239)
-------- --------
Property, plant and equipment, net................... 12,007 11,241
-------- --------
Other assets:
Goodwill, less accumulated amortization of $807 in 1996
and $2,040 in 1997..................................... 18,834 29,458
Other..................................................... 533 1,040
-------- --------
Total other assets................................... 19,367 30,498
-------- --------
Total assets......................................... $ 55,155 $ 61,226
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,215 $ 3,052
Accounts payable.......................................... 1,510 1,927
Accrued liabilities....................................... 3,769 7,039
Deferred revenue.......................................... 670 255
-------- --------
Total current liabilities............................ 9,164 12,273
-------- --------
Long-term debt:
Industrial development revenue bonds and other............ 1,986 1,405
Notes payable............................................. 2,605 2,070
-------- --------
Total long-term debt................................. 4,591 3,475
-------- --------
Other liabilities........................................... 1,386 452
Shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares
authorized, 10,000,264 issued and outstanding in 1996,
10,472,799 issued and outstanding in 1997)............. 100 105
Additional paid-in capital................................ 79,409 82,986
Notes receivable for common stock purchases............... (4) (4)
Accumulated deficit....................................... (39,491) (38,061)
-------- --------
Total shareholders' equity........................... 40,014 45,026
-------- --------
Total liabilities and shareholders' equity........... $ 55,155 $ 61,226
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 58
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................... $21,339 $24,542 $46,166
Costs and expenses:
Cost of revenues.......................................... 17,478 19,423 34,109
Selling, general and administrative expenses.............. 8,137 7,556 10,671
------- ------- -------
Total costs and expenses............................... 25,615 26,979 44,780
------- ------- -------
Income (loss) from operations............................... (4,276) (2,437) 1,386
Other income (expense):
Interest income........................................... 9 421 618
Interest expense.......................................... (277) (373) (428)
------- ------- -------
Total other income (expense)........................... (268) 48 190
------- ------- -------
Income (loss) before income taxes........................... $(4,544) $(2,389) $ 1,576
Income tax expense.......................................... -- -- 146
------- ------- -------
Net income (loss)........................................... $(4,544) $(2,389) $ 1,430
======= ======= =======
Basic earnings per share:
Basic net income (loss) per share......................... $ (0.81) $ (0.32) $ 0.14
======= ======= =======
Diluted earnings per share (restated EPS for FAS 128 and SAB
98)
Diluted net income (loss) per share....................... $ (0.81) $ (0.32) $ 0.13
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 59
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $(4,544) $(2,389) $ 1,430
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization.......................... 1,916 2,064 3,078
Settlement with regulatory agency...................... 273 -- --
Other, net............................................. 129 -- --
Changes in operating assets, net of effect of acquisitions
and divestitures:
Accounts receivable.................................... 866 (554) (4,123)
Parts and supplies..................................... 135 144 (300)
Prepaid expenses....................................... 196 (18) (14)
Other assets........................................... 128 (37) 98
Accounts payable....................................... 570 (428) (413)
Accrued liabilities.................................... (838) 1,178 559
Deferred revenue and other liabilities................. 298 97 (415)
------- ------- -------
Net cash (used in) provided by operating activities......... (871) 57 (100)
------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures................................... (726) (995) (1,235)
Payments for acquisitions, net of cash acquired........ (459) (6,516) (5,552)
Proceeds from maturity of short-term investments....... -- -- 5,799
Purchases of short-term investments.................... -- (5,799) (2,335)
Proceeds from divestitures............................. 792 -- --
------- ------- -------
Net cash used in investing activities....................... (393) (13,310) (3,323)
------- ------- -------
FINANCING ACTIVITIES:
Net proceeds from (payments of) note payable to bank... 858 (858) --
Repayment of long-term debt............................ (171) (3,275) (2,905)
Principal payments on capital lease obligations........ (482) (397) (305)
Principal payments on notes receivable for common stock
purchases............................................ -- 60 --
Proceeds from long-term debt........................... -- 1,000 --
Proceeds from issuance of common stock................. 18 28,535 57
Other.................................................. (27) -- --
------- ------- -------
Net cash provided by (used in) financing activities......... 196 25,065 (3,153)
------- ------- -------
Net increase (decrease) in cash and cash and cash
equivalents............................................... (1,068) 11,812 (6,576)
Cash and cash equivalents at beginning of year.............. 1,026 138 11,950
------- ------- -------
Cash and cash equivalents at end of year.................... $ 138 $11,950 $ 5,374
======= ======= =======
Non-cash activities:
Issuance of common stock for certain acquisitions...... $ -- $ -- $ 3,525
Issuance of notes payable for certain acquisitions..... $ -- $ 6,497 $ 1,120
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 60
STERICYCLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
COMMON STOCK
<TABLE>
<CAPTION>
ACCUMULATED
DIVIDENDS ON TOTAL
CONVERTIBLE NOTES SHAREHOLDERS
ISSUED AND ADDITIONAL REDEEMABLE RECEIVABLE FOR EQUITY
OUTSTANDING PAID-IN PREFERRED COMMON STOCK ACCUMULATED (NET CAPITAL
SHARES AMOUNT CAPITAL STOCK PURCHASES DEFICIT DEFICIENCY
----------- ------ ---------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER
31, 1994........... 370 $ 4 $ 811 $(13,001) $ (619) $(32,558) $(45,363)
Common stock issued
in exchange for
preferred stock.... 5,043 50 49,439 49,489
Issuance of common
stock.............. 350 3 3
Accumulated dividends
cancelled.......... 13,001 13,001
Notes receivable
cancelled.......... (181) (2) (629) 619 (12)
Net loss............. (4,544) (4,544)
------ ---- ------- -------- ------ -------- --------
BALANCES AT DECEMBER
31, 1995........... 5,582 $ 55 $49,621 $ -- $ -- $(37,102) $ 12,574
Initial public
offering of common
stock (net of
offering costs).... 3,450 36 27,586 27,621
Issuance of common
stock for exercise
of options and
warrants and
employee stock
purchases.......... 870 9 717 (64) 662
Note payable
exchanged for
common stock....... 98 1 1,485 1,486
Principal payments
under note
receivable......... 60 60
Net loss............. (2,389) (2,389)
------ ---- ------- -------- ------ -------- --------
BALANCES AT DECEMBER
31, 1996........... 10,000 $100 $79,409 $ -- $ (4) $(39,491) $ 40,014
Issuance of common
stock for exercise
of options and
warrants and
employee stock
purchases.......... 70 1 56 57
Common stock issued
for acquisitions... 403 4 3,521 3,525
Net income........... 1,430 1,430
------ ---- ------- -------- ------ -------- --------
BALANCES AT DECEMBER
31, 1997........... 10,473 $105 $82,986 $ -- $ (4) $(38,061) $ 45,026
====== ==== ======= ======== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 61
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- DESCRIPTION OF BUSINESS
Stericycle, Inc. (the "Company") was incorporated in Delaware in March 1989
for the purpose of providing collection, transportation, treatment, disposal,
reduction, re-use and recycling services for regulated medical waste to
hospitals and other health care providers in the United States and Canada.
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of Stericycle,
Inc. and its wholly-owned subsidiaries, Stericycle of Arkansas, Inc., Stericycle
of Washington, Inc., SWD Acquisition Corporation and Environmental Control Co.,
Inc. All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition:
The Company recognizes revenue when the treatment of the regulated medical
waste is completed on-site 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.
Cash Equivalents and Short-Term Investments:
The Company considers all highly liquid instruments with a maturity of less
than three months when purchased to be cash equivalents. Short-term investments
consist of highly liquid investments in corporate debt obligations which mature
in less than one year and are classified as held-to-maturity since management
has the positive intent and ability to hold the securities to maturity. These
obligations are stated at amortized cost, which approximates fair market value.
Interest income is recognized as earned.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation and
amortization, which include the depreciation of assets recorded under capital
leases, are computed using the straight-line method over the estimated useful
lives of the assets as follows:
Buildings and improvements -- 10 to 30 years
Machinery and equipment -- 3 to 10 years
Office equipment and furniture -- 5 to 10 years
Goodwill:
Goodwill is amortized using the straight-line method over 25 years.
Amortization expense for 1995, 1996 and 1997 related to goodwill was
approximately $320,000, $390,000 and $1,042,000, respectively. The Company
continually evaluates the value and future benefits of its goodwill. The Company
assesses recoverability from future operations using income from operations of
the related acquired business as a measure. Under this approach, the carrying
value of good-will would be reduced if it becomes probable that the Company's
best estimate for expected undiscounted future cash flows of the related
business would be less than the carrying amount of goodwill over its remaining
amortization period. For the three-year period ended December 31, 1997, there
were no adjustments to the carrying amounts of goodwill resulting from these
evaluations.
F-7
<PAGE> 62
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
New Plant Development and Permitting Costs:
The Company expenses costs associated with the operations of new plants
prior to the commencement of services to customers and all initial and on-going
costs related to permitting.
Research and Development Costs:
The Company expenses costs associated with research and development as
incurred. Research and development expense for 1995, 1996 and 1997 was $975,000,
$194,000 and $281,000, respectively.
Income Taxes:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax liabilities
and assets are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Financial Instruments:
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable and payable and long-term debt. The
fair values of these financial instruments were not materially different from
their carrying values. Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of accounts
receivable. Credit risk on trade receivables is minimized as a result of the
large size of the Company's customer base. No single customer represents greater
than 10% of total accounts receivable. The Company performs ongoing credit
evaluation of its customers and maintains allowances for potential credit
losses. These losses, when incurred, have been within the range of management's
expectations.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Income (Loss) Per Common Share:
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes the dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All net income (loss) per
common share amounts for all periods have been presented, and where appropriate,
restated to conform to FAS 128 requirements. In restating net income (loss) per
common share to comply with the requirements of FAS 128, the Company applied the
recently issued Staff Accounting Bulletin No. 98 ("SAB 98"). As a result of
applying the provisions of SAB 98, the Company has restated the 1995 and 1996
loss per share to exclude the antidilutive effect of options and warrants ranted
within one year of the Company's 1996 initial public offering.
F-8
<PAGE> 63
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Impact of Recently Issued Accounting Standards:
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for reporting and display of comprehensive income and its components
in financial statements and is effective for fiscal years beginning after
December 15, 1997. The adoption of FAS 130 will have no impact on the Company's
financial position, results of operations, or cash flows.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosure about products and services,
geographic areas and major customers. FAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. The Company is
evaluating the disclosure requirements of FAS 131 and has not determined whether
its adoption will have a material impact on its future disclosure requirements.
NOTE 3 -- INITIAL PUBLIC OFFERING
On August 28 and August 30, 1996 the Company successfully completed an
initial public offering of 3,450,000 shares of common stock at $9 per share. The
Company received total proceeds from the offering, net of offering costs, of
approximately $27,621,000.
NOTE 4 -- INCOME TAXES
The Company's deferred tax liabilities and assets as of December 31, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Capital lease obligations....................... $ (324,000) $ (461,000)
Property, plant and equipment................... (694,000) (509,000)
Goodwill........................................ (160,000) (228,000)
------------ ------------
Total deferred tax liabilities.................... (1,178,000) (1,198,000)
Deferred tax assets:
Accrued liabilities............................. 835,000 857,000
Research and development costs.................. 324,000 324,000
Other........................................... 198,000 195,000
Net operating tax loss carryforward............. 15,102,000 14,344,000
Alternative minimum tax credit carryforward..... -- 60,000
------------ ------------
Total deferred tax assets......................... 16,459,000 15,780,000
------------ ------------
Net deferred tax assets........................... 15,281,000 14,582,000
Valuation allowance............................... (15,281,000) (14,582,000)
------------ ------------
Net deferred tax assets........................... $ -- $ --
============ ============
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $36,000,000, which expire beginning
in 2004. Based on the Internal Revenue Code of 1986, as amended, and changes in
the ownership of the Company, utilization of the net operating loss
carryforwards are subject to annual limitations, which could significantly
restrict or partially eliminate the
F-9
<PAGE> 64
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- INCOME TAXES (CONTINUED)
utilization of the net operating losses. Additionally, the Company has an
alternative minimum tax credit carryforward of $60,000 available indefinitely.
Significant components of the Company's income tax expense for the year
ended December 31, 1997 are as follows:
<TABLE>
<S> <C>
Current
Federal................................................... $ 60,000
State..................................................... 86,000
--------
Total provisions............................................ $146,000
========
</TABLE>
A reconciliation of the income tax provision computed at the federal
statutory tax rate to the effective tax rate for the year ended December 31,
1997 is as follows:
<TABLE>
<S> <C>
Federal statutory income tax rate........................... 34.0%
Effect of:
State taxes, net of federal tax effect.................... 4.4
Alternative minimum taxes................................. 3.8
Non-deductible goodwill amortization...................... 4.5
Other..................................................... 1.7
Utilization of net operating loss carryforward............ (39.1)
-----
Effective tax rate.......................................... 9.3%
=====
</TABLE>
In 1997, the Company paid income tax of $58,300. No income taxes were paid
in 1996 and 1995. Additionally, the Company did not recognize any income tax
benefit for 1996 and 1995 due to the Company's recurring operating losses and
valuation allowances established for net deferred tax assets.
NOTE 5 -- ACQUISITIONS AND DIVESTITURES
In November 1997, the Company purchased the customer list and certain other
assets of Cal-Va, Inc. ("Cal-Va"), which operated a regulated medical waste
business in northern Virginia and Washington D.C. The purchase price was paid by
the issuance of shares of the Company's common stock and the assumption of
certain of Cal-Va's liabilities. The purchase price is to be adjusted in the
event that revenues fall below certain levels.
In November 1997, the Company purchased selected customer contracts of
Phoenix Services Inc. ("Phoenix"), which operated a regulated medical waste
business in the Baltimore, Maryland metropolitan area. The purchase price was
paid in cash (in January 1998) and by delivery of a $20,000 note due in
September 1998.
In August 1997, the Company purchased the customer list and certain other
assets of Envirotech Enterprises, Inc. which operated a regulated medical waste
business in Arizona. The purchase price was paid in cash and by delivery of a
$300,000 note due in August 1998. The purchase price is to be adjusted in the
event that acquired revenues fall below certain levels.
In June 1997, the Company purchased the customer list and certain other
assets of the regulated medical waste business of Waste Management, Inc. ("WMI")
in Wisconsin ("WMI-WI"). In July 1997, the Company announced the purchase of the
customer lists and certain other assets of the regulated medical waste
businesses of Regional Carting, Inc. and Rumpke Container Service, Inc. in New
Jersey and Ohio, respectively. The purchase price for these three acquisitions
was paid by a combination of cash, assumption of
F-10
<PAGE> 65
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- ACQUISITIONS AND DIVESTITURES (CONTINUED)
liabilities and issuance of shares of common stock of the Company and, in one
case, delivery of a note which was paid in December 1997. In the event that
acquired revenues for each of these three companies fall below certain levels,
the purchase price will be adjusted accordingly.
In May 1997, the Company announced the acquisition of all of the
outstanding stock of Environmental Control Co., Inc. ("ECCO"), one of the
leading medical waste companies in the New York City market. The Company paid
$4,200,000 in cash; issued 125,000 shares of stock, assumed debt on vehicles and
issued a $2,300,000 10-year promissory note for the balance of the purchase
price. The note bears interest at a rate of 6.86% per annum payable in 10 equal
annual installments of $230,000 starting in May, 1998. The ECCO purchase price
is subject to downward adjustments to reflect uncollectible acquired accounts
receivable, additional outstanding obligations not reflected in the purchase
price at closing, and the extent to which ECCO's revenues during the one-year
period following closing are less than a specified amount.
In December 1996, the Company purchased the customer lists, vehicles and
certain other assets of the major portion of WMI's medical waste business (the
"WMI Acquisition") for $5,450,000 cash and a note for $5,210,000. During the
quarter ended June 30, 1997, adjustments were made to the value of the vehicles
purchased and to the purchase price. The purchase price was decreased by
$756,000 as specified in the agreement, and the related goodwill and note
payable were adjusted accordingly. The Company finalized its estimate of the
value of the vehicles purchased and reduced the related note accordingly. In the
quarter ended December 31, 1997, the purchase price was decreased by $163,000 as
specified in the agreement, and the related goodwill was adjusted accordingly.
The Company paid $1,796,650 of the adjusted $3,593,301 balance of the note to
WMI in December 1997. The balance plus accrued interest is due in December 1998.
In May 1996, the Company purchased the customer list and certain other
assets of Doctors Environmental Control, Inc. for $400,000 in cash and notes
payable issued for $600,000, which are payable on May 1, 1998 with an interest
rate of 6% per annum. In addition, the Company assumed vehicle leases totaling
$77,000, which were paid off in May 1996, and delivered option agreements to
shareholders of the seller giving them an option to purchase up to a total of
53,816 shares of the Company's common stock. The price for the purchase of the
common stock upon exercise of each option was the surrender and cancellation of
the note payable. The options were exercised in August 1996.
In April 1996, the Company purchased the customer list and certain other
assets of Sharps Incinerator of Fort, Inc. for $757,000 in cash of which
$562,000 was payable at closing and the balance plus interest was paid in
November 1996.
In January 1996, the Company purchased the customer lists and certain other
assets of WMI Medical Services of New England, Inc. for $100,000 in cash and
$492,000 in notes payable issued to the seller. The notes bear interest at a
rate of 7.5% per annum with $150,000 plus interest paid in 1996, $157,000 plus
interest paid in 1997 and $185,000 plus interest paid in January 1998.
In July 1995, the Company sold selected customer lists and related assets
for $248,000. The Company recognized a gain of $50,000 on this transaction,
which is included in selling, general and administrative expense in the 1995
Consolidated Statement of Operations.
In June 1995 the Company purchased the customer list and transportation
equipment and assumed certain contract obligations of Safetech Health Care for
$160,000.
In April 1995, the Company sold the St. Louis portion of its business to a
competitor. The Company received $544,000 as payment for the customer list and
concurrently agreed to resolve an antitrust lawsuit brought against this
competitor by the Company. The Company recognized a gain on this transaction of
$408,000, which is included in selling, general and administrative expense in
the 1995 Consolidated Statement of Operations.
F-11
<PAGE> 66
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- ACQUISITIONS AND DIVESTITURES (CONTINUED)
For financial reporting purposes these acquisition transactions were
accounted for using the purchase method of accounting. The total purchase price
for 1995, 1996 and 1997 of $459,000, $13,013,000 and $10,197,000, respectively,
net of cash acquired, was allocated to assets acquired and liabilities assumed
based on their estimated fair market value at the date of acquisition. The total
purchase price for 1997 acquisitions includes the value of 403,000 shares of
common stock issued to the sellers. The excess of the purchase price over the
fair market value of the net assets acquired is reflected in the accompanying
Consolidated Balance Sheets as goodwill. The results of operations of these
acquired businesses are included in the Consolidated Statement of Operations
from the date of the acquisition. The effect of these acquisitions would not
have a significant effect on the Company's operations, except for the WMI
Acquisition and the ECCO acquisition.
The following unaudited pro forma results of operations assumes that the
WMI Acquisition occurred as of January 1, 1995 and that the ECCO acquisition
occurred as of January 1, 1996, after giving effect to certain adjustments
including amortization of goodwill, increased interest expense on debt incurred
in connection with the acquisitions and adjustments to record incremental
recurring costs associated with the consolidation of the operations as the
historical results of operations of WMI and ECCO did not reflect these costs:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma revenues.............................. $36,839 $46,619 $48,181
Pro forma net income (loss)..................... (4,270) (1,575) 1,576
Pro forma diluted net income (loss) per share... $ (0.76) $ (0.21) $ 0.15
</TABLE>
The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the transactions taken
place at the beginning of the periods indicated or of future results of
operations.
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Industrial development revenue bonds........................ $1,492 $1,358
Obligations under capital leases............................ 517 212
Note payable to bank........................................ -- --
Notes payable............................................... 5,797 4,957
------ ------
7,806 6,527
Less: Current portion....................................... 3,215 3,052
------ ------
Total.................................................. $4,591 $3,475
====== ======
</TABLE>
In March 1998, the Company entered into a new revolving line of credit with
Silicon Valley Bank. To secure this line of credit, the Company granted the bank
a lien on all of the Company's assets. Borrowings under the line of credit are
limited to the lesser of $7,500,000 or a specific percentage of the Company's
eligible receivables, as defined in the loan and security agreement. Outstanding
borrowings bear interest at the bank's prime rate plus 0.50% or LIBOR plus 3.0%,
at the Company's option. This agreement has a maturity date of March 5, 1999.
Under the terms of the loan and security agreement, the Company is among other
things, restricted from paying dividends and is required to maintain minimum
levels of total liabilities to net
F-12
<PAGE> 67
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- LONG-TERM DEBT (CONTINUED)
worth, quick ratio and profitability. The Company had no borrowings under its
prior $2,500,000 line of credit with the bank as of December 31, 1997.
In connection with the Company's May 1997 purchase of ECCO's stock, a
10-year note for $2,300,000 was issued to the owners of ECCO. The note is
payable in 10 equal annual installments due on May 1 of each year starting in
1998. The note bears interest at the rate of 6.86% per annum.
In connection with the Company's December 1996 purchase of WMI's medical
waste business, a note payable totaling $5,210,000 was issued to WMI. The note
was adjusted to $3,593,301, of which $1,796,650 was repaid in 1997 and
$1,796,651 is due on December 20, 1998. The note bears interest at a rate of 7%
per annum.
In 1995, an agreement was reached with the Rhode Island Department of
Environmental Management regarding two notices of violation issued in 1994 and
1995. Although the Company believed that the allegations were meritless, the
agreement was entered into in order to resolve the matter in the best interest
of the Company and its customers in a timely manner. The Company agreed to pay
$35,000 each year from 1995 to 1998, $50,000 in 1999, $60,000 in 2000 and
$150,000 in 2001 to the Rhode Island Air and Water Protection Fund. In addition,
the Company agreed to perform community services and conduct seminars over a
five-year period. The Company recorded this obligation based on the discounted
cash flows expected to be paid over the term of agreement, using a discount rate
of 11.75%. The recorded obligation of $222,000 at December 31, 1997 has been
included in notes payable. An expense of $458,000 is included in the 1995
Consolidated Statement of Operations as a selling, general and administrative
expense. This amount reflects the recorded obligation and legal fees incurred in
the settlement.
In 1994, a non-interest bearing note in the amount of $2,480,000 was issued
as part of the purchase of the net assets of Safe Way Disposal Systems, Inc. As
a result of the Company's initial public offering in August 1996, a portion of
the note was converted into 98,001 shares of common stock and the remainder was
paid in cash.
During 1992, the Company entered into an obligation to finance the
development of its Woonsocket, Rhode Island facility. The development and
purchase of substantially all of the property and equipment for the Woonsocket,
Rhode Island facility was financed from the issuance of industrial development
revenue bonds. The bonds are due in various amounts through 2017 at fixed
interest rates ranging from 6.0% to 7.375% and are collateralized by the
property and equipment at the Woonsocket, Rhode Island facility. The terms of an
agreement entered into in connection with the issuance of the bonds contain,
among other provisions, requirements for maintaining defined levels of working
capital and various financial ratios including debt to net worth.
Payments due on long-term debt, excluding capital lease obligations, during
each of the five years subsequent to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $2,840
1999........................................................ 430
2000........................................................ 445
2001........................................................ 545
2002........................................................ 410
</TABLE>
The Company paid interest of $262,000, $352,000 and $444,000 for the fiscal
years ended December 31, 1995, 1996 and 1997, respectively.
F-13
<PAGE> 68
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- LONG-TERM DEBT (CONTINUED)
Capital Leases:
In February 1994, the Company entered into a sale leaseback transaction for
equipment acquisitions at its Yorkville, Wisconsin facility in the amount of
$882,000. The lease arrangement has a term of 60 months and at the end of the
lease, the Company will have the option to renew the lease, return the equipment
or purchase the equipment at a fair market value not to exceed 11% of the
original purchase price. In January 1996, the Company entered into a capital
lease obligation of $364,000 for equipment. The lease expires in 1998.
At December 31, property under capital leases included with property, plant
and equipment in the accompanying Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $1,246 $1,246
Less -- accumulated depreciation and amortization........... 293 418
------ ------
$ 953 $ 828
====== ======
</TABLE>
Minimum future lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 218
1999........................................................ --
-----
Total minimum lease payments................................ 218
Less -- Amounts representing interest....................... (6)
-----
Present value of net minimum lease payments................. 212
Less--Current portion....................................... (212)
-----
Long-term obligations under capital leases.................. $ --
=====
</TABLE>
NOTE 7 -- LEASE COMMITMENTS
The Company leases various plant equipment, office furniture and equipment,
motor vehicles and office and warehouse space under operating lease agreements
which expire at various dates over the next six years. The leases for most of
the properties contain renewal provisions.
Rent expense for 1995, 1996 and 1997 was $1,739,000, $2,462,000 and
$3,284,000 respectively.
Minimum future rental payments under non-cancelable operating leases that
have initial or remaining terms in excess of one year as of December 31, 1997
for each of the next five years and in the aggregate are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 4,222
1999........................................................ 3,642
2000........................................................ 2,168
2001........................................................ 954
2002........................................................ 393
Thereafter.................................................. 105
-------
Total minimum rental payments............................... $11,484
=======
</TABLE>
F-14
<PAGE> 69
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- COMMON AND PREFERRED STOCK
In August 1995, the Board of Directors adopted a plan of recapitalization
which was approved by the Company's stockholders in September 1995, pursuant to
which the Company reclassified its 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.
Shares of the Company's common stock have been reserved for issuance upon
the exercise of options and warrants. Also see Note 10. These shares have been
reserved as follows at December 31, 1997:
<TABLE>
<S> <C>
1993 Plan options........................................... 4,938
1995 Plan options........................................... 383,060
1996 Directors Plan options................................. 106,170
1997 Plan options........................................... 351,693
Warrants.................................................... 301,683
---------
Total shares reserved....................................... 1,147,544
=========
</TABLE>
NOTE 9 -- NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of net income (loss) per
common share (in thousands, except for share and per share data):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss)........................................ $ (4,544) $ (2,389) $ 1,430
Denominator:
Denominator for basic earnings per
share -- weighted-average shares...................... 5,582,385 7,471,151 10,239,996
Effect of dilutive securities:
Employee stock options................................... -- -- 441,586
Warrants................................................. -- -- 84,534
--------- --------- ----------
Dilutive potential common shares......................... -- -- 526,120
--------- --------- ----------
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions.......... 5,582,385 7,471,151 10,766,116
========= ========= ==========
Basic earnings per common share............................ $ (0.81) $ (0.32) $ 0.14
========= ========= ==========
Diluted earnings per common share.......................... $ (0.81) $ (0.32) $ 0.13
========= ========= ==========
</TABLE>
For additional information regarding outstanding employee stock options and
outstanding warrants, see Note 10.
Options and warrants to purchase 1,170,626 and 838,849 shares of common
stock were outstanding during 1995 and 1996, respectively, at exercise prices
ranging from $.53-$69.02 and $.53-$69.02, respectively, but were not included in
the computation of diluted earnings per common share in these years because the
Company had net losses in 1995 and 1996 and the effect would be antidilutive.
F-15
<PAGE> 70
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTIONS AND WARRANTS
Stock Options:
In September 1993, the Company's shareholders approved an amended and
restated stock option plan (the "1993 Plan"), which provided for the granting of
options to purchase up to 113,018 shares of common stock. In November 1995, the
outstanding options of all current employees were canceled in conjunction with
the Company's recapitalization.
In 1995, the Company's Board of Directors and shareholders approved an
incentive compensation plan (the "1995 Plan"), which as amended and restated in
1996, provides for the granting of 1,500,000 shares of common stock in the form
of stock options and restricted stock to employees, officers, directors and
consultants of the Company. The exercise price of options granted under the 1995
Plan must be at least equal to the fair market value of the common stock on the
date of grant. In 1995, the Board of Directors authorized the grant to officers
and employees of options to purchase 923,292 shares of the Company's common
stock at an exercise price of $.53 per share. In 1996, the Board of Directors
authorized the grant to officers and employees of options to purchase 229,883
shares of the Company's common stock at exercise prices ranging from $.53 to
$2.12 per share. All options granted to date have 10-year terms and vest over
periods of up to four years after the date of grant.
In 1997, the Company's Board of Directors and shareholders approved the
1997 Stock Option Plan (the "1997 Plan"), which provides for the granting of
1,500,000 shares of common stock in the form of stock options to selected
officers, directors and employees of the Company and its subsidiaries. The
exercise price of options granted under the 1997 Plan must be at least equal to
the fair market value of the common stock on the date of grant. In 1997, the
Board of Directors authorized the grant to officers and employees of options to
purchase 376,367 shares of the Company's common stock at exercise prices ranging
from $7.25 to $9.50 per share. All options granted to date have 10-year terms
and vest over periods of up to 5 years after the date of grant.
In June 1996, the Company's Board of Directors adopted and in July, 1996,
the Company's stockholders approved, the Directors Stock Option Plan. The plan
authorizes stock options for a total of 285,000 shares of common stock to be
granted to eligible directors of the Company, consisting of directors who are
neither officers nor employees of the Company. Each of the six incumbent
eligible directors automatically received an option as of the date of closing of
the Company's initial public offering for 8,195 shares of common stock with an
exercise price of $10.25. As of each annual meeting of the Company's
stockholders, each incumbent eligible director who is re-elected as a director
at the annual meeting automatically receives an option grant based on a
predetermined formula. The exercise price of each option will be the closing
price on the date of grant. In 1997, each of the six incumbent eligible
directors automatically received an option as of the date of the 1997 annual
meeting for 9,500 shares of common stock with an exercise price of $7.50. The
term of each option is six years from the date of grant, and each option vests
in 16 equal quarterly installments and may be exercised only when it is vested
and only while the holder of the option remains a director of the Company or
during the 90-day period following the date that he or she ceases to serve as a
director.
F-16
<PAGE> 71
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of stock option information follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 109,729 $8.56 933,235 $0.62 537,166 $1.93
Granted......................... 923,292 $0.53 279,053 $3.20 433,367 $7.97
Exercised....................... -- $0.00 (660,767) $0.59 (83,006) $0.70
Canceled/Forfeited.............. (99,786) $8.56 (14,355) $3.42 (41,666) $5.38
------- ----- -------- ----- --------- -----
Outstanding at end of year........ 933,235 $0.62 537,166 $1.93 845,861 $4.98
======= ===== ======== ===== ========= =====
Exercisable at end of year........ 542,620 $0.60 315,273 $0.81 326,119 $1.53
Available for future grant........ 576,708 592,004 1,700,303
</TABLE>
Options outstanding and exercisable as of December 31, 1997 by price range:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICE SHARES LIFE IN YEARS PRICE SHARES PRICE
----------------------- ------ ------------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$.53-$1.99................................. 383,060 8.09 $1.04 298,693 $0.79
$7.25-$10.25............................... 462,801 9.27 $8.23 27,426 $9.54
------- -------
845,861 326,119
======= =======
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options approximates the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by FAS 123 as if the Company has accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of that statement. Options granted in 1997 were valued using the Black-
Scholes option pricing model. Options granted in 1996 and 1995, as a non-public
company, were valued using the minimum value method. The following assumptions
were used in 1995, 1996, and 1997: risk-free interest rates ranging from 5.5% to
5.7% in 1995, 5.1% to 6.7% in 1996 and 5.9% to 6.8% in 1997; a dividend yield of
0%; and a weighted-average expected life of the option of 31 months in 1995 and
1996 and 72 months in 1997. The weighted-average fair values of options granted
during 1995, 1996 and 1997 were $.09 per share, $.79 per share and $4.48 per
share, respectively.
Option value models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing method does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-17
<PAGE> 72
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. The Company's
pro forma information follows (in thousands, except for per share information):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss)................................. $(4,559) $(2,474) $1,112
Pro forma diluted net income (loss) per share............... $ (0.82) $ (0.33) $ 0.10
</TABLE>
The pro forma effect for 1995, 1996, and 1997 is not representative of the
pro forma effect in future years as the pro forma disclosures reflect only the
fair value of stock options granted subsequent to December 31, 1994.
Warrants:
The Company, in conjunction with a lease financing agreement, issued the
lessor warrants to purchase up to 15,064 shares of common stock at $18.58 per
share. At December 31, 1997, all of these warrants were outstanding. They expire
in March 1998.
The Company, in connection with the issuance of preferred stock, which was
subsequently reclassified as common stock, issued warrants to purchase up to
6,773 shares of common stock at an exercise price of $69.02 per share. At
December 31, 1997, all of these warrants were outstanding. They expire in March
1999.
During 1995, several of the Company's shareholders and directors provided a
bridge loan to the Company. The loan totaled $830,000 with interest at the prime
rate plus 3% and was repaid. In addition to the interest, the lenders received
warrants to purchase 220,559 shares of common stock at $1.59 per share. These
warrants expire on July 31, 2000. In 1996, the lenders exercised warrants to
purchase 166,749 shares. At December 31, 1997, warrants to purchase 53,810
shares of common stock remained outstanding.
In May 1996, the Company obtained a $1,000,000 bridge loan from certain
shareholders, directors and officers to provide working capital and to finance
acquisitions. The bridge loan was repaid in August 1996. In connection with this
loan, the Company issued warrants to members of the lending group to purchase an
aggregate of 226,036 shares of common stock at $7.96 per share. The warrants
expire in May 2001. At December 31, 1997, all of these warrants were
outstanding.
NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN
Under a plan for 1997 approved by the Board of Directors, employees of
Stericycle can purchase shares of common stock at a market price. Under the
terms of the plan, employees were allowed to purchase shares throughout the year
and pay for the stock through salary deduction. Employees elected to purchase a
total of 5,235 shares under this plan during 1997.
NOTE 12 -- REGISTRATION AGREEMENT
The Company is a party to a registration agreement which gives certain
shareholders of the Company registration rights for their shares. The parties to
the registration agreement are the original holders of the Company's prior Class
A, B, C, D, E, F, H and I preferred stock and a holder of a warrant to purchase
up to 15,064 shares of common stock which the Company issued in conjunction with
a lease financing agreement. After the Company's 1995 recapitalization, the
registration agreement was amended to provide that the registration rights
applied to the shares of common stock that the parties to the registration
agreement received pursuant to the recapitalization, shares issuable under
certain warrants issued to purchasers of the Company's prior Class F preferred
stock, shares issuable under the warrant issued in conjunction with the
F-18
<PAGE> 73
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- REGISTRATION AGREEMENT (CONTINUED)
lease financing agreement and the common stock to be delivered by the Company in
payment of a note delivered in connection with the Safe Way acquisition, for a
total of 5,227,608 shares. According to the registration agreement (i) at any
time, the holders of a majority of the shares which are subject to the
registration rights can request registration of their shares on Form S-1 (a
"Long-Form Registration") and the holders of at least 25% of these shares can
request registration of their shares on Form S-2 or S-3, (ii) at any time, one
shareholder who is a party to the registration agreement may request a Long Form
registration, (iii) at any time, another shareholder who is a party to the
registration agreement can request a Long Form registration, and (iv) the
parties to the registration agreement have the right to include their shares in
any registration which is requested or in any other registration that the
Company may otherwise undertake. If any registration is requested, the Company
will use its best efforts to effect the requested registration at its own
expense.
NOTE 13 -- EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution retirement savings plan
covering substantially all employees of the Company. Each participant may elect
to defer a portion of his or her compensation subject to certain limitations.
The Company may match up to 30% of the first $1,000 contributed to the plan by
each employee. The Company's contributions for the years ended December 31,
1995, 1996 and 1997 were approximately $14,000, $14,000 and $25,000,
respectively.
NOTE 14 -- RELATED PARTIES
In February 1998, the Company announced the formation of an international
joint venture company called Medam S.A. de C.V. ("Medam"), which will utilize
Stericycle's proprietary Electro-Thermal Deactivation (ETD) technology to treat
medical and infectious waste in the Mexico City market. Stericycle's partners in
the joint venture are Controladora Ambiental S.A. de C.V., headquartered in
Mexico City, and Pennoni Associates, Inc., headquartered in Philadelphia,
Pennsylvania. The Company owns 24.5% of the common stock of Medam. During 1997,
the Company received partial payments for machinery to be delivered to Medam in
1998. At December 31, 1997 the Company has made $461,000 in capital
contributions. Capital contributions will be approximately $702,000 in 1998.
In October 1993, the Company entered into an alliance agreement (the
"Alliance") with an investor in the Company. The purpose of the Alliance was to
develop new technologies and procedures for recycling regulated medical waste.
The Company devoted resources to the Alliance research and development program
during the first 18 months of the Alliance. The investor has rights with respect
to the development of any Alliance technology as part of the research and
development program. During the initial 18 months of the Alliance, the Company
provided for $1 million of research and development costs under this agreement.
A license agreement is effective upon the non-renewal of the Alliance and grants
the investor a license to use the Alliance technology subject to certain
conditions. The initial term of the Alliance Agreement ends on October 12, 1998,
and will be automatically renewed for successive one-year terms thereafter,
unless either party notifies the other at least six months prior to the end of
any term of its intent to terminate the Agreement.
Under the Alliance, the investor and the Company have an ongoing
relationship to provide services and products to the health care market place.
F-19
<PAGE> 74
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,374 $ 775
Short-term investments.................................... 2,335 2,335
Accounts receivable, less allowance for doubtful accounts
of $325 in 1998 and $361 in 1997........................ 10,286 10,902
Parts and supplies........................................ 660 1,037
Prepaid expenses.......................................... 440 528
Other..................................................... 392 2,087
------- -------
Total current assets.................................. 19,487 17,664
------- -------
Property, plant and equipment:
Land...................................................... 90 90
Buildings and improvements................................ 5,561 5,753
Machinery and equipment................................... 11,469 13,051
Office equipment and furniture............................ 746 1,030
Construction in progress.................................. 614 988
------- -------
18,480 20,912
Less accumulated depreciation............................... (7,239) (8,869)
------- -------
Property, plant and equipment, net.................... 11,241 12,043
------- -------
Other assets:
Goodwill, less accumulated amortization of $3,052 in 1998
and $2,040 in 1997...................................... 29,458 36,796
Other..................................................... 1,040 1,680
------- -------
Total other assets.................................... 30,498 38,476
------- -------
Total assets....................................... $61,226 $68,183
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,052 $ 6,281
Accounts payable.......................................... 1,927 1,986
Accrued liabilities....................................... 7,039 5,436
Deferred revenue.......................................... 255 663
------- -------
Total current liabilities............................. 12,273 14,366
------- -------
Long-term debt:
Industrial development revenue bonds and other............ 1,405 1,341
Notes payable............................................. 2,070 1,905
------- -------
Total long-term debt.................................. 3,475 3,246
------- -------
Other liabilities........................................... 452 21
Shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares
authorized, 10,741,603 issued and outstanding in 1998,
10,472,799 issued and outstanding in 1997).............. 105 107
Additional paid-in capital................................ 82,986 85,087
Notes receivable for common stock purchases............... (4) (4)
Accumulated deficit....................................... (38,061) (34,640)
------- -------
Total shareholders' equity............................ 45,026 50,550
------- -------
Total liabilities and shareholders' equity......... $61,226 $68,183
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 75
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
---- ----
<S> <C> <C>
Revenues.................................................... $ 33,475 $ 44,759
Costs and expenses:
Cost of revenues.......................................... 25,113 30,492
Selling, general and administrative expenses.............. 7,725 10,151
---------- ----------
Total costs and expenses............................... 32,838 40,643
---------- ----------
Income from operations...................................... 637 4,116
Other income (expense):
Interest income........................................... 528 308
Other income.............................................. -- 20
Interest expense.......................................... (336) (242)
---------- ----------
Total other income (expense)........................... 192 86
---------- ----------
Income before income taxes.................................. 829 4,202
Income tax expense.......................................... 18 781
---------- ----------
Net income.................................................. $ 811 $ 3,421
========== ==========
Earnings per share:
Basic..................................................... $ 0.08 $ 0.32
========== ==========
Diluted................................................... $ 0.08 $ 0.30
========== ==========
Weighted average number of common shares outstanding:
Basic..................................................... 9,999,026 10,579,886
========== ==========
Diluted................................................... 10,480,182 11,233,812
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 76
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
1997 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 811 $ 3,421
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,489 2,694
Changes in operating assets, net of effect of acquisitions:
Accounts receivable....................................... (4,315) (541)
Parts and supplies........................................ (109) (365)
Prepaid expenses.......................................... 246 (88)
Other assets.............................................. 35 (1,632)
Accounts payable.......................................... (546) 59
Accrued liabilities....................................... 2,106 (2,179)
Deferred revenue.......................................... (181) (23)
------- -------
Net cash provided by operating activities................... 536 1,346
------- -------
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired........... (5,704) (7,130)
Proceeds from maturity of short-term investments.......... 5,799 --
Purchases of short-term investments....................... (2,335) --
Capital expenditures...................................... (1,124) (1,825)
------- -------
Net cash used in investing activities....................... (3,364) (8,955)
------- -------
FINANCING ACTIVITIES:
Proceeds from line of credit.............................. -- 4,075
Repayment of long term debt............................... (936) (1,244)
Principal payments on capital lease obligations........... (246) (116)
Principal payments on notes receivable for common stock
purchases.............................................. 4 --
Proceeds from issuance of common stock.................... 37 295
------- -------
Net cash (used in) provided by financing activities......... (1,141) 3,010
------- -------
Net decrease in cash and cash equivalents................... (3,969) (4,599)
Cash and cash equivalents at beginning of period............ 11,950 5,374
------- -------
Cash and cash equivalents at end of period.................. $ 7,981 $ 775
======= =======
Non-cash activities:
Issuance of common stock for certain acquisitions......... $ 2,796 $ 1,807
Issuance of notes payable for certain acquisitions........ $ 2,737 $ 195
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 77
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and 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 that
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, 1997. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
achieved for the entire year ending December 31, 1998.
NOTE 2 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes the dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per common
share amounts for all periods have been presented, and where appropriate,
restated to conform to FAS 128 requirements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for reporting and display of comprehensive income and its components
in financial statements and was effective for the Company beginning January 1,
1998. The adoption of FAS 130 has had no impact on the Company's financial
position, results of operations, or cash flows.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information'
("FAS 131"). FAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosure
about products and services, geographic areas and major customers. FAS 131 is
effective for the Company's annual financial statements for the year ended
December 31, 1998. The Company is evaluating the disclosure requirements of FAS
131 and has not determined whether its adoption will have a material impact on
its future disclosure requirements.
NOTE 3 -- ACQUISITIONS
In February 1998, the Company acquired selected small quantity generator
contracts of Bridgeview, Inc., located in Pennsylvania, and in April 1998, the
Company acquired the customer contracts and selected other assets of Medisin
Inc., located in eastern Kentucky. In June 1998, the Company acquired the
customer contracts and selected other assets of Mediwaste Disposal Services
LLC., Controlled Medical Disposal, Inc., and Arizona Hazardous Waste Disposal,
located in Texas, New Jersey and Arizona, respectively, and selected customer
contracts and other assets of Superior of Wisconsin, Inc., located in Wisconsin.
In July 1998, the Company acquired the customer contracts and selected
other assets of Regional Recycling, Inc. ("Regional"), and Allegro Carting and
Recycling, Inc. ("Allegro"), operating in New Jersey and the New York City
metropolitan market, respectively. In August 1998, the Company acquired the
F-23
<PAGE> 78
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
NOTE 3 -- ACQUISITIONS (CONTINUED)
customer contracts and selected other assets of the affiliated Medical
Compliance Services, Inc., a Texas corporation, and Medical Compliance Services,
Inc., a New Mexico corporation (together, "MCS"), operating in western Texas and
New Mexico, respectively, and also agreed to purchase MCS's treatment facility
and equipment in Albuquerque, New Mexico.
The combined purchase price for these nine acquisitions of approximately
$9,347,000 (exclusive of the $1,250,000 purchase price of MCS's Albuquerque
treatment facility and equipment, the closing of the Company's purchase of which
is not expected to occur until 1999) was paid by a combination of cash,
promissory notes, the issuance of common stock (and, in one case, the
forgiveness of indebtedness).
NOTE 4 -- SALES OF EQUIPMENT TO JOINT VENTURE
During the nine months ended September 30, 1998, the Company sold equipment
utilizing the Company's Electro-Thermal-Deactivation ("ETD") technology to a
Mexican joint venture company, Medam S.A. de C.V. The Company holds a 24.5%
interest in the joint venture. Revenues of $1,202,000 have been recognized in
the condensed consolidated statement of operations for the nine months ended
September 30, 1998.
In July 1998, the Company entered into an agreement to supply and license
its ETD technology to Companhia Auxiliar de Viacao e Obras -- CAVO of Sao Paulo,
Brazil. The Company agreed to supply the ETD equipment and license technology
and to provide engineering, installation, training, and start up services.
Revenues of $2,600,000 have been recognized in the condensed consolidated
statement of operations for the nine months ended September 30, 1998.
NOTE 5 -- STOCK OPTIONS
During the nine months ended September 30, 1998, options to purchase a
total of 281,868 shares of common stock were granted to employees. These options
will vest ratably over a five-year period and have an average exercise price of
approximately $13.75 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.
During the nine months ended September 30, 1998, options to purchase common
stock totaling 63,870 shares were granted to the Company's directors. These
options will vest ratably over a one-year period and have an exercise price of
$14.14 per share. The grant of options was made under the Company's Directors
Stock Option Plan, which authorized the grant of options for a total of 285,000
shares of the Company's common stock. The Directors Stock Option Plan was
approved by the Company's stockholders in April 1996.
NOTE 6 -- STOCK ISSUANCES
During the nine months ended September 30, 1998, options to purchase a
total of 138,131 shares of common stock were exercised at prices ranging from
$0.53-$14.00 per share. The Company also issued 130,673 shares of common stock
in connection with certain acquisitions.
NOTE 7 -- 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
F-24
<PAGE> 79
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
NOTE 7 -- INCOME TAXES (CONTINUED)
1998 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. The Company's 1997 income tax expense reflects
the federal alternative minimum tax and income taxes in states where the Company
has no offsetting net operating losses. For the nine month periods ended
September 30, 1998 and 1997, utilization of the Company's net operating loss
carryforward reduced the Company's income tax expense by $900,000 and $314,000,
respectively.
NOTE 8 -- SUBSEQUENT EVENTS
Waste Systems, Inc. Acquisition
In October 1998, the Company acquired all of the outstanding capital stock
of Waste Systems, Inc. ("WSI"), from WSI's two stockholders, both German limited
liability partnerships. The purchase price was (i) $10,000,000 in cash and (ii)
the grant of certain exclusive negotiation and first refusal rights to the WSI
stockholders in respect of the purchase, for installation and operation in the
Federal Republic of Germany, of medical waste treatment units incorporating the
Company's proprietary ETD technology.
WSI owns a majority of the common stock and all of the preferred stock of
3CI Complete Compliance Corporation ("3CI"). 3CI is engaged in the regulated
medical waste management business in the southwestern and southeastern United
States, including Alabama, Arkansas, Georgia, Florida, Louisiana, Missouri,
Kansas, Mississippi, Oklahoma, Tennessee and Texas. 3CI's common stock is traded
on the Nasdaq SmallCap Market under the symbol "TCCC."
WSI owns 5,104,448 shares of 3CI's common stock, par value $.01 per share,
representing 52.2% of the 9,778,825 shares of 3CI common stock that were
outstanding as of August 14, 1998 (according to 3CI's quarterly report on Form
10-Q for the quarter ended June 30, 1998). In addition, WSI owns all of 3CI's
outstanding preferred stock, consisting of 7,000,000 shares of 3CI's preferred
stock designated as Series B Preferred Stock and 750,000 shares of 3CI's
preferred Stock designated as Series C Preferred Stock. WSI also owns a secured
promissory note from 3CI which, as amended in December 1998, is payable to WSI
in the principal amount of approximately $6,237,000 on or before September 30,
1999.
Med-Tech Environmental Acquisition
In October 1998, the Company purchased the junior secured indebtedness of
Med-Tech Environmental Limited ("Med-Tech") of approximately $3,576,000 from a
Canadian private investment company. The Company paid the face value of the
acquired debt, in the form of $2,920,000 in cash and 36,940 shares of
unregistered common stock, and replaced a letter of credit of approximately
$1,641,000 that the junior lender had provided to Med-Tech's primary lender.
Med-Tech is a privately held company in Toronto, Canada providing medical
waste management services in Canada and the northeastern United States. It
operates in the provinces of Alberta, British Columbia, Ontario and Quebec and
the states of Connecticut, Massachusetts, Maine, New Hampshire, New York, Rhode
Island and Vermont.
In December 1998, the Company purchased a total of 13,929,860 shares of
Med-Tech's common stock, representing approximately 94% of Med-Tech's
outstanding stock, and a total of 3,094,559 warrants, representing approximately
56% of Med-Tech's outstanding warrants. The Company's purchases were pursuant to
its amended offers to all holders of Med-Tech shares and to holders of certain
series of Med-Tech warrants to purchase Med-Tech shares at the price of Canadian
$0.3225 per share, payable in cash or shares of the Company's common stock at
the option of the holder, and to purchase eligible Med-Tech warrants at the
F-25
<PAGE> 80
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
NOTE 8 -- SUBSEQUENT EVENTS (CONTINUED)
price of Canadian $.025 per warrant, payable in cash. The Company paid a total
of approximately U.S. $2,725,000 in cash and approximately 8,500 shares of the
Company's common stock for the Med-Tech shares and warrants that it acquired.
The Med-Tech shares that the Company purchased include the shares that the
Company previously announced that it had acquired in October 1998. In accordance
with a decision of the Ontario Securities Commission in November 1998,
requiring, among other things, that the Company and Browning-Ferris Industries,
Inc. amend their then-current offers to Med-Tech shareholders in order to comply
with the formal take-over bid requirements of Ontario law, the Company granted
to the sellers of these shares the right to withdraw their shares or to obtain
the same terms of payment as other Med-Tech shareholders.
New $25,000,000 Credit Facility
In October 1998, the Company established a new $25,000,000 credit facility
at LaSalle National Bank in Chicago, Illinois under a credit agreement entered
into by the Company, its subsidiaries, and LaSalle National Bank, for itself and
as agent for other lenders who may participate in the credit agreement. This new
credit facility replaced the Company's previous credit facility with Silicon
Valley Bank. As amended, the new credit facility provides for a five-year
$5,000,000 revolving line of credit for working capital purposes and a one-year
$20,000,000 revolving line of credit for acquisition purposes. Upon the maturity
of this latter line of credit, the outstanding balance, if any, will convert
into a four-year term loan repayable in 16 equal quarterly payments of
principal. If the principal amount of the term loan upon conversion is less than
$15,000,000, however, a further one-year line of credit in the amount of the
difference will be available for acquisition purposes, and upon the maturity of
this further line of credit, the outstanding balance, if any, will convert into
a three-year term loan repayable in 12 equal quarterly payments of principal.
The Company's borrowings bear interest at either the Bank's prime rate plus
0.25% or an adjusted LIBOR rate as the Company elects at the time of each
borrowing. Interest is payable quarterly (or at the end of the interest period,
if the Company selects an interest period of less than three months in the case
of a borrowing bearing interest at the adjusted LIBOR rate). As security for the
Company's borrowings, the Company granted the Bank a security interest in all of
the Company's tangible and intangible assets and pledged all of the capital
stock of its subsidiaries, and the Company's subsidiaries granted the bank a
security interest in all of their respective assets.
As of December 31, 1998, the Company's outstanding indebtedness under its
new credit facility was approximately $16,389,000. The Company's indebtedness
was incurred in connection with (i) the repayment of Silicon Valley Bank under
the Company's previous credit facility , (ii) the Company's purchase of the
outstanding common stock of WSI and (iii) the Company's purchase of the junior
secured indebtedness and approximately 94% of the outstanding common stock of
Med-Tech and (iv) a loan to WSI to fund a loan by it to 3CI.
Sale of Recycling Facility
In October 1998, the Company sold its facility in West Memphis, Arkansas
for $425,000, relocating its recycling and research and development operations
to another facility.
F-26
<PAGE> 81
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Waste Systems, Inc.
We have audited the accompanying consolidated balance sheets of Waste
Systems, Inc. and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Waste Systems, Inc. and Subsidiary as of December 31, 1997 and 1996 and the
results of its consolidated operations and cash flows for the years then ended,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 13 to the consolidated financial statements, the Company (i) has
suffered recurring losses from operations, (ii) has a negative working capital,
(iii) has suffered recurring negative cash flow from operating activities and
(iv) is involved in legal proceedings, all of which collectively raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Notes 1 and 13. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
HEARD MCELROY & VESTAL LLP
Shreveport, Louisiana
November 4, 1998
F-27
<PAGE> 82
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 44 $ 32
Restricted cash........................................... -- 130
Accounts receivable, net of allowance for doubtful
accounts of $875,144 and $990,994...................... 3,559 3,753
Inventory................................................. 72 59
Other current assets...................................... 441 233
------- --------
Total current assets................................. 4,116 4,207
Property, plant and equipment, at cost...................... 10,927 11,396
Less -- accumulated depreciation............................ (2,477) (2,933)
------- --------
Net property, plant and equipment.................... 8,450 8,463
Excess of cost over net assets acquired, net of accumulated
amortization of $74,988 and $49,888....................... 362 387
Other intangible assets, net of accumulated amortization of
$149,104 and $74,552...................................... 274 350
Other assets................................................ 25 48
------- --------
Total assets......................................... $13,227 $ 13,455
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdrafts........................................... $ 157 $ 34
Notes payable............................................. 217 212
Notes payable-revolving line of credit.................... -- 12,785
Current portion of long-term debt, unaffiliated lenders... 1,374 1,314
Accounts payable.......................................... 1,069 2,288
Accrued liabilities....................................... 2,189 2,501
Notes payable-stockholders................................ -- 3,851
------- --------
Total current liabilities............................ 5,006 22,985
Long-term debt unaffiliated lenders, net of current
portion................................................... 986 742
------- --------
Total liabilities.................................... 5,992 23,727
Accrued stock put option (565,500 shares of 3CI common stock
at $3.00 per share)....................................... -- 1,697
Shareholders' equity (deficit):
Common stock, no par value, 100 shares authorized, issued
and outstanding........................................... 500 500
Additional paid-in capital.................................. 31,596 11,152
Accumulated deficit......................................... (24,861) (23,621)
------- --------
Total shareholders' equity (deficit)................. 7,235 (11,969)
------- --------
Total liabilities and shareholders' equity
(deficit)........................................... $13,227 $ 13,455
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 83
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Revenues.................................................... $ 18,790 $ 17,748
Expenses:
Cost of services.......................................... 14,286 13,815
Depreciation.............................................. 1,171 1,304
Write-off of intangibles -- Note 12....................... -- 11,385
Write-off of fixed assets -- Note 3....................... -- 1,184
Selling, general and administrative....................... 3,784 5,496
-------- ---------
Total expenses....................................... 19,241 33,184
-------- ---------
Net loss from operations.................................... (451) (15,436)
Other income (expense):
Interest expense.......................................... (855) (1,444)
-------- ---------
Loss before income taxes and accretion of stock put......... $ (1,306) $ (16,880)
Income taxes................................................ -- --
Accretion of stock put...................................... -- (26)
-------- ---------
Loss before minority interest in loss of subsidiary......... (1,306) (16,906)
Minority interest in loss of subsidiary..................... 66 6,040
-------- ---------
Net loss.................................................... $ (1,240) $ (10,866)
======== =========
Weighted average shares outstanding......................... 100 100
======== =========
Loss per common share....................................... $(12,400) $(108,660)
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 84
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Common stock:
Balance at beginning of period............................ $ 500 $ 500
Additional shares issued (retired)........................ -- --
-------- --------
Balance at end of period.................................. $ 500 $ 500
Additional paid-in capital:
Balance at beginning of period............................ $ 11,152 $ 11,152
Conversion of stockholder debt and other liabilities to
additional paid-in capital............................. 5,507 --
Stockholder contributions to additional paid-in capital... 14,937 --
-------- --------
Balance at end of period.................................. $ 31,596 $ 11,152
Accumulated deficit:
Balance at beginning of period............................ $(23,621) $(12,755)
Net loss.................................................. (1,240) (10,866)
-------- --------
Balance at end of period.................................. $(24,861) $(23,621)
-------- --------
Total stockholders' equity (deficit)................... $ 7,235 $(11,969)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 85
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (1,240) $(10,866)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
(Gain) on disposal of fixed and intangible assets...... (24) --
Depreciation and amortization.......................... 1,375 2,249
Accretion of stock put................................. -- 26
Write-off of impaired intangible assets................ -- 11,385
Write-off of fixed assets.............................. -- 1,183
(Increase) decrease in restricted cash................. 130 (30)
(Increase) decrease in net accounts receivable......... 194 (783)
(Increase) decrease in inventory....................... (13) 31
(Increase) in prepaid expenses......................... (207) (5)
(Increase) decrease in other current assets............ 92 126
Increase (decrease) in accounts payable................ (869) 777
Increase in accounts payable, affiliated companies..... 72 12
(Decrease) in accrued liabilities...................... (193) (110)
Gain on foreign currency transaction................... (31) (138)
Minority interest in loss of subsidiary................ (66) (6,040)
-------- --------
Total adjustments.................................... 460 8,683
-------- --------
Net cash (used in) operating activities.............. (780) (2,183)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment....... 249 62
Purchase of property, plant and equipment................. (1,417) (1,680)
-------- --------
Net cash (used in) investing activities.............. (1,168) (1,618)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank overdrafts............................... 122 34
Proceeds from issuance of notes payable................... 1,019 522
Principal reduction of notes payable...................... (1,013) (536)
Reduction of put option................................... (861) --
Proceeds from issuance of long-term debt, unaffiliated
lenders................................................ 931 1,222
Reduction of long-term debt, unaffiliated lenders......... (1,444) (2,638)
Proceeds from issuance of note payable to majority
shareholders........................................... 1,054 5,126
Repayment of revolving line of credit..................... (12,785) --
Contributed capital....................................... 14,937 --
-------- --------
Net cash provided by financing activities............ 1,960 3,730
-------- --------
Net increase (decrease) in cash and cash equivalents........ 12 (71)
Cash and cash equivalents, beginning of period.............. 32 103
-------- --------
Cash and cash equivalents, end of period.................... $ 44 $ 32
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for :
Interest............................................... $ 671 $ 960
======== ========
Taxes................................................ $ -- $ --
======== ========
NONCASH TRANSACTIONS:
Conversion of stockholder debt and other liabilities to
additional paid-in capital............................. $ 5,507 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 86
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements present the consolidated accounts of
Waste Systems, Inc. ("WSI" or "Company") and its majority-owned subsidiary, 3CI
Complete Compliance Corporation ("3CI" or "Subsidiary"). WSI was owned by a
group of German corporate investors and has a year ending on December 31. 3CI's
year ends on September 30. The consolidated financial statements include the
accounts for the respective year-ends. All significant intercompany accounts and
transactions have been eliminated in consolidation. 3CI has suffered recurring
net losses. Such losses have exceeded the minority interest's equity capital.
Under generally accepted accounting principles, such excess losses are charged
against the majority interest. If the losses reverse in later years, the
majority interest will be credited with the amount of minority interest losses
previously absorbed before credit is made to the minority interests.
Organization and Basis of Presentation
3CI, a Delaware corporation, is publicly held and is engaged in the
collection, transportation and incineration of biomedical waste in the
southeastern and southwestern United States. In February 1994, subsidiaries of
3CI acquired all the assets and business operations of American Medical
Transports Corporation ("AMTC"), an Oklahoma corporation, and A/MED, Inc.
("A/MED"), a Delaware corporation. Both AMTC and A/MED were engaged in
businesses similar to that of 3CI. Waste Systems, Inc. (WSI), a Delaware
corporation, was the majority shareholder of both AMTC and A/MED (the
"Companies"). Additionally, in February 1994, WSI purchased 1,255,182 shares of
3CI common stock ("Common Stock") from American Medical Technologies ("AMOT").
As a result of the transactions described above, WSI became the majority
shareholder of 3CI immediately following the acquisition of AMTC and A/MED. For
accounting purposes, AMTC and A/MED were considered the acquirer in a reverse
acquisition. The combined financial statements of AMTC and A/MED are the
historical financial statements of 3CI for periods prior to the date of the
business acquisition. Historical combined shareholders' equity of AMTC and A/MED
has been retroactively restated for the equivalent number of 3CI shares received
for the assets and business operations of AMTC and A/MED, and the combined
accumulated deficit of AMTC and A/MED has been carried forward.
In October 1992, Medical Environmental Disposal, Inc., a wholly-owned
subsidiary of WSI was merged with and into AMTC, with AMTC being the surviving
corporation.
Predecessor to 3CI
Prior to the merger with AMTC and A/MED, 3CI was a majority owned
subsidiary of AMOT. In September 1991, AMOT purchased the business and assets
and assumed certain liabilities of 3CI and 3CI Transportation Systems
Corporation (the "Predecessor Companies"), both existing Texas corporations that
had been in the medical waste disposal business since 1989 and 1990,
respectively. 3CI began operations when AMOT contributed substantially all the
net assets and business operations of the Predecessor Companies to 3CI. In April
1992, 3CI completed an initial public offering of Common Stock whereby 800,000
shares were sold by 3CI and 580,000 shares were sold by AMOT.
Substantial Doubt Regarding Ability to Continue as a Going Concern
The Subsidiary has consistently suffered losses for the past several fiscal
years, and losses have continued in fiscal 1998. As of September 30, 1997, the
Subsidiary had a working capital deficit of $6,135,666. The Subsidiary has
historically relied on WSI, the Subsidiary's majority stockholder, for funding,
and such support was again necessary in fiscal 1997. In the absence of the
Subsidiary being able to secure third party financing,
F-32
<PAGE> 87
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
WSI agreed to provide the Subsidiary with a revolving credit facility of $8
million under a Promissory Note dated September 30, 1995, which provides for
deferred interest with cash advances not to exceed $7.4 million, of which $4.8
million including deferred interest, and $4.9 million including deferred
interest, has been drawn as of September 30, 1997, and December 31, 1997. During
the fiscal year ended September 30, 1996, WSI made additional cash advances that
were in excess of the principal in the original Promissory Note, and 3CI entered
into a second Revolving Credit Facility of $2.7 million including deferred
interest, dated December 20, 1996 with a maturity date of February 28, 1997. It
was the intent of WSI and 3CI that this Revolving Promissory Note evidence all
sums owing by 3CI to WSI to the extent that such sums represent advances of
funds to 3CI in excess of the maximum limits fixed under that certain $8,000,000
Revolving Promissory Note dated September 30, 1995. The Promissory Note dated
September 30, 1995 had a due date of December 31, 1996 of which 3CI requested
from and received an extension to discuss with WSI the possibility of
restructuring the terms of such Promissory Note. In February 1997, 3CI received
a letter from the Nasdaq Stock Market, Inc. regarding 3CI's failure to meet
listing requirements. These requirements include maintaining a minimum capital
and surplus of at least $1,000,000 and a minimum bid price of $1.00. While 3CI
remained out of compliance with these requirements, the Nasdaq Stock Market,
Inc. allowed 3CI to remain listed with an exception added to its trading symbol.
The Nasdaq Stock Market, Inc. gave 3CI until June 25, 1997, to meet the listing
requirements. In June 1997, WSI converted $7,000,000 of debt into 1,000,000
shares of 3CI preferred stock. This conversion allowed 3CI to meet the listing
requirements of the Nasdaq Stock Market, Inc. On June 26, 1997, the Nasdaq Stock
Market, Inc. informed 3CI that it had been found to be in compliance with all
requirements necessary for continued listing on the exchange, and the exception
to its trading symbol had been removed. In connection with the conversion of
debt to preferred stock, WSI canceled the Revolving Credit Facility of $2.7
million dated December 20, 1996, with a maturity date of February 28, 1997,
which had been previously extended to June 30, 1997. The conversion also
resulted in the reduction of the outstanding indebtedness of the Promissory Note
dated September 30, 1995. During the fiscal years ended December 31, 1997 and
1996 WSI made cash advances to 3CI of $2,303,000 and $4,000,000. Since the year
ended December 31, 1997, 3CI has not requested nor received any additional cash
advances from WSI. WSI is under no obligation to provide additional advances and
could demand payment on the debt at any time. During the fiscal year 1997, 3CI
had began to have discussions with a third party lender to obtain an alternative
source of financing apart from WSI. In the event 3CI and WSI do not come to a
resolution on the restructuring of the September 30, 1995 Promissory Note and
3CI is unable to obtain alternative financing, there can be no assurance that
3CI will be able to meet its obligations as they become due or realize the
recorded value of its assets and would likely be forced to seek bankruptcy
protection.
The nature and level of competition in this industry have remained at a
high level for several years. This condition has produced aggressive price
competition and results in pressure on profit margins. 3CI competes against
companies which may have access to greater capital resources. In order to
compete in this industry on a long-term basis and fully realize its business
strategy, 3CI will require additional and continued financing and other
assistance from its current shareholders and if available, from outside sources.
There is no assurance that adequate funds for these purposes will be available
when needed or, if available, on terms acceptable to 3CI.
Inventory
Inventory, consisting of containers and supplies, are stated at the lower
of cost (first-in, first-out method) or market.
F-33
<PAGE> 88
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Expenditures for major renewals and betterments are
capitalized, and expenditures for repairs and maintenance are charged to expense
as incurred.
Impact of Recently Issued Accounting Pronouncements
In March 1995, the FASB issued Statement No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed. The Company adopted Statement No. 121
in 1996 and, has completed an analysis to determine the impact. Prior to the
adoption of Statement No. 121, in the course of preparing its financial
statements, the Company routinely reviewed assets for impairment by reviewing
expected future undiscounted net cash flows.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share."
This pronouncement is effective for periods ending after December 15, 1997. This
statement requires that basic earnings per share be presented on the face of the
income statement. Further, entities with complex capital structures must also
present diluted earnings per shares on the face of the income statement. Basic
earnings per share excludes dilution and is to be computed by dividing income
available to common stockholders by the weighted average number of common shares
of stock outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities, options, or other contracts
to issue common stock were converted into common stock that then shared in the
earnings of the company. No potential common shares may be included in the
computation of any diluted per-share amount when a loss from continuing
operations exists, even if the company reports net income. At the present time
the ultimate impact of the adoption of this standard is not known or reasonably
estimable.
In February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure." This pronouncement is effective for
periods ending after December 15, 1997. This statement establishes standards for
disclosing information for an entity's capital structure. Adoption of this
standard does not have a significant impact on the Company's financial
statements.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." This pronouncement will be effective for years beginning after December
15, 1997. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Because the Company does not presently have any "items of
other comprehensive income," adoption of this standard should not have a
significant impact on the Company's financial statements.
Incineration Rights and Permits
The incineration rights represent amounts capitalized pursuant to the
reverse merger of 3CI for incineration contracts with the cities of Carthage and
Center, Texas (the "Cities"), which own the incineration facilities. The
amortization of the incineration rights commences at the start of the contract
and is amortized on the straight-line method over nine years, which corresponds
to the contract periods. Costs
F-34
<PAGE> 89
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
associated with the permits are being amortized over the life of the contracts.
See Note 12 for write-off of incineration rights and permits.
Intangible Assets
Intangible assets are amortized on a straight-line method as follows:
<TABLE>
<S> <C>
Excess of cost over net assets acquired..................... 17.5-40 years
Permits..................................................... 5-7 years
Customer lists.............................................. 5-10 years
</TABLE>
Amortization expense charged to operations for the years ended December 31,
1997 and 1996 was $122,479 and $864,084, respectively.
Management evaluates the realization of the intangible assets recorded for
each acquisition based on the prospects for the ongoing operations of each
acquired company.
See Note 12 for write-off of intangibles during the fiscal year 1996.
Revenue Recognition
The Company recognizes revenue from the treatment of medical waste in the
period in which the wastes are treated.
Net Loss Per Share
Net loss per common share was computed by dividing the net loss by the
weighted average number of common shares outstanding. For the years ended
December 31, 1997 and 1996, the weighted average common shares outstanding was
100 for both years.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
Restricted Cash
At December 31, 1997 and 1996, the Company had cash of $-0- and $130,000,
respectively, which was restricted pursuant to an irrevocable standby letter of
credit related to workers compensation insurance.
Income Taxes
The Company utilizes the liability method of accounting for income taxes in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109 ("SAS No. 109"). SAS No. 109 requires that deferred income taxes reflect
the tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts.
Management Estimates
Management has used estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts
F-35
<PAGE> 90
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
of assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual results could vary from the
estimates that were used.
Reclassifications
Certain reclassifications have been made to the prior financial statements
to conform to the classifications used in the current financial statements.
2. BUSINESS ACQUISITIONS
River Bay Corporation
In October 1994, 3CI acquired substantially all of the assets and assumed
certain liabilities of River Bay corporation, a Mississippi Corporation ("River
Bay"), in consideration for 865,500 shares of Common Stock and additional shares
of Common Stock contingent upon the profits of the operations attributable to
the assets purchased from River Bay through December 31, 1996. In addition, 3CI
issued to River Bay a promissory note in the original principal amount of
$1,000,000 bearing an interest rate of 8.75%, which as amended, provided for
monthly principal payments ranging from $50,000 to $100,000 through February
1996.
Pursuant to a Put Option Agreement with River Bay, as amended ("Put Option
Agreement"), 3CI, in October 1995, repurchased 300,000 of the shares of Common
Stock issued in connection with acquisition in consideration for its promissory
note in the original principal amount of $900,000 ($3.00 per share) and
providing for monthly principal payments ranging from $25,000 to $75,000, plus
interest, through January 1997. Pursuant to the Put Option Agreement, 3CI were
obligated to repurchase the remaining 565,500 shares of 3CI Common Stock issued
in connection with the acquisition at the option of River Bay, from February 1,
1997 until April 1, 1997 for $3.00 per share. The liability associated with the
Put Option Agreement covering the remaining shares is included in Accrued Stock
Put Option on the accompanying balance sheet as of December 31, 1996. River Bay
exercised its Put Option on or about February 14, 1997, for 3CI to repurchase
the 565,500 shares of Common Stock. On or about March 10, 1997, 3CI commenced
arbitration proceedings before the American Arbitration Association in Houston,
Texas against River Bay and Marlan Baucum seeking to set aside the Purchase
Agreement (the "Purchase Agreement") entered into between 3CI and those parties
on or about October 10, 1994, together with ancillary agreements pertaining
thereto. 3CI was seeking damages and/or to set aside the Purchase Agreement and
collateral agreements, including the Put Option Agreement which, if otherwise
enforceable, would have required the payment by 3CI of approximately $1,700,000
for 565,500 shares of 3CI Common Stock. In response, on April 9, 1997, Bank of
Raleigh and Smith County Bank, assignees of certain rights under the Purchase
Agreement, commenced a complaint for declaratory and monetary relief in the U.S.
District Court for the Southern District of Mississippi, Jackson Division in
Civil Action No. 3:97cv249BN. The Smith County Bank and Bank of Raleigh prayed
declaratory judgment declaring the arbitration provision in the Purchase
Agreement to be not binding upon said banks, the claims of 3CI against River Bay
to be subordinate to the claims of the banks, unspecified compensatory damages,
and punitive damages of at least $1,000,000. In April 1997, the Bank of Raleigh
and Smith County Bank gave notice to certain customers in the River Bay division
that 3CI was in default of the Put Option Agreement and that its payments should
be directly made to the Bank of Raleigh and Smith County Bank. From these
efforts, the Bank of Raleigh and Smith County Bank collected $463,000 of 3CI's
accounts receivables that were pledged in the Purchase Agreement. On or about
May 10, 1997, 3CI filed a Petition of Arbitration in Suit No. 422,107 of the
First Judicial District Court, Caddo Parish, Louisiana, naming River Bay and
Marlan Baucum as defendants therein. This lawsuit sought an injunction and stay
of all judicial and extra-judicial proceedings pursuant to the Put Option
Agreement until such time as the
F-36
<PAGE> 91
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
2. BUSINESS ACQUISITIONS (CONTINUED)
arbitration is completed. This action was removed by the defendants to the U.S.
District Court for the Western District of Louisiana, Shreveport Division in
Civil Action No. 97-0578. On or about October 14, 1997, the parties settled the
lawsuits. In the settlement, 3CI agreed to repurchase the remaining 565,500
shares of Common Stock related to the Put Option Agreement, at a price of
$816,364, with payments ranging from $100,000 to $63,500. This liability is
recorded in the financial statements at December 31, 1997.
River Bay has been engaged in the business of medical waste management
services in Mississippi, Tennessee, Florida, Georgia and Alabama.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
USEFUL
1997 1996 LIFE
---- ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Land.......................................... 591 591
Buildings and improvements.................... 1,622 1,538 3-40 years
Transportation equipment...................... 3,287 3,917 5-10 years
Machinery and equipment....................... 5,098 4,859 5-20 years
Furniture and fixtures........................ 329 491 3-10 years
------ ------
10,927 11,396
====== ======
</TABLE>
Depreciation expense charged to operations was $1,252,462 and $1,385,072
for the years ending December 31, 1997 and 1996, respectively. During the year
ended December 31, 1996, an analysis was done of all the fixed assets of 3CI. In
conjunction with the analysis, 3CI reconsidered the appropriate asset lives as
well as revising various accounting estimates as a result of recent operating
experiences and current market conditions. This write down of $1,183,446 appears
as "write-off of fixed assets" on the Consolidated Statement of Operations.
Substantially all of the Company's property, plant and equipment has been
pledged as collateral against certain of the Company's liabilities.
Set forth below is a summary of the write-offs relating to fixed assets
during fiscal 1996:
Buildings..................................................$12,700
During 1996, it was necessary to replace the refractory in one of 3CI's
incinerators due to the normal wear and tear. There was a net book value of
$12,700 of the previously capitalized refractory that is being written-off.
Leasehold improvements.....................................$80,000
During 1996, 3CI updated and refurbished several of its transportation and
incinerator locations. Management believed the updating and refurbishment was
necessary to make the locations more functional and efficiently operational.
Also 3CI made an operational decision to close its Austin, Texas transportation
location. This closure was made in order to reduce operating costs and personnel
costs. Previous leasehold
F-37
<PAGE> 92
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
3. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
improvement costs, which were being amortized over the life of the lease, (the
lease was terminated due to the decision to close the location) were written-off
as they remained a part of the leased building.
Transportation equipment..................................$500,982
In February 1994, at the time of the reverse merger of 3CI, 3CI had a lease
agreement which was accounted for as a Capitalized Lease and was being
depreciated over the term of the lease agreement. During 1996, management made a
decision to terminate the lease agreement early due to the high cost of
maintenance of the leased transportation equipment. The Company had also
capitalized other costs associated with these leased assets. As the
transportation equipment was returned, it was necessary to write the remaining
capitalized net book value off of $500,982.
Reusable containers........................................$12,000
In 1996, 3CI made an operational decision to move a portion of their
customer base from disposable cardboard boxes to reusable plastic containers. A
significant investment was then made in reusable plastic containers and based
upon its prior operating experience with the reusable containers, the Company
estimated that a three (3) year life was more reflective of the reusable
containers than a five (5) year life. In previous periods 3CI had estimated that
the life of reusable containers was five (5) years. Due to this change in
estimate 3CI wrote-off previously capitalized reusable containers with a net
book value of $12,000.
Machinery and equipment....................................$88,000
During fiscal 1996, it was necessary to change the bags inside the scrubber
at an incinerator as these bags became excessively worn and the integrity of the
bags was beginning to deteriorate. These bags had a remaining net book value of
$22,200 that was written-off as they were no longer able to remain in service.
Also, there is a write-off of a previously capitalized major improvement that
was done to the upper chamber of the incinerator. During 1996, there was a major
improvement completed in the upper chamber and the previously capitalized
improvement was written-off at its net book value of $28,405. In the River Bay
division, machinery and equipment with a net book value of $37,395 was
written-off.
Computer and software.....................................$490,000
During 1994 and 1995, 3CI began capitalizing cost associated with one of
3CI's bar coding systems and an accounting system that would streamline the
paperwork from the transportation locations, to the incinerators, to ultimately
the accounting department (production/billing/accounting system). This was put
into service in fiscal 1995 and was being amortized. During fiscal 1996, due to
continued problems in the ongoing training of employees on the use of the
software and the prohibitive expense of replacing hardware due to harsh
conditions, management determined the bar coding system was no longer cost
effective and abandoned the project and appropriately wrote-off the unamortized
costs. The write-off of these capitalized costs totaled $472,000. The company
also wrote-off previously capitalized accounting software with a remaining net
book value of $18,000 that was acquired in a previous acquisition (River Bay
asset acquisition), as this software was abandoned when the River Bay division
was integrated in the fourth quarter of 1996 into the 3CI accounting system.
F-38
<PAGE> 93
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
4. NOTES PAYABLE
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notes payable to an insurance company, due in monthly
installments including interest of 7% to 9% through March
1998, unsecured........................................... 217 212
=== ======
The Company had a $12,800,000 unsecured revolving line of
credit maturing on December 31, 1997, of which $15,000 was
unused at December 31, 1996. Interest was payable monthly
and accrued at the interbank offered rate (IBOR) (7.15625
at December 31, 1996). The line of credit was repaid in
full on September 17, 1997................................ -- 12,785
=== ======
Notes payable to stockholders bear interest at 4.25%- 4.50%
with all unpaid principal and interest due at maturity.
All stockholder notes were converted to equity at January
1, 1997................................................... -- 3,851
=== ======
</TABLE>
5. LONG-TERM DEBT
Long-term debt-unaffiliated lenders consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Note payable to prior owner of Incendere, at an annual
adjustable interest rate generally ranging between 7.5% to
9.75%, with 34% of interest being paid quarterly and 66%
of interest deferred and added to principal until May 21,
1995. Thereafter, principal and interest are due in equal
monthly installments until maturity on May 21, 1998,
convertible into common stock at $3.00 per share, secured
by substantially all of the assets of A/MED............... 241 615
Notes payable for purchased vehicles and equipment held as
collateral, due in monthly installments, including
interest, at rates ranging from 7% to 16.75%, maturing
through 2002.............................................. 1,303 991
Note payable to Stone Container Corp. due in monthly
payments with interest at 10% through 1997................ -- 74
Notes payable to River Bay Corporation due in monthly
payments with interest of 8.75% through December 1998,
secured by accounts receivable, equipment, and common
stock..................................................... 816 376
------ ------
2,360 2,056
Less--current portion....................................... (1,374) (1,314)
------ ------
986 742
====== ======
</TABLE>
F-39
<PAGE> 94
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
5. LONG-TERM DEBT (CONTINUED)
Payments due on long-term debt, during each of the five years subsequent to
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
1998........................................................ 1,374
1999........................................................ 662
2000........................................................ 314
2001........................................................ 7
2002........................................................ 3
</TABLE>
The total interest expense was $855,115 and $1,443,542 for the years ended
December 31, 1997 and 1996, respectively.
6. INCINERATION CONTRACTS
3CI is a party to exclusive incineration contracts with the Cities whereby
3CI is guaranteed minimum weekly burn capacity and is required to pay fees to
the Cities based on the total pounds incinerated. These contract rights were
obtained in exchange for the Predecessor Companies purchasing certain equipment
for the Cities' incinerators which enabled the Cities to meet all current
federal and state emissions control standards. Due to problems arising from
contractual agreements with the City of Center, 3CI is presently not utilizing
the incinerator at the City of Center for the treatment of medical waste. The
Company is no longer using the incinerator in the City of Center and does not
believe that discontinuing that use will have a material effect on 3CI's
business.
The City of Carthage requires minimum annual payments under the combined
contracts as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MINIMUM REQUIRED
DECEMBER 31, PAYMENTS
- ------------------ ----------------
(DOLLARS IN THOUSANDS)
<C> <S> <C>
1998 ................................................. 1,000
1999 ................................................. 1,000
2000 ................................................. 1,000
-----
3,000
=====
</TABLE>
In the event 3CI fails to meet the minimum amounts of annual guarantees to
the City of Carthage, after giving effect to amounts paid above prior year
minimums, annual required minimums (on a cumulative basis), the City of Carthage
has the option to terminate 3CI's exclusive incineration rights.
3CI had a minimum guaranteed payment to the City of Carthage, for
incineration fees for the years ended May 31, 1997, 1996, and 1995, of
$1,000,000, $716,000, and $596,250, respectively. In the years ended May 31,
1997, 1996, and 1995, 3CI paid incineration fees of $1,401,692, $843,000, and
$750,000, respectively to the City of Carthage. 3CI also had minimum guaranteed
payments to the City of Center, for incineration fees for the years ended May
31, 1997, 1996, and 1995, of $762,000, $695,000, and $495,250, respectively. In
the years ended May 31, 1996 and 1995, 3CI paid incineration fees of $779,000
and $551,000, respectively, to the City of Center, in accordance with terms of
the contract, thereby meeting the annual minimum fees required.
In August 1996, 3CI discontinued use of the City of Center facility, due to
the City of Center's breach of the exclusivity portion of the contract. The
original agreement between 3CI and the City of Center, which was executed on
August 22, 1990, gave 3CI the exclusive and sole right to dispose of medical
waste at the City of
F-40
<PAGE> 95
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
6. INCINERATION CONTRACTS (CONTINUED)
Center's resource recovery facility. 3CI discovered that the City of Center
breached its exclusivity portions of the 1990 agreement, as amended on or about
October 27, 1994. Due to this breach of contract, 3CI does not believe that
minimum guaranteed payment is due to the City of Center. Despite not having the
ability to treat waste at the City of Center's resource recovery facility, 3CI
has ample treatment capacity to dispose of its medical waste. 3CI believes that
the effect of not utilizing this treatment facility has not and will not have a
material adverse effect on its financial position, results of operations or cash
flows.
Included in cost of sales for the years ended December 31, 1997 and 1996,
is $1,429,097 and $1,542,842, respectively, related to incineration costs at the
Cities since the reverse merger.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax rate used was 37
percent for the years ended December 31, 1997 and 1996 representing the federal
rate and an average of state income tax rates. The components of deferred income
tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment................................ 1,461 1,116
Other................................................. 69 67
-------- -------
Total deferred income tax liabilities.............. 1,530 1,183
Deferred income tax assets
Net operating loss carryforward....................... 9,870 8,801
Bad debt reserves..................................... 323 344
Other................................................. 1,403 940
-------- -------
Total deferred income tax assets........................ 11,596 10,085
Valuation allowance..................................... (10,066) (8,902)
-------- -------
Net deferred income tax asset........................... (1,530) (1,183)
Total deferred income tax assets and liabilities... -- --
======== =======
</TABLE>
At December 31, 1997, the Company had approximately $25,559,268 of net
operating loss carryforwards for federal tax purposes which will expire
beginning in 2004 and continue through the year 2012. The Company also had state
net operating losses at December 31, 1997. The Company has established a
valuation allowance for the federal and state net operating losses of
$10,066,016 and $8,902,294 as of December 31, 1997 and 1996, respectively.
Because of separate return limitations, change in ownership limitations, and the
weight of available evidence, it is more likely than not that some portion or
possibly all of the net operating losses will not be available for use by the
consolidated entities.
8. STOCK OPTION PLAN
In conjunction with the business acquisition described in Note 1, a stock
option plan (the "Plan") approved by 3CI's previous shareholders in 1992
totaling 500,000 shares remains in effect. The purpose of the Plan is to provide
additional incentives to officers and employees of 3CI who are primarily
responsible for the management and growth of 3CI. Each option granted pursuant
to the Plan is designated at the time of grant as either an "incentive stock
option" or as a "nonqualified stock option." The exercise price equals or
exceeds the
F-41
<PAGE> 96
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
8. STOCK OPTION PLAN (CONTINUED)
market price as of the grant date. At September 30, 1995, 3CI had 230,000 shares
outstanding under options for two officers and one former officer of 3CI, of
which all were exercisable, at option prices of $3.00 to $4.00 per share. During
1995, 3CI reduced the total shares available under the Plan to 375,000 shares,
resulting in 145,000 shares available for future issuance as of December 31,
1997 and 1996.
During the years ended December 31, 1997 and 1996, 140,000 of the 230,000
option shares described above were canceled and a net of 47,500 option shares
were issued. As of December 31, 1997, a total of 137,500 option shares are
outstanding and a total of 237,500 option shares are available for issuance
under the Plan. The outstanding option shares vest monthly over a three-year
period. As of the year ended December 31, 1997, the exercise prices of all
options granted under the Plan have always exceeded the market price of 3CI's
Common Stock.
9. CONCENTRATION OF CREDIT RISK
3CI's customers are concentrated in the medical industry and, therefore,
changes in economic, regulatory and other factors which affect the medical
industry may impact 3CI's overall credit risk. 3CI monitors the status of its
receivables including follow-up directly with customers on past due balances.
10. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure of Financial Instruments, requires companies to
disclose the fair value of each class of financial instruments for which it is
practical to estimate that value and for which the recorded value significantly
differs from the fair market value. The Company's primary financial instruments
are accounts receivable, notes payable, accounts payable, and accrued
liabilities. The fair value of accounts receivable approximates its carrying
amount. Because of the absence of availability of alternative financing and the
substantial doubt about the Company's ability to continue as a going concern, it
is not practical to estimate the fair values of notes payable, accounts payable
and accrued liabilities.
11. RELATED PARTY TRANSACTIONS
During 1996, the Company made purchases of business forms with a company
owned by the father of Curtis W. Crane, the Chief Financial Officer of the
Company. Payments to the business forms company during fiscal years ended
December 31, 1997 and 1996 totaled $22,000 and $62,000, respectively.
12. INTANGIBLE ASSET WRITE-OFF
In 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. An evaluation of the fair value of the assets associated with
3CI's operations resulted in the determination that certain intangible assets
were impaired. The impaired assets were written down by $11,385,328. Fair value
was based on the estimated future cash flows to be generated by these intangible
assets. This write down is included in the "Write off of Intangibles" amount for
fiscal 1996 on the Consolidated Statements of Operations. During the fiscal year
of 1995, WSI sent an advisor to 3CI to review ongoing operations of 3CI and to
make recommendations as to how to achieve profitability. From this review 3CI
developed specific detail plans for its fiscal year ending September 1996. In
September 1995, management put together a business plan for the fiscal year
ending September 30, 1996. The Board of Directors reviewed the plan in detail
and after thorough consideration in
F-42
<PAGE> 97
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
12. INTANGIBLE ASSET WRITE-OFF (CONTINUED)
every aspect, the plan was approved by the Board of Directors. The Chairman of
the Board met with key operating personnel and officers of the Company to
discuss the actions to be taken. Additionally, the Board installed a new officer
to oversee the operations and implementation of its plan. The business plan for
the fiscal year ended December 31, 1996, included cost reductions and a small
amount of price increases. As the fiscal year began to develop key operating
objectives of the business plan were not being achieved. In one of 3CI's key
operating territories (Houston, Texas), a competitor opened a treatment facility
that significantly increased the capacity to treat waste and by the competitor's
desire to fill the capacity, the competitor began deep discount pricing to fill
the capacity of the new treatment facility. Also, 3CI did not bring its newly
constructed incinerator into full operational use until March 1996; the business
plan had projected the incinerator to be fully operational in January 1996. As
the losses continued, 3CI prepared a forecast based on the best available
business information. This forecast was prepared in the fourth quarter of 1996.
Because of the forecasted continued losses, it became apparent that an
impairment of long-lived assets had occurred.
13. COMMITMENTS AND CONTINGENCIES
In May 1995, a group of minority stockholders of the Company, including
Patrick Grafton, former Chief Executive Officer of the Company, acting
individually and purportedly on behalf of all minority stockholders, and on
behalf of the Company, filed suit in James T. Rash, et al v. Waste Systems,
Inc., et al., No. 95-024912 in the District Court of Harris County, Texas, 129th
Judicial District, against 3CI, WSI and various directors of the Company. The
plaintiffs alleged minority stockholder oppression, breach of fiduciary duty,
breach of contract, and "thwarting of reasonable expectations," and demanded an
accounting, appointment of a receiver for the sale of the Company, unspecified
actual damages and punitive damages of $10 million, plus attorney's fees. In
addition, Mr. Grafton alleged unspecified damages as a result of his removal as
an officer and director of the Company and the Company's failure to renew his
employment agreement in March 1995, and alleged that such removal was wrongful
and ineffective. The Company's insurer denied coverage in the lawsuit. The
Company has denied all material allegations of the lawsuit. However, the outcome
of this cannot be predicted, and an adverse decision in the lawsuit would likely
have a material adverse effect on the Company's financial condition and results
of operations and cash flows. The Company has reached an agreement in principle
with some, but not all, of the plaintiffs for the settlement of this action. The
execution of the appropriate documentation to evidence this settlement has been
completed and both parties are awaiting court approval which is set for late
February 1998. The Company and Mr. Grafton reached a settlement of Mr. Grafton's
individual claims relating to his removal as an officer and director of the
Company. The terms of the settlement reached between the Company and Mr. Grafton
are confidential to both parties. The Company accrued an amount in its fiscal
year ended 1996 and 1995 financial statements which closely approximates the
actual settlement.
In June 1995, the former stockholders of Med-Waste Disposal Service, Inc.
("Med-Waste") filed suit in James H. Shepherd, et al v. 3CI Complete Compliance
Corporation, et al., No. C.V.-95-1441-1 in the Circuit Court of Hot Springs
County, Arkansas, against 3CI and various current and former officers and
directors of 3CI. Plaintiffs have alleged violations of federal and state
securities laws, breach of contract, common law fraud and negligence in
connection with the acquisition of Med-Waste by 3CI, and have demanded
rescission, restitution, unspecified actual damages and punitive damages of $10
million, plus attorneys' fees. The case was transferred to the United States
District Court of the Western District of Arkansas Hot Springs Division and in
November 1996 was subsequently transferred to the United States District Court
for the Western District of Louisiana.
The parties, other than Patrick Grafton, former Chief Executive Officer of
3CI, have agreed to settle the suit in consideration of the issuance by 3CI to
the plaintiffs of 250,000 shares of Common Stock and the
F-43
<PAGE> 98
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
payment by 3CI to the plaintiffs of 20% to 55% of the pre-tax profits, as
defined, attributable to the assets previously acquired from Med-Waste until
such time as the shares of Common Stock held by the plaintiffs become freely
tradable and the market price of the Common Stock averages at least $2.50 per
share over a period of 42 consecutive days. In addition, 3CI and WSI have agreed
to repurchase the shares of Common Stock held by the plaintiffs for $2.50 per
share in certain events, including the bankruptcy of 3CI or in the event WSI
ceases to be the largest beneficial holder of the Common Stock. The obligations
of 3CI to the plaintiffs are secured by a security interest in most of the
assets of 3CI, and WSI has agreed to subordinate its loans to 3CI, and all
related security interests, to the obligations, and the related security
interests, of 3CI to the plaintiffs. This matter has been settled by the parties
and was dismissed in its entirety on July 31, 1997, by order of the court.
3CI accrued $250,000 in expenses, which was reflected in its September 30,
1995 financial statements relating to the settlement of the Med-Waste lawsuit.
In connection with an auto accident in July 1996, two suits have been filed
against 3CI. Ryan O'Neil Youmans & Anita Youmans v. American 3CI, et al, No.
CV9604899, was filed in the Circuit Court of Jefferson County, Alabama, in
August 1996. Jimmy R. Whitfield & Rhonda Whitfield v. Paul Bronger, American
3CI, et al., No. CV-96-847, was filed in the Circuit Court of Shelby County,
Alabama in November of 1996. These proceedings have been settled by 3CI's
insurance carrier and the related expenditure to 3CI are reflected in the
current year consolidated financial statements. The resolution to these lawsuits
did not have a material effect on the Company's financial condition, results of
operations and cash flows.
On or about March 10, 1997, 3CI commenced arbitration proceedings before
the American Arbitration Association in Houston, Texas against River Bay
Corporation ("River Bay") and Marlan Baucum seeking to set aside a Purchase
Agreement (the "Purchase Agreement") entered into between those parties on or
about October 10, 1994, together with ancillary agreements pertaining thereto.
3CI was seeking damages and/or to set aside the Purchase Agreement and
collateral agreements, including a Put Option Agreement (the "Put Option
Agreement") which, if otherwise enforceable, would require the payment by 3CI of
approximately $1,700,000 for 565,500 shares of 3CI Common Stock. In response, on
April 9, 1997, Bank of Raleigh and Smith County Bank, assignees of certain
rights under the Purchase Agreement, commenced a complaint for a declaratory and
monetary relief in the U.S. District Court for the Southern District of
Mississippi, Jackson, Division in Civil Action No. 3:97cv249BN. The Bank of
Raleigh and Smith County Bank prayed declaratory judgment declaring the
arbitration provision in the Purchase Agreement to be not binding upon the said
banks, the claims of 3CI against River Bay to be subordinate to the claims of
the banks, unspecified compensatory damages, and punitive damages for least
$1,000,000. In this action the Bank of Raleigh and Smith County Bank proceeded
to collect the Company's accounts receivable in the River Bay division as it was
used as collateral in the Purchase Agreement; they collected approximately
$463,000, through October 14, 1997. On or about May 10, 1997, the Company filed
a Petition of Arbitration in Suit No. 422,107 of the First Judicial District
Court, Caddo Parish, Louisiana, naming River Bay and Marlan Baucum as defendants
therein. This lawsuit sought an injunction and stay of all judicial and
extra-judicial proceedings pursuant to the Put Option Agreement until such time
as the arbitration is completed. This action was removed by the defendants to
the U.S. District Court for the Western District of Louisiana, Shreveport
Division in Civil Action No. 97-0578. The parties agreed to settle the suit in
consideration of the Company repurchasing the remaining 565,500 shares of Common
Stock related to the Put Option Agreement for $816,364. The outcome of this
lawsuit does not have a material adverse effect on the Company's financial
position, result of operations and net cash flows.
The Company is subject to certain other litigation and claims arising in
the ordinary course of business. In the opinion of management of the Company,
the amounts ultimately payable, if any, as a result of such
F-44
<PAGE> 99
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
litigation and claims will not have a materially adverse effect on the Company's
financial position, results of operations, and net cash flows.
The Company operates within the regulated medical waste disposal industry
which is subject to intense governmental regulation at the federal, state and
local levels. The Company believes it is currently in compliance in all material
respects with all applicable laws and regulations governing the medical waste
disposal business. However, continuing expenditures may be required in order for
the Company to remain in compliance with existing and changing regulations.
Furthermore, because the medical waste disposal industry is predicated upon the
existence of strict governmental regulation, any material relaxation of
regulatory requirements governing medical waste disposal or of their enforcement
could result in a reduced demand for the Company's services and have a material
adverse effect on the Company's revenues and financial condition. The scope and
duration of existing and future regulations affecting the medical waste disposal
industry cannot be anticipated and are subject to changing political and
economic pressures.
At September 30, 1995, 3CI had employment agreements with certain key
employees providing for compensation of $145,000 and $130,000 for the years
ended December 31, 1997 and 1996. These agreements further provide for a bonus
based on the achievement of certain performance objectives. For the years ended
December 31, 1997 and 1996, these performance objectives were not achieved.
At December 31, 1997 and 1996, 3CI had certain noncancelable leases,
principally for office space and equipment, with various expiration dates. The
aggregate rental expenses under such leases were $735,696 and $866,203, for the
fiscal years ended December 31, 1997 and 1996, respectively. Future minimum
rentals under such leases for the following fiscal years aggregate $605,000 for
1998, $353,000 for 1999, $106,000 for 2000, $60,000 for 2001 and $135,000
thereafter.
3CI granted River Bay security interests in certain of the assets purchased
from River Bay and certain accounts receivable attributable to these purchased
assets to secure future debt and the Put option.
The Company has agreed to pay the President of River Bay approximately
$65,000 over a period of 15 months related to the settlement of certain issues.
This liability is included in accrued liabilities in the December 31, 1997 and
1996 balance sheets.
3CI has committed to reimburse WSI approximately $6,000 per month for
services provided and costs incurred by the Company's vice president.
Mr. Charles D. Crochet serves as President of 3CI pursuant to an employment
agreement commencing February 1994. Mr. Crochet was entitled to a salary of
$6,250 per month in February and March 1994, and then $7,500 per month from
April through September 1994, increasing to $9,583 per month commencing October
1994 through September 1995. This employment agreement was renegotiated and
modified in August 1995, increasing Mr. Crochet's salary to $10,833 per month
commencing October 1, 1995 and thereafter increases to $13,333 on October 1,
1997, and continues through May 1998. As an additional incentive to Mr. Crochet
under the new employment agreement, Mr. Crochet is eligible for an annual bonus
based on Fiscal Year Pre-Tax Profits as a percentage of revenues. The amount of
such annual bonus is based on a percentage between 6% and 10% of an amount
determined by the Board of Directors from an approved bonus plan, and such
actual percentage depending upon the Company's Pre-Tax Profits as a percentage
of revenue.
14. SUBSEQUENT EVENTS
The James T. Rash, et al v. Waste Systems, Inc., et al suit (see Note 13)
has been settled. Court approval of such settlement was received in February
1998. Pursuant to the settlement, 3CI has agreed to
F-45
<PAGE> 100
WASTE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
14. SUBSEQUENT EVENTS (CONTINUED)
(i) transfer 78,014 shares of its Common Stock into escrow for later conveyance
to the plaintiffs, (ii) transfer warrants for 1,002,964 shares of 3CI Common
Stock into escrow for later conveyance to the plaintiffs on the basis of one
warrant for every three shares of 3CI Common Stock owned, that are exercisable
for two years from the effective date of the Settlement Agreement at a price of
$1.50 per share, (iii) pay $425,000 into an escrow account to pay the
plaintiffs, attorneys' fees, and (iv) obtain SEC approval, if necessary, to
convert the 1,000,000 shares of 3CI Series A Preferred Stock into 7,000,000
shares of 3CI Series B Convertible Preferred Stock ("Series B Preferred Stock").
Pursuant to the terms of the Settlement Agreement, $425,469 has been paid to the
plaintiff's attorneys' for fees and 78,014 shares of 3CI Common Stock and
warrants for 1,002,964 shares of 3CI Common Stock have been placed in escrow for
subsequent conveyance to the plaintiffs.
3CI, as authorized by the necessary approvals of the Board of Directors and
the 3CI's majority stockholder (WSI), has approved the adoption of an amendment
(the "Amendment") to 3CI's Certificate of Incorporation, as amended, to (i)
increase the authorized preferred stock, of 3CI from 1,000,000 shares to
16,050,000 shares, and (ii) increase the authorized common stock, par value $.01
per share ("Common Stock"), of 3CI from 15,000,000 shares to 40,450,000 shares.
The Amendment was adopted to facilitate (i) the conversion of $7,000,000 of debt
(the "Debt Conversion") owed by 3CI to WSI, 3CI's largest stockholder, in
exchange for 1,000,000 shares of 3CI's Series A Preferred stock, (ii) the
exchange of the Series A Preferred Stock for 7,000,000 shares of 3CI's Series B
Preferred Stock, and (iii) the conversion of an additional $750,000 of debt owed
by 3CI to WSI to 750,000 shares of the Company's Series C Convertible Preferred
Stock (the "Series C Preferred Stock").
3CI has filed the Registration Statement (Form S-1) with the Securities and
Exchange Commission to register 1,518,434 additional shares of its Common Stock.
On about February 27, 1998, an Information Statement was mailed to 3CI's
stockholders informing them of the previous approval by the Board of Directors
of 3CI of the corporate actions referred to above and their subsequent adoption
by the majority stockholder of the 3CI.
On or about October 1, 1998, Stericycle, Inc., a Delaware Corporation with
its principal offices in Deerfield, Illinois, purchased all of the issued and
outstanding shares of stock of WSI. The purchase price for the WSI shares was
$10,000,000 in cash. Upon completion of the transaction, WSI became a
wholly-owned subsidiary of Stericycle, Inc. Stericycle is engaged in the
business of collecting, transporting, treating and disposing of regulated
medical waste. It has developed a proprietary treatment technology known as
electro-thermal deactivation ("ETD"). As a part of the purchase transaction,
Stericycle granted to the sellers certain exclusive negotiation and first
refusal rights in respect of medical waste treatment units utilizing
Stericycle's ETD technology.
On October 1, 1998, the Revolving Promissory Note dated September 30, 1995
(between 3CI and WSI) in the maximum principal amount of $8,000,000 ("Original
Note") was amended and restated in its entirety. 3CI made a new secured
promissory note in the amount of $5,487,308 due on or before September 30, 1999.
The note may be extended to a date not later than September 30, 2000. The note
bears interest at prime plus 2% and the interest is payable quarterly. The
security documents relating to the original note remain in full force and
effect. The note places certain restrictions and financial covenants on 3CI.
F-46
<PAGE> 101
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2 $ 68
Restricted cash........................................... -- 130
Accounts receivable, net of allowance for doubtful
accounts of $597,861 and $960,921...................... 2,813 4,091
Inventory................................................. 87 97
Other current assets...................................... 758 732
-------- --------
Total current assets................................... 3,660 5,118
Property, plant and equipment, at cost...................... 12,586 11,468
Less--accumulated depreciation.............................. (3,600) (2,905)
-------- --------
Net property, plant and equipment...................... 8,986 8,563
Excess of cost over net assets acquired, net of accumulated
amortization of $87,488 and $62,488....................... 343 369
Other intangible assets, net of accumulated amortization of
$186,380 and $111,828..................................... 226 293
Other assets................................................ -- 4
-------- --------
Total assets........................................... $ 13,215 $ 14,347
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdrafts........................................... $ 356 $ 534
Notes payable............................................. 642 514
Current portion of long-term debt, unaffiliated lenders... 1,018 863
Accounts payable.......................................... 1,393 1,519
Accounts payable-affiliated companies..................... 93 386
Accrued liabilities....................................... 843 1,249
-------- --------
Total current liabilities.............................. 4,345 5,065
Long-term debt unaffiliated lenders, net of current
portion................................................... 883 860
-------- --------
Total liabilities...................................... 5,228 5,925
Accrued stock put option.................................... -- 1,592
Shareholders' equity:
Common stock, no par value, 100 shares authorized, issued
and outstanding........................................ 500 500
Additional paid-in capital................................ 32,196 31,206
Accumulated deficit....................................... (24,709) (24,876)
-------- --------
Total shareholders' equity............................. 7,987 6,830
-------- --------
Total liabilities and shareholders' equity............. $ 13,215 $ 14,347
======== ========
</TABLE>
F-47
<PAGE> 102
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues.................................................... $ 14,127 $ 13,978
Expenses:
Cost of services.......................................... 10,475 10,800
Depreciation and amortization............................. 814 881
Selling, general and administrative....................... 2,555 2,746
--------- -----------
Total expenses......................................... 13,844 14,427
--------- -----------
Net income (loss) from operations........................... 283 (449)
Other income (expense):
Interest expense.......................................... (175) (806)
--------- -----------
Income (loss) before income taxes........................... $ 108 $ (1,255)
Income taxes................................................ -- --
--------- -----------
Income (loss) before minority interest in loss of
subsidiary................................................ 108 (1,255)
Minority interest in loss of subsidiary..................... 43 --
--------- -----------
Net income (loss)........................................... $ 151 $ (1,255)
========= ===========
Weighted average shares outstanding......................... 100 100
========= ===========
Income (loss) per common share.............................. $1,513.73 $(12,548.16)
========= ===========
</TABLE>
F-48
<PAGE> 103
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Common stock:
Balance at beginning of period............................ $ 500 $ 500
Additional shares issued (retired)........................ -- --
-------- --------
Balance at end of period.................................. $ 500 $ 500
Additional paid-in capital:
Balance at beginning of period............................ $ 31,595 $ 11,152
Conversion of stockholder debt and other liabilities to
additional paid-in capital................................ 601 18,775
Stockholder contributions to additional paid-in capital..... -- 1,279
-------- --------
Balance at end of period.................................. $ 32,196 $ 31,206
Accumulated deficit:
Balance at beginning of period............................ $(24,860) $(23,621)
Net income (loss)......................................... 151 (1,255)
-------- --------
Balance at end of period.................................. $(24,709) $(24,876)
-------- --------
Total stockholders' equity (deficit)................... $ 7,987 $ 6,830
======== ========
</TABLE>
F-49
<PAGE> 104
WASTE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 151 $(1,255)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
(Gain) loss on disposal of fixed and intangible
assets.............................................. -- 18
Depreciation and amortization........................ 930 1,041
(Increase) decrease in net accounts receivable....... 746 (338)
(Increase) in inventory.............................. (15) (38)
(Increase) in prepaid expenses....................... (292) (474)
(Increase) decrease in other current assets.......... 11 (13)
Increase in accounts payable......................... 363 127
Increase in accounts payable, affiliated companies... 67 54
(Decrease) in accrued liabilities.................... (1,335) (558)
Gain on foreign currency transaction................. -- (39)
Minority interest in loss of subsidiary.............. (43) --
------- -------
Total adjustments................................. 432 (220)
------- -------
Net cash provided by (used in) operating
activities....................................... 583 (1,475)
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment....... 99 233
Purchase of property, plant and equipment................. (1,411) (372)
------- -------
Net cash (used in) investing activities........... (1,312) (139)
Cash flows from financing activities:
Increase in bank overdrafts............................... 199 --
Proceeds from issuance of notes payable................... 1,088 942
Principal reduction of notes payable...................... (663) (13,496)
Reduction of put option................................... -- (105)
Proceeds from issuance of long-term debt, unaffiliated
lenders................................................ 633 --
Reduction of long-term debt, unaffiliated lenders......... (1,092) (1,186)
Proceeds from issuance of note payable to majority
shareholders........................................... 557 14,216
Contributed capital....................................... -- 1,279
Other..................................................... (35) --
------- -------
Net cash provided by financing activities......... 687 1,650
------- -------
Net increase (decrease) in cash and cash equivalents........ (42) 36
Cash and cash equivalents, beginning of period.............. 44 32
------- -------
Cash and cash equivalents, end of period.................... $ 2 $ 68
======= =======
</TABLE>
F-50
<PAGE> 105
WASTE SYSTEMS, INC. AND SUBSIDIARY
SELECTED INFORMATION --
SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ARE NOT INCLUDED
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements present the consolidated accounts of
Waste Systems, Inc. ("WSI" or the "Company") and its majority-owned subsidiary,
3CI Complete Compliance Corporation ("3CI" or "Subsidiary"). WSI was owned by a
group of German corporate investors and has a year ending on December 31. 3CI's
year ends on September 30. All significant intercompany accounts and
transactions have been eliminated in consolidation. 3CI has suffered recurring
net losses. Such losses have exceeded the minority interest's equity capital.
Under generally accepted accounting principles, such excess losses are charged
against the majority interest. If the losses reverse in later years, the
majority interest will be credited with the amount of minority interest losses
previously absorbed before credit is made to the minority interests.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. As applicable under such regulations, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The Company believes that the presentation and disclosures herein are
adequate to make the information not misleading and that the financial
statements reflect all adjustments that are of a normal recurring nature which
are necessary for a fair presentation of these financial statements. These
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto for the year ended December
31, 1997.
3. BUSINESS CONDITIONS
3CI has historically funded its operations, acquisitions and debt service
through cash advances from its majority shareholder, WSI. As a result of 3CI's
prior expansion and program of acquisitions, it has experienced liquidity
deficiencies.
3CI has continued to have discussions with third party lenders to obtain an
alternative source of financing apart from WSI. In the event 3CI and WSI do not
come to a resolution on the restructuring of the 1995 Note and 3CI is unable to
obtain alternative financing, there can be no assurance that 3CI will be able to
meet its obligations as they become due or realize the recorded value of its
assets.
The nature and level of competition in the medical waste industry has
remained high for several years. This condition has produced aggressive price
competition and results in pressures on profit margins. The Company competes
against companies which have access to greater capital resources. In order to
effectively compete in the industry on a long-term basis and fully realize its
business strategy, 3CI will require additional and continued financing and other
assistance from its current majority shareholder and, if available, from outside
sources. There is no assurance that adequate funds for these purposes will be
available when needed or, if available, on terms acceptable to 3CI.
4. OTHER EVENTS
The James T. Rash, et al. v. Waste Systems, Inc., et al. suit (see Note 13
to the Company's consolidated financial statements for the year ended December
31, 1997) has been settled. Court approval of such settlement was received in
February 1998. Pursuant to the settlement, 3CI has agreed to (i) transfer 78,014
shares of its Common Stock into escrow for later conveyance to the plaintiffs,
(ii) transfer warrants for 1,002,964 shares of 3CI Common Stock into escrow for
later conveyance to the plaintiffs, on the basis of one
F-51
<PAGE> 106
WASTE SYSTEMS, INC. AND SUBSIDIARY
SELECTED INFORMATION --
SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ARE NOT INCLUDED -- (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
4. OTHER EVENTS (CONTINUED)
warrant for every three shares of 3CI Common Stock owned, that are exercisable
for two years from the effective date of the Settlement Agreement at a price of
$1.50 per share, (iii) pay $425,000 into an escrow account to pay the
plaintiffs' attorneys' fees, and (iv) obtain SEC approval, if necessary, to
convert the 1,000,000 shares of 3CI Series A Preferred Stock into 7,000,000
shares of 3CI Series B Convertible Preferred Stock ("Series B Preferred Stock").
Pursuant to the terms of the Settlement Agreement, $425,469 has been paid to the
plaintiffs' attorneys' for fees and 78,014 shares of 3CI Common Stock and
warrants for 1,002,964 shares of 3CI Common Stock have been placed in escrow for
subsequent conveyance to the plaintiffs.
3CI, as authorized by the necessary approvals of the Board of Directors and
the 3CI's majority stockholder (WSI), has approved the adoption of an amendment
(the "Amendment") to 3CI's Certificate of Incorporation, as amended, to (i)
increase the authorized preferred stock of 3CI from 1,000,000 shares to
16,050,000 shares, and (ii) increase the authorized common stock, par value $.01
per share ("Common Stock"), of 3CI from 15,000,000 shares to 40,450,000 shares.
The Amendment was adopted to facilitate (i) the conversion of $7,000,000 of debt
(the "Debt Conversion") owed by 3CI to WSI, 3CI's largest stockholder, in
exchange for 1,000,000 shares of 3CI's Series A Preferred stock, (ii) the
exchange of the Series A Preferred Stock for 7,000,000 shares of 3CI's Series B
Preferred Stock, and (iii) the conversion of an additional $750,000 of debt owed
by 3CI to WSI to 750,000 shares of the Company's Series C Convertible Preferred
Stock (the "Series C Preferred Stock").
3CI has filed a Registration Statement (Form S-1) with the Securities and
Exchange Commission to register 1,518,434 additional shares of its Common Stock.
On about February 27, 1998, an Information Statement was mailed to 3CI's
stockholders informing them of the previous approval by the Board of Directors
of 3CI of the corporate actions referred to above and their subsequent adoption
by the majority stockholder of 3CI.
On or about October 1, 1998, Stericycle, Inc., a Delaware corporation with
its principal offices in Deerfield, Illinois, purchased all of the issued and
outstanding shares of stock of WSI. The purchase price for the WSI shares was
$10,000,000 in cash. Upon completion of the transaction, WSI became a
wholly-owned subsidiary of Stericycle, Inc. Stericycle is engaged in the
business of collecting, transporting, treating and disposing of regulated
medical waste. It has developed a proprietary treatment technology known as
electro-thermal deactivation ("ETD"). As a part of the purchase transaction,
Stericycle granted to the sellers certain exclusive negotiation and first
refusal rights in respect of medical waste treatment units utilizing
Stericycle's ETD technology.
On October 1, 1998, the Revolving Promissory Note dated September 30, 1995
(between 3CI and WSI) in the maximum principal amount of $8,000,000 ("Original
Note") was amended and restated in its entirety. 3CI made a new secured
promissory note in the amount of $5,487,308 due on or before September 30, 1999.
The note may be extended to a date not later than September 30, 2000. The note
bears interest at prime plus 2% and the interest is payable quarterly. The
security documents relating to the original note remain in full force and
effect. The note places certain restrictions and financial covenants on 3CI.
F-52
<PAGE> 107
AUDITORS' REPORT
To the shareholders of
Med-Tech Environmental Ltd:
We have audited the consolidated balance sheet of Med-Tech Environmental
Ltd as at March 31, 1998 and 1997, and the consolidated statements of income,
deficit and changes in financial position for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements represent fairly,
in all material respects, the financial position of the Company as at March 31,
1998 and 1997 and the results of its operations and the changes in its financial
position for the years then ended in accordance with generally accepted
accounting principles.
Without qualifying our opinion, we draw attention to Note 1(a) in the
financial statements which indicates the existence of a material uncertainty
which may cast significant doubt about the Company's ability to continue as a
going concern.
COLLINS BARROW, CHARTERED ACCOUNTANTS
Toronto, Canada
May 20, 1998
Except as to Notes 11(c) and 11(d)
which is as of November 16, 1998
F-53
<PAGE> 108
MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- $ 31,375
Accounts receivable....................................... 1,965,398 194,595
Other receivables......................................... 46,599 --
Subscriptions receivable.................................. -- 50,000
Inventory................................................. 169,649 5,500
Prepaid expenses.......................................... 45,693 289,771
----------- -----------
2,227,339 571,241
Capital assets (note 2)..................................... 1,400,184 510,070
Other assets (note 3)....................................... 8,751,671 955,875
----------- -----------
$12,379,194 $ 2,037,186
=========== ===========
LIABILITIES
Current liabilities:
Bank indebtedness (note 4)................................ $ 1,799,618 $ --
Accounts payable and accrued liabilities.................. 2,183,460 424,694
Convertible debenture (note 5)............................ 210,000 200,000
Current portion of obligations under capital lease........ 81,315 --
Current portion of long-term debt......................... 5,752,364 --
----------- -----------
10,026,757 624,694
Obligations under capital leases (note 6)................... 290,802 --
Long-term debt (note 7)..................................... 2,000,000 --
----------- -----------
12,317,559 624,694
----------- -----------
SHAREHOLDERS' EQUITY
Capital stock (note 8)...................................... 6,170,429 2,803,389
Deficit..................................................... (6,108,794) (1,390,897)
----------- -----------
61,635 1,412,492
----------- -----------
$12,379,194 $ 2,037,186
=========== ===========
</TABLE>
See accompanying notes.
F-54
<PAGE> 109
MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED STATEMENTS OF DEFICIT
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Deficit, beginning.......................................... $(1,390,897) $ (891,9l8)
Net loss.................................................... (4,717,897) (498,979)
----------- -----------
Deficit, ending............................................. $(6,108,794) $(1,390,897)
=========== ===========
</TABLE>
See accompanying notes.
F-55
<PAGE> 110
MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED STATEMENTS OF INCOME
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Sales....................................................... $10,983,298 $ 392,432
Direct costs................................................ 6,920,620 298,397
----------- ---------
Gross margin................................................ 4,062,678 94,035
----------- ---------
Operating expenses:
Amortization.............................................. 1,068,964 55,925
Bad debts................................................. 20,000 --
Interest.................................................. 1,467,476 722
Financing costs........................................... -- 106,822
Office and general........................................ 206,269 7,623
Premises costs............................................ 449,527 47,281
Professional fees......................................... 122,666 182,523
Telephone................................................. 126,806 6,479
Wages and benefits........................................ 1,525,864 99,727
----------- ---------
4,987,572 507,102
----------- ---------
Loss before the following................................... (924,894) (413,067)
Laidlaw financing and related costs....................... (1,148,634) --
SMS financing and related costs........................... (1,448,294) --
Loss from discontinued operations (note 9)................ (1,218,373) --
Gain (loss) on disposal of capital assets................. 22,298 (85,912)
----------- ---------
(3,793,003) (85,912)
----------- ---------
Net loss.................................................... $(4,717,897) $(498,979)
=========== =========
</TABLE>
See accompanying notes.
F-56
<PAGE> 111
MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Provided By (Used For)
Operating activities:
Net loss.................................................. $(4,717,897) $ (498,979)
Items not affecting cash
Amortization......................................... 1,068,964 55,925
(Gain) loss on disposal of capital assets............ (22,298) 85,912
----------- ----------
(3,671,231) (357,142)
Changes in non-cash working capital items................... 71,293 (94,385)
----------- ----------
(3,599,938) (451,527)
----------- ----------
Financing activities:
Issue of common shares.................................... 3,367,040 864,499
Obligations under capital leases.......................... 372,117 --
Increase in long-term debt................................ 8,097,166 --
Repayment of long-term debt............................... (500,000) --
Convertible debenture..................................... 10,000 200,000
----------- ----------
11,346,323 1,064,499
----------- ----------
Investing activity:
Purchase of capital assets................................ (1,553,690) (179,658)
Proceeds on disposal of capital assets.................... 16,352 --
Increase in goodwill...................................... (8,040,040) (479,332)
----------- ----------
(9,577,378) (658,990)
----------- ----------
Decrease in cash............................................ (1,830,993) (46,018)
Cash, beginning............................................. 31,375 77,393
----------- ----------
(Bank indebtedness) cash, ending............................ $(1,799,618) $ 31,375
=========== ==========
</TABLE>
See accompanying notes.
F-57
<PAGE> 112
MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements are prepared in accordance with generally
accepted accounting principles in Canada.
(a) Going concern assumption
These financial statements have been prepared on the basis of accounting
principles applicable to a "going concern", which assumes that the Company will
continue in operation for the foreseeable future and will be able to realize its
assets and discharge its liabilities in the normal course of operations.
Several adverse conditions and events cast substantial assumption upon the
validity of this assumption. The Company has incurred significant operating
losses in the current year and has a significant working capital deficiency. In
addition the Company is in breach of certain financial covenants relating to its
bank credit facilities and subordinated debt.
The Company is dependent on the continued support of its banker and
subordinated debt holders and is currently renegotiating its financing
arrangements as well as seeking alternate equity funding and pursuing the
possibility of an outright sale.
These financial statements do not reflect adjustments that would be
necessary if the "going concern" assumption were not appropriate because
management believes that the actions already taken or planned, as described
above, will mitigate the adverse conditions and events which raise doubts about
the validity of the "going concern" assumption used in preparing these financial
statements.
If the "going concern" assumption were not appropriate for these financial
statements, then adjustments would be necessary in the carrying values of assets
and liabilities, the reported revenues and expenses, and the balance sheet
classifications used.
(b) Business combination
On April 4, 1997, Med-Tech Environmental Limited ("Med-Tech") acquired all
the issued and outstanding capital stock of Laidlaw Medical Services Ltd.
("LMSL") and Med-Tech Environmental Inc., a wholly owned subsidiary of Med-Tech,
and acquired all the issued and outstanding capital stock of Laidlaw Medical
Services, Inc. (Delaware) ("LMSI"), for $9,200,000. The purchase price was
funded by the issue of the Company's capital stock, term and subordinated
convertible term debt. The purchase price was allocated equally between LMSL and
LMSI. The acquisition was accounted for by the purchase method.
(c) Change of name
During the year, the following companies, by way of articles of amendment,
changed their names as follows:
<TABLE>
<CAPTION>
FROM TO
---- --
<S> <C>
Laidlaw Medical Services Ltd. Med-Tech Environmental (CDA) Ltd.
Laidlaw Medical Services, Inc. Med-Tech Environmental (MA) Inc.
</TABLE>
(d) Principles of consolidation
These consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Bio-Med Waste Disposal Systems Ltd., Med-Tech
Environmental (CDA) Ltd., Med-Tech Environmental Inc., and Med-Tech
Environmental (MA) Inc. All significant intercompany accounts and transactions
have been eliminated.
F-58
<PAGE> 113
MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Capital assets are recorded at cost. Amortization is calculated on the
following annual rates and methods:
<TABLE>
<S> <C>
Furniture and fixtures............................. 20% declining balance basis
Computers.......................................... 30% declining balance basis
Trucks............................................. 30% declining balance basis
Equipment.......................................... Straight-line over 5 years
Assets under capital leases........................ 30% declining balance basis
</TABLE>
Leasehold improvements are amortized on a straight line basis over the term
of the lease.
(f) Licenses and goodwill are recorded at cost and amortized on a
straight-line basis over a period no greater than 25 years.
(g) Foreign currency translation
Assets and liabilities of integrated foreign subsidiary operations and
foreign currency denominated assets and liabilities of Canadian operations are
translated into Canadian dollars at exchange rates prevailing at the transaction
date for non-monetary items. Revenue and expenses, except amortization, are
converted at average exchange rates for the year. Amortization is converted at
the same rate as the related assets. Gains or losses on translation are expensed
in the year realized or incurred except for the exchange gains or losses on
long-term monetary items which are deferred and amortized over the remaining
terms of the related items.
2. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- --------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---- ------------ -------- --------
<S> <C> <C> <C> <C>
Furniture and fixtures........... $ 538,199 529,805 $ 8,394 $ 11,046
Computers........................ 117,549 34,057 83,492 28,328
Trucks........................... 1,958,503 1,605,938 352,565 29,687
Equipment........................ 1,195,903 814,531 381,372 397,499
Leasehold improvements........... 189,338 50,407 138,931 13,395
Assets under capital leases...... 508,899 73,469 435,430 30,115
---------- --------- ---------- --------
$4,508,391 3,108,207 $1,400,184 $510,070
========== ========= ========== ========
</TABLE>
3. OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- --------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---- ------------ -------- --------
<S> <C> <C> <C> <C>
Licenses................ $ 214,610 23,350 $ 191,260 $201,906
Goodwill................ 9,011,290 450,879 8,560,411 753,969
---------- ------- ---------- --------
$9,225,900 474,229 $8,751,671 $955,875
========== ======= ========== ========
</TABLE>
4. BANK INDEBTEDNESS
The bank indebtedness is secured by a registered general security agreement
covering all assets and bears interest at the bank's prime rate plus 100 basis
points
F-59
<PAGE> 114
MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998
5. CONVERTIBLE DEBENTURE
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
5% convertible debenture to Oriole Point Investment Inc.,
a shareholder; interest payable on the 31st day of March
in each year commencing March 31, 1998, repayable upon
the earlier of: (i) a distribution to the public of
securities of the Company and (ii) March 31,1999. The
Company will make mandatory principal prepayments
commencing April 30, 1998 to the lesser of 50% of annual
free cash flow or $100,000. ............................. $210,000 $200,000
======== ========
</TABLE>
6. OBLIGATIONS UNDER CAPITAL LEASES
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Obligations related to leased trucks repayable in monthly
installments of $5,444 at interest rates ranging from
8%to 12%................................................. $372,117 $ --
Less current portion..................................... 81,315 --
-------- --------
$290,802 $ --
</TABLE>
Total payments due in the next 5 years are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 81,315
2000........................................................ 88,999
2001........................................................ 90,355
2002........................................................ 56,680
2003 and thereafter......................................... 54,768
--------
$372,117
========
</TABLE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
4.8% monthly (57.6% per annum) promissory note to
Oriole Point Investment Inc., a shareholder, due
October 6, 1997, interest accrued monthly commencing
October 6, 1997....................................... $ 105,000 $ --
25% non-revolving convertible term facility, interest
shall be paid monthly at the rate of 12.5% per annum,
the balance of 12.5% increases the amount of the debt,
due March 31, 1999, secured by a registered general
security agreement.................................... 4,647,364 --
Term loan, bearing interest at prime plus 200 basis
points, interest payable monthly, repayable in
quarterly principal payments of $250,000 plus 75% of
the free cash flow to a maximum of $1,000,000 prior to
March 31, 1998 and $500,000 every year thereafter,
secured by a registered general security agreement.... 3,000,000 --
---------- ----------
7,752,364 --
Less current portion.................................. 5,752,364 --
---------- ----------
$2,000,000 $ --
========== ==========
</TABLE>
F-60
<PAGE> 115
MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998
7. LONG-TERM DEBT (CONTINUED)
At year end the company was in default of certain bank covenants and
certain covenants pertaining to the non-revolving convertible term facility and
is currently renegotiating its financing arrangements.
Principal payments required in each of tile next three years are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
1999.................................................. $5,752,364 $
2000.................................................. 1,000,000
2001.................................................. 1,000,000
---------- ----------
$7,752,364 $
========== ==========
</TABLE>
8. CAPITAL STOCK
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Authorized
Unlimited number of Class "A" common shares.........
Issued
14,605,000 (1997 9,725,000) Class "A" common
shares........................................... $6,170,429 $2,803,389
========== ==========
</TABLE>
During the year the Company entered into the following transactions
involving the issuance of capital stock:
a) The company issued 2,250,000 Class "A" common shares at $1.00 per
share for proceeds of $2,250,000.
b) 500,000 First Series Warrants were exercised at $1.00 per share for
500,000 Class "A" common shares for $500,000.
c) 2,000,000 Fourth Series Warrants were exercised at $0.40 per share
for 2,000,000 Class "A" common shares for $800,000.
d) 80,000 corporate share purchase options were exercised at $0.40
each for 80,000 Class "A" common shares for $32,000.
e) The Company issued 50,000 Class "A" Common shares at $0.40 per
share for proceeds of $20,000.
f) The equity portion of the pro rata share of fees paid to TEGS
Capital Corporation on the issue of Class "A" common shares in the amount
of $234,960 was charged as a reduction to capital stock.
The Company has the following warrants and options outstanding:
a) 3,268,062 First Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $1.00 per share, expiring
December 31, 1998.
b) 500,000 Fourth Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $0.40 per share expiring March
21, 1999.
c) 600,000 Fifth Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $0.73 per share, expiring March
31, 2000.
F-61
<PAGE> 116
MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998
8. CAPITAL STOCK (CONTINUED)
d) 600,000 Sixth Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $1.00 per share, expiring March
31, 2000.
e) 1,333,333 Retractable Warrants each entitling the holder to
subscribe for one Class "A" common share at $0.40 per share, exercisable
from the earlier of March 31, 1999 and the prepayment date until the expiry
date, which will be two years from the date the Company becomes a reporting
issuer in Ontario and the retractable Warrants and Class "A" common shares
issuable on their exercise become freely tradeable for the holder or its
nominees.
f) 280,000 Corporate Share Purchase Options to purchase 280,000 Class
"A" common shares at the exercise price of $0.40 per share, expiring
January 23, 2001.
g) 480,000 Corporate Share Purchase Options to purchase 480,000 Class
"A" common shares at the exercise price of $1.00 per share, expiring
November 6, 2002.
h) 24,000 Corporate Share Purchase Options to purchase 24,000 Class
"A" common shares at the exercise price of $0.40 per share, expiring
January 23, 2001.
i) 260,000 Corporate Share Purchase Options to purchase 260,000 Class
"A" common shares at the exercise price of $1.00 per share, expiring
December 31, 2000.
j) 300,000 Corporate Share Purchase Options to purchase 300,000 Class
"A" common shares at the exercise price of $0.40 per share, expiring March
31, 1999.
k) 300,000 Corporate Share Purchase Options to purchase 300,000 Class
"A" common shares at the exercise price of $1.00 per share, expiring May
31, 1999.
l) During the year the 138,277 second series warrants and 553,110
third series warrants expired March 31, 1998 without being exercised.
9. LOSS FROM DISCONTINUED OPERATIONS
The Company discontinued its divisions in Etobicoke, Ontario and Gatineau,
Quebec. Management has estimated losses related to the discontinued operations
and accrued them in these financial statements. Any significant changes to these
estimates will be recorded in the period in which they are realized.
10. ACQUISITION
Effective April 4 1997, Med-Tech acquired all the issued and outstanding
capital stock of Laidlaw Medical Services Ltd. (Canada) and Med-Tech
Environmental Inc., a wholly owned subsidiary of "Med-Tech", acquired all the
issued and outstanding capital stock of Laidlaw Medical Services, Inc.,
(Delaware). Both companies operated a medical waste transportation and disposal
business. The acquisition has been
F-62
<PAGE> 117
MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998
10. ACQUISITION (CONTINUED)
accounted for by the purchase method and the results of operations have been
consolidated from April 4, 1997.
<TABLE>
<S> <C>
Current assets.............................................. $ 1,744,901
Capital assets.............................................. 2,121,706
Goodwill.................................................... 8,057,321
-----------
$11,923,928
===========
Current liabilities......................................... $ 1,390,415
Long term debt.............................................. 7,500,000
Class "A" common shares..................................... 3,033,513
-----------
$11,923,928
===========
</TABLE>
11. COMMITMENTS AND CONTINGENCY
(a) The Company leases operating premises in Brampton, Ontario, St.
Catharines, Quebec, Calgary, Alberta and Haverhill, Massachusetts. The
minimum annual rentals for the balance of these leases amounts to $244,057.
(b) The Company has provided the Ministry of the Environment of
Ontario with bonds for approximately $136,000 as required by provincial
statute.
(c) The Ministry of the Environment of Ontario and the Massachusetts
Department of Environmental Protection have several non-compliance and
related charges outstanding. It is not possible at this time to determine
the amount, if any, of any fines or damages that may be levied as a result
of these non-compliance issues. Any fines or damages incurred as a result
of these concerns will be charged to operations in the year they are
incurred. Management does not believe that fines levied will be in excess
of $15,000 in total.
(d) As at May 20, 1998 several of the Company's legal counsels had not
yet responded to our audit legal enquiry. As at November 16, 1998 the last
of the outstanding legal enquiries was received and note 11(c) was amended
accordingly.
(e) Under the terms of the purchase and sale agreement as described in
note 1(b) between Allied Waste Industries Inc. ("Allied"), Med-Tech, LMSL
and LMSI, Med-Tech has an obligation to obtain a release of Allied's
guarantee on the lease at 139-141 Ferry Road, Haverhill, Massachusetts. To
date, this obligation to obtain a release has not yet been fulfilled.
(f) The Company agreed to issue to 1176698 Ontario Limited or its
nominees Warrants (the "Unrestricted Warrants") entitling the holder to
purchase 2,000,000 Class "A" common shares at an exercise price of $1.00
per share, subject to adjustments. The expiry date of the Unrestricted
Warrants will be two years from the date the Company became a reporting
issuer and the Unrestricted Warrants and Class "A" common shares issuable
on their exercise become freely tradeable for 1176698 Ontario Limited or
its nominees.
F-63
<PAGE> 118
MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998
12. TAX BENEFITS AVAILABLE
These financial statements do not reflect potential tax benefits available
through the application of losses carried forward against future years' earnings
otherwise subject to income taxes. These losses expire approximately as follows:
<TABLE>
<S> <C>
1999........................................................ $1,347,000
2000........................................................ 3,319,000
2001........................................................ 2,198,000
2002........................................................ 1,247,000
2003........................................................ 410,000
2004........................................................ 1,122,000
----------
$9,643,000
==========
</TABLE>
13. RELATED PARTY TRANSACTIONS
During the year the Company incurred the following related party
transactions with certain corporate directors, officers and professional firms
of these certain directors and officers.
<TABLE>
<S> <C>
Professional services expenses.............................. $454,035
Commissions................................................. 266,000
Management and consulting services expenses................. 36,598
Interest.................................................... 39,264
</TABLE>
At March 31, 1998, $319,150 remains outstanding and is included in accounts
payable.
Management is of the opinion that these transactions are in the normal
course of operations and are measured at the exchange amount which is the amount
of consideration established and agreed to by the related parties.
14. RISK MANAGEMENT AND FAIR VALUES
Financial risk is the risk to Med-Tech's earnings that arise from
fluctuations in interest rates and foreign exchange rates and the degree of
volatility of these rates. Med-Tech does not use derivative instruments to
reduce its exposure to interest and foreign exchange risk. The book value of
Med-Tech's financial assets and liabilities approximate amounts for which
instruments could be exchanged in a transaction between knowledgeable and
willing parties based on public market information.
F-64
<PAGE> 119
MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable....................................... $ 1,899,021 $ 1,742,788
Other receivables......................................... 49,470 185,828
Inventory................................................. 135,007 129,704
Prepaids expenses and deposits............................ 183,650 220,582
----------- -----------
Total current assets................................... 2,267,148 2,278,902
Capital assets............................................ 1,482,794 2,927,700
Licenses.................................................. 189,114 198,385
Goodwill.................................................. 8,249,861 6,947,274
----------- -----------
Total assets........................................... $12,188,917 $12,352,261
=========== ===========
LIABILITIES
Current liabilities:
Bank indebtedness......................................... $ 1,732,353 $ 307,483
Accounts payable and accrued liabilities.................. 2,148,577 2,011,332
Convertible debenture..................................... 4,954,769 4,200,000
Current portion of obligations under capital lease........ 124,209 --
Current portion of long-term debt......................... 3,000,000 600,000
----------- -----------
Total Current liabilities.............................. 11,958,907 7,118,815
Obligations under capital lease........................... 372,626 --
Long-term debt............................................ -- 2,900,000
----------- -----------
Total liabilities...................................... 12,332,533 10,018,815
----------- -----------
SHAREHOLDERS' EQUITY
Capital stock............................................... 8,220,429 5,850,430
Deficit..................................................... (6,364,045) (3,316,984)
----------- -----------
Total shareholders equity.............................. (143,618) 2,333,446
----------- -----------
Total liabilities and shareholders' equity............. $12,188,917 $12,352,261
=========== ===========
</TABLE>
F-65
<PAGE> 120
MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Revenue..................................................... $2,894,208 $ 2,512,614
---------- -----------
Direct costs
Disposal and Processing................................... 903,232 1,242,538
Transportation............................................ 601,605 615,041
Packaging................................................. 314,983 282,137
---------- -----------
Total direct costs..................................... 1,819,820 2,139,715
---------- -----------
Gross margin................................................ 1,074,388 372,898
---------- -----------
Selling, general and administrative expenses................ 672,648 1,843,058
---------- -----------
Amortization................................................ 220,669 245,232
Interest expense............................................ 409,557 215,534
---------- -----------
Net loss.................................................... $ (228,486) $(1,930,926)
========== ===========
</TABLE>
F-66
<PAGE> 121
MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(UNAUDITED)
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
JUNE 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Cash provided by (used for)
Operating activities:
Net loss.................................................. $(228,488) $(1,930,926)
Items not affecting cash
Amortization......................................... 220,689 245,232
</TABLE>
F-67
<PAGE> 122
MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
These interim financial statements have been prepared by management in
accordance with generally accepted accounting principles in Canada. These
interim financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the years ended March
31, 1997 and March 31, 1998. The results of operations for the three month
period ended June 30, 1998 are not necessary indicative of the results that may
be achieved for the entire year ending March 31, 1999.
These statements are denoted in Canadian Dollars.
2. STOCK ISSUANCES
In April 1998, options to purchase 150,000 shares of common stock were
exercised at an average price of $0.33 per share.
3. INCOME TAXES
These financial statements do not reflect potential tax benefits available
through the application of losses carried forward against future years earnings.
F-68
<PAGE> 123
INTRODUCTION TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements of the
Company present the unaudited pro forma consolidated statements of operations
for the year ended December 31, 1997 and the nine months ended September 30,
1998 and the unaudited pro forma consolidated balance sheet at September 30,
1998. The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1997 gives pro forma effect to the Company's acquisition of
(a) all of the outstanding common stock of Waste Systems, Inc. ("WSI"), the
majority owner of 3CI Complete Compliance Corporation, on October 1, 1998, (b)
all of the junior secured indebtedness of Med-Tech Environmental Limited
("Med-Tech") on October 20, 1998, and (c) 94% of the outstanding common stock
and 56% of the outstanding warrants of Med-Tech on December 31, 1998, as if such
transactions had occurred on January 1, 1997. The unaudited pro forma
consolidated statement of operations for the nine months ended September 30,
1998 gives pro forma effect to the acquisition of the common stock of WSI and
the common stock, warrants and junior secured indebtedness of Med-Tech as if
such transactions had occurred on January 1, 1998. The unaudited pro forma
consolidated balance sheet gives pro forma effect to the acquisition of the
common stock of WSI and the common stock, warrants and junior secured
indebtedness of Med-Tech as if such transactions had occurred on September 30,
1998. The pro forma as adjusted consolidated financial statements give
additional effect to the offering of 3,000,000 shares of Common Stock made
hereby and the use of a portion of the net proceeds therefrom to repay
interest-bearing indebtedness in the amount of $10,000,000 issued to fund the
acquisition of the common stock of WSI and interest-bearing indebtedness in the
amount of $5,485,000 issued to fund the acquisition of the common stock,
warrants and junior secured indebtedness of Med-Tech, in each case as if such
events had occurred on the first day of the period presented, for purposes of
statement of operations data, and as if such events had occurred on September
30, 1998, for purposes of balance sheet data. The unaudited pro forma
consolidated financial statements presented herein are based on the assumptions
and adjustments described in the accompanying notes. The unaudited pro forma
consolidated statements of operations do not purport to represent what the
Company's results of operations would have been if the events described above
had occurred as of the dates indicated or what such results will be for any
future periods. The unaudited pro forma consolidated financial statements are
based on assumptions and adjustments that the Company believes are reasonable.
The unaudited pro forma consolidated financial statements and the accompanying
notes should be read in conjunction with the historical financial statements of
the Company, including the notes thereto, and the historical financial
statements of WSI and Med-Tech, and the notes thereto, which are included
elsewhere in this Prospectus.
F-69
<PAGE> 124
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OFFERING
PRO FORMA PRO FORMA PRO FORMA
STERICYCLE WSI (1) MED-TECH (2) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ------- ------------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $46,166 $18,790 $ 7,835 -- $72,791 -- $72,791
Costs and expenses:
Cost of revenues......... 34,109 15,456 4,937 -- 54,502 -- 54,502
Selling, general, and
administrative
expenses............... 10,671 3,785 2,511 $ 213(3) 17,180 -- 17,180
Write-off of financing
and related costs...... -- -- 1,853 (820)(4) 1,033 -- 1,033
Loss from shut-down of
operations............. -- -- 869 -- 869 -- 869
------- ------- ------- ----- ------- ------ -------
44,780 19,241 10,170 (607) 73,584 -- 73,584
------- ------- ------- ----- ------- ------ -------
Income (loss) from
operations............... 1,386 (451) (2,335) 607 (793) -- (793)
Other income (expense):
Interest income.......... 618 -- -- -- 618 --(7) 618
Interest expense......... (428) (855) (1,047) (479)(5) (2,809) $1,264(8) (1,545)
Other income (expense)... -- -- 16 -- 16 -- 16
------- ------- ------- ----- ------- ------ -------
190 (855) (1,031) (479) (2,175) 1,264 (911)
------- ------- ------- ----- ------- ------ -------
Income (loss) before income
taxes and minority
interest................. 1,576 (1,306) (3,366) 128 (2,968) 1,264 (1,704)
Income tax expense......... 146 -- -- -- 146 -- 146
------- ------- ------- ----- ------- ------ -------
Income (loss) before
minority interest........ 1,430 (1,306) (3,366) 128 (3,114) 1,264 (1,850)
Minority interest in net
loss of subsidiary....... -- 66 -- -- 66 -- 66
------- ------- ------- ----- ------- ------ -------
Net income (loss).......... $ 1,430 $(1,240) $(3,366) $ 128 $(3,048) $1,264 $(1,784)
======= ======= ======= ===== ======= ====== =======
Weighted average shares
outstanding--basic....... 10,240 45(6) 10,285 3,000(9) 13,285
======= ===== ======= ====== =======
Basic net income (loss) per
share.................... $ 0.14 $ (0.30) $ (0.13)
======= ======= =======
Weighted average number of
common shares and common
stock equivalent shares
outstanding.............. 10,766 45(6) 10,811 3,000(9) 13,811
======= ===== ======= ====== =======
Diluted net income (loss)
per share................ $ 0.13 $ (0.28) $ (0.13)
======= ======= =======
</TABLE>
- -------------------------
(1) The statement of operations data for WSI for the year ended December 31,
1997 represent the historical results of operations of WSI for its fiscal
year ended December 31, 1997. The acquisition of WSI has been accounted for
as a purchase. Accordingly, the results of operations of WSI will be
included in the Company's results of operations from the date of
acquisition.
(2) The statement of operations data for Med-Tech for the year ended December
31, 1997 represent the historical results of operations of Med-Tech for its
fiscal year ended March 31, 1998 and have been converted to U.S. dollars
using the average exchange rate of Canadian $1.4018 for U.S. $1.00 for the
fiscal year ended March 31, 1998. The acquisition of Med-Tech has been
accounted for as a purchase.
F-70
<PAGE> 125
Accordingly, the results of operations of Med-Tech will be included in the
Company's results of operations from the date of acquisition.
(3) The adjustment to selling, general and administrative expenses consists of
an increase in amortization of goodwill from the acquisitions of WSI and
Med-Tech over a 25-year period, as if WSI and Med-Tech were acquired on
January 1, 1997. The adjustment also includes the effects of increased
amortization of goodwill of $8,000 for Med-Tech resulting from differences
in accounting principles generally accepted in Canada and the United States
as discussed in Note 4 below.
(4) The historical statement of operations of Med-Tech for the fiscal year ended
March 31, 1998 include certain legal and financing costs incurred to
complete and obtain financing for its acquisition on April 4, 1997 of
Laidlaw Medical Services, Ltd. and Laidlaw Medical Services, Inc. (together
"Laidlaw"). Under accounting principles generally accepted in Canada, these
costs have been expensed as incurred in the statement of operations for the
year ended March 31, 1998. Under accounting principles generally accepted in
the United States and for purposes of this unaudited pro forma consolidated
statement of operations, these costs have been deferred and are being
amortized on a straight-line basis over 25 years for the legal fees and over
the life of the related loan agreement for the financing costs.
(5) The adjustment to interest expense reflects the following: (a) additional
interest, including commitment fees on the unborrowed portion and net of
reduced commitment fees on the borrowed portion, of $1,334,000 that would
have been incurred had the Company borrowed the $10,000,000 required to fund
the acquisition of the common stock of WSI and the $5,485,000 required to
fund the acquisition of the common stock, warrants and junior secured
indebtedness of Med-Tech under its credit agreement with LaSalle National
Bank on January 1, 1997 at interest rates of 8.50% for WSI and 8.25% for
Med-Tech which were in effect on acquisition, (b) reduced interest expense
of $894,000 that would not have been incurred had the Company purchased on
January 1, 1997 the junior secured indebtedness of Med-Tech with a face
value of $3,576,000 and an interest rate of 25%, and (c) increased
amortization of deferred financing costs of $39,000 for Med-Tech from
January 1, 1997 resulting from differences in accounting principles
generally accepted in Canada and the United States as discussed in Note 4
above.
(6) Shares used in the computation of pro forma basic net income (loss) per
share and pro forma diluted net income (loss) per share give effect to the
issuance of 45,440 shares of Common Stock by the Company as consideration
for the purchase of the common stock, warrants and junior secured
indebtedness of Med-Tech assuming such shares were issued on January 1,
1997.
(7) The Company intends to invest in short-term, interest-bearing investment
grade securities the $34,315,000 of excess proceeds expected from the
Offering, after re-payment of certain indebtedness of the Company as more
fully described in "Use of Proceeds". Based on the 13-week Treasury bill
interest rate of 4.38% effective January 7, 1999, interest income of
$1,503,000 would have been earned assuming the investment of such excess
proceeds during the full period from January 1, 1997 to December 31, 1997.
Such interest income has not been included in the unaudited consolidated pro
forma statement of operations for the year ended December 31, 1997.
(8) The adjustment to interest expense reflects the repayment of certain
indebtedness of the Company by applying a portion of the estimated net
proceeds of the Offering as more fully described in "Use of Proceeds," as if
such transactions had occurred on January 1, 1997.
(9) Shares used in the computation of pro forma basic net income (loss) per
share and pro forma diluted net income (loss) per share, as adjusted, give
effect to the issuance and sale of 3,000,000 shares of Common Stock offered
by the Company hereby.
F-71
<PAGE> 126
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OFFERING
PRO FORMA PRO FORMA PRO FORMA
STERICYCLE WSI(1) MED-TECH(2) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ------ ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $44,759 $14,127 $5,985 -- $64,871 -- $64,871
Costs and expenses:
Cost of revenues.......... 30,492 11,289 4,283 -- 46,064 -- 46,064
Selling, general, and
administrative
expenses................ 10,151 2,555 1,779 $ 161(3) 14,646 -- 14,646
------- ------- ------ ----- ------- ------ -------
40,643 13,844 6,062 161 60,710 -- 60,710
------- ------- ------ ----- ------- ------ -------
Income (loss) from
operations................ 4,116 283 (77) (161) 4,161 -- 4,161
Other income (expense):
Interest income........... 308 -- -- -- 308 (6) 308
Interest expense.......... (242) (175) (834) (359)(4) (1,610) $1,024(7) (586)
Other income (expense).... 20 -- (53) -- (33) -- (33)
------- ------- ------ ----- ------- ------ -------
86 (175) (887) (359) (1,335) 1,024 (311)
------- ------- ------ ----- ------- ------ -------
Income (loss) before income
taxes and minority
interest.................. 4,202 108 (964) (520) 2,826 1,024 3,850
Income tax expense.......... 781 -- -- -- 781 -- 781
------- ------- ------ ----- ------- ------ -------
Income (loss) before
minority interest......... 3,421 108 (964) (520) 2,045 1,024 3,069
Minority interest in net
loss of subsidiary........ -- 43 -- -- 43 -- 43
------- ------- ------ ----- ------- ------ -------
Net income (loss)........... $ 3,421 $ 151 $ (964) $(520) $ 2,088 $1,024 $ 3,112
======= ======= ====== ===== ======= ====== =======
Weighted average shares
outstanding--basic........ 10,580 45(5) 10,625 3,000(8) 13,625
======= ===== ======= ====== =======
Basic net income per
share..................... $ 0.32 $ 0.20 $ 0.23
======= ======= =======
Weighted average number of
common shares and common
stock equivalent shares
outstanding............... 11,234 45(5) 11,279 3,000(8) 14,279
======= ===== ======= ====== =======
Diluted net income per
share..................... $ 0.30 $ 0.19 $ 0.22
======= ======= =======
</TABLE>
- -------------------------
(1) The statement of operations data for WSI for the nine months ended September
30, 1998 represent the results of operations of WSI from January 1, 1998 to
September 30, 1998. The acquisition of WSI has been accounted for as a
purchase. Accordingly, the results of operations of WSI will be included in
the Company's results of operations from the date of acquisition.
(2) The statement of operations data for Med-Tech for the nine months ended
September 30, 1998 represent the historical results of operations of
Med-Tech from January 1, 1998 to September 30, 1998 and have been converted
to U.S. dollars using the average exchange rate of Canadian $1.4692 for U.S.
$1.00 for the period from January 1, 1998 to September 30, 1998. The
acquisition of Med-Tech has been accounted for as a purchase. Accordingly,
the results of operations of Med-Tech will be included in the Company's
results of operations from the date of acquisition.
(3) The adjustment to selling, general and administrative expenses consists of
an increase in amortization of goodwill from the acquisitions of WSI and
Med-Tech over a 25 year period, as if WSI and Med-Tech were acquired on
January 1, 1998. The adjustment also includes the effects of increased
amortization of goodwill of $6,000 for Med-Tech resulting from differences
in accounting principles generally accepted in Canada and the United States
as discussed in Note 4 to the unaudited pro forma consolidated statement of
operations for the year ended December 31, 1997.
F-72
<PAGE> 127
(4) The adjustment to interest expense reflects the following: (a) additional
interest, including commitment fees on the unborrowed portion and net of
reduced commitment fees on the borrowed portion, of $1,001,000 that would
have been incurred had the Company borrowed the $10,000,000 required to fund
the acquisition of the common stock of WSI and the $5,485,000 required to
fund the acquisition of the common stock, warrants, and junior secured
indebtedness of Med-Tech under its credit agreement with LaSalle National
Bank on January 1, 1998 at interest rates of 8.50% for WSI and 8.25% for
Med-Tech which were in effect on the dates of acquisition; (b) reduced
interest expense of $671,000 that would not have been incurred had the
Company purchased on January 1, 1998 the junior secured indebtedness of
Med-Tech with a face value of $3,576,000 and an interest rate of 25%; and
(c) increased amortization of deferred financing costs of $29,000 for
Med-Tech from January 1, 1998 resulting from differences in accounting
principles generally accepted in Canada and the United States as discussed
in Note 4 to the unaudited pro forma consolidated statement of operations
for the year ended December 31, 1997.
(5) Shares used in the computation of pro forma basic net income per share and
pro forma diluted net income per share give effect to the issuance of 45,440
shares of Common Stock by the Company as consideration for the purchase of
the common stock, warrants and junior secured indebtedness of Med-Tech
assuming such shares were issued on January 1, 1998.
(6) The Company intends to invest in short-term interest-bearing investment
grade securities the $34,315,000 of excess proceeds expected from the
Offering, after repayment of certain indebtedness of the Company as more
fully described in "Use of Proceeds". Based on the 13-week treasury bill
interest rate of 4.38% effective January 7, 1999, interest income of
$1,124,000 would have been earned assuming the investment of such excess
proceeds during the full period from January 1, 1998 to September 30, 1998.
Such interest income has not been included in the unaudited consolidated pro
forma statement of operations for the nine months ended September 30, 1998.
(7) The adjustment to interest expense reflects the repayment of certain
indebtedness of the Company by applying a portion of the estimated net
proceeds of the Offering as more fully described in "Use of Proceeds," as if
such transaction had occurred on January 1, 1998.
(8) Shares used in the computation of pro forma basic net income per share and
pro forma diluted net income per share, as adjusted, give effect to the
issuance and sale of 3,000,000 shares of Common Stock offered by the Company
hereby.
F-73
<PAGE> 128
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
OFFERING
PRO FORMA PRO FORMA PRO FORMA
STERICYCLE WSI MED-TECH(1) ADJUSTMENTS(2) PRO FORMA ADJUSTMENTS(3) AS ADJUSTED
---------- --- ----------- -------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 775 $ 2 $ -- $ (260) $ 517 $ 34,315 $ 34,832
Short-term investments......... 2,335 -- -- -- 2,335 -- 2,335
Accounts receivable, net....... 10,902 2,813 $1,542 -- 15,257 -- 15,257
Parts and supplies............. 1,037 87 109 -- 1,233 -- 1,233
Prepaid expenses and other..... 2,615 758 180 -- 3,553 -- 3,553
------- ------- ------ -------- -------- -------- --------
Total current assets....... 17,664 3,660 1,831 (260) 22,895 34,315 57,210
Property, plant and equipment,
net............................ 12,043 8,986 971 -- 22,000 -- 22,000
Goodwill, net.................... 36,796 343 5,516 4,804 47,459 -- 47,459
Other............................ 1,680 226 341 100 2,347 -- 2,347
------- ------- ------ -------- -------- -------- --------
Total assets............... $68,183 $13,215 $8,659 $ 4,644 $ 94,701 $ 34,315 $129,016
======= ======= ====== ======== ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ 6,281 $ 1,660 $7,168 $ 6,909 $ 22,018 $(10,485) $ 11,533
Accounts payable and accrued
liabilities.................. 7,422 2,685 1,491 -- 11,598 -- 11,598
Deferred revenue............... 663 -- -- -- 663 -- 663
------- ------- ------ -------- -------- -------- --------
Total current
liabilities.............. 14,366 4,345 8,659 6,909 34,279 (10,485) 23,794
Long-term debt................... 3,246 883 -- 5,000 9,129 (5,000) 4,129
Other liabilities................ 21 -- -- -- 21 -- 21
Shareholders' equity:
Common stock................... 107 500 4,043 (4,543) 107 30 137
Additional paid-in capital..... 85,087 32,196 -- (31,474) 85,809 49,770 135,579
Notes receivable............... (4) -- -- -- (4) -- (4)
Accumulated deficit............ (34,640) (24,709) (4,043) 28,752 (34,640) -- (34,640)
------- ------- ------ -------- -------- -------- --------
Total shareholders'
equity................... 50,550 7,987 0 (7,265) 51,272 49,800 101,072
------- ------- ------ -------- -------- -------- --------
Total liabilities and
shareholders' equity..... $68,183 $13,215 $8,659 $ 4,644 $ 94,701 $ 34,315 $129,016
======= ======= ====== ======== ======== ======== ========
</TABLE>
- -------------------------
(1) The historical balance sheet data for Med-Tech have been converted to U.S.
dollars using an exchange rate of Canadian $1.5262 for U.S. $1.00 effective
as of September 30, 1998.
(2) Reflects the allocation of the purchase prices for the acquisitions of the
common stock of WSI and of the common stock, warrants and junior secured
indebtedness of Med-Tech to the underlying fair value of the net assets
acquired and the issuance of 45,440 shares of Common Stock of the Company
and incremental borrowings of $15,485,000 under the Company's credit
agreement with LaSalle National Bank to fund the purchase prices. The
allocation of the purchase prices is preliminary. The Company is in the
process of determining the fair values of the acquired property, plant and
equipment and does not expect final adjustments to the purchase price
allocations to be material.
(3) Reflects the issuance of 3,000,000 shares of Common Stock offered by the
Company hereby and the application of the net proceeds therefrom.
F-74
<PAGE> 129
[STERICYCLE LOGO]
[HOME]
Through on-site training and education programs, Stericycle helps customers
establish regulated medical waste management systems.
[HOME]
Stericycle helps health care providers protect patients and employees from the
potential hazards of regulated medical waste with puncture-resistant, leak-proof
Steri-Tub(R) collection containers.
[HOME]
Regulated medical waste is readied for treatment at the beginning of the
process.
[HOME]
The empty Steri-Tub(R) continues on to the wash station where it is sanitized
and prepared for re-use.
[HOME]
A processing vessel containing the regulated medical waste automatically enters
the dielectric oven, where it is treated using Stericycle's patented
Electro-Thermal-Deactivation (ETD) treatment process.
[HOME]
The regulated medical waste has now been rendered noninfectious. The treated
waste can now be recycled, used as a fuel to provide energy, or safely
landfilled.
<PAGE> 130
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer contained herein, and if given or made,
such information or representation must not be relied upon as having been
authorized by the Company, or any Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, shares of
Common Stock in any jurisdiction to any person to whom it is not lawful to make
any such offer or solicitation in such jurisdiction or in which the person
making such offer or solicitation is not qualified to do so. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that there has been no change in the
affairs of the Company since the date hereof.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 15
Price Range of Common Stock........... 16
Capitalization........................ 17
Dividend Policy....................... 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 25
Management............................ 46
Certain Transactions.................. 48
Description of Capital Stock.......... 49
Shares Eligible for Future Sale....... 50
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Available Information................. 53
Documents Incorporated by Reference... 53
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
PROSPECTUS , 1999
3,000,000 Shares
STERICYCLE LOGO
Common Stock
WARBURG DILLON READ LLC
CREDIT SUISSE FIRST BOSTON
WILLIAM BLAIR & COMPANY
<PAGE> 131
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered (other than
underwriting discounts and commissions). All amounts shown are estimates except
the Securities and Exchange Commission registration fee and the Nasdaq National
Market listing fees. All of these expenses will be paid by the Registrant.
<TABLE>
<S> <C>
SEC registration fee........................................ $17,678.64
Nasdaq National Market listing fees.........................
NASD registration fee....................................... 6,333.26
Legal fees and expenses.....................................
Accounting fees and expenses................................
Printing expenses...........................................
Blue sky fees and expenses..................................
Transfer agent fees.........................................
Miscellaneous...............................................
----------
Total................................................ $
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides generally that
a person sued as a director, officer, employee or agent of a corporation may be
indemnified by the corporation in non-derivative suits for expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement if such person
acted in good faith and in a manner that he or she reasonably believed to be in
or not opposed to the best interests of the corporation. In the case of criminal
actions and proceedings, the person must also not have had reasonable cause to
believe that his or her conduct was unlawful. Indemnification of expenses is
also authorized in stockholder derivative actions if the person acted in good
faith and in a manner that he or she reasonably believed to be in or not opposed
to the best interests of the corporation and if he or she has not been found
liable to the corporation. Even in this latter instance, the court may determine
that in view of all the circumstances such person is entitled to indemnification
for such expenses as the court deems proper. A person sued as a director,
officer, employee or agent of a corporation who has been successful in defense
of the action must be indemnified by the corporation against expenses.
Article Fifth of the Registrant's By-Laws requires the Company to indemnify
its directors, officers, employees and agents to the maximum extent permitted by
Delaware law. Article Fifth also requires the Registrant to advance litigation
expenses of a director or officer on receipt of his or her written undertaking
to repay all amounts advanced if it s ultimately determined that he or she is
not entitled to indemnification.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to include a provision in its certificate of incorporation
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for a breach of the director's
fiduciary duty of care. Such a provision may not eliminate or limit the
liability of a director for breaching his or her duty of loyalty, failing to act
in good faith, engaging in intentional misconduct or knowingly violating a law,
declaring an illegal dividend or approving an illegal stock repurchase, or
obtaining an improper personal benefit.
Article Ninth of the Registrant's Certificate of Incorporation eliminates
the personal liability of the Registrant's directors to the fullest extent
permitted by Section 102(b)(7).
By reason of directors' and officers' liability insurance which the
Registrant maintains, the Registrant's directors officers are insured against
actual liabilities, including liabilities under the federal securities laws, for
acts or omissions related to the conduct of their duties.
See the Underwriting Agreement, Exhibit 1.1, for certain indemnification
provisions relating to this Offering.
II-1
<PAGE> 132
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant as currently
in effect. (Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-05665), declared effective on August
22, 1996.)
4.1 Form of common stock purchase warrants in connection with
December 1998 subordinated loan.
5.1** Opinion of Johnson and Colmar.
10.1 Credit Agreement dated as of September 30, 1998 among
LaSalle National Bank, as agent, LaSalle National Bank, as
lender, the Registrant and certain of the Registrant's
subsidiaries, and related Master First Amendment Agreement
date as of October 30, 1998.
10.2* Joint Venture Agreement dated May 16, 1997 among the
Registrant, Pennoni Associates, Inc., Conopam, S.A. de C.V.
and Controladora Ambiental, S.A. de C.V., relating to the
organization of Medam, S.A. de C.V.
10.3* Industrial Building Lease dated July 28, 1998 between Curto
Reynolds Oelerich, Inc. and the Registrant, relating to the
Registrant's lease of office and warehouse space in Lake
Forest, Illinois.
10.4*+ Agreement for Sublease dated April 1, 1997 between Waste
Management of Texas, Inc. and the Registrant, relating to
the Registrant's sublease of a treatment facility in
Terrell, Texas.
10.5*+ Agreement for Sublease dated May 1, 1997 between Waste
Management of Maryland, Inc. and the Registrant, relating to
the Registrant's sublease of a treatment facility in
Baltimore, Maryland.
10.6*+ Agreement for Sublease dated July 30, 1997 between WMI
Medical Services of Arizona, Inc. and the Registrant,
relating to the Registrant's sublease of a treatment
facility in Chandler, Arizona.
10.7* First Amendment to Amended and Restated Incentive
Compensation Plan.
10.8* First and Second Amendments to Directors Stock Option Plan.
10.9* First Amendment to 1997 Stock Option Plan.
10.10 Subordinated Loan Agreement dated December 22, 1998 between
the Registrant and certain lenders (all of whom are
directors of the Registrant)
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of Heard McElroy & Vestal, LLP.
23.3 Consent of Collins Barrow
23.4** Consent of Johnson and Colmar (filed as part of Exhibit
5.1).
24.1 Power of attorney (included under the caption "Power of
Attorney" in Part II of this Registration Statement).
</TABLE>
- -------------------------
* Previously filed
** To be filed by amendment
+ Confidential treatment requested; material omitted and filed separately with
the Commission
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement shall be deemed to
be a new registration statement relating to the securities
II-2
<PAGE> 133
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(2) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time that it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Village of Deerfield, State of Illinois, on January 8, 1999.
Stericycle, Inc.
By /s/ MARK C. MILLER
------------------------------------
Mark C. Miller
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
* Chairman of the Board of Directors January 8, 1999
- ------------------------------------------------
Jack W. Schuler
/s/ MARK C. MILLER President, Chief Executive Officer January 8, 1999
- ------------------------------------------------ and a Director (Principal Executive
Mark C. Miller Officer)
* Vice President, Finance and Chief January 8, 1999
- ------------------------------------------------ Financial Officer (Principal
Frank J.M. Ten Brink Financial and Accounting Officer)
* Director January 8, 1999
- ------------------------------------------------
Rod F. Dammeyer
* Director January 8, 1999
- ------------------------------------------------
Patrick F. Graham
* Director January 8, 1999
- ------------------------------------------------
John Patience
* Director January 8, 1999
- ------------------------------------------------
Peter Vardy
* Director January 8, 1999
- ------------------------------------------------
L. John Wilkerson, Ph.D.
</TABLE>
By /s/ MARK C. MILLER
-----------------------------
Mark C. Miller
Attorney-in-Fact
II-4
<PAGE> 135
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant as currently
in effect. (Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-05665), declared effective on August
22, 1996.)
4.1 Form of common stock purchase warrants in connection with
December 1998 subordinated loan.
5.1** Opinion of Johnson and Colmar.
10.1 Credit Agreement dated as of September 30, 1998 among
LaSalle National Bank, as agent, LaSalle National Bank, as
lender, the Registrant and certain of the Registrant's
subsidiaries, and related Master First Amendment Agreement
date as of October 30, 1998.
10.2* Joint Venture Agreement dated May 16, 1997 among the
Registrant, Pennoni Associates, Inc., Conopam, S.A. de C.V.
and Controladora Ambiental, S.A. de C.V., relating to the
organization of Medam, S.A. de C.V.
10.3* Industrial Building Lease dated July 28, 1998 between Curto
Reynolds Oelerich, Inc. and the Registrant, relating to the
Registrant's lease of office and warehouse space in Lake
Forest, Illinois.
10.4*+ Agreement for Sublease dated April 1, 1997 between Waste
Management of Texas, Inc. and the Registrant, relating to
the Registrant's sublease of a treatment facility in
Terrell, Texas.
10.5*+ Agreement for Sublease dated May 1, 1997 between Waste
Management of Maryland, Inc. and the Registrant, relating to
the Registrant's sublease of a treatment facility in
Baltimore, Maryland.
10.6*+ Agreement for Sublease dated July 30, 1997 between WMI
Medical Services of Arizona, Inc. and the Registrant,
relating to the Registrant's sublease of a treatment
facility in Chandler, Arizona.
10.7* First Amendment to Amended and Restated Incentive
Compensation Plan.
10.8* First and Second Amendments to Directors Stock Option Plan.
10.9* First Amendment to 1997 Stock Option Plan.
10.10 Subordinated Loan Agreement dated December 22, 1998 between
the Registrant and certain lenders (all of whom are
directors of the Registrant)
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of Heard McElroy & Vestal, LLP.
23.3 Consent of Collins Barrow
23.4** Consent of Johnson and Colmar (filed as part of Exhibit
5.1).
24.1 Power of attorney (included under the caption "Power of
Attorney" in Part II of this Registration Statement).
</TABLE>
- -------------------------
* Previously filed
** To be filed by amendment
+ Confidential treatment requested; material omitted and filed separately with
the Commission
II-5
<PAGE> 1
EXHIBIT 4.1
NEITHER THIS WARRANT NOR ANY SHARES OF THE COMMON STOCK OF STERICYCLE, INC.
WHICH MAY BE ISSUED UPON THE EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. NEITHER THIS
WARRANT NOR ANY SUCH SHARES MAY BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE WITH APPLICABLE REGISTRATION REQUIREMENTS OR AN APPLICABLE
EXEMPTION FROM REGISTRATION.
STERICYCLE, INC.
COMMON STOCK PURCHASE WARRANT
Warrant No.--------- Date of Issuance:------------
Void after 12 noon, Chicago, Illinois time,
on [fifth anniversary of date of issuance]
Stericycle, Inc., a Delaware corporation (the "Company"), hereby certifies
that, in consideration of value received ------------------, (the "Holder") is
entitled to purchase from the Company ------------------ fully paid and
nonassessable shares of the Company's common stock, par value $.01 per share
("Common Stock"), at the purchase price per share of U.S. $ (the "Exercise
Price"), at any time or from time to time before 12:00 noon, Chicago, Illinois
time, on [fifth anniversary of date of issuance] (the "Time of Expiration"),
subject to the following terms and conditions.
The number of shares of Common Stock and the character of the property to
be delivered upon exercise of this Warrant are subject to adjustment as provided
in Article 3.
Certain capitalized terms used in this Warrant are defined in Article 8.
ARTICLE 1
COMPLIANCE WITH SECURITIES LAWS
Neither this Warrant nor any shares of Common Stock which may be issued
upon the exercise of this Warrant have been registered under the Securities Act
or any state securities law. By acceptance of this Warrant, the Holder agrees
that this Warrant, and all shares of Common Stock which may be issued upon the
exercise of this Warrant, will be sold, transferred or disposed of only in
accordance with the applicable registration requirements of the Securities Act
and state securities laws or an applicable exemption from registration.
ARTICLE 2
EXERCISE OF WARRANT
2.1 MANNER OF EXERCISE. The Holder may exercise this Warrant, in whole or
in part, by surrender of this Warrant to the Company on any business day on or
after [the first anniversary of the date issuance] and on or before [the fifth
anniversary of the date of issuance] at the Company's Designated Office,
accompanied by the attached Notice of Exercise duly completed and signed and
indicating the whole number of shares of Common Stock being purchased and by:
(a) a certified or bank cashier's check (or with the Company's
prior approval, a personal check) payable to the Company's order in an
amount equal to Purchase Price; or
1
<PAGE> 2
(b) shares of Common Stock having a fair market value on the date
of exercise equal to the Purchase Price;
(c) an instrument cancelling indebtedness of the Company to the
Holder in an amount equal to the Purchase Price; or
(d) written direction to the Company to withhold, from the shares
of Common Stock otherwise issuable upon exercise of the Warrant,
shares of Common Stock having a fair market value on the date of
exercise equal to the Purchase Price.
For purposes of this Section 2.1, the "fair market value" of shares of Common
Stock shall be determined on the basis of the last reported sales price of a
share of Common Stock on the Nasdaq National Market on the last trading day
preceding the effective date of the Holder's exercise of the Warrant. No
purported exercise of this Warrant prior to [the first anniversary of the date
of issuance] or after [the fifth anniversary of the date of issuance] shall be
effective.
2.2 EFFECTIVE DATE OF EXERCISE. Each otherwise proper exercise of this
Warrant shall be considered effective immediately prior to the close of business
on the business day on which this Warrant is surrendered to the Company in
accordance with Section 2.1. The Holder shall be considered to have become the
holder of record of the shares of Common Stock issuable by reason of the
Holder's exercise at that time, notwithstanding the fact that the Company may
not yet have delivered a stock certificate representing those shares to the
Holder.
2.3 DELIVERY OF STOCK CERTIFICATE. As soon as practicable after the
Holder's exercise of this Warrant in whole or in part, and in any event within
10 days after exercise, the Company shall cause to be issued in the Holder's
name:
(a) a certificate or certificates for the number of fully paid
and nonassessable shares of Common Stock to which the Holder is
entitled by reason of the Holder's exercise; and
(b) in case the exercise is in part, a new warrant of like tenor
to this Warrant, providing on its face for the right to purchase a
number of shares of Common Stock equal to the number of shares of
Common Stock issuable under this Warrant at the time of exercise less
the number of shares issuable by reason of the Holder's exercise.
2.4 FRACTIONAL SHARES. This Warrant may be exercised only to purchase a
whole number of shares of Common Stock. The Company shall not be required to
issue any fractional share of Common Stock upon the exercise of this Warrant or
to pay cash or issue scrip in lieu of issuing a fractional share.
ARTICLE 3
ADJUSTMENTS
The number of shares of Common Stock for which this Warrant is exercisable,
and the price at which those shares may be purchased upon exercise of this
Warrant, shall be subject to adjustment as follows:
3.1 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. If any one of the
following events (an "Adjusting Event") occurs at any time prior to the Time of
Expiration:
(a) the Company takes a record of holders of its Common Stock for
the purpose of determining the holders entitled to receive a dividend
payable in or other distribution of shares of Common Stock,
(b) the Company subdivides or splits its outstanding shares of
Common Stock into a larger num-
2
<PAGE> 3
ber of shares of Common Stock, or
(c) the Company combines its outstanding shares of Common Stock
into a smaller number of shares of Common Stock,
then:
(d) the number of shares of Common Stock for which this Warrant
is exercisable immediately after the occurrence of the Adjusting Event
shall be adjusted to equal the number of shares of Common Stock that a
record holder of the same number of shares of Common Stock for which
this Warrant is exercisable immediately prior to the occurrence of the
Adjusting Event would own or would be entitled to receive immediately
after the occurrence of the Adjusting Event; and
(e) the Exercise Price immediately after the occurrence of the
Adjusting Event shall be adjusted to equal the product obtained by
multiplying the Exercise Price in effect immediately prior to the
occurrence of the Adjusting Event by a fraction, the numerator of
which is the number of shares of Common Stock for which this Warrant
is exercisable immediately prior to the occurrence of the Adjusting
Event and the denominator of which is the number of shares of Common
Stock for which this Warrant is exercisable immediately after the
occurrence of the Adjusting Event.
3.2 CORPORATE TRANSACTIONS. If any one of the following events (a
"Corporate Transaction") occurs at any time prior to the time of Expiration:
(a) the Company reorganizes, reclassifies or recapitalizes its
capital stock,
(b) the Company merges or consolidates with or into another
corporation and is not the surviving corporation, or
(c) the Company sells, transfers or otherwise disposes of all or
substantially all of its assets or business to another corporation,
then the Company shall make proper provision so that the Holder, upon the
exercise of this Warrant at any time after the consummation of the Corporate
Transaction, shall be entitled to receive, in lieu of the shares of Common Stock
that would have been issuable upon the Holder's exercise prior to such
consummation, the cash, stock and other securities, and property that the Holder
would have received upon such consummation if the Holder had so exercised this
Warrant immediately prior to such consummation.
ARTICLE 4
NOTICES OF RECORD DATE AND OTHER ACTIONS
If the Company proposes:
(a) to take a record of holders of its Common Stock for the
purpose of determining the holders who are entitled to receive any
dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any
other securities or property, or to receive any other right, or
(b) any reorganization, reclassification or recapitalization of
its capital stock, any merger or consolidation in which the Company
will not be the surviving corporation, or any sale, transfer or other
disposition of all or substantially all its assets or business, or
(c) any voluntary or involuntary dissolution, liquidation or
winding up,
3
<PAGE> 4
the Company shall give the Holder at least 10 days' prior written notice of the
date or expected date on which any such action is to be taken and provide
appropriate details of the action to be taken.
ARTICLE 5
TRANSFER RESTRICTIONS
5.1 NONTRANSFERABLE. This Warrant may not be sold, assigned, pledged or
otherwise transferred without the Company's prior written consent.
5.2 LEGEND ON CERTIFICATEs. Each certificate for shares of Common Stock
issued upon the exercise of this Warrant, and each certificate issued upon the
transfer of any such shares, shall be stamped or otherwise imprinted with a
legend in substantially the following form:
The shares represented by this certificate have not been registered
under the Securities Act of 1933. The shares have been acquired for
investment and may not be sold, transferred, pledged or hypothecated
in the absence of an effective registration statement for the shares
under the Securities Act of 1933 or compliance with the provisions of
Rule 144 of the Securities and Exchange Commission with respect to the
shares proposed to be sold.
ARTICLE 6
RESERVATION OF STOCK
The Company shall reserve and keep available, solely for issuance and
delivery upon the exercise of this Warrant, all shares of Common Stock issuable
upon the exercise of this Warrant. All shares of Common Stock issuable upon the
exercise of this Warrant shall be duly authorized, validly issued, fully paid
and nonassessable, with no personal liability attaching to the ownership of the
shares.
ARTICLE 7
RIGHTS AND OBLIGATIONS OF THE HOLDER
The rights of the Holder are limited to those granted in this Warrant, and
by acceptance of this Warrant, the Holder agrees to be bound by the provisions
of this Warrant. As the holder of this Warrant, the Holder shall not be entitled
to vote, receive dividends on or in any other respect be considered the holder
of shares of Common Stock, and nothing in this Warrant shall be construed to
confer upon the Holder any of the rights of a stockholder of the Company until
this Warrant has been exercised and shares of Common Stock have been issued or
have become issuable to the Holder.
ARTICLE 8
DEFINITIONS
As used in this Warrant, the following terms have these meanings:
(a) DESIGNATED OFFICE means the Company's principal executive
offices as disclosed in its most recent filing with the U.S.
Securities and Exchange Commission. The Designated Office is currently
1419 Lake Cook Road, Suite 410, Deerfield, Illinois 60015.
(b) PURCHASE PRICE means the product obtained by multiplying (i)
the number of shares of Common Stock being purchased upon exercise of
this Warrant by (ii) the Exercise Price.
(c) SECURITIES ACT means the Securities Act of 1933, as amended,
and the related rules and regu-
4
<PAGE> 5
lations issued by the U.S. Securities and Exchange Commission.
ARTICLE 9
MISCELLANEOUS
9.1 NOTICES. All notices and other communications under this Warrant shall
be in writing and sent by certified or registered mail, overnight messenger
service, telecopier or personal delivery, to the Company at its Designated
Office and to the Holder at the address indicated on Schedule A to Agreement
dated October 9, 1998 between the Company and the Holder pursuant to which the
Company purchased shares of Class A Common Stock of Med-Tech Environmental
Limited from the Holder. All notices sent by certified or registered mail shall
be considered to have been given three business days after being deposited in
the mail. All notices sent by overnight courier service, telecopier or personal
delivery shall be considered to have been given when actually received by the
intended recipient. The Holder may change the Holder's address for purposes of
this Warrant by notice to the Company in accordance with this Section 9.1.
9.2 AMENDMENT. Neither this Warrant nor any of its terms may be changed,
waived, discharged or terminated except by an instrument in writing signed by
the Holder and the Company.
9.3 GOVERNING LAW. This Warrant shall be governed by the laws of the State
of Delaware without regard to conflicts of laws principles.
9.4 BINDING EFFECT. This Warrant shall apply to, be binding in all respects
upon and inure to the benefit of the Company and the Holder and their respective
successors and permitted assigns.
STERICYCLE, INC.
By______________________________________
Frank J.M. ten Brink
Vice President, Finance
and Chief Financial Officer
5
<PAGE> 6
NOTICE OF EXERCISE
To: Stericycle, Inc.
The undersigned holder hereby irrevocably elects to exercise the attached
Warrant to the extent of _________ shares of the common stock, par value $.01
per share, of Stericycle, Inc., issuable under the Warrant, and hereby makes
payment for such shares of $____________ by certified or bank cashier's check or
other means allowable pursuant to the terms of the Warrant.
If payment is not by certified or bank cashier's check, please
describe the manner of payment:
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
Date:
---------------- ----
--------------------------------------------
By
----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
INSTRUCTION FOR REGISTRATION OF SHARES
Name:
---------------------------------------------------------------------
Address:
---------------------------------------------------------------------
---------------------------------------------------------------------
6
<PAGE> 1
EXHIBIT 10.1
CREDIT AGREEMENT
BY AND AMONG
LA SALLE NATIONAL BANK, AS AGENT
THE LENDERS SIGNATORY OR PARTIES HERETO
AND
STERICYCLE, INC.
AND ITS SUBSIDIARIES
----------------------------------------
SEPTEMBER 30, 1998
----------------------------------------
1
<PAGE> 2
CREDIT AGREEMENT
This Credit Agreement is made as of September 30, 1998 by and among LaSalle
National Bank, a national banking association with its principal offices located
in Chicago, Illinois as Agent for the Lenders hereunder (the "Agent"), various
financial institutions which are, or may become, signatories or parties hereto
(individually, a "Lender" and collectively, the "Lenders"), and STERICYCLE,
INC., a Delaware corporation ("Stericycle"), and with its Subsidiaries, which
currently consist of the other signatory corporations indicated below
(individually, Stericycle and any of said other corporations may be referred to
herein as a "Borrower," and collectively are sometimes referred to as the
"Borrowers").
WITNESSETH:
WHEREAS, the Borrowers desire to borrow from the Lenders certain amounts
for the purposes set forth in Section 8.A.8 below;
WHEREAS, the Lenders are agreeable to extending said credit facilities
provided that said credit facilities are secured and are on the terms and
conditions provided herein;
WHEREAS, pursuant to a Stock Purchase Agreement (the "Acquisition
Agreement") dated as of September 3, 1998 among Stericycle and the Sellers
indicated therein (the "Sellers"), Stericycle has agreed to acquire from the
Sellers all of the issued and outstanding shares of stock of Waste Systems,
Inc., a Delaware corporation ("WSI" or the "Target") with its principal
executive offices in Shreveport, Louisiana, consisting of 100 shares of common
stock, no par value, with said acquisition being on the terms and conditions set
forth in the Acquisition Agreement (said acquisition pursuant to the Acquisition
Agreement being the "Acquisition", and the date of consummation thereof being
the "Acquisition Date");
WHEREAS, in order to consummate the Acquisition, Stericycle has requested a
loan from the Lenders, the proceeds of which will be used to make the
Acquisition;
WHEREAS, certain financial covenants of the Borrowers hereinafter set forth
relate to the financial condition and results of Stericycle and its
Subsidiaries, such covenants being used herein because the Subsidiaries are
Affiliates of Stericycle, and the financial condition and results of Stericycle
and its Subsidiaries are a material inducement to the Lenders' willingness to
enter into this Credit Agreement and extend the financial accommodations
referred to herein;
WHEREAS, each Subsidiary of Stericycle acknowledges that it is benefited by
the extension of the financial accommodations provided for herein by the
Lenders; and
WHEREAS, as a condition for extending such financial accommodations, the
Lenders require that Stericycle and each Subsidiary enter into this Credit
Agreement establishing the terms
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and conditions thereof;
NOW THEREFORE, for and in consideration of the foregoing premises and the
mutual agreements contained herein, the parties hereto, intending to be legally
bound, do hereby agree as follows:
SECTION 1. DEFINITIONS.
Section 1.A. In addition to the terms that are elsewhere defined herein,
when used herein, the following terms have the meanings as set forth below:
"Accounts," "Account Debtor," "Chattel Paper," "Documents," "Equipment,"
"Fixtures," "General Intangibles," "Goods," "Instruments," "Inventory",
"Securities", "Securities Entitlements", "Securities Accounts" and "Financial
Assets" shall have the meanings assigned to the respective terms in the Security
Agreement.
"Acquisition" is as defined in the Preamble hereto.
"Acquisition Agreement is as defined in the Preamble hereto.
"Acquisition Agreement Assignment" means the Collateral Assignment of
Acquisition Agreement dated the date hereof from Stericycle to the Agent, for
its benefit and for the ratable benefit of the Lenders.
"Acquisition Date" is as defined in the Preamble hereto.
"Acquisition Documents means the Acquisition Agreement and each other
instrument, agreement or document executed and delivered pursuant to or in
connection with the Acquisition Agreement and the Acquisition and other
transactions contemplated thereby and therein.
"Act" or "Acts" means, collectively, the Laws of any state or governmental
subdivision thereof which apply to the conduct of business by any Borrower.
"Adjusted Historical Pro Forma Basis" is as defined in Section 8.B.3 for
purposes of compliance with the provisions thereof, and for all other purposes
means, as at any applicable date and/or for any Measurement Period ending as at
the end of the applicable quarter involved, the relevant financial terms (i.e.
those included in calculating and/or determining all financial covenants, fees,
margins and otherwise, hereunder) as calculated and determined for the Borrowers
and, or including, any Consolidated Subsidiaries at such date, all determined in
accordance with GAAP (except that non-recurring items involving acquired
Consolidated Subsidiaries otherwise included in the relevant calculations or
determinations shall be disregarded, and except for any pro-forma EBITDA
adjustments acceptable to the Bank in its sole discretion) and calculated as if
all Consolidated Subsidiaries at such date, including acquired Consolidated
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Subsidiaries, had been owned by the Borrowers at least throughout any
Measurement Period involved.
"Adjusted LIBOR" is defined in Section 3.A hereof.
"Affiliate" of any Person means any other Person that directly or
indirectly, through one or more intermediaries, controls or is controlled by or
is under common control with such Person and includes, without limitation, each
shareholder, director and any Subsidiaries of such Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
For purposes of this Agreement, all Subsidiaries of Stericycle are Affiliates of
Stericycle. 3CI shall not be considered an Affiliate of Stericycle or any other
Borrower unless and until 3CI becomes a Subsidiary of Stericycle or any other
Borrower.
"Agreement" means, collectively, this Credit Agreement, together with any
and all exhibits, appendices, schedules and amendments hereto and modifications,
renewals, extensions, restatements and substitutions thereof and therefor.
"Applicable L/C Margin," for purposes of determining the Letter of Credit
fees due from the Borrowers under Section 4.C hereof, shall at all times mean
and be the same as the Applicable LIBOR Margin.
"Applicable LIBOR Margin," for purposes of determining the interest rate on
a LIBOR Loan, means initially 1.75% (the "Normal LIBOR Margin"), provided,
however, that the Normal LIBOR Margin shall be subject to quarterly adjustment,
commencing with the fiscal quarter commencing January 1, 1999, based on the
following matrix:
Cash Flow
Leverage Ratio Applicable LIBOR Margin
-------------- -----------------------
Equal to or less
than 2.0:1.00 1.25%
2.01:1.00 through
2.50:1.00 1.50%
2.51:1.00 through
2.75:1.00 1.75%
2.76:1.00 or
greater 2.00%
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"Applicable Margin," for purposes of determining the interest rate on a
Prime Rate Loan, means initially .25% (the "Normal Margin"), provided however
that the Normal Margin shall be subject to quarterly adjustment, commencing with
the fiscal quarter following the fiscal quarter commencing January 1, 1999 based
on the following matrix:
Cash Flow
Leverage Ratio Applicable Margin
-------------- -----------------
Equal to or less
than 2.0:1.00 0.00%
2.01:1.00 through
2.50:1.00 0.25%
2.51:1.00 through
2.75:1.00 0.50%
2.76:1.00 or
greater 0.75%
"Applications" is as defined in Section 2.C.(d) hereof.
"A Revolving Commitment" is as defined in Section 2.A.1 hereof.
"A Revolving Loans" is as defined in Section 2.A.1 hereof.
"A Revolving Note(s)" means the promissory notes of the Borrowers
evidencing the A Revolving Loans.
"Authorized Officer" means one or more officers of the Borrowers duly
authorized (and so certified to the Agent by the corporate Secretary of the
Borrower(s) involved pursuant to a certificate of authority and incumbency from
time to time satisfactory to the Agent ), acting alone, to request Loans and/or
the issuance of Letters of Credit hereunder and execute and deliver documents,
instruments, agreements, reports, statements and certificates in connection
herewith.
"B Revolving Commitment" is as defined in Section 2.A.2 hereof.
"B Revolving LIBOR Loan" means a B Revolving Loan which is also a LIBOR
Loan.
"B Revolving Loans" is as defined in Section 2.A.2 hereof.
"B Revolving Notes" means the promissory notes of the Borrowers evidencing
the B
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Revolving Loans.
"B Revolving Prime Rate Loan" means a B Revolving Loan which is also a
Prime Rate Loan.
"Borrowing" means the total of Loans of a single type (i.e. revolving or
term) made by one or more Lenders to the Borrowers on a single date and for a
single Interest Period. Borrowings of Loans are made ratably from each of the
Lenders according to their Commitments.
"Borrowing Base" means an amount which is equal to 80% of Eligible Accounts
(less all discounts, allowances and credits granted by an applicable Borrower to
the applicable Account Debtors, and less all contra accounts).
"Borrowing Base Certificate" means a certificate (in form satisfactory to
the Agent) of the treasurer or authorized chief financial officer of Stericycle
as to the Borrowing Base as of the date of such certificate and certifying and
representing that all Accounts of the Borrowers identified thereon as being
Eligible Accounts meet all of the requirements and standards therefor.
"Borrowing Notice" means the request of any of the Borrowers for Loans as
further described in Section 3.C hereof.
"Business Day" means any day other than a Saturday, Sunday or other day on
which banks are authorized or required to be closed in Chicago, Illinois, and
with respect to LIBOR Loans, a day on which dealings in United States Dollars
may be carried on by the Agent or the Reference Bank in the London interbank
eurodollar market.
"Capital Expenditures" means all payments, expenditures and the obligations
incurred by a Person for the purchase, creation, improvement, replacement,
substitution, addition, renovation or lease of a fixed or capital asset with a
useful life of more than one year and which are required to be classified or
accounted for as a capital asset or capital lease on the balance sheet or
statement of cash flow of such Person, as determined in accordance with GAAP,
including equipment which is purchased simultaneously with the trade-in of
existing equipment owned by such Person to the extent of the gross amount of the
purchase price of such purchased equipment less the book value of the equipment
being traded in at such time, but excluding (a) expenditures made in connection
with the replacement or restoration of assets, to the extent such replacement or
restoration is financed out of (i) insurance proceeds paid on account of the
loss of or damage to the assets so replaced or restored or (ii) awards or
compensation arising from the taking by condemnation or eminent domain of the
assets so replaced, (b) any portion of capital lease obligations that is not
required to be capitalized on such Person's balance sheet including true leases,
and (c) interest capitalized during construction, and (d) capital assets
purchased in connection with an acquisition permitted under the terms of Section
8.B.3 hereof.
"Cash Flow Leverage Ratio" means, as determined on a Consolidated basis for
Stericycle
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and its Subsidiaries as of the end of each quarter of Stericycle's Fiscal Year
for the then applicable Measurement Period, the ratio of total Funded Debt to
EBITDA.
"Closing Date" means the later of the date hereof or the date on which all
of the conditions precedent to the Loans set forth in Section 6 hereof have been
fully satisfied.
"Closing Fee" is defined at Section 4.B hereof.
"Collateral" means all "Collateral" (or other property which is subjected
to a Lien in the relevant operative document) as defined in the Security
Agreement, the Stock Pledge Agreement, the Intellectual Property Assignments,
the Mortgages, the Leasehold Mortgages, the Collateral Assignment of Leases, the
Collateral Assignment of Notes, and the Acquisition Agreement Assignment (all as
amended or supplemented), and shall also include any and all other property,
tangible and intangible, on or in which a Lien has been granted to the Agent,
for its benefit and the ratable benefit of the Lenders, pursuant to any other
Loan Documents.
"Collateral Assignment of Leases" means the Collateral Assignment of Leases
dated the date hereof executed by the appropriate Borrower in favor of the
Agent, covering such Borrower's Leaseholds identified as Collateral Assignment
of Lease Properties in Schedule 7.R hereto.
"Collateral Assignment of Notes" means the Collateral Assignment of Notes
dated the date hereof executed by the Borrowers in favor of the Agent, covering
such Borrower's right, title and interest in all promissory notes payable to
such Borrowers.
"Commitment" means the aggregate of the A Revolving Commitment, the B
Revolving Commitment, and the commitment of each Lender to make the Term Loan in
the amount thereof.
"Commitment Fees" is defined at Section 4.A. hereof.
"Consolidated" means the consolidation of accounts in accordance with GAAP,
including principles of consolidation.
"Consolidated Net Income" means, for any period, the net income of
Stericycle and its Consolidated Subsidiaries for such period, before the payment
of dividends on all capital stock, determined in accordance with GAAP.
"Contingent Liability" or "Contingent Liabilities" means any agreement,
undertaking or arrangement by which any Person (i) guarantees, endorses or
otherwise becomes or is contingently liable upon (by direct or indirect
agreement, contingent or otherwise, to provide funds for payment, to supply
funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor
against loss) the debt, obligation or other liability of any other Person (other
than by endorsement of instruments in the course of collection), or (ii)
guarantees the payment of
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dividends or other distributions upon the shares of any other Person, or (iii)
undertakes or agrees (contingently or otherwise) (a) to purchase, repurchase, or
otherwise acquire any Debt, obligation or liability or any security therefor, or
(b) to provide funds for the payment or discharge thereof (whether in the form
of loans, advances, stock purchases, capital contributions or otherwise), or (c)
to maintain solvency, assets, level of income or other financial condition, or
(d) to make payment other than for values received. The amount of any Person's
obligation under any Contingent Liability shall (subject to any limitation set
forth herein) be deemed to be the outstanding principal amount (or maximum
permitted principal amount, if larger) of the debt, obligation or other
liability guaranteed or supported thereby.
"Conversion Date" means each of September 30, 1999 (the "Initial Conversion
Date") and September 30, 2000 (the "Final Conversion Date.")
"Debt" of any Person means all items of indebtedness, obligation or
liability of any kind or nature, whether matured or unmatured, liquidated or
unliquidated, joint or several, of such Person, including without limitation and
without duplication: Contingent Liabilities of such Person; any indebtedness
secured by a Lien on or payable out of the proceeds or production from any
property of such Person regardless of whether such indebtedness has been assumed
by such Person; obligations representing the deferred purchase price of
property; obligations which are evidenced by notes, acceptances, or other
instruments; capitalized lease obligations; and obligations in respect of
letters of credit.
"Debt Service Coverage" means the ratio of the following amounts determined
in accordance with GAAP over any applicable Measurement Period (a) EBITDA, less
Capital Expenditures, to (b) current maturities of all Debt for or with respect
to borrowed money during such period, plus Interest Expense during such period.
"Default" means any event which, with the giving of notice or the passage
of time or both, would constitute, become or mature into an Event of Default.
"Default Rate" is as defined at Section 3.G hereof.
"EBITDA" means, for any period, on a Consolidated basis for Stericycle and
its Subsidiaries, the sum for such period of (a) Consolidated Net Income, plus
(b) depreciation and amortization expense deducted in the determination of such
Consolidated Net Income, plus (c) Interest Expense deducted in the determination
of such Consolidated Net Income, plus (d) federal and state income taxes as
determined in accordance with GAAP and deducted in the determination of such
Consolidated Net Income, plus any items of extraordinary loss deducted in the
determination of such Consolidated Net Income, and minus (e) any items of gain
which are extraordinary items as defined in GAAP to the extent reflected in the
determination of such Consolidated Net Income.
"ECCO Notes" are the four promissory notes each dated May 1, 1997 from
Stericycle to
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each of the following in the principal amounts shown: Bennett Velocci
($525,090), Orlando Velocci ($441,140), Umberto Velocci ($506,230) and the
Estate of Vincent Delbroccolo, Sr. ($827,540), to the extent they remain
collateralized with a letter of credit.
"Eligible Accounts" are Accounts of the Borrowers which meet all of the
following requirements, as determined by the Agent in its reasonable discretion:
(a) such Accounts represent completed and bona fide transactions which arise
from arm's length transactions between unrelated parties who are not Affiliates
in the ordinary course of a Borrower's business; (b) such Accounts shall not (i)
be unpaid more than 90 days from the billing date of the original invoice or
(ii) be payable by an Account Debtor more than 30% of whose Accounts are
otherwise ineligible; (c) the services which gave rise to such Accounts were
fully rendered by a Borrower to the Account Debtor on the Borrower's customary
basis, with no part of such services or the fee therefor being disputed; (d)
such Accounts are not evidenced in whole or in part by a judgment, Chattel Paper
or Instrument; (e) Account Debtors with respect to such Accounts have not made
an assignment for the benefit of creditors and are not insolvent or the subject
of any bankruptcy, reorganization, liquidation or insolvency proceedings of any
kind or of any other proceeding or action, threatened or pending, which might
have a material adverse affect on the assets or business of such Account Debtor;
(f) Account Debtors with respect to such Accounts are not the governments of the
United States of America or any agency, department or instrumentality thereof in
excess of $250,000, are not located outside of the United States of America
(unless supported by a letter of credit acceptable to Agent), and are not
officers, directors, employees, a Subsidiary or Affiliate of any Borrower; (g)
such Accounts are valid, legally enforceable obligations of the applicable
Account Debtors and are not subject to any offset or counterclaim based on any
then existing or asserted claim or other existing or asserted defense or dispute
on the part of such Account Debtors; (h) such Accounts are evidenced by an
invoice or other documentation in form acceptable to the Agent; (i) such
Accounts are assignable and subject to a valid and first perfected security
interest in favor of the Agent, free of any and all other security interests,
liens, claims or encumbrances; and (j) such Accounts are not determined by the
Agent to be ineligible for any other reason generally accepted in the banking
business as a reason for ineligibility. No Accounts of WSI are includable in
Eligible Accounts. In addition, the parties acknowledge that no Accounts of 3CI
are includable in Eligible Accounts.
"Employee Plan" means any pension, retirement, disability, medical, dental
or other health plan, life insurance or other death benefit plan, profit
sharing, deferred compensation, stock option, bonus or other incentive plan,
vacation benefit plan, severance plan, or other employee benefit plan or
arrangement, including, without limitation, those pension, profit-sharing and
retirement plans of the Borrowers described from time to time in the Financial
Statements and any pension plan, welfare plan, Defined Benefit Pension Plans (as
defined in ERISA) or any multi-employer plan, maintained or administered by any
of the Borrowers or any Affiliate of any of the Borrowers, to which the
Borrowers or any Affiliate of the Borrowers is a party or may have any liability
or by which any of the Borrowers or any Affiliate is bound.
"Environmental Indemnity Agreement" means that certain Environmental
Indemnity
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Agreement of even date herewith in favor of the Agent, for its benefit and the
ratable benefit of the Lenders, executed by the Borrowers, as amended or
supplemented.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations issued
thereunder or in connection therewith.
"Eurodollar Reserve Percentage" is defined in Section 3.A hereof.
"Event of Default" means an event or occurrence described in Section 9 of
this Agreement.
"Expiration Date" is defined at Section 2.A.1 hereof.
"Federal Funds Rate" means the rate for that day set forth opposite the
caption "Federal Fund (Effective)" in the daily statistical release designated
as "Composite 3:30 p.m. Quotations for U.S. Government Securities," or any
successor publication, published by the Federal Reserve Bank of New York or, if
such publication shall be suspended or terminated, the arithmetic average of the
rates quoted to the Agent as the prevailing rates per annum (rounded upward, if
necessary, to the next higher 1/100 of 1%) bid at approximately 10:00 a.m.
(Chicago time) (or as soon thereafter as is practicable) on such day by two or
more New York or Chicago Federal funds dealers of recognized standing selected
by the Agent for the purchase at face value of Federal funds in the secondary
market in an amount comparable to the principal amount owed for which such rate
is being determined.
"Financial Assurance" means the financial assurance (whether in the form of
a bond, letter of credit, cash or otherwise) required pursuant to any Act.
"Financial Statements" means all of the balance sheets, statements of
operations, statements of cash flow and statements of changes in shareholders'
equity of the Borrowers for each Fiscal Year or each month or quarter thereof
which have been delivered to the Agent on or prior to the date hereof and which
are to be delivered to the Agent pursuant to Section 8.A.2 of this Agreement.
"Fiscal Year" means the fiscal year of Stericycle and its Subsidiaries
ending on December 31 for each year.
"Funded Debt" means Debt for or with respect to borrowed money, provided in
any event that for all purposes hereof all Loans and Letter of Credit
Utilization shall be considered as and included in Funded Debt. Debt shall
exclude the ECCO Notes.
"GAAP" means generally accepted accounting principles, applied on a basis
consistent with prior periods; provided, however, that GAAP with respect to any
interim financial
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statements or reports shall be deemed subject to year-end adjustments and
footnotes made in accordance with GAAP.
"Intellectual Property Assignment" means the Collateral Assignment of
Intellectual Property dated the date hereof among the Borrowers and the Agent.
"Intellectual Property Rights" means all patents and patent applications,
trademarks, copyrights, trade names, trade dress, trade secrets, design rights,
service marks, trademarks and service mark registrations and applications,
registrations and renewals thereof, confidential research, development and
commercial information, know-how and other proprietary information, together
with any licenses of (whether as licensor or licensee) and license agreements
pertaining to any of the foregoing and all license fees and royalties arising
from the use thereof, all rights corresponding to the foregoing and all other
rights of any kind whatsoever accruing thereunder or pertaining thereto
(including without limitation, all claims for damages by way of past, present
and future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the rights included above), together in each case with the
goodwill of the business connected with the use of and symbolized by each such
trademark and service mark.
"Interest Expense" means, with respect to any Person, for any period, the
aggregate interest expense, net of interest income, for such period (including,
without duplication, all commissions, discounts, and other fees and charges owed
with respect to letters of credit, the portion of any capitalized lease
obligations allocable to interest expense, and capitalized interest) determined
in accordance with GAAP (but in any event excluding interest on tax assessments
to the extent such interest is included in deferred taxes).
"Interest Period" is defined at Section 3.D hereof.
"Interest Rate Contract" means interest rate protection, swap, or collar
agreements, and other similar agreements or arrangements (if any) designed to
provide protection against fluctuations in interest rates, pursuant to which any
of the Borrowers has obligations to any Lender that may require payment in the
future by any such Borrowers.
"Laws" means all ordinances, statutes, rules, regulations, codes, orders,
injunctions, writs or decrees of any government, whether federal, state,
municipal, local or foreign, of any political subdivision or agency thereof, or
of any court, board or similar entity established by any of the foregoing,
including without limitation all of the foregoing which relate to the
generation, segregation, handling, packaging, collection, transportation,
treatment, storage and/or disposal of regulated medical waste.
"L/C Refinancing Borrowing" is defined at Section 3.C hereof.
"Leaseholds" means all of the right, title and interest of any Borrower in,
to and under
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any leases, sub-leases, licenses or other agreements, granting rights to a
Borrower to enter, occupy or use real property.
"Leasehold Mortgages" means the Leasehold Mortgages and/or deeds of trust
dated the date hereof executed by the appropriate Borrower in favor of the
Agent, on its behalf and for the ratable benefit of the Lenders covering such
Borrower's Leaseholds identified as Leasehold Mortgage Properties in Schedule
7.R. hereto.
"Letter of Credit" is defined in Section 2.A.1 hereof.
"Letter of Credit Utilization" means, as of any date of determination, the
sum of (i) the maximum aggregate amount which is or at any time thereafter may
be available for drawing under all Letters of Credit then outstanding plus (ii)
the aggregate amount of all drawings under Letters of Credit honored by the
Agent and not theretofore reimbursed by the Borrowers.
"Leverage Ratio" means, as determined on a consolidated basis for
Stericycle and its Subsidiaries as of the end of each quarter of Stericycle's
Fiscal Year for the then applicable Measurement Period, the ratio of total
Funded Debt to EBITDA.
"LIBOR" is defined in Section 3.A hereof.
"LIBOR Loan" means a Loan bearing interest at the rate specified in Section
3.A(b) hereof.
"Lien" means any security interest, mortgage, pledge, hypothecation,
collateral assignment, lien (statutory or otherwise'), charge or encumbrance of
any kind or nature whatsoever, any deposit or preferential arrangement of any
kind or nature whatsoever, including, without limitation, any conditional sale
or other title retention agreement, or any financing lease involving
substantially the same economic effect as any of the foregoing.
"Loan" means a Revolving Loan or a Term Loan and "Loans" means the
Revolving Loans and the Term Loans, collectively and in the aggregate.
"Loan Documents" means, collectively, any Application, Interest Rate
Contract hereafter entered into, and all of those documents set forth and
described in Section 6 hereof, as amended, modified, supplemented or restated
from time to time, and any facilities or agreements in replacement thereof.
"Margin Stock" means "margin stock" as defined in Regulation U of the Board
of Governors of the Federal Reserve System.
"Materially Adverse Effect" means, relative to any occurrence, event,
condition or circumstance, or any change therein, of whatever nature (including
any adverse determination in
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any litigation, arbitration, or governmental investigation or proceeding), a
materially adverse effect on: (i) the assets of or the business, revenues,
financial condition, operations or prospects of the Borrowers taken as a whole;
or (ii) the ability of the Borrowers, taken as a whole, to timely or fully
perform any of the payment or other material obligations involving any of their
Debt.
"Measurement Period" means with respect to each quarter ending December 31,
1998 and thereafter, the rolling period of the four fiscal quarters then ending.
"Monies" means (i) all cash at any time on deposit with or held by the
Agent or any other bank or institution for the account of any Borrower, (ii) all
accounts of any of the Borrowers with the Agent or any other bank or
institution, (iii) all investments and reinvestments of amounts from time to
time credited to such accounts, and (iv) all interest, dividends, distributions
and other proceeds payable on or with respect to such investments and
reinvestments and such accounts.
"Mortgages" means the Mortgages and/or deeds of trust dated the date hereof
executed by the appropriate Borrower in favor of the Agent, on its behalf and
for the ratable benefit of the Lenders, covering such Borrower's owned
properties identified as Owned Properties in Schedule 7.R. hereto.
"Mortgaged Properties" means the properties covered by the Mortgages, the
Leasehold Mortgages and the Collateral Assignment of Leases.
"Net Cash Proceeds" means, in each case as set forth in a statement in
reasonable detail delivered to the Agent: (a) with respect to the disposition of
any asset by an Person, the excess, if any, of (i) the cash received in
connection with such disposition over (ii) the sum of (A) the principal amount
of any Debt (other than Debt under this Agreement) which is secured by such
asset and which is required to be repaid in connection with the disposition
thereof, plus (B) the reasonable out-of-pocket expenses incurred by such Person
in connection with such disposition, plus, (C) provision for taxes, including
income taxes, attributable to the disposition of such asset; (b) with respect to
the issuance by any Person of any equity securities or Debt, the gross proceeds
received by such Person from such issuance less all legal expenses, discounts
and commission and other fees and expenses incurred or to be incurred and all
federal, state, local and foreign taxes assessed or to be assessed in connection
therewith; and (c) with respect to the receipt by any Person or the Agent of any
payment under any insurance policy or pursuant to any condemnation award, the
aggregate amount of any such payment made to the Agent less any income tax
liability of such Person reasonably estimated by such Person to relate to such
payment and all legal expenses incurred in connection with the recovery or
collection thereof.
"Net Worth" means, at any time, the total of Stockholders' Equity and
Subordinated Debt.
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"Note(s)" means the Revolving Notes and the Term Note.
"Obligations" means each and every promise, agreement, covenant, debt and
all other liabilities, obligations and indebtedness of any of the Borrowers,
their successors or assigns, to the Lenders, or any Lender or the Agent whether
primary, secondary, contingent, direct, or indirect, howsoever incurred,
created, arising or evidenced, whether presently or hereafter existing,
evidenced, arising or becoming due, which such promise, agreement, covenant,
debt, liabilities, obligations or indebtedness arises from or in connection with
the Loans or under this Agreement, the Notes, the Applications, the Letters of
Credit (including reimbursement obligations with respect thereto), any Interest
Rate Contract or any other Loan Documents, or any refinancings, substitutions,
extensions, renewals, replacements and modifications for or of the foregoing, or
the enforcement by the Agent or the Lenders of their rights and remedies under
any or all of the foregoing (including all costs, expenses and reasonable
attorneys' and paralegals' fees and expenses incurred by the Agent or the
Lenders), including any of the foregoing that arises after the filing of a
petition by or against a Borrower under any insolvency or related proceeding,
even if the obligations do not accrue because of the automatic stay under
bankruptcy laws or otherwise.
"Other 3CI Interests" means, exclusive of the 3CI Common Stock, 3CI
Preferred Stock, 3CI Note and 3CI Receivable, (i) all of WSI's other interests,
if any, in or relating to 3CI (including, but not limited to, any security
interest in or mortgage on 3CI's assets granted by 3CI as security for its
payment of the 3CI Note or 3CI Receivable (or both)); (ii) all of WSI's claims,
rights and causes of action of any kind against 3CI, and (iii) all of WSI's
rights arising from or in respect of its ownership of the 3CI Common Stock, 3CI
Preferred Stock, 3CI Note or 3CI Receivable (for example, antidilution rights
under any settlement agreement or any other contract).
"Permitted Investments" means (i) cash, (ii) readily marketable securities
issued or guaranteed by the government of the United States of America or any
agency thereof having a maturity at the time of issuance of not exceeding one
year, (iii) commercial paper rated at least A-1 by Standard & Poor's Corporation
or P-1 by Moody's Investors Service, Inc., having a maturity at the time of
issuance not exceeding one year, and money market funds invested in short-term
securities rated at least as provided in the preceding clause, (iv) certificates
of deposit of or demand or time deposits with or repurchase agreements of any
commercial bank which is organized under the laws of the United States of
America or any state thereof and has capital and surplus of in excess of
$100,000,000, and demand deposits or local operating accounts with the Lenders
or any other financial institutions acceptable to the Agent, (v) property used
in the ordinary course of business, the purchase of which does not otherwise
violate or cause or result in a violation of any provision hereof, (vi) current
assets arising from the sale of goods and services in the ordinary course of
business, (vii) loans or advances to employees in the ordinary course of
business, and loans to officers not in excess of $300,000 at any time
outstanding, (viii) unsecured intercompany loans or advances to or among the
Borrowers, which do not otherwise violate or cause or result in a violation of
any provision hereof, (ix) existing investments in
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existing Subsidiaries of Stericycle, and existing investments of WSI in 3CI, and
(x) existing investments and the acquisitions permitted under Section 8.B.3
hereof, and the transactions pemitted under Section 8.B.5 hereof.
"Permitted Liens" means any Liens (i) provided for hereunder or under the
Loan Documents in favor of the Agent; (ii) for taxes or assessments not yet due
and payable; (iii) of vendors incurred in the ordinary course of business,
payment with respect to which is not then due and payable; (iv) which arise out
of pledges or deposits under any Laws relating to workers' compensation,
unemployment insurance, old age pensions or other social security or retirement
benefits; (v) which are being contested in good faith by appropriate and lawful
proceedings, so long as levy and execution thereon have been and continue to be
stayed and which do not materially impair or adversely affect the value or use
of the assets and properties of any Borrower or the operation or condition of
the business of any Borrower; (vi) which are existing on Equipment, Fixtures
and/or real property of any Borrower and are set forth on Schedule 7.G hereto,
provided, however, that the Debt secured by existing Liens on Equipment,
Fixtures and/or real property shall not be increased and such Debt shall not be
secured by any Equipment, Fixtures and/or real property other than that securing
such Debt as of the date hereof; (vii) which are purchase money security
interests on Equipment and/or Fixtures (exclusive of any such Liens referred to
in subparagraph (vi) above) securing the deferred purchase price thereof within
the limitations of and as may be permitted under Section 8.B.2(vii) hereinafter;
provided, however, that any such Lien shall attach only to the Equipment and/or
Fixture financed by the holder of such Lien; (viii) which secure Debt assumed or
incurred in or in connection with any asset acquisition permitted under Section
8.B.3 and which encumber only the assets acquired; (ix) which secure Debt
assumed or incurred in connection with a stock or other equity acquisition
permitted under Section 8.B.3 and which encumber only the assets as of the date
of acquisition of the Person whose stock or equity was acquired; (x) on cash
collateralizing Financial Assurance not to exceed the amount of such Financial
Assurance; (xi) which are currently existing on Accounts of any Borrower and are
set forth on Schedule 7.G hereto; or (xii) with respect to the property (other
than Accounts) of any new Subsidiary of any of the Borrowers which becomes a
Subsidiary after the date hereof, so long as such Liens are either incurred in
connection with an acquisition by the Borrowers permitted under Section 8.B.3
hereof or were in existence prior to such acquisition, and, if incurred in
connection with such an acquisition, are subordinated to the Liens in favor of
the Agent, on its behalf and for the ratable benefit of the Lenders.
"Person" means any individual, sole proprietorship, joint venture,
partnership, association, unincorporated organization, joint-stock company or
association, trust, corporation, entity, institution or government body (or
agency or political subdivision thereof).
"Pledged Shares" means the shares of common and preferred stock of each of
the Subsidiaries owned directly or indirectly by Stericycle, all of which are
pledged to the Agent, for its benefit and for the ratable benefit of the
Lenders, pursuant to the Stock Pledge and Security Agreement of even date
herewith among the Agent, Stericycle and the other Pledgors ("Pledgors")
referred to therein (the "Stock Pledge Agreement").
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"Preferences" is defined at Section 7.K. hereof.
"Prime Rate" means the rate of interest announced or referred to by the
Agent from time to time as its prime or reference rate for interest rate
determinations, with each change in such Prime Rate to take effect on the same
day such change is announced by the Agent. The use of the term "Prime Rate"
herein or in any Note is not intended nor does it imply that said rate of
interest is a preferred rate of interest or one which is offered by the Agent to
its most creditworthy customers.
"Prime Rate Loan" means a Loan bearing interest at the rate specified in
Section 3.A(a) hereof.
"Reference Bank" means ABN/AMRO Bank.
"Refunding Borrowing" is defined in Section 3.C(d) hereof.
"Registration Statement" means the Form S-3 Registration Statement under
the Securities Act of 1933, dated August 4, 1998, as amended.
"Required Lenders" means as of the date of determination thereof, if there
are more than two Lenders, those Lenders holding at least 66-2/3% of the
Commitments or, in the event that there are two or fewer Lenders as of the date
of determination, hereunder, those Lenders holding at least 100% in aggregate
principal amount of the Loans outstanding hereunder.
"Restricted Payments" means (i) any dividend payment or other distribution,
direct or indirect, of assets, properties, cash, rights, obligations or
securities on account of any shares of any class of capital stock of any
Borrower which is not a wholly-owned Subsidiary of Stericycle, or (ii) any
exchange, conversion, repurchase, purchase, redemption, retirement, sinking fund
or other similar acquisition for value, direct or indirect, of any shares of any
class of capital stock of any Borrower or any warrants, rights or options to
acquire any such shares, now or hereafter outstanding, (iii) any payment or
repayment of principal of, premium (if any), or interest on any Subordinated
Debt, and any redemption, purchase, retirement, defeasance, sinking fund or
similar payment with respect to any Subordinated Debt, unless permitted by the
terms of the document or instrument pursuant to which said Subordinated Debt is
created and which have been approved by the Agent, or (iv) any earn-out under
any acquisition agreement in excess of the thresholds set forth in Section
8.B.3, unless permitted by the terms thereunder and approved by Agent.
"Revolving Loans" means, collectively, the A Revolving Loan(s) and the B
Revolving Loan(s).
"Revolving LIBOR Loan" means a Revolving Loan which is also a LIBOR Loan.
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"Revolving Notes" means, collectively, the A Revolving Note and the B
Revolving Note.
"Revolving Prime Rate Loan" means a Revolving Loan which is also a Prime
Rate Loan.
"SEC" means the Securities and Exchange Commission.
"Security Agreement" means that certain Security Agreement of the Borrowers
in favor of the Agent, for its benefit and the ratable benefit of the Lenders,
of even date herewith, as the same may be amended or supplemented.
"Seller" is as defined in the Preamble hereto.
"Stated Amount" of each Letter of Credit means the total amount of the
Letter of Credit available for drawing thereunder.
"Stock Pledge Agreement" is as defined and included in the definition of
Pledged Shares.
"Stockholders' Equity" means the sum of the capital stock, additional
paid-in-capital and retained earnings (after deducting treasury stock) as
determined in accordance with GAAP.
"Subordinated Debt" means Debt for money borrowed by any Borrower if, but
only to the extent that, the payment and, if permitted hereunder, any collateral
therefor is and remains at all times subordinated to the Obligations and the
collateral and other security therefor, on terms and conditions satisfactory to
the Agent.
"Subsidiary" with respect to any Person means any corporation or other
business entity of which more than fifty percent (50%) of the outstanding common
stock or other ownership interests is owned, directly or indirectly, by such
Person.
"Target" is as defined in the Preamble hereto.
"Term LIBOR Loan" means a Term Loan which is also a LIBOR Loan.
"Term Loan" is a defined in Section 2.B.1 hereof.
"Term Notes" and "Term Loans" means the promissory note of the Borrowers
evidencing the Term Loan.
"Term Prime Rate Loan" means a Term Loan which is also a Prime Rate Loan.
"Termination Date" means September 30, 2003.
"Total Capitalization" means the sum of (i) the aggregate amount of Debt
for borrowed money and (ii) Stockholders Equity.
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"Total Leverage Ratio" means, as determined on a consolidated basis for the
Borrowers as of the end of each quarter of Borrowers' Fiscal Year for the then
applicable Measurement Period, the ratio of total Funded Debt to EBITDA.
"Transaction Documents" means the Loan Documents and the Acquisition
Documents.
"3CI Interests" means the following: (i) 5,104,448 shares of common stock,
par value $.01 per share (the "3CI Common Stock"), of 3CI Complete Compliance
Corporation, a Delaware corporation ("3CI") with its principal executive offices
in Shreveport, Louisiana, which represents 52.2% of the 9,778,825 shares of
3CI's common stock issued and outstanding as of July 24, 1998; 7,750,000 shares
of 3CI's preferred stock (the "3CI Preferred Stock"), consisting of 7,000,000
shares of 3CI's preferred stock designated as Series B Preferred Stock and
750,000 shares of 3CI's preferred stock designated as Series C Preferred Stock,
which represents 100% of the issued and outstanding shares of preferred stock of
3CI; (iii) Revolving Promissory Note dated September 30, 1995, from 3CI to WSI,
as amended (the "3CI Note") in the original principal amount of $8,000,000, an
unpaid principal balance as of September 30, 1998 of $4,898,699, and a current
maturity date of September 30, 1998; and (iv) an account receivable of WSI from
3CI (the "3CI Receivable") with a balance as of July 31, 1998 of $466,906.
"UCC" means the version of the Uniform Commercial Code as enacted in
Illinois, as amended from time to time.
Section 1.B. Any accounting terms used but not otherwise defined herein
shall have their customary meanings as defined in, pursuant to, or in accordance
with GAAP. All other terms used but not otherwise defined herein shall have the
meanings provided by the UCC to the extent said terms are used or defined
therein.
Section 1.C. Unless otherwise defined or the context otherwise requires,
terms for which meanings are provided in this Agreement shall have such meanings
when used in the other Loan Documents.
Section 1.D. In this Agreement and each other Loan Document, unless a clear
contrary intention appears: (i) the singular number includes the plural number,
and vice versa; (ii) reference to any Person includes such Person's successors
and assigns but, if applicable, only if such successors and assigns are
permitted by this Agreement, and reference to a Person in a particular capacity
excludes such Person in any other capacity or individually; (iii) reference to
any gender includes each other gender; (iv) references to any agreement
(including this Agreement and the Schedules, Appendices and Exhibits hereto),
document or instrument means such agreement, document or instrument as amended
or modified and in effect from time to time in accordance with the terms thereof
and, if applicable, the terms hereof and reference to any promissory note
includes any promissory note which is an extension or renewal thereof or a
substitute or replacement therefor; (v) unless the context indicates otherwise,
reference to any Article, Section, Appendix, Schedule or Exhibit means such
Article or Section hereof or Schedule, Appendix or
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Exhibit hereto; (vi) "hereunder," "hereof," "hereto" and words of similar import
shall be deemed references to this Agreement as a whole and not to any
particular Article, Section or other provision hereof; (vii) "including" (and
with correlative meaning "include") means including without limiting the
generality of any description preceding such term; and (viii) relative to the
determination of any period of time, "from" means "from and including" and "to"
and "through" means "to but excluding."
Section 1.E. If, after the date of this Agreement, there shall occur any
change in GAAP from those used in the preparation of Stericycle's audited
financial statements for the Fiscal Year ending December 31, 1997, and such
change shall result in a change in the method of calculation of any financial
covenant, standard or term found in this Agreement, either Stericycle or the
Required Lenders may by notice to the other require that the Lenders and the
Borrowers negotiate in good faith to amend such covenant, standard or term so as
equitably to reflect such change in GAAP, with the desired result being that the
criteria for evaluating the financial condition of the Borrowers shall be the
same as if such change had not been made.
Section 1.F. For all purposes of this Agreement, the Target is included
within the definition of "Subsidiary" of Stericycle and shall be a "Borrower"
hereunder, if as and when the Acquisition is completed.
SECTION 2. CREDIT FACILITIES.
Section 2.A. Revolving Loans and Revolving Notes. Subject to the terms and
conditions of this Agreement, the Lenders agree to lend to the Borrowers the
Revolving Loans as provided in this Section.
2.A.1. A Revolving Loans. Subject to the terms and conditions of this
Agreement, the Lenders agree to lend to the Borrowers from time to time until
the earlier of the Termination Date or the occurrence of either a Default or an
Event of Default hereunder (the earlier of such date being hereinafter referred
to as the "Expiration Date"), such sums, in a minimum amount(s) as set forth in
Section 3.B hereof, as Borrowers may request from time to time by a Borrowing
Notice pursuant to Section 3.C hereof; provided, however, that the aggregate
principal amount of all loans outstanding under this Section 2.A.1
(individually, a "A Revolving Loan" or "Loan" or, collectively, the "A Revolving
Loans" or "Loans") plus the Stated Amount of all letters of credit issued
pursuant to Section 2.C hereof (the "Letters of Credit") at any one time shall
not exceed the lesser of (i) Five Million Dollars ($5,000,000) or (ii) the
Borrowing Base (such lesser amount hereinafter referred to as the "A Revolving
Commitment"). Such borrowing of loans shall be made ratably from the Lenders in
proportion to their respective A Revolving Commitments. Subject to the terms and
conditions hereof, the Borrowers may borrow or repay and reborrow hereunder,
from the date hereof until the Expiration Date, either the full amount of the A
Revolving Commitment or any lesser sum in the minimum amounts referred to
herein. If, at any time, the A Revolving Loans plus the Stated Amount of
outstanding Letters of Credit exceed the A Revolving Commitment, the Borrowers
shall immediately notify the Agent of the existence of
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and pay to the Agent the amount of such excess. The maximum amount of the A
Revolving Commitment of each Lender shall be as set forth opposite its name on
the applicable signature page hereto (subject to any reductions thereof pursuant
to the term hereof). For all purposes of this Agreement, where a determination
of the unused or available amount of the A Revolving Commitment is necessary,
the Revolving Loans and the Letter of Credit Utilization shall be deemed to
utilize the A Revolving Commitment. The obligations of the Lenders under this
Section 2.A.1 are several and not joint and no Lender shall under any
circumstances be obligated to extend credit under this Section 2.A.1 in excess
of its A Revolving Commitment.
2.A.2. B Revolving Loans. Subject to the terms and conditions of this
Agreement, the Lenders agree to lend to the Borrowers from time to time until
the earlier of each Conversion Date or the Expiration Date such sums, in a
minimum amount as set forth in Section 3.B hereof, as Borrowers may request from
time to time by a Borrowing Notice pursuant to Section 3.C hereof, provided,
however, that the aggregate principal amount of all loans outstanding under this
Section 2.A.2 (individually, a "B Revolving Loan" or, collectively, the "B
Revolving Loans", or together with the A Revolving Loans, "Revolving Loans" or "
Loans") at any one time shall not exceed: (i) Fifteen Million Dollars
($15,000,000) on or before the Initial Conversion Date, or (ii) $15,000,000,
less the amount of the Term Loans made on the Initial Conversion Date, from and
after the Initial Conversion Date to the Final Conversion Date (the "B Revolving
Commitment" or, together with the A Revolving Commitment, the "Revolving
Commitments"). Such borrowing of loans shall be made ratably from the Lenders in
proportion to their respective B Revolving Commitments. The Borrowers may borrow
or repay and reborrow hereunder, from the date hereof until the earlier of each
Conversion Date or the Expiration Date, either the full amount of the then
applicable B Revolving Commitment or any lesser sum in the minimum amounts
referred to herein. If, at any time, the B Revolving Loans exceed the then
applicable B Revolving Commitment, the Borrowers shall immediately notify the
Agent of the existence of and pay to the Agent the amount of such excess. The
maximum amount of the B Revolving Commitment of each Lender shall be as set
forth opposite its name on the applicable signature page hereto (subject to any
reductions thereof pursuant to the term hereof). The obligations of the Lenders
under this Section 2.A.2 are several and not joint and no Lender shall under any
circumstances be obligated to extend credit under this Section 2.A.2 in excess
of its B Revolving Commitment.
Also subject to the terms and conditions of this Agreement, the Lenders and
Borrowers agree that all B Revolving Loans outstanding on each Conversion Date
shall be consolidated and loaned by the Lenders on a term loan basis to the
Borrowers. Any term loans made pursuant to this paragraph are hereinafter
sometimes referred to as the "Term Loan or "Term Loans." Such borrowing of loans
shall be made from the Lenders in the same amounts as the amounts of their
respective B Revolving Loans outstanding on the respective Conversion Date. The
obligations of the Lenders under this paragraph are several and not joint and no
Lender shall under any circumstances be obligated to extend credit under this
paragraph in excess of the amount of the Term Loan to be made by it.
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2.A.3. Revolving Notes. In order to evidence the Revolving Loans, at the
time of the making of the initial A Revolving Loan and B Revolving Loan, the
Borrowers will execute and deliver promissory notes payable to each Lender in
the principal amount of its A Revolving Commitment and B Revolving Commitment,
substantially in the form of Exhibits A and B hereto, respectively (together
with any and all amendments, modifications, supplements, substitutions,
renewals, extensions and restatements, thereof and therefor whether
individually, or collectively, the "A Revolving Note" and the "B Revolving
Note"). The respective Revolving Loans shall bear and pay interest and mature on
the date as set forth therein and herein.
2.B. Term Loan and Term Note. Subject to the terms and conditions of this
Agreement, the Lenders agree to lend to the Borrowers the Term Loans as provided
in this Section.
2.B.1. Term Loan and Term Note. On each Conversion Date, amounts of B
Revolving Loans then outstanding shall be converted into a Term Loan (the "Term
Loan or "Term Loans"), to be repayable in accordance with the following
provisions; the Term Loan shall be evidenced by, bear interest, be repayable and
mature in accordance with the provisions hereof and of Term Notes of the
Borrowers in the form of Exhibit C hereto, with appropriate insertions (together
with any and all amendments, modifications, supplements, substitutions,
renewals, extensions and restatements, thereof and therefor, whether
individually or collectively, the "Term Note" or the "Term Notes"). The
Borrowers shall deliver to the Lenders executed and completed Term Notes payable
to the order of each Lender in the principal amount of its B Revolving Loans
outstanding on the applicable Conversion Date. The Term Notes shall be dated on
the applicable Conversion Date, shall mature on the Termination Date, and shall
require quarterly principal payments in substantially equal amounts based on a
four (4) year or three (3) year (as appropriate) amortization of the principal
amount thereof. The Term Loans and Term Notes shall bear interest as provided
herein and therein. On the Initial Conversion Date, the amount of the B
Revolving Commitments shall thereupon be permanently reduced by the amount of
the Terms Loans made on said Initial Conversion Date, and on the Final
Conversion Date the amount of the B Revolving Commitments shall thereupon be
permanently reduced to $0.
Section 2.C. Letters of Credit.
(a) General Terms. Subject to all of the terms and conditions hereof,
the A Revolving Commitment may be availed of in the form of Letters of Credit,
provided that the aggregate outstanding amount of Letter of Credit Utilization
by the Borrowers hereunder shall in no event exceed the lesser of (aa) the
unused amount of the A Revolving Commitment or (bb) $1,000,000. The Letters of
Credit shall be issued by the Agent, but each Lender shall be obligated to
reimburse the Agent for a pro rata share of the amount of each draft drawn
thereunder and, accordingly, each Letter of Credit shall be deemed to utilize
the Revolving A Commitments of all Lenders pro rata in accordance with the
respective amounts thereof.
(b) Term. Each Letter of Credit issued hereunder shall expire not later
than sixty (60)
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days prior to the Termination Date. On the Expiration Date or on such earlier
date on which the A Revolving Commitment is terminated or the A Revolving Note
is accelerated, the Borrowers shall pay to the Agent an amount equal to the
aggregate amount undrawn on all the Letters of Credit which are outstanding on
that date to be held as cash collateral for the Obligations in respect of such
Letters of Credit.
(c) General Characteristics. Each Letter of Credit issued hereunder
shall be a standby or commercial letter of credit, shall be payable in U.S.
dollars, shall conform to the general requirements of the Agent for the issuance
of standby or commercial letters of credit as to form and substance, shall be a
letter of credit which the Agent may lawfully issue, and shall be issued for the
account of the Borrowers.
(d) Applications; Reimbursement. At the time any Borrower requests any
Letter of Credit to be issued (or prior to the first issuance of a Letter of
Credit, in the case of a continuing application), an Authorized Officer shall
execute and deliver to the Agent an application for such Letter of Credit in the
form customarily prescribed by the Agent for a Letter of Credit of the type
requested (the "Applications"). The terms, conditions and provisions of all
Applications are incorporated herein by reference and made a part hereof,
provided that if there is a direct and irreconcilable conflict between the
terms, conditions and/or provisions of an Application and the specific
provisions of this Agreement, this Agreement shall be controlling. Subject to
the other provisions of this Section 2.C, the Borrowers' obligation to reimburse
the Agent for drawings under a Letter of Credit shall be absolute, unconditional
and irrevocable under any and all circumstances and governed by the Application
for such Letter of Credit, except that in any event the Borrowers' reimbursement
for a drawing shall be made to the Agent by no later than the same Business Day
which is the date when such drawing was paid. In the event that the Agent is not
reimbursed by such time for the amount of any draft drawn under a Letter of
Credit issued hereunder, the obligation of the Borrowers to reimburse it for the
amount of such draft so paid by the Agent shall bear interest (which the
Borrowers hereby promise to pay) from and after the date such draft was paid
until such reimbursement is made at the rate per annum determined by adding the
Default Rate to the rate of interest for Revolving Prime Rate Loans as from time
to time in effect. Anything contained in the Applications to the contrary
notwithstanding, the Borrowers shall pay fees in connection with Letters of
Credit as set forth in Sections 4.C and 4.D hereof. Subject to the conditions
contained in Section 6.C., the Borrowers may satisfy their reimbursement
obligations with respect to drawings under Letters of Credit by borrowing Prime
Rate A Revolving Loans hereunder in accordance with Section 3.C, and the
Borrowers irrevocably authorize the Agent to disburse Prime Rate A Revolving
Loans in order to satisfy said reimbursement obligations.
(e) Change in Law. If the Agent or any Lender shall determine in good
faith that any change in any applicable law, regulation or guideline (including,
without limitation, Regulation D of the Board of Governors of the Federal
Reserve System) or any new law, regulation or guideline, or any interpretation
of any of the foregoing by any governmental authority charged with the
administration thereof or any central bank or other fiscal, monetary of other
authority
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having jurisdiction over such Lender (whether or not having the force of law)
shall:
(i) impose, modify or deem applicable any reserve, special deposit
or similar requirements against the Letters of Credit, or the Agent's or
such Lender's or any Borrower's liability with respect thereto; or
(ii) impose on the Agent or such Lender any penalty with respect to
the foregoing or any other condition regarding this Agreement, the
Applications or the Letters of Credit;
and the Agent or such Lender shall determine in good faith that the result of
any of the foregoing is to increase the cost (whether by incurring a cost or
adding to a cost) to the Agent or such Lender of issuing or maintaining or
participating in the Letters of Credit hereunder, then the Agent or such Lender
shall use its best efforts to give the Borrowers prompt notice thereof and the
Borrowers shall pay on demand to the Agent or such Lender from time to time as
specified by the Agent or such Lender such additional amounts as the Agent or
such Lender shall reasonably determine are sufficient to compensate and
indemnify it (computed commencing on the effective date of any event mentioned
herein) for such increased cost. If the Agent or a Lender makes such a claim for
compensation, it shall provide to the Borrowers a certificate setting forth such
increased costs as a result of any event mentioned herein and such certificate
shall be prima facie evidence as to the amount thereof.
(f) Absolute Nature of Obligations. The obligation of Borrowers to
reimburse the Agent, and of Lenders to make payment to the Agent, with respect
to Letters of Credit shall be irrevocable and shall not be subject to any
qualification or exception whatsoever and shall be made in accordance with the
terms and conditions of this Agreement under all circumstances, including,
without limitation, any of the following circumstances:
(i) Any lack of validity or enforceability of this Agreement,
any Letter of Credit or any of the other Loan Documents;
(ii) The existence of any claim, setoff, defense or other right
which any Borrower may have at any time against a beneficiary named in a
Letter of Credit or any transferee of any Letter of Credit (or any Person
for whom any such transferee may be acting), the Agent, any Lender or any
other Person, whether in connection with this Agreement, any Letter of
Credit, the transactions contemplated herein or any unrelated transactions
(including any underlying transactions between any Borrower and the
beneficiary named in any Letter of Credit);
(iii) Any draft, certificate or any other document presented under a
Letter of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect;
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(iv) The surrender or impairment of any security for the
performance or observance of any of the terms of any of the Loan Documents;
(v) Payment by the Agent under any Letter of Credit against
presentation of a demand, draft or certificate or other document which does
not comply with the terms of such Letter of Credit; provided, that such
payment does not constitute gross negligence or willful misconduct of the
Agent; or
(vi) Any other circumstance or happening whatsoever which would
give rise to a defense against payment or is similar to any of the
foregoing.
(g) Participation in Letters of Credit. Each Lender shall participate on a
pro rata basis in the Letters of Credit issued by the Agent, which participation
shall automatically arise upon the issuance of each Letter of Credit. Each
Lender unconditionally agrees that in the event the Borrowers do not reimburse
the Agent by the time such reimbursement is due (as set forth in subsection (d)
above) for the amount paid by the Agent on any draft presented under a Letter of
Credit, then in that event such Lender shall pay to the Agent that portion of
the amount of each draft so paid by the Agent which is equal to the same
percentage of the amount so paid as the percentage which its A Revolving
Commitment bears to the aggregate of the A Revolving Commitments and in return
such Lender shall automatically receive an equivalent percentage participation
in the rights of the Agent to obtain reimbursement from the Borrowers for the
amount of such draft, together with interest thereon as provided for herein. In
the event that any Lender fails to honor its obligation to reimburse the Agent
for its pro rata share of the amount of any such draft, then in that event (i)
each other Lender may, but shall not be obligated to, pay to the Agent its pro
rata share of the payment due the Agent from the defaulting Lender (provided
that no Lender shall be required to make such payment to the extent that the
payment, when taken together with the amount outstanding to such Lender under
the A Revolving Commitment, would exceed such Lender's A Revolving Commitment),
(ii) the defaulting Lender shall have no right to participate in any recoveries
from the Borrowers in respect of such draft, and (iii) all amounts to which the
defaulting Lender would otherwise be entitled under the terms of this Agreement
shall first be applied to reimbursing any such Lender's making payments to the
Agent under clause (i) above for their respective pro rata shares of the
defaulting Lender's portion of the draft, together with interest thereon at the
rate provided for in subsection (d) above. Upon reimbursement to such Lenders
pursuant to clause (iii) above of the amount advanced by them to the Agent in
respect of the defaulting Lender's share of the draft, together with interest
thereon, the defaulting Lender shall thereupon be entitled to its participation
in the Agent's rights of recovery against the Borrowers in respect of the draft
paid by the Agent.
SECTION 3. GENERAL PROVISIONS APPLICABLE TO ALL LOANS.
Section 3.A. Applicable Interest Rates. The Borrowers may elect that each
Borrowing of each type of Loans be made by means of a Prime Rate Loan or a LIBOR
Loan; provided, however, that there shall not be more than five Borrowings of
LIBOR Loans outstanding at any
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time.
(a) Prime Rate Loans. Each Prime Rate Loan by the Lenders shall bear
interest (computed on the basis of a year of 360 days and actual days elapsed)
on the unpaid principal amount thereof from the date such Loan is made until
maturity (whether by acceleration or otherwise) at a rate per annum equal to the
Prime Rate from time to time in effect plus the Applicable Margin. Interest on
all Prime Rate Loans is payable on the last day of each calendar quarter and at
maturity (whether by acceleration or otherwise), commencing December 31, 1998.
(b) LIBOR Loans. Each LIBOR Loan made by the Lenders shall bear interest
(computed on the basis of a year of 360 days and actual days elapsed) on the
unpaid principal amount thereof from the date such Loan is made until maturity
(whether by acceleration or otherwise) at a rate per annum equal to the sum of
the Applicable LIBOR Margin plus the Adjusted LIBOR, payable on the last day of
the applicable Interest Period and at maturity (whether by acceleration or
otherwise), and, if the applicable Interest Period is longer than three months,
on each day occurring every three months after the date such Loan is made.
"Adjusted LIBOR" means, for any Borrowing of LIBOR Loans, a rate per annum
determined in accordance with the following formula:
LIBOR
-----------------------------
Adjusted LIBOR= 100%-Eurodollar Reserve Percentage
"LIBOR" means, for an Interest Period for a Borrowing of LIBOR Loans, the
rate of interest per annum (rounded upwards, if necessary, to nearest 1/100 of
1%) at which deposits in U.S. dollars in immediately available funds are offered
by the Agent or the Reference Bank at approximately 11:00 a.m. (London, England
time) two (2) Business Days before the beginning of such Interest Period by
prime banks in the interbank eurodollar market for a period equal to such
Interest Period and in an amount equal or comparable to the principal amount of
the LIBOR Loan scheduled to be made by the Lenders as part of such borrowing.
"Eurodollar Reserve Percentage" means, for any Borrowing of LIBOR Loans,
the daily average for the applicable Interest Period of the maximum rate at
which reserves (including, without limitation, any supplemental, marginal and
emergency reserves) are imposed during such Interest Period by the Board of
Governors of the Federal Reserve System (or any successor) under Regulation D on
"eurocurrency liabilities", as defined in such Board's Regulation D, (or in
respect of any other category of liabilities that includes deposits by reference
to which the interest rate on LIBOR Loans is determined or any category of
extension of credit or other assets that include loans by non-United States
offices of any Lender to United States residents) subject to any amendments of
such reserve requirement by such Board or its successor, taking into account any
transitional adjustments thereto. For purposes of this definition, the LIBOR
Loans shall be deemed to be "eurocurrency liabilities" as defined in
Regulation D.
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<PAGE> 26
(c) Margin, Rate and Fee Determinations. The Agent shall determine each
interest rate applicable to the Loans hereunder, and each rate applicable to
Revolving Commitment Fees due under Section 4.A. hereof ("Fee Rate"), and its
determination thereof shall be conclusive and binding except in the case of
error. Not later than fifteen (15) days after the Agent's receipt of the
quarterly financial statements required by Section 8.A.2 hereof for a given
fiscal quarter and (unless the Required Lenders in their sole discretion do not
so require) a letter from the Borrowers requesting a change in the Applicable
Margin, Applicable L/C Margin and Applicable LIBOR Margin (collectively, the
"Margins"), and/or a change in the Fee Rate, accompanied by a certificate signed
by the chief financial officer of Stericycle computing the Cash Flow Leverage
Ratio as of the close of the most recently completed fiscal quarter, the Agent
shall determine whether such financial information indicates such a change in
the Cash Flow Leverage Ratio as would justify a change in the Margins or in the
Fee Rate and shall then notify the Borrowers and the Lenders of such
determination and of any change in the Margins or in the Fee Rate resulting
therefrom. Any change in the Margins or in the Fee Rate shall be effective
retroactively as of the close of the most recently completed fiscal quarter
(with any additional payment or refund of interest or Letter of Credit fees or
Revolving Commitment Fees to be made within five (5) Business Days after the
date the Agent so notifies the Borrowers and the Lenders of such change) and
with such new Margins or in the Fee Rate to continue in effect until the
effectiveness of the next redetermination thereof. Any determination by the
Agent of the Leverage Ratio shall be conclusive and binding upon the Borrowers
and the Lenders provided that it has been made reasonably and in good faith. If
the Borrowers fail to timely submit the quarterly financial statements, letter
and certificate referred to above, the Margins and Fee Rate as of the close of
the most recently completed calendar quarter shall be the highest Margins and
Fee Rate indicated.
Section 3.B. Minimum and Maximum Borrowing Amounts. Each Borrowing of
Prime Rate Loans (other than an L/C Refinancing Borrowing) shall be in an amount
not less than $500,000 or any larger amount that is an integral multiple of
$100,000. Each Borrowing of LIBOR Loans shall be in an amount not less than
$500,000, or any larger amount that is an integral multiple of $100,000.
Section 3.C. Borrowing Procedures.
(a) Notice to the Agent. The Borrowers shall give telephonic or
telecopy notice to the Agent in the form attached hereto as Exhibit D (the
"Borrowing Notice") (which notice shall be irrevocable once given and, if by
telephone, shall be promptly confirmed in writing) by no later than 12:00 noon
(Chicago time) (i) on the date at least three (3) Business Days prior to the
date of each requested Borrowing of LIBOR Loans and (ii) on the date of any
requested Borrowing of Prime Rate Loans. Each such notice shall specify the date
of the requested Borrowing (which shall be a Business Day), the amount of the
requested Borrowing, the type of Loans to comprise such Borrowing (if no
election as to type of Borrowing is specified in any such notice, then the
requested Borrowing shall be of Prime Rate Loans) and, if such Borrowing is to
be comprised of LIBOR Loans, the Interest Period applicable thereto. The
Borrowers agree that the Agent may rely on any such telephonic or telecopy
notice given by any person the
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<PAGE> 27
Agent in good faith believes is an Authorized Officer without the necessity of
independent investigation and in the event any notice by such means conflicts
with the written confirmation, such notice shall govern if the Agent has acted
in reliance thereon.
(b) Borrowers' Failure to Notify. In the event the Borrowers fail to
give notice pursuant to Section 3.C(a) above of the reborrowing of the principal
amount of any maturing Borrowing or of a Borrowing to refinance a reimbursement
obligation with respect to a Letter of Credit (an "L/C Refinancing Borrowing")
and has not notified the Agent by 12:00 noon (Chicago time) on the day such
Borrowing matures or such reimbursement obligation becomes due that it intends
to repay such Borrowing or such reimbursement obligation with funds not borrowed
hereunder, the Borrowers shall be deemed to have requested a Borrowing of Prime
Rate Loans on such day in the amount of the maturing Borrowing or of the
reimbursement obligation then due, in each case subject to Section 6.C hereof,
which new Borrowing shall be applied to pay, as the case may be, the maturing
Borrowing or reimbursement obligation then due.
(c) Disbursement of Loans. Not later than 2:00 p.m. (Chicago time) on
the date of any Borrowing (a "Funding Date") of LIBOR Loans or Prime Rate Loans,
each Lender shall make available its Loan in funds immediately available in
Chicago, Illinois, at the principal office of the Agent, except to the extent
such Borrowing is either a reborrowing, in whole or in part, of the principal
amount of a maturing Borrowing of Loans (a "Refunding Borrowing") or an L/C
Refinancing Borrowing, in which case each Lender shall record the Loan made by
it as a part of such Refunding Borrowing or L/C Refinancing Borrowing, as the
case may be, on its books or records or on a schedule to the appropriate Note,
as provided in Section 3.H(b) hereof, and shall effect the repayment, in whole
or in part, as appropriate, of its maturing Loan or reimbursement obligation
through the proceeds of such new Loan. Subject to Section 6 hereof, the Agent
shall make the proceeds of each Borrowing available to the Borrowers at the
Agent's principal office in Chicago, Illinois.
Unless the Agent shall have been notified by a Lender (no later than
5:00 p.m. (Chicago time) on the Business Day preceding the date of a requested
Borrowing of LIBOR Loans and no later than 1:00 p.m. (Chicago time) on the date
of a requested Borrowing of Prime Rate Loans), that such Lender does not intend
to make available to the Agent such Lender's pro rata share of Borrowings as
aforesaid, the Agent may assume that such Lender has made such amount available
to the Agent and the Agent, it its sole discretion, may but need not make
available to the Borrowers a corresponding amount. If such corresponding amount
is not in fact made available to the Agent by such Lender on or prior to a
Funding Date, such Lender agrees to pay and Borrowers agree to repay the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to Borrowers until the
date such amount is paid or repaid to the Agent, at (i) in the case of such
Lender, the Federal Funds Rate (together with such other compensatory amounts as
may be required to be paid by such Lender to the Agent pursuant to the rules for
Interbank Compensation of the Council on International Banking or the
Clearinghouse Compensation Committee, as the case may be, as in effect from time
to time), and (ii) in the case of the Borrowers, the interest rate
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<PAGE> 28
applicable at the time to the Borrowing made on such Funding Date. If such
Lender shall pay to the Agent such corresponding amount, such amount so paid
shall constitute such Lender's pro rata share of such Borrowing, and if both
such Lender and the Borrowers shall have paid and repaid, respectively, such
corresponding amount, the Agent shall promptly return to the Borrowers such
corresponding amount in same day funds. Nothing in this Section shall be deemed
to relieve any Lender of its obligation hereunder to make its pro rata share of
Loans on the requested date of Borrowing, nor shall any Lender be responsible
for the failure of any other Lender to perform its obligations to make any Loan
hereunder, and the Commitment of any Lender shall not be increased or decreased
as a result of the failure by any other Lender to perform its obligation to make
a Loan. In the event that, at any time when no Event of Default exists
hereunder, and the applicable conditions for funding set forth hereunder have
been satisfied, a Lender for any reason fails or refuses to fund its pro rata
share of a Loan (the funded portion of such Loan being hereinafter referred to
as a "Non Pro Rata Loan" and such Lender being hereinafter referred to as a
"Defaulting Lender"), then, until such time as such Defaulting Lender has funded
its portion of the Loan which was previously a Non Pro Rata Loan, or all other
Lenders have received payment in full (whether by repayment or prepayment) of
the principal and interest due in respect of such Non Pro Rata Loan, all of the
Obligations owing to such Defaulting Lender hereunder shall be subordinated in
right of payment, as provided in the following sentence, to the prior payment in
full of all principal, interest and fees in respect of all Non Pro Rata Loans in
which the Defaulting Lender has not funded its pro rata share (such principal,
interest and fees being referred to as "Senior Loans"). All amounts paid by
Borrowers and otherwise due to be applied to the obligations owing to the
Defaulting Lender pursuant to the terms hereof shall be distributed by Agent to
the other Lenders in accordance with their respective pro rata shares
(recalculated for purposes hereof to exclude the Defaulting Lender's
Commitment), until all Senior Loans have been paid in full. This provision
governs only the relationship among Agent, the Defaulting Lender, and the other
Lenders; nothing hereunder shall limit the obligation of Borrowers to repay all
Loans in accordance with the terms of this Agreement. Notwithstanding anything
in this Agreement to the contrary, the provisions of this section shall apply
and be effective regardless of whether an Event of Default occurs and is then
continuing, and notwithstanding any instruction of Borrowers as to its desired
application of payments. In addition, no unused commitment fee shall accrue in
favor of, or be payable to, such Defaulting Lender from the date of such failure
to fund until such failure has been cured.
(d) Notice to Lenders. The Agent shall give prompt telephonic, telex or
telecopy notice to each of the Lenders of any Borrowing Notice received pursuant
to Section 3.C(a) above and, if such notice requests the Lenders to make LIBOR
Loans, the Agent shall give notice to the Borrowers and each of the Lenders by
like means of the interest rate applicable thereto promptly after the Agent has
made such determination. The Agent shall promptly confirm in writing (including
by telex or telecopy) any such notice provided by telephone, but the failure to
provide such confirmation shall not affect the obligations of the Borrowers and
the Lenders under this Agreement.
Section 3.D. Interest Periods. As provided in Section 3.C hereof, at
the time of each
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<PAGE> 29
request for the Borrowing of LIBOR Loans hereunder the Borrowers shall select an
Interest Period applicable to such Loans from among the available options. The
term "Interest Period" means the period commencing on the date a Borrowing of
LIBOR Loans is made and ending on the date, as the Borrowers may select, 1, 2, 3
or 6 months thereafter; provided, however, that:
(a) the Borrowers may not select an Interest Period that extends beyond
the Termination Date;
(b) whenever the last day of any Interest Period would otherwise be a
day that is not a Business Day, the last day of such Interest Period shall be
extended to the next succeeding Business Day, provided that, if such extension
would cause the last day of such Interest Period to occur in the following
calendar month, the last day of such Interest Period shall be the immediately
preceding Business Day; and
(c) for purposes of determining the Interest Period for a Borrowing of
LIBOR Loans, a month means a period starting on one day in a calendar month and
ending on the numerically corresponding day in the next calendar month;
provided, however, that if there is no numerically corresponding day in the
month in which such an Interest Period is to end or if such an Interest Period
begins on the last Business Day of a calendar month, then such Interest Period
shall end on the last Business Day of the calendar month in which such Interest
Period is to end.
Section 3.E. Maturity of LIBOR Loans. Each LIBOR Loan shall mature and
become due and payable by the Borrowers on the last day of the Interest Period
applicable thereto.
Section 3.F. Prepayments.
(a) Generally. The Borrowers shall have the privilege of prepaying
without premium or penalty and in whole or in part (but, if in part, then: (i)
in an amount not less than $100,000 or any larger amount that is an integral
multiple of $50,000 in the case of Prime Rate Loans, and in an amount not less
than $50,000 or any larger amount that is an integral multiple of $100,000 in
the case of LIBOR Loans and (ii) in an amount such that the minimum amount
required for a Borrowing pursuant to Section 3.B hereof remains outstanding) on
any Business Day upon prior notice to the Agent which must be received by the
Agent (which shall advise each Lender thereof promptly thereafter) by no later
than 12:00 noon (Chicago time) on the date of such prepayment in the case of
Prime Rate Loans and by no later than 12:00 noon (Chicago time) on the date
three Business Days in advance of the date of such prepayment in the case of
LIBOR Loans, such prepayment to be made by the payment of the principal amount
to be prepaid and accrued interest thereon and, in the case of LIBOR Loans, any
compensation required by Section 3.J hereof. Partial prepayments of any
outstanding type of Loan shall be applied to the various Borrowings and various
installments of principal thereof in the inverse order of their maturity. No
amounts of principal paid or prepaid on any Term Loan may be reborrowed.
(b) Reborrowings. Any amount paid or prepaid on the Revolving Loans
before the
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Expiration Date or the Conversion Date (as appropriate) may, subject to the
terms and conditions of this Agreement, be borrowed, repaid and borrowed again.
(c) Mandatory Prepayments. Notwithstanding that no Default or Event of
Default has occurred and is continuing, the Borrowers shall pay to the Agent, as
prepayments on the Loans, within ten (10) days after receipt thereof, 100% of
the Net Cash Proceeds with respect to the sale of any assets permitted under
Section 8.B.8(iii), and 100% of the Net Cash Proceeds with respect to the
issuance of capital stock. Prepayments under this section shall be applied,
first, to the Term Loans if then outstanding, then the B Revolving Loans if then
outstanding, and then to the A Revolving Loans if then outstanding, in each case
in prepayment of installments thereof in the inverse order of maturity.
Section 3.G. Default Rate. If any Event of Default has occurred and is
continuing, then each Loan or other monetary Obligation shall bear interest,
after as well as before judgment (computed on the basis of a year of 360 days
and actual days elapsed) from the date of such Event of Default until such Loan
or other monetary Obligation is paid in full, payable on demand, at a rate per
annum (the "Default Rate") equal to:
(a) with respect to any Prime Rate Loan, the sum of two percent (2%)
plus the Prime Rate from time to time in effect plus the highest possible
Applicable Margin applicable to such Loan under the relevant matrix; and
(b) with respect to any LIBOR Loan, the sum of two percent (2%) plus
the rate of interest in effect thereon at the time of such default until the end
of the Interest Period applicable thereto and, thereafter, at a rate per annum
equal to the sum of two percent (2%) plus the Prime Rate from time to time in
effect plus the highest possible Applicable Margin applicable to such Loan under
the relevant matrix; and
(c) with respect to other monetary Obligations for which a Default Rate
is not otherwise specified, the sum of two percent (2%) plus the Prime Rate from
time to time in effect plus the highest possible Applicable Margin.
Section 3.H. Notes.
(a) Each Loan made to the Borrowers by a Lender shall be evidenced by a
promissory note of the Borrowers, dated the date hereof, payable to the order of
each Lender in the principal amount of its Commitment, and otherwise be in the
form of Exhibits A through C hereto.
(b) Each Lender shall record on its books or records or on a schedule
to the appropriate Note the amount of each Loan made by it to the Borrowers, the
Interest Period thereof (if applicable), all payments of principal and interest
and the principal balance from time to time outstanding thereon, the interest
rate applicable thereto, and, in respect of any Loan, the type of such Loan;
provided that prior to the transfer of any Note all such amounts shall be
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<PAGE> 31
recorded on a schedule to such Note. The record thereof, whether shown on such
books or records of a Lender or on a schedule to any Note, shall be prima facie
evidence as to all such amounts; provided, however, that the failure of any
Lender to record any of the foregoing or any error in any such record shall not
limit or otherwise affect the obligation of the Borrowers to repay all Loans
made hereunder together with accrued interest thereon. At the request of any
Lender and upon such Lender tendering to the Borrowers the Note to be replaced,
the Borrowers shall furnish a new Note to such Lender to replace any outstanding
Note and at such time the first notation appearing on a schedule on the reverse
side of, or attached to, such Note shall set forth the aggregate unpaid
principal amount of all Loans, if any, then outstanding thereon.
Section 3.I. Revolving Commitment Terminations. The Borrowers shall
have the right at any time and from time to time, upon prior written notice to
the Agent, to terminate without premium or penalty, in whole or in part, any
Revolving Commitment, each such termination (whether in whole or in part) to be
effective as of the close of the calendar quarter specified in such notice
(provided such effective date occurs no earlier than thirty (30) Business Days
after such notice) and each partial termination to be in an amount not less than
$500,000 or any larger amount that is an integral multiple of $250,000 and to
reduce ratably the respective Commitments of each Lender; provided that the
Revolving Commitments may not be reduced to an amount less than the aggregate
principal amount of the utilization then outstanding thereunder. Any termination
of Commitments pursuant to this Section 3.I may not be reinstated.
Section 3.J. Funding Indemnity. In the event any Lender shall incur any
loss, cost or expense (including, without limitation, any loss of profit, and
any loss, cost or expense incurred by reason of the liquidation or re-employment
of deposits or other funds acquired by such Lender to fund or maintain any LIBOR
Loan or the relending or reinvesting of such deposits or amounts paid or prepaid
to such Lender) as a result of:
(a) any payment (including prepayment) of a LIBOR Loan on a date other
than the last day of its Interest Period for any reason, whether before or after
default, and whether or not such payment is required by any provisions of this
Agreement, or
(b) any failure (because of a failure to meet the conditions of Section
6 or otherwise) by the Borrowers to borrow a LIBOR Loan on the date specified in
a notice given pursuant to Section 3.C hereof,
then, upon the demand of such Lender, the Borrowers shall pay to such Lender
such amount as will reimburse such Lender for such loss, cost or expense. If any
Lender makes such a claim for compensation, it shall provide to the Borrowers,
with a copy to the Agent, a certificate executed by an officer of such Lender
setting forth the amount of such loss, cost or expense in reasonable detail
(including an explanation of the basis for and the computation of such loss,
cost or expense) and the amounts shown on such certificate shall be deemed
rebuttably presumptive evidence of the correctness thereof.
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Section 3.K. Change in Circumstances, Etc.
(a) Change of Law. Notwithstanding any other provisions of this
Agreement or any Note, if at any time after the date hereof any change in
applicable Law or in the interpretation thereof makes it unlawful for any Lender
to make or continue to maintain LIBOR Loans or to give effect to its obligations
as contemplated hereby, such Lender shall promptly give notice thereof to the
Borrowers, with a copy to the Agent, and such Lender's obligations to make or
maintain LIBOR Loans under this Agreement shall terminate until it is no longer
unlawful for such Lender to make or maintain LIBOR Loans. The Borrowers shall
prepay on demand the outstanding principal amount of any such affected LIBOR
Loans, together with all interest accrued thereon and all other amounts then due
and payable to such Lender under this Agreement; provided, however, subject to
all of the terms and conditions of this Agreement, the Borrowers may then elect
to borrow the principal amount of the affected LIBOR Loan from such Lender that
shall not be made ratably by the Lenders but only from such affected Lender by
means of a Prime Rate Loan from such Lender.
(b) Unavailability of Deposits or Inability to Ascertain, or Inadequacy
of, LIBOR. If on or prior to the first day of any Interest Period for any
Borrowing of LIBOR Loans:
(i) the Agent advises the Borrowers that deposits in United States
Dollars (in the applicable amounts) are not being offered to it or the Reference
Bank in the interbank eurodollar market, for such Interest Period, or
(ii) Lenders having 50% or more of the aggregate amount of the
Commitments advise the Agent that LIBOR as determined by the Agent will not
adequately and fairly reflect the cost to such Lenders of funding their LIBOR
Loans for such Interest Period, then, the Agent shall forthwith give notice
thereof to the Borrowers and the Lenders, whereupon until the Agent notifies the
Borrowers that the circumstances giving rise to such suspension no longer exist,
the obligation of the Lenders to make LIBOR Loans shall be suspended.
(c) Increased Cost and Reduced Return.
(1) If on or after the date hereof, the adoption of any applicable
Law, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Lender with any request or directive (whether or not having the force of
law) of any such authority, central bank or comparable agency:
(i) shall subject any Lender to any tax, duty or other charge
with respect to the Loans, its Notes or its obligation to make
Loans, or shall change the basis of taxation of payments of any
Lender of the principal of or interest on the Loans or any other
amounts due under this Agreement in respect of its Loans or its
obligation to make Loans (except for changes in the rate of tax on
the overall
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net income of such Lender imposed by the jurisdiction in which
such Lender's principal executive office is located); or
(ii) shall impose, modify or deem applicable any reserve,
special deposition or similar requirement (including, without
limitation, any such requirement imposed by the Board of Governors
of the Federal Reserve System, but excluding with respect to any
LIBOR Loans any such requirement included in an applicable
Eurodollar Reserve Percentage) against assets of, deposits with or
for the account of, or credit extended by, any Lender or shall
impose on any Lender or on the interbank market any other condition
affecting the Loans, its Notes or Lender's obligation to make
Loans;
and the result of any of the foregoing is to increase the cost to such Lender of
making or maintaining any Loan, or to reduce the amount of any sum received or
receivable by such Lender under this Agreement or under its Notes with respect
thereto, by an amount deemed by such Lender to be material, then, within fifteen
(15) days after demand by such Lender (with a copy to the Agent), the Borrowers
shall be obligated to pay such Lender such additional amount or amounts as will
compensate such Lender for such increased cost or reduction (computed commencing
on the effective date of any event mentioned herein). Each Lender agrees to use
its best efforts to give the Borrowers notice of the occurrence of any event
mentioned herein.
(2) If any Lender shall determine that the adoption after the date
hereof of any applicable Law regarding capital adequacy, or any change in any
existing Law, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by such Lender (or any
of its branches or any corporation controlling such Lender (or any of its
branches or any corporation controlling such Lender) with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on such Lender's or such corporation's
capital, as the case may be, as a consequence of Lender's obligations hereunder
or for the credit which is the subject matter hereof to a level below that which
such Lender or such corporation could have achieved but for such adoption,
change or compliance (taking into consideration such Lender's or such
corporation's policies with respect to liquidity and capital adequacy) by an
amount deemed by such Lender to be material, then from time to time, within
fifteen (15) days after demand by such Lender, the Borrowers shall pay to such
Lender such additional amount or amounts reasonably determined by such Lender as
will compensate such Lender for the reduction.
(d) Discretion of Lender as to Manner of Funding. Notwithstanding any
other provision of this Agreement, each Lender shall be entitled to fund and
maintain its funding of all or any part of its Loans in any manner it sees fit,
it being understood, however, that for the purposes of this Agreement all
determinations hereunder shall be made as if each Lender had actually funded and
maintained each LIBOR Loan through the purchase of deposits in the
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relevant market having a maturity corresponding to such Loan's Interest Period
and bearing an interest rate equal to LIBOR, for such Interest Period.
(e) Implementation of European Economic and Monetary Union ("EMU").
This Agreement (including, without limitation, the definition of LIBOR and
related definitions) will be amended to the extent determined by the Agent
(acting reasonably and in consultation with the Borrowers and the Lenders) to be
necessary to reflect implementation of the EMU and change in currency and to put
the Lenders and the Borrowers in the same position, so far as possible, that
they would have been in if such implementation and change in currency had not
occurred.
(f) Lending Offices. Each Lender may, at its option, elect to make its
Loans hereunder at the branch, office or affiliate specified on the appropriate
signature page hereof (each a "Lending Office") for each type of Loan available
hereunder or at such other of its branches, offices or affiliates as it may from
time to time elect and designate in a notice to the Borrowers and the Agent.
SECTION 4. FEES.
Section 4.A. Revolving Commitment Fees. The Borrowers shall pay to the
Agent for the ratable account of the Lenders a commitment fee at the initial
rate of .25% per annum with respect to the A Revolving Commitment and the B
Revolving Commitment (computed on the basis of a year of 360 days and the actual
number of days elapsed) on the average daily unused amount of the respective
Revolving Commitment hereunder ("Commitment Fees") provided, however, that the
Commitment Fees shall be subject to quarterly adjustment beginning with the
fiscal quarter commencing January 1, 1999 based on the following matrix:
<TABLE>
<CAPTION>
Cash Flow Commitment Fee on A and
Leverage Ratio B Revolving Commitments
-------------- -----------------------
<S> <C>
Equal to or less 0.25%
than 2.0:1.00
2.01:1.00 through
2.50:1.00 0.25%
2.51:1.00 through
2.75:1.00 0.25%
2.76:1.00 or
greater 0.375%
</TABLE>
For purposes of this Section 4.A., Letter of Credit Utilization shall
constitute a usage of the A Revolving Commitment for purposes of
computing the commitment fee payable
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<PAGE> 35
hereunder. Such commitment fees are payable in arrears on the last day
of each March, June, September and December occurring after the date
hereof (commencing December 31, 1998) and on the Expiration Date,
unless either of the Revolving Commitments terminates in whole on an
earlier date, in which event the fees for the period to the date of
such termination in whole shall be paid on the date of such
termination.
Section 4.B. Closing Fee. The Borrowers shall pay to the Agent for its
own account on the Closing Date a fee described in a letter dated the date
hereof between Agent and Borrowers (the "Closing Fee").
Section 4.C. Letter of Credit Fees. On the last day of each March,
June, September and December occurring after the date hereof (commencing
December 31, 1998) and on the Expiration Date, the Borrowers shall pay to the
Agent for the ratable account of the Lenders a fee at the rate equal to the
Applicable L/C Margin per annum (computed on the basis of a year of 360 days and
the actual number of days elapsed) on the average daily Stated Amount under
Letters of Credit outstanding during the calendar quarter ending on such date.
Section 4.D. Transaction Charges. The Borrowers shall pay to the Agent
for its own account such issuing and processing fees and charges as the Agent
from time to time customarily imposes in connection with the issuance,
amendment, cancellation, negotiation and payment of letters of credit and drafts
drawn thereunder, such fees to be paid in accord with the standard and customary
practices of the Agent.
Section 4.E. Agent's Fees. The Borrowers shall from time to time pay
the Agent for its own use and benefit such fees as the Borrowers and the Agent
have mutually agreed upon.
SECTION 5. PLACE AND APPLICATION OF PAYMENTS.
Section 5.A. Place and Application of Payments. All payments of
principal of and interest on the Loans, reimbursement obligations with respect
to Letters of Credit and all payments of fees and all other amounts payable
under this Agreement shall be made to the Agent no later than 12:00 Noon
(Chicago time) at the principal office of the Agent in Chicago, Illinois (or
such other location in the State of Illinois as the Agent may designate to the
Borrowers for the benefit of the Lenders). Any payments received after such time
shall be deemed to have been received by the Agent on the next Business Day. All
such payments shall be made in lawful money of the United States of America, in
immediately available funds at the place of payment, without setoff or
counterclaim. The Agent will promptly thereafter cause to be distributed like
funds relating to the payment of principal or interest on Loans, reimbursement
obligations with respect to Letters of Credit or fees ratably to the Lenders and
like funds relating to the payment of any other amount payable to any Lender to
such Lender, in each case to be applied in accordance with the terms of this
Agreement. Alternatively, at its sole discretion, the Agent may charge against
or debit any deposit account or other Monies of any Borrower on deposit with or
in possession of the Agent (except any Monies of any Borrower at any time on
deposit with the
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<PAGE> 36
Agent collateralizing any Letters of Credit), all or any part of any amount due
hereunder or under the Notes. The Agent's right from time to time after the
occurrence or happening of an Event of Default hereunder (which has not been
cured or waived in a writing signed by the Agent) to set off indebtedness owing
by Borrowers to the Agent against any Borrower's Monies, deposits, credits,
accounts or other property now or at any time in the possession or control of
the Agent, except as provided herein, is hereby acknowledged and agreed to by
the Borrowers.
SECTION 6. CONDITIONS PRECEDENT AND SUBSEQUENT.
Notwithstanding any other provisions of this Agreement, the Lenders, at
their sole option and in their sole discretion, need not make any Loans to the
Borrowers or issue any Letter of Credit for the account of the Borrowers, unless
the conditions precedent described below are fulfilled:
Section 6.A. Delivery of Documents as Conditions Precedent. The
delivery of each of the following documents, each of which shall be reasonably
satisfactory to the Agent in substance and form, by on or behalf of the
Borrowers to the Agent shall constitute separate and distinct conditions
precedent to the effectiveness of this Agreement and the making of any Loans or
issuance of any Letters of Credit:
6.A.1. Agreement. A copy of this Agreement duly executed by
Borrowers.
6.A.2. Notes. The Revolving Notes dated as of the Closing Date duly
executed by the Borrowers and payable to the respective Lenders.
6.A.3. Stock Pledge Agreement. The Stock Pledge Agreement duly executed
by Stericycle and the other Pledgors, together with the stock certificates for
the Pledged Shares and duly executed stock powers or assignments endorsed in
blank, and appropriate UCC-1 financing statements from the respective Pledgors
for filing with the appropriate Secretary of State.
6.A.4. Environmental Indemnity Agreement. The Environmental Indemnity
Agreement duly executed by the Borrowers.
6.A.5. Security Agreement, Intellectual Property Assignment, Collateral
Assignment of Notes, and Acquisition Agreement Assignment. The Security
Agreement duly executed by the Borrowers, the Intellectual Property Assignment,
the Collateral Assignment of Notes, and the Acquisition Agreement Assignment.
6.A.6. Financing Statements. UCC-1 financing statements executed by the
Borrowers for filing with the offices indicated on Schedule 6.A.6 hereto, and
such other financing statements or fixture filings as the Agent may request from
the Borrowers from time to time.
6.A.7. UCC and Other Search Results. Satisfactory UCC financing
statement, judgment
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<PAGE> 37
and tax lien search results of the Borrowers from or of the offices indicated on
Schedule 6.A.7 hereto, and from such other offices or governmental agencies or
bodies as the Agent, in its sole discretion, may request from time to time,
indicating that any financing statements to be filed by the Agent or described
above, after being duly and properly filed and recorded, will give the Agent
first priority perfected liens and security interests on and in the Collateral
of the Borrowers, except by reason of Permitted Liens, and that there are no
other lienors or creditors claiming any interest in the Collateral of the
Borrowers, except holders of Permitted Liens.
6.A.8. Evidence of Insurance. Evidence that the Borrowers have
insurance as required by Section 8.A.16, including property, casualty and
liability insurance satisfactory to the Agent, together with: (i) loss
payable/mortgagee endorsements naming the Agent as loss payee and mortgagee with
respect to property and casualty insurance covering Collateral; and (ii)
certificate(s) of insurance(s) and binder(s) naming the Agent and the Lenders as
additional insured with respect to liability insurance.
6.A.9. Certificates of Incorporation. Certificates of Incorporation,
and each and every amendment thereto, of each Borrower, certified of recent date
by the Secretary of State or appropriate government official in each State or
country in which each such Borrower is incorporated.
6.A.10. Good Standing. Certificate of the appropriate Secretary of
State or government official of recent date, as to the good standing of each
Borrower in the State or country of its incorporation and where it is qualified
to do business.
6.A.11. Secretary's Certificates. Certificate of Secretary of each
Borrower as to (i) resolutions authorizing entry into, execution, delivery and
performance of its obligations under this Agreement and related Loan Documents
to which it is a party, (ii) the incumbency and signatures of the officers
authorized to execute on its behalf the Loan Documents to which it is a party,
(iii) its Certificate of Incorporation, and (iv) its bylaws.
6.A.12. Solvency Certificate. Certificate of Solvency duly executed by
the Borrowers, with pro forma balance sheet and cash flow projections provided
for thereunder.
6.A.13. Opinion. The satisfactory opinion letter of Johnson and Colmar,
counsel for the Borrowers, dated as of the Closing Date and addressed to the
Agent and the Lenders as to the matters referred to in Sections 7.A., 7.B.,
7.C., 7.D., 7.E., 7.F. (as far as litigation is concerned), 7.J., and the
perfection of the Agent's Liens in the Collateral.
6.A.14. Environmental Data. All environmental data, information and
reports concerning the Mortgaged Properties or any other property which the
Agent may request.
6.A.15. Officer's Certificates. A certificate of the President of
Stericycle certifying: (i) that the conditions herein insofar as they relate to
the Borrowers have been satisfied, (ii) as to the
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<PAGE> 38
truth of the representations and warranties herein contained, and (iii) that no
Materially Adverse Effect has occurred since December 31, 1997.
6.A.16. Mortgages, Etc. The Mortgages, Leasehold Mortgages, and
Collateral Assignment of Leases.
6.A.17. Pay-Off Letters. Pay-off letters from the holders of all Debt
to be paid or refinanced with Loan proceeds, with any related UCC termination
statements, said pay-off letters to include the acknowledgments of said holders
to the effect that all of its commitments to make any loans to a Borrower are
terminated and that upon receipt of the identified pay-off amounts said holder
will neither have or claim to have any lien rights in any assets of any
Borrower, and will deliver all appropriate release and termination documents.
6.A.18. Other Documents. In form and substance satisfactory to the
Agent the initial Borrowing Base Certificate and any other documents which the
Agent may reasonably request from or to be delivered by the Borrowers from time
to time to effect the intent of this Agreement and the Loan Documents.
Section 6.B. Fees. All fees referred to in Section 4 hereof which are
then due shall have been paid to the Agent on the Closing Date.
Section 6.C. Conditions Precedent. The following conditions are
conditions precedent to the obligation of the Agent and the Lenders to make or
disburse any Loan or issue any Letter of Credit hereunder at any time requested
by the Borrowers, and each request by any Borrower for a Loan or Letter of
Credit hereunder shall be deemed to constitute each Borrower's representation
and warranty to the Agent and the Lenders that, as of the dates of such request
and on which such Loan is disbursed or Letter of Credit issued, these conditions
have been satisfied:
6.C.1. Materially Adverse Effect. No Materially Adverse Effect shall
have occurred, as determined by the Agent in its reasonable discretion, since
the date hereof.
6.C.2. Representations and Warranties. The representations and
warranties set forth in Section 7 hereof and in each Loan Document to which any
Borrower is a party shall be true and correct in all material respects.
6.C.3. Covenants. The affirmative and negative covenants set forth
herein (including, without limitation, those covenants set forth in Section 8
hereof) and in any other Loan Documents to which any Borrower is a party, are
not being breached in any material respects.
6.C.4. Event of Default. No Default or Event of Default shall have
occurred and then be continuing or would occur as a result of making such Loan
or issuing such Letter of Credit.
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<PAGE> 39
6.C.5. Revolving Commitments. After giving effect to the Loan (if it is
a Revolving Loan) or Letter of Credit, the aggregate principal amount of all
such Loans and Letter of Credit Utilization outstanding hereunder shall not
exceed the applicable Revolving Commitment.
6.C.6. No Violations. Such Loan or Letter of Credit shall not violate
any order, judgment or decree of any court or other authority or any provision
of Law applicable to any Lender (including, without limitation, Regulation U of
the Board of Governors of the Federal Reserve System) as then in effect,
provided that if any such circumstances affects fewer than all the Lenders then
the unaffected Lenders shall not be relieved of their obligations to make a Loan
as part of a Refunding Borrowing.
6.C.7. Notes; Notice of Borrowing. The Agent shall have received for
each Lender the Notes of the Borrowers and the notice required by Section 3.C
hereof.
Section 6.D. Letters of Credit; B Revolving Loans. As a further
condition to the issuance of each Letter of Credit, the Agent shall have
received a duly completed and executed Application therefor. As further
conditions to the making of any Loan the proceeds of which will be used to
finance an acquisition, the provisions of Sections 8.A.13 and 8.B.3 are complied
with and satisfied.
Section 6.E. Additional Documents or Events as Conditions Precedent and
Subsequent to WSI Acquisition Loan. The delivery of each of the following
documents to the Agent or, as appropriate, occurrence of the following events
described in Sections 6.E.1, 6.E.2, 6.E.3, 6.E.4 and 6.E.5 either prior to or as
of the execution of this Agreement, shall constitute separate and distinct
conditions precedent to the effectiveness of this Agreement and the making of
any Loans by the Lenders to the Borrowers:
6.E.1. Acquisition Documents. The Agent shall have received fully
executed copies of each of the Acquisition Documents and true copies of all
material instruments, agreements and documents (including third party consents)
required to be delivered or furnished thereunder or in connection therewith, and
the terms and provisions of said Acquisition Documents shall be satisfactory to
the Agent in substance and in form.
6.E.2. Consummation of Acquisition. After giving effect to the funding
of the initial B Revolving Loan and the use of proceeds thereof, the
consummation of the Acquisition has occurred simultaneously, and a Certificate
to that effect has been furnished to the Agent by the President of Stericycle.
6.E.3. Lender Review of Target Financial Statements. The Agent has
received and reviewed acceptable financial statements of the Target, and said
financial statements are satisfactory to the Agent in its reasonable discretion.
6.E.4. Lender Review of Target Budget, Business Plan and Projections.
The Agent has
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<PAGE> 40
received and reviewed reasonably acceptable annual budgets, business plans and
rolling five year projections for the Target.
6.E.5. No Default and Financial Covenant Compliance. The Agent has
received a Certificate of the chief financial officer of Stericycle certifying
that no Default or Event of Default will result from the Acquisition after
giving effect thereto, and also certifying and demonstrating to the reasonable
satisfaction of Agent that after giving effect to the Acquisition that Borrowers
will be in compliance with each of the financial covenants set forth in Section
8A.1 calculated on an Adjusted Historical Pro Forma Basis (as defined in Section
8.B.3).
6.E.6. Joinder. Immediately upon consummation of the acquisition,
Borrowers (now including WSI) shall comply with the provisions of Section 8.A.13
and, in the Agent's absolute discretion, WSI shall deliver the documents
described in Section 6.A. Compliance with this provision is an express covenant
of the Borrowers, and a Default or Event of Default shall result if Borrowers
(including WSI) do not fully comply with this provision immediately upon
consummation of the Acquisition.
Section 6.F. Certain Post Closing Matters. The delivery and/or
satisfaction of each of the following is an express covenant of the Borrowers,
and a Default or Event of Default will result if same have not been delivered
and/or satisfied within the time periods indicated:
6.F.1. Matters Pertaining to Mortgages and Leasehold Mortgages. Within
45 days of the date hereof, the Borrowers shall comply with the following
pertaining to each of the Mortgages and Leasehold Mortgages and properties
covered thereby:
(a) Environmental Matters. All environmental data, information
and reports concerning the Mortgaged Properties involved as the Agent may
request.
(b) Surveys. Current surveys of the Mortgaged Properties
involved, which shall contain flood plain certification, prepared in accordance
with the Minimum Standard Detail Requirement for Land and Title Surveys as
adopted by the American Land Title Association the American Congress on
Surveying and Mapping, and prepared and certified to the Agent and title company
by a licensed surveyor or engineer.
(c) Title Policies. With respect to each Mortgaged Property
involved, an ALTA Loan Policy - 1970 (Amended 10/17/70)(or other form acceptable
to the Agent) title insurance policy or binder issued by a title insurance
company satisfactory to the Agent, in the respective amounts approximating the
market value of the respective Mortgaged Property, insuring or undertaking to
insure, in the case of a binder, that the relevant Mortgage or Leasehold
Mortgage relating thereto creates and constitutes a valid first Lien against
such Mortgaged Property in favor of the Agent, for its benefit and the ratable
benefit of the Lenders, subject to no exceptions other than those acceptable to
the Agent, with such endorsements and affirmative insurance (including
comprehensive endorsement No. 1, survey, revolving credit, contiguity - if
40
<PAGE> 41
applicable, usury, doing business, standard form variable rate, restrictions -
where applicable, encroachment - where applicable, and broad form zoning) as the
Agent may reasonably request; and, if requested by the Agent, copies of all
documents referred to in the title insurance policies and binders.
6.F.2. Matters Pertaining to Leaseholds. Within 45 days of the date
hereof, the Borrowers shall deliver or use their best efforts in the case of
(b)-(d), the following pertaining to each of the Leaseholds and properties
covered thereby:
(a) Environmental Matters. All environmental data, information
and reports concerning the properties involved as the Agent may request.
(b) Landlord's/Lessor's Consent to Collateral Assignment of
Lease. The consent of each Landlord/Lessor involved to the respective Collateral
Assignment of Lease.
(c) Estoppel Certificate. An estoppel certificate substantially
in the form of Exhibit E hereto.
(d) Landlord's Lien Waivers. A Landlord's Lien Waiver and
Agreement substantially in the form of Exhibit F hereto.
6.F.3. [INTENTIONALLY DELETED]
6.F.4. Satisfactory Completion of Due Diligence. Within 90 days of the
date hereof, the Agent and Lenders have satisfactorily completed their due
diligence examination of the Borrowers, their operations and properties,
including its audit/review of the Collateral, historical and pro forma financial
information, and projections and business plans.
6.F.5. Other Matters. All other matters included within the Additional
Post-Closing Matters Memo attached as Exhibit G hereto are delivered and/or
satisfied within the time limits set forth therein.
SECTION 7. REPRESENTATIONS AND WARRANTIES.
As further inducement to the Agent and the Lenders to enter into this
Agreement and make the Loans and issue Letters of Credit hereunder, the
Borrowers jointly and severally represent and warrant, as of the date hereof,
and as of the date of each disbursement of each of the Loans and the date of
issuance of each Letter of Credit, the following, which shall survive the
execution and delivery of this Agreement, the Notes and the Loan Documents and
until all of the Obligations have been paid, satisfied or discharged in full,
regardless of any investigation by the Agent or the Lenders of the Borrowers'
financial condition or assets:
Section 7.A. Corporate Existence and Related Matters. Each Borrower is
a corporation
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<PAGE> 42
duly organized, validly existing and in good standing under the Laws of the
State or country of its incorporation and is duly qualified to do and transact
business and is in good standing as a foreign corporation in each and every
state or country in which the conduct of its business or the location of its
properties requires such qualification and the failure to so qualify would have
a Materially Adverse Effect. Schedule 7.A attached hereto lists each Borrower
and its relationship to Stericycle. As of the date hereof, the only Subsidiaries
of Stericycle are designated in Schedule 7.A hereto and are Borrowers hereunder.
Schedule 7.A hereto correctly sets forth, as to each such Subsidiary, whether or
not it is a Consolidated Subsidiary, the jurisdiction of its incorporation, the
percentage of issued and outstanding shares of each class of its capital stock
owned by Stericycle and the Subsidiaries and, if such percentage is not 100%, a
description of each class of its authorized capital stock and the number of
shares of each class issued and outstanding. All of the issued and outstanding
shares of capital stock of each Subsidiary are validly issued and outstanding
and fully paid and nonassessable and all such shares indicated in Schedule 7.A
as owned by Stericycle or a Subsidiary are owned, beneficially and of record, by
Stericycle or such Subsidiary, free of any Lien. Schedule 7.A contains all
assumed or business names utilized by each Borrower, the jurisdiction of
incorporation of each Borrower, and all jurisdictions where each Borrower is
qualified to do business. The information in Schedule 7.A hereto is true and
complete.
Section 7.B. Corporate Authority. Each Borrower has all corporate power
and authority to own its property and assets and to carry on and engage in its
business as it is presently being conducted, and has all licenses, permits,
franchises, consents, approvals and authorizations required in connection with
the foregoing, including without limitation all of the foregoing required under
applicable Laws. The execution, issuance, delivery, and performance of all
documents in connection with this Agreement, the Notes and the Loan and other
Transaction Documents to which any Borrower is a party or signatory and the
incurrence and performance of the Obligations hereunder and thereunder (i) are
within the corporate power and authority of each Borrower, (ii) have been duly
and properly authorized by all necessary corporate, director, shareholder and
any other action of the Borrowers, and (iii) have not resulted in and will not
result in:
(a) the creation or imposition of any Lien of any nature whatsoever
(except in favor of the Agent) upon any Borrower's property or assets; or
(b) the violation or contravention of, the occurrence of a default,
event of default or event, which with the passage of time or giving of notice or
both, would constitute, mature into or become a default or event of default
under, (1) any term or provision of a Borrower's Certificate of Incorporation or
bylaws, (2) any licenses, permits, franchises, consents, approvals or
authorizations referred to above, (3) any certificates of authority to do or
transact business, (4) any applicable order of any court or government or
administrative agency, or (5) any material contract, agreement (including any
loan or credit agreement or agreement with the holders of any Borrower's
preferred stock or makers of any Subordinated Loan), mortgage, indenture,
instrument, judgment or Laws to which any Borrower is a party or signatory or by
which it is
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<PAGE> 43
bound.
Section 7.C. Consents, Approvals, etc. Except for the filing of UCC
financing statements, the filing of appropriate documents with the United States
Patent and Trademark Office to perfect Agent's Liens in registered trademarks
and patents of the Borrowers, any consents of lessors to leasehold mortgages and
collateral assignments, and the notation of Agent's Liens against vehicles of
Borrowers on the certificates of title for such vehicles, no consent, approval
or authorization or order of, or filing, registration or qualification with, any
Person (governmental, regulatory, or otherwise) is required to be obtained or
effected by any Borrower in connection with the execution, issuance, delivery
and performance of all documents in connection with this Agreement, the Notes
and the Loan and other Transaction Documents to which any Borrower is a party or
signatory or the incurrence or performance of the Obligations or, if so
required, has been duly obtained or effected before the date hereof and are
indicated on Schedule 7.C hereto.
Section 7.D. Binding Effect and Enforceability. Upon delivery hereof
and thereof, this Agreement, the Notes and the Loan and other Transaction
Documents to which any Borrower is a party or signatory will be its respective
legal, valid and binding obligations enforceable in accordance with their
respective terms and provisions (except as limited by bankruptcy, insolvency or
other laws or equitable principles of general application relating to the
enforcement of creditors' rights generally) and, on the date of said delivery,
none of the Borrowers will be in violation or contravention of, and no Default
or Event of Default will exist under, any of the foregoing.
Section 7.E. Default of Debt, Licenses, Permits, Orders and Other
Agreements. Except for breaches of leases caused by the leasehold mortgages and
collateral assignments of leases required to be delivered hereunder, no Borrower
is in breach or default of (in any material respect), and no event of default or
event, which with the passage of time or giving of notice or both, would
constitute, mature into or become a default or event of default, has occurred
and is continuing with respect to (i) any Debt of any kind or nature, (ii) any
license, permit, franchise, approval, consent or authorization referred to in
Section 7.B above, (iii) any order of any court or governmental or
administrative agency, or (iv) any agreement to which it is a party, which
breach or default might have a Materially Adverse Effect.
Section 7.F. Financial Condition and Litigation. The Financial
Statements of the Borrowers delivered to the Agent (including, without
limitation, the audited financial statements of Stericycle and Subsidiaries as
of December 31, 1997, the unaudited financial statements of Stericycle and its
Subsidiaries for the period ended June 30, 1998, and unaudited financial
statements for the Target for the years/periods ending December 31, 1997 and
June 30, 1998), have been prepared in accordance with GAAP (except, in the case
of Target's financial statements, as noted in the accountant's review report
dated May 31, 1998, and audit report dated March 11, 1997), are true and correct
in all material respects and fairly present the financial condition of the
Borrowers as at the dates thereof and results of operations for the periods
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<PAGE> 44
covered thereby. Since the ending date of the period covered by the most recent
Financial Statements dated June 30, 1998, delivered to the Agent and received
thereby, no Materially Adverse Effect has occurred and no dividends on or
redemptions of any of the Borrowers' common or preferred stock have been made.
Except as disclosed to the Agent on said most recent Financial Statements or as
otherwise set forth or mentioned in the Registration Statement: (i) the
Borrowers have no Debt, except as permitted hereunder, or liabilities,
contingent or otherwise; and (ii) except as disclosed in the Registration
Statement or on Schedule 7.F, no proceedings, suits, orders, claims,
investigations, or other actions are pending before any court or governmental
authority or, to the best knowledge of Borrowers, threatened against any
Borrower that are not fully covered by insurance. With respect to any
representation and warranty which is deemed to be made after the date hereof by
the Borrowers, the Financial Statements which as of such date shall most
recently have been furnished by the Borrowers to the Agent and the Lenders for
purposes of or in connection with this Agreement shall have been prepared in
accordance with GAAP, shall be true and correct in all material respects, and
shall fairly present the financial condition of the Borrowers as of the dates
thereof and results of operations for the periods covered thereby.
Section 7.G. Title and Liens. Each Borrower has good and marketable
title to all of its property and assets, including all such property and assets
listed on the most recent Financial Statements, the Mortgaged Properties, and
the other Collateral (except as thereafter disposed of in accordance with and as
permitted by the Security Agreement) and, except as set forth on Schedule 7.G,
the Collateral is not subject to any liens, claims, security interests,
mortgages, pledges, charges or other encumbrance of any Person, except the Agent
and holders of the Permitted Liens.
Section 7.H. Employee Plans. All of the Borrowers' Employee Plans are
listed on Schedule 7.H hereto and are in material compliance with all provisions
of ERISA and meet the minimum funding standards of Section 302 of ERISA where
applicable. No withdrawal liability has been incurred under any such Employee
Plans. No Prohibited Transaction or Reportable Event, as defined in ERISA, has
occurred with respect to any such Employee Plans. No proceedings have been
instituted to terminate or appoint a trustee to administer any such Employee
Plans.
Section 7.I. Taxes. The Borrowers have filed all federal, state and
local tax returns and reports required by Law, have paid all taxes, assessments,
penalties, interest and any other governmental charges which are or were due and
payable, have made adequate provision for the payment of all taxes, assessments,
penalties, interest and other governmental charges which are accruing but are
not yet due and payable, and, except as listed on Schedule 7.I. hereto, have no
knowledge and are not aware of any deficiency or additional assessment which may
have or has arisen in connection of the foregoing.
Section 7.J. Compliance with Laws. Each Borrower hereby makes each and
every representation and warranty contained in the Environmental Indemnity
Agreement, which is
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<PAGE> 45
incorporated herein by this reference as if set forth herein in full. Except as
otherwise represented or provided in the Environmental Indemnity Agreement or as
expressly referred to in the Registration Statement, to the best knowledge of
each Borrower, each Borrower has complied in all material respects with all Laws
applicable to it or to the conduct of its business, noncompliance with which
could have a Materially Adverse Effect, and no Borrower has received any notice
of any kind from any Person claiming or alleging, directly or indirectly, a
violation of any Law, noncompliance with which could have a Materially Adverse
Effect.
Section 7.K. Corporate Structure and Affiliates. Stericycle has no
Subsidiaries and no Affiliates, other than the other Borrowers or as otherwise
identified on Schedule 7.A hereto, and directors and shareholders of the
Borrowers. Stericycle's authorized and outstanding capital stock is as set forth
in the Registration Statement. The preferences, priorities, rights and other
features of the 3CI Preferred Stock (the "Preferences") are as set forth in the
Certificate of Incorporation of 3CI, as amended to date, a copy of which has
been or will be furnished to Agent.
Section 7.L. Corporate Names. Each Borrower has no assumed corporate
names and is not doing business under any corporate name, other than as
identified on Schedule 7.A hereto.
Section 7.M. Solvency. Stericycle and its Subsidiaries on a
consolidated basis (i) is solvent and will not be rendered insolvent by the
incurrence of the Obligations, by the execution of this Agreement, the Notes,
and any other Loan or other Transaction Documents to which it is a party or
signatory, or by any transactions contemplated hereunder or thereunder, (ii) is
able to pay its debts as they come due and does not intend to incur, or believe
that it will incur, debts beyond its ability to pay such debts as they mature or
come due, (iii) has capital sufficient to carry on its business and any business
in which it intends or is about to engage, and (iv) owns property and assets
having a value in excess of its liabilities and debts.
Section 7.N. Margin Regulations. No Borrower is engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation G, T, U or X of the Board of Governors of the
Federal Reserve System). No part of the proceeds of any of the Loans made
hereunder will be used to purchase or carry any Margin Stock, to reduce or
retire any indebtedness originally incurred to purchase or carry any Margin
Stock, to extend credit to others for the purpose of purchasing or carrying any
such Margin Stock, or for any other purpose which might cause any of the Loans
to be considered purpose credit within the meaning of Regulation G, T, U or X of
the Board of Governors of the Federal Reserve Board.
Section 7.O. Indebtedness to Affiliates. Other than intercompany loans
between and among the Borrowers, and except as set forth on Schedule 7.0 hereto,
there are no outstanding loans from any Affiliate to any Borrower, or from any
Borrower to any Affiliate.
Section 7.P. Acts of God. Neither the business nor properties of any
Borrower are
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presently affected by any fire, explosion, accident, drought, storm, hail,
earthquake, embargo, act of God or of the public enemy or of political unrest,
or potential expropriation, or other casualty (whether or not covered by
insurance) which could have a Materially Adverse Effect.
Section 7.Q. Labor Controversies; Union Contracts, Etc. There are no
labor controversies pending or, to the knowledge of any Borrower, threatened
against any Borrower, which if adversely determined could have a Materially
Adverse Effect. There are no pending or, to any Borrower's knowledge, threatened
or anticipated (i) employment discrimination charges or complaints against or
involving any Borrower before any governmental Person, (ii) unfair labor
practice charges or complaints, disputes or grievances or arbitration
proceedings or controversies affecting any Borrower, (iii) union representation
petitions respecting the employees of any Borrower, or (v) strikes, slowdowns,
work stoppages, or lockouts or threats thereof affecting any Borrower except as
set forth in Schedule 7.Q. There are no collective bargaining agreements
covering any of the employees of any Borrower. No Borrower has breached or
otherwise failed to comply with any provision of any collective bargaining
agreement or other labor union contract applicable to any of its employees.
Section 7.R. Collateral, etc. No Borrower owns any real property, or
leases any real property as lessee, or otherwise uses any real property in
connection with its operations, except as set forth in Schedule 7.R hereto,
which contains a complete and accurate description, by owner/lessor and location
(by street address) of all such owned, leased and/or used properties. With
respect to each Leasehold:
(i) The Borrower identified in the Lease has a valid and
indefeasible leasehold interest in the Leasehold, or other rights to use the
Leasehold, free and clear of all Liens except Permitted Liens; and
(ii) Each Lease is a valid and subsisting lease in full force
and effect in accordance with the terms thereof, the Borrower identified in the
Lease is in possession of the Leasehold, and no material default by any Borrower
exists under any Lease.
One or more of the Borrowers are the record and/or beneficial owners of
all presently existing Collateral, in each case free and clear of all Liens
except Permitted Liens. The provisions of the Loan Documents are effective to
create, in favor of the Agent, for its benefit and the ratable benefit of the
Lenders, legal, valid and enforceable Liens in all right, title and interest of
the Borrowers in any and all of the Collateral described therein, securing the
Obligations from time to time outstanding, and upon all filings and recordings
being duly made in the locations referred to in the applicable Loan Documents or
the taking of possession of the Collateral by the Agent in accordance with the
provisions of such Loan Documents, each of such Loan Documents shall constitute,
as of and after the Closing Date, a fully perfected first priority Lien in all
right, title and interest of the respective Borrowers in such Collateral
superior in right to any Liens, existing or future, which the Borrowers or any
creditors thereof or purchasers (other than purchasers of inventory in the
ordinary course of business and purchasers of assets
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the sale of which is permitted hereunder or under the applicable Loan Document)
therefrom, or any other Person, may have against such Collateral or interests
therein, except to the extent, if any, otherwise resulting from a Permitted
Lien.
Section 7.S. Intellectual Property. Each Borrower has the legal right
to all Intellectual Property Rights that are necessary for the conduct of its
business. All Intellectual Property Rights (other than trade secrets,
confidential research development and commercial information and know-how) of
the Borrowers are set forth on Schedule 7.S hereto. Except as set forth in
Schedule 7.S, with respect to all Intellectual Property Rights: (i) one or more
of the Borrowers is the sole and exclusive owner of the entire and unencumbered
right, title and interest in and to thereof; (ii) the Borrowers have no
knowledge of the existence of any Intellectual Property Rights held by any other
Person that would preclude any Borrower from using its Intellectual Property
Rights in the conduct of its business; (iii) no claim has been made, and the
Borrowers have no knowledge of any claim that is likely to be made, that the use
by any Borrower of any of its Intellectual Property Rights does or may violate
the rights of any Person; and (iv) each Intellectual Property Right of all
Borrowers has not been adjudged invalid or unenforceable and is valid and
enforceable, and there are no prior or other uses thereof which to the
Borrower's best knowledge could lead to any such Intellectual Property Right
becoming invalid or unenforceable.
Section 7.T. Surety Obligations; Financial Assurances. Except as set
forth in Schedule 7.T, no Borrower is obligated as surety or indemnitor under
any surety or similar bond or other contract, or issued or entered into any
agreement to assure payment, performance or completion of performance of any
undertaking or obligation of any Person other than another Borrower in excess of
$5,000. No Borrower has posted or placed any Financial Assurance except as
indicated in Schedule 7.T hereto.
Section 7.U. Business Relations. There exists no actual or threatened
termination, cancellation, or adverse limitation of, or any adverse modification
or change in, the contractual and/or business relationship between any Borrower
and any owner/lessor of any facility utilized in any Borrower's business,
municipality, customer and/or supplier, and to Borrowers' knowledge, there
exists no present condition or state of facts or circumstances in such
relations, which in each case would have a Materially Adverse Effect.
Section 7.V. Accuracy of Information. All factual information
heretofore, or contemporaneously furnished by or on behalf of the Borrowers in
writing to the Agent or any Lender for purposes of or in connection with this
Agreement or any transaction contemplated hereby, and all other such factual
information hereafter furnished by or on behalf of the Borrowers to the Agent or
any Lender will be, true and accurate in every material respect on the date as
of which such information is dated, or certified, and to the best knowledge of
Borrowers such information is not, or shall not be, as the case may be,
incomplete by omitting to state any material fact necessary to make such
information not misleading. To the best knowledge of the Borrowers there is no
fact relating to Stericycle and its Subsidiaries or the industry in which they
operate which has a Materially Adverse Effect or in the future may (so far as
any Borrower may
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now foresee), have a Materially Adverse Effect, which has not been set forth
herein or in written materials, certificates or statements furnished to the
Agent prior to the date hereof.
Section 7.W. Representations and Warranties True and Correct. If the
Acquisition Date is not the date of this Agreement, the representations and
warranties of the Borrower contained in this Section 7 and elsewhere in this
Agreement and the other Loan Documents, and all information contained in any
exhibit, schedule or attachment hereto or in writing delivered by any Borrower,
will be true and correct in all material respects on the Acquisition Date as
though then made and immediately after giving effect to the Acquisition. If the
Acquisition Date is the date of this Agreement, then all such representations,
warranties and information shall be and be deemed made by the Borrowers
immediately after giving effect to the Acquisition.
Section 7.X. Representations and Warranties under Acquisition
Documents. All representations and warranties made by any Borrower in any of the
Acquisition Documents (collectively, the "Other Documents") are true and correct
as of the date hereof with the same force and effect as though made on and as of
the date hereof, except to the extent that any such representations and
warranties relate expressly to an earlier date or may have been affected by the
consummation of the transactions contemplated and permitted or required by this
Agreement and the Other Documents or transactions in the ordinary course of
business.
Section 7.Y. Year 2000. The Borrowers have reviewed the areas within
their businesses and operations which could be adversely affected by, and have
developed or are developing a program to address on a timely basis, the "Year
2000 Problem" (that is, the risk that computer applications used by the
Borrowers may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date on or after December 31,
1999), and have made related appropriate inquiry of material suppliers, vendors
and customers. Based on such review and program, the Borrowers believe that the
"Year 2000 Problem" will not have a Materially Adverse Effect. From time to
time, at the request of the Agent, the Borrowers shall provide to the Agent such
updated information or documentation as is requested regarding the status of
their efforts to address the Year 2000 Problems.
SECTION 8. COVENANTS.
The Borrowers hereby covenant and agree with the Agent and the Lenders
that, until the Obligations have been satisfied and discharged in full, the
Borrowers will comply and/or cause compliance with the following covenants,
unless the Required Lenders shall give their prior written consent to the
contrary:
Section 8.A. Affirmative Covenants.
8.A.1. Financial Covenants. The Borrowers shall maintain compliance
with the following financial covenants at all times during the periods indicated
below, all as determined on an Adjusted Historical Pro Forma Basis from the
Borrowers' quarterly and annual Consolidated
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Financial Statements, as appropriate:
(a) Net Worth. The Consolidated Net Worth of Stericycle and its
Subsidiaries shall not at any time be less than $47,673,000, plus 100% of the
positive Consolidated Net Income for the preceding four quarters (without
reduction by any net losses other than extraordinary losses), plus 100% of the
Net Cash Proceeds with respect to the issuance of any equity securities or any
Subordinated Debt.
(b) Debt Service Coverage. The Consolidated Debt Service Coverage of
Stericycle and its Subsidiaries shall not be less than the following ratios
during the following periods:
Ratio Period
----- ------
1.10:1.00 Through September 30, 1999
1.25:1.00 From October 1, 1999 and thereafter
(c) Cash Flow Leverage Ratio. The Cash Flow Leverage Ratio of
Stericycle and its Subsidiaries shall not be greater than the following as at
the end of the Measurement Periods ending during the following periods:
Cash Flow Leverage Ratio Period
3.50:1.00 through September 30, 1999
3.00:1.00 from October 1, 1999 through
September 30, 2000 2.50:1.00 each
Measurement Period ending after
September 30, 2000
(d) Funded Debt to Total Capitalization. The Borrowers shall not permit
the ratio of consolidated Funded Debt to consolidated Total Capitalization to be
greater than 50% at any time.
8.A.2. Financial Information and Reporting. Each Borrower shall keep
and cause to be kept proper books and records in which full and true entries
will be made, in accordance with GAAP, of all dealings or transactions relating
to its business and affairs, and the Borrowers shall cause to be furnished to
the Agent and each Lender:
(i) As soon as practicable, and in any event, within thirty (30)
days after the end of each month, all of the Borrowers' internally
prepared consolidated and consolidating balance sheets as at such date
and statements of income and retained earnings and of cash flow
(consolidated only) for the period from the beginning of the current
Fiscal Year to the end of such month, all in reasonable detail and
certified by
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Stericycle's president or chief financial officer as fairly presenting
the financial condition and operations of the Borrowers as of and for
the period then ending and being accurate in all material respects and
having been prepared in accordance with GAAP;
(ii) As soon as practicable and, in any event, within forty-five
(45) days after the end of each quarter of each Fiscal Year, all of the
Borrowers' consolidated and consolidating statements of income and
retained earnings and of cash flows (consolidated only) through the
quarter then ended and a consolidated and consolidating balance sheet
of the Borrowers as of the end of such quarter, all in reasonable
detail and certified by Stericycle's president or chief financial
officer as fairly presenting the financial condition and operations of
the Borrowers as of and for the period then ending and being accurate
in all material respects and having been prepared in accordance with
GAAP;
(iii) As soon as practicable and, in any event, within ninety
(90) days after the end of each Fiscal Year, all of the Borrowers'
audited consolidated and unaudited consolidating statements of income
and retained earnings and of cash flows (consolidated only) through the
Fiscal Year then ended and a consolidated and consolidating balance
sheet of the Borrowers as of the end of such Fiscal Year, in each case
with comparable information at the close of and for the prior Fiscal
Year, all in reasonable detail, containing no qualifications
unacceptable to the Required Lenders and audited by an independent
certified public accountant selected by the Borrowers and acceptable to
the Agent and prepared in accordance with GAAP;
(iv) Together with the Financial Statements for each quarter of
each Fiscal Year, (a) a certificate in the form attached hereto as
Exhibit H (or such other form reasonably requested by Agent) executed
by the chief financial officer of Stericycle certifying to the Agent
and the Lenders that the Borrowers are in compliance with each of the
financial covenants set forth in Section 8.A.1 hereof and setting forth
in detail satisfactory to the Agent the calculations and computations
showing such compliance, and (b) a certificate executed by the
president or chief financial officer of Stericycle stating whether any
Default or Event of Default currently exists and is continuing and what
action, if any, the Borrowers are taking or propose to take with
respect thereto;
(v) A Borrowing Base Certificate on and as of the date hereof,
on and as of the date of any borrowing of a Loan, and within twenty
(20) days after the end of each month certified as of the last day of
such month;
(vi) When and as so furnished, such other financial information
concerning the Borrowers, their business, financial condition or assets
as may be furnished to the holders of any of the Borrowers' common or
preferred stock (including all financial statements, reports and proxy
statements), or as the Agent may reasonably request from time to time;
and, promptly upon the filing thereof, all registration statements and
annual, quarterly, monthly or other regular reports which any Borrower
files with the SEC;
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(vii) Such notices and information as and when required under
the Environmental Indemnity Agreement;
(viii) Promptly upon discovery thereof, notice of any action,
suit, arbitration, investigation, administrative or other proceeding
instituted, commenced or threatened against or affecting any Borrower
which may reasonably be expected to cause the Borrowers to incur or be
liable for claims, damages and/or costs of any kind (including, without
limitation, attorneys' fees, expert witness fees and court, judgment,
settlement and compliance or remedial costs), aggregating in excess of
$250,000;
(ix) Promptly upon any Borrower's becoming aware thereof, notice
of any proposed Laws, or amendments thereto, which would regulate,
restrict or prohibit any Borrower in such a way as might have a
Materially Adverse Effect;
(x) Notice of the occurrence or existence of any Default or
Event of Default immediately upon any Borrower's becoming aware
thereof; and promptly upon discovery thereof, notice of any
development, financial or otherwise, which might have a Materially
Adverse Effect;
(xi) Upon request of the Agent from time to time, any
information concerning the Borrowers' compliance with any and all Laws;
(xii) Promptly upon any Borrower becoming aware thereof, notice
of any claim of violation of any Law, and notice of any violation or
breach by any Borrower of the terms of, or any revocation or suspension
or threatened revocation or suspension of, any license or permit of a
Borrower, the effect of which would have a Materially Adverse Effect;
(xiii) Notice of the cancellation or expiration of any bond,
letter of credit or similar instrument issued as Financial Assurance
and the terms of any replacement or renewal bond, letter of credit or
similar instrument if not issued by the Agent the effect of which is
material;
(xiv) Within 45 days of the end of each quarter of each Fiscal
Year, a certificate of the president or chief financial officer of
Stericycle and stating that the Borrowers are in compliance in all
material respects with all Environmental Laws (as defined in the
Environmental Indemnity Agreement), and all Laws relating to the
generation, segregation, handling, packaging, collection,
transportation, treatment, storage and/or disposal of regulated medical
waste.
(xv) Within 30 days after the end of each six-month period,
regardless of whether any New Subsidiary has been acquired during such
period, a New Subsidiary Certificate substantially in the form of
Exhibit I hereto;
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(xvi) Within 60 days of the end of each Fiscal Year, updated
annual budgets, financial projections (rolling five years) and business
plans for the ensuing Fiscal Year;
(xvii) Within 20 days after the end of each month, a summary
receivables aging report acceptable to Agent as at the end of such
month; and
(xviii) Such other material information that the Agent
reasonably deems necessary from time to time in the ordinary course of
business.
8.A.3. Corporate Existence and Conduct of Business. Each Borrower will
maintain and preserve its corporate existence, good standing, certificates of
authority, licenses, permits, franchises, patents, trademarks, trade names,
service marks, copyrights, leases and all other contracts and rights necessary
or desirable to continue its operations and business on a profitable basis and
will generally continue the same line of business as that being presently
conducted.
8.A.4. Taxes and Laws. The Borrowers will pay when due, all taxes,
assessments, charges and levies imposed on a Borrower or any of its property or
assets or which it is required to withhold and pay out and will comply in all
material respects with all applicable present and future Laws applicable to any
Borrower or any of its property or assets, unless a Borrower is contesting in
good faith, by an appropriate proceeding, the validity, amount, imposition or
applicability of the above while maintaining reserves therefor which are
appropriate and adequate as determined in accordance with GAAP, and such contest
does not have or cause a Materially Adverse Effect.
8.A.5. Inspection. Upon the Agent's request, the Borrowers will allow
the Agent or any Lender, and any of its officers, employees or agents, to visit,
during normal business hours, for inspection and review, any of the Borrowers'
premises and will make available and furnish to the Agent or any Lender the
Borrowers' books and records and such financial information concerning the
Borrowers' property or assets, business, affairs, operations or financial
condition as reasonably requested by Agent or any Lender.
8.A.6. Agent and Lender Costs. The Borrowers shall pay upon demand, all
reasonable out-of-pocket fees, costs and expenses (including those of outside
counsel, auditors, appraisers, accountants, insurance and environmental
advisors, title companies, surveyors, and other consultants and agents) incurred
or paid by the Agent in connection with the preparation, negotiation,
documentation, administration (including periodic field and collateral audits
and site visits), amendment, modification, waiver, interpretation, collection or
enforcement of this Agreement, the Notes, or any other Loan Documents and the
credit and security therefor. In addition, the Borrowers shall pay upon demand
all such costs and expenses of the Agent and the Lenders in connection with any
Default or Event of Default by the Borrowers hereunder, or in connection with
the collection or enforcement of any of the terms hereof or of the other Loan
Documents and the credit and security therefor, or any "work-out," refinancing
or restructuring of the credit arrangement set forth herein. Any attorneys' fees
due hereunder are to be calculated
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at the attorneys' customary hourly rates, and not as a percentage of the
indebtedness or of the amount recovered. The Borrowers agree to indemnify the
Agent and each Lender, their respective successors and assigns, and their
respective officers, directors and employees, from and hold each of them
harmless against (i) any transfer taxes, documentary taxes and any other taxes,
penalties, assessments or charges made by any governmental authority by reason
of the execution, delivery and performance of the Loan Documents and any
security therefor, and (ii) any and all losses, claims, damages, liabilities and
expenses, including all expenses of litigation or preparation therefor, which
any of them may incur or which may be asserted against any of them in connection
with or arising out of the direct or indirect application of the proceeds of
Loans or drawings under Letters of Credit. The obligations under this Section
8.A.6 shall survive repayment of the Loans and expirations of the Letters of
Credit and the assignment of any rights hereunder.
8.A.7. Employee Plans. The Borrowers shall (i) keep in full force and
effect any and all Employee Plans which are presently in existence or may, from
time to time, come into existence under ERISA, and not withdraw from any such
Employee Plans, unless such withdrawal can be effected or such Employee Plans
can be terminated without material liability to any Borrower; (ii) make
contributions to all of such Employee Plans in a timely manner and in a
sufficient amount to comply with the requirements of ERISA, including the
minimum funding standards of Section 302 of ERISA; (iii) comply with all
material requirements of ERISA which relate to such Employee Plans; (iv) notify
the Agent immediately upon receipt of any notice concerning the imposition of
any withdrawal liability or of the institution of any proceeding or other action
which may result in the termination of any such Employee Plans or the
appointment of a trustee to administer such Employee Plans; and (v) promptly
advise the Agent of the occurrence of any Reportable Event or Prohibited
Transaction, as defined in ERISA, with respect to any such Employee Plans.
8.A.8. Use of Proceeds of Loans. The Borrowers shall use the proceeds
of the Loans as follows: A Revolving Loans - for working capital purposes and
capital expenditures and for Letters of Credit; B Revolving Loans - to finance
acquisitions permitted hereunder; Term Loan - to refinance amounts of
outstanding B Revolving Loans.
8.A.9. Financial Assurance. The Borrowers shall timely comply or cause
compliance with the requirements of any Act or any other Law concerning
Financial Assurance. If any funds are drawn on any Financial Assurance at any
time, the Borrowers shall promptly notify the Agent in writing of the amount of
and the reason for the draw. The Borrowers shall not maintain more in Financial
Assurance than is required pursuant to any Act or any Law at any time. At the
earliest available opportunity under any Act or other Law, the Borrowers shall
request that the amount of Financial Assurance be reduced if and as permitted
under the Act, or such other Law.
8.A.10. Operating Account(s). The Borrowers shall maintain their
principal operating accounts with the Agent. If the average amount of demand
deposit balances on deposit in the Borrowers' operating accounts over any
calendar quarter is not sufficient to cover the costs of
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non-credit services provided by the Agent in servicing such accounts (as
determined and priced in accordance with the Agent's standard rate schedule of
non-credit bank services as then in effect), the Borrowers shall pay to the
Agent, on demand, or Agent shall debit Borrowers' account, a deficient balances
fee on the amount of the deficiency based on the Agent's earnings credit rate
then in effect in accordance with the Agent's standard practice.
8.A.11. [Intentionally Omitted].
8.A.12. Environmental Matters. The covenants and agreements of the
Borrowers set forth in the Environmental Indemnity Agreement are hereby
incorporated herein in full by this reference.
8.A.13. Collateral Agreements; New Subsidiaries and Future
Acquisitions. The Borrowers shall, with reasonable promptness and diligence (i)
pledge or cause to be pledged to the Agent, through execution of the Addendum
attached to the Stock Pledge Agreement and delivery of the stock certificates
and other matters referred to therein, 100% of the stock (or other ownership
interest) of any Person (a "New Subsidiary") hereafter acquired/formed by any
Borrower; and (ii) cause each said party listed in (i) above (other than 3CI
until such time as it is a wholly owned Subsidiary directly or indirectly of
Stericycle) to execute an agreement of joinder and assumption (a "Joinder
Agreement(s)") in the form of Exhibit J hereto pursuant to which it will become
a Borrower under this Agreement and the Notes and a Debtor under the Security
Agreement and a party to other relevant Loan Documents, and to execute such
other documents and take such other action as may be necessary or appropriate to
grant to the Agent, for its benefit and the ratable benefit of the Lenders a
first priority perfected security interest in the Collateral covered by such
Loan Documents (subject to any Lien permitted under clause (ix) of the
definition of Permitted Lien). In addition, within 15 days any such New
Subsidiary shall deliver to the Agent: an executed Officer's Certificate
substantially in the form attached as Exhibit K hereto; organizational documents
as specified in Section 6.A.9 and 6.A.10; an executed secretary's certificate as
described in Section 6.A.11; executed financing statements for each state in
which Collateral owned by a New Subsidiary is located; and such other documents,
instruments or agreements as the Agent may reasonably request. In addition, any
Borrower which hereafter acquires or leases any real property shall, prior to or
contemporaneously therewith, furnish to the Agent all documentation of the type
described in Sections 6.A and 6.F in reference to the Leaseholds or the owned
properties involved.
8.A.14. Interest Rate Contracts. The Borrowers shall execute all
documents and take such other action as may be necessary and appropriate to
include all of its obligations to the Agent or Lenders under any Interest Rate
Contract as obligations which are secured by the Collateral. Nothing herein
shall obligate the Agent, the Lenders or Borrowers to enter into any Interest
Rate Contract.
8.A.15. [Intentionally Deleted.]
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8.A.16. Maintenance of Insurance. The Borrowers shall maintain
insurance with financially sound and respectable insurance companies or
associations in such companies or associations in such amounts and covering such
casualties and risks as are customary in accordance with prudent business
practice in the case of companies engaged in the same or a similar business and
similarly situated, which insurance may provide for reasonable deductibility
from coverage thereof. The Borrowers will, upon request, furnish to the Agent at
reasonable intervals a certificate of an Authorized Officer setting forth the
nature and extent of all insurance maintained by the Borrowers. The Borrowers
shall retain all incidents of ownership of the insurance maintained pursuant
hereto and shall not borrow upon or otherwise impair their rights to receive the
proceeds of such insurance. Unless Borrowers provide Agent with evidence of the
insurance coverage required in this Agreement, Agent may purchase insurance at
Borrowers' expense to protect its interests in the Collateral. This insurance
may, but need not, protect Borrowers' interests. The coverage Agent purchases
may not pay any claim that Borrowers make or any claim that is made against
Borrowers in connection with the Collateral. Borrowers may later cancel any
insurance purchased by Agent, but only after providing Agent with evidence that
Borrowers have obtained insurance as required by this Agreement. If Agent
purchases insurance for the Collateral, Borrowers shall be responsible for the
costs of that insurance, including interest and any other charges Agent may
impose in connection with the placement of the insurance, until the effective
date of the cancellation or expiration of the insurance. The cost of the
insurance may be added to the Obligations. The cost of the insurance may be more
than the cost of insurance Borrowers may be able to obtain on their own.
8.A.17. Voluntary Dissolution - S.D. Acquisition Corp. If SWD
Acquisition Corp. is not dissolved within sixty (60) days of the date hereof,
Stericycle shall cause it to execute a Joinder Agreement.
8.A.18. Stericycle of Arkansas, Inc. Stericycle of Arkansas, Inc.
("Stericycle-Ark.") has entered into a contract to sell its real estate and
other assets. If such sale is not closed on or before December 1, 1998, then
Stericycle-Ark. shall execute a Mortgage in favor of the Agent. Stericycle will
cause Stericycle-Ark. to be dissolved within sixty (60) days of the date any
sale of the real estate and related assets is closed.
8.A.19. 3CI Pledge. Stericycle shall, with reasonable promptness, if
and after 3CI becomes a wholly owned Subsidiary of Stericycle, cause 3CI to
grant to Agent a first priority lien on all its assets except to the extent set
forth in Schedule 8.A.19.
Section 8.B. Negative Covenants.
8.B.1. Liens. The Borrowers shall not create, grant, pledge, permit or
suffer to exist, any Lien upon any of the Collateral or any other property or
assets of any of the Borrowers, except Permitted Liens.
8.B.2. Debt.
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The Borrowers shall not, directly or indirectly, create, assume, incur,
suffer to exist, guarantee, become or be liable for or with respect to any
manner of obligations, liabilities, indebtedness or other Debt whatsoever to any
Person, except with respect to: (i) the Obligations hereunder; (ii) existing
Debt indicated on Schedule 8.B.2 hereto (to the extent such existing Debt is
repaid, additional Debt may not be incurred); (iii) current liabilities and
accounts payable arising or accruing in the ordinary course of business (other
than a guaranty or indebtedness for borrowed money, an extension of credit or
deferred purchase price of property not otherwise permitted hereunder); (iv)
contingent Debt for any draws at any time made on outstanding instruments as
Financial Assurance; (v) contingent Debt with respect to any Interest Rate
Contracts with the Lenders; (vi) Debt assumed or incurred in or in connection
with any merger or acquisition permitted under Section 8.B.3; (vii) purchase
money Debt incurred in connection with liens described in clause (vii) of the
definition of Permitted Liens, provided, however, that such purchase money Debt
shall not exceed (x) $500,000 in the aggregate during any one Fiscal Year (it
being understood that the amount of any such Debt permitted to be incurred
during any one Fiscal Year, but not so incurred, shall not carry over to
subsequent Fiscal Years), or (y) $2,500,000 cumulatively in the aggregate; and
(ix) unsecured short-term Debt incurred in the ordinary course of business
aggregating not more than $250,000 at any one time outstanding.
8.B.3. Fiscal Year, Name Changes, Mergers and Acquisitions. No Borrower
shall (i) change its Fiscal Year or its corporate name or without prior written
notice to the Agent and only after all necessary or desirable Financing
Statements have been duly and properly filed and recorded maintaining Agent's
first priority perfected liens and security interests on and in the Collateral,
adopt an assumed corporate name, (ii) consolidate or merge with any Person,
(iii) acquire any stock in, or acquire all or substantially all of the assets or
properties of, or make any investment in, any Person, except that the existing
investments listed on Schedule 8.B.3 are permitted hereunder as are those
permitted in Section 8.B.5 hereof, or (iv) create any Subsidiaries; provided,
however, that notwithstanding the foregoing, and subject to the conditions set
forth below, the following are permitted: (a) any Borrower may merge with any
other Borrower, so long as Stericycle is the surviving corporation in any merger
involving it and any other Borrower, and provided also that in any merger
involving any Borrower the stock of which has been pledged to the Agent, the
Agent shall have or obtain a first priority security interest in the stock of
the surviving Borrower in such merger, or any Borrower (other than Stericycle)
may dissolve as long as all of its assets are distributed pursuant to the
dissolution to another Borrower; (b) a Borrower may merge with any Person other
than another Borrower, so long as the Borrower is the surviving corporation in
any such merger and no Default or Event of Default would result therefrom
immediately after giving effect thereto; (c) any Borrower may acquire stock in a
New Subsidiary, or acquire all or substantially all of the assets or properties
of, any Person, or create a New Subsidiary, or make an investment in an
Affiliate which is not a Subsidiary, provided that no Default or Event of
Default would result therefrom immediately after giving effect thereto and that
the provisions of Section 8.A.13, if applicable, are complied with; provided,
further, that (x) any individual transaction described in (b) and (c) above that
involves an acquisition and total consideration (meaning total purchase price,
including cash expended and/or the value of stock issued to the seller, Debt
incurred, and liabilities incurred or
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assumed) in excess of $10,000,000 per single acquisition or any acquisition of
which more than $5,000,000 of the consideration consists of cash expended and
liabilities assumed, must also be approved in advance in writing by the Agent;
and (y) in connection with any individual transaction described in (b) and (c)
above that involves an acquisition which requires approval of the Agent under
(x) above, the Borrowers must deliver to the Agent, no less than fourteen (14)
days prior to the consummation of such acquisition, a certificate executed by
the chief financial officer of Stericycle certifying to the Agent that no
Default or Event of Default will result from such acquisition after giving
effect thereto, and also certifying and demonstrating to the reasonable
satisfaction of the Agent that the Borrowers are in compliance with each of the
financial covenants set forth in Section 8.A.1 hereof calculated on an Adjusted
Historical Pro Forma Basis. "Adjusted Historical Pro Forma Basis" means, for any
Measurement Period ending as at the end of the quarter preceding the month in
which Borrowers propose to make any such acquisition permitted hereunder, the
relevant financial terms (i.e. those included in calculating Net Worth, Debt
Service Coverage, Cash Flow Leverage Ratio, Funded Debt and Total
Capitalization) as calculated and determined for the Borrowers and, or
including, any Subsidiaries or business acquired during the Measurement Period
and/or to be acquired and with respect to which the calculation of the various
financial covenants on an Adjusted Historical Pro Forma Basis is being made, all
determined in accordance with GAAP (except that non-recurring items involving
such acquired and to be acquired Subsidiaries or business otherwise included in
the relevant calculations shall be disregarded with approval of the Agent in its
sole discretion) and calculated as if all such acquired and to be acquired
Subsidiaries or business had been owned by the Borrowers through the Measurement
Period involved. In addition, the Agent shall receive within 30 days of closing,
a written description of any acquisition and any other information which Bank
reasonably requests. The Agent shall also receive before Borrowers consummate
any acquisition requiring approval of the Agent referred to in (x) above: due
diligence materials, financial statements for the past three years, if
available, data, information and reports (all of which must be satisfactory to
the Agent; all acquisition documents/agreements (which must be satisfactory to
the Agent); and all documentation requested by the Agent to perfect its Liens on
and against acquired assets. In addition, Borrowers will make no acquisitions or
any business outside of the line of business in which the Borrowers are
currently engaged.
8.B.4. Redemptions, Dividends and Payments Under Subordinated Debt. No
Borrower shall declare or make any Restricted Payments.
8.B.5. Transactions with Affiliates. No Borrower shall enter into any
transaction with its Affiliates or any of its or its Affiliates' shareholders,
directors, officers or employees, except in the ordinary course of business and
upon fair and reasonable terms which are no less favorable to said Borrower than
those that would be available at the time of such transaction in a comparable
arm's length transaction with a Person not an Affiliate. No Borrower shall pay
any management fee to any Affiliate other than Stericycle, nor advance, loan or
invest more than $250,000 in any other Affiliate (other than 3CI).
Notwithstanding the foregoing, (a) Borrowers may advance up to an additional
$3,000,000 to WSI and (b) WSI may purchase, or loan to 3CI to enable it to
purchase, approximately 1,000,000 shares of 3CI Common Stock, at a price of
$2.50
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per share, upon exercise of certain put rights jointly granted by 3CI and WSI
under a certain Settlement Agreement and Release of All Claims effective January
10, 1996 as described on Schedule 8.B.2, provided that any such purchases of
stock shall be funded by B Revolving Loans and any such advances or loans shall
be evidenced by a promissory note which shall be pledged to the Agent. Any
amounts advanced or loaned by a Borrower to 3CI by a Borrower to 3CI may be
converted into 3CI capital stock at an amount not to exceed fair market value.
8.B.6. Capital Structure. No Borrower shall have outstanding or issue
any shares of preferred stock. No Borrower shall make any changes in its capital
structure (including the terms of its outstanding stock), amend its certificate
of incorporation or bylaws, or make any changes in any of its business
objectives, purposes or operations if such change has a reasonable likelihood of
having a Materially Adverse Effect. No Borrower (other than Stericycle) shall be
permitted to issue any stock other than to another Borrower.
8.B.7. Change in Nature of Business. No Borrower shall engage in any
business unrelated to, or make any material change in the nature of, its
business as carried on at the date hereof.
8.B.8. Transfer of Assets. No Borrower shall sell, assign, transfer,
lease or otherwise dispose any of its property or assets, except as may be
permitted under the Security Agreement or other Loan Documents. Provided in any
event that the following are permitted: (i) sales of inventory in the ordinary
course of business; (ii) sales of worn out or obsolete tools, machinery or
equipment no longer used or useful in the operation of business for fair value,
so long as the proceeds of any such sale does not exceed $250,000; (iii) sales
of other assets for cash and for fair value in an aggregate amount not to exceed
$250,000 in any Fiscal Year, provided that the Net Cash Proceeds resulting
therefrom is applied in prepayment of the Loans in the order set forth in
Section 3.F(c) hereof.
8.B.9. Prepayment or Modification of Debt. No Borrower will (i) prepay
any Subordinated Debt or any Funded Debt owing to, or any indebtedness for money
borrowed by any Borrower from a Person other than the Lenders, or any Debt
secured by any of its assets except Debt to the Lenders, if such prepayment
occurs after an Event of Default or would cause an Event of Default or if such
prepayment would result in a borrowing hereunder, or to any holder of Permitted
Liens, and except for prepayment of Debt secured by an asset if a replacement
asset of equal or greater value is purchased in connection therewith, or (ii)
enter into or modify any agreement as a result of which the terms of payment of
any of the foregoing Debt are amended or modified, except Subordinated Debt so
long as such amendment or modification does not, and will not result in any,
increase in the amount of, interest rate on, or collateral for, or any earlier
payment or maturity of, the Subordinated Debt, or conflict with or breach the
terms of this Agreement or any Loan Documents hereunder or the applicable
subordination agreement with the Agent therefor.
8.B.10. False Statements. No Borrower will furnish the Agent or the
Lenders any
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certificate or other document that knowingly contains any untrue statement of
material fact or that omits to state a material fact necessary to make it not
misleading in light of the circumstances under which it was furnished.
8.B.11. Inconsistent or Restrictive Agreements. No Borrower shall enter
into any agreement which would violate or cause a breach of or under this
Agreement or any Loan Documents or the performance by any Borrower of any
obligation hereunder or thereunder or which prohibits or would prohibit the
creation, incurrence or assumption of any Lien upon a Borrower's property or
assets, whether now owned or hereafter acquired.
8.B.12. Investments. The Borrowers shall not make any loan or advance
to any Person, or purchase or otherwise acquire any capital stock, assets,
obligations, or other securities of, make any capital contribution to, or
otherwise invest in or acquire any interest in any Person, or participate as a
partner or joint venturer with any other Person, except for Permitted
Investments and those permitted in Section 8.B.5.
SECTION 9. EVENTS OF DEFAULT.
The following events shall constitute and be deemed Events of Default
hereunder:
Section 9.A. Obligations. Failure by the Borrowers (i) to make any
payment of principal on any Loan or Note or reimbursement of any draw under a
Letter of Credit on the date such payment Obligation is due, or (ii) to make any
payment of interest on any Loan or Note or any payment of any fee due hereunder
within 3 Business Days after such payment Obligation is due.
Section 9.B. Breach or Default Under Loan Documents. (i) failure or
neglect of any Borrower to perform, keep or observe any of the covenants at
Sections 6.E.6., 6.F., 8.A.1, 8.A.2, 8.A.8, 8.A.10, or 8.B hereof; or (ii)
failure or neglect of any Borrower to perform, keep or observe any of its
respective other covenants, conditions, promises or agreements contained herein
or in any other Loan Document to which it is a party or signatory and such
Borrower fails to cure the foregoing within thirty (30) days after notice from
the Agent to the Borrowers thereof; or (iii) an Event of Default occurs under
any other Loan Document; or (iv) at any time any notice is given by a Borrower
of the discontinuance, invalidity or unenforceability of or such Borrower's
obligations thereunder.
Section 9.C. Representation and Warranties. Any warranty or
representation now or hereafter made by any Borrower hereunder or under any Loan
Document, is untrue or incorrect in any material respect or fails to state a
material fact necessary to make such warranty or representation not misleading
in light of the circumstances in which it was made, or any schedule,
certificate, statement, report, financial data, notice or writing furnished to
the Agent or Lenders at any time by any Borrower is untrue or incorrect in any
material respect or fails to state a material fact needed to make the foregoing
not misleading in light of the circumstances in which the
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foregoing were furnished, in each case on the date as of which the facts set
forth therein are stated or certified and such Borrower fails to cure any of the
foregoing within thirty (30) days after such Borrower should have become aware
of the same.
Section 9.D. Judgments. A final and non-appealable judgment or order,
or an aggregate of final and non-appealable outstanding judgments or orders,
requiring payment in excess of $250,000, either not fully covered by insurance
or the insurance for which is disputed or contested, shall have been entered
against a Borrower, and such judgments or order(s) shall remain unsatisfied or
undischarged and in effect for thirty (30) consecutive days without a stay of
enforcement or execution thereof.
Section 9.E. Insolvency and Related Proceedings. If any Borrower (i) if
a natural Person, dies or, if not a natural Person, is dissolved; (ii)
authorizes or makes an assignment for the benefit of creditors; (iii) generally
shall not pay its debts as they become due; (iv) shall admit in writing its
inability to pay its debts generally; or (v) shall authorize or commence
(whether by the entry of an order for relief or the appointment of a receiver,
trustee, examiner, custodian or other similar official therefor or for any
substantial part of its property) any proceeding or voluntary case under any
bankruptcy, reorganization, insolvency, dissolution, liquidation, adjustment or
arrangement of debt, receivership or similar Laws or if such proceedings are
commenced or instituted, or an order for relief or approving any petition
commencing such proceedings is entered against a Borrower and such party, by any
action or failure to act, authorize, approve, acquiesce, or consent to the
commencement or institution of such proceedings, or such proceedings are not
dismissed within sixty (60) days after the date of filing, commencement or
institution.
Section 9.F. Other Material Agreements. If a Borrower defaults or a
default or an event of default occurs under or in the performance of its
obligations under (i) any other agreement with the Agent or the Lenders, or (ii)
under any other material (exceeding $250,000) agreement, document or instruments
for borrowed money, and such default, breach, or event of default continues
beyond any applicable grace period thereunder and the effect of which shall be
to allow the holder of such agreement, document or instrument to terminate the
foregoing, or the Person to whom such obligation is owed to cause such
obligation to become due prior to its stated maturity or otherwise accelerated,
or (iii) under any other material agreement, document or instrument (not for
borrowed money), and such default, breach, or event of default continues beyond
any applicable grace period thereunder and the effect of which shall be to allow
the holder of such agreement, document or instrument to terminate the foregoing
or to accelerate obligations exceeding $250,000 owed to it thereunder.
Section 9.G. State Action. If any proceeding is instituted or commenced
by the State or country of incorporation of any Borrower, seeking a forfeiture
of the Articles of Incorporation of a Borrower and any order entered in such
proceeding shall fail to be vacated within thirty (30) days.
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Section 9.H. ERISA Matters. If any of the following events shall have
occurred with respect to any Employee Plan and the resultant or potential
liability of the Borrowers therefor exceeds $250,000: (i) a Reportable Event or
Prohibited Transaction, as such terms are defined in ERISA, shall have occurred;
(ii) a trustee is appointed by any governmental body or agency or any court to
administer any Employee Plan; (iii) any Employee Plan is involuntarily
terminated, or circumstances exist which constitute grounds entitling the
Pension Benefit Guaranty Corporation to institute proceedings to terminate any
Employee Plan; or (iv) any withdrawal liability is incurred in connection with
any termination of an Employee Plan.
Section 9.I. Tax Liens. If a notice of lien, levy or assessment is
filed or recorded with respect to all or a material part of the assets or the
Collateral owned by any Borrower by the United States, or any department, agency
or instrumentality thereof, or by any state, county, municipality or other
governmental agency, or any taxes or debts owing at any time or times hereafter
to any one or more of the foregoing become a lien upon a material part of the
Collateral, unless such notice or lien is a Permitted Lien or is removed within
thirty (30) days after filing or recording of such notice or becoming such lien.
Section 9.J. Failure of Lien. If any Loan Document shall at any time
after its execution and delivery and for any reason (other than as a result of
any action or inaction by the Agent or the Lenders) cease (i) to create a valid
and perfected first priority Lien (except for Permitted Liens) in and to the
Collateral covered thereby; or (ii) to be in full force and effect or shall be
declared null and void, or the validity or enforceability thereof shall be
contested or any Borrower shall deny it has any further liability or obligation
under any Loan Document, or any Borrower shall fail to perform any of its
obligations under any Loan Document beyond any applicable grace period.
Section 9.K. [Intentionally Omitted].
Section 9.L. Environmental or Other Remediation Costs. If the Agent
receives a notification pursuant to the Environmental Indemnity Agreement of, or
any Borrower or Affiliate becomes aware of, any environmental contamination or
similar site deficiency which may reasonably be expected to cause any Borrower
or Affiliate to incur or be liable for costs of any kind aggregating in excess
of a cost of $250,000.
Section 9.M. Operating Permits and Licenses. If any Borrower fails to
maintain any permits or licenses which are necessary and required for the
ownership, use, occupancy or operation of any facility, if such deficiency would
have a Materially Adverse Effect and is not cured within 30 days.
Section 9.N. Material Adverse Change. If since June 30, 1998, there
shall have occurred any condition or event which the Agent determines has or
might be reasonably expected to have a Materially Adverse Effect.
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Section 9.0. Change in Control. If a Change in Control shall occur.
"Change in Control" means (i) the direct or indirect sale, lease, exchange or
other transfer of all or substantially all of the assets of Stericycle to any
Person or Group, as defined in Rule 13d-5 under the Exchange Act ("Group"),
other than an Affiliate of Stericycle, (ii) the merger or consolidation of
Stericycle with or into another entity with the effect that the then existing
shareholders of Stericycle, collectively, hold less than 50.1% of the combined
voting power of the then outstanding securities of the surviving entity of such
merger or the corporation resulting from such consolidation ordinarily (and
apart from rights arising under special circumstances) having the right to vote
in the election of directors, (iii) during any two-year period, the replacement
of a majority of the Board of Directors of Stericycle from the directors who
constituted the Board of Directors at the beginning of such period, and such
replacement shall not have been approved by a vote of at least a majority of the
Board of Directors of Stericycle then still in office who were either members of
the Board of Directors at the beginning of such period or whose election as a
member of the Board of Directors was previously so approved, (iv) a Person or
Group (other than existing shareholders of Stericycle, and/or any executive
officer of Stericycle or its Subsidiaries, or its successors) shall, as a result
of a tender or exchange offer, open market purchases, privately negotiated
purchases or otherwise, have become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) of securities of Stericycle representing 50%
or more of the combined voting power of the then outstanding securities of
Stericycle ordinarily (and apart from rights arising under special
circumstances) having the right to vote in the election of directors or shall
have acquired the right to designate a majority of the Board of Directors of
Stericycle, (v) any Person or Group shall acquire the right, by contract or
otherwise, to elect, appoint or otherwise designate a majority of the Board of
Directors of Stericycle, whether or not such right is exercised, or (vi) the
occurrence of any event specified in Section 9.E. with respect to Stericycle or
any of its Subsidiaries.
SECTION 10. RIGHTS AND REMEDIES.
Section 10.A. Termination of Commitment and Acceleration. Upon the
happening or occurrence of an Event of Default described in Section 9.E. above,
the Lenders' Commitments shall immediately terminate, and upon the happening or
occurrence of any other Event of Default set forth in Section 9, such Event of
Default not having been previously cured or waived in writing by the Required
Lenders, the Agent shall, if so directed by the Required Lenders, or may with
the consent of the Required Lenders, declare the Commitments terminated, if they
have not yet been terminated. Following the termination of the Commitments, the
Agent shall, if so directed by the Required Lenders, or may with the consent of
the Required Lenders, accelerate the Obligations by declaring that the
Obligations are then due and payable and, thereupon, the Notes shall be and
become forthwith, due and payable without any presentment, demand, protest,
notice of any of the foregoing or other notice of any kind, all of which are
hereby expressly waived notwithstanding anything contained herein or in the
Notes to the contrary, and the Agent and the Lenders shall have all rights and
remedies now or hereafter provided by applicable Laws and without limiting the
generality of the foregoing may, at their option, also appropriate and apply
toward the payment of the Notes, any indebtedness of the Agent or the
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Lenders to the Borrowers, howsoever created or arising, and may also exercise
any and all rights and remedies hereunder, under the Loan Documents or in and to
the Collateral referred to in the Security Agreement and Stock Pledge Agreement.
Section 10.B. Rights of Secured Creditor. The Agent and Lenders shall
have, in addition to the rights and remedies given to them under this Agreement,
the Notes and the other Loan Documents, all of the rights and remedies of a
secured party under the Uniform Commercial Code as enacted in any jurisdiction
in which any of the Collateral may be located and all rights and remedies
allowed by all applicable Laws, all of which rights and remedies shall be
cumulative and non-exclusive, to the extent permitted by said Laws. In addition
to all such rights and remedies, the sale, lease or other disposition of the
Collateral, or any part thereof, by Agent after an Event of Default may be for
cash, credit or any combination thereof, and Agent may purchase all or any part
of the Collateral at public or, if permitted by Law, private sale, and in lieu
of actual payment of such purchase price, may set-off the amount of such
purchase price against the Obligations then owing. Any sale of the Collateral
may be adjourned from time to time with or without notice. Agent may, in its
sole discretion, cause any Collateral to remain on a Borrower's premises, at the
Borrower's expense, pending sale or other disposition of such Collateral. Agent
shall have the right to conduct such sales on a Borrower's premises, at
Borrowers' expense, or elsewhere on such occasion or occasions as Agent may see
fit.
Section 10.C. Entry Upon Premises and Access to Information. If an
Event of Default then exists, without notice, demand or legal process of any
kind, Agent may take possession of any or all of the Collateral, wherever it
might be found and for that purpose, Agent shall have the right, without
breaching the peace, to enter upon the premises of any Borrower where the
Collateral is located (or is believed to be located) without any obligation to
pay rent to any Borrower, or any other place or places under the control of any
Borrower where the Collateral is believed to be located and kept, and remove the
Collateral therefrom to the premises of Agent or any agent of Agent, for such
time as Agent may desire, in order to effectively collect or liquidate the
Collateral, and/or Agent may require any Borrower to assemble the Collateral and
make it available to Agent at a place or places to be designated by Agent. If an
Event of Default then exists, Agent shall have the right to obtain access to any
Borrower's data processing equipment, computer hardware and software relating to
the Collateral and to use all of the foregoing and the information contained
therein in any manner Agent deems appropriate which is related to the
preservation or disposition of the Collateral or to the collection of the
Obligations.
Section 10.D. Sale or Other Disposition of Collateral by Agent. Any
notice required to be given by Agent of a sale, lease or other disposition or
other intended action by Agent with respect to any of the Collateral which is
deposited in the United States mails, postage prepaid and duly addressed to
Borrowers at the address specified in Section 11.I, at least ten (10) Business
Days prior to such proposed action, shall constitute fair and reasonable notice
to Borrowers of any such action. The net proceeds realized by the Lenders upon
any such sale or other disposition, after deduction for the reasonable expenses
of retaking, holding, preparing for sale, selling or the like and the reasonable
attorneys' fees and legal expenses incurred by Agent or
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Lenders in connection therewith, shall be applied as provided herein toward
satisfaction of the Obligations. The Lenders shall account to Borrowers for any
surplus realized upon any such sale or other disposition, and Borrowers shall
remain liable for any deficiency. The commencement of any action, legal or
equitable, or the rendering of any judgment or decree for any deficiency shall
not affect Agent's Lien on the Collateral until the Obligations are fully paid.
Borrowers agree that Agent has no obligation to preserve rights to the
Collateral against any other parties. To the extent Borrowers have the power,
without violating the terms of any agreement existing as of the Closing Date, to
grant such a license, Agent is hereby granted a license or other right to use,
without charge, any Borrower's labels, patents, production certificates, type
certificates, supplemental certificates, copyrights, rights of use of any name,
trade secrets, trade names, tradestyles, trademarks, service marks and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale and selling any
Collateral.
Section 10.E. Collection of Receivables. After an Event of Default
occurs and is continuing, Agent is authorized and empowered (which authorization
and power, being coupled with an interest, is irrevocable until the last to
occur of termination of this Agreement and payment and performance in full of
all of the Obligations) in its sole and absolute discretion:
(i) To endorse in any Borrower's name and to collect any chattel
paper, checks, notes, drafts, instruments or other items of payment
tendered to or received by Agent in payment of any receivable included
in the Collateral;
(ii) To notify, either in Agent's name or any Borrower's name,
and/or to require any Borrower to notify, any account debtor or any
other Person obligated under or in respect of any receivable included
in the Collateral, of the fact of Agent's Lien thereon and of the
collateral assignment thereof to Agent;
(iii) To direct, either in Agent's name or any Borrower's name,
and/or to require any Borrower to direct, any account debtor or other
Person obligated under or in respect of any receivable to make payment
directly to Agent of any amounts due or to become due thereunder or
with respect thereto; and
(iv) To demand, collect, surrender, release or exchange all or
part of any receivable or any amounts due thereunder or with respect
thereto, or compromise or extend or renew for any period (whether or
not longer than the initial period) any and all sums which are now or
may hereafter become due or owing upon or with respect to any
receivable included in the Collateral, or enforce, by suit or
otherwise, payment or performance of any receivable either in Agent's
own name or in the name of any Borrower.
Under no circumstances shall Agent be under any duty to act in regard to any of
the foregoing matters. The costs relating to any of the foregoing matters,
including reasonable attorneys' fees and out-of-pocket expenses, shall be borne
solely by Borrowers whether the same are incurred
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by Agent or Borrowers.
Section 10.F. Rescission. If at any time after acceleration of the
maturity of the Loans, Borrowers shall pay all arrears of interest and all
payments on account of principal of the Loans which shall have become due
otherwise than by acceleration (with interest on principal and, to the extent
permitted by laws, on overdue interest, at the rates specified in this
Agreement) and all Events of Default and Defaults (other than nonpayment of
principal of and accrued interest of the Loans due and payable solely by virtue
or acceleration) shall be remedied or waived pursuant to this Agreement, then by
written notice to Borrowers, the Required Lenders may elect, in their sole
discretion, to rescind and annul the acceleration and its consequences; but such
action shall not affect any subsequent Event of Default or Default or impair any
right or remedy consequent thereon. The provisions of the preceding sentence are
intended merely to bind the Lenders to a decision which may be made at the
election of the Required Lenders; they are not intended to benefit Borrowers and
do not give Borrowers the right to require Lenders to rescind or annul any
acceleration hereunder, even if the conditions set forth herein are met.
Section 10.G. Application of Payments. All monies received by the Agent
or any of the Lenders from the exercise of any rights or remedies shall, unless
otherwise required by applicable Law, be applied as follows:
A. First, to the payment of all reasonable expenses (to the extent not
paid by Borrowers) actually incurred by the Agent or any of the Lenders in
connection with the exercise of such rights or remedies, including all
out-of-pocket costs and expenses of collection, reasonable attorneys' fees and
court costs, all costs incurred by any one or more of the Agent or any of the
Lenders directly or indirectly in carrying out the terms, covenants and
agreements contained in any Loan Document, together with interest thereon as
provided therein, and all other costs and expenses described in Section 8.A.6;
B. Next, to the payment of any outstanding fees due hereunder;
C. Next, to the payment of interest then accrued and unpaid on the
Notes ratably to each Lender in accordance with its pro rata share;
D. Next, to the payment of principal then owing on the Notes ratably to
each Lender in accordance with its pro rata share;
E. Next, to all of the other Obligations ratably in the proportion
which such other obligations owed to the Agent or a Lender bears to all such
other Obligations;
F. Surplus, if any, unless a court of competent jurisdiction decrees
otherwise, to the holder(s) of any junior liens as may be required by the
provision of any applicable agreement governing Subordinated Debt and to the
Borrowers, as appropriate.
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Section 10.H. Letters of Credit. When any Event of Default, other than
an Event of Default described in Section 9.E hereof has occurred and is
continuing, the Borrowers shall, upon demand of the Agent, and when any Event of
Default described in Section 9.E has occurred, the Borrowers shall, without
notice or demand from the Agent, immediately pay to the Agent the full Stated
Amount of each Letter of Credit, the Borrowers hereby agreeing to immediately
make each such payment and acknowledging and agreeing the Agent would not have
an adequate remedy at law for failure of the Borrowers to honor any such demand
and that the Agent shall have the right to require the Borrowers to specifically
perform such undertaking whether or not any draws had been made under the
Letters of Credit.
SECTION 11. AGENCY PROVISIONS.
Section 11.A. Appointment.
(a) Each Lender hereby designates and appoints LaSalle National Bank as
Agent of such Lender under this Agreement and the Loan Documents, and each
Lender hereby irrevocably authorizes Agent to take such action on its behalf
under the provisions of this Agreement and the Loan Documents and to exercise
such powers as are set forth herein or therein, together with such other powers
as are incidental thereto. Agent agrees to act as such on the express conditions
contained in this Section 11.
(b) The provisions of this Section 11 are solely for the benefit of
Agent and Lenders, and Borrowers shall not have any rights to rely on or enforce
any of the provisions hereof (other than as expressly set forth in Section 11.H,
Section 11.I or in Section 11.C(b)). In performing its functions and duties
under this Agreement, Agent shall act solely as Agent of Lenders and does not
assume and shall not be deemed to have assumed any obligation toward or
relationship of agency or trust with or for Borrowers.
Section 11.B. Nature of Duties. Agent shall not have any duties or
responsibilities except those expressly set forth in this Agreement or in the
Loan Documents. The duties of Agent shall be mechanical and administrative in
nature. Agent shall not have by reason of this Agreement a fiduciary
relationship in respect of any Lender. Nothing in this Agreement or any of the
Loan Documents, expressed or implied, is intended or shall be construed to
impose upon Agent any obligation in respect of this Agreement or any of the Loan
Documents except as expressly set forth herein or therein. Each Lender
acknowledges that it has, independently and without reliance upon Agent or any
other Lender and based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement and other Loan Documents, made its own independent investigation of
the financial condition and affairs of Borrowers in connection with the making
and the continuance of the Loans and its Commitment hereunder, and made and
shall continue to make its own appraisal of the creditworthiness of Borrowers.
Except for notices, reports and other documents and information expressly
required to be furnished to the Lenders by the Agent hereunder, Agent shall not
have any duty or responsibility, either initially or on a continuing basis, to
provide any
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Lender with any credit or other information with respect to Borrowers, whether
coming into its possession before the Closing Date or at any time or times
thereafter. If Agent seeks the consent or approval of the Required Lenders to
the taking or refraining from taking any action hereunder, Agent shall send
notice thereof to each Lender. Agent shall promptly notify each Lender at any
time that the Required Lenders have instructed Agent to act or refrain from
acting pursuant hereto.
Section 11.C. Distribution and Apportionment of Payments. Payments
actually received by Agent for the account of Lenders shall be paid to them
promptly after receipt thereof by Agent, provided that Agent shall pay to such
Lenders interest thereon, at the lesser of (i) Federal Funds Rate and (ii) the
rate of interest applicable to such Loans, from the Business Day following
receipt of such funds by Agent until such funds are paid to such Lenders. So
long an there does not exist an Event of Default, all payments of principal and
interest in respect of outstanding Loans, all payments of the fees described in
this Agreement, and all payments in respect of any other Obligations shall be
allocated among such of Lenders as are entitled thereto, in proportion to their
respective pro rata shares or otherwise as provided herein. Agent shall promptly
distribute to each Lender at its primary address set forth on the appropriate
counterpart signature page hereof or on the Assignment and Acceptance, or at
such other address as a Lender may request in writing, such funds as it may be
entitled to receive, provided that Agent shall in any event not be bound to
inquire into or determine the validity, scope or priority of any interest or
entitlement of any Lender and may suspend all payments and seek appropriate
relief (including without limitation instructions from Required Lenders or an
action in the nature of interpleader) in the event of any doubt or dispute as to
any apportionment or distribution contemplated hereby. The order of priority
herein is set forth solely to determine the rights and priorities of Lenders as
among themselves and may at any time or from time to time be changed by Lenders
as they may elect, in writing, without necessity of notice to or consent of or
approval by Borrowers or any other Person.
Section 11.D. Rights, Exculpation, Etc. Neither Agent, any Affiliate of
Agent, nor any of their respective officers, directors, employees, agents,
attorneys or consultants, shall be liable to any Lender for any action taken or
omitted by them hereunder or under any of the Loan Documents, or in connection
herewith or therewith, except that Agent shall be liable for its gross
negligence or willful misconduct in the performance of its express obligations
hereunder. Agent shall not be liable for any apportionment or distribution of
payments made by it in good faith pursuant to Section 11.C, and if any such
apportionment or distribution is subsequently determined to have been made in
error the sole recourse of any Person to whom payment was due, but not made,
shall be to recover from the recipients of such payments any payment in excess
of the amount to which they are determined to have been entitled. Agent shall
not be responsible to any Lender for any recitals, statements, representations
or warranties herein or for the execution, effectiveness, genuineness, validity,
enforceability, collectibility or sufficiency of this Agreement, or any of the
other Loan Documents, or any of the transactions contemplated hereby and
thereby; or for the financial condition of Borrowers. Agent shall not be
required to make any inquiry concerning or to ascertain either the performance
or observance of any of the
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terms, provisions or conditions of this Agreement or any of the Loan Documents,
or the financial condition of Borrowers, or the existence or possible existence
of any Default or Event of Default, or to inspect the property of the Borrowers.
Agent may at any time request instructions from Lenders with respect to any
actions or approvals which by the terms of this Agreement or of any of the Loan
Documents Agent is permitted or required to take or to grant, and if such
instructions are promptly requested, Agent shall be absolutely entitled to
refrain from taking any action or to withhold any approval and shall not be
under any liability whatsoever to any Person for refraining from any action or
withholding any approval under any of the Loan Documents until it shall have
received such instructions from Required Lenders. Without limiting the
foregoing, no Lender shall have any right of action whatsoever against Agent as
a result of Agent acting or refraining from acting under this Agreement or any
of the other Loan Documents in accordance with the instructions of Required
Lenders.
Section 11.E. Reliance. Agent shall be entitled to rely upon any
written notices, statements, certificates, orders or other documents or any
telephone message believed by it in good faith to be genuine and correct and to
have been signed, sent or made by the proper Person, and with respect to all
matters pertaining to this Agreement or any of the Loan Documents and its duties
hereunder or thereunder, upon advice of legal counsel (including counsel for
Borrowers), independent public accountants and other experts selected by it.
Section 11.F. Indemnification. To the extent that Agent is not
reimbursed and indemnified by Borrowers, Lenders will reimburse and indemnify
Agent for and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by, or asserted
against it in any way relating to or arising out of this Agreement or any of the
other Loan Documents or any action taken or omitted by Agent or under this
Agreement or any of the other Loan Documents, in proportion to each Lender's pro
rata share; provided that no Lender shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from Agent's gross negligence or
willful misconduct. Without limiting the foregoing, each Lender agrees to
reimburse the Agent (to the extent not reimbursed by the Borrowers) promptly
upon demand for its ratable share of any out-of-pocket expenses (including
reasonable attorneys' fees) incurred by the Agent in connection with the
preparation, administration, or enforcement of or legal advice in respect of
rights or responsibilities under any Loan Document. The obligations of Lenders
under this Section 11.F shall survive the payment in full of all Obligations and
the termination of this Agreement. In the event that after payment and
distribution of any amount by Agent to Lenders, any Lender or third-party,
including any Borrower, any creditor of any Borrower or a trustee in bankruptcy,
recovers from Agent any amount found to have been wrongfully paid to Agent or
disbursed by Agent to Lenders, then Lenders, in proportion to their respective
pro rata shares, shall reimburse Agent for all such amounts.
Section 11.G. Agent Individually. With respect to its pro rata share of
the Commitments hereunder and the Loans made by it, Agent shall have and may
exercise the same rights and
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powers hereunder and is subject to the same obligations and liabilities as and
to the extent set forth herein for any other Lender. The terms "Lenders" or
"Required Lenders" or any similar terms shall include Agent in its individual
capacity as a Lender or one of the Required Lenders. Agent may accept deposits
from, lend money to, and generally engage in any kind of banking, trust or other
business with any Borrower as if it were not acting as Agent pursuant hereto.
Section 11.H. Successor Agent; Resignation of Agent; Removal Agent.
(a) Agent may resign from the performance of all its functions and
duties hereunder at any time by giving at least thirty (30) Business Days prior
written notice to Lenders and Borrowers. Required Lenders may remove Agent at
any time by giving at least thirty (30) Business Days prior written notice to
Agent, Borrowers and all other Lenders. Such resignation or removal shall take
effect upon the acceptance by a successor Agent of appointment pursuant to
clauses (b) and (c) below or as otherwise provided below.
(b) Upon any such notice of resignation by or removal of Agent,
Required Lenders shall appoint a successor Agent with the consent of Borrowers
(which may not be unreasonably withheld).
(c) If a successor Agent shall not have been so appointed within said
thirty (30) Business Day period, the retiring or removed Agent, with the consent
of Borrowers (which may not be withheld unreasonably), shall then appoint a
successor Agent who shall serve as Agent until such time, if any, as Required
Lenders, with the consent of Borrowers, appoint a successor Agent as provided
above.
Section 11.I. Agency Provisions Relating to Collateral.
(a) Each Lender authorizes and directs Agent to enter into the Loan
Documents for the benefit of the Lenders. Each Lender agrees that any action
taken by Agent or Required Lenders in accordance with the provisions of this
Agreement or the Loan Documents, and the exercise by Agent or Required Lenders
of the powers set forth herein or therein, together with such other powers as
are reasonably incidental thereto, shall be authorized and binding upon all
Lenders.
(b) Agent is hereby authorized on behalf of all Lenders, without the
necessity of any notice to or further consent from any Lender, from time to time
prior to an Event of Default, to take any action with respect to any Collateral
or Loan Documents which may be necessary to perfect and maintain perfected
Agent's Liens upon the Collateral granted pursuant to the Loan Documents.
(c) Lenders hereby irrevocably authorize Agent, at its option and in
its discretion, to release any Lien granted to or held by Agent upon any
Collateral (i) upon termination of the Commitments and payment and satisfaction
of all Obligations which have matured and which
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Agent has been notified in writing are then due and payable; or (ii)
constituting property being sold or disposed of if Borrowers certify to Agent
that the sale or disposition is made in compliance with this Agreement (and
Agent may rely conclusively an any such certificate, without further inquiry);
or (iii) constituting property in which no Borrower owned an interest at the
time the Lien was granted or at any time thereafter; or (iv) if approved,
authorized or ratified in writing by Agent at the direction of all Lenders. Upon
request by Agent at any time, Lenders will confirm in writing Agent's authority
to release particular types or items of Collateral pursuant to this Section
11.I.
(d) Without in any manner limiting Agent's authority to act without any
specific or further authorization or consent by all Lenders (as set forth in
Section 11.I(b)), each Lender agrees to confirm in writing, upon request by
Borrowers, the authority to release Collateral conferred upon Agent under
clauses (i) through (iv) of Section 11.I(c). So long as no Event of Default is
then continuing, upon receipt by Agent of any such written confirmation from all
Lenders of its authority to release any particular items or types of Collateral,
and in any event upon any sale and transfer of Collateral which is expressly
permitted pursuant to the terms of this Agreement, and upon at least five (5)
Business Days prior written request by Borrowers, Agent shall (and is hereby
irrevocably authorized by Lenders to) execute such documents as may be necessary
to evidence the release of the Liens granted to Agent for the benefit of Lenders
herein or pursuant hereto upon such Collateral; provided, that (i) Agent shall
not be required to execute any such document on terms which, in Agent's opinion,
would expose Agent to liability or create any obligation or entail any
consequence other than the release of such Liens without recourse or warranty,
and (ii) such release shall not in any manner discharge, affect or impair the
Obligations or any Liens upon (or obligations of Borrowers in respect of) all
interests retained by Borrowers, including without limitation the proceeds of
any sale, all of which shall continue to constitute part of the Collateral.
(e) Agent shall have no obligation whatsoever to any Lender or to any
other Person to assure that the Collateral exists or is owned by Borrowers or is
cared for, protected or insured or has been encumbered or that the Liens granted
to Agent herein or pursuant hereto have been properly or sufficiently or
lawfully created, perfected, protected or enforced or are entitled to any
particular priority, or to exercise at all or in any particular manner or under
any duty of care, disclosure or fidelity, or to continue exercising, any of the
rights, authorities and powers granted or available to Agent in this Section
11.I or in any of the Loan Documents, it being understood and agreed that in
respect of the Collateral, or any act, omission or event related thereto, Agent
may act in any manner it may deem appropriate, in its sole discretion, given
Agent's own interest in the Collateral as one of the Lenders and that Agent
shall have no duty or liability whatsoever to any Lender.
Section 11.J. Actions Against Collateral. Each Lender agrees that it
will not take any action, nor institute any actions or proceedings, against any
Borrower or any other obligor hereunder with respect to exercising claims
against or rights in any Collateral without the consent of the Required Lenders.
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SECTION 12. MISCELLANEOUS.
Section 12.A. Assignments and Participations.
(a) With the prior consent of the Agent and Stericycle (which consent
shall not be unreasonably withheld or delayed), a Lender may assign to one or
more banks or other financial institutions all or a portion of its rights and
obligations under this Agreement (including without limitation all or a portion
of its Commitments, the Loans owing to it, and participation in Letters of
Credit); provided, however, that (i) each such assignment shall be of a
constant, and not a varying, percentage of such Lender's rights and obligations
under this Agreement, (ii) unless the Agent otherwise consents, the aggregate
amount of the Commitments of such Lender being assigned pursuant to each such
assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall in no event be less than Five Million Dollars
($5,000,000) and shall be an integral multiple of One Million Dollars
($1,000,000) and (iii) the parties to each such assignment shall execute and
deliver to Agent, for its approval and acceptance, an Assignment and Acceptance
in the form of Exhibit L hereto (an "Assignment and Acceptance"); provided,
further that any Lender, without the consent of the Agent, may assign all or
part of its rights and obligations to any Affiliate of the assigning Lender.
Upon such execution, delivery, approval and acceptance of the Assignment and
Acceptance, and upon the effective date specified therein, (a) the assignee
thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment and
Acceptance, have the rights and obligations of a Lender hereunder and (b) the
Lender-assignor thereunder shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such Assignment and Acceptance,
relinquish its rights and be released from its obligations under this Agreement.
(b) By executing and delivering an Assignment and Acceptance, the
Lender-assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than as provided
in such Assignment and Acceptance, such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representation made in or in connection with this Agreement or any
other Loan Document or the execution, legality, validity, enforceability,
genuineness sufficiency or value of this Agreement or any other Loan Document or
any other instrument or document furnished pursuant hereto; (ii) such assigning
Lender makes no representation or warranty and assumes no responsibility with
respect to the financial condition of Borrowers or the performance or observance
by Borrowers of any of their obligations under any Loan Documents or any other
instrument or document furnished pursuant hereto; (iii) such assignee confirms
that it has received a copy of this Agreement, together with copies of Financial
Statements and such other Loan Documents and other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance; (iv) such assignee will, independently and
without reliance upon Agent, such assigning Lender or any other Lender and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this
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Agreement; (v) such assignee appoints and authorizes Agent to take such action
as Agent on its behalf and to exercise such powers under this Agreement and the
other Loan Document as are delegated to Agent by the terms hereof and thereof,
together with such powers as are reasonably incidental thereto; and (vi) such
assignee agrees that it will perform in accordance with their terms all of the
obligations which by the terms of this Agreement are required to be performed by
it as a Lender.
(c) Agent shall maintain at its address referred to on the counterpart
signature pages hereof a copy of each Assignment and Acceptance delivered to and
accepted by it and shall record the names and addresses of each Lender and the
Commitment of, and principal amount of the Loans owing to, such Lender from time
to time. Borrowers, Agent and Lenders may treat each Person whose name is
recorded in the records of the Agent as a Lender hereunder for all purposes of
this Agreement.
(d) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an assignee, Agent shall, if such Assignment and Acceptance
has been properly completed and is in substantially the form of Exhibit L, (i)
accept such Assignment and Acceptance, (ii) record the information contained
therein and (iii) give prompt notice thereof to Borrowers.
(e) With the prior consent of the Agent (which consent shall not be
unreasonably withheld) each Lender may sell participations in or to all or a
portion of its rights and obligations under this Agreement (including without
limitation all or a portion of its Commitment, the Loans owing to it and
participations in Letters of Credit); provided, however, that in connection with
any such sale, (i) such Lender's obligations under this Agreement (including
without limitation its Commitment to Borrowers hereunder) shall remain
unchanged, (ii) such Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iii) Borrowers, Agent and the
other Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement and
with regard to any and all payments to be made under this Agreement, (iv) the
holder of any such participation shall not be entitled to voting rights under
this Agreement except for voting rights with respect to the amendment or
modification of those provisions of this Agreement for which the consent of all
Lenders would be required; and (v) any party to which such a participation has
been granted shall have the benefits of Sections 3.J. and 3.K. but shall not be
entitled to receive any greater payment under either such Section than the
Lender granting such participation would have been entitled to receive with
respect to the rights transferred. No such participant shall have any rights
under this Agreement except as provided in this Section 12.A.(e).
(f) Borrowers will cooperate with Agent and Lenders in connection with
the assignment of interests under this Agreement or the sale of participations
herein.
(g) Anything in this Agreement to the contrary notwithstanding, and
without the need to comply with any of the formal or procedural requirements of
this Agreement, any Lender
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may at any time and from time to time pledge and assign all or any portion of
its rights under all or any of the Loan Documents to a Federal Reserve Agent;
provided that no such pledge or assignment shall release such Lender from its
obligations thereunder. To facilitate any such pledge or assignment, Agent
shall, at the request of such Lender, enter into a letter agreement with the
Federal Reserve Agent in, or substantially in, the form of the exhibit to
Appendix C to the Federal Reserve Agent of New York Operating Circular No. 12.
Section 12.B. Ratable Sharing. Subject to Sections 3.C(d) and 11.C, and
unless otherwise specifically stated herein, Lenders agree among themselves that
(i) with respect to all amounts received by them which are applicable to the
payment of the Obligations, equitable adjustment will be made so that, in
effect, all such amounts will be shared among then ratably in accordance with
their pro rata shares, whether received by voluntary payment, by the exercise of
the right of set-off or banker's lien, by counterclaim or cross action or by the
enforcement of any or all of the Obligations or the Collateral, (ii) if any of
them shall by voluntary payment or by the exercise of any right of counterclaim,
set-off, banker's lien or otherwise, receive payment of a proportion of the
aggregate amount of the obligations held by it which is greater than its pro
rata share of the payments on account of the Obligations, the one receiving such
excess payment shall purchase, without recourse or warranty, an undivided
interest and participation (which it shall be deemed to have done simultaneously
upon the receipt of such payment) in such obligations owed to the others so that
all such recoveries with respect to such Obligations shall be applied ratably in
accordance with their pro rata shares; provided, that if all or part of such
excess payment received by the purchasing party is thereafter recovered from it,
those purchases shall be rescinded and the purchase prices paid for such
participation shall be returned to that party to the extent necessary to adjust
for such recovery, but without interest except to the extent the purchasing
party is required to pay interest in connection with such recovery. Borrowers
agree that any Lender so purchasing a participation from another Lender pursuant
to this Section 12.B may, to the fullest extent permitted by law, exercise all
its rights of payment with respect to such participation as fully as if such
Lender were the direct creditor of Borrowers in the amount of such
participation.
Section 12.C. Withholding Taxes. Except as otherwise required by Law,
each payment by the Borrowers under this Agreement or the Notes or in respect of
the Letters of Credit shall be made without setoff or counterclaim and without
withholding for or on account of any present or future taxes imposed by or
within the jurisdiction in which any Borrower is domiciled, any jurisdiction
from which the Borrowers make any payment hereunder, or (in each case) any
political subdivision or taxing authority thereof or therein (excluding any such
tax imposed on the overall net income of any Lender or its Lending Office). If
any such withholding is so required, the Borrowers shall make the withholding,
pay the amount withheld to the appropriate governmental authority before
penalties attach thereto or interest accrues thereon and forthwith pay such
additional amount as may be necessary to ensure that the net amount actually
received by each Lender and the Agent free and clear of such taxes (including
such taxes on such additional amount) is equal to the amount which that Lender
or the Agent would have received had such withholding not been made. If the
Agent or any Lender pays any amount in respect of any such
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taxes, penalties or interest, the Borrowers shall reimburse the Agent or that
Lender for that payment on demand in the currency in which such payment was
made. If a Borrower pays any such taxes, penalties or interest, it shall deliver
official tax receipts evidencing that payment or certified copies thereof to the
Agent on or before the thirtieth day after payment.
Section 12.D. Amendment and Waivers. No amendment or modification of
any provision of this Agreement shall be effective without the written agreement
of Required Lenders (after notice to all Lenders, which notice may be oral) and
Borrowers, and no termination or waiver of any provision of this Agreement, or
consent to any departure by Borrowers therefrom, shall in any event be effective
without the written concurrence of Required Lenders (after notice to all
Lenders, which notice may be oral), which Required Lenders shall have the right
to grant or withhold at their sole discretion, except that any amendment,
modification or waiver of any provision of Section 2 hereof relating to any
increase of the Commitments or any Lender's Commitment, to the principal amount,
amortization and final maturity of the Loans, to the reduction of interest rates
applicable to the Loans, to the rates at which the fees payable to the Agent for
the ratable benefit of the Lenders pursuant hereto are determined, to the
forgiveness of any amount payable or receivable under Section 2, to the
definition of "Required Lenders" and "pro rata", to the level of consent
required to release Collateral, and to the provisions contained in this Section
12.D shall be effective only if evidenced by a writing signed by or on behalf of
all Lenders, provided that notwithstanding the foregoing, the consent or
approval of a Lender will not be required if such amendment, modification or
waiver does not affect such Lender. No amendment, modification, termination or
waiver of any provision of Section 11 hereof or any other provision referring to
Agent shall be effective without the written concurrence of Agent. Agent may,
but shall have no obligation to, with the concurrence of any Lender, execute
amendments, modifications, waivers or consents on behalf of such Lender. Any
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which it was given. No notice to or demand on Borrowers in
any case shall entitle Borrowers to any further notice or demand in similar or
other circumstances. Any amendment, modification, termination, waiver or consent
effected in accordance with this Section 12.D. shall be binding on each
assignee, transferee or recipient of Agent's or any Lender's Commitment or the
Loans at the time outstanding.
Section 12.E. Merger and Integration Clause. This Agreement and the
Loan Documents contain the entire agreement among the parties hereto with
respect to the subject matter hereof and specifically supersedes in its entirety
the proposal letter of the Agent to Stericycle dated September 14, 1998, and any
prior and subsequent drafts thereof or proposals or letters from the Agent with
respect to the terms of credit facilities hereunder or any other matter which is
the subject matter of this Agreement or any of the Loan Documents.
Section 12.F. Applicable Law. This Agreement, the Notes and the other
Loan Documents have been executed, issued, delivered and accepted in and shall
be deemed to have been made under and shall be governed by and construed in
accordance with the Laws of the State of Illinois.
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Section 12.G. Severability. This Agreement, the Notes and the other
Loan Documents shall be construed and interpreted in such manner as to be
effective, enforceable and valid under all applicable Laws. If any provision of
this Agreement, the Notes or the other Loan Documents shall be held invalid,
prohibited or unenforceable under any applicable Laws of any applicable
jurisdiction, such invalidity, prohibition or unenforceability shall be limited
to such provision and shall not affect or invalidate the other provisions hereof
or thereof or affect the validity or enforceability of such provision in any
other jurisdiction, and to that extent, the provisions hereof and thereof are
severable.
Section 12.H. Section Headings. Section headings used in this Agreement
are for convenience only and shall not effect the construction or interpretation
of this Agreement.
Section 12.I. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Agent, the Lenders and the Borrowers, and their
respective successors and assigns; provided, however, that the Borrowers have no
right to assign any of its rights or its obligations hereunder without the prior
written consent of all Lenders.
Section 12.J. Notices. Any notices, requests or consents required or
permitted by this Agreement shall be (i) in writing, and (ii) delivered in
person, telexed, telecopied or sent by certified or registered mail, postage
prepaid, return receipt requested, or by overnight mail or express delivery
service to the addresses of the parties hereto set forth below on the signature
pages, unless such address, telex number or telecopier number is changed by
written notice hereunder. Each such notice, request, consent or other
communication shall be effective (i) if given by telecopier, when such telecopy
is transmitted to the telecopier number specified on the signature page hereof
and a confirmation of such telecopy has been received by the sender, (ii) if
given by telex, when such telex is transmitted to the telex number specified on
the signature page hereof and the answerback is received by sender, (iii) if
given by mail, five (5) days after such communication is deposited in the mail,
certified or registered with return receipt requested, addressed as aforesaid or
(iv) if given by any other means, when delivered at the addresses specified on
the signature page hereof; provided that any notice given pursuant to Sections 2
and 3 hereof shall be effective only upon receipt.
Section 12.K. Counterparts. This Agreement may be executed in any
number of counterparts, and by the different parties on different counterparts,
each of which when executed shall be deemed an original but all such
counterparts taken together shall constitute one and the same instrument.
Section 12.L. Indemnification. In addition to the agreements of the
Borrowers under the Environmental Indemnity Agreement, each Borrower hereby
indemnities, exonerates and holds free and harmless the Agent, each Lender, each
of their Affiliates and each of their officers, directors, employees, agents-and
attorneys (collectively, the "Indemnified Parties" or, individually, an
"Indemnified Party"), from and against any and all actions, causes of action,
suits, proceedings, investigations, losses, costs, liabilities, damages,
punitive damages, penalties
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and expenses, including reasonable attorneys' and paralegals' fees and
disbursements (the "Indemnified Liabilities"), incurred by the Indemnified
Parties or any of them as a result of, or arising out of, or relating to
(irrespective of whether such Indemnified Party is a party to the action for
which indemnification hereunder is sought):
(a) any transaction financed or to be financed in whole or in
part, directly or indirectly, with the proceeds of any Loan;
(b) the entering into and performance under this Agreement or any
other Loan Document or by any party thereto; or
(c) any investigation, litigation, or proceeding related to any
acquisition or proposed acquisition by any of the Borrowers of all or
any portion of the stock or all or substantially all the assets of any
Person, whether or not the Agent is party thereto and whether or not
the proceeds of any Loans are used or to be used in connection
therewith; except for any such Indemnified Liabilities arising by
reason of an Indemnified Party's gross negligence or wilful misconduct.
In addition, if any Borrower institutes any action, suit or proceeding
against any of the Indemnified Parties and such action, suit or
proceeding is unsuccessful, the Borrowers shall indemnify and hold
harmless the Indemnified Parties from and against all Indemnified
Liabilities arising in connection with or relating to such action, suit
or proceeding. The Borrowers shall pay or reimburse the Indemnified
Parties for any Indemnified Liabilities from time to time within thirty
(30) days after demand. This Section and the agreements of the
Borrowers set forth herein shall survive the termination of this
Agreement and any or all of the Loan Documents and repayment of all of
the Obligations hereunder and thereunder. If and to the extent that the
undertaking described in this Section 12.L. is held or determined by
any court of competent jurisdiction to be unenforceable for any reason,
the Borrowers hereby agree to make the maximum contribution to the
payment and satisfaction of each of the Indemnified Liabilities which
is permissible under applicable Laws.
Section 12.M. Independence of Covenants. All covenants hereunder shall
be given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of an Event of Default or Default if such action is
taken or condition exists, and if a particular action or condition is expressly
permitted under any covenant, unless expressly limited to such covenant, the
fact that it would not be permitted under the general provisions of another
covenant shall not constitute an Event of Default or Default if such action is
taken or condition exists.
Section 12.N. Marshalling; Recourse to Security; Payments Set Aside.
Neither any Lender nor the Agent shall not be under any obligation to marshall
any assets in favor of Borrowers or any other party or against or in payment of
any or all of the Obligations. Recourse to security shall not be required at any
time. To the extent that Borrowers make a payment or
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<PAGE> 77
payments to the Agent or the Lenders or the Agent or Lenders enforce their Liens
or exercise their rights of setoff, and such payment or payments or the proceeds
of such enforcement of setoff or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or another party under any bankruptcy law, state
or federal law, common law or equitable cause, then to the extent of such
recovery, the obligation or part thereof originally intended to be satisfied,
and all Liens, rights and remedies therefor, shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.
Section 12.O. Limitation of Liability. To the extent permitted by
applicable Law, no claim may be made by Borrowers, any Lender or any other
Person against Agent or any Lender, or Affiliates, directors, officers,
employees, attorneys or agents of any of them, for special, indirect,
consequential or punitive damages in respect of any claim for breach of contract
or any other theory of liability arising out of or related to the transactions
contemplated by this Agreement, or any act, omission or event occurring in
connection therewith; and Borrowers, Agent and each Lender hereby waive, release
and agree not to sue upon any claim for any such damages, whether or not accrued
and whether or not known or suspected to exist in its favor.
Section 12.P. Consent to Jurisdiction and Waiver of Jury Trial and
Personal Service. EACH BORROWER EXPRESSLY SUBMITS AND CONSENTS TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN COOK COUNTY, ILLINOIS
IN ANY ACTION, SUIT OR PROCEEDING (WHETHER IN CONTRACT OR TORT, AT LAW OR IN
EQUITY) COMMENCED THEREIN IN CONNECTION WITH OR WITH RESPECT TO THE OBLIGATIONS,
THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENTS (INCLUDING, WITHOUT
LIMITATION, ANY DEFENSES OR COUNTER CLAIMS THEREIN), AND EACH BORROWER, THE
AGENT AND THE LENDERS EACH WAIVE ANY RIGHT TO JURY TRIAL THAT THEY MAY NOW OR
HEREAFTER HAVE UNDER ANY LAWS AND ANY OBJECTION TO VENUE IN CONNECTION
THEREWITH. EACH BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS
OR PAPERS ISSUED OR SERVED IN CONNECTION WITH THE FOREGOING AND AGREES THAT
SERVICE OF SUCH PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, RETURN RECEIPT REQUESTED, DIRECTED TO THE BORROWERS AS SET
FORTH IN SECTION 12.J. ABOVE AND THE BORROWERS' REGISTERED AGENTS, IN WHICH CASE
SUCH PROCESS OR PAPERS SHALL BE DEEMED RECEIVED FIVE (5) DAYS THEREAFTER, OR BY
OVERNIGHT MAIL OR EXPRESS DELIVERY SERVICE, IN WHICH CASE SUCH PROCESS OR PAPERS
SHALL BE DEEMED RECEIVED ONE (1) DAY THEREAFTER.
Section 12.Q. Nature of Borrowers' Obligations. Each Borrower
acknowledges and agrees that the liability of each Borrower for all Obligations,
and under this Agreement and each Loan Document, is joint and several.
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<PAGE> 78
Section 12.R. Mutual Guaranty and Subordination by Borrowers.
(a) Guaranty. Each Borrower hereby guarantees and agrees to timely and
completely pay, perform and discharge when due (whether by acceleration or
otherwise) all of the Loans made by the Lenders to, and all of the other
Obligations of, the other Borrowers to the Agent and the Lenders, their
successors and assigns, including, without limitation, all payments of interest
and principal under the Notes and all costs and expenses for which any Borrower
is liable under any of the Loan Documents. Each Borrower agrees that the
obligations and liabilities of such Borrower pursuant to this Section 12.R shall
be absolute and unconditional, and the rights and remedies of the Agent and the
Lenders hereunder shall not be impaired and shall remain in full force and
effect regardless of:
(i) the genuineness, validity, enforceability, assignment or
purported assignment of all or any part of this Agreement, the Notes,
or any other Loan Documents;
(ii) any amendment, extension, modification, release, waiver,
discharge, settlement or compromise of or with respect to the
Obligations or with respect to the Loan Documents, whether granted to a
Borrower by the Agent or Lenders or by operation of law or under any
bankruptcy, reorganization, liquidation, dissolution or similar
proceedings, without prior or other notice to or the consent of the
other Borrowers;
(iii) any delay, failure, neglect, commission or omission by or on
behalf of the Agents or Lenders, without the consent of a Borrower, to
enforce, assert or exercise any of its rights, powers or remedies under
this Agreement, the Notes, or any other Loan Documents, which shall in
no event be construed as a waiver of any such rights, powers or
remedies; or
(iv) the liquidation, sale or marshalling of all, or
substantially all, of the assets of any Borrower or any receivership,
insolvency, bankruptcy, reorganization, arrangement, composition,
readjustment or other similar proceeding or action involving any
Borrower or an assignment for the benefit of the creditors of any
Borrower.
Each Borrower agrees that the obligations and liabilities to the Agent and
Lenders under this Section 12.R constitute a direct payment obligation and not a
guaranty of collection, such that the Agent and Lenders may, at its sole option
and discretion, proceed directly against any Borrower without proceeding against
or exercising or exhausting any of their rights or remedies against the other
Borrowers under any of the Loan Documents. Each Borrower hereby agrees that, to
the extent the Agent or any Lender receives or applies any payments to the
Obligations which are subsequently set aside for being wholly or partially
invalid, fraudulent or preferential or which are required to be repaid to any
Borrower, any party to the Loan Documents or to any estate, trustee, receiver or
any other party, whether under any state or federal bankruptcy, insolvency,
fraudulent conveyance, preference or similar law affecting creditors' rights
generally or otherwise, then, to such extent, the guaranty, liabilities and
obligations of each Borrower hereunder shall be
78
<PAGE> 79
reinstated as though such payments had not been so received or applied.
(b) Waiver. Until the satisfaction and full and final payment of all of
the Obligations, each Borrower hereby waives and releases any and all claims for
and rights of subrogation, indemnification, reimbursement, restitution,
exoneration and contribution against, and any other right to receive payment
from or participate in any claim brought by any other person against, the other
Borrowers or any other party or person which exists or arises on account of or
by reason of any payment made or performance by a Borrower hereunder or in
respect of the Obligations, whether such claim or right is now existing or is
hereafter acquired or arising and whether arising hereunder, in equity, by
operation of law or contract or otherwise, and each Borrower agrees not to
assert against the other Borrowers or any other person or party at any time any
of such claims or rights or any other remedy of whatsoever kind or nature in
favor of a Borrower existing or arising by reason of the foregoing.
(c) Subordination. All indebtedness, liabilities and obligations of a
Borrower to the other Borrowers, or any claims or causes of action of a Borrower
against the other Borrowers, shall be and hereby are made subject to, postponed,
subordinated and junior in right of payment to the satisfaction and payment in
full of all of the Obligations of each Borrower to the Agent and Lenders arising
under this Agreement, the Notes and any other Loan Documents or in any other
manner arising or existing, and any payment by a Borrower or other distribution
of property of a Borrower to the other Borrowers in payment of any indebtedness,
liabilities or obligations (the "Intercompany Debt") prior to satisfaction or
payment in full of the Obligations, while the Loans or Commitments therefor are
outstanding, shall be received in trust by such Borrower and promptly turned
over to the Agent, provided, however, that so long as no Event of Default has
occurred or is continuing, repayment of loans and advances in accordance with
the terms hereof by any Borrower to any other Borrower shall not be prohibited
or postponed. Each Borrower will mark its books and records and cause any
promissory note or other instrument evidencing the Intercompany Debt to clearly
indicate that the Intercompany Debt is subordinated hereby to the Obligations.
Each Borrower will, upon demand of the Agent, cause any Intercompany Debt not
evidenced by a promissory note or other instrument to be so evidenced and, as
security for the Obligations, endorse with recourse such notes or instruments to
the Agent and otherwise assign to the Agent any and all Intercompany Debt and
any and all security therefor. In the event any receivership, insolvency,
bankruptcy, reorganization, arrangement, composition, readjustment or other
similar proceedings are commenced or instituted by or against a Borrower, the
Obligations shall be paid in full before any Borrower shall be entitled to
receive or retain any payment or distribution in respect to the Intercompany
Debt, and, in order to implement the foregoing, (a) all payments and
distributions of any kind or character, whether in cash, property or securities
in respect of the Intercompany Debt to which a Borrower would be entitled shall
be made directly to the Agent, (b) each Borrower shall promptly file a claim or
claims, in the form required in such proceedings, for the full outstanding
amount of the Intercompany Debt, and shall use its best efforts to cause such
claim or claims to be approved and all payments and other distributions in
respect thereof to be made directly to the Agent, and (c) each Borrower hereby
irrevocably agrees that the Agent may, in its sole discretion, in the name of
such Borrower or
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<PAGE> 80
otherwise, demand, sue for, collect, receive and receipt for any and all such
payments or distributions, and file, prove, and vote or consent in any such
proceedings with respect to, any and all claims of such Borrower relating to the
Intercompany Debt. The Borrowers will not, without the prior written consent of
the Agent, which consent shall not be unreasonably withheld or delayed: (a)
cancel, waive, forgive, transfer or assign, or subordinate any Intercompany
Debt, or security therefor, to any indebtedness other than the Obligations; (b)
attempt to accelerate, enforce or collect any Intercompany Debt; (c) take any
security for any Intercompany Debt; (d) convert any Intercompany Debt into stock
of a Borrower; or (e) commence, or join with any other creditor in commencing,
any bankruptcy, reorganization or insolvency proceedings with respect to a
Borrower.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
BORROWERS:
STERICYCLE, INC.
By: /s/ Frank J.M. ten Brink
--------------------------------------------------
Name: Frank J.M. ten Brink
Title: Vice President, Finance, Chief Financial
Officer and Secretary
Address: 1419 Lake Cook Road, Suite 410
Deerfield, IL 60010
Telephone: 847-945-6550
Telecopy: 847-945-6583
STERICYCLE OF WASHINGTON, INC.
By: /s/ Frank J.M. ten Brink
--------------------------------------------------
Name: Frank J.M. ten Brink
Title: Vice President
Address: c/o Stericycle, Inc., per above
STERICYCLE OF ARKANSAS, INC.
By: /s/ Frank J.M. ten Brink
--------------------------------------------------
Name: Frank J.M. ten Brink
Title: Secretary
Address: c/o Stericycle, Inc., per above
ENVIRONMENTAL CONTROL CO., INC.
By: /s/ Frank J.M. ten Brink
--------------------------------------------------
Name: Frank J.M. ten Brink
Title: Secretary
Address: c/o Stericycle, Inc., per above
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<PAGE> 82
AGENT:
LA SALLE NATIONAL BANK, as Agent
By: /s/ Michael Foster
---------------------------------------
Name: Michael Foster
Title: Senior Vice President
Address: 135 South LaSalle Street
Chicago, Illinois 60603
Telephone: 312-904-6683
Telecopy: 312-904-8544
LENDERS:
Address and Amount
of Commitment:
LA SALLE NATIONAL BANK
135 South LaSalle Street
Chicago, Illinois 60603 By: /s/ Michael Foster
---------------------------------------
Name: Michael Foster
Title: Senior Vice President
Telephone: 312-904-6683
Telecopy: 312-904-8544
Lending Offices: 135 South LaSalle Street
Chicago, Illinois 60603
Prime Rate Loan: 135 South LaSalle Street
Chicago, Illinois 60603
LIBOR Loans: 135 South LaSalle Street
Chicago, Illinois 60603
Amount of Commitments:
A Revolving Loans $ 5,000,000
B Revolving Loans $15,000,000
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<PAGE> 83
EXHIBITS
Exhibit A. Form of A Revolving Note
Exhibit B. Form of B Revolving Note
Exhibit C. Form of Term Note
Exhibit D. Form of Borrowing Notice
Exhibit E. Form of Estoppel Certificate for Landlords of Leaseholds
Exhibit F. Form of Landlord's Lien Waiver
Exhibit G. Additional Post Closing Matters Memo
Exhibit H. Form of Compliance Certificate
Exhibit I. New Subsidiary Certificate
Exhibit J. Joinder and Assumption Agreement
Exhibit K. New Subsidiary Officers' Certificate
Exhibit L. Assignment and Acceptance
SCHEDULES
Schedule 6.A.6. UCC financing statement filing offices
Schedule 6.A.7. Offices searched for UCC financing statements, judgments and
tax liens
Schedule 6.F.3. Holders of Permitted Liens on Equipment, from which waivers
or consents to be obtained
Schedule 7.A. Corporate organizational, ownership and related matters for
Borrowers
Schedule 7.C. Required Third Party Consents
Schedule 7.F. Pending or threatened litigation and government proceedings
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<PAGE> 84
Schedule 7.G. Existing Liens (which are included as Permitted Liens)
Schedule 7.H. Employee Plans
Schedule 7.I. Deficiency or additional tax assessments
Schedule 7.O. Indebtedness to/from Affiliates
Schedule 7.Q. Labor
Schedule 7.R. Owned and Leased or Used Real Properties
Schedule 7.S. Intellectual Property Rights
Schedule 7.T. Financial Assurances
Schedule 8A.13. 3CI Liens
Schedule 8.B.2. Existing Debt (permitted to be maintained by Borrowers)
Schedule 8.B.3. Existing Investments (permitted to be maintained by Borrowers)
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<PAGE> 85
MASTER FIRST AMENDMENT AGREEMENT
This Master First Amendment Agreement ("Agreement") is entered into as of
October 30, 1998 by and among LaSalle National Bank, as Agent for the Lenders
under the Credit Agreement identified below and as the sole Lender thereunder as
at the date hereof, Stericycle, Inc., a Delaware corporation, and its
Subsidiaries, which currently consist of the other signatory corporations
indicated below.
Witnesseth:
WHEREAS, the Agent, the Lender, Stericycle and its Subsidiaries have
entered into that certain Credit Agreement dated as of September 30, 1998 (the
"Credit Agreement", with the capitalized terms used but not otherwise defined
herein being used with the same meanings as therein defined); and
WHEREAS, the parties desire to amend the Credit Agreement as set forth
herein;
NOW, THEREFORE, for and in consideration of the foregoing premises and the
terms, conditions, agreements, premises and covenants contained herein and in
the Loan Documents, as amended hereby, the parties hereto agree as follows:
1. In clause(i) of Section 2.A.2 of the Credit Agreement, "Fifteen Million
Dollars ($15,000,000) is changed to "Twenty Million Dollars ($20,000,000)".
2. The last sentence of Section 2.B.1 is deleted and the following is
inserted in lieu thereof:
"On the Initial Conversion Date, (i) if the amount of the Term Loans
made on said Initial Conversion Date is equal to or greater than
$15,000,000, the amount of the B Revolving Commitments shall thereupon
be permanently reduced to $0, and (ii) if the amount of the Term Loans
made on said Initial Conversion Date is less than $15,000,000, the
amount of the B Revolving Commitments shall thereupon be permanently
reduced by the amount of the Term Loans made on said Initial
Conversion Date, and on the Final Conversion Date the amount of the B
Revolving Commitments shall thereupon be permanently reduced to $0."
3. In clause (bb) of Section 2.C.(a) of the Credit Agreement, "$1,000,000"
is changed to "$3,000,000".
4. In the second proviso in Section 8.B.3 of the Credit Agreement, and
thereafter in said Section with respect to references to "approval of the
Agent", "Agent" is changed to "Required Lenders" and the approval involved is
changed to that of the "Required Lenders".
5. In Section 9.N. of the Credit Agreement, "Agent" is changed to "Required
Lenders".
6. Schedule 7.A to the Credit Agreement is amended by adding to the list of
Stericycle's Subsidiaries the following, under the following columns:
<TABLE>
<CAPTION>
State of Qualified to
Name Incorporation do Business
---- ------------- ------------
<S> <C> <C>
SWD Acquisition Corporation
507375 N.B. LTD. New Brunswick, Canada
</TABLE>
7. Schedule 6.A.6 to the Credit Agreement (indicating UCC Financing
Statement Filing Offices) is amended by adding new Sections VII and VIII
thereto, as follows:
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<PAGE> 86
VII. SWD Acquisition Corporation
(a ______corp.)
<TABLE>
<CAPTION>
Additional
Jurisdiction Address Addresses
------------ ------- ----------
<S> <C> <C>
SOS-
</TABLE>
VIII. 507375 N.B. LTD.
(a New Brunswick Corp.)
<TABLE>
<CAPTION>
Jurisdiction Address Addresses
------------ ------- ---------
<S> <C> <C>
</TABLE>
8. The B Revolving Note in the form attached hereto as Exhibit B (the "New
B Revolving Note"), is hereafter deemed to be Exhibit B to the Credit Agreement
and the form of the B Revolving Note thereunder. Upon the execution and issuance
of the New B Revolving Note, the B Revolving Note heretofore executed by the
Borrowers (the "Old B Revolving Note") shall be returned to Stericycle and the
New B Revolving Note shall be deemed to refinance, extend, renew, replace,
supersede and/or be substituted for, but shall not be deemed payment of, the Old
B Revolving Note.
9. The Mortgages are amended as follows:
(a) In recital A on page 1: "Twenty Million and no/100 Dollars
($20,000,000)" is changed to "Twenty Five Million and no/100 Dollars
($25,000,000)"; "$15,000,000" is changed to "20,000,000"; and "One
Million and no/100 Dollars ($1,000,000)" is changed to "Three Million
and no/100 Dollars ($3,000,000)";
(b) In Section 1.1(a), "Fifteen Million and no/100 Dollars
($15,000,000)" is changed to "Twenty Million and no/100 Dollars
($20,000,000)".
10. All Loan Documents are hereby amended such that:
(i) all references therein to the "Credit Agreement" shall be deemed
to include this Amendment and the amendments to the Credit
Agreement hereunder;
(ii) all references therein to the "Notes" shall be deemed to include
the "New B Revolving Note", and all references therein to the "B
Revolving Note" shall be to the New B Revolving Note; and
(iii) all references therein to the "Obligations" or the indebtedness,
liabilities or obligations of the Borrowers to the Lender shall
be deemed to include the indebtedness, liabilities or
obligations of the Borrowers to the Lender arising under this
Amendment, the Notes (including the New B Revolving Note), the
Credit Agreement and other Loan Documents, as amended hereby.
11. The Borrowers hereby ratify, reaffirm, covenant and agree to be bound
by all representations, warranties, covenants and other agreements set forth in
the Credit Agreement and all other Loan Documents, each as amended hereby.
12. The definition of "Loan Documents" in the Credit Agreement is hereby
amended to include the following deliveries, which shall be delivered to the
Lender by the Borrowers as of the date of this Amendment, which deliveries are
conditions precedent to the effectiveness of this Amendment
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<PAGE> 87
and the Amendments to the Credit Agreement and other Loan Documents effected
hereby:
(a) An executed copy of this Amendment;
(b) The executed New B Revolving Note;
(c) New Subsidiary Certificate (executed by Stericycle, covering
507375 N.B. LTD. ("NB") and SWD Acquisition Corporation ("SWD"));
(d) Certified copy of NB's and SWD's Articles of Incorporation and
good standing certificate(s);
(e) NB and SWD Joinder And Assumption Agreement;
(f) NB and SWD New Subsidiary Officer's Certificate;
(g) NB and SWD Secretary Certificate: Articles, bylaws and
resolutions;
(h) Addendum to Stock Pledge Agreement signed by Stericycle, covering
the NB and SWD stock and the stock of Med-Tech Environmental
Limited ("Med-Tech") acquired by Stericycle, together with
certificate(s) for all of SWD's, NB's and Med-Tech's stock and
assignments thereof endorsed in blank;
(i) SWD UCC-1 Financing Statements for the states of; NB's
filings for New Brunswick;
(j) Collateral Assignment of Credit Agreement And Collateral,
executed by NB and covering the loan to Med-Tech Environmental
Limited purchased by NB from 1176698 Ontario Limited, together
with originals of Med-Tech Credit Agreement and Note(s) (if any)
and copies of all collateral documents pertaining thereto;
(k) Secretary Certificates for each of Stericycle, Stericycle of
Washington, Stericycle of Arkansas, and Environmental Control
Co., Inc., as to: authorizing resolutions for additional
borrowings and this Amendment, and no change to Articles or
Bylaws since September 30, 1998;
(l) Opinion of Johnson and Colmar for all Borrowers, including SWD
and NB; and
(m) The closing fee with respect to this Amendment, in the amount of
$25,000.
13. The Loan Documents are hereby amended in all other respects to give
effect to the foregoing amendments and agreements. The Loan Documents, as
amended hereunder, shall remain in full force and effect and shall continue to
constitute the valid and binding obligations of the respective parties thereto
enforceable in accordance with their respective terms. Nothing herein shall be
deemed to constitute or shall be construed as a waiver of any rights, remedies
or collateral or other security of or granted to the Lender under the Loan
Documents or any Default or Event of Default thereunder which has occurred and
is continuing as of the date hereof, except as may be specifically set forth
herein.
14. This Amendment may be executed in any number of counterparts, each of
which shall be an original hereof, and all of which together shall constitute
one and the same document. This Amendment has been executed, delivered and
accepted and shall be deemed to have been made under and shall be governed by
and construed in accordance with the laws of the State of Illinois.
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<PAGE> 88
Borrowers:
STERICYCLE, INC.
By: /s/ Mark C. Miller
----------------------------------------
Name: Mark C. Miller
Title: President and Chief Executive Officer
Address: 1419 Lake Cook Road, Suite 410
Deerfield, IL 60010
Telephone: 847-945-6550
Telecopy: 847-945-6583
STERICYCLE OF WASHINGTON, INC.
By: /s/ Mark C. Miller
----------------------------------------
Name: Mark C. Miller
Title: Vice President
Address: c/o Stericycle, Inc., per above
STERICYCLE OF ARKANSAS, INC.
By: /s/ Mark C. Miller
----------------------------------------
Name: Mark C. Miller
Title: President
Address: c/o Stericycle, Inc., per above
ENVIRONMENTAL CONTROL CO., INC.
By: /s/ Mark C. Miller
----------------------------------------
Name: Mark C. Miller
Title: Vice President
Address: c/o Stericycle, Inc., per above
SWD ACQUISITION CORPORATION
By: /s/ Mark C. Miller
----------------------------------------
Name: Mark C. Miller
Title: President
Address: c/o Stericycle, Inc., per above
507375 N.B. LTD.
By: /s/ Mark C. Miller
----------------------------------------
Name: Mark C. Miller
Title: President
Address: c/o Stericycle, Inc., per above
88
<PAGE> 89
Agent:
LA SALLE NATIONAL BANK, as Agent
By: /s/ Beth S. Yura
----------------------------------------
Name: Beth S. Yura
Title: Vice President
Address: 135 South LaSalle Street
Chicago, Illinois 60603
Telephone: 312-904-6683
Telecopy: 312-904-8544
Lenders:
Address and Amount
of Commitment: LA SALLE NATIONAL BANK
135 South LaSalle Street
Chicago, Illinois 60603 By: /s/ Beth S. Yura
----------------------------------------
Name: Beth S. Yura
Title: Vice President
Telephone: 312-904-6683
Telecopy: 312-904-8544
Lending Offices: 135 South LaSalle Street
Chicago, Illinois 60603
Prime Rate Loan: 135 South LaSalle Street
Chicago, Illinois 60603
LIBOR Loans: 135 South LaSalle Street
Chicago, Illinois 60603
Amount of Commitments:
A Revolving Loans $ 5,000,000
B Revolving Loans $20,000,000
89
<PAGE> 1
EXHIBIT 10.10
SUBORDINATED LOAN AGREEMENT
This Agreement is entered into as of December 22, 1998 by and Stericycle,
Inc., a Delaware corporation ("Stericycle"), and the lenders whose names appear
on the schedule of loan commitments attached as EXHIBIT A (the "Lenders").
Background:
Stericycle considers it prudent to obtain back-stop financing. The Lenders,
all of whom are directors of Stericycle, are willing to provide this financing
on the following terms. After canvassing other potential lenders, Stericycle
believes that these terms are more favorable to Stericycle than the terms
available from other lenders.
Now, therefore, in consideration of the mutual promises, the parties
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have
these meanings:
CONTRACT means any legally binding contract, agreement, obligation,
promise or undertaking (whether written or oral, and whether express or
implied).
CLOSING PRICE means the last reported sales price of a share of
Common Stock on the Nasdaq National Market.
COMMON STOCK means Stericycle's common stock, par value $.01 per
share.
LNB CREDIT AGREEMENT means the Credit Agreement, dated October 1,
1998, entered into by Stericycle, its wholly-owned subsidiaries, and
LaSalle National Bank, for itself and as agent for the other lenders who
may become parties or signatories to the credit agreement, as amended by
a Master First Amendment Agreement, dated October 30, 1998, and as it may
be further amended.
PENDING OFFERING means Stericycle's pending underwritten offering of
shares of Common Stock pursuant to the Registration Statement on Form S-3
that Stericycle filed with the Securities and Exchange Commission on
August 4, 1998 (Registration No. 333-60591).
2. LOANS, NOTES AND WARRANTS.
(a) LOAN COMMITMENTS. Subject to and upon the terms and conditions of
this Agreement, each Lender commits to lend to Stericycle the amount
shown opposite the Lender's name on the schedule of loan commitments
attached as EXHIBIT A (the Lender's "Loan Commitment"), for a total loan
commitment by the Lenders of $5,500,000 (the "Loan Commitment Amount").
(b) BORROWINGS. Subject to and upon the terms and conditions of this
Agreement, Stericycle shall have the right to borrow all or any portion
of the Loan Commitment Amount from the Lenders at any time prior to
March 1, 1999, upon five days' prior written request to the Lenders. If
Stericycle initially borrows less than the full Loan Commitment Amount,
Stericycle may borrow all or any portion of the remaining Loan
Commitment Amount at any time prior to March 1, 1999, upon five days'
prior written request to the Lenders. Stericycle shall not have the
right to borrow on more than two occasions.
(c) LOANS. Upon Stericycle's request, in accordance with Paragraph
1(b), to borrow all or any portion of the Loan Commitment Amount, each
Lender shall make a loan to Stericycle (a "Loan") equal to the product of
(i) the amount that Stericycle has requested to borrow multiplied by (ii)
a
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fraction, the numerator of which is the Lender's Loan Commitment, and the
denominator of which is the full Loan Commitment Amount.
(d) INTEREST. Interest shall accrue on each Loan at the rate of 6.0%
per annum from disbursement of the Loan and shall be payable quarterly on
March 31, June 30 and September 30, 1999 and on January 5, 2000.
(e) MATURITY. The outstanding principal balance of each Loan,
together with accrued but unpaid interest, shall be due and payable on
the earlier of (i) 10 days after Stericycle's closing of the Pending
Offering or (ii) January 5, 2000.
(f) SUBORDINATION. As described in Paragraph 5, each Loan shall be
subject and subordinate to Stericycle's indebtedness to LaSalle National
Bank ("LNB") and Stericycle's indebtedness to any replacement lender.
(f) NOTE. Each Loan shall be evidenced by a note from Stericycle in
the form of the subordinated note attached as EXHIBIT B (the "Note").
(g) WARRANTS. Stericycle shall issue to the Lenders warrants, in the
form of the common stock purchase warrant attached as EXHIBIT C (the
"Warrants"), to purchase shares of Stericycle's Common Stock as follows:
(1) Upon execution of this Agreement by the parties, Stericycle
shall issue a Warrant to each Lender for a number of shares of
Stericycle's common stock equal to the quotient obtained by first (i)
multiplying the Lender's Loan Commitment by 0.05, and then (ii)
dividing the product obtained by the Closing Price on the last
trading day preceding the date of this Agreement. The exercise price
per share shall be the Closing Price on the last trading day
preceding the date of this Agreement.
(2) Upon disbursement of each Loan, Stericycle shall issue a
Warrant to the Lender for a number of shares of Common Stock equal
to the quotient obtained by first (i) multiplying the amount of the
Lender's Loan by 0.30, and then (ii) dividing the product obtained
by the Closing Price on the last trading day preceding the date of
disbursement of the Lender's Loan. The exercise price per share
shall be the Closing Price on the last trading day preceding the
date of disbursement.
3. STERICYCLE'S REPRESENTATIONS AND WARRANTIES. In order to induce the
Lenders to enter into this Agreement, Stericycle represents and warrants to
Sellers that the statements in this Paragraph 3 are true and correct in all
material respects as of the date of this Agreement, and will be true and correct
in all material respects as of the date of disbursement of each Loan as if made
on and as of the date of disbursement:
(a) Stericycle has the corporate right, power, authority and capacity
to execute and deliver this Agreement and to perform its obligations
under this Agreement, and Stericycle's execution, delivery and
performance of this Agreement have been duly authorized by all necessary
corporate action.
(b) This Agreement constitutes, and upon Stericycle's execution and
delivery of each Note and Warrant, each Note and Warrant will constitute,
a legal, valid and binding obligation of Stericycle, enforceable against
it in accordance with its terms (except as enforcement may be limited by
applicable bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally, and by legal and equitable
limitations on the availability of specific remedies).
(c) Stericycle is a corporation duly organized, validly existing and
in good standing under the Laws of the State of Delaware, with full
corporate power and authority to conduct its business as it
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is now being conducted, to own or use the properties and assets that it
purports to own or use, and to perform its obligations under all
Contracts.
(d) Stericycle's execution, delivery and performance of this
Agreement will not, either directly or indirectly (and with or without
notice or the passage of time or both): (i) violate or conflict with any
organizational document of Stericycle or any resolution adopted by its
board of directors or stockholders; or (ii) result in a breach of or
default by Stericycle under any Contract (other then the LNB Credit
Agreement, the breach of which has been waived by LNB).
(e) Except for (i) reports and disclosures to comply with applicable
securities laws and (ii) the consent of LNB under the LNB Credit
Agreement (which has been obtained), Stericycle's execution, delivery and
performance of this Agreement do not require any notice to, filing with,
permit from or other consent or approval of any governmental body or
other person.
4. CONDITIONS TO LOANS. The obligation of each Lender to make any Loan
that the Lender is otherwise required to make under this Agreement is subject to
satisfaction of both of the following conditions:
(a) Stericycle is not in breach or default under any provision of
this Agreement or under any Note that it may have delivered pursuant to
this Agreement; and
(b) Stericycle's representations and warranties in Paragraph 3 are
true and correct in all material respects as of the date of disbursement
of the Loan as if made on and as of the date of disbursement.
5. SUBORDINATION. Each Lender agrees that payment of the Note or Notes
that Stericycle may issue and deliver to the Lender pursuant to this Agreement
shall be subject and subordinate to Stericycle's payment of its obligations to
LNB under the Credit Agreement and to Stericycle's payment of its obligations to
any subsequent institutional lender replacing LNB. Each Lender agrees that, upon
Stericycle's request, he will execute and deliver a subordination agreement to
LNB in the form that it may require, and that upon Stericycle's request, he will
execute and deliver a subordination agreement to any institutional lender
replacing LNB in the form that the replacement lender may require.
6. RELATIVE PRIORITY AMONG NOTES. All rights under each Note rank shall
rank equally with the rights under all of the other Notes, and no holder of any
Note shall have rights senior to the rights of the holder of any other Note.
Stericycle shall not make any payment or prepayment in respect of any Note
unless it makes payments or prepayments in respect to all other Notes pro-rata
in proportion to the outstanding principal amount of each Note.
7. LENDERS' REPRESENTATIONS AND WARRANTIES. Each Lender, for himself
alone, represents and warrants to Stericycle in respect to Lender's acquisition
of the Notes and the Warrants as follows:
(a) The Lender is an "accredited investor" as defined in Rule 501(a)
under the Securities Act of 1933, as amended.
(b) The Lender is acquiring the Notes and Warrants for his own
account as principal, for investment purposes, and not with a present
view to the further sale or distribution of the Notes or Warrants or the
shares of Common Stock issuable pursuant to exercise of the Warrants.
(c) The Lender acknowledges that the Notes and Warrants, and the
shares of Common Stock issuable pursuant to exercise of the Warrants,
will not have been registered under the Securities Act of 1933, as
amended, or registered or qualified under any state securities laws.
8. AMENDMENTS. This Agreement may not be modified or amended except by an
instrument or instruments in writing signed by the party or parties to be bound
by the modification or amendment.
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<PAGE> 4
9. CAPTIONS. The captions of paragraphs and subparagraphs of this
Agreement are for convenience only and shall not affect this the construction
or interpretation of this Agreement.
10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be considered an original copy of this
Agreement and all of which, when taken together, shall be considered to
constitute one and the same agreement.
11. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Illinois without regard to conflicts of law principles.
12. BINDING EFFECT. This Agreement shall apply to, be binding in all
respects upon and inure to the benefit of parties and their respective heirs,
legal representatives, successors and assigns.
STERICYCLE, INC.
By /s/ Frank J.M. ten Brink
--------------------------------
Frank J.M. ten Brink
Vice President, Finance
and Chief Financial Officer
/s/ Jack W. Schuler
--------------------------------
JACK W. SCHULER
/s/ Mark C. Miller
--------------------------------
MARK C. MILLER
/s/ Rod F. Dammeyer
--------------------------------
ROD F. DAMMEYER
/s/ John Patience
--------------------------------
JOHN PATIENCE
/s/ Peter Vardy
--------------------------------
PETER VARDY
/s/ L. John Wilkerson, Ph.D.
--------------------------------
L. JOHN WILKERSON, PH.D.
4
<PAGE> 5
EXHIBIT A
LOAN COMMITMENTS
<TABLE>
<CAPTION>
LENDER LOAN COMMITMENT
<S> <C>
Jack W. Schuler $ 1,000,000
Mark C. Miller 1,000,000
Rod F. Dammeyer 1,000,000
John Patience 1,000,000
Peter Vardy 500,000
L. John Wilkerson, Ph.D. 1,000,000
</TABLE>
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated March
6, 1998, in the Registration Statement on Form S-3 (No. 333-60591) and related
Prospectus of Stericycle, Inc. for the registration of 3,450,000 shares of its
common stock.
Chicago, Illinois
January 8, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
As independent certified public accountants, we hereby consent to the
inclusion in the Registration Statement on Form S-3 filed by Stericycle, Inc.
(Registration No. 333-60591) for the registration of 3,450,000 shares of common
stock of our report dated November 4, 1998 on consolidated financial statements
of Waste Systems, Inc. and Subsidiary as of and for the years ended December 31,
1997 and 1996, and to all references to our firm in the Registration Statement.
HEARD, McELROY & VESTAL, L.L.P.
Shreveport, Louisiana
January 8, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
As independent chartered accountants, we hereby consent to the
inclusion in the Registration Statement on Form S-3 filed by Stericycle, Inc.
(Registration No. 333-60591) for the registration of 3,450,000 shares of common
stock of our report dated May 20, 1998, except as to Notes 11(c) and 11(d),
which are as of November 16, 1998, on the consolidated financial statements of
Med-Tech Environmental Limited as at and for the years ended March 31, 1998 and
1997, and to all references to our firm in the Registration Statement.
COLLINS BARROW
CHARTERED ACCOUNTANTS
Toronto, Canada
May 20, 1998,
except as to Notes 11(c) and 11(d),
which are as of November 16, 1998
