Filed pursuant to Rule 424(b)(3)
Registration Statement No. 333-91831
PROSPECTUS
[LOGO OF STERICYCLE, INC.]
$125,000,000
OFFER TO EXCHANGE
ALL OUTSTANDING 12 3/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2009
FOR 12 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2009
OF
STERICYCLE, INC.
This Exchange Offer will Expire at 5:00 P.M.,
New York City Time, on Friday, January 21, 2000
================================================================================
Material Terms of the Exchange Offer:
o This exchange offer is not subject to any condition other than that it
must not violate applicable law or any applicable interpretation of the
staff of the Securities and Exchange Commission.
o All outstanding series A notes that are validly tendered and not validly
withdrawn will be exchanged for an equal principal amount of series B notes
which are registered under the Securities Act of 1933.
o You may withdraw tendered outstanding series A notes at any time prior to
the expiration of this exchange offer.
o This exchange of notes will not be a taxable event for U.S. federal income
tax purposes. We will not receive any proceeds from the exchange offer.
o You may tender outstanding notes only in denominations of $1,000 and
multiples of $1,000.
The Series B Notes:
o The terms of the new series of notes are substantially identical to the
outstanding notes, except for transfer restrictions and registration rights
relating to the outstanding notes.
o There is no existing market for the series B notes, and we do not intend
to apply for their listing on any securities exchange.
PLEASE CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS
PROSPECTUS.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved of the notes or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
The date of this prospectus is December 16, 1999.
<PAGE>
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act,
and in accordance therewith we file reports, proxy and information statements
and other information with the Securities and Exchange Commission. You can
inspect and copy these reports, proxy and information statements and other
information at:
o the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, DC 20549; and
o the regional offices of the SEC located at:
o 500 West Madison Street, Room 1400 Chicago, Illinois 60606; and
o 7 World Trade Center, 13th Floor New York, New York 10048.
You also can obtain copies of these materials from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed
rates. You can obtain electronic filings made through the Electronic Data
Gathering, Analysis and Retrieval System at the SEC's web site,
http://www.sec.gov.
In addition, you can inspect material filed by us at the offices of the
Nasdaq Stock Market, Reports Section, at 1735 K Street, Washington, D.C. 20006,
on which shares of our common stock are traded.
<PAGE>
SUMMARY
The following is a summary of the more detailed information appearing
elsewhere in this prospectus. You should read this entire prospectus carefully,
including the "Risk Factors" and the financial statements and related notes.
Unless the context otherwise requires, the statements of operations and
other data provided on a "pro forma combined basis" assume that for each period
presented the acquisition of the medical waste businesses of Browning-Ferris
Industries, Inc. and Allied Waste Industries, Inc. and each acquisition we
completed during that period was completed at the beginning of the period.
Balance sheet information provided on a "pro forma combined basis" assumes those
same events occurred at the date of the balance sheet.
THE EXCHANGE OFFER
Securities Offered...................... Up to $125,000,000 principal amount
of 12 3/8% Series B Senior
Subordinated Notes due 2009.
The Exchange Offer...................... We are offering the series B notes
in exchange for a like principal
amount of our series A notes. You
may exchange series A notes only in
integral multiples of $1,000. We are
issuing the series B notes to
satisfy our obligations under the
terms of the registration rights
agreement among us, our subsidiary
guarantors and Donaldson, Lufkin &
Jenrette Securities Corporation,
Bear, Stearns & Co., Inc., Credit
Suisse First Boston Corporation and
Warburg Dillon Read LLC, who were
the initial purchasers of the series
A notes.
Tenders; Expiration Date;
Withdrawal............................ This exchange offer will expire at
5:00 p.m., New York City time, on
Friday, January 21, 2000, or any
later date and time to which it is
extended. You may withdraw your
tender of series A notes pursuant to
this exchange offer at any time
prior to its expiration. In the
event we terminate this exchange
offer and do not accept for exchange
any series A notes, we will promptly
return tendered series A notes to
their holders.
Accrued Interest on the Notes........... The series B notes will bear
interest from and including the date
of issuance of the series A notes.
Accordingly, if you receive series B
notes in exchange for series A
notes, you will forego accrued but
unpaid interest on your exchanged
series A notes for the period from
and including the date of issuance
of your series A notes to the date
of exchange, but you will be
entitled to interest under the
series B notes.
Conditions to the Exchange
Offer................................. This exchange offer is subject to
customary conditions, any or all of
which may be waived by us. We
currently expect that each of the
conditions will be satisfied and
that no waivers will be necessary.
Procedures for Tendering
Series A Notes........................ If you wish to tender your series A
notes in this exchange offer, you
must complete and sign the letter of
transmittal, in accordance with the
instructions, and submit the letter
of transmittal to the exchange
agent.
<PAGE>
Guaranteed Delivery
Procedures............................ If you wish to tender your series A
notes and your series A notes are
not immediately available or you
cannot deliver your series A notes
and letter of transmittal and any
other documents required by the
letter of transmittal to the
exchange agent prior to the
expiration of this exchange offer,
you must tender your series A notes
according to the guaranteed delivery
procedures set forth in "The
Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of Series A
Notes and Delivery of
Series B Notes........................ We will accept for exchange any and
all series A notes that are properly
tendered in this exchange offer
prior to 5:00 P.M., New York City
time, on Friday, January 21, 2000.
Material Federal Income
Tax Considerations.................... The exchange of series A notes for
series B notes will not constitute a
taxable event for federal income tax
purposes.
Rights of Dissenting Holders............ As a holder of series A notes you do
not have any appraisal or
dissenters' rights under the
Delaware General Corporation Law in
connection with this exchange offer.
Exchange Agent.......................... State Street Bank and Trust Company.
Use of Proceeds......................... We will receive no cash proceeds
from exchanges made pursuant to this
exchange offer. We used the cash
proceeds from the sale of the series
A notes to fund the acquisition of
the medical waste businesses of
Browning-Ferris Industries, Inc. and
Allied Waste Industries, Inc., which
we refer to as the "BFI
acquisition."
CONSEQUENCES OF EXCHANGING SERIES A NOTES PURSUANT TO THE EXCHANGE OFFER
Based on interpretive letters issued by the staff of the Securities and
Exchange Commission to other parties in unrelated transactions, we believe that
you may offer, sell or otherwise transfer your series B notes, as long as:
o you are not our "affiliate" within the meaning of Rule 405 under
the Securities Act;
o you acquired your series B notes in the ordinary course of your
business; and
o you have no arrangement with any person to participate in a
distribution of the series B notes.
If you fail to satisfy any of these conditions and you transfer any
series B notes without delivering a proper prospectus or without qualifying for
a registration exemption, you may incur liability under the Securities Act. We
will not be responsible for, or indemnify you against, any liability you may
incur.
Each broker-dealer that receives series B notes for its own account in
exchange for series A notes must acknowledge that it will deliver a prospectus
in connection with any resale of the series B notes. See "Plan of Distribution."
In addition, to comply with the securities laws of some jurisdictions, a
broker-dealer may not offer or sell series B notes unless they have been
registered or qualified for sale in that jurisdiction or an exemption from
registration or qualification is available and the conditions to the exemption
have been met.
<PAGE>
We have agreed, under the registration rights agreement, subject to
specified limitations, to register or qualify the series B notes for offer or
sale under the securities or blue sky laws of the jurisdictions in which any
holder of series A or series B notes reasonably requests in writing. If you do
not exchange your series A notes for series B notes pursuant to this exchange
offer, your series A notes will continue to be subject to the restrictions on
transfer contained in the legend set forth on your series A notes. In general,
you may not offer or sell series A notes unless they are registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. See "The
Exchange Offer--Purposes of the Exchange Offer" and "--Resales of Notes."
TERMS OF THE SERIES B NOTES
Issuer.................................. Stericycle, Inc.
Securities Offered...................... $125.0 million in principal amount
of 12 3/8% Series B Senior
Subordinated Notes due 2009.
Maturity Date........................... November 15, 2009.
Interest................................ Annual rate -- 12 3/8%. Payment
frequency--in cash every six months
on November 15 and May 15. First
payment--May 15, 2000.
Guarantors.............................. Each of our wholly owned domestic
subsidiaries will initially be a
guarantor. Non-guarantor
subsidiaries accounted for
approximately 9.9% of our pro forma
combined revenues for the twelve
months ended June 30, 1999. If we
cannot make payments on the series B
notes when they are due, the
subsidiary guarantors must make them
instead.
Ranking................................. The series B notes and the
subsidiary guarantees are senior
subordinated debts. They rank behind
all of our and our subsidiary
guarantors' current and future
indebtedness except indebtedness
that expressly provides that it is
not senior to the series B notes and
the subsidiary guarantees.
As of September 30, 1999, the series
B notes would have been subordinated
to, on a pro forma basis,
approximately $235.9 million of
outstanding senior debt and would
have ranked effectively junior to
$22.5 million of other liabilities,
including trade payables, of
non-guarantor subsidiaries.
Optional Redemption..................... We may redeem some or all of the
series B notes at any time at the
redemption prices listed in the
section "Description of Notes" under
the heading "Optional Redemption."
Before November 15, 2002, we may
redeem up to 35% of the series B
notes with the proceeds of certain
offerings of our equity at the
prices listed in the section
"Description of Notes" under the
heading "Optional Redemption."
Mandatory Offer to
Repurchase............................ If we sell specific assets or
experience specific kinds of changes
of control, we must offer to
repurchase the series B notes at the
prices listed in the section
"Description of Notes" under the
heading "Repurchase at the Option of
Holders."
<PAGE>
Covenants............................... The indenture covering the series B
notes contains covenants that, among
other things, restrict our ability
and the ability of our restricted
subsidiaries to:
o borrow money;
o pay dividends on stock or
purchase stock;
o make investments;
o allow the imposition of dividend
restrictions on subsidiaries;
o use assets as security in other
transactions;
o sell specific assets or merge
with or into other companies;
and
o create specified liens.
For more details, see the section
"Description of Notes" under the
heading "Certain Covenants."
Absence of a Public Market
for the Notes......................... No active public market for the
series B notes is currently
anticipated. We currently do not
intend to apply for the listing of
the series B notes on any securities
exchange, although we expect the
series B notes to be eligible for
trading in PORTAL. Firms making a
market in the series B notes may
cease their market-making at any
time. Accordingly, we can give no
assurance as to the liquidity or the
trading market for the series B
notes.
<PAGE>
THE COMPANY
We are the largest regulated medical waste management company in North
America, serving over 235,000 customers. We operate the only fully integrated,
national medical waste management network and have an estimated 22% share of the
regulated medical waste market in the United States. We use this network to
provide the industry's broadest service offering, including medical waste
collection, transportation, treatment, recycling, and disposal to unrelated
parties, together with related consulting, training and education services and
products. Our treatment technologies include our proprietary, environmentally
friendly and efficient electro-thermal deactivation system, as well as
traditional methods such as autoclaving and incineration. On a pro forma
combined basis, for the year ended December 31, 1998 and for the nine months
ended September 30, 1999, we generated revenues of $290.3 million and $229.4
million, respectively.
On November 12, 1999, we completed the BFI acquisition whereby we
purchased from Allied Waste Industries, Inc. the medical waste business of BFI
and the medical waste operations of Allied. The purchase price for these
operations was $410.5 million in cash, subject to post-closing adjustment.
An independent study estimated the size of the regulated medical waste
market in the United States in 1999 to be approximately $1.4 billion. We believe
the worldwide market for regulated medical waste services is approximately $3.0
billion. Including ancillary services such as training, education, product sales
and consulting services, we believe the worldwide market is in excess of $10.0
billion. Industry sources estimate the current annual growth rate of the
regulated medical waste industry in the United States to be 7-10%, driven by a
number of factors, including:
o cost reduction pressures in the health care industry that are
expected to increasingly lead hospitals to outsource their medical
waste management needs;
o the continued expansion of small account customers, due to the
continued growth of the alternate site health care market;
o the increasing average age of the United States population,
resulting in people requiring more medical attention, which
increases the generation of medical waste;
o broader awareness of and compliance with an increasingly complex
environmental and safety regulatory environment; and
o increased costs of operating medical waste incinerators and the
anticipated closures of a significant number of on-site treatment
facilities, thereby increasing the demand for off-site treatment
services, as a result of Clean Air Act regulations adopted in
1997.
Our principal executive offices are located at 28161 North Keith Drive,
Lake Forest, Illinois 60045. Our telephone number is (847) 367-5910.
<PAGE>
PRICE RANGE OF COMMON STOCK
The following table shows for the periods indicated the high and low
closing sales prices of our common stock as reported on the Nasdaq Stock Market.
Fiscal Year Ended High Low
----------------- ---- ---
December 31, 1997
First Quarter............................ $11.125 $8
Second Quarter........................... 9.25 7.25
Third Quarter............................ 10.25 7.625
Fourth Quarter........................... 14.625 9.125
December 31, 1998
First Quarter............................ 16.50 12.25
Second Quarter........................... 17.25 11.125
Third Quarter............................ 19.75 13.50
Fourth Quarter........................... 21 13.625
December 31, 1999
First Quarter............................ 17.9375 11.75
Second Quarter........................... 15.0625 9.875
Third Quarter............................ 16.0625 12.375
Fourth Quarter through December 13 ...... 19.125 14.9375
Our common stock is traded on the Nasdaq Stock Market under the symbol
"SRCL." On December 13, 1999, the closing price for our common stock was $17 3/8
per share, and there were approximately 14.7 million shares of our common stock
outstanding, resulting in a market capitalization of approximately $ 255
million.
RISK FACTORS
See the section entitled "Risk Factors" beginning on page 9 for a
discussion of factors you should consider carefully before deciding to invest in
the series B notes.
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
Below are summary unaudited pro forma financial data for Stericycle and
the BFI medical waste business presented on a combined basis. The information in
the following table is qualified by reference to, and should be read in
conjunction with the sections "Unaudited Pro Forma Condensed Combined Financial
Statements of Stericycle and the BFI Medical Waste Business," "Selected
Consolidated Financial and Other Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Stericycle's consolidated
financial statements and the financial statements of the BFI medical waste
business and, in each case, the related notes thereto, included elsewhere in
this prospectus.
The summary unaudited pro forma financial data set forth below have
been derived from the unaudited pro forma financial data included elsewhere in
this prospectus and give effect to the following:
(i) the BFI acquisition;
(ii) the offering of the series A notes;
(iii) $225 million of borrowings under our credit facility with various
financial institutions, DLJ Capital Funding, Inc., as syndication agent
for the financial institutions, lead arranger and sole book running
manager, Bank of America, N.A., as administrative agent for the
financial institutions, and Bankers Trust Company, as documentation
agent for the financial institutions (See "Description of Other
Indebtedness -- Credit Facility");
(iv) $75.0 million of gross proceeds from the sale by us on November
12, 1999 of our convertible preferred stock to investment funds
associated with Bain Capital, Inc. and with Madison Dearborn Partners,
Inc., which represents approximately 22.6% of our outstanding common
stock on an as-if converted basis (See "Description of Capital Stock --
Convertible Preferred Stock");
(v) the application of the net proceeds received from (ii), (iii)
and (iv) above; and
(vi) the costs and expenses associated with (i)-(iv) above.
The unaudited pro forma statements of operations data, other data and
related ratio information, give effect to these transactions as if each had
occurred as of the beginning of the period presented and the pro forma balance
sheet data give effect to these transactions as if each had occurred on
September 30, 1999. The unaudited pro forma statements of operations data also
include our acquisition of Waste Systems, Inc., the majority owner of 3CI
Complete Compliance Corporation, which closed in October 1998, the acquisition
of Med-Tech Environmental Limited and related transactions, which closed in
December 1998, and the acquisition of Medical Disposal Services, which closed in
April 1999, as if each had occurred as of the beginning of the period presented.
The unaudited pro forma financial data do not purport to represent what our
financial position and results of operations would have been if the transactions
listed above and the other acquisitions had actually occurred as of the dates
indicated and are not intended to project our financial position or results of
operations for any future period.
<PAGE>
<TABLE>
THE COMBINED COMPANIES--UNAUDITED PRO FORMA DATA
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998(1) 1999(2)
------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues..................................................................... $ 290,275 $ 229,438
Cost of revenues............................................................. 190,355 146,124
----------- ------------
Gross profit................................................................. 99,920 83,314
Selling, general and administrative
expenses................................................................... 40,719 30,454
Special charges.............................................................. 435 189
----------- ------------
Operating income............................................................. 58,766 52,671
Net income applicable to common
shareholders............................................................... 11,740 15,147
OTHER DATA:
Ratio of earnings to fixed charges(3)........................................ 1.5x 1.8x
AS OF SEPTEMBER 30, 1999
------------------------
ACTUAL PRO FORMA
------ ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 16,017 $ 12,348
Working capital.............................................................. 28,192 18,679
Total assets................................................................. 128,728 555,434
Long-term debt, including current portion.................................... 5,778 360,910
Convertible Preferred Stock.................................................. -- 70,275
Common shareholders' equity.................................................. 111,812 110,012
(1) The BFI medical waste business component of the combined companies'
statement of operations is for the year ended September 30, 1998.
(2) The BFI medical waste business component of the combined companies'
statement of operations is for the nine months ended June 30, 1999.
(3) The ratio of earnings to fixed charges is computed by dividing
earnings by fixed charges. For this purpose, "earnings" include pro
forma income (loss) before income taxes and fixed charges and "fixed
charges" include pro forma interest expense, amortization of deferred
financing fees and costs, and a portion of rent expense that is
representative of the interest factor in these rentals.
</TABLE>
<PAGE>
RISK FACTORS
Before you invest in the series B notes, you should consider carefully
the following factors, in addition to the other information contained in this
prospectus.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS MAY HAVE A NEGATIVE IMPACT ON
OUR BUSINESS AND FINANCIAL CONDITION, WHICH COULD PREVENT US FROM FULFILLING OUR
OBLIGATIONS UNDER THE NOTES.
We have now and, after this exchange offer, will continue to have a
substantial amount of indebtedness. This leverage could have adverse
consequences both for us and for you. It could, for example:
o make it more difficult for us to satisfy our obligations under the
notes and our other financial obligations;
o make us more vulnerable to unfavorable economic conditions;
o make it more difficult for us to pursue the purchase of other
medical waste management businesses;
o limit our ability to obtain necessary financing for working
capital, for the purchase of machinery, equipment and other major
assets, and for other general corporate requirements;
o require us to dedicate or reserve a large portion of our cash flow
from operations to payments on our indebtedness, which would
prevent us from using it for other purposes;
o limit our ability to plan for and react to changes in our
business; and
o place us at a competitive disadvantage compared to competitors
that have less debt.
Assuming that we had completed the offering of the series A notes, the
BFI acquisition, the issuance of our convertible preferred stock and the
borrowing of funds for the BFI acquisition under our credit agreement at January
1, 1998 our pro forma ratio of earning to fixed charges for the year ended
December 31, 1998 would have been 1.5x.
ADDITIONAL BORROWINGS AVAILABLE--DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR
SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT THAT WOULD BE
SENIOR TO THE SERIES B NOTES, WHICH COULD EXACERBATE THE RISKS DESCRIBED ABOVE.
The terms of the indenture do not fully prohibit us or our subsidiaries
from incurring substantial additional indebtedness in the future. Our credit
facility permits additional borrowings of up to $50 million, all of which would
be senior to the notes and the subsidiary guarantees. If new debt is added to
our and our subsidiaries' current debt levels, the related risks that we and
they now face could intensify. See "Capitalization," "Selected Consolidated
Financial and Other Data" and "Description of Other Indebtedness--Credit
Facility."
COVENANT RESTRICTIONS--COVENANT RESTRICTIONS IN OUR CREDIT FACILITY AND THE
INDENTURE MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
Our credit facility and the indenture contain covenants that restrict
our ability to make distributions or other payments to our investors and
creditors unless certain financial tests or other criteria are satisfied. We
must also comply with financial ratios and tests. In some cases our subsidiaries
are subject to similar restrictions which may restrict their ability to make
distributions to us. If we do not comply with these or other covenants and
restrictions contained in our credit facility or the indenture, we could default
under those agreements and the debt, together with accrued interest, could then
be declared immediately due and payable. Our ability to comply with these
provisions of our credit facility and the indenture may be affected by changes
in economic or business conditions or other events beyond our control.
<PAGE>
Our credit facility contains additional affirmative and negative
covenants, which could affect our ability to operate our business, including
limitations on our ability to incur additional indebtedness and to make
acquisitions and capital expenditures. The indenture for the series B notes
restricts, among other things, our ability to incur additional debt, sell
assets, create liens or other encumbrances, make certain payments and dividends
or merge or consolidate, all of which could affect our ability to operate our
business and may limit our ability to take advantage of potential business
opportunities as they arise. A failure to comply with these covenants and
restrictions could result in an event of default under either our credit
facility or the indenture which could lead to an acceleration of debt under
other debt instruments that may contain cross-acceleration or cross-default
provisions.
SUBORDINATION--YOUR RIGHT TO RECEIVE PAYMENTS ON THE SERIES B NOTES WILL BE
JUNIOR TO OUR CREDIT FACILITY AND POSSIBLY ALL OF OUR FUTURE BORROWINGS.
The series B notes and the subsidiary guarantees rank junior to all of
our and our subsidiary guarantors' existing indebtedness and all of our and
their future borrowings, except any future indebtedness that expressly provides
that it ranks equal with, or is subordinated in right of payment to, the notes
and the subsidiary guarantees. In addition, a substantial portion of our and our
subsidiary guarantors' existing indebtedness is secured by substantially all of
our and their assets. As a result, upon any distribution to our creditors or the
creditors of the subsidiary guarantors in a bankruptcy, liquidation,
reorganization or similar proceeding relating to us or the subsidiary guarantors
or our or their property, the holders of our senior debt and of the senior debt
of our subsidiary guarantors will be entitled to be paid in full in cash before
any payment may be made on the notes or the subsidiary guarantees. In addition,
all payments on the series B notes and the subsidiary guarantees will be blocked
if we default on the payment of our senior debt and may be blocked for up to 179
of 360 consecutive days if a non-payment default occurs on our senior debt. If
we had completed this exchange on September 30, 1999, the series B notes would
have been junior or effectively junior to approximately $258.4 million of our
and our subsidiary guarantors' senior indebtedness and other liabilities
(including trade payables) of our non-guarantor subsidiaries.
In the event of a bankruptcy, liquidation, reorganization or similar
proceeding relating to us or our subsidiary guarantors, holders of the series B
notes will participate with all other holders of our subordinated indebtedness
and that of the subsidiary guarantors in the assets remaining after we and the
subsidiary guarantors have paid all of our and their senior debt, respectively.
However, because the indenture requires that amounts otherwise payable to
holders of the series B notes in a bankruptcy or similar proceeding be paid to
holders of senior debt instead, holders of the notes may receive less, ratably,
than holders of trade payables in any proceeding. In any of these cases, we and
our subsidiary guarantors may not have sufficient funds to pay all of our
creditors and the holders of the notes may receive less, ratably, than the
holders of senior debt.
ABILITY TO SERVICE DEBT--WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE
OUR INDEBTEDNESS, INCLUDING THE SERIES B NOTES, AND OUR ABILITY TO GENERATE CASH
DEPENDS ON MANY FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL.
Our ability to make payments on our indebtedness, including the series
B notes, as well as to fund our operations and future growth, will depend on our
ability to generate cash. Our success in doing so will depend on the results of
our operations, which in turn depend on many factors, including those described
in this "Risk Factors" section and elsewhere in this prospectus. Our ability to
generate adequate cash is also subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond our control.
Based on our current level of operations and anticipated cost savings
and operating improvements, we believe that our cash flow from operations,
available cash and available borrowings under our credit facility will be
sufficient to meet our future liquidity needs, including potential acquisitions.
We cannot assure you, however, that our business will generate
sufficient cash flow from operations, that currently anticipated cost savings
and operating improvements will be realized on schedule or that future
borrowings will be available to us under our credit facility in an amount
sufficient to enable us to pay our indebtedness, including these notes, or to
fund our other liquidity needs. We may need to refinance all or a portion of our
indebtedness, including the series B notes, on or before maturity. We cannot
assure you that we will be able to
<PAGE>
refinance any of our indebtedness, including our credit facility and the series
B notes, on commercially reasonable terms or at all.
SECURED INDEBTEDNESS--OUR ASSETS ARE ENCUMBERED TO SECURE OUR CREDIT FACILITY.
The series B notes will not be secured by any of our assets. Our
obligations under our credit facility, however, are secured by a first priority
pledge of and security interest in the stock of all our present and future
domestic subsidiaries, other than the publicly held stock of 3CI Complete
Compliance Corporation and other subsidiaries which are designated as
unrestricted subsidiaries, and by a first priority pledge of 65% of the stock of
all our present and future first-tier foreign subsidiaries, and substantially
all of our assets and the assets of our domestic subsidiaries. If we were to
become insolvent or liquidated, or if payment under our credit facility were
accelerated, the lenders under the credit facility would be entitled to exercise
the remedies available to a secured lender under applicable law. Accordingly,
all secured lenders would be effectively senior to the holders of series B notes
in right of payment to the extent of the assets securing the indebtedness owed
to the secured lenders.
NOT ALL SUBSIDIARIES ARE GUARANTORS--YOUR RIGHT TO RECEIVE PAYMENTS ON THE
SERIES B NOTES COULD BE ADVERSELY AFFECTED IF ANY OF OUR NON-GUARANTOR
SUBSIDIARIES DECLARE BANKRUPTCY, LIQUIDATE, OR REORGANIZE.
Some but not all of our subsidiaries will guarantee the series B notes.
In the event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their indebtedness and their trade
creditors will generally be entitled to payment of their claims from the assets
of those subsidiaries before any assets are made available for distribution to
us.
Assuming we had completed this exchange on September 30, 1999, the
series B notes would have been effectively junior to $22.5 million of
indebtedness and other liabilities (including trade payables) of these
non-guarantor subsidiaries. The non-guarantor subsidiaries generated 9.9% of our
pro forma revenues for the twelve-month period ended June 30, 1999 and held 4.9%
of our pro forma combined assets as of September 30, 1999.
BFI ACQUISITION--WE MAY NOT SUCCESSFULLY INTEGRATE THE BFI ACQUISITION.
The BFI acquisition greatly increases our size and geographical scope
of operations. We have completed 42 previous acquisitions, however, none of our
prior acquisitions were as large as the BFI acquisition.
The table below sets forth differences between our business before the
BFI acquisition and our business after the BFI acquisition.
<TABLE>
BEFORE AFTER
------ -----
(IN THOUSANDS, EXCEPT
STATES AND SITES)
<S> <C> <C> <C> <C>
Total assets as of September 30, 1999........................................ $ 128,728 $ 555,434
Annual revenues for year ending December 31, 1998............................ $ 66,681 $ 290,275(1)
Customers.................................................................... 85 235
Number of states doing business in........................................... 40 46
Treatment sites.............................................................. 11 35(2)
(1) Revenues for the BFI medical waste business included in this total are
actually revenues for the fiscal year ended September 30, 1998.
(2) Adjusted for three duplicative facilities which have been or are
being closed.
</TABLE>
This increase in our size and geographic scope of operations is
expected to present our management with new and unique challenges. Our
management resources may be stretched to the point where our business, financial
condition and results of operations could be adversely affected.
<PAGE>
RISKS OF ACHIEVEMENT OF COST SAVINGS--WE MAY NOT ACHIEVE ANTICIPATED COST
SAVINGS AND OTHER BENEFITS FROM THE BFI ACQUISITION AND OUR OTHER RECENT AND
FUTURE ACQUISITIONS.
Our integration plan for the BFI acquisition contemplates certain cost
savings, including the elimination of duplicative personnel and facilities. The
potential cost savings are based on analyses completed by members of our
management. These analyses necessarily involve assumptions as to future events,
including general business and industry conditions, costs to operate our
business and competitive factors, many of which are beyond our control and may
not materialize. While we believe these analyses and their underlying
assumptions to be reasonable, they are inherently estimates which are difficult
to predict and are necessarily speculative in nature. We cannot assure you that
unforeseen factors will not offset the estimated cost savings or other
components of our integration plan in whole or in part. As a result, our actual
cost savings may vary considerably, or be considerably delayed, compared to the
estimates in this prospectus. We also cannot assure you that we will realize any
cost savings or other benefits from our recent acquisitions other than those
already realized, or that we will realize any cost savings or other benefits
from other future acquisitions.
RISKS RELATED TO UNAUDITED PRO FORMA FINANCIAL DATA--INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THE UNAUDITED PRO FORMA FINANCIAL DATA PRESENTED
HEREIN.
The unaudited pro forma financial information set forth in this
prospectus is based on a number of assumptions and estimates related to, among
other things, the cost of running the BFI medical waste business. See "--Risks
of Achievement of Cost Savings." The historical financial data of the BFI
medical waste business presented in this prospectus are of limited relevance in
understanding what our results of operations, financial position or cash flows
would have been for the historical periods presented had the BFI acquisition
been completed at the beginning of those periods. In particular, the actual
historical selling, general and administrative expenses for the BFI medical
waste business cannot be determined with precision from BFI's accounting
records. Only that portion of the selling, general and administrative expenses
directly attributable to the BFI medical waste business is reflected in the
historical financial statements and other BFI medical waste business financial
data included in this prospectus. No portion of the selling, general and
administrative expenses associated with the employees and operations of BFI that
were employed in multiple segments of BFI's overall business have been included
in the historical results of the BFI medical waste business. Our management
believes that selling, general and administrative expenses for the BFI medical
waste business should properly include a portion of these indirect expenses. We
have made supplemental disclosures to the pro forma combined financial
information presented in this prospectus to present information that includes
our management's estimate of the indirect selling, general and administrative
expenses of the BFI medical waste business. See Note 5 of Notes to Pro Forma
Condensed Combined Statements of Operations. The actual selling, general and
administrative expenses incurred in the future could be materially different
than those presented herein and, accordingly, you should not place undue
reliance on the unaudited pro forma and adjusted pro forma combined selling,
general and administrative expense information presented herein.
ENVIRONMENTAL AND OTHER LIABILITIES--WE WILL ALWAYS FACE THE RISK OF LIABILITY,
AND INSURANCE MAY NOT ALWAYS BE AVAILABLE OR SUFFICIENT.
Our industry presents risks of liability under:
o statutes and regulations;
o contracts; and
o tort law.
If we fail to comply with any duty imposed by laws or contracts,
liability for environmental contamination, personal injury, or property damage
might result. We maintain pollution liability and general liability insurance
which we believe is adequate to protect our business and employees. If a claim
is made against us for which we are uninsured, or for which we do not have
enough insurance, it could have a material adverse effect on our business,
financial condition and results of operations.
<PAGE>
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA), and similar state laws, impose
strict liability on current and former owners and operators of facilities which
have released hazardous substances into the environment, as well as the
businesses that generate and transport the hazardous substances that come to be
located at those facilities. Responsible parties may be liable for substantial
investigation and clean-up costs and damage to the environment even if they
operated their businesses properly and complied with applicable laws and
regulations. Liability under CERCLA may be joint and several. Accordingly, if we
were found to be a business with responsibility related to a particular CERCLA
site--even if we were not the party responsible for the release of the hazardous
substance--we could be required to pay the entire cost of the investigation and
clean-up, even though other parties might also be liable. We might not be able
to identify who the other responsible parties might be, and we might not be able
to compel them to contribute to these expenses or they might be insolvent or
unable to afford to contribute. Our pollution liability insurance excludes
liabilities under CERCLA. Thus, if we do incur liability under CERCLA and if we
cannot identify other parties responsible under the law who we can compel to
contribute to our expenses and who are financially able to do so, it could have
a material adverse effect on our business, financial condition and results of
operations. See "Business--Potential Liability and Insurance."
We may also be susceptible to negative publicity if we are identified
as the source of potential environmental contamination. If an accident occurred
with one of our transportation trucks, with the potential risk of even minor
medical waste environmental contamination, the resulting media coverage could
have a material adverse effect on our business, financial condition and results
of operations.
GOVERNMENT REGULATION--WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION WITH
WHICH IT IS FREQUENTLY DIFFICULT, TIME-CONSUMING AND EXPENSIVE TO COMPLY.
The medical waste industry is subject to extensive federal, state,
local and foreign laws and regulations. These regulations pertain to the:
o collection, o documentation,
o transportation, o reporting,
o packaging, o treatment, and
o labeling, o disposal
o handling,
of regulated medical waste. Our business requires us to obtain many permits,
authorizations, approvals, certificates, consent orders, or other types of
governmental permission from every jurisdiction where we operate. In some
states, we are required to obtain governmental approval of our pricing. We
believe that we currently have all the permits that the applicable regulations
require and that we are complying in all material respects with all applicable
laws and regulations.
State and local regulations change often and new ones are frequently
enacted. This could require us to obtain new permits or to change the way we
operate. It is possible that we would not be able to obtain newly-required
permits. It is also possible that the cost of complying with new or changed
regulations could have a material adverse effect on our business, financial
condition and results of operations. See "Business--Governmental Regulation."
A permit may be revoked by the government if we do not comply with the
conditions of the permit or with the regulations pursuant to which the permit
was issued or with any other regulation. Inspections by regulatory agencies, as
well as complaints filed or anonymously sponsored by our competitors or others
alleging that we are not complying with regulations, could result in proceedings
to modify, suspend or revoke a permit. If successful, this type of proceeding
could have a material adverse effect on our business, financial condition and
results of operations. Some permits must be renewed periodically, and it is
possible that a particular permit might not be renewed or that unfavorable
conditions would be placed on its renewal. The failure to obtain a renewal or
the imposition of new permit conditions could have a material adverse effect on
our business, financial condition and results of operations. See
"Business--Governmental Regulation."
<PAGE>
The permits that our business or operations require, especially the
permits that we need to build and operate treatment and transfer facilities and
to transport medical waste, are difficult and time-consuming to obtain. They may
also contain conditions or restrictions which limit our ability to operate
efficiently, and they may not be issued as quickly as we need to operate
efficiently. If we cannot obtain the permits we need when we need them, or if
they contain unfavorable conditions, it could have a material adverse effect on
our business, financial condition and results of operations.
Applications for operating and transportation permits are frequently
opposed by elected officials, local residents, or citizen groups. It is possible
that public opposition could force us to delay or withdraw applications and
abandon our plans to expand into or locate our operations at a particular
location. Even after a permit is issued, opponents may initiate administrative
proceedings or litigation to force the applicable regulatory agency to place new
conditions on the permit, or even to revoke it.
We own a treatment technology called electro-thermal-deactivation (ETD)
that is an alternative to incineration (burning) and autoclaving (pressurized
steam heating) for the treatment of regulated medical waste. ETD has not been
approved in all states for the treatment of medical waste. We have received
permits or legislative approval to use ETD in 15 states and we have filed for
permits in other states. We cannot be sure, however, that ETD will be approved
in other jurisdictions where we might want to install it. Our ETD process
involves grinding medical waste within a containment room, which may result in
the aerosolization of pathogens. While we believe that our containment and other
safety systems fully protect our employees through multiple protective measures,
equipment failure or human error possibly could result in exposure of our
employees to pathogens that may be present in medical waste.
In addition to ETD, we currently employ incineration, autoclaving,
chemclaving (steam heating with disinfectant chemicals) and microwaving for the
treatment of regulated medical waste. Incineration is subject to more stringent
regulation than ETD and may expose us to unfavorable regulations. See
"Business--Treatment Technologies" and "--Governmental Regulation."
If we expand into other countries, we will be subject to regulation by
foreign governments. These regulations may include pricing tariffs (taxes),
controls over the location and operation of facilities, and permit requirements
similar to, or more stringent than, those imposed by federal, state and local
governments in the United States. See "Business--Governmental Regulation."
ENVIRONMENTAL REGULATION--THE VIGOR OF GOVERNMENTAL ENFORCEMENT OF ENVIRONMENTAL
REGULATIONS HAS AN UNCERTAIN EFFECT ON OUR BUSINESS.
We believe that the government's strict enforcement of laws and
regulations relating to medical waste collection and treatment has been good for
our business. These laws and regulations increased the demand for our services.
We also believe that laws and regulations that made it more difficult or
expensive to use technologies that compete with our ETD process, such as
incineration, have previously given us a competitive advantage. This advantage
has diminished, however, and is likely to be further reduced because we have
increased our use of autoclaving and incineration, mainly as a result of
purchasing companies, including the BFI medical waste business, that use these
processes. We estimate that during 1998, prior to the BFI acquisition, we used
incineration or autoclaving at our own facilities or those of other parties for
approximately 49% of the regulated medical waste that we treated. This
percentage has increased as a result of the BFI acquisition and is likely to
further increase as we acquire other companies in the future which use
incineration and autoclaving.
See "Business--Treatment Technologies."
Changes in governmental regulation of medical waste, such as:
o encouraging the use of landfills;
o removing obstacles to the use of incineration and autoclaving; or
o reducing manpower and money used to enforce environmental
regulations favorable to our operations
<PAGE>
could have a material adverse effect on our business, financial condition and
results of operations.
We cannot predict the type or size of the effect that any government
action or inaction will have on our business.
GOVERNMENTAL ENFORCEMENT PROCEEDINGS--WE MAY BE SUBJECT TO FINES AND PENALTIES
FOR VIOLATIONS OF REGULATIONS.
From time to time we are subject to governmental proceedings to enforce
regulations. We have had to pay fines and penalties and to undertake remedial
work at our facilities. We may be subject to similar proceedings in the future.
Government enforcement actions also may be initiated against us for the purpose
of revoking or modifying our permits. It is possible that these proceedings
could have a material adverse effect on our business, financial condition and
results of operations.
In April 1997, a worker at our 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 workers were probably exposed to
tuberculosis bacteria from the medical waste being processed at the Morton
facility. We believe that the actual source of exposure has not been determined.
However, we have complied with the recommendations of all regulatory authorities
to outfit the facility's workers with personal protective equipment. In
addition, we have complied with governmental recommendations to modify equipment
at the Morton facility. We are also taking these actions, as applicable, at our
other treatment facilities. The safety measures being taken include those
recommended by the National Institute for Occupational Safety and Health in a
report issued in December 1998.
While future claims are possible, to date we have not been subject to
any court proceedings by the affected employees as a result of the Morton
incident, which the Washington Department of Labor and Industries has determined
is covered by the state workers' compensation program. Incidents like the one in
Morton could result in adverse publicity and could cause governments to:
o require us to adopt additional safety measures;
o impose fines or other penalties on us; or
o modify or revoke our permits, or deny our future applications for
permits.
These incidents could also lead to lawsuits by the employees involved.
Costs associated with conducting or settling these proceedings, the amount of an
adverse judgment, or the negative publicity and loss of customers, could have a
material adverse effect on our business, financial condition and results of
operations. See "Business--Governmental Regulation" and "--Legal and Other
Proceedings."
ACQUISITIONS--OUR GROWTH DEPENDS IN PART ON OUR ACQUIRING OTHER MEDICAL WASTE
BUSINESSES OR OTHER RELATED SERVICE BUSINESSES, WHICH WE MAY BE UNABLE TO DO.
Our growth strategy is based in part on our ability to acquire other
medical waste businesses. We do not know whether in the future we will be able
to:
o identify suitable businesses to buy;
o complete the purchase of those businesses on terms acceptable to
us;
o improve the operations of the businesses that we buy and
successfully integrate their operations into our own; or
o avoid or overcome any concerns expressed by regulators, including
antitrust concerns.
<PAGE>
We compete with other potential buyers for the acquisition of other
medical waste companies. This competition may result in fewer opportunities to
purchase companies that are for sale. It may also result in higher purchase
prices for the businesses that we want to purchase.
In addition, we also cannot be sure that we will: have enough money; be
able to borrow enough money on reasonable terms; be able to issue stock or debt
instruments (like promissory notes) as consideration for the purchase; or be
able to raise enough money by issuing stock or through other financing methods
to complete the purchases of the businesses that we want to buy.
We also do not know whether our growth strategy will continue to be
effective following the BFI acquisition. As a result of the BFI acquisition, our
business is significantly larger, and the BFI acquisition and other acquisitions
may not have the desired benefits that we have expected in the past. Our
increased size as a result of the BFI acquisition also means that state and
federal government regulators, such as antitrust regulators, will be examining
our acquisitions more closely. They may object to some purchases or place
conditions on them that would limit their benefit to us.
COMPETITION--OUR ABILITY TO GROW MAY BE LIMITED BY COMPETITION.
The medical waste industry is very competitive. This has required us in
the past to discount our prices, especially to large account customers, and
competition may require us to discount our prices in the future. Substantial
price reductions could have a material adverse effect on our business, financial
condition and results of operations.
We face important competition from a large number of small, local
competitors. Because companies can enter the collection and transport aspects of
the medical waste industry with very little money or technical know-how, there
are a large number of regional and local companies in the industry. We face
competition from these businesses and that competition may exist in each
location into which we try to expand in the future. Our competitors could take
actions that would hurt our growth strategy, including the support of
regulations which could delay or prevent us from obtaining or keeping permits.
They might also give financial support to citizens' groups that oppose our plans
to locate a treatment or transfer facility at a particular location. See
"Business--Competition."
Y2K PROBLEMS--COMPUTER PROBLEMS RELATED TO THE YEAR 2000 COULD ADVERSELY AFFECT
OUR BUSINESS.
We are highly dependent on our computer software programs and operating
systems in operating our business. For example, we use our computers to assist
in the scheduling and routing of the trucks which pick up waste from our
customers and deliver it to transfer stations and treatment facilities. We also
depend on the proper functioning of the computer systems of other parties,
particularly those parties whose ability to pay us on a timely basis depends on
their computers working correctly.
The failure of any of these systems to correctly interpret calendar
year 2000 could cause business interruptions or shutdowns, financial losses,
regulatory actions, harm to our reputation, and legal liability, any one of
which could have a material adverse effect on our business, financial condition
and results of operations.
We have established plans and conducted tests of our critical hardware
and financial and administrative software, which have verified that our internal
systems are Year 2000 compliant. We are also communicating with customers,
suppliers, financial institutions and others with which we do business to
coordinate Year 2000 conversion. However, given the complexity of Year 2000
issues and the uncertainty surrounding the responses of other parties to these
issues, we cannot assure you that we will be effective in eliminating all Year
2000 problems relating to our business. For more information on our Year 2000
program, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Issues."
<PAGE>
PROPRIETARY INFORMATION--OUR ETD PROCESS AND OTHER ASPECTS OF OUR BUSINESS
DEPEND ON PATENTS AND PROPRIETARY INFORMATION.
We own nine United States patents relating to the ETD treatment process
and other aspects of processing medical waste. We have filed or have been
assigned patent applications in several foreign countries and have received
patents in five of them. We also own one United States patent for our reusable
container, for which we have the registered trademark "Steri-Tub(R)."
We believe that our patents are important to our prospects for success.
However, we cannot be sure that our patent applications will issue as patents or
that any issued patents will give us a competitive advantage. It is also
possible that our patents could be successfully challenged or circumvented by
competitors or other parties. In addition, we cannot be sure that our treatment
processes do not infringe patents or other proprietary rights of other parties.
We may need to sue any company that is infringing our patents, and we
may need to defend against claims of patent infringement brought by other
companies. Any litigation could be very costly and demand a great deal of our
management's time and attention. We also could be required to participate in
proceedings before the United States Patent and Trademark Office to determine
the priority of inventions or the validity of patents, which also could involve
a substantial expense and significant management time and attention. An
unfavorable judgment or decision in any lawsuit or proceeding could:
o result in substantial monetary liability, or
o prevent us from continuing to use our waste treatment processes or
equipment.
If we are prevented from using our processes or equipment, we could
attempt to negotiate a license from the party owning the patent, or we could
attempt to redesign our processes to avoid infringement. If we did suffer a
large monetary liability, or if we could not negotiate a license on reasonable
terms or redesign our processes to avoid infringement, it could have a material
adverse effect on our business, financial condition and results of operations.
See "Business--Patents and Proprietary Rights."
In addition to filing for patent protection where appropriate, we try
to protect our proprietary information through confidentiality agreements with
our employees, consultants and other people who must use our information. We
cannot be sure that these agreements will be complied with or that we can
enforce them effectively. Our proprietary information could become known to
competitors in other ways, and competitors might develop the same information
themselves. See "Business--Patents and Proprietary Rights."
We own federal registrations of:
o the trademarks "Steri-Fuel(R)," "Steri-Plastic(R)," "Steri-Tub(R),"
and "Steri-Cement(R);"
o the service mark "Stericycle(R);" and
o the service mark consisting of the nine green disks that
Stericycle uses in association with its name and services in the
United States (it appears on the cover of this prospectus).
We cannot be sure that our trademarks or service marks will not infringe on the
rights of other parties. If we had to change any trademark, service mark or
trade name, we might lose the goodwill associated with it. A change could also
be very expensive and could have a material adverse effect on our business,
financial condition and results of operations. See "Business--Patents and
Proprietary Rights."
Our competitors and others are continuously trying to develop new and
better medical waste treatment and disposal technologies. These technologies may
operate more cheaply, handle more waste, produce fewer waste by-products or
pollutants, or have other advantages over our processes. If our competitors
successfully introduce these technologies, we could be placed at a competitive
disadvantage. New treatment and disposal technologies could also render our
processes obsolete. It might not be possible to replace or improve our equipment
and processes to compete effectively with new technologies, and even if it is
possible it could be extremely expensive.
<PAGE>
KEY MANAGEMENT--WE DEPEND HEAVILY ON OUR SENIOR EXECUTIVES.
We depend on a small number of senior executives. Our future success
will depend upon, among other things, our ability to keep these executives and
to hire other highly qualified employees at all levels. We compete with other
potential employers for employees, and we may not be successful in hiring and
keeping the executives and other employees that we need. We do not have written
employment agreements with our President and Chief Executive Officer and our
four other most highly compensated officers, and officers and other key
employees may leave us with little or no prior notice, either individually or as
part of a group. Our loss of or inability to hire key employees could have a
material adverse effect on our business, financial condition and results of
operations.
INTERNATIONAL OPERATIONS--SALES OVERSEAS PRESENT NEW AREAS OF RISK.
We plan to grow both in the United States and in foreign countries. We
have already begun to establish operations in some foreign countries. Our
international activities may include the export of ETD technology and equipment.
Foreign operations carry special risks. Our business in foreign
countries may be limited or disrupted by:
o government controls; o changes in tariffs and taxes;
o import and export license o restrictions on repatriating foreign
requirements; profits back to the United States;
o political or economic o our unfamiliarity with foreign laws
instability; and regulations; or
o trade restrictions; o difficulties in staffing and
managing international operations.
Foreign governments and agencies often establish permit and regulatory
standards different from those in the United States. If we cannot obtain foreign
regulatory approvals, or if we cannot get them when we expect, it could have a
material adverse effect on our international business and its financial
condition and results of operations.
Fluctuations in currency exchange rates and increases in duty rates for
ETD equipment could have similar effects. On a pro forma combined basis,
revenues from customers and other sources outside the United States for the
twelve months ending June 30, 1999 were 5.2% of total revenues for the period.
We cannot assure you that we will be able to successfully operate in
any foreign market. See "Business--Business Strategy" and "--Marketing and
Sales."
LACK OF PUBLIC MARKET--NO PUBLIC MARKET EXISTS FOR THE SERIES B NOTES, AND YOU
MAY NOT BE ABLE TO RESELL YOUR SERIES B NOTES.
The series B notes are a new issue of securities with no established
trading market and will not be listed on any securities exchange, although we
expect that the series B notes will be eligible for trading in the PORTAL
market. Firms making a market in these notes may cease their market-making at
any time. In addition, the liquidity of the trading market for the series B
notes, if any, and the market price quoted for the series B notes, or, in the
case of non-tendering holders of series A notes the trading market and market
price for the series A notes, may be adversely affected by the changes in
interest rates in the market for high-yield securities and by changes in our
financial performance or prospects, or in the prospects for companies in the
medical waste management industry generally. As a result, you cannot be sure
than an active trading market will develop for these notes.
FRAUDULENT CONVEYANCE MATTERS--FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER
SPECIFIC CIRCUMSTANCES, TO VOID GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN
PAYMENTS RECEIVED FROM GUARANTORS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee, such as the subsidiary guarantees of the
series B notes by our subsidiary guarantors, could be voided, or claims in
<PAGE>
respect of a guarantee could be subordinated to all other debts of that
guarantor if, among other things, the guarantor, at the time it incurred the
indebtedness evidenced by its guarantee, received less than reasonably
equivalent value or fair consideration for the incurrence of a guarantee; and
any one of the following:
o was insolvent or rendered insolvent by reason of any incurrence;
o was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
o intended to incur, or believed that it would incur, debts beyond
its ability to pay debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could be
voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer
laws will vary depending upon the law applied in any proceeding to determine
whether a fraudulent transfer has occurred. Generally, however, a guarantor
would be considered insolvent if:
o the sum of its debts, including contingent liabilities, were
greater than the fair saleable value of all of its assets;
o if the present fair saleable value of its assets were less than
the amount that would be required to pay its probable liability on
its existing debts, including contingent liabilities, as they
become absolute and mature; or
o it could not pay its debts as they become due.
On the basis of historical financial information, recent operating
history and other factors, we believe that each of our subsidiary guarantors,
after giving effect to its subsidiary guarantee of these notes, will not be
insolvent, will not have unreasonably small capital for the business in which it
is engaged and will not have incurred debts beyond its ability to pay any debts
as they mature. There can be no assurance, however, as to what standard a court
would apply in making these determinations or that a court would agree with our
conclusions in this regard.
FINANCING CHANGE OF CONTROL OFFER--WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE.
Upon the occurrence of specific change of control events, we will be
required to offer to repurchase all outstanding series A and series B notes.
However, it is possible that we will not have sufficient funds at the time of
the change of control to make the required repurchase of notes or that
restrictions in our credit facility will not allow any repurchases. In addition,
certain important corporate events, such as leveraged recapitalizations that
would increase the level of our indebtedness, would not constitute a "change of
control" under the indenture. See "Description of Notes--Repurchase at the
Option of Holders--Change of Control."
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements of our intentions, beliefs, expectations or predictions for
the future, denoted by the words "anticipate," "believe," "estimate," "expect,"
"project," "imply," "intend," "foresee" and similar expressions are
forward-looking statements that reflect our current views about future events.
For example, our current estimate of the timing and amount of cost savings that
we will realize as a result of the BFI acquisition is a forward-looking
statement. All of these forward-looking statements are subject to risks,
uncertainties and assumptions. These risks, uncertainties and assumptions
include those identified in the "Risk Factors" and "Business" sections of this
prospectus and the following:
o changes in laws or regulations affecting the medical waste
industry generally and our operations in particular;
o our success in integrating the BFI acquisition and achieving the
expected cost savings and other benefits of the acquisition;
o the success of our acquisition strategy generally;
o management of our cash resources, particularly in light of our
substantial leverage; and
o industry-wide market factors and other general economic and
business conditions.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable, our actual results could differ
materially from those projected in these forward-looking statements as a result
of these factors and others, many of which are beyond our control. There can be
no assurance our expectations will prove to have been correct. We are under no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
<PAGE>
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
We have commenced this exchange offer to provide holders of series A
notes with an opportunity to acquire series B notes which, unlike the series A
notes, will be freely tradable at all times, subject to any restrictions on
transfer imposed by state "blue sky" laws. On November 12, 1999, we issued and
sold the outstanding series A notes in the aggregate principal amount of $125.0
million in order to provide a portion of the financing for the BFI acquisition.
We did not register the sale of the series A notes to the initial purchasers
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act. The initial purchasers did not register the concurrent
resale of the series A notes to investors under the Securities Act in reliance
upon the exemptions provided by Rule 144A and Regulation S of the Securities
Act.
You may not reoffer, resell or transfer your series A notes other than
by means of a registration statement filed pursuant to the Securities Act or
unless an exemption from the registration requirements of the Securities Act is
available. Pursuant to Rule 144, you generally may resell your series A notes:
o commencing one year after their original issue date, in an amount
up to, for any three-month period, the greater of 1% of the series
A notes then outstanding or the average weekly trading volume of
the series A notes during the four calendar weeks immediately
preceding the filing of the required notice of sale with the SEC;
o commencing two years after the original issue date, in any amount
and otherwise without restriction as long as you are not, and have
not been for the preceding 90 days, an affiliate of ours.
The series A notes are eligible for trading in the PORTAL market, and
you may resell your series A notes to qualified institutional buyers pursuant to
Rule 144A. Other exemptions may also be available under other provisions of the
federal securities laws for the resale of the series A notes.
In connection with the original issue and sale of series A notes, we
entered into a registration rights agreement, pursuant to which we agreed to
file with the SEC a registration statement covering the exchange by us of the
series B notes for the series A notes. The registration rights agreement
provides that:
o we will file a registration statement with the SEC on or prior to
120 days after the issue date of the series A notes;
o we will use all commercially reasonable efforts to have the
registration statement declared effective by the SEC on or prior
to 210 days after the original issue date;
o unless this exchange offer would not be permitted by applicable
law or SEC policy, we will use all commercially reasonable efforts
to commence this exchange offer and issue, on or prior to 30
business days after the date on which the registration statement
is declared effective by the SEC, series B notes in exchange for
all series A notes tendered in this exchange offer; and
o if obligated to file a shelf registration statement covering the
series A notes, we will file the shelf registration statement with
the SEC on or prior to 30 days after the filing obligation arises
and will use all commercially reasonably efforts to cause the
shelf registration statement to be declared effective by the SEC
on or prior to 60 days after the obligation arises.
We will pay liquidated damages to each holder of transfer-restricted
securities, as described below, if any of the following occurs:
o we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for
the filing;
<PAGE>
o any of the registration statements is not declared effective by
the SEC on or prior to the date specified for the effectiveness;
o we fail to consummate this exchange offer within 30 business days
after the date on which the registration statement covering the
exchange of series B notes for series A notes is declared
effective; or
o any registration statement filed by us pursuant to the terms of
the registration rights agreement is declared effective but
thereafter ceases to be effective or usable in connection with
resales of transfer-restricted securities during the periods
specified in the registration rights agreement.
We will pay liquidated damages to the holders of transfer-restricted
securities, with respect to the first 90-day period immediately following the
occurrence of a default, in an amount equal to $.05 per week per $1,000
principal amount of transfer-restricted securities. The amount paid by us to the
holders of series A notes will increase by an additional $.05 per week per
$1,000 principal amount of transfer-restricted securities with respect to each
subsequent 90-day period until all defaults have been cured up to a maximum
amount of $.50 per week per $1,000 principal amount of transfer-restricted
securities, regardless of whether one or more default is outstanding. Following
the cure of all defaults, the accrual of damages will cease.
"Transfer-restricted securities" means each series B note received by a
broker-dealer in exchange for a series A note until the date on which the series
B note is disposed of by the broker-dealer pursuant to the procedures outlined
under the caption "Plan of Distribution," including the delivery of this
prospectus and each series A note until:
o the date on which the series A note has been exchanged in this
exchange offer for a series B note which is entitled to be resold
to the public by the holder thereof without complying with the
prospectus delivery requirements of the Securities Act;
o the date on which the series A note has been disposed of in
accordance with a shelf registration statement and the purchasers
thereof have been issued series B notes; or
o the date on which the series A note is distributed to the public
pursuant to Rule 144 under the Securities Act.
The series B notes otherwise will be substantially identical in all
material respects, including interest rate, maturity, security and restrictive
covenants, to the series A notes for which they may be exchanged pursuant to
this exchange offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
prospectus and in the accompanying letter of transmittal, we will exchange
$1,000 principal amount of series B notes for each $1,000 principal amount of
our outstanding series A notes. Series B notes will be issued only in integral
multiplies of $1,000 to each tendering holder of series A notes whose series A
notes are accepted in this exchange offer.
The series B notes will bear interest from and including the original
issue date of the series A notes. Accordingly, if you receive series B notes in
exchange for series A notes, you will forego accrued but unpaid interest on your
exchanged series A notes for the period from and including the issue date of the
series A notes to the date of your exchange for series B notes, but will be
entitled to interest under the series B notes.
As of the date of this prospectus, $125.0 million aggregate principal
amount of series A notes were outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of series A notes as of
this date. You will not be required to pay brokerage commissions or fees or,
subject to the instructions in the letter of transmittal, transfer taxes with
respect to your exchange of series A notes pursuant to this exchange offer. We
<PAGE>
will pay all charges and expenses, other than specific transfer taxes that may
be imposed, in connection with this exchange offer. See "--Payment of Expenses"
below.
As a holder of series A notes, you do not have any appraisal or
dissenters' rights under the Delaware General Corporation Law in connection with
this exchange offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION
This exchange offer will expire at 5:00 p.m., New York City time, on
Friday, January 21, 2000, subject to our extension by notice to State Street
Bank and Trust Company, the exchange agent. We reserve the right to extend this
exchange offer in our discretion, in which event the expiration date shall be
the time and date on which this exchange offer as so extended shall expire. We
shall notify the exchange agent of any extension by oral or written notice and
shall mail to you an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
We reserve the right to extend or terminate this exchange offer and not
accept for exchange any series A notes if any of the events set forth below
under "--Conditions to the Exchange Offer" occur and are not waived by us, by
giving oral or written notice of this delay or termination to the exchange
agent. See "--Conditions to the Exchange Offer." The rights we reserve in this
paragraph are in addition to our rights set forth below under the caption "--
Conditions to the Exchange Offer."
PROCEDURES FOR TENDERING
Your tender of series A notes pursuant to one of the procedures set
forth below and our acceptance will constitute an agreement between you and us
in accordance with the terms and subject to the conditions set forth in this
prospectus and the letter of transmittal.
Except as set forth below, if you who wish to tender your series A
notes for exchange pursuant to this exchange offer, you must transmit a properly
completed and duly executed letter of transmittal, including all other documents
required by the letter of transmittal, to the exchange agent at the address set
forth below under "Exchange Agent" on or prior to the expiration date. In
addition, either:
o certificates for the series A notes must be received by the
exchange agent along with the letter of transmittal; or
o a timely confirmation of a book-entry transfer of the series A
notes, if the procedure is available, into the exchange agent's
account at The Depository Trust Company pursuant to the procedure
for book-entry transfer described below, must be received by the
exchange agent prior to the expiration date; or
o the holder must comply with the guaranteed delivery procedures
described below.
Letters of transmittal and series A notes should not be sent to us. We
are not asking you for a proxy, and you are requested not to send us a proxy.
Signatures on a letter of transmittal must be guaranteed unless the
series A notes are tendered (1) by a registered holder of series A notes who has
not completed the box entitled "Special Issuance and Delivery Instructions" on
the letter of transmittal or (2) for the account of any firm that is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or a commercial bank or trust company
having an office in the U.S., sometimes referred to as an eligible institution.
In the event that signatures on a letter of transmittal are required to be
guaranteed, the guarantee must be by an eligible institution.
Your method of delivery of series A notes and other documents to the
exchange agent is at your election and risk, but if delivery is by mail we
suggest that the mailing be made sufficiently in advance of the expiration date
to permit delivery to the exchange agent before the expiration date.
<PAGE>
If the letter of transmittal is signed by a person other than a
registered holder of any tendered series A note, the series A note must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear on the
series A note.
If the letter of transmittal or any series A notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, they should indicate the capacity in which they are signing, and,
unless waived by us, should provide proper evidence satisfactory of their
authority to act.
We will resolve all questions as to the validity, form, eligibility,
including time of receipt and acceptance of tendered series A notes, which
determination will be final and binding. We reserve the absolute right to reject
any or all tenders that are not in proper form or the acceptance of which would,
in the opinion of our counsel, be unlawful. We also reserve the right to waive
any irregularities or conditions of tender as to particular series A notes. Our
interpretation of the terms and conditions of this exchange offer, including the
instructions in the letter of transmittal, will be final and binding. Unless
waived, any irregularities in connection with tenders must be cured within the
period of time determined by us. Neither we nor the exchange agent is under any
duty to give notification of defects in these tenders or shall incur liabilities
for failure to give notification. Tenders of series A notes will not be deemed
to have been made until any irregularities have been cured or waived. Any series
A notes received by the exchange agent that are not properly tendered and as to
which the irregularities have not been cured or waived will be returned by the
exchange agent to the tendering holder, unless otherwise provided in the letter
of transmittal, as soon as practicable following the expiration date.
Our acceptance of your series A notes pursuant to this exchange offer
will constitute a binding agreement between you and us upon the terms and
subject to the conditions of this exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with
respect to the series A notes at DTC for purposes of this exchange offer within
two business days after the date of effectiveness of the registration statement
of which this prospectus forms a part, and any financial institution that is a
participant in DTC's systems may make book-entry delivery of series A notes by
causing DTC to transfer series A notes into the exchange agent's account at DTC
in accordance with DTC's procedures for transfer. However, although delivery of
series A notes may be effected through book-entry transfer at DTC, the letter of
transmittal or facsimile thereof with any required signature guarantees and any
other required documents must, in any case, be transmitted to and received by
the exchange agent at one of the addresses set forth below under "Exchange
Agent" on or prior to the expiration date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your series A notes and (1) your series A notes
are not immediately available or (2) you cannot deliver your series A notes, the
letter of transmittal or any other required documents to the exchange agent
prior to the expiration date, you may effect a tender if:
o your tender is made through an eligible institution;
o prior to the expiration date, the exchange agent receives from
your designated eligible institution a properly completed and
duly executed notice of guaranteed delivery by facsimile
transmission, mail or hand delivery setting forth your name and
address, the certificate number(s) of your tendered series A
notes and the principal amount of your tendered series A notes,
stating that the tender is being made thereby and guaranteeing
that, within five NYSE trading days after the expiration date,
the letter of transmittal or facsimile thereof together with the
certificate(s) representing your series A notes, or a book-entry
confirmation, as the case may be, and any other documents
required by the letter of transmittal will be deposited by the
eligible institution with the exchange agent; and
<PAGE>
o your properly completed and executed letter of transmittal or
facsimile thereof, as well as the certificate(s) representing all
your tendered series A notes in proper form for transfer, or a
book-entry confirmation, as the case may be, and all other
documents required by the letter of transmittal are received by
the exchange agent within five NYSE trading days after the
expiration date.
Upon request of the exchange agent, the exchange agent or we will send
a notice of guaranteed delivery to you if you wish to tender your series A notes
according to the guaranteed delivery procedures set forth above.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of this exchange offer or any
extension of this exchange offer, we will not be required to issue series B
notes in respect of any properly tendered series A notes not previously
accepted, and may terminate this exchange offer by oral or written notice to the
exchange agent and the holders, or at our option, modify or otherwise amend this
exchange offer, if any material change occurs that is likely to affect this
exchange offer, including, but not limited to, the following:
o there shall be instituted or threatened any action or proceeding
before any court or governmental agency challenging this exchange
offer or otherwise directly or indirectly relating to this
exchange offer or otherwise affecting us;
o there shall occur any development in any pending action or
proceeding that, in our sole judgment, would or might (1) have an
adverse effect on our business, (2) prohibit, restrict or delay
consummation of this exchange offer or (3) impair the contemplated
benefits of this exchange offer;
o any statute, rule or regulation shall have been proposed or
enacted, or any action shall have been taken by any governmental
authority which, in our sole judgment, would or might (1) have an
adverse effect on our business, (2) prohibit, restrict or delay
consummation of this exchange offer or (3) impair the contemplated
benefits of this exchange offer; or
o there exists, in our sole judgment, any actual or threatened legal
impediment, including a default or prospective default under an
agreement, indenture or other instrument or obligation to which we
are a party or by which we are bound, to the consummation of the
transactions contemplated by this exchange offer.
We expressly reserve the right to terminate this exchange offer and not
accept for exchange any series A notes upon the occurrence of any of the
foregoing conditions. In addition, we may amend this exchange offer at any time
prior to 5:00 p.m., New York City time, on the expiration date if any of the
conditions listed above occur. Moreover, regardless of whether any of these
conditions has occurred, we may amend this exchange offer in any manner that, in
our good faith judgment, is advantageous to you.
These conditions are for our sole benefit and may be waived by us, in
whole or in part, in our sole discretion. Any determination we make concerning
an event, development or circumstance described or referred to above will be
final and binding on all parties.
ACCEPTANCE OF SERIES A NOTES FOR EXCHANGE; DELIVERY OF SERIES B NOTES
Upon the terms and subject to the conditions of this exchange offer, we
will accept all series A notes validly tendered prior to 5:00 p.m., New York
City time, on the expiration date. We will deliver series B notes in exchange
for series A notes promptly following the expiration date.
For purposes of this exchange offer, we shall be deemed to have
accepted validly tendered series A notes when, as and if we have given oral or
written notice of acceptance to the exchange agent. The exchange agent will act
as agent for the tendering holders for the purpose of receiving the series A
notes. Under no circumstances will interest be paid by the exchange agent or us
for any delay in making payment or delivery.
<PAGE>
If we do not accept your tendered series A notes for exchange because
of an invalid tender, the occurrence of other events listed in this prospectus
or otherwise, we will return your unaccepted series A notes to you, at our
expense, as promptly as practicable after the expiration or termination of this
exchange offer.
WITHDRAWAL RIGHTS
Your tender of series A notes may be withdrawn at any time prior to the
expiration date.
For your withdrawal to be effective, you must deliver a written notice
of withdrawal to the exchange agent at the address set forth below under
"Exchange Agent." Your notice of withdrawal must specify your name, identify the
series A notes to be withdrawn, including the principal amount, and, where
certificates for series A notes have been transmitted, specify the name in which
the series A notes are registered, if different from your name. If certificates
for series A notes have been delivered or otherwise identified to the exchange
agent, then prior to the release of the certificates you must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an eligible institution
unless you are an eligible institution. If your series A notes have been
tendered pursuant to the procedure for book-entry transfer described above, your
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawn series A notes and otherwise comply with the
procedures of the facility. We will determine all questions as to the validity,
form and eligibility (including time of receipt) of these notices, which
determination shall be final and binding on all parties.
Any series A notes that are withdrawn will be deemed not to have been
validly tendered for exchange for purposes of this exchange offer. Any series A
notes that have been tendered for exchange but that are not exchanged for any
reason will be returned to the holder thereof without cost to the holder, or, in
the case of series A notes tendered by book-entry transfer into the exchange
agent's account at DTC pursuant to the book-entry transfer procedures described
above, will be credited to an account maintained with DTC for the series A
notes, as soon as practicable after withdrawal, rejection of tender or
termination of this exchange offer. You may retender any properly withdrawn
series A notes by following one of the procedures described under "--Procedures
for Tendering" above at any time on or prior to the expiration date.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of this exchange offer. This discussion is not binding on the IRS
or the courts, and we cannot assure you that the IRS will not take, and that a
court would not sustain, a position contrary to that described below. This
summary is based on the current provisions of the tax code and applicable
Treasury regulations, judicial authority and administrative pronouncements. The
tax consequences described below could be modified by future changes in the
relevant law, which could have retroactive effect. You should consult your own
tax adviser as to these and any other federal income tax consequences of this
exchange offer as well as any tax consequences to you under foreign, state,
local or other law.
The exchange of the series A notes for series B notes pursuant to this
exchange offer should not be treated as an "exchange" for U.S. federal income
tax purposes because the series B notes will not be considered to differ
materially in kind or extent from the series A notes. Rather, any series B notes
received by you should be treated as a continuation of your investment in the
series A notes. As a result, there should be no material U.S. federal income tax
consequences to you resulting from the exchange offer. In addition, you should
have the same adjusted issue price, adjusted basis and holding period in the
series B notes as you had in the series A notes immediately prior to the
exchange. See "Federal Income Tax Considerations."
<PAGE>
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as exchange
agent for this exchange offer. You should address all correspondence in
connection with this exchange offer and the letter of transmittal to the
exchange agent as follows:
<TABLE>
State Street Bank and Trust Company
By Registered or Certified Mail: By Hand /Overnight Delivery: By Facsimile:
- ---------------------------------------- ---------------------------------------- -----------------------------
<S> <C> <C>
State Street Bank and Trust Company State Street Bank and Trust Company (617) 662-1452
P.O. Box 778 Two Avenue de Lafayette
Boston, MA 02102-0078 5th Floor, Corporate Trust Window Confirm by Telephone
Attention: Kellie Mullen Boston, MA 02111-1724 (617) 662-1525
Attention: Kellie Mullen/
MacKenzie Elijah
</TABLE>
You may request additional copies of this prospectus or the letter of
transmittal from the exchange agent or us.
PAYMENT OF EXPENSES
We have not retained any dealer-manager or similar agent in connection
with this exchange offer and will not make any payments to brokers, dealers or
others for soliciting acceptances of this exchange offer. We, however, will pay
reasonable and customary fees and reasonable out-of-pocket expenses to the
exchange agent in connection with the solicitation of acceptances. We will also
pay the cash expenses to be incurred in connection with this exchange offer,
including accounting, legal, printing and related fees and expenses.
ACCOUNTING TREATMENT
We will record the series B notes at the same carrying value as the
series A notes, as reflected in our accounting records on the date of the
exchange. Accordingly, we will recognize no gain or loss for accounting
purposes. We will capitalize our expenses of this exchange offer for accounting
purposes.
RESALES OF NOTES
With respect to resales of series B notes, based on interpretive
letters issued by the staff of the SEC to third parties, we believe that a
holder of series B notes who exchanged series A notes for series B notes in the
ordinary course of business and who is not participating, does not intend to
participate and has no arrangement or understanding with any person to
participate in a distribution of the series B notes will be allowed to resell
the series B notes to the public without further registration under the
Securities Act and without delivering to purchasers of the series B notes a
prospectus that satisfies the requirements of the Securities Act, except for:
o a broker-dealer who purchases series B notes directly from us to
resell pursuant to Rule 144A or any other available exemption
under the Securities Act, or
o a person who is our "affiliate" within the meaning of Rule 405
under the Securities Act.
However, a broker-dealer who holds series A notes that were acquired
for its own account as a result of market-making or other trading activities may
be deemed to be an underwriter within the meaning of the Securities Act and
must, therefore, deliver a prospectus meeting the requirements of the Securities
Act. If any other holder is deemed to be an underwriter within the meaning of
the Securities Act or acquires series B notes in this exchange offer for the
purpose of distributing or participating in a distribution of series B notes,
the holder must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
<PAGE>
transaction, unless an exemption from registration is otherwise available. We
have agreed that for a period of up to one year from the expiration date, we
will make this prospectus, as amended or supplemented, available to any broker-
dealer for use in connection with any resale.
<PAGE>
THE BFI ACQUISITION
TRANSACTION OVERVIEW
On November 12, 1999, we acquired from Allied all of the medical waste
management operations of BFI and Allied in the United States, Canada and Puerto
Rico. The purchase price was $410.5 million in cash, subject to post-closing
adjustment. Our purchase of the BFI medical waste business excluded accounts
receivable and accounts payable. As a result, based on historical requirements
of the BFI medical waste business, we expect to make a net investment in working
capital of approximately $15.0 million in the twelve months following closing.
Prior to the BFI acquisition, BFI was the largest provider of regulated
medical waste services in the United States. For the twelve months ended June
30, 1999, BFI's medical waste business had revenues of $201.7 million. The
medical waste business that Allied owned prior to the BFI acquisition represents
an insignificant amount of the businesses we acquired.
TRANSITION AGREEMENT
We have entered into a transition agreement with Allied that requires
Allied, for a period of one year following the closing, to provide operational
and administrative support to us and to make facilities available to us in order
to facilitate a smooth transition of the BFI medical waste business. In
particular, this agreement requires Allied to: (1) continue to operate permitted
treatment and disposal facilities and transfer stations of the BFI medical waste
business for us until we receive the necessary permits and approvals to operate
them, (2) make available to us at operating locations of the BFI medical waste
business substantially the same space used by that business prior to the
closing, and (3) to provide operational and administrative support to us at the
operating locations of the BFI medical waste business as we require to
facilitate a smooth transition, including vehicle maintenance, telephone
answering, dispatching, backup drivers, personnel assistance and customer
billing. The transition agreement requires us to reimburse Allied for these
services on a direct cost, pass-through basis, except that for services other
than facility operation there are no charges during the first six months
following the closing of the BFI acquisition provided we use our reasonable best
efforts to stop using these services as soon as possible.
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated cash and cash
equivalents and capitalization as of September 30, 1999 on an actual basis and
pro forma to give effect to the BFI acquisition and related financing
transactions as if those events all occurred on September 30, 1999. You should
read this table in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Description of Other
Indebtedness" and our financial statements and notes thereto.
<TABLE>
AS OF SEPTEMBER 30,
1999
ACTUAL PRO FORMA
------ ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................... $ 16,017 $ 12,348
=========== =============
Long-term debt (including current portion):
Credit facility:
Revolving credit facility(1)...................................... $ -- $ --
Term loan A....................................................... -- 75,000
Term loan B....................................................... -- 150,000
Series A notes....................................................... -- 125,000
Capital leases assumed............................................... -- 5,132
Existing indebtedness................................................ 5,778 5,778
----------- -------------
Total long-term debt, including current portion................... 5,778 360,910
Convertible Preferred Stock............................................. -- 70,275
Common shareholders' equity:
Common stock......................................................... 147 147
Additional paid-in capital........................................... 136,148 136,148
Accumulated deficit.................................................. (24,483) (26,283)
----------- -------------
Common shareholders' equity....................................... 111,812 110,012
----------- -------------
Total capitalization.............................................. $ 117,590 $ 541,197
=========== =============
(1) Our revolving credit facility has a total availability of $50.0 million, subject to satisfaction of
customary conditions. See "Description of Other Indebtedness-- Credit Facility."
</TABLE>
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF STERICYCLE AND THE BFI MEDICAL WASTE BUSINESS
The unaudited pro forma condensed combined balance sheet as of
September 30, 1999 gives effect to the following, as if each had occurred on
September 30, 1999:
(i) the BFI acquisition;
(ii) the offering of the series A notes;
(iii)$225 million of borrowings under our credit facility with various
financial institutions, DLJ Capital Funding, Inc., as syndication
agent for the financial institutions, lead arranger and sole book
running manager, Bank of America, N.A., as administrative agent
for the financial institutions, and Bankers Trust Company, as
documentation agent for the financial institutions (See
"Description of Other Indebtedness -- Credit Facility");
(iv) $75.0 million of gross proceeds from the sale by us on November
12, 1999 of our convertible preferred stock to investment funds
associated with Bain Capital, Inc. and with Madison Dearborn
Partners, Inc., which represents approximately 22.6% of our
outstanding common stock on an as-if converted basis (See
"Description of Capital Stock -- Convertible Preferred Stock");
(v) the application of the net proceeds received from (ii), (iii) and
(iv) above; and
(vi) the costs and expenses associated with (i)-(iv) above.
The unaudited pro forma condensed combined statements of operations for
the year ended December 31, 1998 and for the nine months ended September 30,
1999 give effect to these transactions as if each occurred at the beginning of
the period presented. In addition, the unaudited pro forma condensed combined
statements of operations include our acquisition of Waste Systems, Inc., the
majority owner of 3CI Complete Compliance Corporation, which closed in October
1998, the acquisition of Med-Tech Environmental Limited and related
transactions, which closed in December 1998, and the acquisition of Medical
Disposal Systems, which closed in April 1999, as if each had occurred at the
beginning of the period presented.
The unadited pro forma condensed combined financial statements do not
include adjustments to reflect (a) cost savings that we expect to realize over
the year following the BFI acquisition or (b) an increase in selling, general
and administrative expense to reflect the allocation of historical BFI corporate
and shared services costs to the BFI medical waste business. See Note 5 of Notes
to Pro Forma Condensed Combined Statements of Operations. The unaudited pro
forma financial data do not purport to represent what our financial position and
results of operations would have been if the transactions listed above and the
other acquisitions had actually occurred as of the dates indicated and are not
intended to project our financial position or results of operations for any
future period. See "Special Note Regarding Forward-Looking Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The pro forma adjustments to the purchase price allocation and
financing of the BFI medical waste business acquisition are preliminary and
based on information obtained to date that is subject to revision as additional
information becomes available. Revision to the preliminary purchase price
allocation and financing may have a significant impact on total assets, total
liabilities and shareholders' equity, cost of revenue, selling, general and
administrative expenses, depreciation and amortization and interest expense.
The unaudited pro forma condensed combined financial statements should
be read in conjunction with the notes thereto, the historical consolidated
financial statements of Stericycle and related notes thereto included herein,
and the historical financial statements of the BFI medical waste business and
related notes thereto included herein.
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
<CAPTION>
BFI MEDICAL
STERICYCLE WASTE PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
(NOTE 1) (NOTE 2) (NOTE 3)
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents................... $ 16,017 $ -- $ (3,669) (a) $ 12,348
Other current assets........................ 25,213 18,152 (16,552) (b) 26,813
------------- ------------ -------------- -------------
Total current assets........................ 41,230 18,152 (20,221) 39,161
Property and equipment, net................. 22,435 60,548 (6,001) (c) 76,982
Other assets................................ 5,539 3,061 16,359 (d) 24,959
Goodwill, net............................... 59,524 53,100 301,708 (e) 414,332
------------- ------------ ------------- -------------
Total assets................................ $ 128,728 $ 134,861 $ 291,845 $ 555,434
============= ============ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Other current liabilities................... $ 11,138 $ 3,198 $ (99) (f) $ 14,237
Current portion of long-term debt........... 1,900 970 3,375 (g) 6,245
------------- ------------ ------------- -------------
Total current liabilities................... 13,038 4,168 3,276 20,482
Long-term debt, net of current portion...... 3,878 4,162 346,625 (g) 354,665
Other long-term liabilities................. -- 938 (938) (h) --
Convertible preferred stock................. -- -- 70,275 (i) 70,275
Common shareholders' equity................. 111,812 125,593 (127,393) (j) 110,012
------------- ------------ -------------- -------------
Total liabilities and
shareholders' equity.................... $ 128,728 $ 134,861 $ 291,845 $ 555,434
============= ============ ============= =============
The accompanying notes are an integral part
of this unaudited pro forma condensed
combined balance sheet.
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
1. STERICYCLE HISTORICAL
The historical balances represent the consolidated balance sheet of
Stericycle as of September 30, 1999 as reported in the unaudited historical
consolidated financial statements of Stericycle.
2. BFI MEDICAL WASTE BUSINESS HISTORICAL
The amounts related to the BFI medical waste business in the pro forma
condensed combined balance sheet represent the historical assets and liabilities
of the BFI medical waste business (which includes the Medical Disposal Systems
acquisition) as of June 30, 1999, as reported in the unaudited historical
financial statements of the BFI medical waste business. The amount included in
common shareholders' equity in the unaudited pro forma condensed combined
balance sheet for the BFI medical waste business is its directly identifiable
assets in excess of its directly identifiable liabilities.
3. PRO FORMA ADJUSTMENTS
The pro forma adjustments reflected in the unaudited pro forma
condensed combined balance sheet give effect to the following (in thousands,
except share data):
(a) The use of Stericycle cash on hand to fund a portion of the cash
required in connection with the BFI acquisition and related financing
transactions, as follows:
Total Stericycle cash required.......................... $ 6,475
Transaction costs paid by September 30, 1999............ (2,806)
------------
$ 3,669
============
(b) The elimination of the historical book value of the BFI medical
waste business accounts receivable of $16,552, which is not included in
the net assets acquired.
(c) Based on preliminary appraisal information, the historical net book
values of the acquired property and equipment exceed the fair market
values of these assets by approximately $6,001.
(d) The increase in the fair value of intangible assets and the
capitalization of deferred financing fees and costs, as follows:
Increase in fair value of intangible assets...............$ 5,109
Payment of deferred financing fees and costs.............. 11,250
----------
$ 16,359
==========
(e) The incremental increase in goodwill resulting from the BFI
acquisition, as follows:
<TABLE>
<S> <C>
Cost in excess of the estimated fair value of the acquired net assets...... $ 358,315
Elimination of historical goodwill of the BFI medical waste business....... (53,100)
Transaction costs incurred by September 30, 1999........................... (3,507)
------------
$ 301,708
============
</TABLE>
(f) Adjustments to exclude the historical book value of accrued
liabilities which are not included in the net assets acquired and to
record liabilities in accordance with EITF Issue 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination" and
EITF Issue 94-3, "Liability Recognition of Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)." The liabilities recognized in accordance
with EITF 95-3 and EITF 94-3 represent severance and closure costs
estimated to be incurred in the expected elimination of duplicative
<PAGE>
personnel and closing of certain duplicative facilities of both
Stericycle and the BFI medical waste business. The adjustments are as
follows:
<TABLE>
<S> <C>
Liabilities relating to the BFI medical waste business severance and facility
closings........................................................................ $ 2,000
Liabilities relating to Stericycle severance and facility closings, net of tax...... 1,800
Elimination of historical accrued liabilities of the BFI medical waste business..... (3,198)
Transaction costs accrued at September 30, 1999..................................... (701)
------------
$ (99)
===========
</TABLE>
(g) The offering of series A notes and borrowings under our credit
facility calculated as follows:
Proceeds from our credit facility................................ $ 225,000
Proceeds from the series A notes................................. 125,000
-------------
$ 350,000
=============
The net increase in long-term debt has been classified as follows:
Current portion of long-term debt................................ $ 3,375
Long-term debt, net of current portion........................... 346,625
-------------
$ 350,000
=============
(h) The elimination of other long-term liabilities of $938, which were
not assumed in the BFI acquisition.
(i) The issuance of 75,000 shares of 3.375% payment-in-kind series A
convertible preferred stock and payment of the related financing fees
and costs, as follows:
Issuance of Convertible Preferred Stock.......................... $ 75,000
Payment of financing fees and costs.............................. (4,725)
-------------
$ 70,275
=============
(j) The elimination of the historical shareholders' equity of the BFI
medical waste business and an accrual for a Stericycle restructuring
charge in accordance with EITF 94-3, as follows:
Elimination of historical shareholders' equity..................... $ (125,593)
Liabilities relating to Stericycle severance and facility
closings, net of tax........................... (1,800)
------------
$ (127,393)
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<CAPTION>
BFI ADJUSTMENTS OTHER
STERICYCLE MEDICAL WASTE FOR PRIOR PRO FORMA
HISTORICAL HISTORICAL ACQUISITIONS ADJUSTMENTS PRO FORMA
---------- ---------- ------------ ----------- ---------
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4)
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 66,681 $ 198,222 $ 25,372 $ -- $ 290,275
Cost of revenues............. (45,328) (132,629) (19,282) 6,884 (a) (190,355)
Selling, general and
administrative expense.... (14,929) (13,273) (4,964) (7,553)(b) (40,719)
Special charges.............. -- (257) (178) -- (435)
----------- ----------- ----------- ----------- ------------
Operating income............. 6,424 52,063 948 (669) 58,766
Interest income.............. 714 -- -- -- 714
Interest expense............. (777) -- (1,619) (36,770)(d) (39,166)
----------- ----------- ----------- ------------ ------------
Income before income taxes... 6,361 52,063 (671) (37,439) 20,314
Income tax expense........... (648) -- -- (5,438)(e) (6,086)
Minority interest............ -- -- 43 -- 43
----------- ----------- ----------- ----------- ------------
Net income................... 5,713 52,063 (628) (42,877) 14,271
Dividends on convertible
preferred stock........... -- -- -- (2,531)(f) (2,531)
----------- ----------- ----------- ------------ ------------
Net income applicable to
common shareholders....... $ 5,713 $ 52,063 $ (628) $ (45,408) $ 11,740
=========== =========== =========== ============ ============
Basic earnings per share..... $ 0.54 -- -- -- $ 1.10
=========== ============
Weighted average common
shares outstanding........ 10,647 -- 37 -- 10,684
=========== =========== ============
Diluted earnings per share... $ 0.51 -- -- -- $ 0.92
=========== ============
Weighted average common
and common equivalent
shares outstanding........ 11,264 -- 37 4,286 (g) 15,586
=========== =========== =========== ============
OTHER DATA:
Ratio of earnings to
fixed charges............. 1.5x
The accompanying notes are an integral part of this unaudited pro forma
condensed combined statement of operations.
</TABLE>
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<CAPTION>
BFI ADJUSTMENTS OTHER
STERICYCLE MEDICAL WASTE FOR PRIOR PRO FORMA
HISTORICAL HISTORICAL ACQUISITIONS ADJUSTMENTS PRO FORMA
---------- ---------- ------------ ----------- ---------
(NOTE 1) (NOTE 2) (NOTE 3) (NOTE 4)
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 74,285 $ 152,266 $ 2,887 $ -- $ 229,438
Cost of revenues............. (48,998) (99,831) (2,137) 4,842 (a) (146,124)
Selling, general and
administrative expense.... (15,541) (8,824) (525) (5,564)(b) (30,454)
Special (charges) credit..... -- 469 (178) (480)(c) (189)
----------- ----------- ------------ ----------- ------------
Operating income............. 9,746 44,080 47 (1,202) 52,671
Interest income.............. 576 -- -- -- 576
Interest expense............. (689) -- -- (27,632)(d) (28,321)
Other income................. 404 -- -- -- 404
----------- ----------- ----------- ----------- ------------
Income before income taxes... 10,037 44,080 47 (28,834) 25,330
Income tax expense........... (2,168) -- -- (6,117)(e) (8,285)
----------- ----------- ----------- ----------- ------------
Net income................... 7,869 44,080 47 (34,951) 17,045
Dividends on convertible
preferred stock........... -- -- -- (1,898)(f) (1,898)
----------- ----------- ----------- ----------- ------------
Net income applicable to
common shareholders....... $ 7,869 $ 44,080 $ 47 $ (36,849) $ 15,147
=========== =========== =========== =========== ============
Basic earnings per shares.... $ 0.56 -- -- -- $ $1.08
=========== ============
Weighted average common
shares outstanding........ 14,073 -- -- -- $ 14,073
=========== ==============
Diluted earnings per shares.. $ 0.54 -- -- -- $ 0.91
=========== =============
Weighted average common
and common equivalent
shares outstanding........ 14,482 -- -- 4,286 (g) 18,768
=========== =========== ==============
OTHER DATA:
Ratio of earnings to
fixed charges............. 1.8x
The accompanying notes are an integral part of this unaudited pro forma
condensed combined statement of operations.
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENTS OF OPERATIONS
1. STERICYCLE HISTORICAL
The historical balances in this column represent the consolidated
results of operations of Stericycle for each of the indicated periods as
reported in the historical consolidated financial statements of Stericycle.
2. BFI MEDICAL WASTE BUSINESS HISTORICAL
The amounts related to the BFI medical waste business in this column
represent the historical revenues and direct expenses of the BFI medical waste
business for its fiscal year ended September 30, 1998 and the nine months ended
June 30, 1999 as reported in the historical financial statements of the BFI
medical waste business. The historical statements of revenues and direct
expenses for the BFI medical waste business exclude specific costs for selling,
general and administrative efforts which were performed by BFI on a shared
service basis.
3. ADJUSTMENTS FOR PRIOR ACQUISITIONS
The pro forma adjustments in this column reflect, in accordance with
SEC regulations, the unaudited pro forma condensed combined results of
operations for the year ended December 31, 1998 of Waste Systems, Inc., acquired
by Stericycle in October 1998, and Med-Tech Environmental Limited, acquired by
Stericycle in December 1998 and the related purchase price allocations and
financing, all to give effect to these transactions as if each had occurred at
the beginning of the period presented. The results of operations of Med-Tech for
the year ended December 31, 1998 have been adjusted to exclude $803,000 of
direct acquisition costs, principally professional fees, incurred by Med-Tech as
a result of its sale to Stericycle. This column also reflects the unaudited pro
forma condensed combined results of operations for the year ended September 30,
1998, and the nine months ended June 30, 1999 of Medical Disposal Systems,
acquired by BFI in April 1999, and the related purchase price allocations.
4. OTHER PRO FORMA ADJUSTMENTS
The pro forma adjustments in this column reflect the following:
(a) A decrease in depreciation expense relating to acquired property
and equipment based on estimated useful lives and appraised values. The
preliminary appraised values of the acquired property and equipment are
not less than the BFI historical net book value. The following table
indicates the components of the adjustments by asset class and the
amount by which current estimates of average useful lives differ from
the average remaining lives in the depreciation accounts of BFI (in
thousands, except lives in years):
<PAGE>
<TABLE>
DEPRECIATION EXPENSE
--------------------
PRELIMINARY CURRENT APPROXIMATE YEAR NINE MONTHS
ESTIMATED AVERAGE BFI AVERAGE ENDED ENDED
FAIR VALUE ESTIMATED LIFE REMAINING LIFE 12/31/98 9/30/99
---------- -------------- -------------- -------- -------
<S> <C> <C> <C>
Land....................................... $ 7,222 N/A N/A $ -- $ --
Buildings and improvements................. 19,782 28.2 21 701 526
Machinery and equipment.................... 26,284 6.3 3 4,146 3,110
Office equipment and furniture............. 1,055 5 2 211 158
Construction in process.................... 204 N/A N/A -- --
------------ --------- --------
$ 54,547 5,058 3,794
------------
BFI medical waste business depreciation expense (including Medical
Disposal Systems).......................................................... 12,361 8,982
--------- --------
Decrease in depreciation expense................................................ 7,303 5,188
Less: decrease allocated to selling, general and administrative expense........ (419) (346)
--------- --------
Decrease in cost of revenues.................................................... $ 6,884 $ 4,842
========= ========
</TABLE>
The decrease in depreciation expense is due to a decrease in
the fair value of the acquired assets compared to their net book value
and our belief that the assets acquired will have an average useful
life longer than that originally determined by BFI. The expected
remaining useful lives added to the current age of the assets is
consistent with the useful lives Stericycle assigns to its other
similar assets when acquired.
(b) An increase in amortization expense relating to acquired intangible
assets and goodwill based on estimated lives, net of a decrease in
depreciation expense as computed in Note 4(a) above and the
reclassification of interest expense which has been included in the
historical selling, general and administrative expense of the BFI
medical waste business, on capital leases which are being assumed, as
follows (in thousands, except estimated lives in years):
<TABLE>
AMORTIZATION EXPENSE
--------------------
PRELIMINARY CURRENT YEAR NINE MONTHS
ESTIMATED ESTIMATED ENDED ENDED
FAIR VALUE AVERAGE LIFE 12/31/98 9/30/99
---------- ------------ -------- -------
<S> <C> <C> <C> <C>
Non-compete agreement................ $ 5,300 5 $ 1,060 $ 795
Employee work force.................. 2,870 3 957 718
Goodwill............................. 358,315 40 8,958 6,718
--------- ---------
10,975 8,231
BFI medical waste business amortization expense (including Medical
Disposal Systems)............................................................ 2,845 2,148
--------- ---------
Increase in amortization expense................................................ 8,130 6,083
Reclassification of interest expense on capital leases assumed.................. (158) (173)
Decrease in depreciation expense................................................ (419) (346)
--------- ---------
Increase in selling, general, and administrative expense........................ $ 7,553 $ 5,564
========= =========
</TABLE>
(c) The elimination of a gain on the sale of customer lists to
Stericycle of $480,000 for the nine months ended June 30, 1999, which
is included in the historical financial statements of the BFI medical
waste business during this period.
(d) A net increase in interest expense reflecting the draw down of our
credit facility, issuance of the notes, amortization of deferred
financing costs and a reclassification of interest expense which has
been included in the historical selling, general and administrative
expenses of the BFI medical waste business on capital leases which are
being assumed, calculated as follows (in thousands, except interest
rates):
<PAGE>
<TABLE>
INTEREST EXPENSE
----------------
YEAR NINE MONTHS
AMOUNT INTEREST ENDED ENDED
BORROWED RATE 12/31/98 9/30/99
-------- ---- -------- -------
Credit facility:
<S> <C> <C> <C> <C>
Term loan A............................ $ 75,000 8.25% $ 6,188 $ 4,641
Term loan B............................ 150,000 9.00% 13,500 10,125
Series A notes............................ 125,000 12.375% 15,469 11,602
Amortization of deferred financing costs.. 1,455 1,091
Reclassification of interest expense on
capital leases assumed................. 158 173
--------- ---------
Increase in interest expense.............. $ 36,770 $ 27,632
========= =========
</TABLE>
(e) Income tax expense resulting from a pro forma increase in taxable
income at an effective rate of 40%, net of an elimination of
alternative minimum taxes of $143 for the year ended December 31, 1998.
(f) Payment-in-kind dividends at an annual rate of 3.375% on the $75
million liquidation value of our convertible preferred stock.
(g) Incremental issuance of common shares on an as if converted basis
for the convertible preferred shares at a conversion price of $17.50
per share.
5. EXCLUDED COSTS AND EXPECTED COST SAVINGS (IN THOUSANDS, EXCEPT PER SHARE
DATA)
The statements of operations data for the BFI medical waste business
and the pro forma condensed combined statements of operations exclude indirect
selling, general and administrative expenses of the BFI medical waste business
of $13,298 for the nine months ended September 30, 1999 and $17,090 for the year
ended September 30, 1998. See note 3 to the Notes to Financial Statements of the
BFI Medical Waste Business. The pro forma condensed combined statements of
operations also do not reflect the effect of the expected elimination of
duplicative personnel and facilities costs related to both Stericycle and the
BFI medical waste business. Based upon our detailed transition plans, we
estimate that if these expected eliminations had been in effect on January 1,
1998, they would have had the effect of reducing transportation, plant,
operations and facilities costs by $9,581, during the nine months ended
September 30, 1999 and by $12,805, during the year ended December 31, 1998.
Adjusting for the indirect selling, general and administrative expenses
mentioned above, the reduction in transportation, plant, operations and
facilities costs, and the related tax effects of each, would result in net
income to common shareholders, basic earnings per share and diluted earnings per
share of $13,213, $0.94, and $0.81 for the nine months ended September 30, 1999
and $9,554, $0.89 and $0.78 for the year ended December 31, 1998, respectively.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
STERICYCLE
You should read Stericycle's selected historical consolidated financial
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our consolidated financial
statements and the notes thereto, and the other financial information included
herein. The data for the full years have been derived from our audited
consolidated financial statements. The data for the nine months ended September
30, 1998 and 1999 have been derived from our unaudited consolidated financial
statements and, in the opinion of our management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the results of operations for the periods and financial
condition as of the dates presented. The results of operations for the nine
months ended September 30, 1999 are not necessarily indicative of the results of
operations for the full year.
<TABLE>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................. $ 16,141 $ 21,339 $ 24,542 $ 46,166 $ 66,681 $ 44,759 $ 74,285
Cost of revenues..................... 13,922 17,478 19,423 34,109 45,328 30,492 48,998
Selling, general and administrative
expenses........................... 7,927 8,137 7,556 10,671 14,929 10,151 15,541
-------- --------- -------- -------- --------- --------- ---------
Total costs and expenses............. 21,849 25,615 26,979 44,780 60,257 40,643 64,539
-------- --------- -------- -------- --------- --------- ---------
Income (loss) from operations........ (5,708) (4,276) (2,437) 1,386 6,424 4,116 9,746
Interest income (expense), net....... (104) (268) 48 190 (63) 66 (113)
Other income......................... -- -- -- -- -- 20 404
-------- --------- -------- -------- --------- --------- ---------
Income (loss) before income taxes.... (5,812) (4,544) (2,389) 1,576 6,361 4,202 10,037
Income tax expense................... -- -- -- 146 648 781 2,168
-------- --------- -------- -------- --------- --------- ---------
Net income (loss).................... (5,812) (4,544) (2,389) 1,430 5,713 3,421 7,869
Less cumulative preferred dividends(1) (4,481) -- -- -- -- -- --
-------- --------- -------- -------- --------- --------- ---------
Income (loss) applicable to common stock $(10,293) $ (4,544) $ (2,389) $ 1,430 $ 5,713 $ 3,42 $ 7,869
======== ========= ======== ======== ========= ========= =========
OTHER DATA:
Ratio of earnings to fixed charges(2) -- -- -- 1.9x 4.3x 3.9x 5.5x
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------ -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 1,206 $ 138 $ 11,950 $ 5,374 $ 1,283 $ 775 $ 16,017
Working capital...................... 2,510 438 14,617 4,879 1,166 3,298 28,192
Property, plant and equipment, net... 11,633 10,228 12,007 11,241 23,100 12,043 22,435
Total assets......................... 27,809 23,491 55,155 61,226 97,755 68,183 128,728
Long-term debt (including current portion) 5,441 5,919 7,806 6,527 28,959 9,527 5,778
Convertible redeemable preferred stock(1) 62,909 -- -- -- -- -- --
Shareholders' equity (capital deficiency) (45,363) 12,574 40,014 45,026 53,651 50,550 111,812
(1) In August 1995, our Board of Directors adopted a plan of
recapitalization which was approved by our stockholders in September
1995, pursuant to which we reclassified our previously outstanding
convertible redeemable preferred stock as common stock. As part of the
plan of recapitalization, all conversion, redemption and liquidation
rights associated with the convertible redeemable preferred stock were
terminated in exchange for the issuance of shares of common stock.
(2) The ratio of earnings to fixed charges is computed by dividing
earnings by fixed charges. For this purpose, "earnings" include income
(loss) before income taxes and fixed charges and "fixed charges"
include interest expense, amortization of deferred financing fees and
costs, and a portion of rent expense that is representative of the
interest factor in these rentals. For the years ended December 31,
1994, 1995, and 1996, earnings were insufficient to cover fixed
charges by $4,093, $2,563, and $50, respectively.
</TABLE>
THE BFI MEDICAL WASTE BUSINESS
You should read the selected historical financial data for the BFI
medical waste business set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations--BFI
Medical Waste Business," the financial statements and the notes thereto of the
BFI medical waste business, and the other financial information included in this
prospectus. The financial statements of the BFI medical waste business are not
<PAGE>
intended to be a complete presentation of the assets and liabilities and results
of operations and cash flows of the BFI medical waste business. Rather, these
financial statements were prepared for the purpose of complying with the rules
and regulations of the SEC. In particular, the actual historical selling,
general and administrative expenses for the BFI medical waste business cannot be
determined with precision from BFI's accounting records. Only that portion of
the selling, general and administrative expenses directly attributable to the
BFI medical waste business is reflected in the historical financial data for
that business included in this prospectus. No portion of the selling, general
and administrative expenses associated with the employees and operations of BFI
that were employed in multiple segments of BFI's overall business have been
included in the historical results of the BFI medical waste business. Therefore,
the selling, general and administrative expenses of the BFI medical waste
business are not comparable to those of Stericycle. See Note 3 of Notes to
Financial Statements of Browning-Ferris Industries, Inc. Medical Waste Business.
In addition, in connection with the installation of new computer
systems in 1998, the manner of accounting for certain selling, general and
administrative costs was changed. Beginning in January 1998, some costs
previously identifiable directly with medical waste operations were pooled with
similar costs related to BFI's other business operations by marketplace so that
only the selling, general and administrative costs related to medical waste-only
geographic locations could be specifically identified and charged to the BFI
medical waste business in fiscal year 1998 and subsequent financial statements.
Therefore, the financial data of the BFI medical waste business are not
comparable between the fiscal year ended September 30, 1998 and prior years.
The data for the fiscal years have been derived from the audited
financial statements of the BFI medical waste business. The data for the nine
months ended June 30, 1998 and 1999 have been derived from the unaudited
financial statements of the BFI medical waste business. The results of
operations for the nine months ended June 30, 1999 are not necessary indicative
of the results of operations for the full fiscal year.
<TABLE>
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------- --------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF REVENUES IN EXCESS
OF DIRECT EXPENSES DATA:
Revenues........................... $ 199,886 $ 199,060 $ 198,222 $ 148,837 $ 152,266
Cost of revenues................... 140,482 138,000 132,629 99,406 99,831
------------- ----------- ------------ ------------- ------------
Gross profit....................... 59,404 61,060 65,593 49,431 52,435
Direct selling, general
and administrative
expenses......................... 22,468 20,948 13,273 8,937 8,824
Special charges
(credits)(1)..................... 9,236 4,500 257 257 (469)
------------- ----------- ------------ ------------- ------------
Revenues in excess of direct
expenses........................ $ 27,700 $ 35,612 $ 52,063 $ 40,237 $ 44,080
============= =========== ============ ============= ============
OTHER DATA:
Depreciation and amortization...... $ 20,098 $ 17,327 $ 14,972 $ 11,525 $ 11,010
Capital expenditures............... 10,794 4,149 6,847 5,790 6,456
</TABLE>
<TABLE>
AS OF SEPTEMBER 30, AS OF JUNE 30,
-------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $ -- $ --
Working capital............................................. 13,132 14,820 13,984
Total directly identifiable assets.......................... 129,503 125,632 134,861
Long-term debt, including current portion................... 1,766 3,015 5,132
Total directly identifiable assets in
excess of directly identifiable liabilities............... 121,719 117,967 125,593
(1) See Note 11 of Notes to Financial Statements of Browning-Ferris Industries, Inc. Medical Waste Business.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STERICYCLE
BACKGROUND
Stericycle derives its revenues from services to two principal types of
customers: (i) small account customers, including outpatient clinics, medical
and dental offices and long-term and sub-acute care facilities; and (ii) large
account customers, including hospitals, blood banks and pharmaceutical
manufacturers. Substantially all of our services are provided pursuant to
long-term customer contracts specifying either scheduled or on-call services, or
both. Contracts with small accounts are generally two to three years in length,
usually can be terminated only for cause, generally provide for annual price
increases and renew automatically unless the customer notifies us prior to
expiration of the contract. Contracts with hospitals and other large accounts,
which generally run for one to five years, typically include price escalator
provisions which allow for price increases, generally tied to an inflation index
or to a fixed percentage. As of June 30, 1999, we served over 85,000 customers.
In addition to various wholly owned domestic subsidiaries, we own 55%
of 3CI Complete Compliance Corporation and have international investments and
operations, including: Med-Tech Environmental Limited, a Canadian medical waste
services subsidiary; Medam S.A. de C.V., a joint venture company in Mexico
formed by us and others for the collection, treatment and disposal of regulated
medical waste in the Mexico City metropolitan market; and a licensing and
equipment sales agreement for our ETD technology in Brazil with Companhia
Auxiliar de Viacao e Obrar.
We recognize 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. Revenue and costs on contracts to supply our proprietary
treatment equipment are accounted for by the percentage of completion method,
whereby income is recognized based on the estimated stage of completion of the
individual contract.
We currently expense as incurred all permitting, design and start-up
costs associated with our facilities. We elect to expense rather than to
capitalize the costs of obtaining permits and approvals for each proposed
facility regardless of whether we are ultimately successful in obtaining the
desired permits and approvals and developing the facility. We currently
recognize as a current expense all legal fees and other costs related to
obtaining and maintaining permits and approvals. In addition, we currently
expense all costs related to research and development as incurred.
Our cost of revenues includes all costs of treatment, transportation,
disposal and supplies, depreciation of operating assets, and some indirect
overhead costs such as operations managers. Our selling, general and
administrative expenses are comprised of accounting, information systems,
selling, district and area management offices and corporate headquarters costs.
In addition, we include amortization of intangible assets, such as goodwill
resulting from acquisitions, in selling, general and administrative expenses.
We do not own or operate any landfills or waste storage facilities. We
dispose of any waste remaining after completion of the treatment process at
facilities of unrelated parties. Accordingly, the calculation of our operating
costs is not subject to the estimates inherently associated with landfill
accounting.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues. Revenues increased $29,526,000, or 66.0%, to $74,285,000
during the nine months ended September 30, 1999 from $44,759,000 during the
comparable period in 1998 as we continued to implement our strategy of acquiring
selected businesses and focusing on sales to higher-margin small account
customers while simultaneously paring specified higher-revenue but lower-margin
accounts with large account customers. Revenues generated from the sale of
machinery internationally was $5,161,000 during the nine month period ended
September 30, 1999 as compared to $3,802,000 during the same period in 1998.
<PAGE>
During the nine months ended September 30, 1999, acquisitions made during the
last 12 months contributed approximately $24,846,000 to the increase in revenues
as compared to the prior year.
Cost of Revenues. Cost of revenues increased $18,506,000, or 60.7%, to
$48,998,000 during the nine months ended September 30, 1999 from $30,492,000
during the comparable period in 1998. This increase was primarily due to the
substantial increase in revenues during 1999 compared to the same period in 1998
and an increase in the cost of equipment sold internationally. The gross margin
percentage increased to 34.0% during the nine months ended September 30, 1999
from 31.9% during the comparable period in 1998 due to further integration of
new acquisitions into the existing infrastructure, lower relative costs relating
to the changing mix of small account versus large account customers, increased
utilization of treatment capacity and an increase in sales of equipment
internationally.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $15,541,000 for the nine months ended
September 30, 1999 from $10,151,000 for the comparable period in 1998. The
increase was largely the result of increases in selling and marketing expenses
and goodwill amortization as a result of our acquisitions, expansion of the
sales network, and increased administrative expenses related to the higher
volume. Selling, general and administrative expenses as a percentage of revenues
decreased to 20.9% during the nine months ended September 30, 1999 from 22.7%
during the comparable period in 1998. Excluding amortization, selling, general
and administrative expenses as a percent of revenue decreased to 18.5% during
the nine months ended September 30, 1999 from 20.4% during the comparable period
in 1998.
Interest Expense and Interest Income. Interest expense increased to
$689,000 during the nine months ended September 30, 1999, from $242,000 during
the comparable period in 1998, primarily due to increased interest expense
related to borrowings associated with acquisitions completed prior to our public
offering in February 1999. Interest income also increased to $576,000 during the
nine months ended September 30, 1999, from $308,000 during the comparable period
in 1998, primarily due to the investment of proceeds from the public offering,
offset by lower cash balances prior to the stock issuance.
Other Income and Expense. A one-time gain of $656,000 on the sale of
routes by 3CI Complete Compliance Corporation of which Waste Systems, Inc. (our
wholly owned subsidiary) is majority shareholder, was partially offset by a
one-time non-cash expense of $192,000 for warrants issued with bridge loan
borrowings in December 1998 and January 1999. See "Certain Transactions."
Income Tax Expense. The estimated effective tax rate of approximately
21.6% for the nine months ended September 30, 1999 reflects federal taxable
income expected in excess of Internal Revenue Code Section 382 limitations on
the annual utilization of our net operating loss carryforward and state income
taxes in states where we have no offsetting net operating losses.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased $20,515,000, or 44.4%, to $66,681,000
during 1998 from $46,166,000 during 1997 as we continued to focus on sales to
higher margin, small account customers, while simultaneously paring some lower
margin accounts with large account customers. The increase also reflects
$5,952,000 in revenues from the sale of equipment to Companhia Auxiliar and
Medam. During 1998, acquisitions completed since January 1, 1997 contributed
approximately $13,103,000 to the increase in revenues from 1997. Excluding these
incremental revenues from acquisitions, revenues increased from $46,166,000 to
$53,578,000 or 16.1%. For the year, internal revenue growth for small account
customers increased 14.8% while revenues from large account customers decreased
by 7.2%.
Cost of Revenues. Cost of revenues increased $11,219,000, or 32.9%, to
$45,328,000 during 1998, from $34,109,000 during 1997. The increase was
primarily due to the substantial increase in revenues during 1998 and to the
cost of equipment supplied to Companhia Auxiliar and Medam. The gross margin
percentage increased to 32.0% during 1998 from 26.1% during 1997 as a result of
the sale of equipment internationally, the further integration of new
acquisitions into our existing infrastructure, improved profitability relating
to the changing mix of small account and large account customers and increased
utilization of existing treatment capacity.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $14,929,000 during 1998 from $10,671,000
during 1997 due to our continued progress in strengthening our sales and
<PAGE>
administrative organizations and due to the increase in the amortization of
goodwill and other incremental costs associated with acquisitions. Selling,
general and administrative expenses as a percentage of revenues decreased to
22.4% during 1998 from 23.1% during 1997. Amortization of goodwill increased to
$1,505,000 during 1998 from $1,042,000 in 1997, and excluding amortization,
selling, general and administrative expenses as a percent of revenues decreased
to 20.1% in 1998 from 20.9% in 1997.
Interest Expense and Interest Income. Interest expense increased to
$777,000 during 1998, from $428,000 during 1997, primarily due to borrowings on
our revolving line of credit partially offset by the repayment of certain debt
issued in connection with one of our acquisitions. Interest income also
increased to $714,000 during 1998 from $618,000 during 1997, primarily due to
interest income on the Med-Tech subordinated debt acquired in October 1998
partially offset by lower interest income on invested cash balances.
Income Tax Expense. The estimated effective tax rate of approximately
10.2% for 1998 reflects the utilization of our net operating losses for income
tax purposes, offset by alternative minimum tax and state income taxes in states
where we have 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 1997 from $24,542,000 during 1996 as we continued to implement our
strategy of focusing on higher margin small account customers while
simultaneously paring certain higher revenue but lower margin accounts with
large account customers. 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., which was completed in December 1996,
eight months of revenues from the Environmental Control Co., Inc. acquisition
completed in May 1997, and a partial year's revenues from various other smaller
acquisitions. During 1997, acquisitions completed since January 1, 1996
contributed approximately $20,975,000 to the increase in revenues from 1996.
Excluding these incremental revenues from acquisitions, revenues increased from
$24,542,000 in 1996 to $25,191,000 in 1997, or 2.6%. For the year, internal
revenue growth for small account customers was 13.0%, while revenues from large
account customers decreased by 4.0%.
Cost of Revenues. Cost of revenues increased $14,686,000, or 75.6%, to
$34,109,000 during 1997 from $19,423,000 during 1996. The principal reasons for
the increase were higher transportation, treatment and disposal costs as a
result of the higher volume attributable to our acquisitions and integration
expenses related to our 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 small account customers and increased utilization of our
treatment capacity.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $10,671,000 during 1997 from $7,556,000
during 1996. The increase was largely due to increases in selling and marketing
expenses as a result of our acquisitions and expansion of our 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. Amortization of goodwill
increased to $1,042,000 during 1997 from $390,000 in 1996 and, excluding
amortization, selling, general and administrative expenses as a percent of
revenues decreased to 20.9% in 1997 from 29.2% in 1996.
Interest Expense and Interest Income. Interest expense increased to
$428,000 during 1997 from $373,000 during 1996. This increase was primarily
attributable to higher indebtedness related to the Waste Management and
Environmental Control acquisitions. Interest income increased to $618,000 during
1997 from $421,000 during 1996 due to interest earned on the invested cash
proceeds from our initial public offering in August 1996.
Income Tax Expense. The estimated effective tax rate of 9.3% for 1997
reflects the utilization of our net operating losses for income tax purposes,
offset by alternative minimum tax and state income taxes in states where we have
no offsetting net operating losses. We did not pay any income taxes in 1996.
<PAGE>
BFI MEDICAL WASTE BUSINESS
The following discussion of the financial condition and results of
operations of the BFI medical waste business should be read in conjunction with
the BFI Medical Waste Business Statements of Directly Identifiable Assets and
Liabilities and Statements of Revenues and Direct Expenses and related notes
included elsewhere in this prospectus.
BACKGROUND
On November 12, 1999, we acquired from Allied all of the medical waste
operations of BFI in the United States, Canada and Puerto Rico. The purchase
price for these operations was $410.5 million in cash, subject to post-closing
adjustment. Allied purchased BFI on July 30, 1999.
The BFI medical waste business provides medical waste collection,
transportation, treatment and disposal services to hospitals, healthcare
providers and other small quantity generators in the United States, Canada and
Puerto Rico. Until November 12, 1999, the BFI medical waste business was a
service line of BFI.
BFI's operating organization was aligned along functional lines into
five groups: sales and marketing, collection, post-collection, business
development and business analysis. As a result, BFI did not maintain separate
books and records for the medical waste operations other than service line
revenues and direct operating costs. Therefore, the financial statements include
only those costs that are directly attributable to the medical waste operations
and that are separately identifiable in BFI's accounting records. Significant
additional costs were incurred by BFI on a shared service basis and have been
excluded because these costs have not been allocated to the various BFI service
lines. As a result, the accompanying financial statements are not intended to
be, and are not, a complete presentation of the assets, liabilities and results
of operations of the BFI medical waste business. Rather, the accompanying
financial statements were prepared for the purpose of complying with rules and
regulations of the SEC, which indicate that specific financial statements are
required for the BFI medical waste business. All significant transactions among
units of the BFI medical waste business have been eliminated. For a further
description of the bases of the financial statements, see the notes to the
financial statements of the BFI medical waste business.
The BFI medical waste business derives its revenues from services to
two principal types of customers: (i) small account customers, including
outpatient clinics, medical and dental offices, and long-term and subacute care
facilities; and (ii) large account customers, including hospitals, blood banks
and pharmaceutical manufacturers. Substantially all of the services of the BFI
medical waste business are provided pursuant to long-term customer contracts
specifying either scheduled or on-call services, or both. Contracts with small
accounts are generally two to three years in length, usually can be terminated
only for cause, generally provide for annual price increases and have an
automatic renewal provision which operates unless the customer notifies the BFI
medical waste business prior to completion of the contract. Contracts with
hospitals and other large accounts, which generally run for one to five years,
typically include price escalator provisions which allow for price increases,
generally tied to an inflation index or to a fixed percentage. As of June 30,
1999, the BFI medical waste business served over 150,000 customers.
Direct selling, general and administrative expense and special charges
(credits) include only those costs which are incurred solely for the medical
waste operations and are separately identified in BFI's accounting records.
These costs include payroll costs for sales and administrative employees whose
function is to solely support the medical waste business and general and
administrative costs of medical waste only facilities. Further, in connection
with the installation of new computer systems in January 1998, certain selling,
general and administrative costs previously identifiable directly to medical
waste operations through December 1997 were no longer accounted for in this
manner. Beginning in January 1998, these costs were pooled with similar costs
related to BFI's other business operations by marketplace so that only the
selling, general and administrative costs related to geographic locations
devoted exclusively to medical waste could be specifically identified and
charged to medical waste in fiscal year 1998 and subsequent financial
statements. For these reasons, the selling, general and administrative costs of
the BFI medical waste business are not comparable to those of Stericycle and are
not comparable between the fiscal year ended September 30, 1998 and prior fiscal
years.
<PAGE>
For processing activities, the BFI medical waste business recognizes
revenue when the treatment of the regulated medical waste is completed at its
facilities or the waste is shipped off-site for processing and disposal. For
waste shipped off-site, all associated costs are recognized at time of shipment.
For collection activities, the BFI medical waste business recognizes revenue
when regulated medical waste is collected from its customers.
The BFI medical waste business expenses costs associated with the
operation of new plants prior to the commencement of services to customers.
Initial plant permit costs are capitalized as part of property, plant, and
equipment and are amortized using the straight-line method over the useful lives
up to 25 years. All ongoing permit costs are expensed.
BFI's cost of revenues does not include depreciation of operating
assets.
The BFI medical waste business does not own or operate any landfills or
waste storage facilities. It disposes of any waste remaining after completion of
the treatment process at facilities of unrelated parties. Accordingly, the
calculation of its operating costs is not subject to the estimates inherently
associated with landfill accounting.
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
Revenues. Revenues for the nine months ended June 30, 1999 were
$152,266,000 representing an increase of $3,429,000 or 2.3% over revenues of
$148,837,000 for the nine months ended June 30, 1998. During the nine months
ended June 30, 1999, the BFI medical waste business completed six acquisitions
which contributed approximately $3,000,000 in revenue for the nine-month period.
The estimated annual revenues for the six acquisitions were approximately
$9,800,000. The remaining increase in revenues is attributable to internal
growth in other marketplaces.
Direct Operating Costs. Direct operating costs increased $1,108,000, or
1.2%, to $91,568,000 for the nine months ended June 30, 1999 from $90,460,000
for the nine months ended June 30, 1998, primarily as a result of the
acquisition transactions completed during the period. However, as a percentage
of revenues, the direct gross operating margin increased from 39.2% to 39.9%,
primarily as a result of the continuing implementation of additional safety
training, which reduced costs associated with accidents and injuries, and the
consolidation of certain small collection operations into nearby larger
collection facilities. Including the depreciation of operating assets, gross
margin increased to 34.4% for the nine months ended June 30, 1999 from 33.2% in
the prior year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $281,000 to $6,077,000 for the nine months
ended June 30, 1999 from $6,358,000 for the nine months ended June 30, 1998. The
nine months ended June 30, 1998 includes the January 1, 1998 conversion date of
BFI to its SAP management software system. Therefore, for three months of this
nine-month period, the BFI medical waste business was charged for shared
selling, general and administrative costs. After the conversion, only directly
related selling, general and administrative costs were charged to the BFI
medical waste business.
Depreciation and Amortization Expense. Total depreciation and
amortization expense decreased $515,000 to $11,010,000 for the nine months ended
June 30, 1999 from $11,525,000 for the nine months ended June 30, 1998 and as a
percentage of revenues, decreased from 7.7% to 7.2%. These decreases are
primarily due to assets becoming fully depreciated in 1998, and longer useful
lives of assets acquired in the nine months ended June 30, 1999 than in the
prior period.
Special Charges (Credits). During the nine months ended June 30, 1999,
the BFI medical waste business recorded special credits of $469,000 relating to
a gain on the sale of customer lists totaling $480,000, offset by a write-down
of a non-core business asset totaling $11,000. During the nine months ended June
30, 1998, the BFI medical waste business recorded special charges of $257,000
relating to the write-down of a non-core business asset.
<PAGE>
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
Revenues. Revenues remained relatively flat between periods,
$198,222,000 for the year ended September 30, 1998 compared to $199,060,000 for
the year ended September 30, 1997. In December, 1997, the BFI medical waste
business divested its Arizona collection and processing operations representing
approximately $3,000,000 or 1.5% of revenues in fiscal 1997. However, internal
growth and acquisitions in other markets largely offset the reduction in revenue
resulting from the Arizona divestiture. The BFI medical waste business completed
three acquisitions during the year ended September 30, 1998, which collectively
contributed approximately $1,000,000 in revenues.
Direct Operating Costs. Direct operating costs decreased $3,060,000, or
2.5%, to $121,096,000 for the year ended September 30, 1998, from $124,156,000
during the year ended September 30, 1997. As a percentage of revenues, the
direct gross operating margin increased from 37.6% to 38.9%, primarily due to
the implementation of cost control measures at all of the processing facilities,
and a reduction of accident and injury costs due to continuing implementation of
additional safety training. Costs were also reduced by $800,000 as a result of
the divestiture of the Arizona operation.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as reported on the Statements of Revenues and Direct
Expenses, decreased $7,631,000, or 43.7%, to $9,834,000 for the year ended
September 30, 1998, from $17,465,000 during the year ended September 30, 1997.
As indicated elsewhere herein, selling, general and administrative expenses
include only those expenses which are incurred solely for the medical waste
operations and are separately identified in BFI's accounting records. In
connection with the installation of a new general ledger system in January 1998,
certain selling, general and administrative expenses assigned directly to
medical waste operations through December 1997 were no longer accounted for in
this manner. Beginning in January 1998, these expenses were pooled with similar
expenses related to BFI's other business operations by marketplace so that only
the selling, general and administrative expenses related to medical waste only
geographic locations could be specifically charged to the BFI medical waste
business in fiscal year 1998 and subsequent periods. Also, in May 1998, BFI
announced that its corporate office and marketplace level offices, which provide
shared selling, general and administrative expenses, had undertaken various
cost-cutting measures. Further, the year ended September 30, 1997 included
$1,500,000 in expenses related to fines paid for violations of the Clean Water
Act.
Depreciation and Amortization Expense. Total depreciation and
amortization expense decreased $2,355,000, to $14,972,000 for the year ended
September 30, 1998, from $17,327,000 during the year ended September 30, 1997
and as a percentage of revenues decreased from 8.7% to 7.6%. These decreases
were due primarily to the divestiture of the Arizona operation in December 1997,
and due to a significant number of medical waste containers becoming fully
depreciated.
Special Charges. In the year ended September 30, 1998, the BFI medical
waste business recorded special charges of $257,000 relating to the write-down
of one non-core business asset. In 1997 the BFI medical waste business recorded
special charges of $4,500,000 relating to the closure of an incinerator at the
Bronx, New York facility.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Revenues. Revenues remained relatively flat between periods, decreasing
slightly to $199,060,000 for the year ended September 30, 1997 compared to
$199,886,000 for the year ended September 30, 1996. The BFI medical waste
business completed one acquisition during the year ended September 30, 1997,
which contributed approximately $300,000 in revenues. The closure of an
incinerator at the Bronx, New York facility in July 1997 resulted in a reduction
in revenues of approximately $500,000.
Direct Operating Costs. Direct operating costs remained relatively flat
at $124,156,000 during the year ended September 30, 1997 compared to
$123,801,000 for the year ended September 30, 1996. As a percentage of revenues,
the direct gross operating margin decreased from 38.1% to 37.6%. Increased costs
for repair and maintenance of equipment of approximately $604,000 were incurred
in the Arizona operations prior to its divestiture. However, these cost
increases were offset by cost reduction programs instituted in the year ended
<PAGE>
September 30, 1997. These cost reduction programs include centralized purchasing
of materials and supplies, re-routing of collection operations, and a balancing
of the volumes of waste processed among the various processing facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1,586,000 during the year ended September 30,
1997 to $17,465,000 compared to $19,051,000 for the year ended September 30,
1996. This decrease was due primarily to the internal reorganization within BFI
of the corporate sales, marketing, and accounting service groups during fiscal
1997. Selling, general and administrative expenses include specific directly
charged shared services provided by BFI's corporate and district level offices.
Further, the year ended September 30, 1997 included $1,500,000 in costs related
to fines paid for violations of the Clean Water Act.
Depreciation and Amortization Expense. Total depreciation and
amortization expense decreased $2,771,000 to $17,327,000 in 1997 from
$20,098,000 in 1996 and as a percentage of revenues decreased from 10.1% to
8.7%. These decreases were primarily due to a significant number of medical
waste containers becoming fully depreciated, due primarily to a change in the
useful life of medical waste containers. This change retired the containers
which had been in service in excess of three years, and accordingly, reduced the
following year's depreciation and amortization. These decreases were also due in
part to the curtailment of acquisitions in that only one acquisition was
completed during the year ended September 30, 1997, adding less than $200,000 in
assets. Additionally, capital expenditures decreased due to BFI's reduction of
capital spending.
Special Charges. In 1997 the BFI medical waste business recorded
special charges of $4,500,000 relating to the closure of an incinerator at the
Bronx, New York facility. In 1996, the BFI medical waste business recorded
$9,236,000 in special charges related to the future closures of processing
facilities at Rancho Cordova, California, Washington, D.C., Bartow, Florida and
Vancouver, Washington. Waste processed at these locations was redirected to
other facilities of the BFI medical waste business after those facilities were
closed. Collection operations continued at each of these locations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, our working capital was $28,192,000 compared to
working capital of $1,166,000 at December 31, 1998. The increase in working
capital was primarily due to higher cash balances and lower current liabilities
as a result of the public offering completed in February 1999.
Net cash provided by operating activities was $5,834,000 during the
nine months ended September 30, 1999 compared to $1,346,000 for the comparable
period in 1998. This increase primarily reflects higher net income and
depreciation and amortization expense, offset by changes in working capital.
Net cash used in investing activities for the nine months ended
September 30, 1999 was $15,074,000 compared to $8,955,000 for the comparable
period in 1998. The change is primarily attributable to the increase in cash
used for funding acquisitions and international investments completed in 1999
and an increase in capital expenditures. Capital expenditures were $2,367,000
for the nine months ended September 30, 1999 compared to $1,825,000 for the same
period in 1998. The increase in capital spending is a result of improvements
made to existing treatment facilities, the movement of the corporate office to a
new facility and facility improvements made by our subsidiaries, 3CI Complete
Compliance Corporation and Med-Tech Environmental Limited. Payments for
acquisitions and international investments amounted to $11,667,000 during the
nine months ended September 30, 1999.
In order to finance the BFI acquisition, we conducted a series of
financings in addition to the sale of the series A notes. As a result, we are a
substantially leveraged company. See "Risk Factors--Substantial Leverage,"
"--Additional Borrowings Available," and "--Ability to Service Debt." We also
recorded a substantial increase in goodwill and other intangible assets in
connection with the BFI acquisition, and we will have a corresponding large
increase in amortization expense.
We have a credit agreement with a group of lenders that provides for an
aggregate of up to $275.0 million in senior secured financing comprised of (i) a
six-year term loan A amortizing facility of $75.0 million, (ii) a seven-year
term loan B amortizing facility of $150.0 million, and (iii) a $50.0 million
revolving loan facility. Stericycle has drawn the $225.0 million term loan
facilities to finance the BFI acquisition. See "Description of Other
Indebtedness" for a more detailed description of these credit facilities.
Pursuant to a Series A Convertible Preferred Stock Purchase Agreement,
on November 12, 1999 we issued and sold to investment funds associated with Bain
Capital and with Madison Dearborn 75,000 shares of our convertible preferred
stock for $1,000 per share, or an aggregate of $75.0 million, in cash, less some
of the fees and expenses which are described below. See "Description of Capital
Stock" for a more detailed description of the convertible preferred stock.
Dividends on the convertible preferred stock are payable in kind in additional
shares and accrue at the annual rate of 3.375%, subject to adjustment.
Our ability to make payments on our indebtedness, including these
notes, as well as to fund our operations and future growth, will depend on our
ability to generate cash. Our success in doing so will depend on the results of
our operations, which in turn will depend on many factors, including those
described in the "Risk Factors" section of this prospectus and elsewhere in this
prospectus. Our ability to generate adequate cash is also subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond our control. We also will continue to evaluate and pursue selected
acquisitions.
Based on our current level of operations and anticipated cost savings
and operating improvements, we believe that our cash flow from operations,
available cash and available borrowings under our credit facility will be
sufficient to meet our future liquidity needs, including potential acquisitions,
however, we cannot assure you that this will be the case. We also may need to
refinance all or a portion of our indebtedness, including the series B notes, on
or before maturity. We cannot assure you that we will be able to refinance any
of our indebtedness, including our credit facility and the series B notes, on
commercially reasonable terms or at all. See "Risk Factors--Ability to Service
Debt."
Capital expenditures for Stericycle and the BFI medical waste business
on a pro forma combined basis for the twelve months ended June 30, 1999 were
approximately $14.4 million. In addition, we currently anticipate that we will
spend approximately $14.0 million on a pro forma combined basis for capital
expenditures in 2000, which includes approximately $4.0 million to install air
pollution control systems so that our incinerators will comply with EPA
regulations which become effective in 2002.
As part of the BFI acquisition, we anticipate taking a non-cash charge
of approximately $1.8 million, net of tax, and recording accrued purchase
accounting liabilities of approximately $2.0 million for severance and facility
closing costs expected to be incurred as part of the integration plan. We
anticipate incurring the cash costs related to these initiatives over the next
twelve months.
We are purchasing the BFI medical waste business excluding accounts
receivable and accounts payable. As a result, based on historical requirements
of the BFI medical waste business, we expect to make a net investment in working
capital of approximately $15.0 million in the twelve months following closing.
Our exposure to market risk includes the possibility of rising interest
rates in connection with our credit facility, thereby increasing debt service
obligations, which could adversely affect our cash flows. We have borrowings
outstanding subject to variable interest rates of approximately $225.0 million.
Net cash provided by financing activities was $23,974,000 during the
nine months ended September 30, 1999 compared to $3,010,000 for the comparable
period in 1998. The difference between the two periods results primarily from
the completion of our second public offering of common stock, which raised
$47,158,000 net of offering costs, partially offset by the repayment of
$25,881,000 in debt in 1999.
Our other financial obligations include industrial development revenue
bonds issued on behalf of and guaranteed by us to finance our Woonsocket, Rhode
Island treatment facility and equipment. These bonds, which had an outstanding
aggregate balance of $1,071,000 as of September 30, 1999 at fixed interest rates
ranging from 6.30% to 7.375%, are due in various amounts through June 2017. In
addition, we have issued various promissory notes in connection with
acquisitions during 1997 and 1998, consisting primarily of a 10-year note issued
as part of the Environmental Control acquisition, which had an outstanding
balance of $1,840,000 at September 30, 1999.
<PAGE>
As a consequence of changes in stock ownership, it is expected our
annual utilization of net operating loss carryforwards permitted by Internal
Revenue Code Section 382 will be limited and that, as a result, our effective
tax rate will increase.
For all periods for which financial statements of the BFI medical waste
business are presented in this prospectus, all treasury related activities,
including cash payments, receipts and borrowings were performed by BFI's
corporate headquarters and are not separately identifiable with the BFI medical
waste business. BFI did not separately identify intercompany loans receivable or
payable associated with different service lines. Accordingly, all treasury
related assets and liabilities (cash and debt and the related interest income
and expense) and intercompany loans receivable and payable have been excluded
from the BFI medical waste business financial statements.
YEAR 2000 ISSUES
Stericycle. We have developed a plan to modify our information systems
in anticipation of the year 2000. We currently have substantially implemented
this plan at a cost of less than $200,000. In light of our progress to date and
the fact that our business is not significantly affected by the software
employed by our vendors and customers, we do not anticipate that the year 2000
will present any material problems in respect of our key products and services.
We are continuously making acquisitions and in the course of an acquisition may
acquire software or hardware that is not year 2000 compliant. In the event that
this situation arises, we will take the necessary steps to correct the
compliance issues in a timely manner.
Our plan for the year 2000 comprises both remediating our existing
hardware and software and upgrading our business information systems generally.
We initiated the upgrading process in 1998 in order to respond to the growth in
size of our business and the inefficiencies caused by disparate hardware and
software. Undertaken for reasons unrelated to year 2000 issues, our upgrading of
our business information systems has the benefit of enabling us to become year
2000 compliant in the course of the upgrade.
We have conducted an extensive review of potential year 2000 issues.
Our assessment of our treatment facilities and equipment concluded that there
was no material risk that we would be unable to treat regulated medical waste as
a result of year 2000 issues. The new software that we adopted in 1998 for
accounting and related purposes is already year 2000 compliant. Our other
software and computer hardware are currently being tested, and upgrades or
appropriate adjustments have been or will be made in accordance with our upgrade
plans or as required. We are also in the process of reviewing the year 2000
compliance status of our significant vendors.
We believe that we have an effective plan in place to resolve year 2000
issues in a timely manner. In the event that we are unable to complete the
remaining phases of our year 2000 plan, we believe that, as a result of year
2000 issues solely affecting us, the principal effect on us would be an
inability to invoice a portion of our customers for our services.
We are also developing contingency plans to take into account any
inability of us 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.
The BFI medical waste business. In fiscal 1995, BFI initiated a project
to implement the SAP suite of business systems software (which is year 2000
compliant) to replace essentially all of its existing business systems. The
first phase of this project, implemented in January 1998, replaced approximately
45% of the existing business systems of BFI. Due to timing related to
implementation of the second phase of this project, BFI commenced a year 2000
project to ensure compliance of remaining legacy systems.
As of June 30, 1999 nearly all of the facilities and operations of the
BFI medical waste business utilized BFI's SAP suite of business systems software
as well as BFI's legacy system known as CMS. Both SAP and CMS are already year
2000 compliant systems. Conversions of the remaining facilities and operations
are planned for completion before December 1999. The costs related to these
conversions are not material to the results of operations or financial position
of the BFI medical waste business.
<PAGE>
The risk to the BFI medical waste business of not completing the
conversions of the remaining facilities and operations are that customer
invoices from those facilities may have to be prepared manually and therefore
may be delayed. Our contingency plan for the BFI medical waste business is to
enter all customer information into CMS so as to produce invoices in a timely
manner. This entry may have to be performed manually which may cause a short
delay in customer invoices.
In addition, BFI has initiated a process to (1) identify critical
supplier and customer related issues, (2) assess the year 2000 readiness of
equipment located at all of its operating facilities and (3) determine what
contingency plans may be required. At this time, the potential effects in the
event that the BFI medical waste business and/or third parties are unable to
resolve year 2000 problems timely are not determinable.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activity." SFAS No. 133
provides comprehensive and consistent standards for the recognition and
measurement of derivative and hedging activities. It requires that derivatives
be recorded on the consolidated balance sheets at fair value and establishes
criteria for hedges of changes in the fair value of assets, liabilities or firm
commitments, hedges of variable cash flows of forecasted transactions and hedges
of foreign currency exposures of net investments in foreign operations. Changes
in the fair value of derivatives that do not meet the criteria for hedges would
be recognized in the consolidated statement of earnings. This statement will be
effective for us beginning January 1, 2001. The adoption of SFAS No. 133 is not
expected to have a material impact on us.
<PAGE>
BUSINESS
OVERVIEW
We are the largest regulated medical waste management company in North
America, serving over 235,000 customers throughout the United States, Canada and
Puerto Rico. We have the only fully integrated, national medical waste
management network and an estimated 22% share of the United States regulated
medical waste market. Our network includes 35 treatment/collection centers and
93 additional transfer and collection sites. We use this network to provide the
industry's broadest service offering, including medical waste collection,
transportation, treatment, recycling and disposal to unrelated parties, together
with related consulting, training and education services and products. Our
treatment technologies include our proprietary, environmentally friendly and
efficient electro-thermal deactivation system, as well as traditional methods
such as autoclaving and incineration. On a pro forma combined basis, for the
year ended December 31, 1998 and for the nine months ended September 30, 1999,
we generated revenues of $290.3 million and $229.4 million, respectively.
On November 12, 1999, we acquired from Allied the BFI medical waste
business and Allied's medical waste operations. The purchase price for these
operations was $410.5 million in cash, subject to post-closing adjustment.
Our operations benefit significantly from the stability associated with
our long-term customer relationships. We have long-term customer contracts of
between one and five years with substantially all of our customers. In general,
our contracts with small account customers have automatic renewal provisions. We
believe the services we offer are compelling to our customers, because they
allow our customers to avoid the significant capital and operating costs that
they would have to incur to internally manage their regulated medical waste.
Furthermore, by outsourcing these services and purchasing consulting and other
services from us, our customers reduce or eliminate their risk of the large
fines associated with regulatory non-compliance.
We benefit from significant customer diversification, with no single
customer accounting for more than 2% of revenues, and our top 10 customers
accounting for approximately 7% of revenues, in each case on a pro forma
combined basis for the year ended December 31, 1998. Our two principal groups of
customers include: over 230,700 small account customers (e.g., outpatient
clinics, medical and dental offices and long-term and sub-acute care facilities)
and over 4,300 large account customers (e.g., hospitals, blood banks and
pharmaceutical manufacturers). Small account customers tend to be most likely to
outsource medical waste management services and tend to be more service oriented
and less price sensitive, resulting in higher margins for us. We are targeting
new small account customers through our proprietary database of over 330,000
potential small account customers not presently served by us and our dedicated
small account sales force. We successfully increased the proportion of revenues
from small account customers from 33% of revenues in the fourth quarter of 1996
to 57% in the second quarter of 1999, which helped increase our operating income
margin significantly.
INDUSTRY OVERVIEW
The large, fragmented medical waste industry has experienced
significant growth since its inception. The regulated medical waste industry
began with the Medical Waste Tracking Act of 1988, which was enacted by Congress
in response to media attention after medical waste washed ashore on beaches,
particularly in New York and New Jersey. Since the 1980s, the public and
government regulators have increasingly demanded the proper handling and
disposal of the medical waste generated by the health care industry. Regulated
medical waste is generally described as any medical waste that can cause an
infectious disease, including: single-use disposable items, such as needles,
syringes, gloves and other medical supplies; cultures and stocks of infectious
agents; and blood and blood products.
An independent study estimated the size of the regulated medical waste
market in the United States in 1999 to be approximately $1.4 billion. We believe
the worldwide market for regulated medical waste management services currently
is approximately $3.0 billion and, including ancillary services such as
training, education, product sales and consulting services, in excess of $10.0
billion. We also believe the regulated medical waste industry is less
susceptible than most industries to the effects of a general economic downturn.
<PAGE>
Industry sources estimate the current annual growth rate of the United States
regulated medical waste industry to be 7-10%, driven by a number of factors,
including:
Pressure to Reduce Hospital Costs Leads to Outsourcing of Services. The
health care industry is under pressure to reduce costs and improve efficiency.
To accomplish this, it is using outside contractors to perform some services,
including medical waste management. We believe that our medical waste management
services help health care providers reduce costs by reducing their medical waste
tracking, handling and compliance costs, reducing their potential liability
related to employee exposure to bloodborne pathogens and other infectious
material and reducing the amount of money invested in on-site treatment of
medical waste.
Growing Importance of Smaller Account Customers. We believe that
managed care and other health care cost-containment pressures are causing
patient care to shift from institutional higher-cost acute-care settings to less
expensive, smaller, off-site treatment alternatives. Many common diseases and
conditions are now being treated in smaller non-institutional settings. We
believe that these non-institutional alternate-site health care expenditures
will continue to grow as cost-cutting pressures increase.
Aging of the Population. According to industry statistics, the "baby
boom" generation (births between 1946 and 1964) constitutes approximately 30% of
the United States population. The relative size of this generation, combined
with declining birth rates, will continue to result in an increase in the
average age of the population, while falling mortality rates ensure that the
average person will live longer. As people age, they typically require more
medical attention and a wider variety of tests and procedures. In addition, as
technology improves, more tests and procedures become available. All of these
factors lead to increased generation of medical waste.
Environmental and Safety Regulation. We believe that many businesses
currently not using outsourced medical waste services are unaware of the need
for proper training of employees and the Occupational Safety and Health
Administration requirements regarding the handling of medical waste. These
businesses include restaurants, casinos, hotels and generally all businesses
where employees may come in contact with blood-borne pathogens. In addition,
home health care is currently unregulated and may become subject to similar
blood-borne pathogen regulations in the future.
Our industry is subject to extensive regulation beyond the MWTA. For
example, the new stringent Clean Air Act regulations adopted in 1997 limit the
discharge into the atmosphere of pollutants released by medical waste
incineration. This is expected to increase the costs of operating medical waste
incinerators and to result in significant closures of on-site treatment
facilities, thereby increasing the demand for off-site treatment services. The
EPA estimates that approximately 83-90% of small medical waste incinerators,
60-95% of medium medical waste incinerators and up to 35% of large medical waste
incinerators in the United States will be closed over the next several years. In
addition, OSHA has issued regulations concerning employee exposure to bloodborne
pathogens and other potentially infectious materials that require, among other
things, special procedures for the handling and disposal of medical waste and
annual training of all personnel who may be exposed to blood and other body
fluids. We believe that these regulations will help to expand the market for our
services beyond traditional providers of health care.
<PAGE>
COMPETITIVE STRENGTHS
We believe that we benefit from the following competitive strengths:
MARKET LEADER. We are the largest and the only national provider of
medical waste management services in the United States. We estimate our market
share to be approximately 22% in the United States and that we have over 11
times the revenues of our next largest competitor. As a result of our market
leadership position, we provide our customers with superior, vertically
integrated services as well as a variety of products and we are the only
industry participant able to service national accounts. We believe our leading
market position provides us with more operating leverage and a unique
competitive advantage in attracting and retaining customers as compared to our
smaller regional and local competitors.
BROADEST RANGE OF HIGH QUALITY SERVICES. We offer our customers a wide
range of services to help them develop internal systems and processes which
allow them to efficiently and safely manage their medical waste from the point
of generation through treatment and disposal. For example, we have developed
programs to help train our customers' employees on the proper methods of
handling medical waste in order to reduce potential employee exposure. Other
services include those designed to help clients ensure and maintain compliance
with OSHA and other relevant regulations. We also supply specially designed
containers for use by most of our large account customers, including our
Steri-Tub(R) container, a reusable leak- and puncture-resistant container, made
from recycled plastic, which we developed and patented.
ESTABLISHED NATIONAL NETWORK. Our 35 treatment/collection centers and
our 235,000 customers in 46 states give us the largest and the only national
network in the regulated medical waste industry. The extensive federal, state
and local laws and regulations governing the regulated medical waste industry
typically require some type of governmental approval for new facilities. These
approvals are frequently opposed by elected officials, local residents or
citizen groups, and can be difficult to obtain. We have significant experience
in obtaining and maintaining these permits, authorizations and other types of
governmental approvals. We believe a network similar in scale and scope to ours
would be expensive and time-consuming for a competitor to develop.
LOW COST OPERATOR. We are often the low-cost provider within the
markets we serve. This results from our vertically integrated network and our
broad geographic presence. As a result, we are able to: increase our route
densities, which permits our drivers to make more stops per shift; minimize the
distance traveled by our collection vehicles to treatment facilities; and
increase the utilization of our equipment and facilities to internally treat
more of the waste we collect. Our next largest competitor in the U.S. market has
five treatment facilities and we believe most of our competitors do not have
fully integrated operations. We believe our vertically integrated operations
provide us a competitive advantage over smaller, less integrated competitors.
DIVERSE CUSTOMER BASE AND REVENUE STABILITY. We have developed strong
contracts and service agreements with a diverse network of established
customers. Our top 10 customers only accounted for approximately 7% of revenues
and no single customer accounted for more than 2% of revenues, in each case on a
pro forma combined basis for the year ended December 31, 1998. We believe that
our diverse customer base would mitigate the impact of the loss of any
particular customer. We are also generally protected from regulatory changes
which affect our costs, because our contracts generally contain provisions which
allow us to adjust our prices to reflect any additional costs caused by changes
in regulations.
STRONG SALES NETWORK AND PROPRIETARY DATABASE. We have the largest,
most well-established sales force in the medical waste industry, with over 277
sales representatives and telemarketing personnel. We use both telemarketing and
direct sales efforts to obtain new customers. In addition, we have developed a
proprietary database of over 330,000 potential small account customers not
presently served by us, which we believe gives us a competitive advantage in
identifying and reaching higher margin, small account customers. We believe that
we have been particularly effective at attracting new small account customers
through our innovative "flex-rep" program in which part-time field sales
representatives work in tandem with telemarketers. We believe that the
combination of the two allows us to cost-effectively sell "face-to-face" with
potential small account customers and is more effective at converting sales
leads into customers than telemarketing alone.
<PAGE>
EXPERIENCED MANAGEMENT TEAM. The Chairman of our Board of Directors and
our five most senior executives collectively have over 45 years of management
experience in the health care and waste management industries. Our Chief
Executive Officer, had more than 15 years of senior management experience at
Abbott Laboratories and, since joining us in 1992 as Chief Executive Officer,
has led us from an early stage venture capital concept to the industry leader.
Frank ten Brink, our Chief Financial Officer, previously served as Chief
Financial Officer of Hexacomb Corporation. Richard Kogler recently joined us as
executive vice president for domestic operations and Chief Operating Officer.
Previously, Mr. Kogler served in senior roles with American Disposal Services,
Inc. Jack Schuler, our Chairman, is also the current Chairman of Ventana Medical
Systems. Previously, Mr. Schuler was the President and Chief Operating Officer
of Abbott Laboratories. Anthony J. Tomasello has been our Executive Vice
President and Chief Technical Officer since January 1999, and previously was our
Vice President, Operations beginning in 1990. Previously, Mr. Tomasello was
President and Chief Operating Officer of Pi Enterprises and Orbital Systems.
Collectively, our directors and senior executives have beneficial ownership of
approximately 16.4% of our common stock.
BUSINESS STRATEGY
Our goals are to maintain our position as the largest provider of
integrated services in the regulated medical waste industry and to continuously
improve our profitability. Components of our strategy to achieve these goals
include:
TARGET HIGHER MARGIN, SMALL ACCOUNT CUSTOMERS. We intend to continue
actively targeting and growing our base of higher margin, small account
customers. Prior to the BFI acquisition, our management had successfully raised
the percentage of our revenues from small account customers from 33% of revenues
in the fourth quarter of 1996 to 57% in the second quarter of 1999, which helped
increase our operating income margin significantly. Small account customers
typically do not produce a sufficient volume of regulated medical waste on an
individual basis to justify capital expenditures on their own waste treatment
facilities or the expense of hiring regulatory compliance personnel. Small
account customers are more service sensitive and typically rely on fully
integrated service providers like us for timely waste removal, staff training,
assistance with recordkeeping and OSHA compliance consulting. We believe that
the number of small account customers and the opportunities for sales of
ancillary services and products to these customers will continue to grow, which
will generate significant additional revenue growth opportunities.
CAPITALIZE ON OUTSOURCING DUE TO NEWLY ENACTED CLEAN AIR REGULATIONS.
The Clean Air Act regulations have increased both the capital costs required to
bring many existing incinerators into compliance and the operating costs of
continued compliance. The EPA expects that most hospitals will shut down their
incinerators in response to regulations adopted in 1997, which limit the
discharge into the atmosphere of pollutants released by medical waste
incineration. We plan to capitalize on the anticipated movement by hospitals to
outsource medical waste treatment rather than incur the cost of installing the
air pollution control systems necessary to comply with these EPA regulations. We
believe that approximately 35% of the total medical waste disposal market is
treated on-site at hospitals. Because our facilities are modern and well
maintained, we believe that our capital expenditures required to bring our
incinerators into compliance with these new regulations will only be
approximately $4.0 million.
EXPAND RANGE OF SERVICES AND PRODUCTS. We believe that we have the
opportunity to expand our business by increasing the range of products and
services that we offer to our existing customers. For example, we may expand our
collection and treatment of materials like photographic chemicals, lead foils
and amalgam used in dental and radiology laboratories. In addition, because our
drivers call on numerous medical facilities on a routine basis, we offer many
single-use disposable medical supplies to our customers and we intend to
increase these offerings in the future.
ACQUISITION AND INTEGRATION HISTORY
We believe that our management team has substantial experience in
evaluating potential acquisition candidates and determining whether a particular
medical waste management business can be successfully integrated into our
business. In determining whether to proceed with a business acquisition, we
evaluate a number of factors including:
o the financial impact of the proposed acquisition, including the
effect on our cash flow and earnings per share;
<PAGE>
o the historical and projected financial results of the target
company;
o the purchase price negotiated with the seller and our expected
internal rate of return;
o the composition and size of the target company's customer base;
o the efficiencies we can achieve by integrating the target company
with one or more of our existing operations;
o the potential for enhancing or expanding our geographic service
area and allowing us to make other acquisitions in the same
service area;
o the experience, reputation and personality of the target company's
management;
o the target company's reputation for customer service and
relationships with the communities that it serves; and
o whether the acquisition gives us any strategic advantages over our
competition.
We have established an efficient procedure for integrating
newly-acquired companies into our business while minimizing disruption of our
operations. Once a business is acquired, we implement programs designed to
improve customer service, sales, marketing, routing, equipment utilization,
employee productivity, operating efficiencies and overall profitability.
We have completed the following 43 acquisitions:
<TABLE>
SELLER DATE MARKETS SERVED
- ------ ---- --------------
<S> <C> <C>
Allied Waste Industries, Inc. (BFI acquisition)...... November 1999 United States, Canada and
Puerto Rico
All-Med Safewaste Inc................................ July 1999 Massachusetts
Ionization Research Company, Inc..................... July 1999 California
Enviro-Tech Services................................. June 1999 Arizona
Foster Environmental Services Corp................... May 1999 New York
Environmental Guardian, Inc.......................... May 1999 Wisconsin
Browning-Ferris Industries, Inc...................... April 1999 Texas
Arizona Medical Waste Management..................... March 1999 Arizona
Enviro-Tech Disposal Division of
Lancaster General Services Business Trust........ March 1999 Pennsylvania
Medical Express and General Courier
Service, Inc...................................... February 1999 Pennsylvania
Southwest Medecol L.C................................ February 1999 Kansas, Texas and Colorado
Medical Resources Recycling Systems, Inc............. February 1999 Washington and Idaho
Medical Resources Corporation........................ February 1999 New Mexico, Colorado and
Arizona
Environmental Transloading Services, Inc............. January 1999 California
Med-Tech Environmental Limited....................... January 1999 and
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
<PAGE>
Waste Systems, Inc. (3CI)............................ October 1998 Alabama, Arkansas,
Florida, Georgia, Kansas,
Louisiana, Mississippi,
Missouri, Oklahoma,
Tennessee and Texas
Medical Compliance Services, Inc..................... September 1998 New Mexico and Texas
Regional Recycling, Inc.............................. August 1998 New Jersey
Allegro Carting and Recycling, Inc................... August 1998 New York
Mediwaste Disposal Services LLC...................... July 1998 Texas
Superior of Wisconsin, Inc........................... July 1998 Wisconsin
Arizona Hazardous Waste Disposal..................... July 1998 Arizona
Controlled Medical Disposal, Inc..................... June 1998 New Jersey
Arizona Hazardous Waste Disposal..................... June 1998 Arizona
Medisin, Inc......................................... April 1998 Kentucky and Ohio
Bridgeview, Inc...................................... March 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................................ June 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.
Doctors Environmental Control, Inc................... May 1996 California
WMI Medical Services of New England.................. February 1996 New Hampshire,
Massachusetts and
Maine
Bio-Med of Oregon, Inc............................... January 1996 Oregon
Safetech Health Care................................. June 1995 California
Safe Way Disposal Systems, Inc....................... September 1994 Connecticut and New York
Recovery Corporation of America...................... March 1994 Illinois, Indiana and
Michigan
</TABLE>
SERVICES AND OPERATIONS
Our services and operations are comprised of collection,
transportation, treatment, disposal and recycling, together with related
training and education programs, consulting services and product sales. We have
35 treatment/collection facilities that service over 235,000 customers,
consisting of over 230,700 small account customers and over 4,300 large account
customers. We develop programs to help our customers handle, separate and
contain medical waste. We also advise health care providers on the proper
methods of recording and documenting their medical waste management to comply
with federal, state and local regulations. In addition, we offer consulting
services to our health care customers to assist them in reducing the amount of
medical waste they generate.
Collection and Transportation. We consider efficiency of collection and
transportation to be a critical element of our operations because it represents
the largest component of our operating costs. We try to maximize the number of
<PAGE>
stops on each route. We use a tracking system for our collection vehicles that
helps to improve efficiency. We try to match the size of our collection vehicles
to the amount of medical waste to be collected at a particular stop or on a
particular route. We collect containers or corrugated boxes of medical waste
from our customers at intervals depending upon customer requirements, terms of
the service agreement and the volume of 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 our treatment facilities or to one of our
transfer stations where it is combined with other medical waste and transported
to a treatment facility. In some circumstances we transport waste to other
specially-licensed medical waste treatment facilities. We transport small
quantities of specific hazardous substances, such as photographic fixer, lead
foils and dental amalgam, from some of our customers to a metals recycling
operation.
The use of transfer stations is another important component of our
collection and transportation operations. We utilize transfer stations in a "hub
and spoke" configuration which allows us to expand our geographic service area
and increase the volume of medical waste that can be treated at a particular
facility. Smaller loads of waste containers are temporarily held at the transfer
stations until they can be consolidated into full truckloads and transported to
a treatment facility.
As part of our collection operations, we supply specially-designed
containers for use by most of our large account customers and many of our larger
small account customers. We have developed and patented a reusable leak- and
puncture-resistant container, made from recycled plastic, which we call the
Steri-Tub(R) container. The plastic container enables our customers to reduce
costs by reducing the number of times that medical waste is handled, eliminating
the cost (and weight) of corrugated boxes and potentially reducing liability
resulting from human contact with medical waste. The plastic containers are
designed to maximize the loads that will fit within the cargo compartments of
standard trucks and trailers. We believe these features make the Steri-Tub(R)
plastic container superior to our competitors' reusable containers. If a
customer generates a large volume of waste, we will place a large temporary
storage container or trailer on the customer's premises. In order to maximize
regulatory compliance and minimize potential liability, we will not accept
medical waste unless it is properly packaged by customers in containers that we
have either supplied or approved.
Treatment and Disposal. Upon arrival at a treatment facility,
containers or boxes of medical waste are scanned to verify that they do not
contain any unacceptable substances, like radioactive material. Any container or
box that is discovered to contain unacceptable waste is returned to the
customer. In some cases our operating permits require that unacceptable waste be
reported to regulatory authorities. After inspection, the waste is treated using
one of our various treatment technologies. Upon completion of the particular
process, the resulting waste or incinerator ash is transported for resource
recovery, recycling or disposal in a nonhazardous waste landfill operated by
parties unaffiliated with us. After the Steri-Tub(R) plastic containers have
been emptied, they are washed, sanitized and returned to customers for re-use.
Consulting Services. Before medical waste is picked up by our trucks,
our integrated waste management approach attempts to "build in" efficiencies
that will yield logistic advantages. For example, our consulting services can
assist our customers in reducing the volume of medical waste they generate. In
addition, we provide customers with the documentation necessary for compliance
with laws which, if they complete them properly, will reduce interruptions to
their businesses to verify compliance.
Documentation. We provide complete documentation to our customers for
all medical waste that we collect, including the name of the generator, date of
pick-up and date of delivery to a treatment facility. We believe that our
documentation system meets all applicable federal, state and local regulations
regarding the packaging and labeling of medical waste, including regulations
issued by the U.S. Department of Transportation, OSHA and state and local
authorities. This documentation is sometimes used by our customers to prove that
they are in compliance with these regulations. These customers will often pay
for us to retrieve and reprint old manifests and other documentation. We believe
that our ability to offer document archiving and retrieval services represents a
competitive advantage.
<PAGE>
MARKETING AND SALES
MARKETING STRATEGY
We have the largest, most well-established sales force in the medical
waste industry, with over 277 sales representatives and telemarketing personnel.
We use both telemarketing and direct sales efforts to obtain new customers. In
addition, we developed a proprietary database of over 330,000 potential small
account customers not presently served by us, which we believe gives us a
competitive advantage in identifying and reaching higher margin, small account
customers. We believe that we have been particularly effective at attracting new
small account customers through our innovative "flex-rep" program in which
part-time field sales representatives work in tandem with telemarketers. We
believe that the combination of the two allows us to cost-effectively sell
"face-to-face" with potential small account customers and is more effective at
converting sales leads into customers than telemarketing alone.
In addition to our sales representatives and telemarketing personnel we
have 21 account managers responsible for customer service centers. Our 868
drivers also participate in our marketing and sales effort by actively
soliciting small account customers while they service their routes.
SMALL ACCOUNT CUSTOMERS
We have targeted small account customers as a growth area. We believe
that these customers offer high profit potential compared to other potential
customers. Typical small account customers are individual or small groups of
doctors, dentists and other health care providers who are widely dispersed and
generate only small amounts of medical waste. These customers are very concerned
about having the medical waste picked up and disposed of in compliance with
applicable state and federal regulations. We believe the potential risks of
non-compliance by these customers with applicable state and federal medical
waste regulations is viewed by them as disproportionate to the cost of the
services we provide. We believe this has been the basis for the significantly
higher gross margins we have achieved with our small account customers relative
to our large account customers. Our telemarketers use our proprietary database
to identify and qualify these small account customers and arrange appointments
for our trained "flex-reps." We believe that our telemarketing program provides
a cost-effective way to reach the numerous but scattered small account
customers.
We have a "mail-back" service through which we can reach small account
customers located in outlying areas that would be inefficient to serve using our
regular route structure. In addition, we have introduced a medical waste
management and compliance program specifically targeted to small account
customers who are required to comply with the OSHA bloodborne pathogens
regulations but who lack the internal personnel and systems to do so.
LARGE ACCOUNT CUSTOMERS
We believe that we have been successful in serving large account
customers and plan to continue to serve those customers as long as satisfactory
levels of profitability can be maintained. Our marketing and sales efforts to
large account customers are conducted by full-time account executives whose
responsibilities include identifying and attracting new customers and serving
our existing account base of approximately 4,300 large account customers. In
addition to securing new contracts, our marketing and sales personnel provide
consulting services to our health care customers, assisting them in reducing the
amount of medical waste they generate, training their employees on safety issues
and implementing programs to audit, classify and segregate medical waste in a
proper manner. We have several strategic alliances to supplement our marketing
and sales efforts to large account customers.
We believe that the implementation of more stringent Clean Air Act and
other federal regulations directly and indirectly affecting medical waste will
enable us to improve our marketing efforts to large account customers because
the additional costs they will incur to comply with these regulations will make
the costs of our services more attractive, particularly relative to their use of
their own incinerators.
<PAGE>
NATIONAL ACCOUNTS
As a result of our extensive geographic coverage, we are the only
company capable of servicing national account customers (i.e., those customers
requiring medical waste disposal services at various geographically dispersed
locations). The BFI medical waste business has historically focused on national
accounts and, as a result of its extensive geographic coverage, has been very
successful with this type of account.
CONTRACT AND SERVICE AGREEMENTS
We have long-term contracts with substantially all of our customers. We
negotiate individual service agreements with each large account and small
account customer. Although we have a standard form of agreement, particularly
for small account customers, terms may vary depending upon the customer's
service requirements and the volume of 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 medical waste in
approved containers. Substantially all of our agreements with small account
customers contain automatic renewal provisions.
Service agreements are generally for a period of one to five years,
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. We may set our prices on the basis of the number
of containers that we collect, the weight of the medical waste that we collect
and treat, the number of collection stops that we make on the customer's route,
the number of collection stops that we make for a particular multi-site customer
and other factors.
We have a diverse customer base, with no single customer accounting for
more than 2% of revenues, and our top 10 customers accounting for approximately
7% of revenues, in each case on a pro forma combined basis for the year ended
December 31, 1998. We do not believe that the loss of any single customer would
have a material adverse effect on our business, financial condition or results
of operations.
INTERNATIONAL
We have also expanded beyond the United States and Canada. In 1996, we
entered into an agreement with a Brazilian company to assist in exploring
opportunities for the commercialization of our medical waste management
technology in South America. This relationship was expanded in July 1998, when
we entered into an agreement for an exclusive license to use our ETD technology
in Brazil and for the sale to Companhia Auxiliar of two fully integrated ETD
processing lines for use in treating medical waste in the Sao Paulo, Brazil
metropolitan market. In February 1998, we announced the formation of Medam, a
Mexican joint venture company, to utilize our 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. In addition, Medam has acquired a
transportation service company in Mexico.
TREATMENT TECHNOLOGIES
We primarily use three treatment technologies for treating regulated
medical waste: autoclaving, incineration and our proprietary ETD technology. On
a pro forma combined basis, the percentages of medical waste, by volume, that we
treated in 1998, by the type of treatment technology used, were as follows:
o autoclaving, 63%;
o incineration, 27%; and
o our proprietary ETD technology, 10%.
<PAGE>
We vary our treatment of medical waste among available treatment
technologies based on the type of waste and capacity and pricing considerations
in each service area, in order to minimize operating costs and capital
investments.
AUTOCLAVING. We estimate that autoclaving accounts for approximately
20-25% of United States capacity to treat medical waste at a site other than its
source. Autoclaving treats medical waste with steam at high temperature and
pressure to kill pathogens. Autoclaving alone does not change the appearance of
waste, and recognizable medical waste may not be accepted by some landfill
operators, but autoclaving may be combined with a shredding or grinding process
to render the medical waste unrecognizable.
INCINERATION. We estimate that incineration accounts for approximately
65-70% of United States capacity to treat medical waste at a site other than its
source. Incineration burns medical waste at elevated temperatures and reduces it
to ash. Incineration reduces the volume of waste, and it is the recommended
treatment and disposal option for some types of medical waste such as anatomical
waste or residues from chemotherapy procedures. However, incineration has come
under criticism from the public and from federal, state and local regulators
because of the air emissions which must be controlled. Emissions from
incinerators can contain pollutants which are subject to federal, state and, in
some cases, local regulation. In some circumstances the ash byproduct of
incineration may be regulated. As a result, it is expensive to permit and
construct new incineration facilities.
ETD TREATMENT PROCESS. We estimate that our patented ETD treatment
process accounts for approximately 8% of United States capacity to treat medical
waste at a site other than its source. ETD includes a system for grinding
medical waste. After grinding, ETD uses an oscillating field of low-frequency
radio waves to heat medical waste to temperatures that destroy pathogens such as
viruses, bacteria, fungi and yeast, without melting the plastic content of the
waste. ETD employs low-frequency radio waves because they can penetrate deeper
than high-frequency waves, like microwaves, which can penetrate medical waste of
a typical density only to a depth of approximately five inches. ETD uses
frequencies that match the physical properties of medical waste, enabling the
ETD treatment process to kill pathogens at temperatures as low as 90(0)C.
Although ETD is effective in destroying pathogens present in anatomical waste,
we do not currently treat anatomical waste using the ETD process.
We believe that ETD offers advantages over other methods of treating
medical waste. We believe that it is easier to get permits for ETD facilities
than for incineration facilities because ETD does not produce fluid or air
pollution. ETD facilities are also cheaper to construct than incinerators or
autoclaves with shredding capability. ETD also renders medical waste
unrecognizable and thus more acceptable for landfills and reduces the volume of
waste as well. It may also facilitate recycling of polypropylene plastics and
some of the ETD-treated waste may be used for fuel in "waste-to-energy"
electrical plants.
FACILITIES
We lease office space for our corporate offices in Lake Forest,
Illinois. We own or lease three ETD treatment facilities, 12 incineration
facilities, 14 autoclave facilities, three facilities that use a combination of
these methods, and three facilities that use other methods. We also operate one
ETD treatment facility through Medam, our Mexican joint venture company. All of
our treatment facilities also serve as collection sites. We own or lease 93
additional transfer and collection sites. We consider these facilities adequate
for our present and anticipated needs. Substantially all of these facilities are
pledged to secure the indebtedness under our credit facility.
We do not own or operate any landfills or any other type of disposal
site. After treatment, all remaining waste materials are transported to parties
unaffiliated with us for permanent disposal.
COMPETITION
The medical waste services industry is highly competitive. It consists
of many different types of service providers, including a large number of
regional and local companies. Another major source of competition is the on-site
treatment of medical waste by some large-quantity generators, particularly
hospitals. We believe this internal capacity represents approximately 35% of the
total industry and that we have approximately a 22% share of the industry.
<PAGE>
In addition, we face potential competition from businesses that are
attempting to commercialize alternate treatment technologies or products
designed to reduce or eliminate the generation of medical waste, such as
reusable or degradable medical products.
We compete for service agreements primarily on the basis of
cost-effectiveness, quality of service and geographic location. We also attempt
to compete by demonstrating to customers that we can do a better job in reducing
their potential liability. Our 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 offer prices to
the potential customer that are lower than ours.
GOVERNMENTAL REGULATION
We operate within the 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 us, including requirements to obtain and maintain government
permits. These permits grant us the authority:
o to construct and operate treatment and transfer facilities,
o to transport medical waste within and between relevant
jurisdictions, and
o to handle particular regulated substances,
among other things. Our permits must be periodically renewed and are subject to
modification or revocation by the regulatory authority. We are also subject to
regulations that govern the definition, generation, segregation, handling,
packaging, transportation, treatment, storage and disposal of medical waste. We
are also subject to extensive regulations designed to minimize employee exposure
to medical waste. In addition, we are subject to foreign laws and regulations.
FEDERAL REGULATION
There are at least four federal agencies that have authority over
medical waste. These agencies are the EPA, OSHA, the U.S. Department of
Transportation and the U.S. Postal Service. These agencies regulate medical
waste under a variety of statutes and regulations.
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. 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 grew following media reports of careless management of medical
waste. The MWTA was intended to be the first step in addressing these problems.
The primary objective of the MWTA was to ensure that medical wastes which were
generated in a covered state and which posed environmental problems, including
an unsightly appearance, 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 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 medical waste management and the success of the
demonstration program for tracking 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 our ETD technology. It is possible that this third report will contain
findings or make recommendations that are unfavorable to our business and
technology.
<PAGE>
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 August 1997, the EPA adopted regulations
under the Clean Air Act Amendments of 1990 that limit the discharge into the
atmosphere of pollutants released by medical waste incineration. These
regulations required every state to submit to the EPA for approval a plan to
meet minimum emission standards for these pollutants. See "--State and Local
Regulation." The EPA estimates that of the approximately 1,100 small, 690 medium
and 460 large medical waste incinerators in operation in May 1996, approximately
83-90% of the small incinerators, 60-95% of the medium incinerators and up to
35% of the large incinerators will be closed as hospitals seek less expensive
methods of medical waste disposal rather than incur the cost of installing the
necessary air pollution control systems to comply with the EPA's regulations. We
currently operate 10 incinerators. Because our facilities are modern and well
maintained, we believe that our capital expenditures required to bring our
incinerators into compliance with these new regulations will only be
approximately $4.0 million. We believe that we will be successful in obtaining
all necessary federal and state permits to continue the operation of our
incinerators. 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 us if the result is that hospitals and other generators increase or
accelerate their use of outside medical waste treatment contractors like us.
Stricter emissions standards could also have a material adverse effect on us to
the extent that we incur increased costs to bring our own incinerators into
compliance with the more stringent standards. We might also face price increases
for treatment of medical waste that we deliver to other parties for
incineration.
Occupational Safety and Health Act of 1970. The Occupational Safety and
Health Act of 1970 authorizes OSHA to issue occupational safety and health
standards. OSHA regulations are designed to minimize the exposure of employees
to hazardous work environments. Various standards apply to our operations. These
regulations govern, among other things:
o exposure to bloodborne pathogens and other potentially infectious
materials;
o lock out/tag out procedures;
o medical surveillance requirements;
o use of respirators and personal protective equipment;
o emergency planning;
o hazard communication;
o noise;
o ergonomics; and
o forklift safety.
We are subject to unannounced OSHA safety inspections at any time.
Our employees are required by our policy to receive new employee
training, annual refresher training and training in their specific tasks. As
part of our medical surveillance program, employees receive pre-employment
physicals, including drug testing, annually-required medical surveillance and
exit physicals. We also subscribe to a drug-free workplace policy.
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. These standards included a documentation program for
the transportation of hazardous wastes and a permit system for solid and
hazardous waste disposal facilities. Medical wastes are currently considered
<PAGE>
non-hazardous solid wastes under RCRA. However, some substances collected by us
from some of our customers, including photographic fixer developer solutions,
lead foils and dental amalgam, are considered hazardous wastes.
We use landfills operated by parties unrelated to us for the disposal
of treated medical waste from two of our ETD facilities and for the disposal of
incinerator ash and autoclaved waste. Waste is not regulated as hazardous under
RCRA unless it contains hazardous substances exceeding specific quantities or
concentration levels, meets specified descriptions, or exhibits specific
hazardous characteristics. Following treatment, waste from our ETD and autoclave
facilities is disposed of as nonhazardous waste. At our incineration facilities,
we test ash from the incineration process to determine whether it must be
disposed of as hazardous waste.
We employ quality control measures to check incoming medical waste for
specific types of hazardous substances. Our customer agreements also require our
customers to exclude different kinds of hazardous substances or radioactive
materials from the medical waste they provide us. We use a different type of
contract for the relatively small number of customers from whom we pick up
hazardous wastes.
DOT Regulations. The U.S. Department of Transportation has put
regulations into effect under the Hazardous Materials Transportation
Authorization Act of 1994. These regulations require us to package and label
medical waste in compliance with designated standards, and incorporate
bloodborne pathogens standards issued by OSHA. Under these standards, we must,
among other things, identify our packaging with a "biohazard" marking on the
outer packaging, and our medical waste container must be sufficiently rigid and
strong to prevent tearing or bursting, and must be puncture-resistant,
leak-resistant, properly sealed and impervious to moisture.
DOT regulations also require that a transporter be capable of
responding on a 24-hour-a-day basis in the event of an accident, spill, or
release to the environment of a hazardous material. We have entered into an
agreement with CHEMTREC, an organization that provides 24-hour emergency spill
notification in the United States and Canada, to provide this service and we
also have agreements with several emergency response organizations to provide
spill cleanup services in some of our service areas.
Our drivers are trained on topics such as safety, hazardous materials,
medical waste, hazardous chemicals and infectious substances. Employees are
trained to deal with emergency spills and releases of hazardous materials, and
we have a written contingency plan for these events. Our vehicles are outfitted
with spill control equipment and the drivers are trained in its use.
Comprehensive Environmental Response, Compensation and Liability Act of
1980. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 established a regulatory and remedial program to provide for the
investigation and cleanup of facilities that have released or threaten to
release hazardous substances into the environment. CERCLA and state laws similar
to it may 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 these facilities. Responsible parties may be liable
for substantial site investigation and cleanup costs and natural resource
damages, regardless of whether they exercised due care and complied with
applicable laws and regulations. If we were found to be a responsible party for
a particular site, we could be required to pay the entire cost of site
investigation and cleanup, even though other parties also may be liable. This
would be the case if we were unable to identify other responsible parties, or if
those parties were financially unable to contribute money to the cleanup.
United States Postal Service. We have obtained a permit from the U.S.
Postal Service to conduct our "mail-back" program, pursuant to which customers
mail approved "sharps" (needles, knives, broken glass and the like) containers
directly to our treatment facilities.
STATE AND LOCAL REGULATION
We conduct business in numerous states. Each state has its own
regulations related to the handling, treatment and storage of medical waste.
Although there are many differences among the various state laws and
regulations, many states have followed the medical waste model under the MWTA
and are implementing programs under RCRA. In each of the states where we operate
a treatment facility or a transfer station, we are required to comply with
<PAGE>
numerous state and local laws and regulations as well as our operating plan for
each site. State agencies involved in regulating the medical waste industry are
frequently the departments of health and environmental protection agencies. In
addition, many local governments have ordinances, local laws and regulations,
such as zoning and health regulations, that affect our operations.
In recent years, a number of communities have instituted "flow control"
requirements, which 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 may consider legislation that would at
least partially overturn these court decisions.
Similarly, the U.S. Supreme Court has consistently held that state and
local measures that seek to restrict the importation of waste into the
particular jurisdiction, or to tax imported waste at a higher rate, are
unconstitutional. To date, congressional efforts to enable states to impose
differential taxes on out-of-state waste or restrict waste importation have been
unsuccessful.
In the absence of federal legislation, various local laws that direct
waste to designated facilities, or limit or tax the interstate movement of
waste, may continue to be invalidated by the courts. If the U.S. Congress adopts
legislation allowing for specific types of flow control or authorizing
restriction on the importation of waste, or if valid legislation affecting
interstate transportation of waste is adopted at the federal or state level, our
business, financial condition and results of operations could be materially
adversely affected. In addition, we cannot assure you that municipalities will
not pass ordinances which effectively block or discourage us from locating a
treatment or transfer facility within their limits.
States usually regulate medical waste as a solid or "special" waste and
not as a hazardous waste under RCRA. State definitions of medical waste include:
o microbiological waste (cultures and stocks of infectious agents);
o pathology waste (human body parts from surgical procedures and
autopsies);
o blood and blood products; and
o sharps.
Most states require segregation of different types of medical waste at the
hospital or other location where they were created. A majority of states require
that the universal biohazard symbol or a label appear on medical waste
containers. Storage regulations may apply to the party generating the waste, the
treatment facility, the transport vehicle, or all three. Storage rules seek to
identify and secure the storage area for public safety as well as set standards
for the manner and length of storage. Many states require employee training for
safe environmental cleanup through emergency spill and decontamination plans.
Many states also require that transporters carry spill equipment in their
vehicles. Those states whose regulatory framework relies on the MWTA model have
tracking document systems in place. Some states (Washington, for example)
regulate the prices we may charge.
We maintain numerous governmental permits and licenses to conduct our
business. Our permits vary from state to state based upon our activities within
that state and on the applicable state and local laws and regulations. These
permits include:
o transport permits for solid waste, medical waste and hazardous
substances;
o permits to construct and operate treatment facilities;
o permits to construct and operate transfer stations;
o permits governing discharge of sanitary water and registration of
equipment under air regulations;
o approvals for the use of ETD to treat medical waste; and
o various business operator's licenses.
<PAGE>
We believe that we are currently in compliance in all material respects
with our permits and with applicable laws and regulations.
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 some 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 we operate an incinerator adopts more
stringent limits than the federal emissions standards, it could be very
expensive for us to bring our incinerator into compliance with the state's
requirements. See "--Governmental Regulation--Federal Regulation--Clean Air Act
Regulations."
Subsequent to the issuance of our original license for our Woonsocket,
Rhode Island treatment facility, the State of Rhode Island enacted legislation
that required us to obtain an additional license for our medical waste
management operations. We applied for but have not yet received this additional
license. Until regulatory action is taken on this additional license, we are
being permitted to continue to operate under our current license. Denial of this
additional license could result in us being required to cease our operations in
Rhode Island and it could have a material adverse effect on our business,
financial condition and results of operations.
Our ETD treatment technology has not been approved in all states. We
have received permits or been granted legislative approval to operate our ETD
treatment technology in 15 states, with additional applications pending. We
cannot be sure, however, that our treatment technology will be approved for the
treatment of medical waste in each state or other jurisdiction where we may want
to use it. Our inability to obtain regulatory approval could have a material
adverse effect on our business, financial condition and results of operations.
FOREIGN AND TERRITORIAL REGULATION
We presently conduct business in several provinces in Canada. Our
activities in British Columbia are governed at the federal level by the Canadian
Transportation of Dangerous Goods Act and the Canadian Environmental Protection
Act, and at the provincial level by comparable legislation. The Canadian
Environmental Protection Act regulates, among other things, the transborder
movement of medical waste. The federal Transportation of Dangerous Goods Act
regulates the movement of dangerous goods, including infectious substances, by
all modes of transportation. It imposes joint and several liability on all
persons who are responsible for, or who caused or contributed to the release of
any dangerous substance into the environment. Any business engaged in a
regulated activity is presumed to be liable for any release, unless the business
can demonstrate that it acted reasonably.
Provincial legislation typically regulates the storage, transportation
and disposal of waste, including biomedical waste, and imposes strict, joint and
several liability for all the costs of cleanup of contaminated sites. We believe
that we have obtained all permits required by federal and provincial
legislation.
We presently conduct business in the United States territory of Puerto
Rico. Our storage and treatment activities in Puerto Rico are governed at the
territorial level by the Puerto Rico Environmental Quality Board, while the U.S.
Department of Transportation regulates the transportation of medical waste in
Puerto Rico and applies the regulations promulgated under the Hazardous
Materials Transportation Authorization Act of 1994. We believe that we have in
place all permits required by federal and territorial legislation applicable to
Puerto Rico.
We cannot give you any assurances, however, that we will not be
required in the future to pay for cleanup costs incurred under Canadian or
Puerto Rican environmental laws, or that we will not incur additional operating
or capital costs required by changes to laws, regulations or permits.
We also conduct business in Mexico through our joint venture, Medam,
which collects 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
<PAGE>
is responsible for the enforcement of Mexico's medical waste law. We believe
that our joint venture operations in Mexico are in compliance with all
applicable laws, rules and regulations.
If we expand our operations into other foreign jurisdictions, we will
be required to comply with the laws and regulations of each of these
jurisdictions.
PERMITTING PROCESS
Each state in which we currently operate, and each state in which we
may operate in the future, has a specific permitting process. After we have
identified a geographic area in which we want to locate a treatment or transfer
facility, we identify one or more locations for a potential new site. Typically,
we 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 enough public interest is shown, a public
hearing may be held. If we are 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 may provide an
opportunity for public opposition or other action that may impede our ability to
construct or operate the planned facility. Permitting for transportation
operations frequently involves registration of vehicles, inspection of
equipment, and background investigations on our officers and directors.
We have been successful in obtaining permits for our current medical
waste transfer, treatment and processing facilities and for our transportation
operations. Several of our past attempts to construct and operate medical waste
treatment facilities, however, have met with significant community opposition.
In some of these cases, we have withdrawn our permit application.
PATENTS AND PROPRIETARY RIGHTS
We consider the protection of our technology to be important to our
business. Our policy is to protect our technology by a variety of means,
including applying for patents in the United States and in some foreign
countries.
We hold nine United States patents relating to the ETD treatment
process and other aspects of processing medical waste. We have filed or have
been assigned patent applications in several foreign countries and we have
received patents in Russia, Hungary, Canada, Mexico and Australia. We also hold
one United States patent for our reusable container, which is used under the
registered trademark Steri-Tub(R).
In November 1995, we entered into a cross-license agreement with IIT
Research Institute (IITRI). Under this agreement, IITRI granted us an exclusive
royalty-free 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 various patent rights
and know-how held by IITRI relating to the use of radio-frequency technology in
the treatment of medical waste, and we granted to IITRI a royalty-free exclusive
license in the remaining countries of the world to use and commercialize
specified corresponding patent rights and know-how held by us. The agreement
continues until the expiration of the last-to-expire of any of the subject
patents held by either IITRI or us.
The term of the first-to-end of our existing United States patents
relating to our ETD treatment process will end in October 2009 at the earliest
or in September 2010 at the latest, and the term of the last-to-end of these
patents will end in January 2015.
In addition, we own additional technology relating to the processing of
medical waste and other health care waste that we believe is patentable. We are
evaluating the technology to determine whether to file for patent protection on
it.
There can be no assurance that any pending or future patent
applications will be granted; that any issued patents will provide us with
competitive advantages; that our patents will not be challenged by other
parties; or that the existing or future patents of other parties will not have
an adverse effect on our ability to carry out our business. In addition, there
<PAGE>
can be no assurance that other companies will not independently develop similar
processes or avoid our patents. Litigation or administrative proceedings may be
necessary to enforce the patents issued to us or to determine the scope and
validity of others' proprietary rights. Any litigation or administrative
proceeding could result in substantial cost to us and distraction of our
management. A ruling against us in any litigation or administrative proceeding
could have a material adverse effect on our business, financial condition and
results of operations.
Our commercial success may also depend on our not infringing patents
issued to other parties. There can be no assurance that patents belonging to
other parties will not require us to alter our processes, pay licensing fees, or
cease development of our current or future processes. In addition, there can be
no assurance that we would be able to license the technology rights that we may
require at a reasonable cost or at all. If we could not obtain a license to any
infringing technology that we currently use, it could have a material adverse
effect on our business, financial condition and results of operations. In
addition, to determine the priority of inventions or patent applications we may
have to participate in proceedings before the U.S. Patent and Trademark Office
or in proceedings before foreign agencies, any of which could result in
substantial costs to us and distraction of our management.
We own 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 six green disks that we use in
the United States (which appears on the front of this prospectus). There can be
no assurance that our registered or unregistered trademarks or service marks
will not infringe upon the rights of other parties. The requirement to change
any trademark, service mark or trade name of ours could result in the loss of
any goodwill associated with that trademark, service mark or trade name and
could entail significant expense.
We also rely on unpatented and unregistered trade secrets, trademarks,
proprietary know-how and continuing technological innovation. We try to protect
this information, in part, by confidentiality agreements with our employees,
vendors and consultants. There can be no assurance that these agreements will
not be breached, that we would have adequate remedies for any breach or that our
trade secrets or know-how will not otherwise become known or independently
discovered by other parties.
EMPLOYEES
As of November 30, 1999, we had 2,165 full-time and 120 part-time
employees. Approximately 37 of our drivers and transportation helpers at our New
York City facilities and drivers at Med-Tech's Montreal, Quebec facility are
covered by collective bargaining agreements with the International Brotherhood
of Teamsters. Our production and maintenance employees at our Morton, Washington
facility were previously represented by the Teamsters but voted in April 1998 to
decertify the union. Approximately 100 former employees of the BFI medical waste
business that are now our employees are covered by a total of 16 collective
bargaining agreements with local Teamster unions. Two of these agreements,
covering a total of six BFI medical waste employees, have expiration dates of
September 30, 1999 and October 31, 1999. Both of these agreements are area
agreements involving multiple employers and management expects both to be
renewed without any work stoppage or other disruption. The remaining 14
agreements expire at various dates from April 2000 to April 2004. We consider
our employee relations to be satisfactory.
POTENTIAL LIABILITY AND INSURANCE
The medical waste industry involves potentially significant risks of
statutory, contractual, tort and common law liability claims. Potential
liability claims could involve, for example:
o cleanup costs;
o personal injury;
o damage to the environment;
o employee matters;
o property damage; and
<PAGE>
o alleged negligence or professional errors or omissions in the
planning or performance of work.
We could also be subject to fines or penalties in connection with
violations of regulatory requirements.
We carry $26.0 million of liability insurance (including umbrella
coverage), and under a separate policy, $10.0 million of aggregate pollution and
legal liability insurance ($5.0 million per incident), which we consider
sufficient to meet regulatory and customer requirements and to protect our
employees, assets and operations. Our pollution liability insurance excludes
liabilities under CERCLA. There can be no assurance that we will not face claims
under CERCLA or similar state laws resulting in substantial liability for which
we are uninsured and which could have a material adverse effect on our business,
financial condition and results of operations.
Our insurance programs utilize large deductible plans offered by a
commercial insurance company. Large deductible plans allow us the benefits of
cost-effective risk financing while protecting us from catastrophic risk with
specific stop loss insurance limiting the amount of self-funded exposure for any
one loss and aggregate stop loss insurance limiting the self-funding exposure
for any one year.
LEGAL AND OTHER PROCEEDINGS
We operate in a highly regulated industry and are exposed to regulatory
inquiries or investigations from time to time. Government authorities can
initiate investigations for a variety of reasons. We have been involved in
several legal and administrative proceedings that have been settled or otherwise
resolved on terms acceptable to us, without having a material adverse effect on
our business. From time to time, we may consider it more cost-effective to
settle proceedings than to become involved in costly and time-consuming
administrative actions or litigation. We are also a party to various legal
proceedings arising in the ordinary course of business. We believe that the
resolution of these other matters will not have a material adverse effect on us.
In April 1997, a worker at our 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 workers were probably exposed to tuberculosis
bacteria from the medical waste being processed at the Morton facility. We
believe that the actual source of exposure has not been determined. However, we
have complied with the recommendations of all regulatory authorities to outfit
the facility's workers with personal protective equipment. In addition, we have
complied with governmental recommendations to modify equipment at the Morton
facility. We are also taking these actions, as applicable, at our other
treatment facilities. The safety measures being taken include those recommended
by the National Institute for Occupational Safety and Health in a report issued
in December 1998. While future claims are possible, to date we have 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.
In 1998, BFI filed a plea agreement with the U.S. Department of Justice
regarding possible violations of the Clean Water Act by the BFI medical waste
business arising from its Washington, D.C. treatment facility. The possible
violations arose from the wastewater treatment system used to contain and treat
all wastewater produced by the facility. BFI pled guilty to three violations
under the Clean Water Act and agreed to pay $1,500,000 in fines and make a
$100,000 community service contribution. These obligations have been satisfied
and the Washington, D.C. facility was closed in 1997.
In 1997, the BFI medical waste business voluntarily ceased operating
its incinerator at the Bronx, New York facility due to its inability to
consistently meet its permit requirements. In 1999, BFI executed an agreement
with the New York Department of Environmental Conservation to dismantle and
dispose of the incinerator of the BFI medical waste business located in the
Bronx, New York, pay a civil penalty of $50,000, institute a pilot program for
the use of natural gas powered trucks within six months of the date of the order
and establish and fund an Environmental Benefit Program for projects benefiting
the community and the environment in the amount of $200,000 to be paid within
two years of the date of the agreement. The agreement also allows us, on an
interim basis, to continue to operate the former BFI medical waste business,
collection and transfer operation at the same site.
<PAGE>
MANAGEMENT
The following table contains certain information with respect to our
directors, executive officers and certain key employees:
<TABLE>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mark C. Miller.............................. 43 President, Chief Executive Officer and Director
Richard T. Kogler........................... 40 Chief Operating Officer
Anthony J. Tomasello........................ 53 Executive Vice President and Chief Technical Officer
Frank J.M. ten Brink........................ 42 Vice President, Finance and Chief Financial Officer
Michael J. Bernert.......................... 45 Vice President, Sales and Marketing
Joel P. Wilson.............................. 40 Vice President, Operations
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
John P. Connaughton......................... 33 Director
Thomas R. Reusche........................... 44 Director
</TABLE>
Our directors are elected annually to serve until the next annual
meeting and until their successors have been elected and qualified. Our officers
serve at the discretion of our Board of Directors. Thomas R. Reusche and John P.
Connaughton joined our Board of Directors in November 1999 as the selections of
Bain Capital and Madison Dearborn, respectively, pursuant to the terms of the
preferred stock purchase agreement by which we issued and sold our convertible
preferred stock to investment funds associated with Bain Capital and with
Madison Dearborn. See "Description of Capital Stock--Convertible Preferred
Stock."
Mark C. Miller has served as President and Chief Executive Officer and
a director since joining us in May 1992. From May 1989 until he joined us, Mr.
Miller served as Vice President for the Pacific, Asia and Africa in the
International Division of Abbott Laboratories, which he joined in 1976 and where
he held a number of management and marketing positions. He is a director of
Affiliated Research Centers, Inc., which provides clinical research for
pharmaceutical companies and is a director of Lake Forest Hospital. Mr. Miller
received a B.S. degree in computer science from Purdue University, where he
graduated Phi Beta Kappa.
Richard T. Kogler joined us as 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 our Executive Vice President and
Chief Technical Officer since January 1999 and previously had served as Vice
President, Operations since joining us in August 1990. For eight years prior to
joining us, 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.
Frank J.M. ten Brink has served as our 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 us, 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.
<PAGE>
Michael J. Bernert has served as our Vice President, Sales and
Marketing, with responsibility for sales and marketing throughout North America,
since January 1999. Since joining us in 1992, Mr. Bernert had held the position
of Vice President, Eastern Region. Prior to joining us 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 our Vice President, Operations, with
responsibility for operations throughout North America, since January 1999.
Since joining us in 1991, Mr. Wilson had held the positions of Vice President,
Midwest Region, Director of Engineering, General Manager of the Midwest Region,
General Manager of Operations and District Manager of Wisconsin. Prior to
joining us, 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 our Chairman of the Board of Directors
since January 1990. From January 1987 to August 1989, Mr. Schuler served as
President and Chief Operating Officer of Abbott Laboratories, a diversified
health care company, where he served as a director from April 1985 to August
1989. Mr. Schuler serves as a director of Chiron Corporation, Medtronic, Inc.
and Ventana Medical Systems, Inc. He is a co-founder of Crabtree Partners LLC, a
private investment firm in Lake Forest, Illinois, which was formed in June 1995.
Mr. Schuler received a B.S. degree in mechanical engineering from Tufts
University and a M.B.A. degree from the Stanford University Graduate School of
Business Administration.
Rod F. Dammeyer has served as a director since January 1998. He is the
Managing Partner of Equity Group Corporate Investments and Vice Chairman and a
director of Anixter International Inc., where he has been employed since 1985.
Mr. Dammeyer is a director of Antec Corporation, CNA Surety Corporation, Grupo
Azucarero Mexico, IMC Global, Inc., Jacor Communications, Inc., Matria
Healthcare, Inc., Metal Management, Inc., TeleTech Holdings, Inc. and Transmedia
Network, Inc., and a trustee of Van Kampen Investments, Inc. closed-end funds.
He received a B.S. degree from Kent State University.
Patrick F. Graham has served as a director since May 1991. Mr. Graham
is a Vice President of A. T. Kearney and is the head of Global Strategy Practice
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 since our incorporation in March
1989. He is a co-founder and partner of Crabtree Partners LLC, a private
investment firm in Lake Forest, Illinois, which was formed in June 1995. From
January 1988 to March 1995, Mr. Patience was a general partner of Marquette
Venture Partners, L.P., a venture capital fund which he co-founded and which led
our initial capitalization. Mr. Patience is a director of TRO Learning, Inc. and
Ventana Medical Systems, Inc. He received B.A. and B.L. degrees from the
University of Sydney in Sydney, Australia, and a M.B.A. degree from the Wharton
School of Business of the University of Pennsylvania.
Peter Vardy has served as a director 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 since July 1992. He
is a consultant to The Wilkerson Group, a health care products consulting firm
in New York, New York. Dr. Wilkerson has served with The Wilkerson Group since
1980 and prior to its acquisition by IBM Corporation was its Chairman. Dr.
Wilkerson also serves as a general partner of Galen Partners, L.P. and Galen
Partners International, L.P., affiliated health care venture capital funds. He
is a director of British Biotech Plc. and several privately held health care
companies. Dr. Wilkerson received a B.S. degree in biological sciences from Utah
State University and a Ph.D. degree in managerial economics and marketing
research from Cornell University.
John P. Connaughton has served as a director since November 1999. He
has been a Managing Director of Bain Capital since 1997 and a member of the firm
since 1989. Prior to joining Bain Capital, Mr. Connaughton was a consultant at
<PAGE>
Bain & Company, where he worked in consumer products and healthcare strategy
consulting. He is also a director of Epoch Senior Living and Dade Behring Inc.
Mr. Connaughton received a B.S. degree in commerce from the University of
Virginia and a M.B.A. degree from the Harvard University Graduate School of
Business.
Thomas R. Reusche has served as a director since November 1999. He is a
Managing Director and co-founder of Madison Dearborn. Prior to founding Madison
Dearborn, Mr. Reusche was a senior investment manager of First Chicago Venture
Capital, which comprised the private equity investment activities of First
Chicago Corporation, the holding company parent of First National Bank of
Chicago. Mr. Reusche serves on the board of directors of Hines Horticulture,
Inc., Woods Equipment Company and a number of private companies. He has received
an A.B. degree from Brown University and a M.B.A. degree from the Harvard
University Graduate School of Business.
<PAGE>
EXECUTIVE COMPENSATION
1998 COMPENSATION
The following table provides certain information regarding the
compensation paid to or earned by our President and Chief Executive Officer and
our four other most highly compensated executive officers (the "named executive
officers") for services rendered in 1998, 1997 and 1996:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
NUMBER OF SECURITIES
FISCAL ANNUAL COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(2) COMPENSATION(3)
- --------------------------- ---- ------ -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mark C. Miller(4) 1998 $235,000 $30,500 $51,429 $300
President and 1997 235,000 -- 60,000 300
Chief Executive Officer 1996 148,481 -- 41,220 300
Anthony J. Tomasello 1998 150,000 1,750 22,000 300
Executive Vice President and 1997 150,000 -- 20,972 300
Chief Technical Officer 1996 136,025 -- 9,946 300
Frank J.M. ten Brink(5) 1998 150,000 11,867 20,429 300
Vice President, Finance and 1997 70,619 -- 55,000 300
Chief Financial Officer 1996 -- -- -- --
Linda D. Lee(6) 1998 130,000 13,400 11,286 300
Vice President, Regulatory 1997 130,000 -- 16,830 300
Affairs and Quality Assurance 1996 120,583 -- 5,086 300
Michael J. Bernert 1998 127,462 21,569 11,000 300
Vice President, 1997 123,833 -- 21,174 300
Sales and Marketing 1996 112,615 -- 22,101 300
(1) The bonuses paid during 1998 to Messrs. Miller, Tomasello, ten Brink
and Bernert and Ms. Lee were awarded under our cash bonus program for
executive officers. Under this program executive officers may elect, in
advance of any award, to forego some portion or all of any bonus
otherwise payable under the bonus program and receive instead an
immediately vested nonstatutory stock option. The option has an
exercise price per share equal to the closing price of a share of our
common stock on the bonus award date. For the bonuses paid in 1998, the
number of shares for which an option was granted was determined by
dividing the product of four times the amount of the cash bonus that a
participating executive officer elected to forego by the closing price.
Without giving effect to their prior elections to forego portions of
their cash bonuses, the cash bonuses paid to Messrs. Miller, Tomasello
and ten Brink and Ms. Lee would have been $70,500, $36,750, $16,867 and
$28,400, respectively. Mr. Bernert did not elect to forego any portion
of his cash bonus.
(2) The stock options granted during 1998 to Messrs. Miller, Tomasello and
ten Brink and Ms. Lee include options to purchase 11,429, 10,000, 1,429
and 4,286 shares, respectively. These options were granted to them in
lieu of portions of the cash bonuses otherwise payable to them under
our cash bonus program for executive officers. See Note 1.
(3) These amounts represent our matching contribution under our 401(k)
plan. For 1996, 1997 and 1998, the matching contribution was 30% of the
first $1,000 contributed by each participant.
<PAGE>
(4) The salary for 1996 shown for Mr. Miller includes $22,917 paid to him
in February 1997. This amount represented the additional salary that we
would have paid to Mr. Miller in 1996 if, like our other executive
officers, he had resumed receiving his full base salary upon the
termination in mid-October 1996 of a voluntary 12-month salary
reduction program for management. The amount in question has been
excluded from the salary for 1997 shown for Mr. Miller.
(5) Mr. ten Brink joined us in June 1997.
(6) Ms. Lee resigned as an employee in March 1999.
</TABLE>
1998 STOCK OPTION GRANTS
The following table provides certain information regarding stock
options granted to the named executive officers in 1998. In accordance with the
rules of the SEC, the following table also provides the potential realizable
value over the term of the options (i.e., the period from the date of grant to
the date of expiration) based upon assumed rates of stock appreciation of 5% and
10%, compounded annually. These amounts do not represent our estimate of future
appreciation of the price of its common stock. We did not grant stock
appreciation rights to any named executive officer in 1998.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN PRICE EXPIRATION OPTION TERM(4)
OPTIONS(1) FISCAL YEAR(2) PER SHARE(3) DATE 5% 10%
---------- -------------- ------------ ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Mark C. Miller 8,545 2.90% $13.625 3/31/08 $ 73,219 $ 185,552
11,429 3.88% 14.00 3/31/08 100,627 255,008
31,455 10.69% 13.625 3/31/08 269,528 683,037
Anthony J. Tomasello 12,000 4.08% 13.625 3/31/08 102,824 260,577
10,000 3.40% 14.00 3/31/08 88,045 223,124
Frank J.M. ten Brink 7,725 2.62% 13.625 3/31/08 66,193 167,746
1,429 0.49% 14.00 3/31/08 12,582 31,884
11,275 3.83% 13.625 3/31/08 96,612 244,834
Linda D. Lee 7,000 2.38% 13.625 3/31/08 59,981 152,003
4,286 1.46% 14.00 3/31/08 37,736 95,631
Michael J. Bernert 11,000 3.74% 13.625 3/31/08 94,256 238,862
(1) All of the stock options granted to the named executive officers were
granted under our 1997 Stock Option Plan. Each option granted vests
over a four-year period: one-quarter of the option vests at the end of
the first year, and the balance of the option vests in equal monthly
increments over the next 36 months. The options for 11,429, 10,000,
1,429 and 4,286 shares granted to Messrs. Miller, Tomasello and ten
Brink and Ms. Lee, respectively, were granted in lieu of portions of
the cash bonuses otherwise payable to them under our cash bonus
program for executive officers.
(2) The percentages shown in the table reflect options for a total of
294,368 shares granted to employees during 1998. All of these options
were granted under our 1997 Stock Option Plan.
(3) The exercise price per share shown in the table is equal to the closing
price of a share of common stock on the date of grant.
<PAGE>
(4) The potential realizable value was calculated on the basis of the
10-year term of each option on its grant date, assuming that the fair
market value of the underlying stock on the grant date appreciates at
the indicated annual rate compounded annually for the entire term of
the term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price. The
potential realizable value of each option was calculated using the
exercise price of the option as the fair market value of the
underlying stock on the grant date.
</TABLE>
1998 OPTION EXERCISES AND YEAR END OPTION VALUES
The following table provides certain information regarding stock option
exercises in 1998 by the named executive officers and the value of the stock
options that they held at December 31, 1998. No named executive officer
exercised any stock appreciation rights during the year or had any stock
appreciation rights outstanding at the end of the year.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL OPTIONS AT
ACQUIRED VALUE YEAR END FISCAL YEAR END(2)
ON EXERCISE REALIZED(1) VESTED UNVESTED VESTED UNVESTED
----------- ----------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Mark C. Miller 26,400 $300,246 95,904 90,941 $1,163,146 $579,651
Anthony J. Tomasello 6,000 81,750 20,925 28,121 133,756 173,814
Frank J.M. ten Brink -- -- 17,925 57,504 147,067 360,345
Linda D. Lee 11,354 159,532 5,658 19,292 21,770 123,791
Michael J. Bernert 2,000 29,940 62,361 31,929 901,741 238,446
(1) The value realized was determined by multiplying the number of option
shares acquired by the closing price of a share of our common stock on
the date of exercise, and then subtracting the aggregate exercise
price.
(2) The value of in-the-money stock options was determined by multiplying
the number of vested (exercisable) or unvested (unexercisable) options
by $16.125 per share, which was the closing price of a share of common
stock on December 31, 1998, and then subtracting the aggregate
exercise price.
</TABLE>
STOCK OPTION PLANS
We have adopted two stock option plans in addition to the Directors
Stock Option Plan: (1) the 1997 Stock Option Plan (the "1997 Plan"), which was
approved by our stockholders at the 1997 Annual Meeting; and (2) the Incentive
Compensation Plan (the "1995 Plan"), which was adopted in August 1995. Each plan
authorizes a total of 1,500,000 shares of common stock to be issued pursuant to
options granted under the plan or, in the case of the 1995 Plan, restricted
stock awarded under the plan. If an option granted under either plan expires
unexercised or is surrendered, or, in the case of the 1995 Plan, if we
repurchase shares of restricted stock awarded under the plan, the shares subject
to the option or repurchased by it once again become available for option grants
or, in the case of the 1995 Plan, restricted stock awards.
As of December 31, 1998, 924,224 shares were available for future
option grants under the 1997 Plan, and 377,942 shares were available for future
option grants or restricted stock awards under the 1995 Plan. No option grants
or restricted stock awards were made under the 1995 Plan during 1998. Each plan
has a 10-year term, and no option may be granted under the 1997 Plan after its
expiration in January 2007, and no option may be granted or shares of restricted
stock awarded under the 1995 Plan after its expiration in July 2005.
Both plans provide for the grant of incentive stock options intended to
satisfy the requirements of section 422 of the Internal Revenue Code of 1986, as
amended, nonstatutory stock options and, in the case of the 1995 Plan,
<PAGE>
restricted stock awards. Incentive stock options may be granted and, in the case
of the 1995 Plan, shares of restricted stock may be awarded only to our
employees. Nonstatutory stock options may be granted under the 1997 Plan to
employees, directors and consultants and may be granted under the 1995 Plan to
employees and consultants. Both plans are administered by our Board of Directors
in respect of all eligible persons other than executive officers and by the
Compensation Committee of our Board of Directors in respect of executive
officers. Our Board of Directors or the Compensation Committee, as the case may
be, selects the eligible persons to whom options are granted or, in the case of
the 1995 Plan, restricted stock is awarded and, subject to the provisions of the
particular plan, determines the terms of each option or award, including, in the
case of an option, the number of shares, type of option, exercise price and
vesting schedule, and, in the case of an award of restricted stock under the
1995 Plan, the purchase price, if any, and the restrictions applicable to the
award.
The exercise price per share of options granted under either plan must
be at least equal to the closing price of a share of common stock on the date of
grant, with the exception that the exercise price per share of an incentive
stock option granted to an employee holding more than 10% of our outstanding
common stock must be at least 110% of the closing price. The maximum term of an
option granted under either plan may not exceed 10 years. An option may be
exercised only when it is vested and, in the case of an option granted to an
employee, only while the holder of the option remains an employee of ours or
during the 90-day period following the termination of his or her employment. In
the discretion of our Board of Directors or the Compensation Committee, as the
case may be, this 90-day period may be extended in the case of nonstatutory
stock options to any date ending on or before the expiration date of the option.
In addition, our Board of Directors or the Compensation Committee, as the case
may be, may accelerate the exercisability of an option at any time.
OTHER PLANS
We maintain a 401(k) plan in which employees who have completed one
year's employment and attained age 21 are eligible to participate. The plan
permits us to make matching contributions of a percentage of participants'
deferrals as determined each year by the Board of Directors. For 1998, we made
matching contributions of 30% of the first $1,000 contributed by participants.
We also maintain a nonqualified employee stock purchase plan under which
employees may purchase common stock on the open market through payroll
deductions.
EMPLOYMENT AGREEMENTS
We have not entered into written employment agreements with any of our
executive officers or employees. All of our executive officers and employees
have signed confidentiality agreements with us.
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial
ownership of our common stock as of November 30, 1999 by (i) each person known
by us to be the beneficial owner of more than 5% of our outstanding common
stock, (ii) each of our directors, (iii) each of our executive officers listed
in the Summary Compensation Table and (iv) all of our directors and executive
officers as a group:
<TABLE>
OPTION AND
WARRANT SHARES
INCLUDED IN
SHARES BENEFICIALLY
BENEFICIALLY OWNED COMBINED
OWNED SHARES(1) PERCENTAGE(2)
----- --------- -------------
<S> <C> <C> <C>
The TCW Group, Inc.(3)
865 South Figueroa Street
Los Angeles, CA 90017........................................ 1,043,700 -- 7.1%
Bain Capital Group(4)(6)
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116............................................. 2,121,427 -- 11.2
Madison Dearborn Partners, LLC (5)(6)
70 W. Madison Street
Chicago, IL 60602............................................ 2,142,857 -- 11.3
Mark C. Miller(7)................................................. 682,415 138,483 4.6
Anthony J. Tomasello.............................................. 168,625 39,612 1.1
Frank J.M. ten Brink.............................................. 32,220 32,167 *
Michael J. Bernert(8)............................................. 89,645 83,274 *
Jack W. Schuler(9)................................................ 946,484 51,969 6.4
Rod F. Dammeyer(10)............................................... 27,583 16,583 *
Patrick F. Graham................................................. 29,350 19,567 *
John Patience..................................................... 263,653 52,596 1.8
Peter Vardy(11)................................................... 206,911 43,549 1.4
L. John Wilkerson, Ph.D.(12)...................................... 46,611 17,385 *
Thomas R. Reusche(13)............................................. -- -- *
John P. Connaughton(14)........................................... -- -- *
All directors and executive officers
as a group (14 persons)(15).................................. 2,496,600 488,944 16.4
* Less than 1%.
(1) This column shows shares of common stock issuable upon the exercise of
stock options or warrants exercisable as of or within 60 days after
June 30, 1999.
(2) Shares of common stock issuable upon the exercise of stock options or
warrants exercisable as of or within 60 days after June 30, 1999 are
considered outstanding for purposes of computing the percentage of the
person holding the option or warrant but are not considered
outstanding for purposes of computing the percentage of any other
person.
(3) The shares shown as beneficially owned by The TCW Group, Inc., are
derived from a Schedule 13F, filed by the TCW Group, Inc. on June 30,
1999. Schedule 13G filings are more comprehensive than Schedule 13F
filings but filed less frequently. A Schedule 13G, jointly filed by
The TCW Group, Inc., a parent holding company, and Robert Day, an
individual who may be deemed to control The TCW Group, Inc., reported
that, as of December 31, 1998, for reporting purposes, each of them
held sole voting and dispositive power over 785,300 shares. The
Schedule 13G indicated that: (i) no shares are held directly by The
TCW Group, Inc.; (ii) The TCW Group, Inc. indirectly held shares
through its subsidiaries, Trust Company of the West, TCW Asset
Management Company and TCW Funds Management, Inc.; and (iii) aside
<PAGE>
from the indirect holdings of The TCW Group, Inc., Robert Day did not
directly or indirectly hold any of these shares.
(4) The shares shown as beneficially owned by Bain Capital Group are
derived from a joint Schedule 13D filed on November 22, 1999 by
investment funds associated with Bain Capital and with Madison
Dearborn. The shares of common stock reported as beneficial owned by
these funds are derived from the beneficial ownership of our
convertible preferred stock on an as-if converted basis. See
"Description of Capital Stock--Convertible Preferred Stock." The
Schedule 13D reports that the following funds associated with Bain
Capital are the beneficial owners of the following shares, and each has
sole voting and sole dispositive power with respect to these shares:
Shares of Shares of
Convertible Preferred Stock Common Stock Percentage of
Fund Beneficially Owned Beneficially Owned Outstanding Shares
---- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Bain Capital Fund VI, L.P. 25,403.76 1,451,643 7.64%
BCIP Associates II 4,491.38 256,650 1.35
BCIP Associates II-B 615.62 35,178 0.19
BCIP Associates II-C 1,319.76 75,415 0.40
BCIP Trust Associates II 1,291.22 73,784 0.39
BCIP Trust Associates II-B 206.08 11,776 0.06
Pep Investments Pty Limited 84.68 4,839 0.03
Brookside Capital Partners Fund L.P. 1,856.25 106,071 0.56
Sankaty High Yield Asset Partners, L.P. 1,856.25 106,071 0.56
The Schedule 13D further reports that other entities related to Bain
Capital, in their roles as general partners of the funds, may be deemed
to control some of these funds and thus share voting and dispositive
power with respect to those common shares. In addition, W. Mitt Romney,
an individual, may be deemed to share voting and dispositive power with
respect to 2,116,588 shares of common stock in his capacity as sole
shareholder of Bain Capital and of other entities that serve as general
partners of the funds.
(5) The Schedule 13D jointly filed by investment funds associated with Bain
Capital and with Madison Dearborn reports that Madison Dearborn
Partners, LLC, as sole general partner of Madison Dearborn Partners
III, L.P., shares voting and dispositive power with respect to
2,142,857 common share based on the beneficial ownership of convertible
preferred stock by the following investment funds for which Madison
Dearborn Partners III is the general partner:
Shares of Shares of
Convertible Preferred Stock Common Stock Percentage of
Fund Beneficially Owned Beneficially Owned Outstanding Shares
---- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Madison Dearborn Capital Partners III, L.P. 36,538.68 2,087,925 10.99%
Madison Dearborn Special Equity III, L.P. 811.32 46,361 0.24
Special Advisors Fund I, LLC, L.P.. 150 8,571 0.05
(6) The funds associated with Bain Capital and with Madison Dearborn have
agreed to vote their shares of convertible preferred stock in
accordance with the terms of an inter-investor agreement. As a result
of the terms of the inter-investor agreement, the Bain Capital and
Madison Dearborn funds may be deemed to constitute a "group" for
purposes of the Exchange Act. Accordingly, the Schedule 13D reports
that by virtue of their beneficial ownership of 75,000 shares of
convertible preferred stock, the funds associated with Bain Capital
and with Madison Dearborn may be deemed to beneficially own 4,285,714
shares of common stock, representing approximately 22.6% of the total
number of outstanding shares of common stock. For purposes of
computing the percentages for each of Bain Capital and Madison
Dearborn, all of our convertible preferred stock is assumed to be
converted into common stock.
(7) The shares shown as beneficially owned by Mr. Miller include 76,346
shares owned by trusts for the benefit of his sons, as to which Mr.
Miller disclaims beneficial ownership.
<PAGE>
(8) The shares shown as beneficially owned by Mr. Bernert include 1,000
shares owned by his wife, as to which Mr. Bernert disclaims beneficial
ownership.
(9) The shares shown as beneficially owned by Mr. Schuler include 35,218
shares owned by his wife and trusts for the benefit of his children,
as to which Mr. Schuler disclaims any beneficial ownership, and 30,000
shares owned by a family foundation of which Mr. Schuler is the sole
trustee, as to which Mr. Schuler disclaims beneficial ownership.
(10) The shares shown as beneficially owned by Mr. Dammeyer include 1,000
shares owned by his wife, as to which Mr. Dammeyer disclaims
beneficial ownership.
(11) The shares shown as beneficially owned by Mr. Vardy include 67,614
shares owned by trusts for the benefit of his children, as to which
Mr. Vardy disclaims beneficial ownership.
(12) Dr. Wilkerson is an indirect general partner of Galen Partners, L.P.
and Galen Partners International, L.P., which together own 290,484
shares (including 16,279 shares issuable upon the exercise of stock
options and warrants exercisable as of or within 60 days after May 31,
1999). Dr. Wilkerson disclaims any beneficial interest in the shares
held by these two limited partnerships except to the extent of his
individual ownership of limited partnership interests and his
pecuniary interest arising from his indirect general partnership
interest.
(13) Mr. Reusche is a Managing Director of Madison Dearborn which may be
deemed to beneficially own 2,142,857 shares. Mr. Reusche disclaims any
beneficial interest in the shares held by the investment funds
associated with Madison Dearborn, and theses shares are not included
in the number of shares beneficial owned by Mr. Reusche or the number
of shares beneficial owned by all of our directors and officers as a
group.
(14) Mr. Connaughton is a Managing Director of Bain Capital which may be
deemed to beneficially own 2,121,427 shares. Mr. Connaughton disclaims
any beneficial interest in the shares held by the investment funds
associated with Bain Capital, and theses shares are not included in
the number of shares beneficial owned by Mr. Reusche or the number of
shares beneficial owned by all of our directors and officers as a
group.
(15) The group of directors and executive officers does not include Ms. Lee,
who resigned as an employee in March 1999.
</TABLE>
<PAGE>
CERTAIN TRANSACTIONS
In December 1998, we entered into a subordinated loan agreement with a
group of lenders consisting of six of our seven directors at that time (Mr.
Graham being the only director not participating), pursuant to which the lenders
agreed to provide us with up to $5,500,000 of short-term financing upon our
request. In December 1998, we borrowed $2,750,000, and in January 1999, we
borrowed the remaining balance available under the loan agreement. Each loan
bore interest at 6.0% per annum and was repaid in March 1999 following the
completion in February 1999 of our public offering which was pending when the
loans were made. Under the terms of the subordinated loan agreement, the lenders
were granted five-year warrants to purchase shares of our 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 to purchase
a number of shares of common stock equal to the amount of the lender's loan
commitment multiplied by 0.05 and then divided by the closing price of a share
of 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 was granted a
warrant to purchase 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. In
connection with their loans, the lenders were granted warrants to purchase, in
the aggregate, 18,970 shares of common stock at $14.50 per share, 43,551 shares
of common stock at $15.50 per share and 59,092 shares of common stock at $16.50
per share.
In May 1996, we borrowed $1,000,000 under a short-term loan from a
group of nine lenders consisting of directors (Messrs. Schuler, Miller, Patience
and Vardy), executive officers (Messrs. Tomasello and Bernert and our former
Vice President, Finance) and stockholders (Galen Partners, L.P. and Galen
Partners International, L.P.). Our loan was interest-free if paid when due and
was due within 30 days after completion of an initial public offering or upon
the occurrence of other events. We repaid the loan following the closing of our
initial public offering in August 1996. In connection with the loan, we issued
warrants to members of the lending group to purchase, in the aggregate, 226,036
shares of our common stock at an exercise price of $7.96 per share. These
warrants expire in May 2001 and are exercisable at any time prior to their
expiration. During 1998, warrants to purchase 35,940 shares were exercised, and
at December 31, 1998, warrants to purchase 190,096 shares remained outstanding.
In November 1999, in connection with the preferred stock purchase
agreement, we paid a closing fee to investment funds associated with Bain
Capital and with Madison Dearborn, the purchasers of our convertible preferred
stock, of $750,000 and agreed to pay $600,000 of their expenses. See
"Description of Capital Stock--Convertible Preferred Stock."
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT FACILITY
We have a term loan and revolving credit facility with various
financial institutions from time to time parties thereto, DLJ Capital Funding,
Inc., as syndication agent for the financial institutions, lead arranger and
sole book running manager, Bank of America, N.A., as administrative agent for
the financial institutions and Bankers Trust Company, as documentation agent for
the financial institutions, consisting of (a) a six-year revolving credit
facility of up to $50.0 million, (b) a six-year term loan A in the principal
amount of $75.0 million and (c) a seven-year term loan B in the principal amount
of $150.0 million.
REPAYMENT
The term loan A matures in quarterly installments, resulting in
aggregate annual amortization payments as a percentage of the initial principal
amount as follows:
YEAR AFTER CLOSING ANNUAL AMORTIZATION
------------------ -------------------
(IN PERCENTAGE OF THE
INITIAL PRINCIPAL AMOUNT)
1.................................................. 2.5%
2.................................................. 7.5
3.................................................. 12.5
4.................................................. 22.5
5.................................................. 25.0
6.................................................. 30.0
The term loan B matures in quarterly installments, resulting in
aggregate annual amortization payments as a percentage of the initial principal
amount as follows:
YEAR AFTER CLOSING ANNUAL AMORTIZATION
------------------ -------------------
(IN PERCENTAGE OF THE
INITIAL PRINCIPAL AMOUNT)
1-6............................................... 1%
7................................................. 94
GUARANTEES; SECURITY
The credit facility is secured by a first-priority (subject to
customary exceptions), perfected lien on: (i) substantially all our property and
assets and substantially all the property and assets of our subsidiaries, other
than unrestricted subsidiaries and foreign subsidiaries, (ii) all capital stock
(or similar equity interests) of all of our direct and indirect subsidiaries,
provided that no more than 65% of the capital stock (or similar equity
interests) of our foreign subsidiaries directly held by us or one of our
non-foreign subsidiaries is required to be pledged and no capital stock of our
foreign subsidiaries held by our foreign subsidiaries is required to be pledged,
and (iii) all intercompany notes other than intercompany notes held by our
foreign subsidiaries.
The credit facility is guaranteed on a senior secured basis by entities
customary for transactions of this nature, including all of our direct and
indirect non-foreign subsidiaries (other than any unrestricted subsidiaries).
INTEREST
At our option, the interest rates per annum applicable to the revolving
credit facility, term loan A and term loan B will be a fluctuating rate of
interest determined by reference to (a) the London Interbank Offered Rate
(LIBOR) plus the applicable margin, or (b) a base rate which is the greater of
the prime rate and the rate which is 1/2 of 1% in excess of the rates on
overnight Federal funds transactions as published by the Federal Reserve Bank of
<PAGE>
New York, plus the applicable margin. The applicable margin will be determined
based on our total leverage ratio.
USE OF PROCEEDS
The term loans were used to finance in part the BFI acquisition, the
refinancing of existing debt and fees and expenses associated with the BFI
acquisition and related financing transactions. The revolving credit facility is
available to be used for working capital and general corporate purposes.
PREPAYMENTS
We are permitted to voluntarily prepay the obligations under the term
loans and to reduce the amount committed under the revolving credit facility
without any penalty or premium at any time. We are required to prepay the term
loans with:
(i) 100% net proceeds of specified asset sales, proceeds from
condemnation and the like and proceeds from loss or casualty,
subject to customary exceptions for repairs and replacements;
(ii) 100% of the net proceeds from the sale or issuance of debt
securities;
(iii)50% of the net proceeds from the issuance of equity securities,
subject to customary adjustments to be mutually determined;
(iv) 75% of excess cash flow, subject to customary adjustments to be
mutually determined; and
(v) 100% of payments by or on behalf of Allied in respect of any
purchase price adjustment under the purchase agreements regarding
the BFI acquisition.
Prepayments will be applied pro rata to term loan A and term loan B and
will be applied to scheduled installments on each loan on a pro rata basis;
provided that the lenders with respect to term loan B can decline to be prepaid.
COVENANTS; EVENTS OF DEFAULT
The credit facility contains covenants restricting our ability and the
ability of any of our subsidiaries to (with limited exceptions), among other
things:
o incur debt;
o subject our assets to liens;
o make investments;
o incur contingent liabilities;
o pay dividends;
o merge or sell assets;
o make capital expenditures;
o enter into sale/lease-back transactions;
o enter into new businesses;
o discount receivables; and
o enter into affiliate transactions.
<PAGE>
In addition, the credit facility requires us to meet financial
performance tests, including a maximum leverage ratio and a minimum cash
interest coverage ratio and, as we elect, either a minimum fixed charge coverage
ratio or minimum EBITDA.
The credit facility contains conditions under which an event of default
under the credit facility will exist, including:
o failure to make payments when due under the credit facility;
o defaults in other agreements;
o breach of covenants;
o material misrepresentations;
o involuntary or voluntary bankruptcy;
o judgments or attachments against us;
o dissolution; and
o changes in control.
OTHER INDEBTEDNESS
Our other financial obligations include industrial development revenue
bonds issued on behalf of and guaranteed by us to finance our Woonsocket, Rhode
Island treatment facility and equipment. These bonds, which had an outstanding
aggregate balance of $1,071,000 as of September 30, 1999 at fixed interest rates
ranging from 6.300% to 7.375%, are due in various amounts through June 2017. In
addition, we have issued various promissory notes in connection with
acquisitions during 1997 and 1998, consisting primarily of a 10-year note issued
as part of the Environmental Control Co. acquisition, which had an outstanding
balance of $1,840,000 at September 30, 1999.
<PAGE>
DESCRIPTION OF NOTES
You can find the definitions of various terms used in this description
under the subheading "Certain Definitions." In this description, the words "we,"
"us," "our" and similar terms refer to Stericycle, Inc. and not to any of our
subsidiaries.
We issued the series A notes under an indenture among us, our
subsidiary guarantors and State Street Bank and Trust Company, as trustee, in a
private transaction that was not subject to the registration requirements of the
Securities Act. The terms of the indenture apply to the series A notes and to
the Series B notes to be issued in exchange for the series A notes pursuant to
the exchange offer. The terms of the series B notes include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939. The series B notes are subject to all of these terms.
The following description is a summary of the material provisions of
the indenture and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the indenture and the
registration rights agreement because they, and not this description, define
your rights as Holders of the notes. Copies of the indenture and the
registration rights agreement are filed as exhibits to the registration
statement of which this prospectus is a part and are also available as set forth
below under "--Additional Information."
Generally terms used in this description but not defined below under
the subheading "Certain Definitions" have the meanings assigned to them in the
indenture. Unless the context requires otherwise, "notes" refers to both the
series A and the series B notes. We us the term "Guarantors" in this description
since it is used in the indenture, but elsewhere in this prospectus we have used
the term "subsidiary guarantors" to have the same meaning.
BRIEF DESCRIPTION OF THE SERIES B NOTES AND THE GUARANTEES
THE SERIES B NOTES
The series B notes:
o are general unsecured obligations of ours;
o are subordinated in right of payment to all of our existing and
future Senior Debt;
o are pari passu in right of payment with any of our future senior
subordinated Indebtedness; and
o are unconditionally guaranteed by our Guarantors.
THE SUBSIDIARY GUARANTEES
The series B notes will be guaranteed by all of our current and future
Domestic Subsidiaries that are Restricted Subsidiaries, except 3CI Complete
Compliance Corporation, a publicly traded corporation in which we hold a
controlling interest, and our foreign subsidiaries.
The guarantees of the series B notes:
o are general unsecured obligations of each Guarantor;
o are subordinated in right of payment to all existing and future
Senior Debt of each Guarantor; and
o are pari passu in right of payment with any future senior
subordinated Indebtedness of each Guarantor.
Not all of our subsidiaries will guarantee the series B notes. Med-Tech
Environmental Limited, Med-Tech Environmental (CDA), Ltd., Bio-Med Waste
Disposal Systems, Ltd., and 507375 N.B. Ltd., our existing foreign subsidiaries,
and 3CI Complete Compliance Corporation will not be guarantors. In the event of
<PAGE>
a bankruptcy, liquidation or reorganization of any of these non-guarantor
subsidiaries, these non-guarantor subsidiaries will pay the holders of their
debts and their trade creditors before they will be able to distribute any of
their assets to us. The non-guarantor subsidiaries generated 9.9% of our pro
forma revenues for the twelve-month period ended June 30, 1999 and held 4.9% of
our pro forma combined assets as of September 30, 1999.
As of the date of the indenture, all of our subsidiaries were
"Restricted Subsidiaries." However, under the circumstances described below
under the subheading "--Certain Covenants--Designation of restricted and
unrestricted subsidiaries," we will be permitted to designate some of our
subsidiaries as "Unrestricted Subsidiaries." The effect of designating a
Subsidiary as an "Unrestricted Subsidiary" will be
o an Unrestricted Subsidiary will not be subject to many of the
restrictive covenants in the indenture;
o a Subsidiary that has previously been a Guarantor and that is
designated an Unrestricted Subsidiary will be removed from its
Subsidiary Guarantee; and
o the assets, income, cash flow and other financial results of an
Unrestricted Subsidiary will not be consolidated with ours for
purposes of calculating compliance with the restrictive covenants
contained in the indenture.
PRINCIPAL, MATURITY AND INTEREST
The indenture provides for the issuance by us of notes with a maximum
aggregate principal amount of $200.0 million, of which $125.0 million of series
A notes were issued in the initial offering. We may issue additional notes (the
"Additional Notes") from time to time. Any offering of Additional Notes is
subject to the covenant described below under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." The
series A and series B notes and any Additional Notes subsequently issued under
the indenture would be treated as a single class for all purposes under the
indenture, including, without limitation, waivers, amendments, redemptions and
offers to purchase. We have issued and will issue notes in denominations of
$1,000 and integral multiples of $1,000. The series B notes will mature on
November 15, 2009.
Interest on the series B notes will accrue at the rate of 12 3/8% per
annum and will be payable semi-annually in arrears on November 15 and May 15,
commencing on May 15, 2000. We will make each interest payment to the Holders of
record on the immediately preceding November 1 and May 1.
Interest on the series B notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
METHODS OF RECEIVING PAYMENTS ON THE SERIES B NOTES
If you have given wire transfer instructions to us at least ten
business days prior to the applicable payment date, we will pay all principal,
interest and premium and Liquidated Damages, if any, on your series B notes in
accordance with those instructions. All other payments on the series B notes
will be made at the office or agency of the paying agent and registrar for the
notes within the City and State of New York unless we elect to make interest
payments by check mailed to the Holders at their addresses set forth in the
register of Holders.
PAYING AGENT AND REGISTRAR FOR THE SERIES B NOTES
The trustee will initially act as paying agent and registrar. We may
change the paying agent or registrar without prior notice to the Holders of
series B notes, and we or any of our Subsidiaries may act as paying agent or
registrar.
<PAGE>
TRANSFER AND EXCHANGE
A Holder may transfer or exchange series B notes in accordance with the
indenture. The registrar and the trustee may require a Holder to furnish
appropriate endorsements and transfer documents in connection with a transfer of
series B notes. Holders will be required to pay all taxes due on transfer. We
are not required to transfer or exchange any note selected for redemption. Also,
we are not required to transfer or exchange any note for a period of 15 days
before a selection of series B notes to be redeemed.
The registered holder of a series B note will be treated as its owner
for all purposes.
SUBSIDIARY GUARANTEES
The Guarantors will jointly and severally guarantee our obligations
under the series B notes. Each Subsidiary Guarantee will be subordinated to the
prior payment in full in cash of all Senior Debt of that Guarantor (including,
without limitation, Senior Debt incurred after the date of the indenture) to the
extent the payment of Subordinated Note Obligations are subordinated to our
Senior Debt, as described below under the caption "Subordination." The
obligations of each Guarantor under its Subsidiary Guarantee will be limited as
necessary to prevent that Subsidiary Guarantee from constituting a fraudulent
conveyance under applicable law. See "Risk Factors--Fraudulent Conveyance
Matters--Federal and state statutes allow courts, under specific circumstances,
to void guarantees and require noteholders to return payments received from
guarantors."
A Guarantor may not sell or otherwise dispose of all or substantially
all of its assets to, or consolidate with or merge with or into (whether or not
the Guarantor is the surviving Person), another Person, other than us or another
Guarantor, unless:
(1) immediately after giving effect to that transaction,
no Default or Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any sale or
disposition or the Person formed by or surviving any
consolidation or merger assumes all the obligations
of that Guarantor under the indenture, its Subsidiary
Guarantee and the registration rights agreement
pursuant to a supplemental indenture satisfactory to
the trustee; or
(b) any sale or other disposition complied with the
"Asset Sale" provisions of the indenture.
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including
by way of merger or consolidation) to a Person that is not
(either before or after giving effect to the transaction) a
Restricted Subsidiary of ours, if the Guarantor applies the
Net Proceeds of that sale or other disposition in accordance
with the "Asset Sale" provisions of the indenture;
(2) in connection with any sale of all of the Capital Stock of
a Guarantor to a Person that is not (either before or after
giving effect to the transaction) a Restricted Subsidiary of
ours, if we apply the Net Proceeds of that sale in accordance
with the "Asset Sale" provisions of the indenture; or
(3) if we properly designate any Restricted Subsidiary of ours
that is a Guarantor as an Unrestricted Subsidiary in
accordance with the applicable provisions of the indenture.
See "--Repurchase at the Option of Holders--Asset Sales."
<PAGE>
SUBORDINATION
The payment of Subordinated Note Obligations will be subordinated to
the prior payment in full in cash of all of our Senior Debt, including Senior
Debt incurred after the date of the indenture.
The holders of Senior Debt will be entitled to receive payment in full
in cash of all Obligations due in respect of Senior Debt (including interest
after the commencement of any bankruptcy proceeding at the rate specified in the
applicable Senior Debt) before the Holders of series B notes will be entitled to
receive any payment with respect to Subordinated Note Obligations (except that
Holders of series B notes may receive and retain Permitted Junior Securities and
payments made from the trust described under "--Legal Defeasance and Covenant
Defeasance"), in the event of any distribution to our creditors:
(1) in our liquidation or dissolution;
(2) in a bankruptcy, reorganization, insolvency, receivership
or similar proceeding relating to us or our property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of our assets and liabilities.
We also may not make any payment in respect of the series B notes
(except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") if:
(1) a payment default on Designated Senior Debt occurs and is
continuing; or
(2) any other default occurs and is continuing on Designated
Senior Debt that permits holders of the Designated Senior Debt
as to which that default relates to accelerate its maturity
and the trustee receives a notice of the default (a "Payment
Blockage Notice") from us or the holders of any Designated
Senior Debt.
Payments on the series B notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which
the default is cured or waived; and
(2) in case of a nonpayment default, the earlier of the date
on which the nonpayment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice
is received, unless the maturity of any Designated Senior Debt
has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360
days have elapsed since the delivery of the immediately prior Payment Blockage
Notice.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless the default shall have
been cured or waived for a period of not less than 90 days.
If the trustee or any Holder of the notes receives a payment in respect
of the notes (except in Permitted Junior Securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance") when the payment is
prohibited by these subordination provisions, the trustee or the Holder, as the
case may be, shall promptly turn over the payment to the holders of Senior Debt
or their proper representative. Until the trustee or the Holder, as the case may
be, shall have so turned over the payment, the trustee or the Holder, as the
case may be, shall hold the payment in trust for the benefit of the holders of
Senior Debt.
We must promptly notify Holders of Senior Debt if payment of the series
B notes is accelerated because of an Event of Default.
<PAGE>
As a result of the subordination provisions described above, in the
event of our bankruptcy, liquidation or reorganization, Holders of series B
notes may recover less ratably than trade creditors and our other creditors who
are holders of Senior Debt. See "Risk Factors--Subordination."
OPTIONAL REDEMPTION
At any time prior to November 15, 2002, we may on any one or more
occasions redeem up to 35% of the aggregate principal amount of series B notes
issued under the indenture at a redemption price of 112.375% of the principal
amount of the series B notes redeemed, plus accrued and unpaid interest and
Liquidated Damages, if any, to the redemption date, with the net cash proceeds
of one or more Equity Offerings; provided that:
(1) at least 65% of the series B notes issued under the
indenture remain outstanding immediately after the occurrence
of the redemption (excluding series B notes held by any of our
Subsidiaries or us); and
(2) the redemption occurs within 60 days of the date of the
closing of the Equity Offering.
Except pursuant to the preceding paragraph, the series B notes will not
be redeemable at our option prior to November 15, 2004. We are not prohibited,
however, from acquiring series B notes by means other than a redemption, whether
pursuant to an issuer tender offer or otherwise, assuming the acquisition does
not otherwise violate the terms of the indenture.
After November 15, 2004, we may redeem all or a part of the series B
notes upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and Liquidated Damages, if any, on the series B
notes redeemed to the applicable redemption date, if redeemed during the
twelve-month period beginning on November 15 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2004................................................ 106.1875%
2005................................................ 104.1250%
2006................................................ 102.0625%
2007 and thereafter................................. 100.0000%
MANDATORY REDEMPTION
Except as described in "Repurchase at the Option of Holders--Change of
Control" and "Repurchase at the Option of Holders--Asset Sales," We are not
required to make mandatory redemption or sinking fund payments with respect to
the series B notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of series B notes will have
the right to require us to repurchase all or any part (equal to $1,000 or an
integral multiple of $1,000) of that Holder's series B notes pursuant to the
Change of Control Offer on the terms set forth in the indenture. In the Change
of Control Offer, we will offer a Change of Control Payment in cash equal to
101% of the aggregate principal amount of series B notes repurchased plus
accrued and unpaid interest and Liquidated Damages, if any, on the series B
notes repurchased to the date of purchase. Within 30 days following any Change
of Control, we will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
series B notes on the Change of Control Payment Date specified in the notice,
which date shall be no earlier than 30 days and no later than 60 days from the
date the notice is mailed, pursuant to the procedures required by the indenture
and described in the notice. We will comply with the requirements of Rule 14e-1
<PAGE>
under the Exchange Act and any other securities laws and regulations thereunder
to the extent those laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change of
Control provisions of the indenture, we will comply with the applicable
securities laws and regulations and will not be deemed to have breached our
obligations under the Change of Control provisions of the indenture by virtue of
this conflict.
On the Change of Control Payment Date, we will, to the extent lawful:
(1) accept for payment all series B notes or portions of notes
properly tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the
Change of Control Payment in respect of all series B notes or
portions of notes properly tendered; and
(3) deliver or cause to be delivered to the trustee the series
B notes so accepted together with an officers' certificate
stating the aggregate principal amount of series B notes or
portions of series B notes being purchased by us.
The paying agent will promptly mail to each Holder of series B notes
properly tendered the Change of Control Payment for the series B notes, and the
trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new note equal in principal amount to any unpurchased
portion of the notes surrendered, if any; provided that each new series B note
will be in a principal amount of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of this "Change of
Control" covenant, but in any event within 90 days following a Change of
Control, we will either repay all outstanding Senior Debt or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Debt to permit the repurchase of series B notes required by this covenant. We
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
The provisions described above that require us to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the Holders of the series B notes to require that
we repurchase or redeem the series B notes in the event of a takeover,
recapitalization or similar transaction.
We will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and purchases all
series B notes properly tendered and not withdrawn under the Change of Control
Offer.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or
other disposition (other than by way of merger or
consolidation), in one or a series of related transactions, of
all or substantially all of the properties or assets of our
Subsidiaries and us taken as a whole to any "person" (as that
term is used in Section 13(d)(3) of the Exchange Act) other
than a Principal or a Related Party of a Principal;
(2) the adoption of a plan relating to our liquidation or
dissolution;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the Beneficial
Owner, directly or indirectly, of more than 50% of our Voting
Stock, measured by voting power rather than number of shares;
or
<PAGE>
(4) the first day on which a majority of the members of our
Board of Directors are not Continuing Directors.
The definition of Change of Control in the indenture includes a phrase
relating to the direct or indirect sale, lease, transfer, conveyance or other
disposition of "all or substantially all" of the properties or assets of our
Subsidiaries and us taken as a whole. Although there is a limited body of case
law interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of series B notes to require us to repurchase the series B notes as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of our assets and our Subsidiaries taken as a whole to another Person or
group may be uncertain.
ASSET SALES
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) We (or the Restricted Subsidiary, as the case may be)
receive consideration at the time of the Asset Sale at least
equal to the fair market value of the assets or Equity
Interests issued or sold or otherwise disposed of;
(2) in the case of Asset Sales involving consideration in
excess of $5.0 million, the fair market value is determined by
our Board of Directors and evidenced by a resolution of the
Board of Directors set forth in an officers' certificate
delivered to the trustee; and
(3) at least 75% of the consideration received in the Asset
Sale by the Restricted Subsidiary or us from or on behalf of
the transferee consists of:
(a) cash or readily marketable Cash Equivalents;
(b) the assumption of Indebtedness or other
liabilities reflected on the consolidated balance
sheet of us and and our Restricted Subsidiaries in
accordance with GAAP (excluding Indebtedness or any
other liabilities that are subordinate in right of
payment to the series B notes) and the release from
all liability on the Indebtedness or other
liabilities assumed;
(c) all or substantially all of the assets of, or a
majority of the Voting Stock of, another Permitted
Business;
(d) other long-term assets that are used or useful
in a Permitted Business;
(e) any securities, notes or other obligations
received by us or any Restricted Subsidiary of ours
from a transferee that are converted by us or the
Restricted Subsidiary into cash within 90 days of the
receipt thereof, to the extent of the cash received
in that conversion or Cash Equivalents, to the extent
of the Cash Equivalents received in that conversion;
(f) any Permitted Investment; or
(g) any combination thereof.
Within 365 days after the receipt of any Net Proceeds from an Asset
Sale, we may apply those Net Proceeds at our option:
(1) to repay Senior Debt and, if the Senior Debt repaid is
revolving credit Indebtedness, to correspondingly reduce
commitments with respect thereto;
<PAGE>
(2) to acquire all or substantially all of the assets of, or a
majority of the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure;
(4) to acquire other long-term assets that are used or useful
in a Permitted Business;
(5) to redeem the notes with the Net Proceeds of an Asset Sale
pursuant to any of the provisions described above under the
caption "Optional Redemption;" or
(6) any combination of the foregoing.
Pending the final application of any Net Proceeds, we may temporarily
reduce revolving credit borrowings (without reducing commitments) or otherwise
invest the Net Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, we will make an Asset
Sale Offer to all Holders of series B notes and all holders of other
Indebtedness that is pari passu with the series B notes containing provisions
similar to those set forth in the indenture relating to the series B notes with
respect to offers to purchase or redeem with the proceeds of sales of assets to
purchase the maximum principal amount of series B notes and such other pari
passu Indebtedness that may be purchased out of the Excess Proceeds. The offer
price in any Asset Sale Offer will be equal to 100% of the principal amount plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, we may use those Excess Proceeds for any
purpose not otherwise prohibited by the indenture. If the aggregate principal
amount of series B notes and other Indebtedness tendered into the Asset Sale
Offer exceeds the amount of Excess Proceeds, the trustee will select the series
B notes and the other Indebtedness to be purchased on a pro rata basis based on
the principal amount of series B notes and the other pari passu Indebtedness
tendered. Upon completion of each Asset Sale Offer, the amount of Excess
Proceeds will be reset at zero.
We will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent these
laws and regulations are applicable in connection with each repurchase of series
B notes pursuant to an Asset Sale Offer. To the extent that the provisions of
any securities laws or regulations conflict with the Asset Sales provisions of
the indenture, we will comply with the applicable securities laws and
regulations and will not be deemed to have breached our obligations under the
Asset Sale provisions of the indenture by virtue of the conflict.
The agreements governing our outstanding Senior Debt currently prohibit
us from purchasing any series B notes, and also provide that some change of
control or asset sale events with respect to us would constitute a default under
these agreements. Any future credit agreements or other agreements relating to
Senior Debt to which we become a party may contain similar restrictions and
provisions. In the event a Change of Control or Asset Sale occurs at a time when
we are prohibited from purchasing series B notes, we could seek the consent of
our senior lenders to the purchase of series B notes or could attempt to
refinance the borrowings that contain the prohibition. If we do not obtain a
consent or repay the borrowings, we will remain prohibited from purchasing
series B notes. In that case, our failure to purchase tendered series B notes
would constitute an Event of Default under the indenture which would, in turn,
constitute a default under the Senior Debt. In these circumstances, the
subordination provisions in the indenture would likely restrict payments to the
Holders of series B notes.
SELECTION AND NOTICE
If less than all of the series B notes are to be redeemed at any time,
the trustee will select series B notes for redemption as follows:
<PAGE>
(1) if the series B notes are listed on any national
securities exchange, in compliance with the requirements of
the principal national securities exchange on which the series
B notes are listed; or
(2) if the series B notes are not listed on any national
securities exchange, on a pro rata basis, by lot or by any
method as the trustee shall deem fair and appropriate.
No series B notes of $1,000 or less will be redeemed in part. Notices
of redemption will be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of series B notes to be
redeemed at its registered address. Notices of redemption may not be
conditional.
If any series B note is to be redeemed in part only, the notice of
redemption that relates to that series B note will state the portion of the
principal amount of that series B note that is to be redeemed. A new series B
note in principal amount equal to the unredeemed portion of the original series
B note will be issued in the name of the Holder thereof upon cancellation of the
original series B note. Series B notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on series B notes or portions of them called for redemption.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of our Equity Interests (including,
without limitation, any payment in connection with any merger
or consolidation involving us) or to the direct or indirect
holders of our Equity Interests in that capacity (other than
dividends or distributions payable in Equity Interests (other
than Disqualified Stock) of ours);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger
or consolidation involving us) any Equity Interests of us or
any direct or indirect parent of ours;
(3) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the series B notes or the
Subsidiary Guarantees, except a payment of interest or
principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all of the payments and
other actions set forth in these clauses (1) through (4) above
being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to the Restricted Payment:
(1) no Default or Event of Default has occurred and is
continuing or would occur as a consequence thereof; and
(2) we would, at the time of the Restricted Payment and after
giving pro forma effect thereto as if the Restricted Payment
had been made at the beginning of the applicable four-quarter
period, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
(3) the Restricted Payment, together with the aggregate amount
of all other Restricted Payments made by our Restricted
Subsidiaries and us after the date of the indenture (excluding
Restricted Payments permitted by clauses (2), (3), (4), (6),
(7), (8), (9) and (10) of the next succeeding paragraph) is
less than the sum, without duplication, of:
<PAGE>
(a) 50% of our Consolidated Net Income for the period
(taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the date
of the indenture to the end of our most recently
ended fiscal quarter for which internal financial
statements are available at the time of the
Restricted Payment (or, if the Consolidated Net
Income for the period is a deficit, less 100% of the
deficit), plus
(b) 100% of the aggregate net cash proceeds received
by us since the date of the indenture as a
contribution to our common equity capital or from the
issue or sale of our Equity Interests (other than
Disqualified Stock) or from the issue or sale of our
convertible or exchangeable Disqualified Stock or
convertible or exchangeable debt securities that have
been converted into or exchanged (pursuant to the
terms thereof) for the Equity Interests (other than
Equity Interests (or Disqualified Stock or debt
securities) sold to a Subsidiary of ours), plus
(c) to the extent that any Restricted Investment that
was made after the date of the indenture is sold for
cash or otherwise liquidated or repaid for cash, the
lesser of (i) the cash return of capital with respect
to the Restricted Investment (less the cost of
disposition, if any) and (ii) the initial amount of
the Restricted Investment.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend, other payment or
distribution, within 60 days after the date of declaration
notice thereof, if at said date of declaration the payment or
distribution would have complied with the provisions of the
indenture;
(2) the redemption, repurchase, retirement, defeasance or
other acquisition of any subordinated Indebtedness of any
Guarantor or us or of any of our Equity Interests in exchange
for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Restricted Subsidiary of
ours) of our Equity Interests (other than Disqualified Stock);
provided that the amount of any net cash proceeds that are
utilized for any redemption, repurchase, retirement,
defeasance or other acquisition will be excluded from clause
(3)(b) of the preceding paragraph;
(3) any purchase, repurchase, redemption defeasance or other
acquisition or retirement for value of subordinated
Indebtedness, either
(i) solely in exchange for Permitted Refinancing
Indebtedness that is permitted to be incurred
pursuant to the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred
Stock," or
(ii) through the application of the net proceeds of a
substantially current sale for cash (other than to a
Subsidiary of ours) of our Permitted Refinancing
Indebtedness that is permitted to be incurred
pursuant to the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred
Stock;"
(4) repurchases of Equity Interests from Persons who are not
our Affiliates who have sold assets or stock of a Permitted
Business to us within the prior 18 months in exchange for the
Equity Interests repurchased;
(5) the declaration and payment of dividends to holders of any
class or series of Designated Preferred Stock (other than
Disqualified Stock) issued after the date of the indenture;
provided, that at the time of the issuance, after giving
effect to the issuance as if the same had occurred at the
beginning of the applicable four-quarter period on a pro forma
basis, we would have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage
<PAGE>
Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(6) repurchases of Capital Stock deemed to occur upon the
exercise of stock options if the Capital Stock represents a
portion of the exercise price thereof;
(7) payments in connection with the BFI acquisition and
related transactions made on the date of the indenture;
(8) payment to holders of our Capital Stock in lieu of
issuance of fractional shares of our Capital Stock in an
amount not to exceed $100,000 per annum;
(9) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of our or any
Subsidiary of us held by any former member of our (or any of
our Subsidiaries') management committee or any former officer,
employee or director of ours or any of our Subsidiaries
pursuant to any equity subscription agreement, stock option
agreement, employment agreement or other similar agreements
provided that the aggregate price paid for all repurchased,
redeemed, acquired or retired Equity Interests shall not
exceed $2.0 million in any calendar year (with unused amounts
in any calendar year being carried over to succeeding calendar
years);
(10) the payment of dividends on the series A convertible
preferred stock pursuant to the provisions of the Preferred
Stock Agreement as in effect on the date of the indenture; and
(11) other Restricted Payments in an aggregate amount not to
exceed $5.0 million since the date of the indenture.
The amount of all Restricted Payments (other than cash) will be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued to or by us or any Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant will be determined by the Board of Directors whose resolution with
respect thereto shall be delivered to the trustee. The Board of Directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, we will deliver to the trustee an officers' certificate
stating that the Restricted Payment is permitted and setting forth the basis
upon which the calculations required by this "Restricted Payments" covenant were
computed, together with a copy of any fairness opinion or appraisal required by
the indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
We will not, and will not permit any of our Subsidiaries to, directly
or indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and we will
not issue any Disqualified Stock and will not permit any of our Subsidiaries to
issue any shares of preferred stock; provided, however, that we may incur
Indebtedness (including Acquired Debt) or issue Disqualified Stock, and our
Restricted Subsidiaries may incur Indebtedness or issue preferred stock, if the
Fixed Charge Coverage Ratio for our most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which the additional Indebtedness is incurred or the
Disqualified Stock or preferred stock is issued would have been at least 2.0 to
1.0 in the case of any incurrence or issuance occurring on or prior to the third
anniversary of the date of the indenture and 2.25 to 1.0 in the case of any
incurrence or issuance that occurs thereafter, in each case determined on a pro
forma basis (including a pro forma application of the net proceeds therefrom),
as if the additional Indebtedness had been incurred or the preferred stock or
Disqualified Stock had been issued, as the case may be, at the beginning of the
four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence
of any of the following items of Indebtedness (collectively, "Permitted Debt"):
<PAGE>
(1) the incurrence by us and any Guarantor of additional
Indebtedness and letters of credit under Credit Facilities in
an aggregate principal amount at any one time outstanding
under this clause (1) (with letters of credit being deemed to
have a principal amount equal to the maximum potential
liability of any Guarantors and us thereunder) not to exceed
$275.0 million less the aggregate amount of all Net Proceeds
of Asset Sales that have been applied by us or any of our
Restricted Subsidiaries since the date of the indenture to
repay any term Indebtedness under a Credit Facility pursuant
to the covenant described under the caption "--Repurchase at
the Option of Holders--Asset Sales" and less the aggregate
amount of all Net Proceeds of Asset Sales applied by us or any
of our Restricted Subsidiaries to repay any revolving credit
Indebtedness under a Credit Facility and effect a
corresponding commitment reduction thereunder pursuant to the
covenant described under the caption "--Repurchase at the
Option of Holders--Asset Sales" and less the aggregate amount
of Indebtedness of Receivables Subsidiaries outstanding
pursuant to clause (13) below;
(2) the incurrence by us and our Subsidiaries of the Existing
Indebtedness;
(3) the incurrence by the Guarantors and us of Indebtedness
represented by the series A and series B notes and the related
Subsidiary Guarantees;
(4) the incurrence by us or any of our Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each
case, incurred for the purpose of financing all or any part of
the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of any of
the Restricted Subsidiary or us, in an aggregate principal
amount, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (4), not to exceed $10.0
million at any time outstanding;
(5) the incurrence by any of our Restricted Subsidiaries or us
of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace
Indebtedness (other than intercompany Indebtedness) that was
permitted by the indenture to be incurred under the first
paragraph of this covenant or clauses (2), (3), (4), (5), or
(14) of this paragraph;
(6) the incurrence by us or any of our Restricted Subsidiaries
of intercompany Indebtedness between or among any of our
Restricted Subsidiaries and us; provided, however, that:
(a) if we or any Guarantor are the obligor on the
Indebtedness and the holders of Senior Debt under the
Credit Facilities do not have a security interest
therein, the Indebtedness must be expressly
subordinated to the prior payment in full in cash of
all Obligations with respect to the series B notes,
in our case, or the Subsidiary Guarantee, in the case
of a Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity
Interests that results in the Indebtedness being held
by a Person other than us or a Restricted Subsidiary
of ours and (ii) any sale or other transfer of the
Indebtedness to a Person that is not either our
Restricted Subsidiary or us will be deemed, in each
case, to constitute an incurrence of the Indebtedness
by us or the Restricted Subsidiary, as the case may
be, that was not permitted by this clause (6);
(7) Indebtedness consisting of Permitted Hedging Agreements;
(8) the guarantee by us or any of the Guarantors of
Indebtedness of us or a Restricted Subsidiary of ours that was
permitted to be incurred by another provision of this
covenant;
(9) the incurrence by our Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if the Indebtedness
ceases to be Non-Recourse Debt of an Unrestricted Subsidiary,
<PAGE>
that event will be deemed to constitute an incurrence of
Indebtedness by a Restricted Subsidiary of ours that was not
permitted by this clause (9);
(10) the accrual of interest, the accretion or amortization of
original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the
same terms, and the payment of dividends on Disqualified Stock
in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes
of this covenant; provided, in each case, that the amount
thereof is included in our Fixed Charges as accrued;
(11) obligations in respect of performance and surety bonds
and completion guarantees provided by us or any of our
Restricted Subsidiaries in the ordinary course of business;
(12) Indebtedness incurred by us or any of our Restricted
Subsidiaries constituting reimbursement obligations with
respect to letters of credit issued in the ordinary course of
business in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to
reimbursement type obligations regarding workers' compensation
claims;
(13) the incurrence by a Receivables Subsidiary of
Indebtedness in a Qualified Receivables Transaction that is
without recourse to us or any other Restricted Subsidiary of
ours or our or their assets (other than the Receivables
Subsidiary and its assets and, as to us or any Subsidiary of
ours, other than pursuant to representations, warranties,
covenants and indemnities customary for these transactions);
and
(14) the incurrence by us or any of our Restricted
Subsidiaries of additional Indebtedness and/or the issuance of
Permitted Domestic Subsidiary Preferred Stock by our Domestic
Subsidiaries in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to
this clause (14), not to exceed $20.0 million.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (14) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, we
will be permitted to classify the item of Indebtedness on the date of its
incurrence in any manner that complies with this covenant. Indebtedness incurred
under Credit Facilities outstanding on the date on which notes are first issued
and authenticated under the indenture shall be deemed to have been incurred on
that date in reliance on the exception provided by clause (1) of the definition
of Permitted Debt.
NO SENIOR SUBORDINATED DEBT
We will not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment to
any of our Senior Debt and senior in any respect in right of payment to the
series B notes. No Guarantor will incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to the Senior Debt of the Guarantor and senior in any respect
in right of payment to the Guarantor's Subsidiary Guarantee.
LIENS
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind securing Indebtedness that is pari passu or subordinated in right of
payment to the series B notes on any asset now owned or hereafter acquired,
except Permitted Liens, unless the series B notes are secured by the Lien on an
equal and ratable basis.
<PAGE>
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its
Capital Stock to us or any of our Restricted Subsidiaries, or
with respect to any other interest or participation in, or
measured by, its profits, or pay any Indebtedness owed to us
or any of our Restricted Subsidiaries;
(2) make loans or advances to us or any of our Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to us or any of
our Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements existing on the date of the indenture, as in
effect on the date of the indenture;
(2) the indenture, the series B notes and the Subsidiary
Guarantees;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of
a Person acquired by us or any of our Restricted Subsidiaries
as in effect at the time of the acquisition (except to the
extent the Indebtedness was incurred in connection with or in
contemplation of the acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that,
in the case of Indebtedness, the Indebtedness was permitted by
the terms of the indenture to be incurred;
(5) customary non-assignment provisions in leases, licenses
and other agreements entered into in the ordinary course of
business;
(6) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions on the
property so acquired of the nature described in clause (3) of
the preceding paragraph;
(7) any agreement for the sale or other disposition of a
Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing the
Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements
governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be
incurred pursuant to the provisions of the covenant described
above under the caption "--Liens" that limit the right of the
debtor to dispose of the assets subject to the Lien;
(10) provisions with respect to the disposition or
distribution of assets or property in joint venture
agreements, asset sale agreements, stock sale agreements and
other similar agreements entered into in the ordinary course
of business;
(11) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the
ordinary course of business;
<PAGE>
(12) Indebtedness or other contractual requirements of a
Receivables Subsidiary in connection with a Qualified
Receivables Transaction, provided that the restrictions apply
only to the Receivables Subsidiary and its Subsidiaries; and
(13) any encumbrances or restrictions imposed by any
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings of the
contracts, instruments or obligations referred to in clauses
(1) through (12) above; provided that the amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are, in the good
faith judgment of our Board of Directors, no more restrictive
with respect to the dividend or other payment restrictions
prior to the amendment, modification, restatement, renewal,
increase, supplement, refunding, replacement or refinancing.
MERGER, CONSOLIDATION OR SALE OF ASSETS
We may not (1) consolidate or merge with or into another Person
(whether or not we are the surviving corporation); or (2) directly or
indirectly, sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of us and our Restricted
Subsidiaries taken as a whole, in one or more related transactions, to another
Person; unless:
(1) either: (a) we are the surviving corporation; or (b) the
Person formed by or surviving any consolidation or merger (if
other than us) or to which a sale, assignment, transfer,
conveyance or other disposition shall have been made is a
corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia;
(2) the Person formed by or surviving the consolidation or
merger (if other than us) or the Person to which a sale,
assignment, transfer, conveyance or other disposition shall
have been made assumes all our Obligations under the series B
notes, the indenture and the registration rights agreement
pursuant to agreements reasonably satisfactory to the trustee;
(3) immediately after the transaction no Default or Event of
Default exists; and
(4) we, or the Person formed by or surviving the consolidation
or merger (if other than us), or to which a sale, assignment,
transfer, conveyance or other disposition shall have been made
will, on the date of the transaction after giving pro forma
effect thereto and any related financing transactions as if
the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
In addition, we may not, directly or indirectly, lease all or
substantially all of our properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among us and any of our Restricted
Subsidiaries.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
Our Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by us and our Restricted
Subsidiaries in the Restricted Subsidiary so designated will be deemed to be an
Investment made as of the time of the designation and will either reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under the caption "--Restricted Payments" or reduce the
amount available for future Investments under one or more clauses of the
definition of Permitted Investments, as we shall determine. That designation
will only be permitted if the Investment would be permitted at that time and if
the Restricted Subsidiary otherwise meets the definition of an Unrestricted
<PAGE>
Subsidiary. Our Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
TRANSACTIONS WITH AFFILIATES
We will not, and will not permit any of our Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of our
or their properties or assets to, or purchase any property or assets from, or
enter into or make or amend any transaction, contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an
"Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less
favorable to us or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable
transaction by us or the Restricted Subsidiary with an
unrelated Person; and
(2) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate
consideration in excess of $2.0 million, the Affiliate
Transaction complies with this covenant and the Affiliate
Transaction has been approved by a majority of the
disinterested members of our Board of Directors; and
(3) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate
consideration in excess of $10.0 million, our Board of
Directors or the Board of Directors of any Restricted
Subsidiary party to the Affiliate Transaction shall have
received an opinion as to the fairness to the Holders of the
Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of
national standing.
The following items shall not be deemed to be Affiliate Transactions
and, therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by us or any of our
Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of us or the Restricted
Subsidiary;
(2) transactions between or among us and/or our Restricted
Subsidiaries;
(3) transactions with a Person that is our Affiliate solely
because we own an Equity Interest in the Person;
(4) payment of reasonable directors fees;
(5) sales of Equity Interests (other than Disqualified Stock)
to our Affiliates;
(6) Restricted Payments that are permitted by the provisions
of the indenture described above under the caption
"--Restricted Payments;"
(7) loans by us and our Restricted Subsidiaries to employees
of us of our Restricted Subsidiaries that are entered in the
ordinary course of business and that are approved by our Board
of Directors in good faith;
(8) payments of customary arms'-length fees by us and any of
our Restricted Subsidiaries to investment banking firms,
financial consultants and financial advisors made for any
financial advisory, financing, underwriting or placement
services or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions
and divestitures, in each case to the extent that the same are
approved by a majority of the disinterested members of our
Board of Directors in good faith;
<PAGE>
(9) transactions with customers, clients, suppliers, joint
venture partners or purchasers or sellers of goods or
services, in each case in the ordinary course of business
(including, without limitation, pursuant to joint venture
agreements) and otherwise in compliance with the terms of the
indenture that are fair to us or our Restricted Subsidiaries,
in the reasonable determination of our Board of Directors or
senior management, or are on terms at least as favorable as
might reasonably have been obtained at the time from an
unaffiliated party;
(10) any agreement as in effect on the date of the indenture
or any amendment to the agreement (so long as the amendment is
not disadvantageous to the Holders of the series B notes in
any respect) or any transaction contemplated thereby;
(11) transactions between or among us and/or our Restricted
Subsidiaries or transactions between a Receivables Subsidiary
and any Person in which the Receivables Subsidiary has an
Investment; and
(12) any transaction with an Affiliate where the only
consideration paid by us or any of our Restricted Subsidiaries
is our Capital Stock (other than Disqualified Stock).
ADDITIONAL SUBSIDIARY GUARANTEES
If we or any of our Restricted Subsidiaries acquire or create another
Domestic Subsidiary after the date of the indenture (other than a Receivables
Subsidiary), then that newly acquired or created Domestic Subsidiary will become
a Guarantor and execute a supplemental indenture and deliver an opinion of
counsel satisfactory to the trustee within 20 business days of the date on which
it was acquired or created. This covenant will not apply to any Subsidiary that
has been properly designated as an Unrestricted Subsidiary in accordance with
the indenture for so long as it continues to constitute an Unrestricted
Subsidiary. The designation may be made effective concurrent with the Person
becoming a Domestic Subsidiary.
BUSINESS ACTIVITIES
We will not, and will not permit any Subsidiary to, engage in any
business other than Permitted Businesses, except to the extent as would not be
material to us and our Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any Holder of series B notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the indenture or the
notes unless the consideration is offered to be paid and is paid to all Holders
of the series B notes that consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to the consent, waiver or
agreement.
REPORTS
Whether or not required by the SEC, so long as any notes are
outstanding, we will furnish to the Holders of series B notes, within the time
periods specified in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would
be required to be contained in a filing with the SEC on Forms
10-Q and 10-K if we were required to file these Forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the
annual information only, a report on the annual financial
statements by our certified independent accountants; and
(2) all current reports that would be required to be filed
with the SEC on Form 8-K if we were required to file these
reports.
<PAGE>
In addition, following the consummation of the exchange offer
contemplated by the registration rights agreement, whether or not required by
the SEC, we will file a copy of all of the information and reports referred to
in clauses (1) and (2) above with the SEC for public availability within the
time periods specified in the SEC's rules and regulations (unless the SEC will
not accept the filing) and make the information available to securities analysts
and prospective investors upon request. In addition, we and the Guarantors have
agreed that, for so long as any series B notes remain outstanding, we will
furnish to the Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest
on, or Liquidated Damages with respect to, the series B notes
whether or not prohibited by the subordination provisions of
the indenture;
(2) default in payment when due of the principal of, or
premium, if any, on the series B notes, whether or not
prohibited by the subordination provisions of the indenture;
(3) failure by any of our Subsidiaries or us to comply with
the provisions described under the captions "--Repurchase at
the Option of Holders--Change of Control" and "--Repurchase at
the Option of Holders--Asset Sales;"
(4) failure by any of our Subsidiaries or us to comply with
any of the other agreements in the indenture or the series B
notes for 60 days after notice from the trustee or the Holders
of at least 25% in principal amount of the then outstanding
series B notes;
(5) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by us or any of
our Subsidiaries (or the payment of which is guaranteed by us
or any of our Subsidiaries), which default continues for at
least 10 days whether the Indebtedness or guarantee now
exists, or is created after the date of the indenture, if that
default:
(a) is caused by a failure to pay Indebtedness at its
stated final maturity (after giving effect to any
applicable grace period provided in that
Indebtedness) (a "Payment Default"); or
(b) results in the acceleration of the Indebtedness
prior to its stated final maturity,
and, in each case, the principal amount of the Indebtedness,
together with the principal amount of any other Indebtedness
under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $10.0 million or
more;
(6) failure by us or any of our Subsidiaries to pay final
judgments aggregating in excess of $7.5 million, which
judgments are not paid, discharged or stayed for a period of
60 days after the judgment or judgments become final and
non-appealable;
(7) any Guarantor, or any Person acting on behalf of any
Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee;
(8) except as permitted by the indenture, any Subsidiary
Guarantee issued by any Significant Subsidiary shall be held
in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect; and
<PAGE>
(9) events of bankruptcy or insolvency described in the
indenture with respect to us or any of our Significant
Subsidiaries or any group of Subsidiaries that, taken
together, would constitute a Significant Subsidiary.
In the case of an Event of Default arising from specific events of
bankruptcy or insolvency with respect to us or any of our Significant
Subsidiaries, all outstanding series B notes will become due and payable
immediately without further action or notice. If any other Event of Default
occurs and is continuing, the trustee or the Holders of at least 25% in
principal amount of the then outstanding series B notes may declare all the
series B notes to be due and payable immediately. However, so long as any
Indebtedness permitted to be incurred pursuant to the Credit Agreement shall be
outstanding, an acceleration of the series B notes shall not be effective until
the earlier of an acceleration of any Indebtedness under the Credit Agreement
and five business days after receipt by us and the administrative agent under
the Credit Agreement of written notice of that acceleration.
Holders of the series B notes may not enforce the indenture or the
series B notes except as provided in the indenture. Subject to specific
limitations, Holders of a majority in principal amount of the then outstanding
series B notes may direct the trustee in its exercise of any trust or power. The
trustee may withhold from Holders of the series B notes notice of any continuing
Default or Event of Default if it determines that withholding notice is in their
interest, except a Default or Event of Default relating to the payment of
principal or interest or Liquidated Damages.
The Holders of a majority in aggregate principal amount of the notes
then outstanding by notice to the trustee may on behalf of the Holders of all of
the notes waive any existing Default or Event of Default and its consequences
under the indenture except a continuing Default or Event of Default in the
payment of interest or Liquidated Damages on, or the principal of, the series B
notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of us with the intention
of avoiding payment of the premium that we would have had to pay if we then had
elected to redeem the series B notes pursuant to the optional redemption
provisions of the indenture, an equivalent premium will also become and be
immediately due and payable to the extent permitted by law upon the acceleration
of the series B notes. If an Event of Default occurs prior to November 15, 2004,
by reason of any willful action (or inaction) taken (or not taken) by or on
behalf of us with the intention of avoiding the prohibition on redemption of the
notes prior to November 15, 2004, then the premium specified in the indenture
will also become immediately due and payable to the extent permitted by law upon
the acceleration of the series B notes.
We are required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, we are required to deliver to the trustee a statement
specifying the Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of us or
any Guarantor, as such, will have any liability for any obligations of us or the
Guarantors under the series B notes, the indenture, the Subsidiary Guarantees or
for any claim based on, in respect of, or by reason of, the obligations or their
creation. Each Holder of series B notes by accepting a series B note waives and
releases all liability. The waiver and release are part of the consideration for
issuance of the notes. The waiver might not be effective to waive liabilities
under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option and at any time, elect to have all of our
Obligations discharged with respect to the outstanding series B notes and all
Obligations of the Guarantors discharged with respect to their Subsidiary
Guarantees ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding series B notes to
receive payments in respect of the principal of, or interest
or premium and Liquidated Damages, if any, on the series B
notes when the payments are due from the trust referred to
below;
<PAGE>
(2) our obligations with respect to the series B notes
concerning issuing temporary series B notes, registration of
series B notes, mutilated, destroyed, lost or stolen notes and
the maintenance of an office or agency for payment and money
for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the
trustee, and our and the Guarantor's obligations in connection
therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have the
obligations of us and the Guarantors released with respect to specific covenants
that are described in the indenture ("Covenant Defeasance") and thereafter any
omission to comply with those covenants shall not constitute a Default or Event
of Default with respect to the series B notes. In the event Covenant Defeasance
occurs, some events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the series B notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) we must irrevocably deposit with the trustee, in trust,
for the benefit of the Holders of the series B notes, cash in
U.S. dollars, non-callable government securities, or a
combination thereof, in the amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, or interest and
premium and Liquidated Damages, if any, on the outstanding
series B notes on the stated maturity or on the applicable
redemption date, as the case may be, and we must specify
whether the series B notes are being defeased to maturity or
to a particular redemption date;
(2) in the case of Legal Defeasance, we shall have delivered
to the trustee an opinion of counsel reasonably acceptable to
the trustee confirming that (a) we have received from, or
there has been published by, the Internal Revenue Service a
ruling or (b) since the date of the indenture, there has been
a change in the applicable federal income tax law, in either
case to the effect that, and based thereon the opinion of
counsel shall confirm that, the Holders of the outstanding
series B notes will not recognize income, gain or loss for
federal income tax purposes as a result of the Legal
Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as
would have been the case if the Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, we shall have
delivered to the trustee an opinion of counsel reasonably
acceptable to the trustee confirming that the Holders of the
outstanding series B notes will not recognize income, gain or
loss for federal income tax purposes as a result of the
Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times
as would have been the case if the Covenant Defeasance had not
occurred;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of the deposit (other than a Default or
Event of Default resulting from the incurrence of Indebtedness
all or a portion of the proceeds of which will be used to
defease the series B notes pursuant to either Legal Defeasance
or Covenant Defeasance concurrently with the incurrence);
(5) the Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a Default
under any material agreement or instrument (other than the
indenture) to which we or any of our Subsidiaries are a party
or by which we, or any of our Subsidiaries are bound;
(6) we must deliver to the trustee an officers' certificate
stating that the deposit was not made by us with the intent of
preferring the Holders of series B notes over our other
creditors with the intent of defeating, hindering, delaying or
defrauding our creditors or others; and
<PAGE>
(7) we must deliver to the trustee an officers' certificate
and an opinion of counsel, each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the
indenture or the notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of
any note or alter the provisions with respect to the
redemption of the notes (other than provisions relating to the
covenants described above under the caption "--Repurchase at
the Option of Holders");
(3) reduce the rate of or change the time for payment of
interest on any note;
(4) waive a Default or Event of Default in the payment of
principal of, or interest or premium, or Liquidated Damages,
if any, on the notes (except a rescission of acceleration of
the notes by the Holders of at least a majority in aggregate
principal amount of the notes and a waiver of the payment
default that resulted from the acceleration);
(5) make any note payable in money other than that stated in
the notes;
(6) make any change in the provisions of the indenture
relating to waivers of past Defaults or the rights of Holders
of notes to receive payments of principal of, or interest or
premium or Liquidated Damages, if any, on the notes;
(7) waive a redemption payment with respect to any note
(other than a payment required by one of the covenants
described above under the caption "--Repurchase at the Option
of Holders");
(8) release any Guarantor from any of its obligations under
its Subsidiary Guarantee or the indenture, except in
accordance with the terms of the indenture; or
(9) make any change in the preceding amendment and waiver
provisions.
Notwithstanding the preceding, without the consent of any Holder of
notes, the Guarantors, the trustee and we may amend or supplement the indenture
or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in
place of certificated notes;
(3) to provide for the assumption of our Obligations to
Holders of notes in the case of a merger or consolidation or
sale of all or substantially all of our assets;
<PAGE>
(4) to make any change that would provide any additional
rights or benefits to the Holders of notes or that does not
adversely affect the legal rights under the indenture of any
Holder; or
(5) to comply with requirements of the SEC in order to effect
or maintain the qualification of the indenture under the Trust
Indenture Act.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect
as to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated (except
lost, stolen or destroyed notes that have been
replaced or paid and notes for whose payment money
has theretofore been deposited in trust and
thereafter repaid to us) have been delivered to the
trustee for cancellation; or
(b) all notes that have not been delivered to the
trustee for cancellation have become due and payable
by reason of the making of a notice of redemption or
otherwise or will become due and payable within one
year we or any Guarantor has irrevocably deposited or
caused to be deposited with the trustee as trust
funds in trust solely for the benefit of the Holders,
cash in U.S. dollars, non-callable government
securities, or a combination thereof, in amounts as
will be sufficient without consideration of any
reinvestment of interest, to pay and discharge the
entire Indebtedness on the notes not delivered to the
trustee for cancellation for principal, premium and
Liquidated Damages, if any, and accrued interest to
the date of maturity or redemption;
(2) no Default or Event of Default shall have occurred and be
continuing on the date of the deposit or shall occur as a
result of the deposit and the deposit will not result in a
breach or violation of, or constitute a default under, any
other instrument to which we or any Guarantor is a party or by
which we or any Guarantor is bound;
(3) we or any Guarantor has paid or caused to be paid all sums
payable by us under the indenture; and
(4) we have delivered irrevocable instructions to the trustee
under the indenture to apply the deposited money toward the
payment of the notes at maturity or the redemption date, as
the case may be.
In addition, we must deliver an officers' certificate and an opinion of counsel
to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of us or any Guarantor, the indenture
limits its right to obtain payment of claims in some cases, or to realize on
property received in respect of a claim as security or otherwise. The trustee
will be permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate the conflict within 90 days, apply to the
SEC for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
exceptions. The indenture provides that in case an Event of Default shall occur
and be continuing, the trustee will be required, in the exercise of its power,
to use the degree of care of a prudent man in the conduct of his own affairs.
Subject to the provisions, the trustee will be under no obligation to exercise
<PAGE>
any of its rights or powers under the indenture at the request of any Holder of
series B notes, unless the Holder shall have offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture
and registration rights agreement without charge by writing to Stericycle, Inc.,
28161 N. Keith Drive, Lake Forest, IL 60045, Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The series B notes will be issued in the form of one or more registered
global notes without interest coupons (collectively, the "Global Notes"). Upon
issuance, the Global Notes will be deposited with the trustee, as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and registered in
the name of DTC or its nominee for credit to the accounts of DTC's Direct and
indirect participants (as defined below).
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in limited
circumstances. Beneficial interests in the Global Notes may be exchanged for
series B notes in certificated form in some limited circumstances. See
"--Transfer of Interests in Global Notes for Certificated Notes." In addition,
transfer of beneficial interests in any Global Note will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants
(including, if applicable, those of Euroclear and CEDEL), which may change from
time to time.
Initially, the trustee will act as paying agent and registrar. The
series B notes may be presented for registration of transfer and exchange at the
offices of the registrar.
DEPOSITARY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Cedel are provided solely as a matter of convenience. These
operations and procedures are solely within the control of their respective
settlement systems and are subject to change by them. We take no responsibility
for these operations and procedures and urge investors to contact the DTC,
Euroclear or Cedel or their participants directly to discuss these matters.
DTC has advised us that it is a limited-purpose trust company created
to hold securities for its participating organizations, referred to in this
prospectus as "direct participants," and to facilitate the clearance and
settlement of transactions in those securities between direct participants
through electronic book-entry changes in accounts of direct participants. The
direct participants include securities brokers and dealers (including the
initial purchasers), banks, trust companies, clearing corporations and other
organizations, including Euroclear and CEDEL. Access to DTC's system is also
available to other entities that clear through or maintain a direct or indirect,
custodial relationship with a direct participant, referred to in this prospectus
as "indirect participants."
DTC has advised us that, pursuant to DTC's procedures:
(1) upon deposit of the Global Notes, DTC will credit the
accounts of the direct participants designated by the exchange
agent with portions of the principal amount of the Global
Notes; and
(2) DTC will maintain records of the ownership interests by
and between direct participants. DTC will not maintain records
of the ownership interests of, or the transfer of ownership
interests by and between, indirect participants or other
owners of beneficial interests in the Global Notes. direct
participants and indirect participants must maintain their own
records of the ownership interests of, and the transfer of
ownership interests by and between, indirect participants and
other owners of beneficial interests in the Global Notes.
<PAGE>
The laws of some states in the United States require that some Persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to these Persons. Because DTC can act only on behalf of direct
participants, which in turn act on behalf of indirect participants and others,
the ability of a Person having a beneficial interest in a Global Note to pledge
the interest to Persons or entities that are not direct participants in DTC, or
to otherwise take actions in respect of the interests, may be affected by the
lack of physical certificates evidencing the interests. For other restrictions
on the transferability of the notes see the subheading "--Transfers of Interests
in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED UNDER THE SUBHEADING "--TRANSFERS OF INTERESTS IN
GLOBAL NOTES FOR CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE
GLOBAL NOTES WILL NOT HAVE SERIES B NOTES REGISTERED IN THEIR NAMES, WILL NOT
RECEIVE PHYSICAL DELIVERY OF SERIES B NOTES IN CERTIFICATED FORM AND WILL NOT BE
CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY
PURPOSE.
Under the terms of the indenture, we, the Guarantors and the trustee
will treat the Persons in whose names the series B notes are registered
(including the series B notes represented by Global Notes) as the owners thereof
for the purpose of receiving payments and for any and all other purposes
whatsoever. Payments in respect of the principal, premium, Liquidated Damages,
if any, and interest on Global Notes registered in the name of DTC or its
nominee will be payable by the trustee to DTC or its nominee as the registered
Holder under the indenture. Consequently, neither we, the trustee nor any agent
of ours or of the trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any direct participant's
or indirect participant's records relating to or payments made
on account of beneficial ownership interests in the Global
Notes or for maintaining, supervising or reviewing any of
DTC's records or any direct participant's or indirect
participant's records relating to the beneficial ownership
interests in any Global Note; or
(2) any other matter relating to the actions and practices of
DTC or any of its direct participants or indirect
participants.
DTC has advised us that its current payment practice (for payments of
principal, interest and the like) with respect to securities such as the series
B notes is to credit the accounts of the relevant direct participants with the
payment on the payment date in amounts proportionate to the direct participant's
respective ownership interests in the Global Notes as shown on DTC's records.
Payments by direct participants and indirect participants to the beneficial
owners of the notes will be governed by standing instructions and customary
practices between them and will not be the responsibility of DTC, the trustee,
the Guarantors or us. Neither we, the Guarantors, nor the trustee will be liable
for any delay by DTC or its direct participants or indirect participants in
identifying the beneficial owners of the notes, and the trustee and we may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee as the registered owner of the notes for all purposes.
The Global Notes will trade in DTC's Same-day Funds Settlement System
and, therefore, transfers between direct participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between indirect participants (other than indirect participants
who hold an interest in the notes through Euroclear or CEDEL) who hold an
interest through a direct participant will be effected in accordance with the
procedures of the direct participant but generally will settle in immediately
available funds. Transfers between and among indirect participants who hold
interests in the notes through Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
series B notes described herein, cross-market transfers between direct
participants in DTC, on the one hand, and indirect participants who hold
interests in the series B notes through Euroclear or CEDEL, on the other hand,
will be effected by Euroclear's or CEDEL's respective Nominee through DTC in
accordance with DTC's rules on behalf of Euroclear or CEDEL; however, delivery
of instructions relating to crossmarket transactions must be made directly to
Euroclear or CEDEL, as the case may be, by the counterparty in accordance with
the rules and procedures of Euroclear or CEDEL and within their established
deadlines (Brussels time for Euroclear and UK time for CEDEL). indirect
participants who hold interests in the notes through Euroclear and CEDEL may not
deliver instructions directly to Euroclear's or CEDEL's Nominee. Euroclear or
CEDEL will, if the transaction meets its settlement requirements, deliver
<PAGE>
instructions to its respective Nominee to deliver or receive interests on
Euroclear's or CEDEL's behalf in the relevant Global Note in DTC, and make or
receive payment in accordance with normal procedures for same-day fund
settlement applicable to DTC.
Because of time zone differences, the securities accounts of an
indirect participant that comes to hold an interest in the series B notes
through Euroclear or CEDEL purchasing an interest in a Global Note from a direct
participant in DTC will be credited, and that crediting will be reported to
Euroclear or CEDEL during the European business day immediately following the
settlement date of DTC in New York. Although recorded in DTC's accounting
records as of DTC's settlement date in New York, Euroclear and CEDEL customers
will not have access to the cash amount credited to their accounts as a result
of a sale of an interest in a Global Note to a DTC Participant until the
European business day for Euroclear or CEDEL immediately following DTC's
settlement date.
DTC has advised us that it will take any action permitted to be taken
by a Holder of series B notes only at the direction of one or more direct
participants to whose account interests in the Global Notes are credited and
only in respect of the portion of the aggregate principal amount of the series B
notes to which the direct participant or direct participants has or have given
direction. However, if there is an Event of Default under the series B notes,
DTC reserves the right to exchange Global Notes (without the direction of one or
more of its direct participants) for series B legended notes in certificated
form, and to distribute the certificated forms of series B notes to its direct
participants. See "--Transfers of Interests in Global Notes for Certificated
Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Notes, they are
under no obligation to perform or to continue to perform these procedures, and
these procedures may be discontinued at any time. Neither we, the Guarantors,
the initial purchasers nor the trustee shall have any responsibility for the
performance by DTC, Euroclear or CEDEL or their respective direct and indirect
participants of their respective obligations under the rules and procedures
governing any of their operations.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive series B notes in
registered, certificated form without interest coupons ("Certificated Notes")
if:
(1) DTC:
(a) notifies us that it is unwilling or unable to
continue as depositary for the Global Notes and we
thereupon fail to appoint a successor depositary
within 90 days, or
(b) has ceased to be a clearing agency registered
under the Exchange Act;
(2) we, at our option, notify the trustee in writing that we
elect to cause the issuance of Certificated Notes; or
(3) there shall have occurred and be continuing a Default or
an Event of Default with respect to the series B notes. In any
case, we will notify the trustee in writing that, upon
surrender by the direct and indirect participants of their
interest in the Global Note, Certificated Notes will be issued
to each Person that the direct and indirect participants and
DTC identify as being the beneficial owner of the related
series B notes.
Beneficial interests in Global Notes held by any direct or indirect
participant may be exchanged for Certificated Notes upon request to DTC, by the
direct participant (for itself or on behalf of an indirect participant), to the
trustee in accordance with customary DTC procedures. Certificated notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of the direct or indirect participants (in accordance with DTC's
customary procedures).
<PAGE>
Neither we, the Guarantors nor the trustee will be liable for any delay
by the Holder of any Global Note or DTC in identifying the beneficial owners of
series B notes, and we and the trustee may conclusively rely on, and will be
protected in relying on, instructions from the Holder of the Global Note or DTC
for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The indenture will require that payments in respect of the series B
notes represented by the Global Notes, including principal, premium, if any,
interest and Liquidated Damages, if any, be made by wire transfer of immediately
available same day funds to the accounts specified by the Holder of interests in
the Global Note. With respect to Certificated Notes, we will make all payments
of principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available same day funds to the accounts specified by
the Holders thereof or, if no account is specified, by mailing a check to each
of the Holder's registered address. We expect that secondary trading in the
Certificated Notes will also be settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The following description is a summary of the material provisions of
the registration rights agreement. It does not restate that agreement in its
entirety. We urge you to read the proposed form of registration rights agreement
in its entirety because it, and not this description, defines your registration
rights as Holders of these notes. See "--Additional Information."
We, the Guarantors and the initial purchasers entered into the
registration rights agreement upon the closing of the initial offering of the
series A notes. Pursuant to the registration rights agreement, we and the
Guarantors agreed to file with the SEC the Exchange Offer Registration Statement
on the appropriate form under the Securities Act with respect to the series B
notes. Upon the effectiveness of the Exchange Offer Registration Statement, the
Guarantors and we will offer to the Holders of Transfer Restricted Securities
pursuant to the Exchange Offer who are able to make specific representations the
opportunity to exchange their Transfer Restricted Securities for series B notes.
If:
(1) we and the Guarantors are not required to file the
Exchange Offer Registration Statement, or permitted to
consummate the Exchange Offer because the Exchange Offer is
not permitted by applicable law or SEC policy; or
(2) any Holder of Transfer Restricted Securities notifies us
prior to the 20th business day following the consummation
deadline for the Exchange Offer that:
(a) it is prohibited by law or SEC policy from
participating in the Exchange Offer; or
(b) it may not resell the Exchange Notes acquired by
it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained
in the Exchange Offer Registration Statement is not
appropriate or available for the resales; or
(c) it is a broker-dealer and owns series B notes
acquired directly from any of our Affiliates or us,
we and the Guarantors will file with the SEC a Shelf Registration Statement to
cover resales of the series B notes by the Holders thereof who satisfy
conditions relating to the provision of information in connection with the Shelf
Registration Statement.
The Guarantors and we will use all commercially reasonable efforts to
cause the applicable registration statement to be declared effective as promptly
as possible by the SEC.
<PAGE>
For purposes of the preceding, "Transfer Restricted Securities" means:
(1) each series A note until:
(a) the date on which the series A note has been
exchanged in the Exchange Offer for a series B note
which is entitled to be resold to the public by the
Holder thereof without complying with the prospectus
delivery requirements of the Securities Act;
(b) the date on which the series A note has been
disposed of in accordance with a Shelf Registration
Statement and the purchasers thereof have been issued
Exchange Notes;
(c) the date on which the series A note is
distributed to the public pursuant to Rule 144 under
the Securities Act; and
(2) each series B note held by a broker-dealer until the date
on which the series B note is disposed of by a broker-dealer
to a purchaser who receives from the broker-dealer on or prior
to the date of sale a copy of the prospectus contained in the
Exchange Offer Registration Statement.
The registration rights agreement provides:
(1) we and the Guarantors will file an Exchange Offer
Registration Statement with the SEC on or prior to 120 days
after the closing of the offering of the series A notes;
(2) we and the Guarantors will use all commercially
reasonable efforts to have the Exchange Offer Registration
Statement declared effective by the SEC at the earliest
possible time but in no event later than 210 days after the
closing of this offering;
(3) unless the Exchange Offer would not be permitted by
applicable law or SEC policy, we and the Guarantors will
(a) use all commercially reasonable efforts to
commence the Exchange Offer and to keep the Exchange
Offer open for a period of not less than the minimum
period required under applicable federal and state
securities laws provided that in no event shall the
period be less than 20 business days; and
(b) use all commercially reasonable efforts to issue
on or prior to 30 business days, or longer, if
required by the federal securities laws, after the
date on which the Exchange Offer Registration
Statement was declared effective by the SEC, series B
notes in exchange for all series A notes tendered
prior thereto in the Exchange Offer; and
(4) if obligated to file the Shelf Registration Statement, we
and the Guarantors will file the Shelf Registration Statement
with the SEC on or prior to 30 days after the filing
obligation arises and use all commercially reasonable efforts
to cause the shelf registration to be declared effective by
the SEC on or prior to 60 days after the obligation arises.
If:
(1) we and the Guarantors fail to file any of the
registration statements required by the registration rights
agreement on or before the date specified for the filing; or
(2) any required registration statements is not declared
effective by the SEC on or prior to the date specified for its
effectiveness (the "Effectiveness Target Date"); or
(3) the Guarantors and we fail to consummate the Exchange
Offer within 30 business days of the Effectiveness Target Date
with respect to the Exchange Offer Registration Statement; or
<PAGE>
(4) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in
the registration rights agreement (each event referred to in
clauses (1) through (4) above, a "Registration Default"),
then the Guarantors and we will pay Liquidated Damages to each Holder of series
A notes, with respect to the first 90-day period immediately following the
occurrence of the first Registration Default in an amount equal to $.05 per week
per $1,000 principal amount of series A notes held by the Holder.
The amount of the Liquidated Damages will increase by an additional
$.05 per week per $1,000 principal amount of series A notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages for all Registration Defaults of $.50 per
week per $1,000 principal amount of series A notes.
All accrued Liquidated Damages with respect to the Global Note will be
paid by us and the Guarantors on each Damages Payment Date to the Global Note
Holder by wire transfer of immediately available funds or by federal funds check
and to Holders of Certificated Notes by wire transfer to the accounts specified
by them or by mailing checks to their registered addresses if no accounts have
been specified.
Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of series A notes will be required to make specific
representations to us (as described in the registration rights agreement) in
order to participate in the Exchange Offer and will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the registration rights agreement in order to have their series A
notes included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages set forth above. By acquiring Transfer
Restricted Securities, a Holder will be deemed to have agreed to indemnify the
Guarantors and us against losses arising out of information furnished by the
Holder in writing for inclusion in any Shelf Registration Statement. Holders of
series A notes will also be required to suspend their use of the prospectus
included in the Shelf Registration Statement under some circumstances upon
receipt of written notice to that effect from us.
CERTAIN DEFINITIONS
Set forth below are some of the defined terms used in the indenture.
Reference is made to the indenture for a full disclosure of these terms, as well
as other terms used herein.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time the
other Person is merged with or into or became a Restricted Subsidiary
of the specified Person, whether or not the Indebtedness is incurred in
connection with, or in contemplation of, the other Person merging with
or into, or becoming a Restricted Subsidiary of, the specified Person;
and
(2) Indebtedness secured by a Lien encumbering any asset
acquired by the specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of the Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings. No Person (other than us or any of our
Subsidiaries) in whom a Receivables Subsidiary makes an Investment in connection
with a Qualified Receivables Transaction will be deemed to be an Affiliate of us
or any of our Subsidiaries solely by reason of the Investment.
<PAGE>
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition by us or
any of our Restricted Subsidiaries of any assets or rights (other than
director's qualifying shares); provided that the sale, conveyance or
other disposition of all or substantially all of the assets of us and
our Restricted Subsidiaries taken as a whole will be governed by the
provisions of the indenture described above under the caption
"--Repurchase at the Option of Holders--Change of Control" and/or the
provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of our Restricted
Subsidiaries or the sale of Equity Interests in any of our Subsidiaries
(other than director's qualifying shares).
Notwithstanding the preceding, the following items shall not be deemed
to be Asset Sales:
(1) any single transaction or series of related transactions
that involves assets having a fair market value of less than $1.0
million;
(2) a transfer of assets between or among us and our Restricted
Subsidiaries;
(3) an issuance of Equity Interests by a Restricted Subsidiary
to us or to another Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts
receivable or other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment or Permitted Investment that is
permitted by the covenant described above under the caption "--Certain
Covenants--Restricted Payments;"
(7) the licensing of intellectual property in the ordinary
course of business;
(8) sales of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction" to a
Receivables Subsidiary for the fair market value thereof, including
cash in an amount at least equal to 90% of the book value thereof as
determined in accordance with GAAP, it being understood that, for the
purposes of this clause (8), notes received in exchange for the
transfer of accounts receivable and related assets will be deemed cash
if the Receivables Subsidiary or other payor is required to repay said
notes as soon as practicable from available cash collections less
amounts required to be established as reserves pursuant to contractual
agreements with entities that are not Affiliates of us entered into as
part of a Qualified Receivables Transaction; and
(9) transfers of accounts receivable and related assets of the
type specified in the definition of "Qualified Receivables Transaction"
(or a fractional undivided interest therein) by a Receivables
Subsidiary in a Qualified Receivables Transaction.
"Beneficial Owner" has the meaning assigned to the term in Rule 13d-3
and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), the "person" shall be deemed to have beneficial ownership
of all securities that the "person" has the right to acquire by conversion or
exercise of other securities, whether the right is currently exercisable or is
exercisable only upon occurrence of a subsequent condition (other than a
condition that the noteholders waive one or more provisions of the indenture).
The terms "Beneficially Owns" and "Beneficially Owned" shall have corresponding
meanings.
<PAGE>
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of
the corporation;
(2) with respect to a partnership, the Board of Directors of
the general partner of the partnership; and
(3) with respect to any other Person, the board or committee of
the Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at that time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents
(however designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or
insured by the United States government or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States is pledged in support thereof) having maturities of not
more than one year from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any lender party to the Credit Agreement
or with any domestic commercial bank having capital and surplus in
excess of $500.0 million and a Thomson Bank Watch Rating of "B" or
better;
(4) marketable direct obligations issued by any state of the
United States of America or any political subdivision of any state or
any public instrumentality thereof maturing within one year from the
date of acquisition thereof and, at the time of acquisition, having one
of the two highest ratings obtainable from either Standard & Poor's
Rating Services or Moody's Investors Service, Inc.;
(5) certificates of deposit or bankers' acceptance (or, with
respect to foreign banks, similar instruments) maturing within one year
from the date of acquisition thereof issued by a bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia, Japan or any member of the European Economic
Community or any U.S. branch of a foreign bank having at the date of
acquisition thereof combined capital and surplus of not less than
$500.0 million;
(6) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (2),
(3) and (4) above entered into with any financial institution meeting
the qualifications specified in clauses (3) or (4) above;
(7) commercial paper having a rating of at least P-1 from
Moody's Investors Service, Inc. or at least A1 from Standard & Poor's
Rating Services and in each case maturing within one year after the
date of acquisition; and
<PAGE>
(8) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1)
through (7) of this definition.
"Consolidated Cash Flow" means, with respect to any specified Person
for any period, the Consolidated Net Income of the Person for the period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized by the Person or any of its Restricted Subsidiaries in
connection with an Asset Sale, to the extent losses were deducted in
computing Consolidated Net Income; plus
(2) provision for taxes based on income or profits of the
Person and its Restricted Subsidiaries for the period, to the extent
that provision for taxes was deducted in computing Consolidated Net
Income; plus
(3) consolidated interest expense of the Person and its
Restricted Subsidiaries for the period, whether paid or accrued and
whether or not capitalized (including, without limitation, amortization
of debt issuance costs and original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and
net of the effect of all payments made or received pursuant to Hedging
Agreements), to the extent that any expense was deducted in computing
Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of
goodwill and other intangibles but excluding amortization of prepaid
cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any non-cash expense to the extent that it
represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a
prior period) of the Person and its Restricted Subsidiaries for the
period to the extent that depreciation, amortization and other non-cash
expenses were deducted in computing Consolidated Net Income; minus
(5) non-cash items increasing Consolidated Net Income for the
period, other than normal accruals in the ordinary course of business,
in each case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified Person
for any period, the aggregate of the Net Income of the Person and its Restricted
Subsidiaries for the period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income of any Person that is not a Restricted
Subsidiary of the specified Person or that is accounted for by the
equity method of accounting shall be included in the Consolidated Net
Income of the specified Person only to the extent of the amount of
dividends or distributions paid in cash to the specified Person or a
Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income
is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement
(other than an agreement with us or our Restricted Subsidiaries or an
agreement in effect on the date of the indenture as in effect on that
date), instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders;
(3) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of the
acquisition shall be excluded;
(4) the cumulative effect of a change in accounting principles
shall be excluded;
<PAGE>
(5) gains and losses from Asset Sales (without regard to the
$1.0 million limitation set forth in the definition thereof) or
abandonments or reserves relating thereto and the related tax effects
according to GAAP shall be excluded;
(6) gains and losses due solely to fluctuations in currency
values and the related tax effect according to GAAP shall be excluded;
and
(7) one-time non-cash compensation charges arising from stock
options or stock grant plans shall be excluded.
"Continuing Directors" means, as of any date of determination, any
member of our Board of Directors who:
(1) was a member of the Board of Directors on the date of the
indenture; or
(2) was nominated for election or elected to the Board of
Directors with the approval of a majority of the Continuing Directors
who were members of the Board at the time of nomination or election.
"Credit Agreement" means the Credit Agreement, dated as of November 12,
1999, by and among us, the various financial institutions from time to time
parties thereto, DLJ Capital Funding, Inc., as syndication agent for the
financial institutions, lead arranger and sole book running manager, Bank of
America, N.A., as administrative agent for the financial institutions and
Bankers Trust Company, as documentation agent for the financial institutions,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time.
"Credit Facilities" means, (a) the Credit Agreement and (b) following
written notice thereof by us to the trustee, other debt facilities or commercial
paper facilities, in each case with banks or other institutional lenders
providing for revolving credit loans, term loans, note issuances, receivables
financing (including through the sale of receivables to lenders or to special
purpose entities formed to borrow from lenders against receivables) or letters
of credit. Without limiting the generality of the foregoing, the term "Credit
Facilities" shall include any amendment, amendment and restatement, supplement
or other modification to the Credit Agreement, all other debt facility documents
and ancillary documents and all renewals, extensions, refundings, replacements
and refinancings thereof, including, without limitation, any agreement or
agreements (i) extending or shortening the maturity of any Indebtedness incurred
thereunder or contemplated thereby, (ii) adding or deleting borrowers or
guarantors thereunder or (iii) increasing the amount of Indebtedness incurred
thereunder or available to be borrowed thereunder to the extent permitted under
the indenture.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Preferred Stock" means preferred stock that is so
designated as Designated Preferred Stock, pursuant to an officers' certificate
executed by our principal executive officer and principal financial officer, on
the issuance date thereof, the cash proceeds of which are excluded from the
calculation set forth in clause (3)(b) of the first paragraph of the covenant
described under the caption "--Restricted Payments."
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Credit Agreement;
and
(2) in the event no Indebtedness is outstanding under the
Credit Agreement, any other Senior Debt permitted under the indenture
the principal amount of which is $25.0 million or more and that has
been designated by us as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the series B notes mature. Notwithstanding the preceding sentence,
<PAGE>
any Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require us to repurchase the Capital Stock
upon the occurrence of a change of control or an asset sale shall not constitute
Disqualified Stock if the terms of the Capital Stock provide that we may not
repurchase or redeem any Capital Stock pursuant to the provisions unless the
repurchase or redemption complies with the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"Domestic Subsidiary" means any Subsidiary that was formed under the
laws of the United States or any state thereof or the District of Columbia or
that guarantees or otherwise provides direct credit support for any of our
Indebtedness.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any offering of our Qualified Capital Stock.
"Existing Indebtedness" means our Indebtedness and the Indebtedness of
our Restricted Subsidiaries (other than Indebtedness under the Credit Agreement)
in existence on the date of the indenture.
"Fixed Charges" means, with respect to any specified Person for any
period, the sum, without duplication, of:
(1) the consolidated interest expense of the Person and its
Restricted Subsidiaries for the period, whether paid or accrued,
including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net of the effect of all
payments made or received pursuant to Hedging Agreements (excluding
amortization of capitalized deferred financing fees in existence on the
date of the indenture); plus
(2) the consolidated interest of the Person and its Restricted
Subsidiaries that was capitalized during the period; plus
(3) any interest expense on Indebtedness of another Person that
is Guaranteed by the Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of the Person or one of its Restricted
Subsidiaries, whether or not the Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends, whether paid or accrued
and whether or not in cash, on any series of preferred stock of the
Person or any of its Restricted Subsidiaries, other than dividends on
(i) Equity Interests payable solely in our Equity Interests (other than
Disqualified Stock), (ii) the series A convertible preferred stock to
the extent dividends are paid in kind in accordance with the Preferred
Stock Agreement as in effect on the date of the indenture or (iii) to
us or a Restricted Subsidiary of ours, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the
then current combined effective federal, state and local statutory tax
rate of the Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified
Person and its Restricted Subsidiaries for any period, the ratio of the
Consolidated Cash Flow of the Person and its Restricted Subsidiaries for the
period to the Fixed Charges of the Person and its Restricted Subsidiaries for
the period. In the event that the specified Person or any of its Restricted
Subsidiaries incurs, assumes, Guarantees, repays, repurchases or redeems any
Indebtedness (other than ordinary working capital borrowings) or issues,
repurchases or redeems preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated and on or
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to the incurrence,
assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or
the issuance, repurchase or redemption of preferred stock, and the use of the
proceeds therefrom as if the same had occurred at the beginning of the
applicable four-quarter reference period.
<PAGE>
In addition, for purposes of calculating the Fixed Charge Coverage
Ratio:
(1) acquisitions that have been made by the specified Person or
any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during
the four-quarter reference period or subsequent to the reference period
and on or prior to the Calculation Date shall be given pro forma effect
as if they had occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for the reference period shall be
calculated on a pro forma basis (including Pro Forma Cost Savings), but
without giving effect to clause (3) of the proviso set forth in the
definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be
excluded;
(3) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, but only
to the extent that the obligations giving rise to the Fixed Charges
will not be obligations of the specified Person or any of its
Restricted Subsidiaries following the Calculation Date;
(4) notwithstanding the foregoing, the Consolidated Cash Flow
for any period that includes the period from July 1, 1999 through and
including September 30, 1999, shall be determined by assuming that the
Consolidated Cash Flow attributable to the BFI medical waste business
for that period was equal to one-half of the Consolidated Cash Flow
attributable to that business for the six-month period ended June 30,
1999; and
(5) notwithstanding the foregoing, the Consolidated Cash Flow
for any period that includes the period from October 1, 1999 through
and including the date of the indenture, shall be determined by
assuming that the Consolidated Cash Flow attributable to the BFI
medical waste business for that period was equal to the Consolidated
Cash Flow attributable to that business for the six-month period ended
June 30, 1999 times a fraction the numerator of which is the number of
days in the period from October 1, 1999 through and including the date
of the indenture and the denominator of which is 181.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in other statements by the other
entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means each of:
(1) Stericycle of Arkansas, Inc., Stericycle of Washington,
Inc., SWD Acquisition Corp., Environmental Control Co., Inc., Waste
Systems, Inc., Med-Tech Environmental, Inc., Med-Tech Environmental
(MA), Inc., Ionization Research Company, Inc., BFI Medical Waste, Inc.,
Browning-Ferris Industries of Connecticut, Inc.; and
(2) any other Domestic Subsidiary that executes a Subsidiary
Guarantee in accordance with the provisions of the indenture;
and their respective successors and assigns.
"Hedging Agreement" means, with respect to any specified Person, any
interest rate protection agreement (including, without limitation, interest rate
swaps, caps, floors, collars, derivative instruments and similar agreements),
and/or other types of interest hedging agreements and any currency protection
agreement (including, without limitation, foreign exchange contracts, currency
swap agreements or other currency hedging arrangements) of the Person.
<PAGE>
"Holder" means a Person in whose name a note is registered.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of the Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in
respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) in respect of the balance deferred and unpaid of the
purchase price of any property, except any balance that constitutes an
accrued expense or trade payable; or
(6) representing any net payment obligation under Hedging
Agreements at the time of determination,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Agreements) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not the Indebtedness is assumed by the
specified Person) and, to the extent not otherwise included, the Guarantee by
the specified Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness
issued with original issue discount; and
(2) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
For purposes of calculating the amount of Indebtedness of a Receivables
Subsidiary outstanding as of any date, the face or notional amount of any
interest in receivables or equipment that is outstanding as of the date shall be
deemed to be Indebtedness but any interests held by us or any of our Restricted
Subsidiaries shall be excluded for purposes of the calculation.
"Investments" means, with respect to any Person, all direct or indirect
investments by the Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If we or any of
our Restricted Subsidiaries sells or otherwise disposes of any Equity Interests
of any of our direct or in direct Restricted Subsidiaries such that, after
giving effect to any sale or disposition, the Person is no longer a Restricted
Subsidiary of ours, we shall be deemed to have made an Investment on the date of
the sale or disposition equal to the cost basis of the Equity Interests of the
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments." The acquisition by us or any
of our Restricted Subsidiaries of a Person that holds an Investment in a third
Person shall be deemed to be an Investment by us or the Restricted Subsidiary in
the third Person in an amount equal to the fair market value of the Investment
held by the acquired Person in the third Person in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of the asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
<PAGE>
interest in and, except in connection with any Qualified Receivable Transaction,
any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified Person, the net
income (loss) of the Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, any
extraordinary gain and loss, together with any related provision for taxes on
items of extraordinary gain and loss.
"Net Proceeds" means the aggregate cash proceeds received by us or any
of our Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
the Asset Sale, including, without limitation, legal, accounting and investment
banking fees, and sales commissions, and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof, in each case, after
taking into account any available tax credits or deductions and any tax sharing
arrangements, and amounts required to be applied to the repayment of
Indebtedness, other than Senior Debt under a Credit Facility, secured by a Lien
on the asset or assets that were the subject of the Asset Sale and any reserve
for adjustment in respect of the sale price of the asset or assets established
in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness of an Unrestricted Subsidiary:
(1) as to which neither we nor any of our Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable as a guarantor or
otherwise, or (c) constitutes the lender;
(2) no default with respect to which (including any rights that
the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or
both any holder of any other Indebtedness (other than the notes) of
ours or any of our Restricted Subsidiaries to declare a default on the
other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of us or any of
our Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness, including, in each case, interest
accruing subsequent to the filing of, or which would have accrued but for the
filing of, a petition for bankruptcy, reorganization or similar proceeding,
whether or not the interest is an allowable claim in the proceeding.
"Permitted Business" means medical waste disposal and consulting,
distribution of medical services and products to medical waste customers, and
the expansion of related services and distribution of products to medical waste
customers.
"Permitted Domestic Subsidiary Preferred Stock" means any series of
Preferred Stock of a Domestic Subsidiary of ours that has a fixed dividend rate,
the liquidation value of all series of which, when combined with the aggregate
amount of Indebtedness of us and our Restricted Subsidiaries incurred pursuant
to clause (14) of the definition of Permitted Debt, does not exceed $20.0
million.
"Permitted Hedging Agreement" of any Person means any Hedging Agreement
entered into with one or more financial institutions in the ordinary course of
business (a) for the purpose of fixing or hedging interest or foreign currency
exchange rate risk with respect to any floating rate Indebtedness or foreign
currency based Indebtedness, respectively, that is permitted by the terms of the
indenture to be outstanding; provided that the notional amount of any Hedging
Agreement does not exceed the amount of Indebtedness or other liability to which
the Hedging Agreement relates; or (b) for the purpose of fixing or hedging
currency exchange risk with respect to any currency exchanges made in the
ordinary course of business and not for purposes of speculation.
<PAGE>
"Permitted Investments" means:
(1) any Investment in us or in our Restricted Subsidiaries;
(2) any Investment in Cash Equivalents;
(3) any Investment by us or any of our Restricted Subsidiaries
in a Person, if as a result of the Investment:
(a) the Person becomes a Restricted Subsidiary of
ours; or
(b) the Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, us or a Restricted Subsidiary
of ours;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales;"
(5) any acquisition of assets solely in exchange for the
issuance of our Equity Interests (other than Disqualified Stock);
(6) Hedging Agreements;
(7) Investments existing on the date of the indenture
(including Indebtedness received in exchange therefor);
(8) loans and advances to our employees and officers and the
employees and officers of our Restricted Subsidiaries in the ordinary
course of business;
(9) accounts receivable created or acquired in the ordinary
course of business;
(10) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of trade creditors or customers;
(11) Guarantees by us of Indebtedness otherwise permitted to be
incurred by our Restricted Subsidiaries that are Guarantors under the
indenture;
(12) the acquisition by a Receivables Subsidiary in connection
with a Qualified Receivables Transaction of Equity Interests of a trust
or other Person established by the Receivables Subsidiary to effect the
Qualified Receivables Transaction; and any other Investment by us or
our Subsidiaries in a Receivables Subsidiary or any Investment by a
Receivables Subsidiary in any other Person in connection with a
Qualified Receivables Transaction provided, that the other Investment
is in the form of a note or other instrument that the Receivables
Subsidiary or other Person is required to repay as soon as practicable
from available cash collections less amounts required to be established
as reserves pursuant to contractual agreements with entities that are
not our Affiliates entered into as part of a Qualified Receivables
Transaction;
(13) any Investment in a joint venture with one or more foreign
partners to the extent that, as a result of the Investment, we
recognize gross profit from licensing of intellectual property or sales
of equipment to that joint venture over the twelve-month period
following the Investment that is at least equal to the amount of the
Investment; and
(14) other Investments in any Person having an aggregate fair
market value (measured on the date each Investment was made and without
giving effect to subsequent changes in value), when taken together with
all other Investments made pursuant to this clause (14) that are at the
time outstanding not to exceed $25.0 million.
<PAGE>
"Permitted Junior Securities" means:
(1) Equity Interests in us or any Guarantor; or
(2) debt securities that are subordinated to (a) all Senior
Debt and (b) any debt securities issued in exchange for Senior Debt to
substantially the same extent as, or to a greater extent than, the
notes and the Subsidiary Guarantees are subordinated to Senior Debt
under the indenture.
"Permitted Liens" means:
(1) Liens in favor of us or the Guarantors;
(2) Liens on property of a Person existing at the time the
Person is merged with or into or consolidated with us or any of our
Subsidiaries; provided that the Liens were in existence prior to the
contemplation of the merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with
us or the Subsidiary;
(3) Liens on property existing at the time of acquisition
thereof by us or any of our Subsidiaries, provided that the Liens were
in existence prior to the contemplation of the acquisition;
(4) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a
like nature incurred in the ordinary course of business;
(5) Liens existing on the date of the indenture and any
extensions, renewals and replacements thereof;
(6) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good
faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as
shall be required in conformity with GAAP shall have been made
therefor;
(7) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries;
(8) Liens incurred or deposits made in the ordinary course of
business in connection with worker's compensation, unemployment
insurance and other types of social security, including any Lien
securing letters of credit issued in the ordinary course of business
consistent with past practice in connection therewith, or to secure the
performance of tenders, statutory obligations, surety and appeal bonds,
bids, leases, government contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(9) judgment Liens not giving rise to an Event of Default;
(10) easements, rights-of-way, zoning restrictions and other
similar charges or encumbrances in respect of real property not
interfering in any material respect with the ordinary conduct of the
business of us or any of our Restricted Subsidiaries;
(11) any interest or title of a lessor under any Capitalized
Lease Obligation;
(12) purchase money Liens to finance property or assets of us
or any of our Restricted Subsidiaries acquired in the ordinary course
of business; provided, however, that
(A) the related purchase money Indebtedness shall not
exceed the cost of the property or assets and shall not be
secured by any property or assets of us or any of our
Restricted Subsidiaries other than the property and assets so
acquired and
<PAGE>
(B) the Lien securing the Indebtedness shall be
created within 90 days of the acquisition;
(13) Liens upon specific items of inventory or other goods and
proceeds of any Person securing the Person's obligations in respect of
banker's acceptances issued or created for the account of the Person to
facilitate the purchase, shipment, or storage of the inventory or other
goods;
(14) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other
property relating to the letters of credit and products and proceeds
thereof;
(15) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual, or warranty
requirements of us or any of our Restricted Subsidiaries, including
rights of offset and set-off;
(16) Liens securing Indebtedness incurred in reliance on clause
(4) of the second paragraph of the covenant described above under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock" so long as the Lien extends to no assets other than
the assets acquired;
(17) Liens on assets of us or a Receivables Subsidiary incurred
in connection with a Qualified Receivables Transaction;
(18) Leases or subleases granted to others that do not
materially interfere with the ordinary course of business of us and our
Restricted Subsidiaries;
(19) Liens arising from filing Uniform Commercial Code
financing statements regarding leases;
(20) Liens securing the series A and series B notes and the
related guarantees;
(21) Liens securing intercompany Indebtedness of us or a
Restricted Subsidiary on assets of any of our Subsidiaries;
(22) Liens securing Senior Debt and other Obligations with
respect thereto;
(23) Liens securing Hedging Agreements which relate to
Indebtedness that is otherwise permitted under the indenture; and
(24) Liens incurred in the ordinary course of business of us or
any of our Restricted Subsidiaries with respect to obligations that do
not exceed $5.0 million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of us or
any of our Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of us or any of our Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of
the Permitted Refinancing Indebtedness does not exceed the principal
amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus all
accrued interest thereon and the amount of all fees, expenses and
premiums incurred in connection therewith);
(2) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to
the series B notes, the Permitted Refinancing Indebtedness is
subordinated in right of payment to, the series B notes on terms at
least as favorable to the Holders of series B notes as those contained
in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded;
(3) the Permitted Refinancing Indebtedness has a Weighted
Average Life to Maturity later than the Weighted Average Life to
Maturity of the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and
<PAGE>
(4) the Indebtedness is incurred either by us or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Preferred Stock Agreement" means the agreement by and among Bain
Capital, Inc., Madison Dearborn Partners, Inc. and us relating to the purchase
and sale of our series A convertible preferred stock, as in effect on the date
hereof.
"Principals" means Bain Capital, Inc. and Madison Dearborn Partners,
Inc.
"Pro Forma Cost Savings" means, with respect to any period, the
reduction in costs that occurred during the four-quarter period or after the end
of the four-quarter period and on or prior to the transaction date that were (i)
directly attributable to an asset acquisition and calculated on a basis that is
consistent with Article 11 of Regulation S-X under the Securities Act as in
effect on the date of the indenture or (ii) implemented by the business that was
the subject of the asset acquisition within six months of the date of the asset
acquisition and that are supportable and quantifiable by the underlying
accounting records of the business, as if, in the case of each of clause (i) and
(ii), all the reductions in costs had been effected as of the beginning of the
period. In addition, for purposes of calculating the Fixed Charge Coverage Ratio
for any four-quarter period that includes a period prior to the date of the
indenture, we shall also give effect to the supplemental adjustments described
in the Offering Memorandum, dated as of November 4, 1999.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Stock.
"Qualified Receivables Transaction" means any transaction or series of
transactions entered into by us or any of our Subsidiaries pursuant to which we
or any of our Subsidiaries sell, convey or otherwise transfer to (i) a
Receivables Subsidiary (in the case of a transfer by us or any of our
Subsidiaries) and (ii) any other Person (in the case of a transfer by a
Receivables Subsidiary), or grant a security interest in, any accounts
receivable (whether now existing or arising in the future) of us or any of our
Subsidiaries, and any assets related thereto including, without limitation, all
collateral securing the accounts receivable, all contracts and all guarantees or
other obligations in respect of the accounts receivable, proceeds of the
accounts receivable and other assets which are customarily transferred or in
respect of which security interests are customarily granted in connection with
asset securitization transactions involving accounts receivable.
"Receivables Subsidiary" means a Subsidiary of ours which engages in no
activities other than in connection with the financing of accounts receivable
and which is designated by our Board of Directors (as provided below) as a
Receivables Subsidiary (a) no portion of the Indebtedness or any other
Obligations (contingent or otherwise) of which (i) is guaranteed by us or any of
our Subsidiaries (excluding guarantees of Obligations (other than the principal
of, and interest on, Indebtedness) pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction), (ii) is recourse to or
obligates us or any of our Subsidiaries in any way other than pursuant to
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction or (iii) subjects any property or asset of us or any of our
Subsidiaries (other than accounts receivable and related assets as provided in
the definition of "Qualified Receivables Transaction"), directly or indirectly,
contingently or otherwise, to the satisfaction thereof, other than pursuant to
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction, (b) with which neither we nor any of our Subsidiaries has any
material contract, agreement, arrangement or understanding other than on terms
no less favorable to us or the Subsidiary than those that might be obtained at
the time from Persons who are not our Affiliates, other than fees payable in the
ordinary course of business in connection with servicing accounts receivable and
(c) with which neither we nor any of our Subsidiaries has any obligation to
maintain or preserve the Subsidiary's financial condition or cause the
Subsidiary to achieve specific levels of operating results. Any designation by
our Board of Directors will be evidenced to the Trustee by filing with the
Trustee a certified copy of the resolution of our Board of Directors giving
effect to the designation and an officers' certificate certifying that the
designation complied with the foregoing conditions.
<PAGE>
"Related Party" means:
(1) any controlling stockholder, more than 50% owned
Subsidiary, or immediate family member (in the case of an individual)
of any Principal; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding a greater than 50% or more controlling interest of which
consist of any one or more Principals and/or the other Persons referred
to in the immediately preceding clause (1).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"Senior Debt" means:
(1) all Indebtedness of us or any Guarantor outstanding under
Credit Facilities and all Hedging Agreements permitted to be entered
into under the terms of the indenture;
(2) any other Indebtedness of us or any Guarantor permitted to
be incurred under the terms of the indenture, unless the instrument
under which the Indebtedness is incurred expressly provides that it is
on a parity with or subordinated in right of payment to the notes or
any Subsidiary Guarantee; and
(3) all Obligations with respect to the items listed in the
preceding clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt
will not include:
(1) any liability for federal, state, local or other taxes owed
or owing by us;
(2) any Indebtedness of us to any of our Subsidiaries or other
Affiliates;
(3) any trade payables; or
(4) the portion of any Indebtedness that is incurred in
violation of the indenture except to the extent that the Indebtedness
so incurred was extended by the lenders thereof in reliance on a
certificate executed and delivered by our president, chief executive
officer or chief financial or accounting officer, in which certificate,
the officer certified that the incurrence of the Indebtedness was
permitted under the proviso to the first sentence under the caption "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
"Significant Subsidiary" means any Subsidiary that would be a
"significant Subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as the regulation is in effect on
the date hereof (excluding in all cases, 3CI Complete Compliance Corporation
while it is a public non-wholly-owned subsidiary of us).
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing the Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any interest or principal prior to the date
originally scheduled for the payment thereof.
"Subordinated Note Obligations" means all Obligations with respect to
the notes, including, without limitation, principal, premium, if any, interest
and Liquidated Damages, if any, payable pursuant to the terms of the notes
(including, without limitation, upon acceleration or redemption thereof),
together with and including, without limitation, any amounts received or
receivable upon the exercise of rights of rescission or other rights of action,
including, without limitation, claims for damages, or otherwise.
<PAGE>
"Subsidiary" means, with respect to any specified Person (and if no
Person is specified, it shall be understood to mean with respect to us):
(1) any corporation, association or other business entity of
which more than 50% of the total voting power of shares of Capital
Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at
the time owned or controlled, directly or indirectly, by the Person or
one or more of the other Subsidiaries of that Person (or a combination
thereof); and
(2) any partnership (a) the sole general partner or the
managing general partner of which is the Person or a Subsidiary of the
Person or (b) the only general partners of which are the Person or one
or more Subsidiaries of the Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary of ours that is
designated by our Board of Directors as an Unrestricted Subsidiary pursuant to a
Board resolution and in accordance with the terms of the indenture, but only to
the extent that the Subsidiary:
(1) has no indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with us or any of our Restricted Subsidiaries unless the
terms of the agreement, contract, arrangement or understanding are no
less favorable to us or the Restricted Subsidiary than those that might
be obtained at the time from Persons who are not our Affiliates;
(3) is a Person with respect to which neither we nor any of our
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or
preserve the Person's financial condition or to cause the Person to
achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly
provided credit support for any Indebtedness of us or any of our
Restricted Subsidiaries.
Any designation of a Subsidiary of us as an Unrestricted Subsidiary
shall be evidenced to the trustee by filing with the trustee a certified copy of
the Board resolution giving effect to the designation and an Officers'
Certificate certifying that the designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"--Certain Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the indenture and any Indebtedness of the Subsidiary shall be deemed
to be incurred by a Restricted Subsidiary of us as of the date and, if the
Indebtedness is not permitted to be incurred as of the date under the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock," we shall be in default of the covenant. Our Board
of Directors may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that the designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of us of any outstanding
Indebtedness of the Unrestricted Subsidiary and the designation shall only be
permitted if (1) the Indebtedness is permitted under the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if the designation had
occurred at the beginning of the four-quarter reference period; (2) no Default
or Event of Default would be in existence following the designation; and (3) if
any Subsidiary is a Domestic Subsidiary, it shall execute a supplemental
indenture to become a Guarantor with respect to the notes.
"Voting Stock" of any Person as of any date means the Capital Stock of
the Person that is at the time entitled to vote in the election of the Board of
Directors of the Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
<PAGE>
(1) the sum of the products obtained by multiplying (a) the
amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between the
date and the making of the payment; by
(2) the then outstanding principal amount of the Indebtedness.
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 30,000,000 shares of common
stock, par value $0.01 per share, of which 14,730,889 shares were issued and
outstanding as of December 13, 1999, and 1,000,000 shares of preferred stock,
par value $0.01 per share, of which 75,000 shares of 3.375% payment-in-kind
series A convertible preferred stock are issued and outstanding.
COMMON STOCK
Our outstanding shares of common stock are validly issued, fully paid
and nonassessable. Common stockholders are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. As of
December 13, 1999, shares of our common stock were held of record by
approximately 279 stockholders.
Holders of shares of common stock do not have any preemptive rights or
rights to subscribe for any additional securities. Our common stock is neither
redeemable nor convertible into other securities, and there are no sinking fund
provisions. Subject to the preferences applicable to any shares of convertible
preferred stock outstanding at the time, common stockholders are entitled to
dividends if, when and as declared by the Board of Directors from funds legally
available therefore and are entitled, in the event of liquidation, to share
ratably in all assets remaining after payment of liabilities and convertible
preferred stock preferences, if any.
UNDESIGNATED PREFERRED STOCK
We have authorized 1,000,000 shares of preferred stock, $.01 par value.
Our Board of Directors has designated 100,000 shares of this preferred stock as
Series A convertible preferred stock (see description below). The remaining
900,000 shares of preferred stock may be issued in series from time to time by
our Board of Directors, who would have the power to determine the respective
powers, designations, preferences, rights, qualifications, limitations and
restrictions of each series. These matters would include, for example: (1) the
number of shares in each series, (2) whether a series will bear dividends and,
if so, whether the dividends will be cumulative, (3) the dividend rate and the
dates of dividend payments, (4) liquidation preferences, if any, (5) the terms
of redemption, if any, including timing, rates and prices, (6) conversion
rights, if any, (7) sinking fund requirements, if any, (8) any restrictions on
the issuance of additional shares of any series, (9) any voting rights and (10)
any other powers, designations, preferences, rights, qualifications, limitations
or restrictions.
Shares of preferred stock could have priority over shares of common
stock with respect to dividends (which may be made cumulative with respect to
the preferred stock) and with respect to our assets upon liquidation, and could
reduce the amount of assets available for distribution to the holders of common
stock upon a liquidation. Depending upon the particular terms of any series of
preferred stock, holders of that series may have significant voting rights and
the right to representation on our Board of Directors. In addition, the approval
of holders of shares of preferred stock, voting as a class or as a series, may
be required for the taking of specific corporate actions, such as mergers.
CONVERTIBLE PREFERRED STOCK
On November 12, 1999, we issued and sold 75,000 shares of our
convertible preferred stock to investment funds associated with Bain Capital and
with Madison Dearborn, as initial investors, for $1,000 per share, or an
aggregate of $75.0 million, in cash, less various fees and expenses.
DIVIDENDS
The convertible preferred stock bears preferential dividends, payable
in additional shares of convertible preferred stock, at the rate of 3.375% per
annum from the date of issuance. Dividends accrue daily at the per annum rate of
3.375% and will accumulate annually on the anniversary date of initial issuance.
In addition to preferential dividends, the convertible preferred stock will also
be entitled to share pro rata with holders of common stock, on the basis of the
number of shares of common stock into which the convertible preferred stock is
<PAGE>
convertible, in all other dividends and distributions. Because the convertible
preferred stock dividends are payable in additional shares of convertible
preferred stock, the certificate of designations covers 100,000 share in order
that we will have shares available for the payment of those dividends for a
period of time.
LIQUIDATION
Upon any liquidation, dissolution or winding up of us, each holder of
convertible preferred stock shall be entitled to be paid, before any
distribution or payment is made to the holders of common stock, a liquidation
value of the greater of (i) the sum of $1,000 per share plus accumulated
preferential dividends plus accrued and unpaid dividends not yet accumulated and
(ii) the amount that would be payable if the convertible preferred stock had
been converted into common stock.
VOTING; ELECTION OF DIRECTORS
The convertible preferred stock is entitled to vote with the holders of
common stock as a single class on each matter submitted to our stockholders.
Each share of convertible preferred stock shall have a number of votes for the
matters submitted to our stockholders equal to the number of votes possessed by
the common stock into which the convertible preferred stock is convertible. So
long as the initial investors hold 50% or more of the convertible preferred
stock or the common stock into which it is convertible, they will have the
right, voting as a separate class, to elect two directors to our Board of
Directors. In the event that the initial investors and their affiliates cease to
hold 50% but still hold 25% or more, they will have the right, voting as a
separate class, to elect one director and if they cease to hold 25%, their right
to elect directors as a separate class will terminate.
CONVERSION
Each holder of convertible preferred stock may, at any time and from
time to time, upon ten business days notice, convert all or part of the
convertible preferred stock into shares of common stock. The price at which the
holders may convert is $17.50 per share, subject to adjustment, and this price,
as adjusted from time to time, is referred to as the "conversion price." The
conversion price will be adjusted under specified circumstances.
The 75,000 shares of convertible preferred stock held by the initial
investors is convertible into 4,285,714 shares of our common stock, or
approximately 22.6% of the amount of our common stock currently outstanding.
REDEMPTION AT OUR OPTION
Beginning on the 30th month anniversary of the date of initial issuance
of the convertible preferred stock, if the closing price of the common stock
exceeds 150% of the conversion price for 20 consecutive trading days, we may
elect, upon at least 30 days' prior written notice, to redeem all (but not part)
of the outstanding shares of convertible preferred stock, subject to any
holder's right to first convert its shares into common stock prior to the
redemption date, in the manner described above. If we make an election, the
redemption price will equal the liquidation value to the date of redemption.
REDEMPTION UPON A CHANGE OF CONTROL
A "change of control" with respect to us is defined as a circumstance
in which: (i) any person or group (as the terms are used for purposes of
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
becomes the beneficial owner of more than 50% of our total voting power; or (ii)
during any consecutive 36-month period, our directors at the beginning of the
period and their successors cease to comprise a majority of our Board of
Directors.
In the event of a change of control, or if a bankruptcy event (as
defined in the certificate of designation governing the convertible preferred
stock) has occurred and continued for 60 days, each holder of shares of
convertible preferred stock can, by the giving of 15 business days notice, cause
us to redeem all or any part of the holder's shares at a price per share equal
to the liquidation value per share.
<PAGE>
CORPORATE GOVERNANCE AGREEMENT
A corporate governance agreement between us and the initial investors
contains specific provisions to implement the right of the initial investors to
elect two directors to our Board of Directors and under specific circumstances
to appoint an observer. The corporate governance agreement also provides that
until the earlier of (i) the date on which the initial investors and their
permitted transferees (as defined in the corporate governance agreement) cease
to own any convertible preferred stock, (ii) the date on which the initial
investors have completed a distribution of the convertible preferred stock to
their partners or (iii) the first anniversary of the closing, the initial
investors and their transferees and affiliates will not acquire beneficial
ownership of more than 30% of the voting power of our company or acquire or
attempt to acquire control of our company, except in response to a proposal that
has been made to our stockholders that would materially and adversely affect the
initial investors, or pursuant to the exercise of their preemptive rights. The
corporate governance agreement also contains restrictions, for a period of five
years, on an initial investor's ability to transfer the convertible preferred
stock and further provides that the approval of the holders of a majority of the
convertible preferred stock and underlying common stock be obtained for us to:
(1) engage in mergers, acquisitions or divestitures of specified sizes, (2)
enter into contracts with our officers, directors, employees or affiliates,
except for ordinary employment and benefit plans and transactions with our
subsidiaries, and (3) incur indebtedness or issue capital stock that would cause
our fixed charge coverage ratio (as defined in the preferred stock purchase
agreement) to be less than 1.75 to 1.0 (2.0 to 1.0 after the second anniversary
of the initial issuance of the convertible preferred stock).
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. federal
income tax consequences associated with the exchange of the series A notes for
series B notes and the ownership and disposition of the series B notes by an
original purchaser of the series B notes who is not a U.S. holder. The
discussion below is based upon current provisions of the Internal Revenue Code
of 1986, as amended, applicable U.S. Department of Treasury regulations,
judicial authority and administrative rulings and practice, any of which may be
altered with retroactive effect thereby changing the federal tax consequences
discussed below.
The tax treatment of a holder of the notes may vary depending upon the
holder's particular situation. Some holders (including, but not limited to,
financial institutions, insurance companies, tax-exempt organizations,
broker-dealers and persons holding the notes as part of a "straddle," "hedge" or
"conversion transaction") may be subject to special rules not discussed below.
This discussion is limited to holders who purchased the notes on original
issuance and who hold the notes as "capital assets" (generally, property held
for investment) within the meaning of section 1221 of the U.S. tax code. We will
not seek a ruling from the IRS with respect to any of the matters discussed
herein and there can be no assurance that the IRS will not challenge one or more
of the tax consequences described below.
THIS SUMMARY DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF U.S. FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A HOLDER'S DECISION TO EXCHANGE SERIES A
NOTES FOR SERIES B NOTES OR TO PURCHASE THE NOTES. PERSONS CONSIDERING AN
EXCHANGE OF SERIES A NOTES FOR SERIES B NOTES OR A PURCHASE OF THE NOTES SHOULD
CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY AND EFFECT
OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS.
EXCHANGE OFFER
The exchange of the series A notes for series B notes pursuant to this
exchange offer should not be treated as an "exchange" for U.S. federal income
tax purposes because the series B notes will not be considered to differ
materially in kind or extent from the series A notes. Rather, any series B notes
received by you should be treated as a continuation of your investment in the
series A notes. As a result, there should be no material U.S. federal income tax
consequences to you resulting from the exchange offer. In addition, you should
have the same adjusted issue price, adjusted basis and holding period in the
series B notes as you had in the series A notes immediately prior to the
exchange.
NON-U.S. HOLDERS
U.S. holders acquiring the notes are subject to different rules than
those discussed below. For purposes of this discussion, a U.S. holder is a
holder of the notes who is:
o a citizen or resident of the U.S. or any political subdivision
thereof;
o a partnership or corporation created or organized in the U.S. or
under the laws of the U.S. or any political subdivision thereof;
o an estate the income of which is subject to U.S. federal income
taxation regardless of its source;
or
o a trust if a court within the U.S. is able to exercise primary
supervision of the administration of the trust and one or more
U.S. persons have the authority to control all decisions of the
trust.
"U.S." refers to the United States of America (including the States and
the District of Columbia) and its possessions, which include, as of the date
hereof, Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island
and the Northern Mariana Islands. This summary is based upon current provisions
of the U.S. tax code, applicable Treasury regulations, judicial authority and
administrative rulings and practice, any of which may be altered with
retroactive effect thereby changing the U.S. federal tax consequences discussed
below.
<PAGE>
Under present U.S. federal income and estate tax law, and subject to
the discussion below concerning backup withholding:
(a) The so-called "portfolio interest" exception provides
that interest on the notes will not be subject to U.S. federal
income tax and withholding of U.S. federal income tax will not
be required with respect to the payment by us or our paying
agent of principal or interest on the notes owned by a
non-U.S. holder, provided that (1) the beneficial owner of the
notes does not actually or constructively own 10% or more of
the total combined voting power of all classes of stock of
Stericycle entitled to vote within the meaning of section
871(h)(3) of the U.S. tax code and the Treasury regulations
issued thereunder, (2) the beneficial owner is not (i) a
foreign private foundation as defined in section 509 of the
tax code and the Treasury regulations issued thereunder, (ii)
a bank whose receipt of interest on the notes is described in
section 881(c)(3)(A) of the tax code or (iii) a "controlled
foreign corporation" (as defined section 957 of the tax code)
that is related directly, indirectly or constructively to us
through stock ownership, (3) the interest is not considered
contingent interest under section 871(h)(4) of the tax code
and the Treasury regulations issued thereunder, and (4) the
beneficial owner satisfies the requirements (described
generally below) set forth in section 871(h) and section
881(c) of the tax code and the Treasury regulations issued
thereunder relating to registered securities.
To satisfy the requirements referred to in (4) above, the
beneficial owner of the notes, or a financial institution
holding the notes on behalf of the owner, must provide, in
accordance with specified procedures, our paying agent with a
statement to the effect that the beneficial owner is not a
U.S. person. Currently, these requirements will be met if
either (i) the beneficial owner of the notes certifies to us
or our paying agent, under penalties of perjury, that it is
not a U.S. person (which certification may be made on an IRS
Form W-8 or successor form) and provides its name and address
or (ii) a securities clearing organization, bank or other
financial institution that holds customers' securities in the
ordinary course of its trade or business and that holds the
notes on behalf of a beneficial owner, certifies to us or our
paying agent, under penalties of perjury, that the statement
has been received by it from the beneficial owner (directly or
through another intermediary financial institution), and
furnishes us or our paying agent with a copy thereof. A
certificate described in this paragraph is effective only with
respect to payments of interest made to the certifying
non-U.S. holder after the issuance of the certificate, in the
calendar year of its issuance and two immediately succeeding
calendar years.
Treasury regulations finalized in 1997, applicable to interest
paid after December 31, 2000, provide alternative
documentation procedures for satisfying the certification
requirement described above. These regulations add
intermediary certification options for some qualifying agents.
Under one option, a withholding agent would be allowed to rely
on IRS Form W-8IMY furnished by a financial institution or
other intermediary on behalf of one or more beneficial owners
(or other intermediaries) without having to obtain the
beneficial owner certificate described in the preceding
paragraph, provided that the financial institution or
intermediary has entered into a withholding agreement with the
IRS and thus is a "qualified intermediary". Under another
option, an authorized foreign agent of a U.S. withholding
agent would be permitted to act on behalf of the U.S.
withholding agent, provided specified conditions are met. With
respect to the certification requirement for notes that are
held by a foreign partnership, the final regulations provide
that unless the foreign partnership has entered into a
withholding agreement with the IRS, the foreign partnership
will be required, in addition to providing an intermediary
Form W-8IMY, to attach an appropriate certification by each
partner. Prospective investors, including foreign partnerships
and their partners, should consult their tax advisors
regarding possible additional reporting requirements.
(b) If a non-U.S. holder cannot satisfy the requirements of
the "portfolio interest" exception described in paragraph (a)
above, payments of interest made to the non-U.S. holder will
generally be subject to withholding tax of 30% unless the
beneficial owner of the notes provides us or our paying agent,
as the case may be, with a properly executed (i) IRS Form 1001
(or successor form) claiming an exemption from or reduced rate
of withholding under the benefit of a tax treaty or (ii) IRS
<PAGE>
Form 4224 (or successor form) stating that interest paid on
the notes is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a
trade or business in the United States. Under the final
regulations, non-U.S. holders will generally be required to
provide IRS Form W-8BEN, W-8IMY, W-8EXP or W-8ECI in lieu of
Form 1001 and Form 4224, although alternative documentation
may be applicable in specific situations. Additionally, the
non-U.S. holder may be required to obtain a U.S. taxpayer
identification number. In each case, the relevant IRS form
must be delivered pursuant to applicable procedures and must
be properly transmitted to the person otherwise required to
withhold U.S. federal income tax, and none of the persons
receiving the relevant form may have actual knowledge that any
statement on the form is false.
(c) A non-U.S. holder will not be subject to U.S. federal
income tax on any gain realized on the sale, exchange,
retirement, or other disposition of the notes, unless (i) the
holder is an individual who is present in the United States
for 183 days or more during the taxable year and other
requirements are met, or (ii) the gain is effectively
connected with the conduct of a United States trade or
business of the holder.
(d) Under section 2105(b) of the U.S. tax code, if interest
on the notes would be exempt from withholding of U.S. federal
income tax under the rules set forth in paragraph (a) above
(without regard to the statement requirement), the notes will
not be included in the estate of a non-U.S. holder for U.S.
federal estate tax purposes.
(e) If a non-U.S. holder is engaged in a trade or business in
the United States and interest on the notes (or gain realized
on the sale, exchange or other disposition of the notes) is
effectively connected with the conduct of the trade or
business, the non-U.S. holder, although exempt from the
withholding tax discussed above, will generally be subject to
U.S. federal income tax on the effectively connected income in
the same manner as if it were a U.S. person. The non-U.S.
holder may also need to provide a United States taxpayer
identification number (social security number or employer
identification number) on the forms referred to in paragraph
(b) above in order to meet the requirements set forth above.
In addition, if the non-U.S. holder is a foreign corporation,
it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for the taxable
year, subject to adjustments. For this purpose, interest on,
and any gain recognized on the sale, exchange or other
disposition of, the notes will be included in the foreign
corporation's effectively connected earnings and profits if
the interest or gain, as the case may be, is effectively
connected with the conduct by the foreign corporation of a
trade or business in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
"Backup" withholding and information reporting requirements may apply
to payments on, and to proceeds of sale before maturity of, the notes. Interest
paid to a non-U.S. holder on a registered security will be required to be
reported annually on IRS Form 1042-S. We are not obligated to reimburse or
indemnify holders of the notes, including non-U.S. holders, for any tax imposed
on, or withheld from payments with respect to, the notes.
No information reporting on IRS Form 1099 or backup withholding will be
required with respect to payments made by us or any paying agent to non-U.S.
holders on registered securities with respect to which a statement described in
paragraph (a)(4) above has been received; provided that we or our paying agent,
as the case may be, does not have actual knowledge that the beneficial owner is
a U.S. person.
In addition, backup withholding and information reporting will not
apply if payments of principal or interest on the notes are paid to or collected
by a foreign office of a custodian, nominee or other foreign agent on behalf of
the beneficial owner of the notes, or if the foreign office of a broker (as
defined in applicable Treasury regulations) pays the proceeds of the sale of the
notes to the owner thereof. If, however, the nominee, custodian, agent or broker
is, for U.S. federal income tax purposes, a U.S. person, a controlled foreign
corporation or a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a United States trade or business for a three-year
period, or another United States related person described in Section
<PAGE>
1.6049-5(c)(5) of the Treasury regulations, then information reporting will be
required unless (i) the custodian, nominee, agent or broker has in its records
documentary evidence that the beneficial owner is not a U.S. person and specific
other conditions are met or (ii) the beneficial owner otherwise establishes an
exemption.
Payments of principal and interest on the notes to the beneficial owner
of the notes by a United States office of a custodian, nominee or agent, or
payment by the United States office of a broker of the proceeds of the sale of
the notes, will be subject to information reporting and backup withholding
unless the holder or beneficial owner provides the statement referred to in
paragraph (a)(4) above or otherwise establishes an exemption from information
reporting and backup withholding, and the payor does not have actual knowledge
that the beneficial owner is a U.S. person.
APPLICABLE TAX TREATIES
Non-U.S. holders and purchasers should also consult any applicable
income tax treaties, which may provide for a lower rate of withholding tax,
exemption from or reduction of branch profits tax, or other rules different from
those under United States federal tax laws.
The U.S. federal income tax discussion set forth above is included for
general information only and may not be applicable depending upon a holder's
particular situation. You should consult your own tax advisor with respect to
the consequences of your ownership and disposition of the notes, including the
tax consequences under state, local, foreign and other tax laws and the possible
effects on you of changes in U.S. federal or other tax laws.
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives series B notes for its own account
pursuant to this exchange offer, sometimes referred to as a participating
broker, must acknowledge that it will deliver a prospectus in connection with
any resale of the series B notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a participating broker in
connection with any resale of series B notes received in exchange for series A
notes where the series A notes were acquired as a result of market-making
activities or other trading activities. We have agreed that for a period of one
year from the expiration of this exchange offer, we will make this prospectus,
as amended or supplemented, available to any participating broker for use in
connection with the resales. In addition, until March 15, 2000, 90 days from the
date of this prospectus, all broker-dealers effecting transactions in the notes
may be required to deliver a prospectus.
We will not receive any proceeds from any sale of series B notes by
broker-dealers. Series B notes received by any participating broker may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the series B notes or
a combination of the methods of resale, at market prices prevailing at the time
of resale, at prices related to the prevailing market prices or negotiated
prices. Any resale may be made directly to purchasers or to or through brokers
or dealers who may receive compensation in the form of commissions or
concessions from any broker-dealer and/or the purchasers of any series B notes.
Any participating broker that resells notes that were received by it for its own
account pursuant to this exchange offer and any broker or dealer that
participates in a distribution of series B notes may be deemed to be an
underwriter within the meaning of the Securities Act and any profit on any
resale of series B notes and any commissions or concessions received by any
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver, and
by delivering, a prospectus as required, a participating broker will not be
deemed to admit that it is an underwriter within the meaning of the Securities
Act.
For a period of one year from the expiration of this exchange offer, we
will send a reasonable number of additional copies of this prospectus and any
amendment or supplement to this prospectus to any participating broker that
requests these documents in the letter of transmittal. We will pay all the
expenses incident to this exchange offer, which shall not include the expenses
of any holder in connection with resales of series B notes. We have agreed to
indemnify holders of series B notes, including any participating broker, against
some liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
McDermott, Will & Emery, Chicago, Illinois will opine on the validity
of the series B notes for us.
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP, independent public accountants, have audited our
consolidated financial statements at December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, as set forth in their
report. We have included our consolidated financial statements in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young's
report, given on their authority as experts in accounting and auditing. We have
included in this registration statement the audited financial statements of the
BFI medical waste business as of September 30, 1998 and for each of the three
years in the period ended September 30, 1998 in reliance on the audit report of
Arthur Andersen LLP, which issued the report as independent public accountants
and as experts in auditing and accounting.
<PAGE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
STERICYCLE, INC. FINANCIAL STATEMENTS
Report of Independent Public Accountants...................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.................................................. F-3
Consolidated Statements of Operations for each of the years in the three year
period ended December 31, 1998............................................................................ F-4
Consolidated Statements of Cash Flows for each of the years in the three year
period ended December 31, 1998............................................................................ F-5
Consolidated Statements of Shareholder's Equity for each of the years in the
three year period ended December 31, 1998................................................................. F-6
Notes to Consolidated Financial Statements.................................................................... F-7
Consolidated Balance Sheet as of September 30, 1999 (Unaudited)............................................... F-22
Consolidated Statements of Operations for the nine months ended September 30, 1998
and 1999 (Unaudited)...................................................................................... F-23
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998
and 1998 (Unaudited)...................................................................................... F-24
Notes to Unaudited Consolidated Financial Statements.......................................................... F-25
BFI MEDICAL WASTE BUSINESS FINANCIAL STATEMENTS
Report of Independent Public Accountants...................................................................... F-30
Statements of Directly Identifiable Assets and Liabilities of BFI Medical
Waste as of September 30, 1997 and 1998 and June 30, 1999................................................. F-31
Statements of Revenues and Direct Expenses of BFI Medical Waste for the
Years Ended September 30, 1996, 1997 and 1998 and for the nine months
ended
June 30, 1998 and 1999.................................................................................... F-32
Notes to Financial Statements................................................................................. F-33
</TABLE>
<PAGE>
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, 1997 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Stericycle, Inc. and Subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 16, 1999, except Note 16, as to which the date is
November 12, 1999
<PAGE>
<TABLE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 5,374 $ 1,283
Short-term investments............................................................... -- 536
Accounts receivable, less allowance for doubtful accounts of
$361 in 1997 and $901 in 1998..................................................... 10,286 16,582
Parts and supplies................................................................... 660 1,291
Prepaid expense...................................................................... 440 1,283
Other ............................................................................... 392 835
------------- -------------
Total current assets.............................................................. 17,152 21,810
------------- -------------
Property, plant and equipment:
Land ............................................................................... 90 680
Buildings and improvements........................................................... 5,561 10,514
Machinery and equipment.............................................................. 11,469 18,924
Office equipment and furniture....................................................... 746 1,425
Construction in progress............................................................. 614 1,007
------------- -------------
18,480 32,550
Less accumulated depreciation........................................................... (7,239) (9,450)
------------- -------------
Property, plant and equipment, net................................................ 11,241 23,100
------------- -------------
Other assets:
Goodwill, less accumulated amortization of $2,040 in 1997
and $3,551 in 1998................................................................ 29,458 49,112
Other............................................................................... 3,375 3,733
------------- -------------
Total other assets................................................................ 32,833 52,845
------------- -------------
Total assets...................................................................... $ 61,226 $ 97,755
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt.................................................... $ 3,052 $ 5,499
Accounts payable..................................................................... 1,927 6,502
Accrued liabilities.................................................................. 7,039 6,465
Deferred revenue..................................................................... 255 2,178
------------- -------------
Total current liabilities......................................................... 12,273 20,644
------------- -------------
Long term debt, net of current portion.................................................. 3,475 23,460
Other liabilities....................................................................... 452 --
Shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares authorized,
10,472,799 issued and outstanding in 1997,
10,865,862 issued and outstanding in 1998)........................................ 105 109
Additional paid-in capital........................................................... 82,986 85,894
Notes receivable for common stock purchases.......................................... (4) --
Accumulated deficit.................................................................. (38,061) (32,352)
------------- -------------
Total shareholders' equity........................................................ 45,026 53,651
------------- -------------
Total liabilities and shareholders' equity........................................ $ 61,226 $ 97,755
============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues.............................................................. $ 24,542 $ 46,166 $ 66,681
Costs and expenses:
Cost of revenues................................................... 19,423 34,109 45,328
Selling, general and administrative expenses....................... 7,556 10,671 14,929
-------------- -------------- ----------
Total costs and expenses........................................ 26,979 44,780 60,257
-------------- -------------- ----------
Income (loss) from operations......................................... (2,437) 1,386 6,424
Other income (expense):
Interest income.................................................... 421 618 714
Interest expense................................................... (373) (428) (777)
-------------- -------------- ----------
Total other income (expense).................................... 48 190 (63)
-------------- -------------- ----------
Income (loss) before income taxes..................................... $ (2,389) $ 1,576 $ 6,361
Income tax expense.................................................... -- 146 648
Net income (loss)..................................................... $ (2,389) $ 1,430 $ 5,713
============== ============== ==========
Basic earnings per share:
Basic net income (loss) per share.................................. $ (0.32) $ 0.14 $ 0.54
============= ============== ==========
Diluted earnings per share:
Diluted net income (loss) per share................................ $ (0.32) $ 0.13 $ 0.51
============= ============== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..................................................... $ (2,389) $ 1,430 $ 5,713
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................................... 2,064 3,078 4,064
Changes in operating assets, net of effect of acquisitions:
Accounts receivable................................................ (554) (4,123) (1,884)
Parts and supplies................................................. 144 (300) (420)
Prepaid expenses................................................... (18) (14) 58
Other assets....................................................... (37) 98 302
Accounts payable................................................... (428) (413) 1,781
Accrued liabilities................................................ 1,178 559 (6,223)
Deferred revenue and other liabilities............................. 97 (415) 1,471
-------------- -------------- ----------
Net cash provided by (used in) operating activities................... 57 (100) 4,862
-------------- -------------- ----------
INVESTING ACTIVITIES:
Capital expenditures............................................... (995) (1,235) (4,342)
Payments for acquisitions, net of cash acquired.................... (6,516) (5,552) (19,775)
Proceeds from maturity of short-term investments................... -- 5,799 --
Purchases of short-term investments................................ (5,799) (2,335) (41)
Proceeds from sale of property..................................... -- -- 405
-------------- -------------- ----------
Net cash used in investing activities................................. (13,310) (3,323) (23,753)
-------------- -------------- ----------
FINANCING ACTIVITIES:
Net proceeds from bank lines of credit............................. (858) -- 16,386
Repayment of long term debt........................................ (3,275) (2,905) (3,189)
Principal payments on capital lease obligations.................... (397) (305) (1,273)
Principal payments on notes receivable for
common stock purchases.......................................... 60 -- --
Proceeds from long-term debt....................................... 1,000 -- --
Proceeds from subordinated notes................................... -- -- 2,750
Payment of deferred financing costs................................ -- -- (218)
Proceeds from issuance of common stock............................. 28,535 57 344
-------------- -------------- ----------
Net cash provided by (used in) financing activities................... 25,065 (3,153) 14,800
-------------- -------------- ----------
Net (decrease) increase in cash and cash and
cash equivalents................................................... 11,812 (6,576) (4,091)
Cash and cash equivalents at beginning of year........................ 138 11,950 5,374
-------------- -------------- ----------
Cash and cash equivalents at end of year.............................. $ 11,950 $ 5,374 $ 1,283
============== ============== ==========
Non-cash activities:
Issuance of common stock for certain acquisitions.................. $ -- $ 3,525 $ 2,568
Issuance of notes payable for certain acquisitions................. $ 6,497 $ 1,120 $ 195
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
<CAPTION>
NOTES
ISSUED AND ADDITIONAL RECEIVABLE FOR TOTAL
OUTSTANDING PAR PAID-IN COMMON STOCK ACCUMULATED SHAREHOLDERS'
SHARES VALUE CAPITAL PURCHASES DEFICIT EQUITY
------ ----- ------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
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 35 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
Issuance of common stock for
exercise of options and warrants
and employee stock purchases................ 226 $ 2 342 344
Common stock issued for acquisitions........... 167 2 2,566 2,568
Principal payments under note
receivable.................................. 4 (4) 0
Net income..................................... 5,713 5,713
--------- ------- --------- ---------- ---------- -----------
BALANCES AT DECEMBER 31, 1998.................. 10,866 $ 109 $ 85,894 $ -- $ (32,352) $ 53,651
========= ======= ========= ========== ========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1--DESCRIPTION OF BUSINESS
Stericycle, Inc. and Subsidiaries (the "Company") provides medical
waste collection, transportation, treatment, disposal, reduction, re-use, and
recycling services to hospitals, health care providers, and other small quantity
generators in the United States and Canada. The Company is also expanding into
international markets through joint ventures and by licensing its proprietary
technology and selling associated equipment.
NOTE 2--SUMMARY OF SIGNIFICANT 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 Corp., Environmental
Control Co., Inc. ("ECCO"), Waste Systems, Inc. ("WSI") (majority shareholder of
3CI Complete Compliance Corporation ("3CI")), Mid-America Environmental, Inc.,
507375 N.B. Ltd., and Med-Tech Environmental Limited ("Med-Tech"). 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. Revenue and costs on contracts to supply the
Company's proprietary treatment equipment are accounted for by the percentage of
completion method, whereby income is recognized based on the estimated stage of
completion of the individual contract.
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
and certificates of deposit which mature in less than one year and are
classified as held-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 improvement -- 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 1996, 1997 and 1998 related to goodwill was
approximately $390,000, $1,042,000 and $1,505,000, respectively.
<PAGE>
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 goodwill 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,
1998, there were no adjustments to the carrying amounts of goodwill resulting
from these evaluations.
NEW PLANT DEVELOPMENT AND PERMITTING COSTS
The Company expenses costs associated with the operation 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 1996, 1997 and 1998 was $194,000,
$281,000 and $15,000, 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.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures 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. It also establishes standards
for related enterprise-wide disclosures about products and services, geographic
areas, and major customers. The adoption of FAS 131 did not affect the Company's
results of operations or financial position, but did affect its disclosures. The
Company's operating segments, (Stericycle, Inc., WSI, and Med-Tech) have similar
economic characteristics and are similar in the nature of their products and
services, treatment processes, types of customers, methods of distribution of
services, and nature of their regulatory environments. Based on this conclusion,
the Company has not presented segment disclosure information. The Company has
provided its enterprise-wide disclosures in Note 15.
<PAGE>
NOTE 3--PUBLIC OFFERINGS
On August 28 and August 30, 1996, the Company successfully completed an
initial public offering of 3,500,000 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.
On February 5, 1999, the Company successfully completed a public
offering of 3,500,000 shares of common stock at $14.50 per share. The Company
received total proceeds from the offering, net of offering costs, of
approximately $47,250,000.
NOTE 4--INCOME TAXES
The Company's deferred tax liabilities and assets as of December 31,
1997 and 1998 are as follows:
<TABLE>
1997 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
Capital lease obligations................................................... $ (461,000) $ (561,000)
Property, plant and equipment............................................... (509,000) (357,000)
Goodwill.................................................................... (228,000) (465,000)
Other ...................................................................... -- (265,000)
----------------- ---------------
Total deferred tax liabilities................................................. (1,198,000) (1,648,000)
Deferred tax assets:
Accrued liabilities......................................................... 857,000 659,000
Research and development costs.............................................. 324,000 324,000
Other ...................................................................... 195,000 149,000
Net operating tax loss carryforward......................................... 14,344,000 10,927,000
Alternative minimum tax credit carry-forward................................ 60,000 140,000
----------------- ---------------
Total deferred tax assets...................................................... 15,780,000 12,199,000
----------------- ---------------
Net deferred tax assets..................................................... 14,582,000 10,551,000
Valuation allowance......................................................... (14,582,000) (10,551,000)
----------------- ---------------
Net deferred tax assets................................................. $ -- $ --
================= ===============
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximated $27,000,000, 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 utilization of the net operating losses.
Additionally, the Company has an alternative minimum tax credit carryforward of
$140,000 available indefinitely.
Significant components of the Company's income tax expense for the year
ended December 31, 1997 and 1998 are as follows:
<TABLE>
1997 1998
---- ----
<S> <C> <C>
Current
Federal..................................................................... $ 60,000 $ 243,000
State ...................................................................... 86,000 405,000
----------------- ---------------
Total provisions............................................................ $ 146,000 $ 648,000
================= ===============
</TABLE>
A reconciliation of the income tax provision computed at the federal
statutory rate to the effective tax rate for the years ended December 31, 1997
and 1998 is as follows:
<PAGE>
<TABLE>
1997 1998
---- ----
<S> <C> <C>
Federal statutory income tax rate.............................................. 34.0% 34.0%
Effect of:
State taxes, net of federal tax effect...................................... 4.4% 4.0%
Alternative minimum taxes................................................... 3.8% 3.8%
Nondeductible goodwill amortization......................................... 4.5% 1.8%
Other ...................................................................... 1.7% --
Utilization of net operating loss carryforward.............................. (39.1)% (33.4)%
------- -------
Effective tax rate............................................................. 9.3% 10.2%
======= =======
</TABLE>
The Company paid income taxes of $1,030,000 and $58,300 in 1998 and
1997. Additionally, the Company did not recognize any income tax benefit for
1996 due to the Company's historical operating losses and valuation allowances
established for net deferred tax assets.
NOTE 5--ACQUISITIONS
In late December 1998 the Company gained control of a significant
majority of the outstanding common stock and warrants of Med-Tech Environmental
Limited ("Med-Tech") and in January 1999 the Company acquired all of the
remaining outstanding common stock and warrants of Med-Tech. 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
$3,059,000 in cash for the Med-Tech shares and warrants that it acquired. In
October 1998, the Company 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 the Company's common stock, and
replacing a letter of credit of approximately $1,641,000 (which was cancelled in
January 1999).
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 connection with 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 approximately
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.
In August 1998, the Company acquired the customer contracts, vehicles,
and certain other assets of the regulated medical waste management business of
Medical Compliance Services, Inc. (MCS) for $5,850,000 in cash. The Company also
agreed to purchase from MCS and a related party, MCS's Albuquerque, New Mexico
treatment facility and equipment for $1,250,000 in cash. The purchase of the
treatment facility and equipment closed in March 1999.
In May 1997, the Company acquired all of the outstanding stock of
Environmental Control Co., Inc. ("ECCO"), a regulated medical waste business
operating 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 the rate of 6.86% per annum payable in 10 equal installments of
$230,000, which started in May 1998.
In December 1996, the Company purchased the customer lists, vehicles,
and certain other assets of the major portion of the medical waste business of
Waste Management, Inc. ("WMI") for $5,450,000 in 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 the adjusted balance of the note plus accrued
interest in 1997 and 1998.
<PAGE>
In addition to the above acquisitions, in 1996, 1997 and 1998, the
Company acquired the customer contracts and other assets of nineteen other
regulated medical waste businesses. The purchase prices for these acquisitions
were paid by a combination of cash, notes payable, and shares of common stock of
the Company.
For financial reporting purposes these acquisition transactions were
accounted for using the purchase method of accounting. The total aggregate
purchase price for 1996, 1997 and 1998 of $13,013,000, $10,197,000 and
$22,538,000, respectively, net of cash acquired, was allocated to the assets
acquired and liabilities assumed based on their estimated fair market values at
the dates of acquisition. The total aggregate purchase price of 1997 and 1998
acquisitions includes the value of 403,000 and 167,000 shares of common stock,
respectively, issued to the sellers. The excess of the purchase prices over the
fair market values 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 Statements of Operations
from the respective dates of acquisition. The effect of these acquisitions would
not have a significant effect on the Company's operations, except for the
Med-Tech, WSI, MCS and ECCO acquisitions.
The following unaudited pro forma results of operations assumes that
the Med-Tech, WSI, MCS and ECCO acquisitions occurred as of January 1, 1997,
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 Med
Tech, WSI, MCS and ECCO did not reflect these costs:
<TABLE>
YEAR ENDED
DECEMBER 31,
------------
1997 1998
---- ----
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Pro forma revenues............................................................. $79,213 $91,726
Pro forma net income (loss).................................................... (3,031) 4,245
Pro forma diluted net income (loss) per share.................................. (0.29) 0.38
</TABLE>
The unaudited 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>
1997 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Industrial development revenue bonds.................................. $ 1,358 $ 1,093
Obligations under capital leases...................................... 212 847
Notes payable to banks................................................ -- 19,412
Subordinated debt..................................................... -- 2,750
Notes payable......................................................... 4,957 4,857
--------------- ----------
6,527 28,959
Less: Current portion................................................. 3,052 5,499
--------------- ----------
Total.......................................................... $ 3,475 $ 23,460
=============== ==========
</TABLE>
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 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. At December 31,
1998 the Company had borrowed $2,750,000. Each loan bore interest at 6.0% per
annum and was due on the earlier of 10 days after completion of the Company's
February 5, 1999 public offering pending when the loan was made or January 5,
2000. Under the terms of the subordinated loan agreement, the lenders were
granted five-year warrants to purchase shares of the Company's common stock
<PAGE>
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 was 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. In
January 1999, the Company borrowed the remaining balance of $2,750,000 available
under the loan agreement. In connection with their loans, the lenders were
granted warrants to purchase, in the aggregate, 18,970 shares of common stock at
$14.50 per share, 43,551 shares of common stock at $15.50 per share and 59,092
shares of Common Stock at $16.50 per share. All of the loans were repaid in
March 1999.
In connection with the Company's acquisition of Med-Tech, in December
1998, the Company assumed bank notes payable having an aggregate balance of
$3,023,000 at December 31, 1998, with the National Bank of Canada.
The notes were paid in full in January 1999.
In connection with the Company's acquisition of WSI, in October 1998,
the Company acquired a number of notes payable having an aggregate balance of
$1,838,000 at December 31, 1998. These notes are collateralized by vehicles and
equipment and are due in monthly installments, including interest at rates
ranging from 7% to 16.75% through 2002.
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 credit facility previously in
place with Silicon Valley Bank. 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 under its LaSalle Bank credit facility bear
interest at either the Bank's prime rate plus .25% (8.00% at December 31, 1998),
or an adjusted LIBOR rate (7.05% at December 31, 1998) as the Company elects at
the time of each borrowing. The Company also pays a commitment fee of 0.25% per
annum on the unborrowed portion of the credit facility. 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. In addition, the Company is required to maintain a minimum level
of net worth and comply with certain restrictive financial covenants, and is
restricted from paying dividends on its capital stock. At December 31, 1998, the
Company had borrowed $16,386,000 under the credit facility. In February 1999,
upon receipt of the proceeds from the Company's public offering of common stock,
all borrowings under the credit facility were repaid.
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 amount of the note was subsequently adjusted to $3,593,301 and was repaid
during 1997 and 1998.
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
<PAGE>
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 6.3% 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 during each of the five years subsequent
to December 31, 1998, including capital lease obligations and excluding
borrowings under the Company's LaSalle National Bank credit facility and under
the subordinated loan agreement with certain of its directors, which amounts
were repaid in February 1999, are as follows:
(IN THOUSANDS)
1999................................................ $5,499
2000................................................ 1,262
2001................................................ 788
2002................................................ 445
2003................................................ 230
The Company paid interest of $352,000, $444,000 and $670,000 for the
fiscal years ended December 31, 1996, 1997 and 1998, respectively.
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 eight years. The leases
for most of the properties contain renewal provisions.
Rent expense for 1996, 1997 and 1998 was $2,462,000, $3,284,000 and
$3,508,000 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,
1998 for each of the next five years and in the aggregate are as follows:
(IN THOUSANDS)
1999................................................ $ 3,916
2000................................................ 3,052
2001................................................ 2,584
2002................................................ 1,915
2003................................................ 1,078
Thereafter.......................................... 895
------------
Total minimum rental payments....................... $ 13,440
============
<PAGE>
NOTE 8--NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss)............................................ $ (2,389) $ 1,430 $ 5,713
Denominator:
Denominator for basic earnings per
share--weighted-average shares............................. 7,471,151 10,239,996 10,647,083
Effect of dilutive securities:
Employee stock options....................................... -- 441,586 473,723
Warrants .................................................... -- 84,534 142,722
---------------- ---------------- ---------------
Dilutive potential common shares............................. -- 526,120 616,445
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversions........... 7,451,151 10,766,116 11,263,528
================ ================ ===============
Basic net income (loss) per share............................ $ (0.32) $ 0.14 $ 0.54
=============== ================ ===============
Diluted net income (loss) per share.......................... $ (0.32) $ 0.13 $ 0.51
=============== ================ ===============
</TABLE>
For additional information regarding outstanding employee stock options
and outstanding warrants, see Note 9.
Options to purchase 838,849 shares of common stock were outstanding
during 1996 at exercise prices ranging from $.53-$69.02, but were not included
in the computation of diluted earnings per share because the Company had a net
loss in 1996 and the effect would be antidilutive. In 1997 and 1998, options and
warrants to purchase 75,945 shares and 67,615 shares, respectively, at exercise
prices of $10.25-$69.02 and $15.50-$69.02, respectively, were not included in
the computation of diluted earnings per share because the effect would be
antidilutive. In 1999, the Company issued 3,500,000 shares of common stock upon
completion of its February 5, 1999 public offering and 59,157 shares of common
stock in payment for certain acquisitions.
NOTE 9--STOCK OPTIONS AND WARRANTS
Shares of the Company's common stock have been reserved for issuance
upon the exercise of options and warrants. These shares have been reserved as
follows at December 31, 1998:
1995 Plan options.................................. 242,763
1996 Directors Plan options........................ 152,345
1997 Plan options.................................. 550,862
Warrants........................................... 268,481
-------------
Total shares reserved.............................. 1,214,451
=============
STOCK OPTIONS
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. 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
<PAGE>
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. 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 shareholders 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. As of each annual meeting of the
Company's shareholders, 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. 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.
A summary of stock option information follows:
<TABLE>
1996 1997 1998
---- ---- ----
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............ 933,235 $ 0.62 537,166 $ 1.93 845,861 $ 4.98
Granted.................................. 279,053 $ 3.20 433,367 $ 7.97 360,238 $ 13.92
Exercised................................ (660,767) $ 0.59 (83,006) $ 0.70 (155,979) $ 2.21
Canceled/Forfeited....................... (14,355) $ 3.42 (41,666) $ 5.38 (104,150) $ 8.89
---------- ------- ------------- ------ ------------ -------
Outstanding at end of year.................. 537,166 $ 1.93 845,861 $ 4.98 945,970 $ 8.37
========== ======= ============= ====== ============ =======
Exercisable at end of year.................. 315,273 $ 0.81 326,119 $ 1.53 393,084 $ 5.37
Available for future grant.................. 592,004 1,700,303 1,434,821
</TABLE>
Options outstanding and exercisable as of December 31, 1998 by price
range:
<TABLE>
OUTSTANDING EXERCISABLE
----------- -----------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE IN YRS PRICE SHARES PRICE
- ------------------------ ------ ----------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$.53-$1.99.................................. 238,314 7.08 $ 1.14 201,578 $ 0.98
$5.84-$10.25................................ 384,292 7.29 $ 8.18 135,438 $ 8.29
$11.125-$18.125............................. 323,364 8.51 $ 13.94 56,068 $ 14.11
------------- -------------
945,970 393,084
============= =============
</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 the 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 and 1998 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 1996, 1997 and 1998: expected volatility of
zero in 1996, 0.50 in 1997 and 0.61 in 1998; risk-free interest rates ranging
from 5.1% to 6.7% in 1996, 5.9% to 6.8% in 1997 and 4.5% to 4.8% in 1998; a
dividend yield of 0%; and a weighted-average expected life of the option of 31
<PAGE>
months in 1996, 72 months in 1997 and 1998. The weighted-average fair values of
options granted during 1996, 1997 and 1998 were $0.79 per share, $4.48 per share
and $6.52 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.
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>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss).................................. $ (2,474) $ 1,112 $ 4,485
Pro forma net income (loss) per share........................ $ (0.33) $ 0.10 $ 0.40
</TABLE>
The pro forma effect in 1996, 1997 and 1998 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 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, 1998, 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. In 1998, all of the remaining
warrants to purchase 53,810 shares were exercised.
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. In 1998, warrants to purchase 35,940 shares were exercised.
At December 31, 1998, warrants to purchase 190,096 shares remained outstanding.
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 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. Under the terms
of the subordinated loan agreement, the lenders have been 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. The closing price of the
Company's common stock on the dates of grant is also the exercise price of the
warrant. In December 1998 and January, 1999, lenders were granted warrants to
purchase, in the aggregate, 18,970 shares of common stock at $14.50 per share,
43,551 shares of common stock at $15.50 per share and 59,092 shares of common
stock at $16.50 per share.
NOTE 10--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 2,905 shares under this plan in 1998.
<PAGE>
NOTE 11--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,
1996, 1997 and 1998 were approximately $14,000, $25,000 and $10,000,
respectively.
NOTE 12--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
utilizes 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. ("Contam"), headquartered in Mexico City and Pennoni Associates, Inc.,
headquartered in Philadelphia, Pennsylvania. The Company owns 24.5% of the
common stock of Medam. At December 31, 1998, the Company had made $1,164,000 in
capital contributions. In 1998 the Company sold to Medam $1,202,000 of
proprietary equipment and earned technology license fees of $1,060,000. The
Company's investment in Medam is accounted for under the equity method and is
included in other non-current assets in the Consolidated Balance Sheets. The
Company's share of the results of operations of Medam in 1998 was not material.
NOTE 13--LEGAL 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.
NOTE 14--SUBSEQUENT EVENTS
In the first quarter of 1999, the Company completed six acquisitions.
In January 1999, the Company purchased the customer lists and selected other
assets of Environmental Transloading Services, Inc., in Los Angeles, California,
and Medical Resources Corporation, in Farmington, New Mexico. In February 1999,
the Company purchased the customer lists and selected other assets of Medical
Resource Recycling Systems, Inc., in Spokane, Washington, Southwest Medecol,
L.C., in Amarillo, Texas, and Medical Express & General Courier Service, Inc.,
in Pittsburgh, Pennsylvania. In March 1999, the Company purchased the customer
list and selected other assets of Enviro-Tech Disposal, a division of Lancaster
General Service Business Trust, in Lancaster, Pennsylvania.
The aggregate purchase price for these six acquisitions was
approximately $3,825,000 (exclusive of liabilities assumed in two cases), of
which approximately $2,550,000 was paid in cash, approximately $1,200,000 was
paid (or will be paid) by the issuance of 59,157 unregistered shares of the
Company's common stock, and $75,000 was paid by a seven-month interest-free
note. In addition, the Company assumed certain liabilities of two of the sellers
in the aggregate amount of approximately $130,000. In the case of three of the
acquisitions, the purchase price is subject to a downwards adjustment if
revenues from the customer contracts acquired do not reach certain specified
levels.
<PAGE>
NOTE 15--PRODUCTS AND SERVICES AND GEOGRAPHIC INFORMATION
Summary revenue information for the Company's products and services is
as follows:
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Medical waste management services............................ $ 24,542 $ 46,166 $ 59,669
Proprietary equipment sales.................................. -- -- 5,952
Technology license........................................... -- -- 1,060
------------ -------------- --------------
Total........................................................ $ 24,542 $ 46,166 $ 66,681
============ ============== ==============
</TABLE>
Summary financial information by geographic area is as follows:
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
United States............................................. $ 24,542 $ 46,166 $ 59,206
Canada.................................................... -- -- 463
Other foreign countries................................... -- -- 7,012
------------ -------------- --------------
Total .................................................... $ 24,542 $ 46,166 $ 66,681
============ ============== ==============
Long-lived assets:
United States............................................. $ 44,074 $ 66,853
Canada.................................................... -- 9,092
Other foreign countries................................... -- --
-------------- --------------
Total .................................................... $ 44,074 $ 75,945
============== ==============
</TABLE>
Revenues are attributed to countries based on the location of
customers. In 1998, the Company provided medical waste management services to
customers in Canada and licensed and sold proprietary equipment to a Brazilian
company and to a joint venture in Mexico. Additionally, no individual customer
represents more than 10% of the Company's revenues.
NOTE 16--BROWNING FERRIS ACQUISITION AND FINANCING
On November 12, 1999, the Company issued $125 million aggregate
principal amount of Senior Subordinated Notes (the Notes) due November 15, 2009.
The Notes bear interest at 12.375% per annum, payable semi-annually in arrears
on November 15 and May 15, commencing May 15, 2000. Payments under the Notes are
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis by all of the Company's wholly-owned domestic subsidiaries, which include
Environmental Control Company, Inc., acquired in May 1997, Waste Systems, Inc.,
acquired October 1, 1998, Med-Tech Environmental, Inc., acquired December 31,
1998, and certain other subsidiaries which have insignificant assets and
operations (collectively, the Guarantors). Simultaneously with the issuance, the
Company entered into a credit agreement (the New Credit Facility) with DLJ
Capital Funding, Inc., Bank of America, N.A., and Bankers Trust Company, which
will provide an aggregate facility of $275 million, consisting of a six-year
revolving line of credit of $50 million, a six-year term loan A in the principal
amount of $75 million, and a seven-year term loan B in the principal amount of
$150 million. Also simultaneous with the issuance, the Company issued for $75
million a new class of convertible preferred stock to investment funds
affiliated with Bain Capital, Inc. and Madison Dearborn Partners, Inc.
On April 14, 1999, the Company entered into agreements with Allied
Waste Industries, Inc. (Allied) to purchase all of the medical waste operations
of Allied and Browning-Ferris Industries, Inc. in the United States, Canada, and
Puerto Rico for $410.5 million in cash, subject to post-closing adjustment.
These transactions closed on November 12, 1999.
<PAGE>
Financial information concerning the Guarantors as of and for the year
ended December 31, 1998 is presented below for purposes of complying with the
reporting requirements of the Guarantors. The financial information concerning
the Guarantors is being presented through condensed consolidating financial
statements since the guarantees are full and unconditional and are joint and
several. Guarantor financial statements have not been presented because
management does not believe that such financial statements are material to
investors.
<TABLE>
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
<CAPTION>
NON-
GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 1,590 $ 173 $ (480) $ - $ 1,283
Other current assets.......... 13,339 10,139 8,657 (11,608) 20,527
--------------------------------------------------------------------------------
Total current assets............. 14,929 10,312 8,177 (11,608) 21,810
Property, plant and equipment, net
11,569 788 10,727 16 23,100
Goodwill, net.................... 29,065 14,246 6,016 (215) 49,112
Investment in subsidiaries....... 25,976 2,588 - (28,564) -
Other assets..................... 3,559 5 174 (5) 3,733
================================================================================
Total assets..................... $85,098 $27,939 $25,094 $(40,376) $97,755
================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term debt $ 2,937 $ 99 $ 2,463 $ - $ 5,499
Other current liabilities..... 7,255 925 18,395 (11,430) 15,145
--------------------------------------------------------------------------------
Total current liabilities........ 10,192 1,024 20,858 (11,430) 20,644
Long-term debt, net of current
portion....................... 20,997 - 2,463 - 23,460
Shareholders' equity............. 53,909 26,915 1,773 (28,946) 53,651
================================================================================
Total liabilities and shareholders'
equity........................ $85,098 $27,939 $25,094 $(40,376) $97,755
================================================================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<CAPTION>
NON-
GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues......................... $52,357 $9,598 $4,726 $ - $66,681
Cost of revenues................. 35,194 6,334 3,800 - 45,328
Selling, general, and
administrative expense........ 12,789 1,408 732 - 14,929
--------------------------------------------------------------------------------
Total costs and expenses......... 47,983 7,742 4,532 - 60,257
--------------------------------------------------------------------------------
Income from operations........... 4,374 1,856 194 - 6,424
Equity in net income (loss) of
subsidiaries.................. 2,081 (106) - (1,975) -
Other income (expense), net...... (244) 144 37 - (63)
--------------------------------------------------------------------------------
Income before income taxes....... 6,211 1,894 231 (1,975) 6,361
Income tax expense............... 498 150 - - 648
================================================================================
Net income....................... $ 5,713 $ 1,744 $ 231 $(1,975) $ 5,713
================================================================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<CAPTION>
NON-
GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities........ $ 3,749 $ 278 $ 835 $ - $ 4,862
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.......... (3,629) (271) (442) - (4,342)
Payments for acquisitions, net
of cash acquired............ (19,775) - - - (19,775)
Purchases of short-term
investments................. (41) - - - (41)
Proceeds from sale of property 395 10 - - 405
--------------------------------------------------------------------------------
Net cash used in investing
activities.................... (23,050) (261) (442) (1,894) (23,753)
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from bank lines of
credit...................... 16,589 - (203) - 16,386
Repayment of long term debt... (2,513) (6) (670) - (3,189)
Principal payments on capital
lease obligations........... (1,273) - - - (1,273)
Proceeds from subordinated notes
2,750 - - - 2,750
Payment of deferred financing
costs....................... (218) - - - (218)
Proceeds from issuance of common
stock....................... 344 - - - 344
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities.......... 15,679 (6) (873) - 14,800
--------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents.............. $ (3,622) $ 11 $ (480) $ - (4,091)
================================================================
Cash and cash equivalents at
beginning of year............. 5,374
-----------------
Cash and cash equivalents at end of
year.......................... $ 1,283
=================
</TABLE>
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
SEPTEMBER 30, 1999
------------------
(UNAUDITED)
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents..................................................................... $ 16,017
Short-term investments........................................................................ 1,583
Accounts receivable, less allowance for doubtful accounts of $743............................. 18,553
Other receivable.............................................................................. 1,679
Parts and supplies............................................................................ 1,003
Prepaid expenses.............................................................................. 808
Other ...................................................................................... 1,587
--------------
Total current assets....................................................................... 41,230
-------------
Property, plant and equipment:
Land ...................................................................................... 725
Buildings and improvements.................................................................... 11,066
Machinery and equipment....................................................................... 20,964
Office equipment and furniture................................................................ 1,644
Construction in progress...................................................................... 901
-------------
35,300
Less accumulated depreciation.................................................................... (12,865)
-------------
Property, plant and equipment net............................................................. 22,435
-------------
Other assets:
Goodwill, less accumulated amortization of $5,461............................................. 59,524
Other ...................................................................................... 5,539
--------------
Total other assets......................................................................... 65,063
-------------
Total assets............................................................................. $ 128,728
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt............................................................. $ 1,900
Accounts payable.............................................................................. 4,747
Accrued liabilities........................................................................... 6,213
Deferred revenue.............................................................................. 178
-------------
Total current liabilities.................................................................. 13,038
-------------
Long-term debt, net of current portion........................................................... 3,878
Shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares authorized,
14,713,398 issued and outstanding)......................................................... 147
Additional paid-in capital.................................................................... 136,148
Accumulated deficit........................................................................... (24,483)
-------------
Total shareholders' equity................................................................. 111,812
-------------
Total liabilities and shareholders' equity............................................... $ 128,728
=============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1999
---- ----
<S> <C> <C>
Revenues ..................................................................... $ 44,759 $ 74,285
Costs and expenses:
Cost of revenues............................................................ 30,492 48,998
Selling, general and administrative expenses................................ 10,151 15,541
---------------- ----------------
Total costs and expenses................................................. 40,643 64,539
---------------- ----------------
Income from operations......................................................... 4,116 9,746
Other income (expense):
Interest income............................................................. 308 576
Interest expense............................................................ (242) (689)
Other income................................................................ 20 404
---------------- ----------------
Total other income (expense)............................................. 86 291
---------------- ----------------
Income before income taxes..................................................... $ 4,202 $ 10,037
Income tax expense............................................................. 781 2,168
---------------- ----------------
Net income..................................................................... $ 3,421 $ 7,869
================ ================
Earnings per share--Basic....................................................... $ 0.32 $ 0.56
================ ================
Earnings per share--Diluted..................................................... $ 0.30 $ 0.54
================ ================
Weighted average number of common shares outstanding--Basic..................... 10,579,886 14,073,309
Weighted average number of common shares outstanding--Diluted................... 11,233,812 14,471,191
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income.............................................................................. $ 3,421 $ 7,869
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................................................ 2,694 5,316
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable.................................................................. (541) (1,864)
Parts and supplies................................................................... (365) 438
Prepaid expenses..................................................................... (88) 475
Other assets......................................................................... (1,632) (2,393)
Accounts payable..................................................................... 59 (1,755)
Accrued liabilities.................................................................. (2,179) (252)
Deferred revenue..................................................................... (23) (2,000)
----------- ----------
Net cash provided by operating activities............................................... 1,346 5,834
----------- ----------
INVESTING ACTIVITIES:
Payments for acquisitions and international investments,
net of cash acquired.............................................................. (7,130) (11,667)
Proceeds from maturity of short-term investments..................................... -- 460
Purchases of short term investments.................................................. -- (1,500)
Capital expenditures................................................................. (1,825) (2,367)
----------- ----------
Net cash used in investing activities................................................... (8,955) (15,074)
----------- ----------
FINANCING ACTIVITIES:
Net proceeds (payments) on line of credit............................................ 4,075 (16,359)
Proceeds from subordinated debt...................................................... -- 2,750
Repayment of subordinated debt....................................................... -- (5,500)
Repayment of long term debt.......................................................... (1,244) (4,022)
Payments of deferred financing costs................................................. -- (40)
Principal payments on capital lease obligations...................................... (116) (154)
Net proceeds from secondary public offering.......................................... -- 47,158
Proceeds from issuance of common stock............................................... 295 141
----------- ----------
Net cash provided by financing activities............................................... 3,010 23,974
----------- ----------
Net (decrease) increase in cash and cash equivalents.................................... (4,599) 14,734
Cash and cash equivalents at beginning of period........................................ 5,374 1,283
----------- ----------
Cash and cash equivalents at end of period.............................................. $ 775 $ 16,017
=========== ==========
Non-cash activities:
Net issuances of common stock for certain acquisitions
and international investments..................................................... $ 1,807 $ 2,993
Net issuances of notes payable for certain acquisitions.............................. $ 195 $ 103
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations; but the Company believes the disclosures in the
accompanying condensed consolidated financial statements are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments necessary for a fair presentation for the periods presented have
been reflected and are of a normal recurring nature. These condensed
consolidated financial statements should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto for the three
years ended December 31, 1998, included herein. The results of operations for
the nine-month period ended September 30, 1999 are not necessarily indicative of
the results that may be achieved for the entire year ending December 31, 1999.
2. ACQUISITIONS
During the nine months ended September 30, 1999, the Company purchased
the customer lists and selected other assets 13 medical waste management
businesses. The aggregate purchase price for these acquisitions was
approximately $7,767,000, of which $6,091,000 was paid in cash, $1,572,000 was
paid by the issuance of unregistered shares of the Company's common stock, and
$103,000 was paid by the issuance of promissory notes. In addition, the Company
assumed certain liabilities of the sellers aggregating approximately $105,000.
In certain cases, the purchase price is subject to downwards adjustment if
revenues from customer contracts acquired do not reach certain specified levels.
On September 30, 1999, the Company purchased an additional 18.45%
ownership in its Mexican joint venture from Pennoni, Inc., increasing its
ownership percentage to 49%. The purchase price was immaterial and was paid by
the issuance of common stock.
3. STOCK OPTIONS
During the nine months ended September 30, 1999, options to purchase
common stock totaling 803,323 shares were granted to key employees. These
options will vest ratably over a five year period and have an exercise prices
ranging from $12.563 to 13.625 per share. The grant of options was made under
the Company's 1997 Stock Option Plan, which authorized the grant of options for
a total of 1,500,000 shares of the Company's common stock. The 1997 Stock Option
Plan was approved by the Company's stockholders in April 1997.
4. STOCK ISSUANCES
During the nine months ended September 30, 1999, options to purchase
130,826 shares of common stock were exercised at prices ranging from
$.53-$13.625 per share. The Company also issued 216,710 shares of common stock
in connection with certain acquisitions and international investments made
during the nine months ended September 30, 1999. In February 1999 the Company
issued 3,500,000 shares of common stock at a price to the public of $14.50 per
share in a public offering.
5. INCOME TAXES
Prior to 1997, the Company had generated net operating losses for
income tax purposes. Any benefit resulting from these net operating losses has
been offset by a valuation allowance. Annual utilization of the Company's net
operating loss carryforward is limited by Internal Revenue Code Section 382. The
Company's income tax expense reflects federal taxable income expected in excess
of the Section 382 limitation and income taxes in states where the Company has
no offsetting net operating losses.
<PAGE>
6. SUBSEQUENT EVENTS
On November 12, 1999, the Company completed its pending acquisition
from Allied Waste Industries, Inc. (Allied) of the medical waste businesses of
both Allied and Browning-Ferris Industries, Inc. (BFI) which Allied acquired in
July 1999.
The purchase price for the Company's acquisition of BFI's medical waste
business was $410.5 million in cash. The Company paid the purchase price from
the following sources, in addition to cash on hand: (i) $225.0 million in
borrowings under the term loan facilities of a new senior credit facility that
the Company established with DLJ Capital Funding, Inc., Bank of America, N.A.
and Bankers Trust Company; (ii) $125.0 million in proceeds from the sale of
12.375 senior subordinated notes due 2009; and (iii) $75.0 in proceeds from the
issuance of new convertible preferred stock to investment funds affiliated with
Bain Capital, Inc. and Madison Dearborn Partners, Inc. These transactions were
completed concurrently with completion of the Company's acquisition.
The convertible preferred stock issued to the Bain and Madison Dearborn
funds accrues dividends at the rate of 3.375% per annum, payable in additional
shares of convertible preferred stock, and are convertible into common stock
based on the liquidation preference of the convertible preferred stock at a
conversion price of $17.50 per share. Such stock also has voting rights on an
as-if-converted basis, with special class voting rights on certain matters, and
possesses certain demand and piggyback registration rights. The convertible
preferred stock has a liquidation preference over the Company's common stock in
an amount equal to the purchase price of the convertible preferred stock plus
accumulated and accrued dividends. Pursuant to an agreement with Bain and
Madison Dearborn, the Company increased the size of its board of directors from
seven to nine members, and in November 1999, the Bain and Madison Dearborn funds
designated John P. Connaughton and Thomas R. Reusche to serve as directors of
the Company.
7. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Payments under the Company's senior subordinated notes (the Notes) are
unconditionally guaranteed, jointly and severally, by all of the Company's
wholly-owned domestic subsidiaries, which include Environmental Control Company,
Inc., acquired in May 1997, Waste Systems, Inc., acquired October 1, 1998, and
Med-Tech Environmental, Inc., acquired December 31, 1998 and certain other
subsidiaries which have insignificant assets and operations (collectively, the
Guarantors). Financial information concerning the Guarantors as of and for the
nine month period ended September 30, 1999 is presented below for purposes of
complying with the reporting requirements of the Guarantors. The financial
information concerning the Guarantors is being presented through condensed
consolidating financial statements since the guarantees are full and
unconditional and are joint and several. Guarantor financial statements have not
been presented because management does not believe that such financial
statements are material to investors.
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1999
<CAPTION>
NON-
GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 15,086 $ 393 $ 435 $ 103 $ 16,017
Other current assets.......... 16,519 12,193 10,164 (13,663) 25,213
--------------------------------------------------------------------------------
Total current assets............. 31,605 12,586 10,599 (13,560) 41,230
Property, plant and equipment, net
11,959 652 9,824 - 22,435
Goodwill, net.................... 38,494 13,982 6,964 84 59,524
Investment in subsidiaries....... 30,942 3,320 - (34,262) -
Other assets..................... 6,847 (194) 13 (1,127) 5,539
================================================================================
Total assets..................... $119,847 $30,346 $27,400 $(48,865) $128,728
================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term debt $ 317 $ 81 $ 1,502 $ - $ 1,900
Other current liabilities..... 4,435 692 20,279 (14,268) 11,138
--------------------------------------------------------------------------------
Total current liabilities........ 4,752 773 21,781 (14,268) 13,038
Long-term debt, net of current
portion....................... 3,178 - 700 - 3,878
Shareholders' equity............. 111,917 29,573 4,919 (34,597) 111,812
================================================================================
Total liabilities and shareholders'
equity........................ $119,847 $30,346 $27,400 $(48,865) $128,728
================================================================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
<CAPTION>
NON-
GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues......................... $47,945 $9,135 $17,569 $(364) $74,285
Cost of revenues................. 29,904 5,820 13,638 (364) 48,998
Selling, general, and
administrative expense........ 10,772 1,758 3,011 - 15,541
--------------------------------------------------------------------------------
Total costs and expenses......... 40,676 7,578 16,649 (364) 64,539
--------------------------------------------------------------------------------
Income from operations........... 7,269 1,557 920 - 9,746
Equity in net income of subsidiaries
2,608 732 - (3,340) -
Other income (expense), net...... 53 431 (193) - 291
--------------------------------------------------------------------------------
Income before income taxes....... 9,930 2,720 727 (3,340) 10,037
Income tax expense............... 2,061 107 - - 2,168
================================================================================
Net income....................... $ 7,869 $2,613 $ 727 $(3,340) $ 7,869
================================================================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<CAPTION>
NON-
GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities........ $(895) $238 $6,409 $ 82 $5,834
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.......... (2,254) - (129) 16 (2,367)
Payments for acquisitions, net
of cash acquired............ (11,667) - - - (11,667)
Proceeds from sale of short-term
investments................. 460 - - - 460
Purchases of short-term
investments................. - - (1,500) - (1,500)
--------------------------------------------------------------------------------
Net cash used in investing
activities.................... (13,461) - (1,629) 16 (15,074)
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net payments on bank lines of
credit...................... (16,359) - - - (16,359)
Repayment of long term debt... (262) - (3,760) - (4,022)
Principal payments on capital
lease obligations........... (36) (18) (100) - (154)
Proceeds from subordinated notes
2,750 - - - 2,750
Payments on subordinated notes
(5,500) - - - (5,500)
Payment of deferred financing
costs....................... (40) - - - (40)
Net proceeds from secondary
public offering............. 47,158 - - - 47,158
Proceeds from issuance of common
stock....................... 141 - (5) 5 141
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities.......... 27,852 (18) (3,865) 5 23,974
--------------------------------------------------------------------------------
Net increase in cash and cash
equivalents................... 13,496 220 915 103 14,734
================================================================
Cash and cash equivalents at
beginning of year............. 1,283
-----------------
Cash and cash equivalents at end of
year.......................... $ 16,017
=================
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Stericycle, Inc.:
We have audited the accompanying statements of directly identifiable
assets and liabilities of the Medical Waste Business of Browning-Ferris
Industries, Inc., a Delaware corporation ("BFI Medical Waste" as described in
Note 1), as of September 30, 1998 and 1997, and the related statements of
revenues and direct expenses of BFI Medical Waste for each of the three years in
the period ended September 30, 1998. These financial statements are the
responsibility of management of BFI Medical Waste. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 3, and are not intended to be a complete
presentation of BFI Medical Waste's financial position as of September 30, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1998.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the directly identifiable assets and
liabilities of BFI Medical Waste as of September 30, 1998 and 1997, and its
revenues and direct expenses for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 30, 1999
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
<TABLE>
STATEMENTS OF DIRECTLY IDENTIFIABLE ASSETS AND LIABILITIES
AS OF SEPTEMBER 30, 1997 AND 1998 AND JUNE 30, 1999
IN THOUSANDS)
<CAPTION>
AS OF
AS OF SEPTEMBER 30, JUNE 30,
------------------- --------
1997 1998 1999
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
DIRECTLY IDENTIFIABLE ASSETS:
Accounts Receivable, net of Allowance for
Doubtful Accounts of $840, $904, and
$1,040 as of September 30, 1997 and
1998 and June 30, 1999................................ $ 15,356 $ 16,300 $ 16,552
Parts and Supplies....................................... 1,456 1,435 1,393
Prepaid Expenses......................................... 317 181 207
--------------- ------------- --------------
Total Current Assets............................... 17,129 17,916 18,152
--------------- ------------- --------------
Property, Plant and Equipment
Land.................................................. 3,014 2,951 3,308
Buildings and Improvements............................ 34,108 36,181 37,134
Machinery and Equipment............................... 104,771 102,972 105,744
Office Furniture and Equipment........................ 2,139 1,878 2,228
Construction in Progress.............................. -- 141 204
--------------- ------------- --------------
144,032 144,123 148,618
Accumulated Depreciation.............................. (81,367) (83,999) (88,070)
--------------- ------------- --------------
Property, Plant and Equipment, net.................... 62,665 60,124 60,548
Intangibles, net of Accumulated Amortization
of $20,064, $22,781 and $24,988 as
of September 30, 1997 and 1998 and
June 30, 1999......................................... 49,709 47,592 56,161
--------------- ------------- --------------
Total Directly Identifiable Assets....................... $ 129,503 $ 125,632 $ 134,861
DIRECTLY IDENTIFIABLE LIABILITIES:
Compensation Accruals.................................... $ 1,875 $ 2,168 $ 1,969
Other Accrued Liabilities................................ 1,752 259 1,229
Current Portion of Capital Lease Obligation.............. 370 669 970
--------------- ------------- --------------
Total Current Liabilities.......................... 3,997 3,096 4,168
--------------- ------------- --------------
Capital Lease Obligation, net of
current portion....................................... 1,396 2,346 4,162
Other Long-Term Liabilities.............................. 2,391 2,223 938
--------------- ------------- --------------
Total Long-Term Liabilities........................... 3,787 4,569 5,100
--------------- ------------- --------------
Total Directly Identifiable Liabilities............ 7,784 7,665 9,268
--------------- ------------- --------------
Total Directly Identifiable Assets in
Excess of Directly Identifiable Liabilities........... $ 121,719 $ 117,967 $ 125,593
=============== ============= ==============
The accompanying notes are an integral part of these Financial Statements.
</TABLE>
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
<TABLE>
STATEMENTS OF REVENUES AND DIRECT EXPENSES
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND
1998 AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------ --------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................... $ 199,886 $ 199,060 $ 198,222 $ 148,837 $ 152,266
Cost of Revenues:
Direct Operating Costs........ 123,801 124,156 121,096 90,460 91,568
Depreciation.................. 16,681 13,844 11,533 8,946 8,263
----------- ----------- ------------- -------------- -------------
Total Cost of Revenues.. 140,482 138,000 132,629 99,406 99,831
Other Expenses:
Selling, General and
Administrative.............. 19,051 17,465 9,834 6,358 6,077
Depreciation and
Amortization................ 3,417 3,483 3,439 2,579 2,747
Special Charge (Credit)....... 9,236 4,500 257 257 (469)
----------- ----------- ------------- -------------- -------------
Total Other Expenses.... 31,704 25,448 13,530 9,194 8,355
----------- ----------- ------------- -------------- -------------
Revenues in excess of
Direct Expenses............. $ 27,700 $ 35,612 $ 52,063 $ 40,237 $ 44,080
The accompanying notes are an integral part of these Financial Statements.
</TABLE>
<PAGE>
BROWNING-FERRIS INDUSTRIES, INC.
MEDICAL WASTE BUSINESS
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
The accompanying financial statements include certain assets and
liabilities and revenues and direct expenses of the Medical Waste Business of
Browning-Ferris Industries, Inc. ("BFI Medical Waste"). For the periods
presented herein, BFI Medical Waste is a service line of Browning-Ferris
Industries, Inc. ("BFI"), a Delaware corporation. BFI Medical Waste provides
medical waste collection, transportation, treatment, and disposal services to
hospitals, healthcare providers and other small account customers in the United
States, Canada, and Puerto Rico.
2. DESCRIPTION OF ACQUISITION
On April 14, 1999, Stericycle entered into purchase agreements with
Allied Waste Industries, Inc. ("Allied"), pursuant to which Stericycle will
acquire all of the medical waste operations of BFI in the United States, Canada,
and Puerto Rico. The purchase price for these operations is $410.5 million in
cash, subject to post-closing adjustment. As of July 30, 1999, concurrent with
Allied's acquisition of BFI, BFI Medical Waste became a wholly-owned subsidiary
of Allied.
Under Stericycle's purchase agreements with Allied, Allied will cause
BFI to transfer all of the assets, as defined in the agreements, used by BFI in
its United States, Canada and Puerto Rico medical waste operations, which are
currently held and operated with a variety of other BFI operations by many
different BFI subsidiaries, to one or more newly-formed wholly-owned
subsidiaries. At closing, Allied will sell all of the stock of these
newly-formed subsidiaries to Stericycle for $410.5 million in cash, subject to
closing adjustments as provided for in the purchase agreements. The purchase
agreements are subject to a number of conditions including Stericycle obtaining
the necessary financing to fund the acquisition and the U.S. Department of
Justice ("DOJ") approval among other items. The purchase agreements also contain
clauses regarding shared assets, employee benefits, transition services and
assumed liabilities, among other items.
3. BASIS OF PRESENTATION
BFI's operating organization is aligned along functional lines into
five groups: sales and marketing, collection, post-collection, business
development and business analysis. As a result of this and other factors, BFI
does not maintain separate books and records for its medical waste operations
other than service line revenues and direct operating costs. The basis upon
which these financial statements have been prepared is described further below
and in Note 4. As a result, the accompanying financial statements are not
intended to be a complete presentation of the assets and liabilities and results
of operations and cash flows of BFI Medical Waste. Rather, these financial
statements were prepared for the purpose of complying with rules and regulations
of the Securities and Exchange Commission, which indicate that certain financial
statements are required for BFI Medical Waste. All significant transactions
among BFI Medical Waste units have been eliminated. Significant transactions
with other BFI business units are disclosed in Note 9.
STATEMENTS OF DIRECTLY IDENTIFIABLE ASSETS AND LIABILITIES OF BFI MEDICAL WASTE
Service line balance sheet information is not prepared by BFI. However,
certain assets and liabilities, which are specific to the medical waste
operations, are directly identifiable. Assets and liabilities included in the
accompanying financial statements of BFI Medical Waste include accounts
receivable, parts and supplies, prepaid expenses, property, plant and equipment,
intangibles, compensation accruals and other accruals specifically related to
and identified with BFI Medical Waste.
All treasury related activities including cash payments, receipts, and
borrowings are performed by BFI's corporate headquarters and are not separately
directly identifiable with BFI Medical Waste. BFI does not separately identify
intercompany loans receivable or payable associated with different service
lines. Accordingly, all treasury related assets and liabilities (cash and debt
<PAGE>
and the related interest income and expense) and intercompany loans receivable
and payable have been excluded from these financial statements.
Accounts receivable presented in the financial statements include only
those accounts receivable attributable to medical waste operations which are
identified separately from other BFI operations. Accounts receivable, other
assets, accounts payable and accrued liabilities, that are not directly
identifiable to the individual service lines due to the fact that they are
managed and accounted for on a consolidated basis, have not been included in
these financial statements.
Property, plant and equipment included in the accompanying financial
statements include all assets and related accumulated depreciation that are
specific to BFI Medical Waste. Excluded from the BFI Medical Waste specific
assets are shared operating facilities and administrative offices.
STATEMENTS OF REVENUES AND DIRECT EXPENSES OF BFI MEDICAL WASTE
Revenues and direct cost of revenues for BFI's medical waste service
line are separately accounted for within BFI's accounting systems. Cost of
revenues (including certain allocations) include costs of vehicle drivers and
related benefit costs, vehicle operating expenses, processing operations,
disposal costs, containers, supplies and certain occupancy costs. Cost of
revenues also include an allocation for costs of shared facilities and employees
that can be attributed to BFI Medical Waste. This allocation is generally based
on square footage and number of employees attributable to BFI Medical Waste at
these shared facilities.
Direct selling, general and administrative expenses and special charges
(credits) include only those costs which are incurred solely for the medical
waste operations and are separately identified as such in BFI's accounting
records. These costs include payroll costs for sales and administrative
employees whose function is to solely support the medical waste business and
general and administrative costs of medical waste only facilities. In connection
with the installation of new computer systems in January 1998, certain selling,
general and administrative costs previously identifiable directly to medical
waste operations through December 1997 were no longer accounted for in this
manner. Beginning in January 1998, these costs were pooled with similar costs
related to BFI's other business operations by marketplace so that only the
selling, general and administrative costs related to medical waste-only
geographic locations could be specifically identified and charged to medical
waste in fiscal year 1998 and subsequent financial statements.
Significant additional costs related to selling, general and
administrative ("SG&A") efforts are performed by BFI on a corporate and shared
service basis. Such costs have been excluded from the statements of revenues and
direct expenses of BFI Medical Waste because an allocation of these costs in
accordance with Staff Accounting Bulletin No. 55 ("SAB No. 55") could not be
obtained for the years ended September 30, 1996 and 1997. Accordingly, as
discussed above, the accompanying financial statements are not intended to be a
complete presentation of the assets and liabilities and results of operations of
BFI Medical Waste. This allocation could not be obtained due to the fact that
information flow at BFI was re-engineered which resulted in the consolidation of
several hundred administrative locations into 26 administrative locations. In
addition, many of the employees needed to assist in the preparation of the
allocation of shared service expenses for 1996 and 1997 are no longer employed
by BFI. However, an allocation of corporate and shared service expense was
prepared for the year ended September 30, 1998 and for the nine months in the
periods ended June 30, 1998 and 1999, respectively. The allocation of BFI
corporate and shared services historical costs were determined in accordance
with Staff Accounting Bulletin No. 55 ("SAB No. 55"). These costs were allocated
by BFI to BFI Medical Waste based on various formulas which reasonably
approximate the actual costs incurred.
<PAGE>
The incremental increases in expenses recorded by BFI Medical Waste as
a result of these allocations were approximately:
<TABLE>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
------------- --------------
1998 1998 1999
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Approximate incremental increase
in expenses as a result of
allocations in accordance
with SAB No. 55................................ $ 17,090,000 $ 13,861,000 $ 13,298,000
</TABLE>
Depreciated and amortization expense relates to the property, plant and
equipment and intangible assets which are directly related to BFI Medical Waste
and included in the statements of directly identifiable assets and liabilities.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING PRONOUNCEMENT
In April 1998, Statement of Position No. 98-5--"Reporting on the Costs
of Start-Up Activities" ("SOP No. 98-5") was issued by the American Institute of
Certified Public Accountants. The statement requires costs of start-up
activities and organization costs to be expensed as incurred. Initial
application of the statement, which is effective for BFI Medical Waste's fiscal
year 2000, is to be reported as a cumulative effect of a change in accounting
principle. Management of BFI Medical Waste believes that the future adoption of
SOP No. 98-5 will not have a material effect on its results of operations or
financial position.
REVENUE RECOGNITION
For processing activities, BFI Medical Waste recognizes revenue when
the treatment of the regulated medical waste is completed at its facilities or
the waste is shipped off-site for processing and disposal. For waste shipped
off-site, all associated costs are recognized at time of shipment. For
collection activities, BFI Medical Waste recognizes revenue when regulated
medical waste is collected from its customers.
ACCOUNTS RECEIVABLE
The financial statements include only those accounts receivable
directly attributable to the medical waste operations. Accounts receivable at
certain facilities co-located with other BFI operations are not separately
directly identifiable. BFI Medical Waste grants credit to the majority of its
customers on terms of up to 60 days. It is not the policy of BFI Medical Waste
to require collateral from its customers in order to obtain credit. Management
does not believe a significant credit risk exists as of June 30, 1999.
PARTS AND SUPPLIES
Parts and supplies consist of containers and vehicle and processing
facility replacement parts and are carried at the lower of cost ("first in,
first out") or market. The amounts presented in the financial statements reflect
parts and supplies at medical waste only operations. Parts and supplies at
facilities co-located with other BFI operations are not separately directly
identifiable.
PREPAID EXPENSES
Prepaid expenses consist of prepaid licenses, insurance and permits.
The amounts presented in the financial statements reflect prepaid expenses at
medical waste only operations. Prepaid expenses at facilities co-located with
other BFI operations are not separately directly identifiable.
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation
expense, which includes the depreciation of assets recorded under capital
leases, is computed using the straight-line method over the estimated useful
lives (or life of lease if shorter) of the assets as follows:
ASSET DESCRIPTION LIFE
----------------- ----
Buildings and improvements 10 to 30 years
Machinery and equipment 5 to 12 years
Office furniture and equipment 3 to 10 years
Expenditures for major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as incurred.
During fiscal years 1996, 1997 and 1998, maintenance and repairs charged to
expense were $12,822,000, $13,388,000 and $12,745,000, respectively.
When property and equipment is retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operating expenses.
INTANGIBLE ASSETS
Goodwill is amortized using the straight-line method over 40 years.
Amortization expense for 1996, 1997 and 1998 related to goodwill was
approximately $1,171,000, $1,208,000 and $1,207,000, respectively.
Other directly identifiable intangible assets, substantially all of
which are customer lists and covenants not to compete, are amortized on the
straight-line method over their estimated lives, which is no more than seven
years. Amortization expense related to other intangible assets was $1,772,000,
$1,783,000 and $1,510,000 in 1996, 1997 and 1998, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are comprised principally of property and equipment,
goodwill and other intangible assets. BFI Medical Waste periodically evaluates
whether events and circumstances have occurred that indicate the remaining
estimated useful lives of these assets should be revised or the remaining
balances of these assets are not recoverable. When factors indicate that an
evaluation should be performed for possible impairment, BFI Medical Waste uses
an estimate of the future income from operations of the related asset or
business as a measure of future recoverability of these assets.
INCOME TAXES
Each of the different BFI subsidiaries that currently hold and operate
BFI Medical Waste also hold and operate various other operations of BFI.
Accordingly, BFI Medical Waste is not a subsidiary. Therefore, in accordance
with Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes," income taxes are not included in the accompanying financial statements.
NEW PLANT DEVELOPMENT AND PERMITTING COSTS
BFI Medical Waste expenses costs associated with the operation of new
plants prior to the commencement of services to customers. Initial plant permit
costs are capitalized as part of property, plant, and equipment and are
amortized using the straight-line method over their useful lives up to 25 years.
All ongoing permit costs are expensed.
<PAGE>
USE OF ESTIMATES
The preparation of these financial statements required management to
make estimates and assumptions that affected the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
these financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results may differ from those estimates.
5. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited statements of revenues and direct expenses for the nine
months ended June 30, 1998 and 1999, and the unaudited statement of directly
identifiable assets and liabilities as of June 30, 1999, include, in the opinion
of management, all adjustments necessary to present fairly BFI Medical Waste's
directly identifiable assets and liabilities and revenues and direct expenses.
In the opinion of management, all these adjustments are of a normal and
recurring nature. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the fiscal year.
6. SUPPLEMENTARY CASH FLOW INFORMATION
As a service line of BFI, BFI Medical Waste does not maintain separate
cash flow information. Disbursements of BFI Medical Waste for payroll, capital
projects, operating supplies and operating expenses are processed and funded by
BFI through centrally managed accounts. In addition, cash receipts from the
collection of accounts receivable and the sales of assets are remitted directly
to bank accounts controlled by BFI. In this type of centrally managed cash
system in which the cash receipts and disbursements of BFI's various divisions
and service lines are commingled, it is not feasible to segregate cash received
from BFI (e.g., financing for BFI Medical Waste) from cash transmitted to BFI
(e.g., distribution). Accordingly, a statement of cash flows has not been
prepared.
Selected supplemental cash flow information for BFI Medical Waste is as
follows:
<TABLE>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------- --------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Capital Expenditures............. $ 10,794 $ 4,149 $ 6,847 $ 5,790 $ 6,456
Depreciation and
Amortization................... 20,098 17,327 14,972 11,525 11,010
Acquisition of
Businesses..................... 6,023 400 1,000 186 11,927
</TABLE>
7. LEASE COMMITMENTS
BFI Medical Waste leases various plant equipment, office furniture and
equipment, motor vehicles and office and warehouse space under lease agreements
which expire at various dates over the next nine years. The leases for most of
the properties contain renewal provisions.
Rent expense for 1996, 1997 and 1998 was $3,816,000, $3,769,000 and
$3,526,000, respectively.
<PAGE>
Minimum future rental payments under noncancellable leases that have
initial or remaining terms in excess of one year as of September 30, 1998, for
each of the next five years and in the aggregate are as follows:
<TABLE>
CAPITALIZED OPERATING
LEASES LEASES
------ ------
(IN THOUSANDS)
<S> <C> <C>
1999............................................................. $ 994 $ 1,215
2000............................................................. 805 1,179
2001............................................................. 625 1,091
2002............................................................. 460 965
2003............................................................. 370 811
Thereafter....................................................... 514 2,599
--------------- ------------------
Minimum rental payments.......................................... $ 3,768 $ 7,860
Less: Amount representing interest............................... 753 --
--------------- ------------------
Total minimum rental payments.................................... $ 3,015 $ 7,860
=============== ==================
1997 1998
---- ----
(IN THOUSANDS)
Capital lease obligations, primarily trucks,
trailers and other operating equipment, weighted
average interest rate of 6.6% for both 1997 and 1998 due
in varying
amounts through December 2008.................................. $ 2,338 $ 4,088
Capital lease obligations, primarily
office equipment, weighted average interest
rate of 8.06% and 7.05% for 1997 and 1998,
respectively, due in varying amounts
through September 2003......................................... 55 98
Accumulated Amortization......................................... (627) (1,171)
--------------- ------------------
Total capital lease obligations................................ $ 1,766 $ 3,015
=============== ==================
</TABLE>
Leases at co-located facilities that benefit all operations at the
facility are not included in the above tables.
8. EMPLOYEE BENEFIT PLAN
EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN
BFI sponsors an employee stock ownership and savings plan which
incorporates deferred savings features permitted under IRS Code Section 401(k).
The plan covers substantially all U.S. employees (including Medical Waste
employees) with one or more years of service except for certain employees
subject to collective bargaining agreements. Eligible employees may make
voluntary contributions to one or more of six investment funds through payroll
deductions which, in turn, will allow them to defer income for federal income
tax purposes. BFI matches these voluntary contributions at a rate of $0.50 per
$1.00 on the first 5% of total earnings contributed by each participating
employee. BFI matches the voluntary contributions through open market purchases
or issuances of shares of BFI's common stock. BFI expenses its contributions to
the employee stock ownership and savings plan. Included in the statements of
revenues and direct expenses are costs of $570,000, $616,000 and $585,000 for
fiscal years 1996, 1997 and 1998, respectively, related to the employee stock
ownership and savings plan. These contribution amounts were allocated to BFI
Medical Waste based on the percentage of total payroll method. The costs are
included in costs of revenues or selling, general, and administrative expense
based on the percentage of employees included in each expense type.
<PAGE>
EMPLOYEE RETIREMENT PLANS
BFI and its domestic subsidiaries have two defined benefit retirement
plans covering substantially all U.S. employees except for certain employees
subject to collective bargaining agreements. The benefits for these plans are
based on years of service and the employee's compensation. BFI's general funding
policy for these plans is to make annual contributions to the plans equal to or
exceeding the actuary's recommended contribution. During the second quarter of
fiscal 1998, BFI changed its method of accounting for recognition of value
changes in its employee retirement plan for purposes of determining annual
expense under SFAS No. 87--"Employers' Accounting for Pensions," effective
October 1, 1997. The impact of this accounting change decreased pension expense
by $315,000 in 1998. Included in the statements of revenues and direct expenses
are costs (income) of $668,000, $537,000 and $(86,000) for fiscal years 1996,
1997 and 1998, respectively, related to the employee retirement plans. These
amounts were allocated to BFI Medical Waste based on the percentage of total
payroll method. The costs are included in costs of revenues or selling, general,
and administrative expense based on the percentage of employees included in each
expense type. In connection with the Stericycle acquisition of BFI Medical
Waste, the assets and liabilities of these plans remain with BFI.
OTHER POST-RETIREMENT BENEFITS
BFI maintains an unfunded post-retirement benefit plan which provides
for employees participating in its medical plan to receive a monthly benefit
after retirement based on years of service. As permitted under SFAS No.
106--"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
BFI chose to recognize the transition obligation over a 20 year period. The
actuarially-determined accumulated postretirement benefit obligation was
historically amortized over a 20 year period, and the related expense is not
material to the statement of revenues and direct expenses for any period
presented.
During the fourth quarter of fiscal 1998, BFI restricted the
participation in its postretirement benefit plan to employees over the age of 55
with 10 years of experience and individuals already covered by the plan. The BFI
Medical Waste portion of the curtailment gain is $465,000 and was recognized in
income in the fourth quarter of fiscal 1998. In connection with the Stericycle
acquisition of BFI Medical Waste, the assets and liabilities of this plan remain
with BFI.
9. RELATED PARTY TRANSACTIONS
Related-party transactions with BFI not disclosed elsewhere in the
financial statements are as follows:
SHARED SERVICES
BFI Medical Waste shares services of BFI employees for such items as
sales and marketing and certain general and administrative costs including
accounting. The cost of these shared services is not allocated to BFI Medical
Waste.
CORPORATE SERVICES
BFI provides certain support services to BFI Medical Waste including,
but not limited to, legal, accounting, information systems, human resource and
business development and building services. The cost of these corporate services
is not allocated to BFI Medical Waste.
FINANCIAL ACCOMMODATIONS
Letters of credit and performance bonds have been provided by BFI
Medical Waste to customers and various states to support facility closures.
Total letters of credit and performance bonds outstanding for this purpose
aggregated approximately $1,084,000 as of June 30, 1999.
<PAGE>
BFI is a guarantor and is jointly responsible for the various
performance bonds issued on behalf of BFI Medical Waste. The letters of credit
have been issued by BFI's financial institutions which are guaranteed by amounts
on deposit in BFI accounts. WASTE DISPOSAL SERVICES
BFI provides BFI Medical Waste with waste disposal services for its
solid waste. Cost of revenues includes, $6,843,000, $6,355,000 and $5,431,000
for the years ended September 30, 1996, 1997, and 1998, respectively. These
services were provided by BFI to BFI Medical Waste on a basis management
believes is consistent with third parties.
INSURANCE MATTERS
BFI is self-insured for workers' compensation, auto liability and
general and comprehensive liability claims. Under its insurance programs, BFI
generally has self-insured retention limits ranging from $500,000 to $5,000,000
and has obtained fully insured layers of coverage above such self-retention
limits. BFI provides for self-insurance costs based upon estimates provided by a
third-party actuary. The actuary reviews BFI's actual claims activity and
estimates the ultimate exposure related to these aggregate claims.
BFI Medical Waste was allocated approximately $4,996,000, $5,605,000,
and $2,317,000 in the years ended September 30, 1996, 1997, and 1998,
respectively, for insurance costs. Insurance premiums are allocated based on the
percent of BFI Medical Waste revenues to total BFI revenues. Directly
identifiable BFI Medical Waste insurance claims are expensed at the plant level
for amounts up to $100,000 per claim.
10. LEGAL PROCEEDINGS
BFI Medical Waste operates in a highly regulated industry and is
subject to regulatory inquiries or investigations from time to time.
Investigations can be initiated for a variety of reasons.
BFI Medical Waste is involved in various administrative matters or
litigation, including personal injury and other civil actions, as well as other
claims and disputes that could result in additional litigation or other
adversary proceedings.
While the final resolution of any matter may have an impact on the
results of BFI Medical Waste for a particular reporting period, management
believes that the ultimate disposition of these matters will not have a
materially adverse effect upon the results of operations or financial position
of BFI Medical Waste.
On January 23, 1998, BFI was notified by the DOJ that it was the target
of a federal grand jury investigation regarding possible violations of the Clean
Water Act with respect to a BFI Medical Waste facility located in the District
of Columbia. On May 29, 1998, the DOJ and BFI filed a plea agreement styled
United States of America v. Browning-Ferris Inc. in the U.S. District Court for
the District of Columbia. On October 1, 1998, judgment was entered pursuant to
which BFI pled guilty to three violations under the Clean Water Act and agreed
to pay $1,500,000 in fines and make a $100,000 community service contribution.
All requirements of the judgment have been completed. In fiscal 1997 this amount
is included in other accrued liabilities in the statement of directly
identifiable assets and liabilities and as an expense in the statement of
revenues and direct expenses.
In July 1995, BFI Medical Waste acquired the assets of Metro New York
Health Waste Processing, Inc. which included a facility and incinerator in the
Bronx, New York. BFI Medical Waste undertook extensive retrofitting and
improvements to the incinerator and its emissions control equipment to meet the
compliance requirements of the two year permit issued by the New York Department
of Environmental Conservation ("NYDEC"). In July of 1997, BFI Medical Waste
voluntarily suspended operation of the incinerator and did not seek renewal of
its permit. In March of 1999, BFI Medical Waste executed an agreement with NYDEC
to dismantle the incinerator and its emissions control equipment, pay a civil
penalty of $50,000, institute a pilot program for the use of natural gas powered
trucks within six months of the date of the order and establish and fund an
Environmental Benefit Program for projects benefiting the community and the
<PAGE>
environment in the amount of $200,000 to be paid within two years of the date of
the agreement. The agreement also allows BFI Medical Waste on an interim basis
to continue to operate its collection and transfer operation at the same site.
11. SPECIAL CHARGES
Special charges of $9,236,000 were reported in fiscal 1996. The charges
resulted from BFI Medical Waste's decision to divest certain non-core business
assets and close specific facilities. These decisions were reached based on a
review of the non-core business assets and operations which were not expected to
achieve BFI Medical Waste's desired performance objectives. The special charges,
which included asset writedowns of $7,771,000 and related liabilities recorded
for certain contractual arrangements of $1,468,000, do not consider future
expenses associated principally with severance and relocation costs which will
occur as a result of these decisions. The results of operations for these
non-core business assets were not material to BFI Medical Waste's financial
statements. During 1997, BFI Medical Waste divested or closed the majority of
these facilities, with the remaining facilities divested or closed during 1998.
A total of $366,000 and $227,000 of the special charge liabilities were utilized
during 1997 and 1998, respectively.
A special charge of $4,500,000 was reported in fiscal 1997. This charge
related to the closure of an incinerator. Except for the special charge, the
closure of the incinerator did not have a material effect on BFI Medical Waste's
financial statements. Of the special charge, a $952,000 liability was
established for the dismantlement of the incinerator. None of this liability was
utilized during 1998.
A special charge of $257,000 was reported for 1998. This special charge
related to the write-down of an additional non-core business asset. The
aggregate total assets of this charge represented less than 1% of BFI Medical
Waste's total assets on a pre-special charge basis.
12. BUSINESS COMBINATIONS
During the fiscal year ended September 30, 1998, BFI Medical Waste paid
approximately $1,000,000 to acquire three medical waste businesses, which were
accounted for as purchases. During the fiscal years ended September 30, 1997 and
September 30, 1996, BFI Medical Waste paid approximately $400,000 and
$6,023,000, respectively, to acquire medical waste businesses, which were
accounted for as purchases. The results of these business combinations are not
material to the operating results or assets and liabilities of BFI Medical
Waste.
13. SUBSEQUENT EVENTS--BUSINESS COMBINATIONS (UNAUDITED)
In April 1999, BFI Medical Waste acquired, as a result of an asset swap
transaction between BFI and Allied Waste Industries, Inc., all of the assets of
Medical Disposal Services for cash and other consideration of approximately
$7,123,000 and certain contingent payment obligations. The acquisition was
accounted for as a purchase, with the excess of the purchase price over the fair
market value of net assets acquired being allocated to goodwill in the amount of
approximately $5,843,000. The goodwill is being amortized over its estimated
useful life of 40 years.
In November 1998, BFI Medical Waste acquired all of the assets of
Safety Medical Systems of Burlington, Vermont for cash of approximately
$2,860,000. The acquisition was accounted for as a purchase, with the excess of
the purchase price over the fair market value of the net assets acquired being
allocated to goodwill in the amount of approximately $2,254,000. The goodwill is
being amortized over its estimated useful life of 40 years.
During the nine months ended June 30, 1999, BFI Medical Waste also paid
approximately $1,944,000 to acquire four other medical waste businesses, which
were accounted for as purchases. The results of all of these business
combinations are not material to the operating results or assets and liabilities
of BFI Medical Waste.
<PAGE>
- ---------------------------------------------- --------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER,
SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS
PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU
MUST NOT RELY ON UNAUTHORIZED INFORMATION.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES OR OUR SOLICITATION OF YOUR OFFER
TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALES MADE HEREUNDER AFTER THE DATE OF [LOGO OF STERICYCLE, INC.]
THIS PROSPECTUS SHALL CREATE AN IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN OR THE
AFFAIRS HAVE NOT CHANGED SINCE THE DATE STERICYCLE, INC.
HEREOF.
---------------
TABLE OF CONTENTS
Page OFFER TO EXCHANGE
Summary...................................... 1
Risk Factors................................. 9 ALL OUTSTANDING
Special Note Regarding Forward- 12 3/8% SERIES A SENIOR
Looking Statements........................ 20 SUBORDINATED NOTES DUE 2009
The Exchange Offer........................... 21 FOR
The BFI Acquisition.......................... 29 12 3/8% SERIES B SENIOR
Capitalization............................... 30 SUBORDINATED NOTES DUE 2009
Unaudited Pro Forma Condensed Combined
Financial Statements of Stericycle and the
BFI Medical Waste Business.................. 31
Selected Consolidated Financial and
Other Data................................ 40
Management's Discussion and Analysis
of Financial Condition and Results of ---------------------
Operations................................ 42 PROSPECTUS
Business..................................... 52 ---------------------
Management................................... 70
Executive Compensation....................... 73
Principal Stockholders....................... 77
Certain Transactions......................... 80
Description of Other Indebtedness............ 81
Description of Notes......................... 84
Description of Capital Stock................. 127
Federal Income Tax Considerations............ 130
Plan of Distribution......................... 134
Legal Matters................................ 134
Independent Public Accountants............... 134
Index to Financial Statements................ F-1
DECEMBER 16, 1999
- ---------------------------------------------- --------------------------------
