e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2005
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from
to
|
Commission File
Number 0-21229
Stericycle, Inc.
(Exact name of Registrant as
Specified in its Charter)
|
|
|
Delaware
|
|
36-3640402
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification Number)
|
28161 North Keith Drive
Lake Forest, Illinois 60045
(Address of Principal Executive
Offices including Zip Code)
(847) 367-5910
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value
(title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K,
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
The aggregate market value of voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which common equity was last sold as of the last business day
of the registrants most recently completed second fiscal
quarter (June 30, 2005) was: $2,147,249,555.
On February 27, 2006, there were 44,002,862 shares of
the Registrants Common Stock outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Information required by Items 10, 11, 12 and 13 of
Part III of this Report is incorporated by reference from
the Registrants definitive Proxy Statement for the 2006
Annual Meeting of Stockholders to be held on May 3, 2006.
Stericycle,
Inc.
2005
ANNUAL REPORT ON
FORM 10-K
INDEX
1
PART I
Unless the context requires otherwise, we,
us or our refers to Stericycle, Inc. and
its subsidiaries on a consolidated basis.
Company
Overview
Our business is the management of medical waste, infection
control and pharmaceutical returns and the provision of related
compliance services. Our product and service offerings include:
|
|
|
|
|
our industry-leading Stericycle medical waste management
services;
|
|
|
|
our Bio
Systems®
sharps management services that reduce the risk of needle
sticks in hospitals;
|
|
|
|
our
Steri-Safe®
OSHA and HIPPA compliance programs;
|
|
|
|
an assortment of products for infection control; and
|
|
|
|
our Direct
Return®
pharmaceutical returns and product recall management
services under the Stericycle Pharmaceutical Services
unit.
|
We are the largest regulated medical waste management company in
North America, serving approximately 333,000 customers
throughout the United States, Puerto Rico, Canada, Mexico and
the United Kingdom. In North America we have a fully integrated,
national medical waste management network. Our network includes
45 treatment/collection centers and 105 additional
transfer/collection sites. We use this network to provide a
broad range of services to our customers. Our medical waste
treatment technologies include our proprietary
electro-thermal-deactivation system, or ETD, as well as
traditional methods such as autoclaving and incineration. In the
United Kingdom we have a fully integrated waste management
network, which includes 12 treatment/collection centers and two
additional transfer/collection sites.
We also serve pharmacies, distributors and manufacturers of
pharmaceutical products by managing the return and disposal of
expired or surplus pharmaceutical products and by managing the
recall of pharmaceutical products being recalled by the
manufacturer.
In addition, we offer consulting and regulatory compliance
services in areas that are related to our medical waste and
pharmaceutical returns services.
We benefit from significant customer diversification, with no
single customer accounting for more than 2% of total revenues,
and our top 10 customers accounting for approximately 8% of
total revenues. Our two principal groups of customers include
approximately 325,000 small medical waste generators such as
outpatient clinics, medical and dental offices and long-term and
sub-acute care facilities and approximately 7,700 large medical
waste generators such as hospitals, blood banks and
pharmaceutical manufacturers.
Industry
Overview
Since the 1980s, government regulation has increasingly required
the proper handling and disposal of the medical waste generated
by the health care industry. Regulated medical waste is
generally considered 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 products.
We believe that the United States market for our regulated
medical waste services is approximately $3.0 billion and in
excess of $10.0 billion globally. Industry growth is driven
by a number of factors. These factors include:
Pressure To Reduce Healthcare Costs. The
health care industry is under pressure to reduce costs and
improve efficiency. We believe that our services can help health
care providers reduce costs by reducing their handling and
compliance costs, reducing their potential liability related to
employee exposure to blood borne
2
pathogens and other infectious material, and reducing the amount
of time and money invested in infection control and compliance.
Shift to Off-Site Treatment. We believe that
managed care and other health care cost-containment pressures
are causing patient care to continue 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 off-site
health care expenditures will continue to grow as cost-cutting
pressures increase.
Aging of U.S. Population. The average age
of the U.S. population is increasing. 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 medical waste.
Environmental and Safety Regulation. We
believe that many businesses that are not currently using
outsourced medical waste services are unaware either of the need
for proper training of employees or the U.S. Occupational
Safety and Health Administration, or OSHA, requirements
regarding the handling of medical waste. These businesses
include manufacturing facilities, schools, restaurants, casinos,
hotels and generally all businesses where employees may come
into 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.
The medical waste management industry is subject to extensive
regulation beyond the Medical Waste Tracking Act or MWTA. For
example, the stringent Clean Air Act regulations adopted in 1997
limit the discharge into the atmosphere of pollutants released
by medical waste incineration. These regulations have increased
the costs of operating medical waste incinerators and have
resulted in significant closures of
on-site
treatment facilities, thereby increasing the demand for off-site
treatment services. In addition, OSHA has issued regulations
concerning employee exposure to blood borne 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. These regulations
underlie the expansion of our service offerings to include OSHA
compliance services for health care providers.
The pharmaceutical returns (or reverse distribution) industry
arose in response to the need to facilitate the return of
unused, expired or recalled drugs to the manufacturer for credit
and proper destruction. Stericycle Pharmaceutical Services
provides pharmaceutical returns management, recall services
and pharmaceutical product disposal services to pharmacies,
distributors and manufacturers of pharmaceutical products.
We operate our pharmaceutical services business from five
centers located in Florida, Georgia, Illinois, Indiana and New
Jersey.
Competitive
Strengths
We believe that we benefit from the following competitive
strengths, among others:
Broad Range of Services. We offer our
customers a broad range of services to help them develop
internal systems and processes, which allow them to manage their
medical waste efficiently and safely. 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 regulations, sharps management services (Bio
Systems), infection control tracking and pharmaceutical
returns. We also supply specially designed containers for use by
most of our large account customers, including our
Steri-Tub®
container, a reusable leak and puncture-resistant container,
made from recycled plastic, which we developed and patented.
Established National Network. In North America
our 45 medical waste treatment/collection centers and five
pharmacy returns centers in 28 states, Puerto Rico, Canada
and Mexico give us a national network in the regulated medical
waste and significant scale in the pharmaceutical services
industry. The extensive federal, state and local laws and
regulations governing the regulated medical waste industry and
the pharmaceutical
3
services industry typically require some type of governmental
approval for new facilities. We have significant experience in
obtaining and maintaining these permits, authorizations and
other types of governmental approvals. We believe that a network
similar in scale and scope to ours would be extremely expensive
and time-consuming for a national competitor to develop.
Low-Cost Operations. We are often the low-cost
provider of medical waste management within the areas we serve.
Our low costs result from our vertically integrated network and
broad geographic presence.
Diverse Customer Base and Revenue
Stability. We have developed strong contracts and
service agreements with a diverse network of established
customers. Our top 10 medical waste customers account for
approximately 8% of our medical waste revenues, and no single
customer accounts for more than 2% of revenues. We are also
generally protected from regulatory changes and other factors,
which affect our costs, because our medical waste contracts
typically contain provisions that allow us to adjust our prices
to reflect any additional costs caused by changes in regulations
or any other increases in our operating costs.
Strong Sales Network and Proprietary
Database. We use both telemarketing and direct
sales efforts to obtain new medical waste customers. In
addition, we have a large database of potential new small
account customers, which we believe gives us a competitive
advantage in identifying and reaching this higher-margin sector.
Experienced Senior Management Team. Our five
most senior executives collectively have over 100 years of
management experience in the health care, consumer and waste
management industries.
Business
Strategy
Our goals are to strengthen our position as a leading provider
of integrated medical waste, pharmaceutical services and
compliance services and to continue to improve our
profitability. Components of our strategy to achieve these goals
include:
Improve Margins. We intend to continue
actively to work to improve our margins by increasing our base
of small account customers and focusing on service strategies
that more efficiently meet the needs of our large account
customers. We have successfully raised the percentage of our
revenues from small account customers from 33% of domestic
revenues in the fourth quarter of 1996 to 63% in the fourth
quarter of 2005, which has contributed to an increase in our
operating income margins. 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. We believe that the number of small
account customers and the opportunities for the sale of
ancillary services and products to both large and small account
customers will continue to grow.
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 medical waste customers. For example, through our
Steri-Safesm
program, we now offer OSHA compliance services to health care
providers, and our mercury mail-back program enables customers
to manage waste that should be handled separately. Our
acquisition of Scherer Healthcare, Inc. in January 2003 provided
the opportunity to market its Bio Systems sharps
management program in new geographic service areas, and we
continually research and test new products and service offerings
for our customers. After establishing our first center in Lake
Forest, Illinois in 2003, we have expanded our pharmaceutical
returns and recall business through our acquisitions in 2005 of
Automated Health Technologies, Universal Solutions, Inc., L.L.
Horizons, Inc. and NNC Group, LLC.
Seek Complementary Acquisitions. As described
below, we actively seek strategic opportunities to acquire
businesses that expand our national and international network of
treatment centers and increase our customer and product base. We
also consider acquisitions that can leverage the skills and
infrastructure that we have in place, for example, our
acquisition of the Bio Systems sharps management program.
We believe that strategic acquisitions can enable us to gain
operating efficiencies through increased utilization of our
service infrastructure as well as to expand our services offered
to our customers and to expand the product offerings and
geographic service areas in which we operate.
4
Acquisitions
Evaluation and Integration. Our management
team has substantial experience in evaluating potential
acquisition candidates and determining whether a particular
medical waste management or related service business can be
successfully integrated into our business.
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.
Acquisitions History. We completed a total of
100 acquisitions from 1993 through 2005, including nine domestic
medical waste management businesses in 2005. The most
significant of these was our acquisition in November 1999 of the
medical waste business of Browning Ferris Industries, Inc.
(BFI) in the United States, Canada and Puerto Rico.
At the time, BFI was the largest provider of regulated medical
waste services in the United States.
In 2005, our majority owned subsidiary in Mexico completed the
acquisition of seven medical waste management companies in
Mexico, and our United Kingdom subsidiary completed two
acquisitions in the United Kingdom.
In addition, in 2005 we acquired four pharmaceutical returns and
product recall businesses: Automated Health Technologies, Inc.,
Universal Solutions, Inc., L.L. Horizons, Inc and NNC Group, LLC.
Collection and Transportation. We consider
efficiency of collection and transportation to be a critical
element of our medical waste operations because it represents
the largest component of our operating costs.
The use of transfer stations is an 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.
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 a comprehensive line of reusable leak and
puncture-resistant plastic containers. The containers enable our
customers to reduce costs by reducing the number of times that
materials and supplies are handled, eliminate the cost of
corrugated boxes and potentially reduce liability resulting from
human contact with medical waste. 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
typically 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 and the appropriate regulatory
authorities are informed. 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 landfill operated by third parties unaffiliated with us. We
do not own any landfills. After the plastic containers such as
our
Steri-Tub®
or Bio Systems containers have been emptied, they are
washed, sanitized and returned to customers for re-use.
Consulting Services. Before our trucks pick up
medical waste, our integrated waste management approach attempts
to build in efficiencies that will yield logistical
advantages. For example, our consulting services can assist our
customers in reducing the volume of medical waste that they
generate. In addition, we provide customers with the
documentation necessary for compliance with applicable
regulations, which, if they complete the documentation properly,
will reduce regulatory interruptions to their businesses to
verify compliance.
5
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 including those mandated by the
U.S. Department of Transportation, or DOT.
Marketing
and Sales
Marketing Strategy. We use both telemarketing
and direct sales efforts to obtain new customers.
Our more than 1,300 drivers also may participate in our
marketing and sales efforts by actively soliciting small account
customers while they service their routes.
Small Account Customers. We have targeted
small account customers as a growth area of our medical waste
business. We believe that these customers offer a higher
relative profit potential on small revenue per customer compared
to other potential customers. We believe that these customers
view the potential risks of non-compliance with applicable state
and federal medical waste regulations as disproportionate to the
cost of the services that we provide. We believe that this
factor has been the basis for the significantly higher gross
margins that we have achieved with our small account customers
relative to our large account customers.
Steri-Safesm. Our
Steri-Safesm
OSHA compliance program provides an integrated medical waste
management and compliance-assistance service for small account
customers and other healthcare providers who typically lack the
internal personnel and systems to comply with OSHA blood borne
regulations. Customers for our
Steri-Safesm
service pay a predetermined subscription fee in advance for
medical waste collection and treatment services and can also
choose from available packages of training and education
services and products designed to help them to comply with OSHA
regulations. Approximately 95,000 small account customers are
enrolled in this program. We believe that the implementation of
our
Steri-Safesm
service will provide us with new and enhanced opportunities to
leverage our existing customer base through the programs
prepayment structure and diversified product and service
offerings.
We also operate several mail-back programs through
which we can reach small account customers located in outlying
areas that would be inefficient to serve using our regular route
structure. Mail-back programs are also used in home care patient
settings where there is a focus on reducing the potential
injuries to workers at recycling centers or other solid waste
handling locations.
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 7,700 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 that they generate, training their employees on safety
issues and implementing programs to audit, classify and
segregate medical waste in a proper manner.
Our Bio Systems sharps management offering can enhance
our revenue and margin potential per account. The Bio Systems
service offering can help our customers eliminate plastic
and cardboard from their waste stream while providing a safe and
cost effective way for them to deal with the disposal of their
sharp objects (such as needles, syringes, etc.).
Our Stericycle Pharmaceutical Services unit can
streamline manufacturer return credits, recalls, enhance
inventory management capabilities and deliver online business
information related to expired medications.
We believe that the implementation of more stringent Clean Air
Act and other federal regulations directly and indirectly
affecting medical waste will continue to enable us to improve
our marketing efforts to large account customers because the
additional costs that they will incur to comply with these
regulations will make the costs of our services more attractive,
particularly in the event they use their own incinerators.
6
National Accounts. As a result of our
extensive geographic coverage, we are capable of servicing
national account customers (i.e., customers requiring medical
waste disposal services at various geographically dispersed
locations). We will continue to selectively focus on national
accounts.
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 customers 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 the
types of containers, frequency of collection, pricing, treatment
of waste and documentation for tracking purposes. Each agreement
also specifies the customers obligation to pack its
medical waste in approved containers. Substantially all of our
agreements with small account customers contain automatic
renewal provisions.
International
In 1998, we formed Medam S.A. de C.V., or Medam, a Mexican joint
venture company, in which we now have a 64.5% interest, to
utilize our ETD technology to treat medical waste primarily in
the Mexico City market. From 2001 through 2004, Medam completed
the acquisition of five medical waste businesses in Mexico and,
as noted, in 2005, it completed seven acquisitions.
In 1999, we established a joint venture in Argentina, Medam,
B.A. Srl, in which we have a 37.5% interest, to utilize our ETD
technology to treat medical waste primarily in the Buenos Aires
market.
In 2000, we entered into agreements with Aso Cement Co., Ltd and
Aso Mining Co., Ltd, to establish an ETD treatment facility in
Japan. In 2002, we entered into agreements with Medical Safety
Systems of Hokkaido, Japan to establish a second ETD treatment
facility in Japan, and in 2003, we entered into agreements with
Shiraishi-Sogyo Co. Ltd. of Tochigi, Japan to establish a third
ETD treatment facility. Under these agreements, we supplied ETD
treatment equipment and provide ongoing consulting assistance in
the operation of the equipment.
In 2001, we concluded an agreement with SteriCorp Limited, an
Australian company, under which we provided financing to
SteriCorp through the purchase of convertible notes, licensed
our ETD technology to it for use in Australia and certain other
countries, and agreed to sell to it an ETD processing line and
assist in its installation.
In 2004, we completed our first acquisition in Europe with the
purchase of White Rose Environmental, Ltd in Leeds, England. In
2005, our United Kingdom subsidiary completed the acquisitions
of Healthcare Waste Limited, which operated a medical waste
business in England, and Indigo Equity Holdings Limited
(formerly known as Waste Solutions, Inc.), which operated a
medical waste business in England and Wales.
Treatment
Technologies
We currently use both non-incineration technologies (our
proprietary ETD technology and autoclaving) and incineration
technologies for treating regulated medical waste.
Stericycle was founded on the belief that there was a need for
safe, secure, and environmentally responsible management of
regulated medical waste. From our beginning we have championed
the use of non-incineration, alternate treatment technologies
such as our patented ETD process. While we recognize that some
state regulations as currently in force mandate that some types
of medical waste must be incinerated, we also know from years of
experience working with our customers that there are ways to
reduce the amount of waste that is ultimately incinerated. The
most effective strategy that we have seen involves comprehensive
education of our customers in waste minimization and
segregation. Working in cooperation with our customers, we have
made tremendous strides in shifting away from incineration and
moving towards alternate treatment technologies. At the end of
2005, incineration constituted less than 9% of our treatment
capacity in North America.
7
Autoclaving. Autoclaving treats medical waste
with steam at high temperature and pressure to kill pathogens.
Autoclaving alone does not change the appearance of waste, and
some landfill operators may not accept recognizable medical
waste, but autoclaving may be combined with a shredding or
grinding process to render the medical waste unrecognizable.
ETD Treatment Process. 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.
We believe that ETD offers advantages over many 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 regulated air or water emissions.
ETD facilities also can be more cost-effective 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.
Incineration. 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. Air
emissions from incinerators can contain certain byproducts,
which are subject to federal, state and, in some cases, local
regulation. In some circumstances the ash byproduct of
incineration may be regulated.
Competition
The medical waste services industry is highly competitive, and
barriers to entry into the collection and disposal business are
very low. The industry 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.
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 compete by trying to demonstrate 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 customers 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
The medical waste management industry 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, among other things:
|
|
|
|
|
to construct and operate treatment and transfer facilities;
|
|
|
|
to transport medical waste within and between relevant
jurisdictions; and
|
|
|
|
to handle particular regulated substances.
|
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. Four federal agencies have
authority over medical waste. These agencies are the
U.S. Environmental Protection Agency or EPA, Occupational
Safety and Health Administration or OSHA,
8
Department of Transportation or DOT 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 MWTA, which was added to the Resource Conservation
and Recovery Act of 1976.
In regulations implementing the MWTA, the EPA defined medical
waste and established guidelines for its segregation, handling,
containment, labeling and transport. 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. We currently
operate six incinerators in the United States. We believe these
incinerators are in compliance with applicable state
requirements.
Occupational Safety and Health Act of
1970. The Occupational Safety and Health Act of
1970 authorizes OSHA to issue occupational safety and health
standards. Various standards apply to certain aspects of our
operations, and govern such matters as exposure to blood borne
pathogens and other potentially infectious materials.
Resource Conservation and Recovery Act of
1976. The Resource Conservation and Recovery Act
of 1976, or RCRA created standards for the generation,
transportation, treatment, storage and disposal of solid and
hazardous wastes. Medical wastes are currently considered
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 our ETD facilities and
for the disposal of incinerator ash and autoclaved waste. We do
not own or operate any landfills.
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. DOT has put
regulations into effect under the Hazardous Materials
Transportation Authorization Act of 1994 which require us to
package and label medical waste in compliance with designated
standards, and which incorporate blood borne 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.
Comprehensive Environmental Response, Compensation and
Liability Act of 1980. The Comprehensive
Environmental Response, Compensation and Liability Act of 1980,
or CERCLA, 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
9
required to pay the entire cost of the site investigation and
cleanup, even though other parties also may be liable. This
result 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
permits from the U.S. Postal Service to conduct our
mail-back programs, 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 47 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 have implemented programs under RCRA.
In each of the states where we operate a treatment facility or a
transfer station, we are required to comply with numerous state
and local laws and regulations as well as our operating plan for
each site. In addition, many local governments have ordinances,
local laws and regulations, such as zoning and health
regulations, which affect our operations.
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:
|
|
|
|
|
microbiological waste (cultures and stocks of infectious agents);
|
|
|
|
pathology waste (human body parts from surgical procedures and
autopsies);
|
|
|
|
blood and blood products; and
|
|
|
|
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. One state (Washington)
regulates the prices that 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.
We believe that we are currently in compliance in all material
respects with our permits and applicable laws and regulations,
including state requirements regarding air emissions from
incinerators.
Foreign Territorial Regulation. We are subject
to substantial regulation by the governments of the foreign
jurisdictions in which we do business. We believe that we have
obtained all permits required by the relevant regulatory
authorities.
If we expand our operations into other foreign jurisdictions, we
will be required to comply with the laws and regulations of each
of those 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.
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.
The pharmaceutical returns business is highly regulated, both on
the federal and state level.
10
Once out-dated or recalled pharmaceutical products have been
sorted at our returns center, pharmaceutical products that will
be disposed of instead of being returned to their manufacturer
may be considered hazardous waste and require handling in
compliance with U.S. Food and Drug Administration or FDA,
EPA, RCRA and DOT regulations.
Most states have licensing requirements for reverse distributors
of pharmaceutical products. We believe we are in compliance with
all federal and state licensing requirements applicable to our
pharmaceutical services business.
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 14 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 Australia,
Canada, France, Mexico and the United Kingdom.
The term of the
first-to-end
of our existing United States patents relating to our ETD
treatment process will currently end in May 2009 and the term of
the
last-to-end
will currently end in January 2019.
We own federal registrations of the trademarks
Steri-Fuel®,
Steri-Plastic®,
Steri-Tub®,
Direct
Return®,
the service mark
Stericycle®
and a service mark consisting of a nine-circle design.
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:
|
|
|
|
|
cleanup costs;
|
|
|
|
personal injury;
|
|
|
|
damage to the environment;
|
|
|
|
employee matters;
|
|
|
|
property damage; or
|
|
|
|
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 $35 million of liability insurance (including
umbrella coverage), and under a separate policy,
$10 million of aggregate pollution and legal liability
insurance ($5 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.
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.
Employees
As of December 31, 2005, we had 4,320 full-time and
111 part-time employees (including employees of our
subsidiaries). Approximately 347 of our drivers, transportation
helpers and plant workers are covered by a total of eight
collective bargaining agreements with local unions of the
International Brotherhood of Teamsters.
11
These agreements expire at various dates from October 2006 to
June 2010. We consider our employee relations to be satisfactory.
Website
Access
We maintain an Internet website,
http://www.stericycle.com, providing a variety of
information about us. Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports, that we file with the
Securities and Exchange Commission are available, as soon as
reasonably practicable after filing, at the investors page
on our website, http://www.stericycle.com/investor.htm,
or by a direct link to our filings on the SECs free
website, http://www.sec.gov.
We are
subject to extensive governmental regulation which it is
frequently difficult, expensive and time-consuming to comply
with.
The medical waste management industry is subject to extensive
federal, state and local laws and regulations relating to the
collection, transportation, packaging, labeling, handling,
documentation, reporting, treatment and disposal of regulated
medical waste. Our business requires us to obtain many permits,
authorizations, approvals, certificates or other types of
governmental permission from every jurisdiction where we
operate. We believe that we currently comply in all material
respects with all applicable permitting requirements. State and
local regulations change often, however, and new regulations are
frequently adopted. Changes in the regulations could require us
to obtain new permits or to change the way in which we operate
under existing permits. We might be unable to obtain the new
permits that we require, and the cost of compliance with new or
changed regulations could be significant.
Many of the permits that we require, especially those to build
and operate treatment plants and transfer facilities, are
difficult and time-consuming to obtain. They may also contain
conditions or restrictions that limit our ability to operate
efficiently, and they may not be issued as quickly as we need
them (or at all). If we cannot obtain the permits that we need
when we need them, or if they contain unfavorable conditions, it
could substantially impair our operations and reduce our
revenues.
The
handling and treatment of hazardous medical waste carries with
it the risk of personal injury to employees and
others.
Our business requires us to handle materials that may be
infectious or hazardous to life and property in other ways.
While we try to handle such materials with care and in
accordance with accepted and safe methods, the possibility of
accidents, leaks, spills, and acts of God always exists.
Examples of possible exposure to such materials include:
|
|
|
|
|
truck accidents;
|
|
|
|
damaged or leaking containers;
|
|
|
|
improper storage of medical waste by customers;
|
|
|
|
improper placement by customers of materials into the waste
stream that we are not authorized or able to process, such as
certain body parts and tissues; or
|
|
|
|
malfunctioning treatment plant equipment.
|
Human beings, animals or property could be injured, sickened or
damaged by exposure to medical waste. This in turn could result
in lawsuits in which we are found liable for such injuries, and
substantial damages could be awarded against us.
While we carry liability insurance intended to cover these
contingencies, particular instances may occur that are not
insured against or that are inadequately insured against. An
uninsured or underinsured loss could be substantial and could
impair our profitability and reduce our liquidity.
12
The
handling of medical waste exposes us to the risk of
environmental liabilities, which may not be covered by
insurance.
As a company engaged in medical waste management, we face risks
of liability for environmental contamination. The federal
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, or CERCLA, and similar state laws impose strict
liability on current or former owners and operators of
facilities that release hazardous substances into the
environment as well as on the businesses that generate those
substances and the businesses that transport them to the
facilities. Responsible parties may be liable for substantial
investigation and
clean-up
costs even if they operated their businesses properly and
complied with applicable federal and state laws and regulations.
Liability under CERCLA may be joint and several, which means
that if we were found to be a business with responsibility for a
particular CERCLA site, we could be required to pay the entire
cost of the investigation and
clean-up
even though we were not the party responsible for the release of
the hazardous substance and even though other companies might
also be liable.
Our pollution liability insurance excludes liabilities under
CERCLA. Thus, if we were to incur liability under CERCLA and if
we could not identify other parties responsible under the law
whom we are able to compel to contribute to our expenses, the
cost to us could be substantial and could impair our
profitability and reduce our liquidity. Our customer service
agreements make clear that the customer is responsible for
making sure that only appropriate materials are disposed of. If
there were a claim against us that a customer might be legally
liable for, we might not be successful in recovering our damages
from the customer.
The
level of governmental enforcement of environmental regulations
has an uncertain effect on our business and could reduce the
demand for our services.
We believe that the governments strict enforcement of laws
and regulations relating to medical waste collection and
treatment has been good for our business. These laws and
regulations increase the demand for our services. A relaxation
of standards or other changes in governmental regulation of
medical waste could increase the number of competitors or reduce
the need for our services.
If we
are unable to acquire other medical waste businesses, our
revenue and profit growth may be slowed.
Historically our growth strategy has been based in substantial
part on our ability to acquire other medical waste businesses.
We do not know whether in the future we will be able to:
|
|
|
|
|
identify suitable businesses to buy;
|
|
|
|
complete the purchase of those businesses on terms acceptable to
us;
|
|
|
|
improve the operations of the businesses that we do buy and
successfully integrate their operations into our own; or
|
|
|
|
avoid or overcome any concerns expressed by regulators.
|
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.
We also do not know whether our growth strategy will continue to
be effective. Our business is significantly larger than before,
and new acquisitions may not have the desired benefits that we
have obtained in the past.
The
implementation of our acquisition strategy could be affected in
certain instances by the concerns of state regulators, which
could result in our not being able to realize the full synergies
or profitability of particular acquisitions.
We may become subject to inquiries and investigations by state
antitrust regulators from time to time in the course of
completing acquisitions of other medical waste businesses. In
order to obtain regulatory
13
clearance for a particular acquisition, we could be required to
modify certain operating practices of the acquired business or
to divest ourselves of one or more assets of the acquired
business. Changes in the terms of our acquisitions required by
regulators or agreed to by us in order to settle regulatory
investigations could impede our acquisition strategy or reduce
the anticipated synergies or profitability of our acquisitions.
The likelihood and outcome of inquiries and investigations from
state regulators in the course of completing acquisitions cannot
be predicted.
Aggressive
pricing by existing competitors and the entrance of new
competitors could drive down our profits and slow our
growth.
The medical waste industry is very competitive because of low
barriers to entry, among other reasons. This competition has
required us in the past to reduce our prices, especially to
large account customers, and may require us to reduce our prices
in the future. Substantial price reductions could significantly
reduce our earnings.
We face direct competition from a large number of small, local
competitors. Because it requires very little money or technical
know-how to compete with us in the collection and transportation
of medical waste, there are many regional and local companies in
the industry. We face competition from these businesses, and
competition from them is likely to exist in the new locations to
which we may expand in the future. In addition, large national
companies with substantial resources may decide to enter the
medical waste industry. For example, Waste Management, Inc., a
major solid waste treatment company, announced in February 2005
that it intended to begin offering medical waste management
services to hospitals and possibly other large quantity
generators of medical waste.
Our competitors could take actions that would hurt our growth
strategy, including the support of regulations that 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.
Restrictions
in our senior unsecured credit facility may limit our ability to
pay dividends, incur additional debt, make acquisitions and make
other investments.
Our senior unsecured credit facility contains covenants that
restrict our ability to make distributions to stockholders or
other payments unless we satisfy certain financial tests and
comply with various financial ratios.
It also contains covenants that limit our ability to incur
additional indebtedness, acquire other businesses and make
capital expenditures, and imposes various other restrictions.
These covenants could affect our ability to operate our business
and may limit our ability to take advantage of potential
business opportunities as they arise.
The
loss of our senior executives could affect our ability to manage
our business profitably.
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 any of our
executive officers, and officers and other key employees could
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 impair our ability to manage our business and
direct its growth.
Our
expansion into foreign countries exposes us to unfamiliar
regulations and may expose us to new obstacles to
growth.
We plan to grow both in the United States and in foreign
countries. We have established substantial operations in Canada,
Mexico and the United Kingdom. Foreign operations carry special
risks. Although our
14
business in foreign countries has not yet been affected, our
business in the countries in which we currently operate and
those in which we may operate in the future could be limited or
disrupted by:
|
|
|
|
|
government controls;
|
|
|
|
import and export license requirements;
|
|
|
|
political or economic insecurity;
|
|
|
|
trade restrictions;
|
|
|
|
changes in tariffs and taxes;
|
|
|
|
exchange rate fluctuations;
|
|
|
|
our unfamiliarity with local laws, regulations, practices and
customs;
|
|
|
|
restrictions on repatriating foreign profits back to the United
States;
|
|
|
|
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 obtain them when we expect, our growth and profitability
from international operations could be limited. Fluctuations in
currency exchange could have similar effects.
Litigation
is always unpredictable and adverse judgments against us could
require us to pay substantial amounts.
We are parties to private antitrust litigation described
elsewhere in this report (see Part I,
Item 3 Legal Proceedings). We do not
believe that any of the lawsuits against us has merit, and we
are vigorously defending the litigation. Litigation, however, is
by its nature unpredictable, and the outcome of these lawsuits
cannot be assessed with any degree of certainty. Our insurance
may or may not cover some or any of the claims in these
lawsuits, and to the extent that it does not, we, and not an
insurance company, would have to bear the financial burden of
any adverse judgment. The potential thus exists for
unanticipated adverse judgments against us which may be
substantial in amount and which could materially impair our cash
reserves and financial condition.
Our
earnings could decline if we write-off intangible assets, such
as goodwill.
As a result of purchase accounting for our various acquisitions,
our balance sheet at December 31, 2005 contains goodwill, net of
accumulated amortization, of $685.2 million and other
intangible assets, net of accumulated amortization, of
$63.1 million (including indefinite lived intangibles of
$18.5 million). In accordance with FAS 142, we
evaluate on an ongoing basis, using the fair value of reporting
units, whether facts and circumstances indicate any impairment
of the value of indefinite-lived intangible assets such as
goodwill. As circumstances after an acquisition can change, the
value of these intangible assets may not be realized by us. If
we were to determine that a significant impairment has occurred,
we would be required to incur non-cash write-offs of the
impaired portion of goodwill and other unamortized intangible
assets, which could have a material adverse effect on our
results of operations in the period in which the write-off
occurs.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We lease office space for our corporate offices in Lake Forest,
Illinois. In North America we own or lease three ETD treatment
facilities, nine incineration facilities, 31 autoclave
facilities and two facilities that use a combination of these
methods or other methods. All of our treatment facilities also
serve as collection sites. We own or lease 105 additional
transfer and collection sites, eight additional
sales/administrative sites, four pharmaceutical services
processing sites and three facilities for storage of supplies.
These totals include eight sites owned or leased by our
majority-owned subsidiary, 3CI Complete Compliance Corporation
(3CI). In the United Kingdom we lease nine
incineration facilities and three autoclave facilities. We also
lease two
15
additional transfer and collection sites and one administrative
site. We consider that these treatment facilities are adequate
for our present and anticipated needs.
We do not own or operate any landfills or any other type of
disposal site. After treatment, all remaining waste materials
are transported to unaffiliated third parties for permanent
disposal.
|
|
Item 3.
|
Legal
Proceedings
|
We operate in a highly regulated industry and deal with
regulatory inquiries or investigations from time to time that
may be instituted for a variety of reasons. We are also involved
in a variety of civil litigation from time to time.
3CI Litigation. In November 2005, we entered
into a preliminary settlement to resolve class action litigation
by the minority shareholders of our majority-owned subsidiary,
3CI Complete Compliance Corporation (3CI), in which
3CI joined with the class as a plaintiff. This litigation is
pending in state court in Louisiana (Robb,
et al. v. Stericycle, Inc., et al., First
Judicial District Court, Caddo Parish, Louisiana
(No. 467704-A))
(the Louisiana Litigation). We have described this
litigation on a number of occasions, including our report on
Form 10-K
for 2004.
Under the terms of the preliminary settlement, we agreed to pay
$32.5 million in cash to a trust fund to be established by
a claims administrator approved by the court for the purpose of
(i) settling all claims in the Louisiana Litigation and in
related litigation in state court in Texas (3CI Complete
Compliance Corporation v. Waste Systems, Inc.,
et al., 269th Judicial District, Harris County,
Texas
(No. 2003-46899)),
(ii) canceling or otherwise acquiring all of the shares of
3CI common stock held by members of the plaintiff class and
(iii) paying court-approved administrative expenses and
legal fees. In accordance with the terms of the preliminary
settlement, we made the required $32.5 million deposit with
the claims administrator following the courts preliminary
approval of the settlement in December 2005.
The preliminary settlement remains subject to the courts
final approval. A hearing on final approval was held on
February 21, 2006. The court has not yet rendered its
decision.
The parties to the preliminary settlement intend that, through
the settlement, we will acquire sufficient shares of 3CI common
stock so that, with the shares that we and one of our
subsidiaries already own, we will own 90% or more of 3CIs
outstanding common stock. This level of ownership would enable
us to acquire the balance of the outstanding 3CI common stock
through a short-form merger under Delaware law. If
we do acquire 90% or more of 3CIs common stock as
contemplated, we intend to conduct such a short-form merger as
soon as practicable as we determine.
Private Antitrust Litigation. In January 2003,
we were sued in federal court in Arizona by a private plaintiff
claiming anticompetitive conduct in Arizona, Colorado and Utah
from November 1997 to the present and seeking certification of
the lawsuit as a class action on behalf of all customers of ours
in the three-state area during this period. Over the next
several months, four similar suits were filed in federal court
in Utah, Arizona, Colorado and New Mexico. These five lawsuits
have been consolidated for multidistrict proceedings in federal
court in Utah, and the plaintiffs have filed a consolidated
class action complaint, superseding their prior, separate
complaints, alleging various anticompetitive conduct, including
monopolization of the market for medical waste services. In
December 2004 the plaintiffs filed a motion for class
certification, and in October 2005 the court heard arguments on
the plaintiffs motion. The court has not yet issued a
ruling. Discovery in these proceedings is at an early stage.
In December 2003, a sixth suit was filed in federal court in
Utah alleging monopolistic and other anticompetitive conduct in
California from 1999 through the present and seeking
certification of the lawsuit as a class action on behalf of all
California customers of ours during this period. In December
2004 the plaintiffs filed a motion for class certification, and
in October 2005 the court heard arguments on the
plaintiffs motion. The court has not yet issued a ruling.
Discovery in this lawsuit, which is coordinated with discovery
in the multidistrict proceedings, is at an early stage.
16
In February 2003, we were sued in federal court in Utah by a
third-party hauler of medical waste alleging various
anticompetitive conduct, including an alleged denial of access
to one of our incinerators. Discovery in this lawsuit, which is
consolidated with discovery in the multidistrict proceedings, is
at an early stage.
We do not believe that any of these lawsuits has merit and are
vigorously defending them.
Other Litigation. In Australia, we are in
arbitration with SteriCorp Limited over the ETD equipment that
we sold to them. Discovery is pending in these proceedings. We
currently expect that the arbitration hearing will be held
during the second quarter of 2006.
During 2005, we were in arbitration regarding various disputes
under an exclusive marketing and distribution license agreement
with a licensor of software. The licensor claimed, among other
things, that our license had ceased to be exclusive because of
our failure to pay minimum royalties under the license
agreement, and we claimed, among other things, that the
licensors actions entitled us to rescind the license
agreement and to be repaid the $1.8 million license fee we
had paid. On March 1, 2006, the arbitrator awarded the
licensor $0.4 million in damages for breach of the license
agreement and denied all of the parties other claims,
including our claim for rescission, and the license agreement
was effectively terminated. As a result of the arbitrators
decision we wrote-off the remaining $1.4 million
unamortized portion of our license intangible asset.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matter was submitted to a vote of our stockholders during the
fourth quarter of 2005.
Supplemental
Information
Executive
Officers of the Registrant
The following table contains certain information regarding our
five current executive officers:
|
|
|
|
|
|
|
Name
|
|
Position
|
|
Age
|
|
Mark C. Miller
|
|
President, Chief Executive Officer
and a Director
|
|
|
50
|
|
Richard T. Kogler
|
|
Executive Vice President and Chief
Operating Officer
|
|
|
46
|
|
Frank J.M. ten Brink
|
|
Executive Vice President and Chief
Financial Officer
|
|
|
49
|
|
Richard L. Foss
|
|
Executive Vice President,
Corporate Development
|
|
|
51
|
|
Shan S. Sacranie
|
|
Executive Vice President,
International
|
|
|
53
|
|
Mark C. Miller has served as our President and Chief Executive
Officer and a director since joining us in May 1992. From May
1989 until he joined us, Mr. Miller served as vice
president for the Pacific, Asia and Africa in the International
Division of Abbott Laboratories, which he joined in 1976 and
where he held a number of management and marketing positions. He
is a director of Ventana Medical Systems, Inc. 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.
Frank J.M. ten Brink has served as our Executive 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.
17
Richard L. Foss has served as our Executive Vice President for
Corporate Development since February 2003. From 1999 to 2002,
Mr. Foss was a vice president and director of worldwide
product marketing in the personal communication sector at
Motorola Inc., and from 1977 until 1999, he held a number of
management and marketing positions at The Proctor &
Gamble Company, including serving as a vice president and
general manager in the health care segment. Mr. Foss
received a B.S. degree in chemistry and an M.B.A degree from
Rensselear Polytechnic Institute.
Shan S. Sacranie joined us in May 2003 and became our Executive
Vice President, International in November 2003. From 2001 to
2002 he was chief executive for Appliance Controls Group, Inc.
and from 1995 to 2001, he was president of Oak Industries Inc.
From 1978 to 1995 he held a number of management positions for
Honeywell. Mr. Sacranie holds a BA degree (Hons) in
economics from the University of Bombay, an M.B.A. degree from
Minnesota State University and a J.D. in from the William
Mitchell College of Law.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity and Related Stockholder
Matters
|
As of February 27, 2006, we had approximately 196
stockholders of record.
The following table provides the high and low sales prices of
our Common Stock for each calendar quarter during our two most
recent fiscal years:
|
|
|
|
|
|
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
First quarter 2004
|
|
|
49.23
|
|
|
|
43.12
|
|
Second quarter 2004
|
|
|
51.74
|
|
|
|
45.43
|
|
Third quarter 2004
|
|
|
53.06
|
|
|
|
44.36
|
|
Fourth quarter 2004
|
|
|
47.35
|
|
|
|
41.79
|
|
First quarter 2005
|
|
|
51.60
|
|
|
|
44.20
|
|
Second quarter 2005
|
|
|
53.82
|
|
|
|
43.92
|
|
Third quarter 2005
|
|
|
59.47
|
|
|
|
50.58
|
|
Fourth quarter 2005
|
|
|
63.52
|
|
|
|
54.36
|
|
We did not pay any cash dividends during 2005 and have never
paid any dividends on our capital stock. We currently expect
that we will retain future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. See Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
18
In May 2002 our Board of Directors authorized the Company to
repurchase up to 3,000,000 shares of our common stock, in the
open market or through privately negotiated transactions, at
times and in amounts in the Companys discretion. In
February 2005, at a time when we had purchased a cumulative
total of 1,478,430 shares, the Board authorized the Company
to purchase up to an additional 1,478,430 shares, thereby
giving the Company the authority to purchase up to a total of
3,000,000 additional shares. The following table provides
information about our purchases during the year ended
December 31, 2005 of shares of our common stock.
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Number (or
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
|
|
|
|
|
|
|
|
|
|
Value) of
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Shares (or
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Units) that
|
|
|
|
|
|
|
Average
|
|
|
(or Units)
|
|
|
May Yet Be
|
|
|
|
Total
|
|
|
Price
|
|
|
Purchased as Part
|
|
|
Purchased
|
|
|
|
Number of Shares
|
|
|
Paid per
|
|
|
of Publicly
|
|
|
Under the
|
|
|
|
(or Units)
|
|
|
Share
|
|
|
Announced Plans
|
|
|
Plans or
|
|
Period
|
|
Purchased
|
|
|
(or Unit)
|
|
|
or Programs
|
|
|
Programs
|
|
|
January 1-January 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,868,570
|
|
February 1-February 28, 2005
|
|
|
544,000
|
|
|
|
45.88
|
|
|
|
544,000
|
|
|
|
2,803,000
|
|
March 1-March 31, 2005
|
|
|
204,600
|
|
|
|
44.56
|
|
|
|
204,600
|
|
|
|
2,598,400
|
|
April
1-April 30,
2005
|
|
|
117,600
|
|
|
|
43.92
|
|
|
|
117,600
|
|
|
|
2,480,800
|
|
May 1-May 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,480,800
|
|
June 1-June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,480,800
|
|
July 1-July 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,480,800
|
|
August
1-August 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,480,800
|
|
September 1-September 30, 2005
|
|
|
146,600
|
|
|
|
55.33
|
|
|
|
146,600
|
|
|
|
2,334,200
|
|
October 1-October 31, 2005
|
|
|
187,700
|
|
|
|
55.59
|
|
|
|
187,700
|
|
|
|
2,146,500
|
|
November 1-November 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146,500
|
|
December
1-December 31,
2005
|
|
|
50,000
|
|
|
|
57.38
|
|
|
|
50,000
|
|
|
|
2,096,500
|
|
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands, except
per share amounts)
|
|
|
Statements of Income
Data(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
609,457
|
|
|
$
|
516,228
|
|
|
$
|
453,225
|
|
|
$
|
401,519
|
|
|
$
|
359,024
|
|
Income from operations
|
|
|
168,355
|
|
|
|
145,655
|
|
|
|
126,397
|
|
|
|
100,832
|
|
|
|
73,294
|
|
Net income
|
|
|
67,154
|
|
|
|
78,178
|
|
|
|
65,781
|
|
|
|
45,724
|
|
|
|
14,710
|
|
Net income applicable to Common
Stock
|
|
|
67,154
|
|
|
|
78,178
|
|
|
|
65,781
|
|
|
|
45,037
|
|
|
|
12,167
|
|
Diluted net income per share of
Common Stock(2)
|
|
|
1.48
|
|
|
|
1.69
|
|
|
|
1.43
|
|
|
|
1.01
|
|
|
|
0.35
|
|
Depreciation and amortization
|
|
|
21,431
|
|
|
|
21,803
|
|
|
|
17,255
|
|
|
|
14,981
|
|
|
|
25,234
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
94,327
|
|
|
$
|
114,611
|
|
|
$
|
123,887
|
|
|
$
|
98,731
|
|
|
$
|
64,550
|
|
Cash used in investing activities
|
|
|
(156,001
|
)
|
|
|
(105,093
|
)
|
|
|
(57,635
|
)
|
|
|
(49,470
|
)
|
|
|
(36,673
|
)
|
Cash (used in) provided by
financing activities
|
|
|
59,500
|
|
|
|
(6,941
|
)
|
|
|
(66,820
|
)
|
|
|
(53,705
|
)
|
|
|
(17,806
|
)
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands, except
per share amounts)
|
|
|
Balance Sheet Data (at
December 31)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
8,545
|
|
|
$
|
7,949
|
|
|
$
|
7,881
|
|
|
$
|
8,887
|
|
|
$
|
13,017
|
|
Total assets
|
|
|
1,047,660
|
|
|
|
834,141
|
|
|
|
707,462
|
|
|
|
667,095
|
|
|
|
614,530
|
|
Long-term debt, net of current
maturities
|
|
|
348,841
|
|
|
|
190,431
|
|
|
|
163,016
|
|
|
|
224,124
|
|
|
|
267,365
|
|
Convertible redeemable preferred
stock
|
|
|
|
|
|
|
|
|
|
|
20,944
|
|
|
|
28,049
|
|
|
|
44,872
|
|
Shareholders equity
|
|
$
|
521,634
|
|
|
$
|
495,372
|
|
|
$
|
407,820
|
|
|
$
|
326,729
|
|
|
$
|
232,510
|
|
|
|
|
(1) |
|
See Note 4 to the Consolidated Financial Statements for
information concerning our acquisitions during the three years
ended December 31, 2005. |
|
(2) |
|
See Note 10 to the Consolidated Financial Statements for
information concerning the computation of net income per common
share. In 2005, net income includes costs related to the 3CI
preliminary settlement of class action litigation of
$23.4 million net of tax, South Africa note receivable
write-down of $1.5 million net of tax, fixed asset
impairments of $0.5 million net of tax, acquisition-related
costs of $0.5 million net of tax, settlement of licensing
litigation of $1.1 million net of tax, and items related to
debt restructuring of $0.3 million net of tax which
negatively impacted EPS by $0.60 per share. Of the total of
$27.3 million of such items, $3.4 million were
non-cash items. In 2004, net income includes acquisition-related
costs of $0.5 million net of tax, fixed asset write-offs of
$0.7 million net of tax, and items related to debt
restructuring and redemption of senior subordinated debt of
$2.8 million net of tax that negatively impacted EPS by
$0.09 per share. Of the total of $4.0 million of such
items, $1.4 million were non-cash items. In 2003, net
income includes acquisition-related costs of $0.4 million
net of tax and items related to debt restructuring and
subordinated debt repurchase of $2.0 million net of tax,
which negatively impacted EPS by $0.04 per share. Of the
total of $2.4 million of such items, $0.5 million were
non-cash items. In 2002, net income includes acquisition-related
costs of $0.2 million net of tax, fixed asset write-offs of
$1.8 million net of tax and items related to debt
restructuring and subordinated debt repurchases of
$1.4 million net of tax, which negatively impacted EPS by
$0.08 per share. Of the total of $3.4 million of such
items, $2.0 million were non-cash items. In 2001, net
income includes acquisition-related costs of $0.2 million
net of tax, fixed asset write offs of $2.0 million net of
tax and items related to debt restructuring and subordinated
debt repurchases, of $7.3 million net of tax, which
negatively impacted EPS by $0.12 per share. Of the total of
$9.5 million of such items, $5.5 million were non-cash
items. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation
|
The following discussion of our financial condition and results
of operations should be read in conjunction with our
consolidated financial statements and related notes in
Item 8 of this Report.
Introduction
We are the largest provider of regulated medical waste services
in North America. In addition we offer OSHA compliance services
to health care providers and other monitoring services. During
2004, we acquired White Rose Environmental Ltd., which is a
leading provider of regulated medical waste services in the
United Kingdom.
We derive our revenues from services to two principal types of
customers: (i) outpatient clinics, medical and dental
offices, biomedical companies, pharmacies municipal entities,
long-term and sub-acute care facilities and other
smaller-quantity generators of regulated medical waste
(small account customers) and (ii) hospitals,
blood banks, pharmaceutical manufacturers and other
larger-quantity generators of regulated medical waste
(large account customers).
20
Substantially all of our services are provided pursuant to
customer contracts specifying either scheduled or on-call
services, or both. Contracts with small account customers
generally provide for annual price increases and have an
automatic renewal provision unless the customer notifies us to
the contrary prior to the expiration of the current term of the
contract. Contracts with hospitals and other large account
customers, which may run for more than one year, typically
include price escalator provisions, which allow for price
increases generally tied to an inflation index or set at a fixed
percentage.
We also serve pharmacies, distributors and manufacturers of
pharmaceutical products by managing the return and disposal of
expired or surplus pharmaceutical products and by managing the
recall of pharmaceutical products being recalled by the
manufacturer. In 2005, we completed four acquisitions of
companies that provide these services.
As of December 31, 2005, we served approximately 333,000
customers, of which approximately 325,000 were small account
customers and approximately 7,700 were large account customers.
Critical
Accounting Policies and Procedures
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires that we
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities. We believe that
of our significant accounting policies (see Note 2 to our
consolidated financial statements), the following ones may
involve a higher degree of judgment on our part and greater
complexity of reporting.
Revenue Recognition. We recognize revenue for
our medical waste services at the time of medical waste
collection. Revenue and costs on contracts to supply our
proprietary ETD treatment equipment are recognized based on
shipment of equipment and services provided for in the
individual contract. We routinely review total estimated costs
and shipments to complete each contract and revise the revenues
and estimated gross margin on the contract as necessary.
Payments received in advance are deferred and recognized as
services are provided. Royalty revenues are calculated based on
measurements specified in each contract or license and revenues
are recognized at the end of each reporting period when the
activity being measured has been completed. Revenues from
product sales are recognized at the time the goods are shipped
to the ordering customer. Software licensing revenues are
recognized on a prorated basis over the term of the license
agreement. Revenues from pharmaceutical services are recorded at
the time services are performed. We do not have any contracts in
a loss position. Losses would be recorded when known and
estimable for any contracts that should go into a loss position.
Payments received in advance are deferred and recognized as
services are provided.
Goodwill and Other Identifiable Intangible
Assets. Goodwill associated with the excess
purchase price over the fair value of assets acquired is not
amortized. We have determined that our permits have indefinite
lives and, accordingly are not amortized. This position is in
accordance with Statements of Financial Accounting Standards
(FAS) No. 142, which became effective for
fiscal years beginning after December 15, 2001.
Our balance sheet at December 31, 2005 contains goodwill,
net of accumulated amortization, of $685.2 million. In
accordance with FAS 142, we evaluate on at least an annual
basis, using the fair value of reporting units, whether goodwill
is impaired. If we were to determine that a significant
impairment has occurred, we would be required to incur non-cash
write-offs of the impaired portion of goodwill that could have a
material adverse effect on our results of operations in the
period in which the write-off occurs. We use the market value of
our stock as the current measurement of total fair value of our
reporting units and any unforeseen material drop in our stock
price maybe an indicator of a potential impairment of goodwill.
The results of the 2005 impairment test conducted in June 2005
did not show any impairment of goodwill, and there have not
occurred any events since that time that indicate that an
impairment situation exists.
21
Our permits are currently tested for impairment annually at
December 31 or more frequently if circumstances indicate
that they may be impaired. We use a discounted cash flow model
as the current measurement of the fair value of the permits. The
estimate of cash flow is based upon, among other things, certain
assumptions about expected future operating performance and an
appropriate discount rate determined by management. Our
estimates of discounted cash flow may differ from actual cash
flow due to, among other things; inaccuracies in economic
estimates and actual cash flow could materially affect the
future financial value of the permits. The results of the 2005
impairment test did not show any impairment of our permits and
no events have occurred since that time that would indicate an
impairment situation exists.
Other identifiable intangible assets, such as customer lists,
tradenames and covenants not-to-compete, are currently amortized
using the straight-line method over their estimated useful
lives. We have determined that our medical waste business
customer lists have
40-year
lives and our pharmaceutical services business customer lists
have 20-year
lives. These assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may be less than the undiscounted cash flows. There
have been no indicators of impairment of these intangibles (see
Note 8 to our consolidated financial statements).
During 2005 we were in arbitration proceedings regarding various
disputes under an exclusive marketing and distribution license
agreement with a licensor of software. On March 1, 2006,
subsequent to year-end, the arbitrator awarded damages to the
licensor and the license agreement was effectively terminated.
Although this event occurred after the end of the year, we are
required to write-off the unamortized portion of the license fee
that we had previously paid. The effect is a reduction in the
carrying amount of this intangible by $1.8 million and a
reduction in the accumulated amortization of $0.4 million.
Income Taxes. Deferred income tax liabilities
and assets are determined based on the differences between the
financial statement and income tax basis of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
Accounts Receivable. Accounts receivable
consist primarily of amounts due to us from our normal business
activities. Accounts receivable balances are determined to be
delinquent when the amount is past due based on the contractual
terms with the customer. We maintain an allowance for doubtful
accounts to reflect the expected uncollectibility of accounts
receivable based on past collection history and specific risks
identified among uncollected accounts. Accounts receivable are
charged to the allowance for doubtful accounts when we have
determined that the receivable will not be collected
and/or when
the account has been referred to a third party collection
agency. No single customer accounts for more than 2% of our
revenues.
Insurance. Our insurance for workers
compensation, vehicle liability and physical damage, and
employee-related health care benefits is obtained using high
deductible insurance polices. A third-party administrator is
used to process all such claims. We require all workers
compensation, vehicle liability and physical damage claims to be
reported within 24 hours. As a result, we accrue our
workers compensation, vehicle and physical damage
liability based upon the claim reserves established by the
third-party administrator at the end of each reporting period.
Our employee health insurance benefit liability is based on our
historical claims experience rate. Our earnings would be
impacted to the extent that actual claims vary from historical
experience. We review our accruals associated with the exposure
to these liabilities for adequacy at the end of each reporting
period.
Litigation. We operate in a highly regulated
industry and deal with regulatory inquiries or investigations
from time to time that may be instituted for a variety of
reasons. We are also involved in a variety of civil litigation
from time to time. Settlements from litigation would be recorded
when known, probable and estimable.
Stock Option Plans. We have issued stock
options to employees and directors as an integral part of our
compensation programs. Accounting principles generally accepted
in the United States allow alternative methods of accounting for
these plans. We have chosen to account for our stock option
plans under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25). As required by FAS 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure, calculations of
22
pro forma net income and earnings per share, computed in
accordance with the method prescribed by FAS No. 123,
Accounting for Stock-Based Compensation, are set forth in
Note 11 to our consolidated financial statements.
We will adopt the provisions of FAS 123 (revised 2004),
Share-Based Payments, (FAS 123R) on
January 1, 2006. Among other things, FAS 123R requires
all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first
interim or annual period after January 1, 2006. See
Note 2-New
Accounting Pronouncements in Item 8, Financial Statements
and Supplemental Data for further information.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
The following summarizes (in thousands) our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
609,457
|
|
|
|
100.0
|
%
|
|
$
|
516,228
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
324,988
|
|
|
|
53.3
|
%
|
|
|
271,189
|
|
|
|
52.5
|
%
|
Depreciation
|
|
|
16,432
|
|
|
|
2.7
|
%
|
|
|
16,833
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
341,420
|
|
|
|
56.0
|
%
|
|
|
288,022
|
|
|
|
55.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
268,037
|
|
|
|
44.0
|
%
|
|
|
228,206
|
|
|
|
44.2
|
%
|
Selling, general and administrative
|
|
|
93,033
|
|
|
|
15.3
|
%
|
|
|
75,653
|
|
|
|
14.7
|
%
|
Depreciation
|
|
|
3,403
|
|
|
|
0.6
|
%
|
|
|
2,540
|
|
|
|
0.5
|
%
|
Amortization
|
|
|
1,596
|
|
|
|
0.3
|
%
|
|
|
2,430
|
|
|
|
0.5
|
%
|
Acquisition related costs
|
|
|
778
|
|
|
|
0.1
|
%
|
|
|
773
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and
administrative expenses
|
|
|
98,810
|
|
|
|
16.2
|
%
|
|
|
81,396
|
|
|
|
15.8
|
%
|
Write off fixed as sets
|
|
|
872
|
|
|
|
0.1
|
%
|
|
|
1,155
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
168,355
|
|
|
|
27.6
|
%
|
|
|
145,655
|
|
|
|
28.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down of note receivable with
former joint venture
|
|
|
2,495
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
Licensing legal settlement
|
|
|
1,823
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
3CI legal settlement
|
|
|
36,481
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
Net income
|
|
|
67,154
|
|
|
|
11.0
|
%
|
|
|
78,178
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share diluted
|
|
$
|
1.48
|
|
|
|
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Our revenues increased
$93.2 million, or 18.1%, to $609.5 million in 2005
from $516.2 million in 2004. Revenues generated from the
sale of ETD equipment and licensing of technology
internationally were $1.0 million during 2005, compared to
$8.2 million during 2004. This decrease is a result of the
delivery of a large portion of an order of ETD equipment to a
customer in Japan in 2004. During 2005, acquisitions less than
one year old contributed approximately $63.6 million to the
increase in our revenues from 2004. For the year, internal
growth for small account customers increased approximately 9%
while revenues from large quantity customers increased by
approximately 5%.
During 2005, the size of the regulated medical waste market in
the United States remained relatively stable. Through our
acquisition of White Rose Environmental Ltd. in June 2004 and
subsequent United Kingdom acquisitions in 2005, we were able to
expand our geographic presence outside of North America.
Cost of Revenues. Our cost of revenues
increased $53.4 million or 18.5%, to $341.4 million
during 2005, from $288.0 million during 2004. The increase
was primarily related to the increase in revenues during 2005
compared to 2004. Our gross margin percentage decreased to 44.0%
during 2005 from 44.2% during 2004 as we experienced higher
energy related costs. Domestic energy costs increased in 2005,
which were partially offset by higher revenues related to fuel
surcharges. Employee benefit costs as a percentage of
23
compensation costs decreased by 2.0% in 2005. This was a result
of the changes to our employee healthcare programs including
changes to our providers and program formats.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased to $98.8 million during 2005, from
$81.4 million during 2004. This increase was primarily the
result of increased spending on marketing our
Steri-Safesm
program and Bio Systems sharps management program and the
expansion into the pharmaceutical services programs. Bad debt
expense increased during 2005 to $2.7 million from
$0.8 million in 2004 due to higher sales and increased
write-offs in 2005. In addition, as noted in the cost of
revenues discussion above, employee benefit costs as a
percentage of compensation costs decreased in 2005. Amortization
decreased to $1.6 million during 2005, from
$2.4 million during 2004 as a result of intangibles
becoming fully amortized at the end of 2004. Selling, general
and administrative expenses as a percentage of revenue increased
to 16.2% during 2005 compared to 15.8% in 2004.
Income from Operations. Income from operations
increased to $168.4 million during 2005 from
$145.7 million during 2004. The increase was due to higher
revenues partially offset by higher costs of revenues and
selling, general and administrative expenses. During the year
ended December 31, 2005 3CI Complete Compliance
Corporation, of which we own a majority of the common stock,
recorded a non-cash impairment charge of $0.9 million on
its Springhill, Louisiana building and property. During the year
ended December 31, 2004 we recorded a non-cash write-down
of idled Stericycle incinerator equipment at our Baltimore,
Maryland and Terrell, Texas facility of $1.2 million.
Income from operations as a percentage of revenue decreased to
27.6% during 2005 from 28.2% during 2004 as a result of the
factors described above.
Interest Expense and Interest Income. Interest
expense increased to $13.0 million during 2005, from
$11.2 million during 2004, primarily due to higher debt
levels during the year. Interest income was $0.8 million
during 2005 and $0.6 million during 2004.
Write-down of note receivable. During 2005 we
wrote-down a $2.5 million note receivable that we had
recorded from the sale of interest in our former South African
joint venture when we had determined that the amount was
uncollectible.
Legal Settlements. During November 2005 we
incurred $36.5 million in expenses related to the
preliminary settlement of the 3CI class action litigation and
related legal expenses. In December 2005, we recorded a cash
charge of $0.4 million for damages and a non-cash charge of
$1.4 million, representing the write-off of the unamortized
portion of a license fee that we previously paid, as a result of
an arbitrators award in March 2006 and the license
agreement being effectively terminated.
Debt Extinguishments and Refinancing
Expenses. During 2005 we incurred
$0.5 million in refinancing expense for non-cash
accelerated amortization of financing fees related to amendments
to our bank credit facility agreements. During 2004 we
repurchased the remaining $50.9 million of our senior
subordinated notes. As a result, in 2004 we incurred
$3.1 million in redemption premium expenses and
$1.1 million in non-cash accelerated amortization of
financing fees associated with the repurchase of the notes.
Income Tax Expense. Income tax expense for the
years 2005 and 2004 reflects an effective tax rate of
approximately 40.0% and 39.2%, respectively, for federal and
state income taxes. Excluding the effect of the legal settlement
expense, the effective tax rate for 2005 was 39%.
24
|
|
|
Year
Ended December 31, 2004 Compared to Year Ended
December 31, 2003
|
The following summarizes (in thousands) our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
Revenues
|
|
$
|
516,228
|
|
|
|
100.0
|
%
|
|
$
|
453,225
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
271,189
|
|
|
|
52.5
|
%
|
|
|
243,170
|
|
|
|
53.7
|
%
|
Depreciation
|
|
|
16,833
|
|
|
|
3.3
|
%
|
|
|
13,430
|
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
288,022
|
|
|
|
55.8
|
%
|
|
|
256,600
|
|
|
|
56.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
228,206
|
|
|
|
44.2
|
%
|
|
|
196,625
|
|
|
|
43.4
|
%
|
Selling, general and administrative
|
|
|
75,653
|
|
|
|
14.7
|
%
|
|
|
65,733
|
|
|
|
14.5
|
%
|
Depreciation
|
|
|
2,540
|
|
|
|
0.5
|
%
|
|
|
1,975
|
|
|
|
0.4
|
%
|
Amortization
|
|
|
2,430
|
|
|
|
0.5
|
%
|
|
|
1,850
|
|
|
|
0.4
|
%
|
Acquisition related costs
|
|
|
773
|
|
|
|
0.1
|
%
|
|
|
670
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and
administrative expenses
|
|
|
81,396
|
|
|
|
15.8
|
%
|
|
|
70,228
|
|
|
|
15.5
|
%
|
Write off fixed assets
|
|
|
1,155
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
145,655
|
|
|
|
28.2
|
%
|
|
|
126,397
|
|
|
|
27.9
|
%
|
Net income
|
|
|
78,178
|
|
|
|
15.1
|
%
|
|
|
65,781
|
|
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share diluted
|
|
$
|
1.69
|
|
|
|
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Our revenues increased
$63.0 million, or 13.9%, to $516.2 million in 2004
from $453.2 million in 2003. Revenues generated from the
sale of ETD equipment and licensing of technology
internationally were $8.2 million during 2004, compared to
$2.8 million during 2003. This increase is a result of the
delivery of a large portion of an order of ETD equipment to a
customer in Japan in 2004. During 2004, acquisitions less than
one year old contributed approximately $47.6 million to the
increase in our revenues from 2003. For the year, internal
growth for small account customers increased approximately 9%
while revenues from large quantity customers decreased by
approximately 4% because of our program of improving
lower-margin accounts. This margin improvement program
identifies large quantity customers with margins below
internally acceptable thresholds and we make adjustments to
pricing or service in an effort to improve the margin. These
adjustments may result in our not renewing the customer contract
and therefore may result in a reduction of revenues.
During 2004, the size of the regulated medical waste market in
the United States remained relatively stable. Through our
acquisition in June of White Rose Environmental Ltd., we were
able to expand our geographic presence outside of North America.
Cost of Revenues. Our cost of revenues
increased $31.4 million or 12.2%, to $288.0 million
during 2004, from $256.6 million during 2003. The increase
was primarily related to the increase in revenues during 2004
compared to 2003. Our gross margin percentage increased to 44.2%
during 2004 from 43.4% during 2003 as we realized improvements
from our continuous programs to improve margins on our large
quantity business, increased our number of small quantity
customers electing our
Steri-Safesm
program from 70,000 to 87,000 and improved our transportation
productivity by increasing route density. During the year fuel
prices as a percent of revenue increased by 20%. Employee
benefit costs as a percentage of compensation costs decreased by
3.3% in 2004. This was a result of the changes implemented in
late 2003 to our employee healthcare programs including changes
to our third-party administrators and providers. The lower gross
margins of White Rose, which started consolidating into our
financials in June 2004, reduced the gross margin percentage for
the consolidated business by 134 basis points in 2004.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased to $81.4 million during 2004, from
$70.2 million during 2003. This increase was primarily the
result of increased spending as a result on marketing our
Steri-Safesm
program and the national rollout of the Bio
25
Systems sharps management program and the acquisition of
White Rose in June 2004. Amortization increased to
$2.4 million during 2004, from $1.9 million during
2003. Acquisition related costs increased to $0.8 million
in 2004 from $0.7 million in 2003. Bad debt expense
decreased during 2004 to $0.8 million from
$2.0 million in 2003. This decrease was the result of
improved collections and decreased write-offs during 2004. Legal
expenses increased to $5.4 million in 2004 from
$3.4 million in 2003 as a result of litigation expense of
which, $1.5 million was incurred by our majority-owned
subsidiary 3CI under the direction of the special committee of
its board of directors. In addition, as noted in the cost of
revenues discussion above, employee benefit costs as a
percentage of compensation costs decreased in 2004. Selling,
general and administrative expenses as a percentage of revenue
increased to 15.8% during 2004 compared to 15.5% in 2003.
Income from Operations. Income from operations
increased to $145.7 million during 2004 from
$126.4 million during 2003. The increase was due to higher
revenues, offset by higher costs of revenues and selling,
general and administrative expenses. During the year ended
December 31, 2004 we had a non-cash write down of idled
incinerator equipment and related spare parts in the amount of
$1.2 million. Income from operations as a percentage of
revenue increased to 28.2% during 2004 from 27.9% during 2003 as
a result of the factors described above.
Interest Expense and Interest Income. Interest
expense decreased to $11.2 million during 2004, from
$12.8 million during 2003, primarily due to lower debt
levels and lower interest rates during the year. Interest income
was $0.6 million during 2004 and 2003.
Debt Extinguishments and Refinancing
Expenses. During 2004 we repurchased the
remaining $50.9 million of our senior subordinated notes
compared to a repurchase of $17.8 million of notes in 2003.
As a result, in 2004 we incurred $3.1 million in redemption
premium expenses and $1.1 million in non-cash accelerated
amortization of financing fees associated with the repurchase of
the notes compared to $2.8 million and $0.5 million,
respectively, in 2003. In addition, we amended our bank credit
facility agreement in 2004 and paid $0.3 million in
financing fees.
Income Tax Expense. Income tax expense for the
years 2004 and 2003 reflects an effective tax rate of
approximately 39.2% and 39.5%, respectively, for federal and
state income taxes.
Liquidity
and Capital Resources
In June 2005, we obtained a new $400.0 million senior
unsecured revolving credit facility maturing in June 2010 in
place of our existing senior secured credit facility. The new
credit facility reduced the interest rates that we are charged
by reducing the applicable margin that is added to the relevant
interest rate. The new credit facility also allowed us to borrow
in pre-approved currencies other than United States dollars. Our
borrowings bear interest at fluctuating interest rates
determined, at our election in advance for any quarterly or
other applicable interest period, by reference to (i) a
base rate (the higher of the prime rate at Bank of
America, N.A. or 0.5% above the rate on overnight federal funds
transactions) or (ii) the London Interbank Offered Rate, or
LIBOR, plus, in either case, the applicable margin within the
relevant range of margins provided in our credit agreement. The
applicable margin is based upon our consolidated leverage ratio.
As of December 31, 2005, the margin for interest rates on
borrowings under our new credit facility was 0.0% on base rate
loans and 0.75% on LIBOR loans.
In December 2005, we amended our $400.0 million senior
unsecured revolving credit facility. The facility was increased
to $550.0 million, with additional capacity available up to
$650.0 million upon request. We also increased the letter
of credit sub-limit from $125.0 million to
$150.0 million.
Our amended credit facility requires us to comply with various
financial, reporting and other covenants and restrictions,
including a restriction on dividend payments. At
December 31, 2005, our material financial covenants were as
follows:
|
|
|
|
|
The permitted maximum leverage ratio is 3.00:1.00. As of
December 31, 2005, our actual leverage ratio was 1.80:1.00.
|
26
|
|
|
|
|
The permitted minimum interest coverage ratio is 3.00:1.00. As
of December 31, 2005, our actual interest coverage ratio
was 16.45:1.00.
|
As of December 31, 2005, we had $291.7 million of
borrowings outstanding under our senior unsecured credit
facility, which includes foreign currency borrowings of
$5.2 million. In addition, we had $65.9 million
committed to outstanding letters of credit.
Working Capital. At December 31, 2005,
our working capital was $45.3 million compared to working
capital of $32.3 million at December 31, 2004. As
noted, we have available a $550.0 million revolving line of
credit under our senior unsecured credit facility and at
December 31, 2005 had borrowed $291.7 million under
this line and had an additional $65.9 million committed in
letters of credit.
Net Cash Provided or Used. Net cash provided
by operating activities was $94.3 million during the year
ended December 31, 2005 compared to $114.6 million for
2004. This decrease primarily reflects higher accounts
receivable, accrued liability balances and lower net income. The
decrease in net income was primarily the result of the
$23.4 million, net of tax, recorded for the preliminary
settlement of the 3CI class action litigation. Net cash provided
by operating activities in 2005 included a $7.4 million tax
benefit from disqualifying dispositions of stock options.
Net cash used in investing activities for 2005 was
$156.0 million compared to $105.1 million for 2004.
This increase is primarily attributable to the increase in
payments for acquisitions. Cash investments in acquisitions and
international joint ventures for 2005 were $139.7 million
compared to $72.4 million in 2004. The increase was
primarily the result of our acquisition of pharmaceutical return
businesses. In addition, in 2005 we sold the Consumer Products
Division of Universal Solutions, Inc., which we had acquired as
part of the Universal Solutions, Inc. acquisition, and received
$10.3 million of net proceeds. Capital expenditures were
$26.3 million for 2005, for investments in capital
equipment to support a nationwide rollout of the Bio Systems
sharps management program and other improvements in our
infrastructure, compared to $33.3 million in 2004. As of
December 31, 2005 we had less than 9% of our treatment
capacity in North America in incineration and approximately 91%
in non-incineration technologies such as our proprietary ETD
technology and autoclaving. The implementation of our commitment
to move away from incineration in North America may result in a
write-down of the incineration equipment as and when we close
incinerators that we are currently operating. Our commitment to
move away from incineration in North America is in the nature of
a goal to be accomplished over an undetermined number of years.
Because of uncertainties relating, among other things, to
customer education and acceptance and legal requirements to
incinerate portions of the medical waste, we do not have a
timetable for this transition or specific plans to close any of
our existing incinerators.
Net cash provided by financing activities was $59.5 million
during 2005 compared to $6.9 million net cash used in
financing activities in 2004. During 2005 we borrowed money to
fund acquisitions, stock repurchases and the 3CI legal
settlement. In addition, we made debt repayments of
$198.9 million when we terminated our 2001 senior credit
facility, $60.7 million in common stock repurchases,
$12.8 million repayments on promissory notes and
$0.8 million for capital leases. In 2005, we also amended
our $400.0 million senior unsecured revolving credit
facility. The facility was increased to $550.0 million, in
which we borrowed $371.5 million and made debt repayments
of $79.8 million.
In addition, at December 31, 2005 we had $68.0 million
outstanding primarily related to promissory notes issued in
connection with acquisitions made during 2002 through 2005.
27
Contractual Cash Commitments. The following
table displays our future contractual cash commitments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After
|
|
Payments Due by Period (In
Thousands)
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Long term debt*
|
|
$
|
441,224
|
|
|
$
|
30,504
|
|
|
$
|
98,832
|
|
|
$
|
309,151
|
|
|
$
|
2,737
|
|
Capital lease obligations*
|
|
|
1,298
|
|
|
|
1,068
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
Purchasing obligations
|
|
|
1,650
|
|
|
|
864
|
|
|
|
786
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
97,742
|
|
|
|
24,747
|
|
|
|
47,364
|
|
|
|
15,550
|
|
|
|
10,081
|
|
Other long-term liabilities*
|
|
|
3,187
|
|
|
|
839
|
|
|
|
1,634
|
|
|
|
417
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
545,101
|
|
|
$
|
58,022
|
|
|
$
|
148,846
|
|
|
$
|
325,118
|
|
|
$
|
13,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The long-term debt, capital lease and other long-term
liabilities items include both the future principal payment
amount as well as an amount calculated for expected future
interest payments. For long-term debt with variable rates of
interest, management used judgment to estimate the future rate
of interest. |
At December 31, 2005 we had $65.9 million in stand-by
letters of credit issued.
We anticipate that our operating cash flow, together with
borrowings under our senior secured credit facility, will be
sufficient to meet our anticipated future operating expenses,
capital expenditures and debt service obligations as they become
due during the next 12 months and the foreseeable future.
Guarantees. We have guaranteed a loan to the
Azoroa Bank in Japan on behalf of Shiraishi-Sogyo Co. Ltd
(Shiraishi). Shiraishi is a customer in Japan that
is expanding their medical waste management business and has a
five-year loan with a current balance of $6.5 million with
the Azoroa Bank that expires in June 2009. Management currently
believes no amount will be paid under the guarantee.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We are subject to market risks arising from changes in interest
rates on our senior unsecured credit facility. Our interest rate
exposure results from changes in LIBOR or the base rate, which
are used to determine the applicable interest rates under our
revolving credit facility. Our potential loss over one year that
would result from a hypothetical, instantaneous and unfavorable
change of 100 basis points in the interest rate on all of
our variable rate obligations would be approximately
$2.9 million.
We have exposure to commodity pricing for gas and diesel fuel
for our trucks. We do not hedge these items to manage the
exposure.
|
|
Item 8.
|
Consolidated
Financial Statements and Supplemental Data
|
Managements
Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined
in
Rules 13a-15(f)
under the Securities Exchange Act of 1934 as a process designed
by, or under the supervision of, a companys principal
executive and principal financial officers and effected by the
companys board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. The Companys
internal control over financial reporting includes those
policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and
28
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2005. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework.
Based on this assessment and those criteria, management
concludes that the Company maintained effective internal control
over financial reporting as of December 31, 2005.
The Companys independent auditors have issued an
attestation report on managements assessment of the
Companys internal control over financial reporting. That
report appears on page 30.
Stericycle, Inc.
Lake Forest, IL
March 1, 2006
29
Report of
Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
The Board
of Directors and Shareholders of Stericycle, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Stericycle, Inc. maintained effective
internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Stericycle, Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Stericycle,
Inc. maintained effective internal control over financial
reporting as of December 31, 2005 is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, Stericycle, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2005 based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Stericycle, Inc. and Subsidiaries
as of December 31, 2005 and 2004, and the related
consolidated statements of income, cash flows and changes in
shareholders equity for each of the three years in the
period ended December 31, 2005 and our report dated
March 1, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
March 1, 2006,
30
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Stericycle, Inc.
We have audited the accompanying consolidated balance sheets of
Stericycle, Inc. and Subsidiaries as of December 31, 2005
and 2004, and the related consolidated statements of income,
cash flows and changes in shareholders equity for each of
the three years in the period ended December 31, 2005. Our
audits also included the financial statement schedule listed in
the Index at Item 15(a). These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Stericycle, Inc. and Subsidiaries at
December 31, 2005 and 2004, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Stericycle, Inc.s internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 1, 2006 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
March 1, 2006,
31
STERICYCLE,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except for share
and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,825
|
|
|
$
|
7,850
|
|
Short-term investments
|
|
|
720
|
|
|
|
99
|
|
Accounts receivable, less allowance
for doubtful accounts of $4,810 in 2005 and $4,188 in 2004
|
|
|
103,703
|
|
|
|
74,888
|
|
Parts and supplies
|
|
|
5,263
|
|
|
|
4,259
|
|
Prepaid expenses
|
|
|
6,523
|
|
|
|
6,716
|
|
Notes receivable
|
|
|
3,164
|
|
|
|
3,423
|
|
Deferred tax asset
|
|
|
13,452
|
|
|
|
13,296
|
|
Other
|
|
|
3,392
|
|
|
|
4,961
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
144,042
|
|
|
|
115,492
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
8,190
|
|
|
|
8,352
|
|
Buildings and improvements
|
|
|
48,149
|
|
|
|
44,951
|
|
Machinery and equipment
|
|
|
144,795
|
|
|
|
126,689
|
|
Office equipment and furniture
|
|
|
21,581
|
|
|
|
18,940
|
|
Internally developed software
|
|
|
1,101
|
|
|
|
|
|
Construction in progress
|
|
|
11,220
|
|
|
|
12,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,036
|
|
|
|
211,459
|
|
Less accumulated depreciation
|
|
|
(98,816
|
)
|
|
|
(75,947
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
136,220
|
|
|
|
135,512
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
685,169
|
|
|
|
516,808
|
|
Intangible assets, less accumulated
amortization of $8,965 in 2005 and $7,951 in 2004
|
|
|
61,641
|
|
|
|
50,800
|
|
Notes receivable
|
|
|
10,672
|
|
|
|
9,517
|
|
Other
|
|
|
9,916
|
|
|
|
6,012
|
|
Total other assets
|
|
|
767,398
|
|
|
|
583,137
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,047,660
|
|
|
$
|
834,141
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long term debt
|
|
$
|
12,044
|
|
|
$
|
13,218
|
|
Accounts payable
|
|
|
27,872
|
|
|
|
17,998
|
|
Accrued liabilities
|
|
|
48,450
|
|
|
|
44,411
|
|
Deferred revenue
|
|
|
10,394
|
|
|
|
7,611
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
98,760
|
|
|
|
83,238
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current
portion
|
|
|
348,841
|
|
|
|
190,431
|
|
Deferred income taxes
|
|
|
71,549
|
|
|
|
57,477
|
|
Other liabilities
|
|
|
6,876
|
|
|
|
7,623
|
|
Common shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock (par value
$.01 per share, 80,000,000 shares authorized,
44,149,722 issued and outstanding in 2005, 44,732,070 issued and
outstanding in 2004)
|
|
|
442
|
|
|
|
448
|
|
Additional paid-in capital
|
|
|
259,075
|
|
|
|
298,046
|
|
Accumulated other comprehensive
income
|
|
|
546
|
|
|
|
2,461
|
|
Retained earnings
|
|
|
261,571
|
|
|
|
194,417
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
521,634
|
|
|
|
495,372
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
1,047,660
|
|
|
$
|
834,141
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
32
STERICYCLE,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share
data)
|
|
|
Revenues
|
|
$
|
609,457
|
|
|
$
|
516,228
|
|
|
$
|
453,225
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
341,420
|
|
|
|
288,022
|
|
|
|
256,600
|
|
Selling, general and
administrative expenses
|
|
|
98,032
|
|
|
|
80,623
|
|
|
|
69,558
|
|
Write off of fixed assets
|
|
|
872
|
|
|
|
1,155
|
|
|
|
|
|
Acquisition related expenses
|
|
|
778
|
|
|
|
773
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
441,102
|
|
|
|
370,573
|
|
|
|
326,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
168,355
|
|
|
|
145,655
|
|
|
|
126,397
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
764
|
|
|
|
558
|
|
|
|
550
|
|
Interest expense
|
|
|
(13,011
|
)
|
|
|
(11,186
|
)
|
|
|
(12,848
|
)
|
Debt extinguishments and
refinancing
|
|
|
(447
|
)
|
|
|
(4,574
|
)
|
|
|
(3,268
|
)
|
Write-down of note receivable with
former joint venture
|
|
|
(2,495
|
)
|
|
|
|
|
|
|
|
|
Licensing legal settlement
|
|
|
(1,823
|
)
|
|
|
|
|
|
|
|
|
3CI legal settlement
|
|
|
(36,481
|
)
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(2,882
|
)
|
|
|
(1,889
|
)
|
|
|
(2,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(56,375
|
)
|
|
|
(17,091
|
)
|
|
|
(17,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
111,980
|
|
|
|
128,564
|
|
|
|
108,729
|
|
Income tax expense
|
|
|
44,826
|
|
|
|
50,386
|
|
|
|
42,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
67,154
|
|
|
$
|
78,178
|
|
|
$
|
65,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share Basic
|
|
$
|
1.52
|
|
|
$
|
1.77
|
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share Diluted
|
|
$
|
1.48
|
|
|
$
|
1.69
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding Basic
|
|
|
44,284,580
|
|
|
|
44,250,913
|
|
|
|
41,439,020
|
|
Weighted average number of common
shares outstanding Diluted
|
|
|
45,310,509
|
|
|
|
46,195,897
|
|
|
|
46,097,802
|
|
The accompanying notes are an integral part of these financial
statements.
33
STERICYCLE,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
67,154
|
|
|
$
|
78,178
|
|
|
$
|
65,781
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
27
|
|
|
|
21
|
|
|
|
76
|
|
Write-off of deferred financing
costs
|
|
|
447
|
|
|
|
1,094
|
|
|
|
484
|
|
Write-down of note receivable with
former joint venture
|
|
|
2,495
|
|
|
|
|
|
|
|
|
|
Fees paid for extinguishment of
senior subordinated debt
|
|
|
|
|
|
|
3,147
|
|
|
|
2,784
|
|
Write-off of licensing intangible
|
|
|
1,431
|
|
|
|
|
|
|
|
|
|
Loss on sale and impairment of
fixed assets
|
|
|
872
|
|
|
|
1,515
|
|
|
|
295
|
|
Tax benefit of disqualifying
dispositions of stock options and exercise of non-qualified
stock options
|
|
|
7,432
|
|
|
|
7,719
|
|
|
|
10,044
|
|
Depreciation
|
|
|
19,835
|
|
|
|
19,373
|
|
|
|
15,405
|
|
Amortization
|
|
|
1,596
|
|
|
|
2,430
|
|
|
|
1,850
|
|
Deferred income taxes
|
|
|
13,514
|
|
|
|
13,849
|
|
|
|
9,576
|
|
Change in operating assets and
liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(19,679
|
)
|
|
|
(4,986
|
)
|
|
|
5,983
|
|
Parts and supplies
|
|
|
(962
|
)
|
|
|
(494
|
)
|
|
|
1,720
|
|
Prepaid expenses and other assets
|
|
|
(1,909
|
)
|
|
|
6,301
|
|
|
|
(1,710
|
)
|
Accounts payable
|
|
|
7,393
|
|
|
|
(5,123
|
)
|
|
|
(515
|
)
|
Accrued liabilities
|
|
|
(8,056
|
)
|
|
|
(5,926
|
)
|
|
|
11,363
|
|
Deferred revenue
|
|
|
2,737
|
|
|
|
(2,487
|
)
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
94,327
|
|
|
|
114,611
|
|
|
|
123,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions and
international investments, net of cash acquired
|
|
|
(139,696
|
)
|
|
|
(72,408
|
)
|
|
|
(37,222
|
)
|
Proceeds from maturity/(purchases)
of short-term investments
|
|
|
(621
|
)
|
|
|
542
|
|
|
|
(129
|
)
|
Net proceeds from sale of assets
from acquisition
|
|
|
10,328
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and
equipment
|
|
|
302
|
|
|
|
85
|
|
|
|
688
|
|
Capital expenditures
|
|
|
(26,314
|
)
|
|
|
(33,312
|
)
|
|
|
(20,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(156,001
|
)
|
|
|
(105,093
|
)
|
|
|
(57,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes
payable
|
|
|
735
|
|
|
|
12,435
|
|
|
|
1,132
|
|
Repayments of senior subordinated
debt
|
|
|
|
|
|
|
(54,012
|
)
|
|
|
(20,559
|
)
|
Repayment of long term debt
|
|
|
(12,845
|
)
|
|
|
(4,402
|
)
|
|
|
(6,023
|
)
|
Net borrowings (repayments) from
2001 senior credit facility
|
|
|
27,500
|
|
|
|
61,695
|
|
|
|
(37,187
|
)
|
Repayment of 2001 senior credit
facility
|
|
|
(198,853
|
)
|
|
|
|
|
|
|
|
|
Borrowings on 2005 senior credit
facility
|
|
|
371,522
|
|
|
|
|
|
|
|
|
|
Repayments on 2005 senior credit
facility
|
|
|
(79,853
|
)
|
|
|
|
|
|
|
|
|
Payments of deferred financing costs
|
|
|
(1,484
|
)
|
|
|
|
|
|
|
(395
|
)
|
Principal payments on capital lease
obligations
|
|
|
(795
|
)
|
|
|
(996
|
)
|
|
|
(1,117
|
)
|
Purchase/cancellation of treasury
stock
|
|
|
(60,657
|
)
|
|
|
(34,847
|
)
|
|
|
(13,204
|
)
|
Proceeds from other issuances of
common stock
|
|
|
14,230
|
|
|
|
13,186
|
|
|
|
10,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
59,500
|
|
|
|
(6,941
|
)
|
|
|
(66,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
2,149
|
|
|
|
(1,967
|
)
|
|
|
(567
|
)
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(25
|
)
|
|
|
610
|
|
|
|
(1,135
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
7,850
|
|
|
|
7,240
|
|
|
|
8,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
7,825
|
|
|
$
|
7,850
|
|
|
$
|
7,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net issuances of notes payable for
certain acquisitions
|
|
$
|
49,736
|
|
|
$
|
17,795
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net issuances of common stock and
warrants for certain acquisitions
|
|
$
|
|
|
|
$
|
441
|
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
34
STERICYCLE,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
and
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Outstanding
|
|
|
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balances at December 31, 2002
|
|
|
40,437
|
|
|
$
|
404
|
|
|
$
|
277,531
|
|
|
$
|
50,458
|
|
|
$
|
(1,435
|
)
|
|
$
|
(229
|
)
|
|
$
|
326,729
|
|
Issuance of common stock for
exercise of options and warrants and employee stock purchases
|
|
|
960
|
|
|
|
10
|
|
|
|
10,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,400
|
|
Conversion of Preferred Stock
|
|
|
812
|
|
|
|
8
|
|
|
|
7,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,105
|
|
Purchase/Cancellation of treasury
stock
|
|
|
(343
|
)
|
|
|
(3
|
)
|
|
|
(14,636
|
)
|
|
|
|
|
|
|
1,435
|
|
|
|
|
|
|
|
(13,204
|
)
|
Common stock and warrants issued
for acquisitions
|
|
|
2
|
|
|
|
1
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206
|
|
Tax benefit of disqualifying
dispositions of stock options and exercise of non-qualified
stock options
|
|
|
|
|
|
|
|
|
|
|
10,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,044
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527
|
|
|
|
527
|
|
Change in fair value of cashflow
hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
232
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,781
|
|
|
|
|
|
|
|
|
|
|
|
65,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
41,868
|
|
|
$
|
420
|
|
|
$
|
290,631
|
|
|
$
|
116,239
|
|
|
$
|
|
|
|
$
|
530
|
|
|
$
|
407,820
|
|
Issuance of common stock for
exercise of options and warrants and employee stock purchases
|
|
|
808
|
|
|
|
8
|
|
|
|
13,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,186
|
|
Conversion of Preferred Stock
|
|
|
2,836
|
|
|
|
28
|
|
|
|
20,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,944
|
|
Purchase/Cancellation of treasury
stock
|
|
|
(789
|
)
|
|
|
(8
|
)
|
|
|
(34,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,847
|
)
|
Common stock and warrants issued
for acquisitions
|
|
|
9
|
|
|
|
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441
|
|
Tax benefit of disqualifying
dispositions of stock options and exercise of non-qualified
stock options
|
|
|
|
|
|
|
|
|
|
|
7,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,719
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,934
|
|
|
|
1,934
|
|
Change in fair value of cashflow
hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,178
|
|
|
|
|
|
|
|
|
|
|
|
78,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
44,732
|
|
|
$
|
448
|
|
|
$
|
298,046
|
|
|
$
|
194,417
|
|
|
$
|
|
|
|
$
|
2,461
|
|
|
$
|
495,372
|
|
Issuance of common stock for
exercise of options and warrants and employee stock purchases
|
|
|
668
|
|
|
|
7
|
|
|
|
14,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,248
|
|
Purchase/Cancellation of treasury
stock
|
|
|
(1,250
|
)
|
|
|
(13
|
)
|
|
|
(60,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,657
|
)
|
Tax benefit of disqualifying
dispositions of stock options and exercise of non-qualified
stock options
|
|
|
|
|
|
|
|
|
|
|
7,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,432
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,817
|
)
|
|
|
(1,817
|
)
|
Change in fair value of cashflow
hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
(98
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,154
|
|
|
|
|
|
|
|
|
|
|
|
67,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
44,150
|
|
|
$
|
442
|
|
|
$
|
259,075
|
|
|
$
|
261,571
|
|
|
$
|
|
|
|
$
|
546
|
|
|
$
|
521,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements
35
STERICYCLE,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
Unless the context requires otherwise, we,
us or our refers to Stericycle, Inc. and
its subsidiaries on a consolidated basis.
Note 1 Description
of Business
We were incorporated in 1989 and presently serve approximately
333,000 customers throughout the United States, Puerto Rico,
Canada, Mexico and the United Kingdom. In North America we have
a fully integrated, national medical waste management network.
Our network includes 45 treatment/collection centers and 105
additional transfer and collection sites. We use this network to
provide a broad range of services to our customers. Our medical
waste treatment technologies include our proprietary
electro-thermal-deactivation system, or ETD, as well as
traditional methods such as autoclaving and incineration. In the
United Kingdom we have a fully integrated waste management
network, which includes 12 treatment/collection centers and two
additional transfer/collection sites.
We also serve pharmacies, distributors and manufacturers of
pharmaceutical products, from five processing centers within the
United States, by managing the return and disposal of expired or
surplus pharmaceutical products and by managing the recall of
pharmaceutical products being recalled by the manufacturer.
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 as well as
our 64.5% ownership in Medam S.A. de C.V. (Medam) (a
Mexican company) and 67.5% common stock ownership in 3CI
Complete Compliance Corporation (3CI). All
significant intercompany accounts and transactions have been
eliminated. In addition, we have a 37.5% ownership in Medam B.A.
Srl (an Argentine company), which is accounted for using the
equity method. Minority interest expense related to our majority
owned subsidiaries and our equity interest in the income or loss
of unconsolidated subsidiaries are included in the other income
(expense).
Revenue
Recognition:
We recognize revenue for our medical waste services at the time
of medical waste collection. Revenue and costs on contracts to
supply our proprietary ETD treatment equipment are recognized
based on shipment of equipment and services provided for in the
individual contract. We routinely review total estimated costs
and shipments to complete each contract and revise the revenues
and estimated gross margin on the contract as necessary.
Payments received in advance are deferred and recognized as
services are provided. Royalty revenues are calculated based on
measurements specified in each technology contract and revenues
are recognized at the end of each reporting period when the
activity being measured has been completed. Revenues from
product sales are recognized at the time the goods are shipped
to the ordering customer. Software licensing revenues are
recognized on a prorata basis over the term of the license
agreement. Revenues from pharmaceutical services are recorded at
the time services are performed. We do not have any contracts in
a loss position. Losses would be recorded when known and
estimable for any contracts that should go into a loss position.
Payments received in advance are deferred and recognized as
services are provided.
Cash
Equivalents and Short-Term Investments:
We consider all highly liquid investments with a maturity of
less than three months when purchased to be cash equivalents.
Short-term investments consist of certificates of deposit, which
mature in less than one year.
36
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
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
|
|
3 to 30 years
|
Machinery and Equipment
|
|
3 to 20 years
|
Containers
|
|
2 to 20 years
|
Transportation Equipment
|
|
4 to 10 years
|
Office Equipment and Furniture
|
|
3 to 10 years
|
Software
|
|
3 to 7 years
|
During the year ended December 31, 2005, 3CI of which we
own a majority of the common stock, recorded a non-cash
impairment charge of $0.9 million on its Springhill,
Louisiana building and property. During the year ended
December 31, 2004 we recorded a non-cash write-down of
idled Stericycle incinerator equipment at our Baltimore,
Maryland and Terrell, Texas facility of $1.2 million.
During 2004 we evaluated the estimated useful life of our
reusable Bio Systems containers by performing durability
studies. Based on these studies we determined that the useful
life of the containers was actually longer than our current life
used to calculate depreciation. During 2004 we adjusted the
total useful lives from 3 years to 17 years for
containers that had been purchased during 2003 and 2004. In
addition we adjusted the useful lives on the containers
originally acquired with the Scherer Healthcare acquisition in
January 2003 to a total of 10 years from the date of the
original purchase. The impact of the change in the estimated
useful life was immaterial to our results in 2004.
Goodwill
and Intangibles:
Goodwill and other indefinite lived intangibles are not
amortized but are subject to an annual impairment test.
According to Statements of Financial Accounting Standards
(FAS) No. 142, other intangible assets will
continue to be amortized over their useful lives. We have
determined that our customer relationships have useful lives
from 20 to 40 years based upon the type of customer. We
have non-compete intangibles with useful lives from one to five
years. We have tradename intangibles with useful lives from 20
to 40 years. We have a software technology intangible with
a useful life of five years. We have determined that our permits
have indefinite lives and thus they are not amortized.
Income
Taxes:
Deferred income tax liabilities and assets are determined based
on the differences between the financial statement and income
tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
Accounts
Receivable:
Accounts receivable consist primarily of amounts due to us from
our normal business activities. Accounts receivable balances are
determined to be past due when the amount is overdue based on
the contractual terms with the customer. We maintain an
allowance for doubtful accounts to reflect the expected
uncollectibility of accounts receivable based on past collection
history and specific risks identified among uncollected
accounts. Accounts receivable are written off against the
allowance for doubtful accounts when we have determined that the
receivable will not be collected
and/or when
the account has been referred to a third party collection agency.
37
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
Financial
Instruments:
Our financial instruments consist of cash and cash equivalents,
short-term investments, derivatives, 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 us 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 our customer base. No single
customer represents greater than 2% of total accounts
receivable. We perform ongoing credit evaluation of our
customers and maintain allowances for potential credit losses.
For any contracts in loss positions, losses are recorded when
known and estimable. These losses, when incurred, have been
within the range of our expectations.
Use of
Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Some areas
where we make estimates include allowance for doubtful accounts,
credit memo reserve, accrued employee health and welfare
benefits, income tax liabilities and accrued auto and
workers compensation insurance claims. Such estimates are
based on historical trends and on various other assumptions that
are believed to be reasonable under the circumstances. Actual
results could differ from our estimates.
Derivative
Instruments:
We have three forward contracts for the purchase of Sterling
(GBP) as hedging instruments for an intercompany loan from the
parent company to our subsidiary in the United Kingdom,
Stericycle International Ltd, which are described more fully in
Note 7. The subsidiary borrowed the funds for the purchase
of White Rose. The forward contracts align with the anticipated
repayment schedule of the loan and the last contract expires in
July 2009. On October 1, 2005, we prospectively designated
our existing foreign currency forward contracts as cash flow
hedges to receive hedge accounting treatment.
Stock-Based
Compensation:
At December 31, 2005, we have stock-based compensation
plans, which are described more fully in Note 11. We have
elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
interpretations in accounting for employee stock options using
the intrinsic value method because the alternative fair value
accounting method provided for under Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation (FAS 123),
requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25,
because the exercise price of our employee stock options equals
the market price of the underlying stock on the measurement date
(date of grant), no compensation expense is recognized.
38
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
The following table illustrates the effect on net income and
earnings per share if we had applied the fair value recognition
of FAS 123 to stock-based employee compensation (in
thousands except per share information).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Stock options expense included in
net income
|
|
$
|
16
|
|
|
$
|
13
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported net income
|
|
$
|
67,154
|
|
|
$
|
78,178
|
|
|
$
|
65,781
|
|
Pro forma impact of stock options,
net of tax
|
|
|
(5,940
|
)
|
|
|
(5,540
|
)
|
|
|
(6,172
|
)
|
Pro forma impact of employee stock
plan, net of tax
|
|
|
(127
|
)
|
|
|
(111
|
)
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
61,087
|
|
|
$
|
72,527
|
|
|
$
|
59,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
Basic as reported
|
|
$
|
1.52
|
|
|
$
|
1.77
|
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
1.38
|
|
|
$
|
1.64
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as
reported
|
|
$
|
1.48
|
|
|
$
|
1.69
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
1.36
|
|
|
$
|
1.58
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation:
Assets and liabilities of foreign affiliates that use the local
currency as their functional currency are translated at current
exchange rates, and income statement accounts are translated at
the average rates during the period. Related translation
adjustments are reported as a component of comprehensive income
(loss) directly in equity.
Environmental
Matters:
We record a liability for environmental remediation or damages
when a cleanup program becomes probable and the costs or damages
can be reasonably estimated. We do not have environmental
liabilities recorded at December 31, 2005 nor are we aware
of any issues at our facilities that could initiate the need for
environmental remediation.
Reclassifications:
Certain amounts in the 2003 and 2004 financial statements have
been reclassified to conform to the 2005 presentation.
New
Accounting Standards:
In December 2004, the Financial Accounting Standards Board
(FASB) issued FAS 123R, which replaces
FAS 123 and supersedes APB 25. FAS 123R requires
all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first
interim or annual period after January 1, 2006. The pro
forma disclosures previously permitted under FAS 123 no
longer will be an alternative to financial statement
recognition. We will begin expensing stock options in the first
quarter of 2006 and will use the modified prospective transition
method. The modified prospective method requires that
compensation expense be recorded for both new awards and awards
previously granted but not fully vested as of the adoption date.
We anticipate that we will continue to use the Black-Scholes
option-pricing model to determine the fair value of options
granted to employees. We expect the adoption of FAS 123R
will have a material impact on our consolidated statements
39
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
of income and earnings per share. We have no reason to believe
that the amounts reported as a result of the adoption will be
materially different from our currently disclosed pro forma
amounts.
Significant components of our income tax expense for the years
ended December 31, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,186
|
|
|
$
|
12,308
|
|
|
$
|
8,945
|
|
State
|
|
|
2,730
|
|
|
|
1,941
|
|
|
|
2,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,916
|
|
|
|
14,249
|
|
|
|
11,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
26,349
|
|
|
|
29,714
|
|
|
|
26,992
|
|
State
|
|
|
4,561
|
|
|
|
6,423
|
|
|
|
4,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,910
|
|
|
|
36,137
|
|
|
|
31,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Provision
|
|
$
|
44,826
|
|
|
$
|
50,386
|
|
|
$
|
42,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the income tax provision computed at the
federal statutory rate to the effective tax rate for the years
ended December 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes , net of federal tax
effect
|
|
|
4.1
|
%
|
|
|
4.2
|
%
|
|
|
4.2
|
%
|
Other
|
|
|
0.9
|
%
|
|
|
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
40.0
|
%
|
|
|
39.2
|
%
|
|
|
39.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes were $28.1 million,
$25.9 million and $16.7 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
40
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
Our deferred tax liabilities and assets as of December 31
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant, and equipment
|
|
$
|
(12,732
|
)
|
|
$
|
(11,073
|
)
|
Goodwill and other intangibles
|
|
|
(58,817
|
)
|
|
|
(46,404
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(71,549
|
)
|
|
|
(57,477
|
)
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
8,389
|
|
|
|
6,146
|
|
Other
|
|
|
1,394
|
|
|
|
3,456
|
|
Net operating tax loss carryforward
|
|
|
3,669
|
|
|
|
4,616
|
|
Valuation allowance
|
|
|
|
|
|
|
(922
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
13,452
|
|
|
|
13,296
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(58,097
|
)
|
|
$
|
(44,181
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, net operating loss carry forwards for
U.S. federal income tax purposes have been fully utilized,
excluding net operating loss carry forwards related to 3CI. We
have a foreign tax credit of approximately $0.5 million,
which will begin to expire beginning in 2010. Undistributed
earnings of foreign subsidiaries are considered to be
permanently invested, and therefore, no U.S. deferred taxes
are recorded thereon. The cumulative amounts of such earnings
are $22.3 million at December 31, 2005, and it was not
practible to estimate the U.S. and withholding tax thereon
assuming repatriation. 3CI, our majority owned subsidiary, has
net operating loss carry forwards for federal and state purposes
of $10.0 million beginning to expire in 2006. Stericycle
has net operating loss carry forwards for state purposes of
$4.4 million, which expire through 2018.
|
|
Note 4
|
Acquisitions
and Divestiture
|
During the year ended December 31, 2005 we completed the
acquisition of nine domestic medical waste businesses and four
pharmaceutical returns (reverse distribution) businesses, our
Mexican subsidiary completed the acquisition of seven medical
waste businesses and our United Kingdom subsidiary completed the
acquisition of two medical waste businesses. No individual
acquisition or the acquisitions in aggregate were significant to
our operations.
During the quarter ended March 31, 2005 our Mexican
subsidiary, Medam S.A. de C.V. (Medam) acquired
selected assets of Servicios Ecologicos PEGE y Asociados S. De
R.L. de C.V.
During the quarter ended June 30, 2005 we completed six
acquisitions of medical waste businesses, consisting of selected
assets of Envirotech of America, Inc. which operated in central
New York, Medical Systems, Inc., which operated in Missouri,
BioClean, Inc., which operated in western New York, all of the
stock of Sanford Motors, Inc. and two affiliated companies,
which operated in eastern Pennsylvania and New Jersey, selected
assets of Five Star Waste, Inc., which operated in Florida, and
selected assets of Bio-Med Tec Inc. and an affiliated company,
which operated in West Virginia and southern Ohio. We also
acquired all of the stock of Automated Health Technologies,
Inc., a pharmaceutical returns company based in Florida. Our
United Kingdom subsidiary, Stericycle International Ltd.,
acquired all of the stock of Healthcare Waste Limited (formerly
known as Select Environmental Limited) and Medam completed the
acquisition of all of the stock of Planta Incineradora de
Residuos Biologicos Infecciosos, S.A. de C.V., Soluciones
Ecologicas Integrales, S.A. de C.V. and L.A.E. Gabriela
Hernandez Romo.
41
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
During the quarter ended September 30, 2005 we completed
two acquisitions of medical waste businesses, consisting of all
of the stock of Nicklin Associates Inc., which operated in New
York, Maryland and Washington D.C. and selected assets of
Med-Trac Inc., which operated in Pennsylvania. Medam completed
the acquisition of selected assets of Impulso Mexicano, S.A. de
C.V. and selected assets of Biol. Donaji de la Caridad Gutierrez
Garcia.
During the quarter ended December 31, 2005 we acquired all
of the stock of Iowa Medical Waste Reduction Center, Inc., which
operated in Iowa. In addition, we completed the acquisition of
three pharmaceutical returns businesses, consisting of selected
assets of L.L. Horizons, Inc. (also known as Certified Returns)
which operated in Florida, all of the stock of Universal
Solutions International Inc., which operated in North Carolina,
Georgia and New Jersey and all of the stock of NNC Group, LLC,
which operated in Indiana. In conjunction with the acquisition
of Universal Solutions International Inc., we sold selected
assets of their consumer products division to Carolina Supply
Chain Services LLC for $12.3 million, of which
$10.3 million was the net amount received in cash with
$2.0 million being held in escrow. Medam completed the
acquisition of selected assets of Servicios Integrales En Manejo
de Residuos S.A. de C.V., (formerly known as Simar) and our
United Kingdom subsidiary, Stericycle International, Ltd.,
acquired all of the stock of Indigo Equity Holdings Limited,
(formerly known as Waste Solution Inc.).
The aggregate net purchase price of these acquisitions during
2005 was approximately $189.4 million, of which
approximately $139.7 million was paid in cash and
$49.7 million was paid by the issuance of notes payable.
As of December 31, 2005 the valuation of certain goodwill
and intangibles assets associated with the acquisitions have not
been finalized.
During the year ended December 31, 2004 we completed the
acquisition of two domestic medical waste businesses, Medam
completed the acquisition of three medical waste businesses and
Stericycle International, LLC completed one acquisition. No
individual acquisition or the acquisitions in aggregate were
significant to our operations.
During the quarter ended March 31, 2004 we completed the
acquisition of two medical waste businesses, consisting of
selected assets of American Waste Industries, Inc., which
operated in Virginia, Maryland and North Carolina.
During the quarter ended June 30, 2004 we completed the
acquisition of selected assets of Texas Environmental Services,
Inc., which operated in Texas and Stericycle International Ltd.,
completed the acquisition of all the common stock of White Rose
Environmental Ltd (White Rose), which operated in
the United Kingdom.
During the quarter ended September 30, 2004 Medam completed
the acquisition of all of the common stock of Sterimed S.A. de
C.V., all of the remaining stock of Proterm de Mexico JV. S.A.
de C.V. and selected assets of Bio-Infex Servicios Y Technologia
SA De CV.
The aggregate net purchase price of these acquisitions during
2004 was approximately $90.6 million, of which
approximately $72.4 million was paid in cash,
$17.8 million was paid by the issuance of notes payable and
$0.4 million was paid by the issuance of unregistered
shares of our common stock.
During the year ended December 31, 2003 we completed the
acquisition of four medical waste businesses, our Canadian
subsidiary completed one acquisition, and our majority owned
subsidiary, 3CI Complete Compliance Corporation
(3CI), completed one acquisition. In addition, we
completed the acquisition of a pharmaceutical returns software
company. No individual acquisition or the acquisitions in
aggregate were significant to our operations.
42
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
During the quarter ended March 31, 2003 we completed the
acquisition of two medical waste businesses, consisting of all
of the common and preferred stock of Scherer Healthcare, Inc.
which operated in 10 northeastern and Mid-Atlantic states and
selected assets of Kuglen Services, Ltd., LLP, which operated in
Texas.
During the quarter ended June 30, 2003 we completed the
acquisition of selected assets of Environmental Management
Group, Inc., which operated a medical waste business in Ohio and
Kentucky. Our majority owned subsidiary, 3CI, acquired selected
assets of PMT USA, Inc., dba Air & Sea
Environmental, which operated a medical waste business in
southeast Texas.
During the quarter ended September 30, 2003 we completed
the acquisition of selected assets of NAWA Medical Disposal,
L.L.C., which operated a medical waste business in western
Texas. In addition, we acquired substantially all of the assets
of Pharmacy Software Solutions, Inc. (PSSI), a
pharmaceutical returns software company based in Illinois. Our
wholly owned Canadian subsidiary completed the acquisition of
selected assets of Enviro-Med Canada, Inc., which operated a
medical waste business in northern Ontario.
The aggregate net purchase price of these acquisitions during
2003 was approximately $37.4 million, of which
approximately $37.2 million was paid in cash;
$0.2 million was paid by the issuance of unregistered
shares of our common stock.
For financial reporting purposes these acquisition transactions
were accounted for using the purchase method of accounting. The
total purchase price for 2005, 2004 and 2003 of
$189.4 million, $90.6 million and $37.4 million,
respectively, net of cash acquired, was allocated to the assets
acquired and liabilities assumed based on the estimated fair
market value at the date of acquisition. The total purchase
price for acquisitions completed in 2004 and 2003 includes the
value of 8,323 and 1,906 shares respectively, of our common
stock issued to the sellers. In certain cases, the purchase
price is or was subject to downwards adjustment if revenues from
customer contracts acquired failed to reach certain specified
levels. The excess of the purchase price over the fair market
value of the net assets acquired is reflected in the
accompanying consolidated balance sheets as goodwill. Goodwill
was recorded in the amounts of $170.0 million and
$49.6 million during the years of 2005 and 2004,
respectively. The results of operations of these acquired
businesses have been included in the consolidated statements of
income from the date of the acquisition.
Note 5 Long
Term Debt
Long-term debt consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Obligations under capital leases
|
|
$
|
1,209
|
|
|
$
|
1,500
|
|
Senior Credit Facility
|
|
|
291,669
|
|
|
|
171,353
|
|
Notes Payable
|
|
|
68,007
|
|
|
|
30,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360,885
|
|
|
|
203,649
|
|
Less: Current Portion
|
|
|
12,044
|
|
|
|
13,218
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
348,841
|
|
|
$
|
190,431
|
|
|
|
|
|
|
|
|
|
|
43
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
Payments due on long-term debt excluding capital lease
obligations, during each of the five years subsequent to
December 31, 2005 are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
11,037
|
|
2007
|
|
|
23,897
|
|
2008
|
|
|
12,439
|
|
2009
|
|
|
9,230
|
|
2010
|
|
|
299,217
|
|
Thereafter
|
|
|
3,856
|
|
|
|
|
|
|
|
|
$
|
359,676
|
|
|
|
|
|
|
We paid interest of $13.5 million, $11.5 million and
$13.6 million for the years ended December 31, 2005,
2004 and 2003, respectively.
Property under capital leases included with property, plant and
equipment in the accompanying Consolidated Balance Sheets is as
follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Machinery and Equipment
|
|
$
|
401
|
|
|
$
|
43
|
|
Vehicles
|
|
|
5,936
|
|
|
|
5,786
|
|
Less accumulated
depreciation and amortization
|
|
|
(5,831
|
)
|
|
|
(5,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
506
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
Amortization related to these capital leases is included with
depreciation expense.
Minimum future lease payments under capital leases are as
follows (in thousands):
|
|
|
|
|
2006
|
|
$
|
1,068
|
|
2007
|
|
|
195
|
|
2008
|
|
|
35
|
|
2009
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
1,298
|
|
Less amounts representing interest
|
|
|
(89
|
)
|
|
|
|
|
|
Present value of net minimum lease
payments
|
|
|
1,209
|
|
Less Current portion
|
|
|
1,007
|
|
|
|
|
|
|
Long-term obligations under
capital leases
|
|
$
|
202
|
|
|
|
|
|
|
Senior
Credit Facility
In June 2005, we obtained a new $400.0 million senior
unsecured revolving credit facility maturing in June 2010,
containing a letter of credit sub limit of $125.0 million,
in place of our existing senior secured credit facility.
The new revolving credit facility, provided under a credit
agreement with various financial institutions, reduced the
interest rates that we are charged by reducing the applicable
margin that is added to the relevant
44
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
interest rate. The new facility also allows us to borrow in
pre-approved currencies other than United States dollars. Our
borrowings bear interest at fluctuating interest rates
determined, at our election in advance for any quarterly or
other applicable interest period, by reference to (i) a
base rate (the higher of the prime rate at Bank of
America, N.A. or 0.5% above the rate on overnight federal funds
transactions) or (ii) the London Interbank Offered Rate, or
LIBOR, plus, in either case, the applicable margin within the
relevant range of margins provided in our credit agreement. The
applicable margin is based upon our consolidated leverage ratio.
As of December 31, 2005, the margin for interest rates on
borrowings under our revolving new credit facility was zero on
base rate loans and 0.75% on LIBOR loans.
Our credit agreement requires us to comply with various
financial, reporting and other covenants and restrictions,
including restrictions on dividend payments. At
December 31, 2005, we were in compliance with these
covenants and restrictions.
In December 2005, we increased our revolving credit facility
from $400.0 million to $550.0 million and also
increased the letter of credit sub limit from
$125.0 million to $150.0 million.
As of December 31, 2005, we had $291.7 million of
borrowings outstanding under our senior unsecured credit
facility, which includes foreign currency borrowings of
$5.2 million. In addition, we had $65.9 million
committed to outstanding letters of credit. The weighted average
rate of interest on the unsecured revolving credit facility was
4.99% per annum.
As of December 31, 2004, our senior secured credit facility
consisted of a $205.0 million revolving credit facility and
a Term A loan in the principal amount of $62.4 million.
As of December 31, 2004, we had $171.4 million of
borrowings outstanding under our senior secured credit facility,
of which $109.0 million consisted of borrowings under the
revolving credit component and $62.4 million under the Term
A component. In addition at December 31, 2004 we had
$30.9 million of standby letters of credit issued under our
revolving credit component. As of December 31, 2004, the
margin for interest rates on borrowings under our revolving
credit facility and the Term A component was zero on base rate
loans and 1.25% on LIBOR loans. The average rate of interest on
the revolving credit facility was 3.64% per annum and the
average rate of interest on the Term A loan was 3.66% per
annum. This secured credit facility was replaced in June 2005
with the unsecured credit facility discussed above.
Senior
Subordinated Notes
On November 15, 2004 we redeemed the remaining
$50.9 million of our senior subordinated notes in
accordance with the terms of the governing specified in the
trust indenture. The redemption price was 106.1875% of the
principal face amount plus accrued interest as of the redemption
date. The interest rate for the senior subordinated notes was
123/8% per
annum. These notes had a maturity date of November 15, 2009.
Notes Payable
At December 31, 2005 we had promissory notes, primarily
issued as a result of acquisitions totaling $68.0 million.
The weighted average interest rate on these notes is 5.30%. The
fixed rate to floating rate ratio is 78.4% to 21.6%. The
weighted average maturity is approximately 4.2 years.
At December 31, 2004 we had $17.5 million outstanding
related to promissory notes issued in connection with
acquisitions during 2002 and 2004, consisting primarily of a
three-year note issued as part of the White Rose Environmental
Ltd. acquisition, which had an outstanding balance of
$10.9 million at December 31, 2004.
45
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
Guarantees
We have guaranteed a loan to the Azoroa Bank in Japan on behalf
of Shiraishi-Sogyo Co. Ltd. (Shiraishi). Shiraishi
is a customer in Japan that is expanding their medical waste
management business and has a five-year loan with a current
balance of $6.5 million with the Azoroa Bank that expires
in June 2009.
Note 6 Accrued
Liabilities
Accrued liabilities at December 31 consist of the following
items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Accrued compensation
|
|
$
|
7,394
|
|
|
$
|
5,370
|
|
Accrued vacation
|
|
|
5,596
|
|
|
|
4,470
|
|
Accrued insurance
|
|
|
12,075
|
|
|
|
12,913
|
|
Accrued income tax
|
|
|
3,950
|
|
|
|
9,235
|
|
Accrued interest
|
|
|
2,684
|
|
|
|
554
|
|
Accrued professional liabilities
|
|
|
3,105
|
|
|
|
2,038
|
|
Accrued
liabilities other
|
|
|
13,646
|
|
|
|
9,831
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
48,450
|
|
|
$
|
44,411
|
|
|
|
|
|
|
|
|
|
|
Note 7 Derivative
Instruments
In July 2004, we entered into four forward contracts to hedge a
GBP Sterling-based intercompany loan between our US-based
subsidiary, Stericycle International L.L.C. and our subsidiary
in the United Kingdom, Stericycle International Ltd. The
subsidiary borrowed the funds for the purchase of White Rose.
The forward contracts align with the anticipated repayment
schedule of the loan and the last contract expires in July 2009.
Initially, we did not elect hedge accounting on the forward
contracts and have been recognizing the change in value of the
hedges through other income (expense). This amount has been
generally offset by the currency adjustment to the intercompany
receivable. During 2004 the cost of the forward contract was
immaterial to our net income.
On October 1, 2005, we prospectively designated these
existing forward contracts as cash flow hedges and are using
hedge accounting. We expect the income related to this hedge
accounting election will be $0.1 million, recognized over
the remaining life of the contracts through interest income.
During 2005 and 2004 the cost of the forward contracts
recognized was immaterial to our net income. As of
December 31, 2005, the total notional amount of hedges
outstanding is GBP 13.0 million. At December 31, 2005
the hedges were determined to be 100% effective.
Note 8 Goodwill
and Other Intangible Assets
In June 2001, the FASB issued FAS No. 141, Business
Combinations, and FAS No. 142, Goodwill and Other
Intangible Assets. Under FAS 142, goodwill and other
indefinite lived intangibles are no longer amortized and are
subject to an annual impairment test, or to more frequent
testing if circumstances indicate that they may be impaired. In
2005 and 2004 we performed our annual impairment evaluations and
determined that there was no impairment. At December 31,
2005 and 2004, we had $18.5 million and $17.4 million,
respectively, of indefinite lived intangibles that consist of
environmental permits for which we performed an annual
impairment test, and determined there was no impairment.
46
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
We have two geographical reporting segments, United States and
Foreign Countries, both of which have goodwill. The changes in
the carrying amount of goodwill for the years ended
December 31, 2005 and 2004 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
Foreign
|
|
|
|
|
|
|
States
|
|
|
Countries
|
|
|
Total
|
|
|
Balance as of January 1, 2004
|
|
$
|
458,593
|
|
|
$
|
6,353
|
|
|
$
|
464,946
|
|
Goodwill acquired during year
|
|
|
16,988
|
|
|
|
32,638
|
|
|
|
49,626
|
|
Effect of currency fluctuation on
carrying value
|
|
|
|
|
|
|
2,236
|
|
|
|
2,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004
|
|
|
475,581
|
|
|
|
41,227
|
|
|
|
516,808
|
|
Goodwill acquired during year
|
|
|
145,915
|
|
|
|
24,035
|
|
|
|
169,950
|
|
Effect of currency fluctuation on
carrying value
|
|
|
|
|
|
|
(1,589
|
)
|
|
|
(1,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
$
|
621,496
|
|
|
$
|
63,673
|
|
|
$
|
685,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
According to FAS 142, other intangible assets will continue
to be amortized over their useful lives.
During the year ended December 31, 2005 we recorded at fair
value the intangibles acquired in connection with our
acquisitions of Sanford Motors, Iowa Medical Waste Reduction
Center, Automated Health Technologies, L.L. Horizons, Bio-Med
Tech, Envirotech, Bio Clean, Medical Systems, Med Trac, and the
acquisitions completed by our United Kingdom and Mexican
subsidiaries. We assigned $13.3 million to customer
relationships with amortization periods of 20 to 40 years,
$1.7 million to facility environmental permits with
indefinite lives and $0.4 million to non-compete agreements
with amortization periods of one to five years.
During 2005 we were in arbitration proceedings regarding various
disputes under an exclusive marketing and license agreement with
a licensor of software. On March 1, 2006, subsequent to
year-end, the arbitrator awarded in favor of the licensor.
Although this event occurred after the end of the year, we are
required to write-off the unamortized portion of the license fee
that we had previously paid because the license agreement was
effectively terminated. The effect is a reduction in the
carrying amount of this intangible by $1.8 million and a
reduction in the accumulated amortization of $0.4 million.
During the year ended December 31, 2004 we recorded at fair
value the intangibles acquired in connection with our
acquisitions of PSSI, American Waste Industries, Inc. Texas
Environmental Services, Inc., White Rose Environmental Ltd., and
Sterimed S.A.de C.V. We assigned $11.7 million to customer
relationships with amortization periods of 20 to 40 years,
$2.2 million to tradenames with an amortization period of
20 to 40 years, $6.4 million to facility environmental
permits with indefinite lives, $0.5 million to a software
license with an amortization period of 5 years and
$0.2 million to non-compete agreements with amortization
periods of one to five years.
47
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
As of December 31, the value of the amortizing intangible
assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
Carrying Amount
|
|
|
Amortization
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
Non-compete
|
|
$
|
6,881
|
|
|
$
|
6,528
|
|
|
$
|
6,046
|
|
|
$
|
5,716
|
|
Customer relationships
|
|
|
40,978
|
|
|
|
28,551
|
|
|
|
2,385
|
|
|
|
1,526
|
|
Tradenames
|
|
|
3,575
|
|
|
|
3,790
|
|
|
|
274
|
|
|
|
187
|
|
License agreement
|
|
|
500
|
|
|
|
2,300
|
|
|
|
208
|
|
|
|
477
|
|
Other
|
|
|
141
|
|
|
|
141
|
|
|
|
52
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,075
|
|
|
$
|
41,310
|
|
|
$
|
8,965
|
|
|
$
|
7,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2005, 2004 and 2003 the
aggregate amortization expense was $1.6 million,
$2.4 million and $1.9 million respectively. The
estimated amortization expense, in thousands, for each of the
next five years is as follows for the years ended
December 31:
|
|
|
|
|
2006
|
|
$
|
1,779
|
|
2007
|
|
|
1,760
|
|
2008
|
|
|
1,531
|
|
2009
|
|
|
1,409
|
|
2010
|
|
|
1,299
|
|
Note 9 Lease
Commitments
We lease 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 twelve years. The leases for most of the properties
contain renewal provisions.
Rent expense for 2005, 2004, and 2003 was $25.8 million,
$21.2 million and $18.2 million, 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, 2005 for each of the next five
years and in the aggregate are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
24,747
|
|
2007
|
|
|
19,529
|
|
2008
|
|
|
15,636
|
|
2009
|
|
|
12,200
|
|
2010
|
|
|
8,808
|
|
Thereafter
|
|
|
16,822
|
|
|
|
|
|
|
Total minimum rental payments
|
|
$
|
97,742
|
|
|
|
|
|
|
48
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
|
|
Note 10
|
Net
Income per Common Share
|
The following table sets forth the computation of basic and
diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share and
per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
67,154
|
|
|
$
|
78,178
|
|
|
$
|
65,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted-average shares
|
|
|
44,284,580
|
|
|
|
44,250,913
|
|
|
|
41,439,020
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
1,025,822
|
|
|
|
1,142,564
|
|
|
|
1,814,728
|
|
Warrants
|
|
|
107
|
|
|
|
8,613
|
|
|
|
8,386
|
|
Convertible preferred stock
|
|
|
|
|
|
|
793,807
|
|
|
|
2,835,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
1,025,929
|
|
|
|
1,944,984
|
|
|
|
4,658,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share adjusted weighted-average shares and
assumed conversions
|
|
|
45,310,509
|
|
|
|
46,195,897
|
|
|
|
46,097,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
1.52
|
|
|
$
|
1.77
|
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
1.48
|
|
|
$
|
1.69
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For additional information regarding outstanding employee stock
options and outstanding warrants, see Note 11.
In 2005, 2004 and 2003, options and warrants to purchase
33,208 shares, 55,719 shares and 13,623 shares,
respectively, at exercise prices of $44.22-$62.21, $46.95-$51.14
and $35.05-$49.84, respectively, were not included in the
computation of diluted earnings per share because the effect
would be antidilutive.
Note 11 Preferred
Stock, Stock Options and Warrants
Preferred
Stock
At December 31, 2005 and 2004 we had 1,000,000 authorized
shares of preferred stock and no shares issued or outstanding.
Stock
Options
We have adopted five stock option plans: (i) the 2005
Incentive Stock Option Plan (the 2005 Plan), which
our stockholders approved in April 2005; (ii) the 2000
Nonstatutory Stock Option Plan (the 2000 Plan),
which our Board of Directors adopted in February 2000;
(iii) the 1997 Stock Option Plan (the 1997
Plan), which our stockholders approved in April 1997;
(iv) the Directors Stock Option Plan (the Directors
Plan), which our shareholders approved in July 1996 (prior
to our initial public offering in August 1996); and (v) the
1995 Incentive Compensation Plan (the 1995 Plan),
which our stockholders approved in September 1995.
The 2005 Plan authorizes awards of stock options and stock
appreciation rights for a total of 2,400,000 shares; as
amended, the 2000 Plan authorizes stock option grants for a
total of 3,500,000 shares; the
49
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
1997 and 1995 Plans each authorize stock option grants for a
total of 3,000,000 shares; and as amended, the Directors
Plan authorizes stock option grants for a total of
1,170,000 shares.
The 2005 Plan provides for the grant of nonstatutory stock
options (NSOs) and incentive stock options intended
to qualify under section 422 of the Internal Revenue Code
(ISOs) as well as stock appreciation rights; the
2000 Plan provides for the grant of NSOs; the 1997 and 1995
Plans each provide for the grant of NSOs and ISOs; and the
Directors Plan provides for the grant of NSOs.
The 2005 Plan authorizes awards to our officers, employees and
consultants and, following the expiration of the Directors Plan
in May 2006, to our directors; the 2000 Plan authorizes stock
option grants to our employees and consultants but not to our
officers and directors; the 1997 and 1995 Plans each authorize
stock option grants to our officers, directors, employees and
consultants; and the Directors Plan authorizes stock option
grants to our outside directors.
The exercise price per share of an option granted under any of
our stock option plans may not be less than the closing price of
a share of our common stock on the date of grant. The maximum
term of an option granted under any 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 (including
an officer), only while he or she remains an employee and for a
limited period following the termination of his or her
employment.
Options granted to officers and employees generally vest over
five years. During 2005, options granted to officers and
employees generally vested at the rate of 20% of the option
shares on each of the first five anniversaries of the option
grant date. During 2004, options granted to officers and
employees generally vested at the rate of 20% of the option
shares on the first anniversary of the option grant date and
then at the rate of 1/60 of the option shares for each of the
next 48 months. In 2000, our Board of Directors approved
the 2000 Nonstatutory Stock Option Plan (the 2000
Plan), which in total now provides for the granting of
3,500,000 shares of our common stock in the form of stock
options to employees, (but not to officers or directors).
Shares of the Companys common stock have been reserved for
issuance upon the exercise of outstanding options and warrants.
These shares, which include both shares available for option
grant and shares granted as options but not yet exercised, have
been reserved as follows at December 31, 2005:
|
|
|
|
|
1995 Plan options
|
|
|
367,615
|
|
1996 Directors Plan options
|
|
|
602,112
|
|
1997 Plan options
|
|
|
952,182
|
|
2000 Plan options
|
|
|
2,202,468
|
|
2005 Plan options
|
|
|
2,400,000
|
|
Warrants
|
|
|
1,000
|
|
|
|
|
|
|
Total shares reserved
|
|
|
6,525,377
|
|
|
|
|
|
|
50
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
A summary of stock option information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
3,420,298
|
|
|
$
|
27.13
|
|
|
|
3,653,799
|
|
|
$
|
21.02
|
|
|
|
3,610,373
|
|
|
$
|
14.95
|
|
Granted
|
|
|
897,687
|
|
|
|
48.44
|
|
|
|
805,069
|
|
|
|
44.74
|
|
|
|
981,267
|
|
|
|
32.36
|
|
Exercised
|
|
|
(646,035
|
)
|
|
|
21.19
|
|
|
|
(797,946
|
)
|
|
|
16.13
|
|
|
|
(831,491
|
)
|
|
|
12.08
|
|
Cancelled/Forfeited
|
|
|
(79,101
|
)
|
|
|
39.84
|
|
|
|
(240,624
|
)
|
|
|
29.26
|
|
|
|
(106,350
|
)
|
|
|
22.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
3,592,849
|
|
|
|
33.24
|
|
|
|
3,420,298
|
|
|
|
27.13
|
|
|
|
3,653,799
|
|
|
|
21.02
|
|
Exercisable at end of year
|
|
|
1,840,013
|
|
|
$
|
23.91
|
|
|
|
1,770,681
|
|
|
$
|
20.03
|
|
|
|
1,617,059
|
|
|
$
|
15.62
|
|
Available for future grant
|
|
|
2,931,528
|
|
|
|
|
|
|
|
1,349,114
|
|
|
|
|
|
|
|
1,913,559
|
|
|
|
|
|
Options outstanding and exercisable as of December 31, 2005
by price range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Outstanding
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Range of Exercise
Price
|
|
Shares
|
|
|
Life in Years
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$4.000-$10.125
|
|
|
553,560
|
|
|
|
3.51
|
|
|
$
|
7.78
|
|
|
|
552,060
|
|
|
$
|
7.78
|
|
$10.344-$22.505
|
|
|
401,355
|
|
|
|
5.11
|
|
|
|
16.38
|
|
|
|
367,892
|
|
|
|
16.46
|
|
$22.910-$27.370
|
|
|
382,425
|
|
|
|
6.08
|
|
|
|
27.23
|
|
|
|
243,090
|
|
|
|
27.19
|
|
$30.699-$35.050
|
|
|
466,943
|
|
|
|
7.05
|
|
|
|
34.85
|
|
|
|
246,375
|
|
|
|
34.72
|
|
$35.430-$44.050
|
|
|
250,143
|
|
|
|
7.31
|
|
|
|
38.48
|
|
|
|
149,831
|
|
|
|
38.13
|
|
$44.220-$45.710
|
|
|
568,859
|
|
|
|
8.19
|
|
|
|
44.36
|
|
|
|
184,417
|
|
|
|
44.31
|
|
$45.800-$45.800
|
|
|
620,873
|
|
|
|
9.13
|
|
|
|
45.80
|
|
|
|
3,035
|
|
|
|
45.80
|
|
$44.850-$62.210
|
|
|
348,691
|
|
|
|
9.22
|
|
|
|
53.19
|
|
|
|
93,313
|
|
|
|
47.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,592,849
|
|
|
|
6.95
|
|
|
$
|
33.24
|
|
|
|
1,840,013
|
|
|
$
|
23.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have elected to follow APB 25, Accounting for
Stock Issued to Employees and related interpretations in
accounting for its employee stock options because, as discussed
below, the alternative fair value accounting provided for under
FAS 123, Accounting for Stock-Based
Compensation, requires use of option valuation models that
were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of our employee
stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and net income per
share is required by FAS 123 as if we had accounted for our
employee stock options granted subsequent to December 31,
1994 under the fair value method of that statement. Options
granted were valued using the Black-Scholes option-pricing
model. In 2005, in anticipation of the adoption of FAS 123R
on January 1, 2006, we reviewed the values of the variables
used to determine the fair value of its stock options granted in
2003, 2004 and 2005. We determined that the values of the
expected volatility, weighted average expected life of the
option and risk-free interest rates variables should be modified
slightly in order to provide a better estimate of the fair value
of the employee stock options. The modifications resulted in an
immaterial reduction in the pro forma stock option expense in
2005, 2004 and 2003. The following revised assumptions were used
in 2005, 2004 and 2003: expected volatility of 0.32 in 2005,
0.42 in 2004 and 0.49 in 2003; risk-free interest rates of 4.05%
in 2005, 3.43% in 2004, and
51
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
2.97% in 2003; a dividend yield of 0%; and a weighted-average
expected life of the option of 52 months in 2005,
56 months 2004 and 56 months in 2003. The revised
weighted-average fair values of options granted during 2005,
2004 and 2003 were $14.52 per share, $15.57 per share,
and $13.73 per share, respectively.
Option value models require the input of highly subjective
assumptions. Because our 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
managements 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. Our pro forma information follows (in thousands, except
for per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Stock options expense included in
net income
|
|
$
|
16
|
|
|
$
|
13
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported net income
|
|
$
|
67,154
|
|
|
$
|
78,178
|
|
|
$
|
65,781
|
|
Pro forma impact of stock options,
net of tax
|
|
|
(5,940
|
)
|
|
|
(5,540
|
)
|
|
|
(6,172
|
)
|
Pro forma impact of employee stock
plan, net of tax
|
|
|
(127
|
)
|
|
|
(111
|
)
|
|
|
(149
|
)
|
Pro forma net income
|
|
$
|
61,087
|
|
|
$
|
72,527
|
|
|
$
|
59,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
1.52
|
|
|
$
|
1.77
|
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
1.38
|
|
|
$
|
1.64
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as
reported
|
|
$
|
1.48
|
|
|
$
|
1.69
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
1.36
|
|
|
$
|
1.58
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants:
In June 2000, in connection with our acquisition of an
additional 15% interest in Medam, we issued warrants to purchase
88,748 shares of our common stock. Of these warrants,
warrants for 62,256 shares were immediately exercisable,
while the remaining 26,492 shares become exercisable over
five years. The exercise price of the warrants is $8.75 per
share. In 2001, warrants to purchase 65,190 shares were
exercised. In 2003, warrants to purchase 12,966 shares were
exercised. In 2005, warrants to purchase 10,592 shares were
exercised. At December 31, 2005 there were no warrants
outstanding.
In September 2003, in connection with our acquisition of NAWA
Medical Disposal L.L.C. we issued warrants to purchase
1,000 shares of our common stock. The warrants will become
exercisable in September 2008. The exercise price of the
warrants is $47.25 per share. At December 31, 2005 all
of the warrants were outstanding.
Note 12 Employee
Benefit Plan
We have a 401(k) defined contribution retirement savings plan
covering substantially all employees. Each participant may elect
to defer a portion of his or her compensation subject to certain
limitations. We may contribute up to 50% of the first 5% of
compensation contributed to the plan by each employee up to a
52
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
maximum of $1,500 per annum. Our contributions for the
years ended December 31 2005, 2004 and 2003 were
approximately $1.3 million, $1.3 million and
$1.1 million, respectively.
Note 13 Employee
Stock Purchase Plan
In October 2000, our Board of Directors adopted the Stericycle,
Inc. Employee Stock Purchase Plan (the ESPP)
effective as of July 1, 2001. Our stockholders approved the
ESPP in May 2001. The ESPP authorizes 300,000 shares of our
common stock to be purchased by employees at a 15% discount from
the market price of the stock through payroll deductions during
two six-month offerings each year. An employee who elects to
participate in an offering is granted an option on the first day
of the offering for a number of shares equal to the
employees payroll deductions under the ESPP during the
offering period (which may not exceed $5,000) divided by the
option price per share. The option price per share is the lower
of 85% of the closing price of a share of our common stock on
the first trading day of the offering period or 85% of the
closing price on the last trading day of the offering period.
Every employee who has completed one years employment as
of the first day of an offering and who is a full-time employee,
or a part-time employee who customarily works at least
20 hours per week, is eligible to participate in the
offering. During 2005, 2004 and 2003, 18,572 shares,
20,363 shares and 22,012 shares, respectively, were
issued through the ESPP.
Note 14 Non-Consolidating
Joint Ventures
We have an investment in a joint venture, Medam, B.A. Srl, an
Argentine corporation, which was formed to utilize our ETD
technology to treat medical waste primarily in the Buenos Aires
market. Our investment in the joint venture was
$2.6 million and $2.8 million at December 31,
2005 and 2004 respectively, which is included in other long-term
assets.
In 2005, 2004 and 2003, we recorded $0.3 million,
$0.2 million and $1.7 million, respectively, of equity
losses related to the above joint venture, which was recorded in
the other income (expense).
During January 2004 we sold our minority interest investment in
Evertrade Medical Waste (Pty) Ltd, a South African company and
the associated current receivables and loans due from the joint
venture to Reno Africa PTE Ltd for cash and an $8.1 million
note receivable. During the fourth quarter of 2005 the remaining
unpaid loan balance was $2.5 million. During December 2005
we determined that the issuer of the note would be unable to
generate the remaining cash to pay off the note receivable and
therefore we wrote-off the remaining $2.5 million balance
as uncollectible at December 31, 2005.
Note 15 Legal
Proceedings
We operate in a highly regulated industry and must deal with
regulatory inquiries or investigations from time to time that
may be instituted for a variety of reasons. We are also involved
in a variety of civil litigation from time to time.
3CI Litigation. In November 2005, we entered
into a preliminary settlement to resolve class action litigation
by the minority shareholders of our majority-owned subsidiary,
3CI Complete Compliance Corporation (3CI), in which
3CI joined with the class as a plaintiff. This litigation is
pending in state court in Louisiana (Robb,
et al. v. Stericycle, Inc., et al., First
Judicial District Court, Caddo Parish, Louisiana
(No. 467704-A))
(the Louisiana Litigation). We have described this
litigation on a number of occasions, including our report on
Form 10-K
for 2004.
Under the terms of the preliminary settlement, we agreed to pay
$32.5 million in cash to a trust fund to be established by
a claims administrator approved by the court for the purpose of
(i) settling all claims in the Louisiana Litigation and in
related litigation in state court in Texas (3CI Complete
Compliance Corporation v. Waste Systems, Inc.,
et al., 269th Judicial District, Harris County,
Texas
(No. 2003-46899)),
(ii) canceling or
53
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
otherwise acquiring all of the shares of 3CI common stock held
by members of the plaintiff class and (iii) paying
court-approved administrative expenses and legal fees. In
accordance with the terms of the preliminary settlement, we made
the required $32.5 million deposit with the claims
administrator following the courts preliminary approval of
the settlement in December 2005.
The preliminary settlement remains subject to the courts
final approval. A hearing on final approval was held on
February 21, 2006. The court has not yet rendered its
decision.
The parties to the preliminary settlement intend that, through
the settlement, we will acquire sufficient shares of 3CI common
stock so that, with the shares that we and one of our
subsidiaries already own, we will own 90% or more of 3CIs
outstanding common stock. This level of ownership would enable
us to acquire the balance of the outstanding 3CI common stock
through a short-form merger under Delaware law. If
we do acquire 90% or more of 3CIs common stock as
contemplated, we intend to conduct such a short-form merger as
soon as practicable as we determine.
Private Antitrust Litigation. In January 2003,
we were sued in federal court in Arizona by a private plaintiff
claiming anticompetitive conduct in Arizona, Colorado and Utah
from November 1997 to the present and seeking certification of
the lawsuit as a class action on behalf of all customers of ours
and of Browning-Ferris Industries, Inc. in the three-state area
during the period in question. Over the next three months, four
similar suits were filed in federal court in Utah, Arizona,
Colorado and New Mexico. In February and May 2003, two
additional suits were filed, in federal court in Utah and
Arizona, claiming substantially the same anticompetitive conduct
but not seeking class action certification. In December 2003, an
eighth suit was filed in federal court in Utah claiming
monopolistic and other anticompetitive conduct in California
during the prior four years and seeking certification of the
suit as a class action on behalf of all California customers of
ours during this four-year period. These eight suits were
subsequently consolidated before the same judge in federal court
in Utah. The first five suits were consolidated under one
consolidated class action complaint; the next two suits were
consolidated for discovery purposes; and the eighth suit was
coordinated for discovery purposes. In June 2004 we settled, for
an immaterial amount, the suit filed in May 2003, which, as
noted, did not seek class action certification.
Proceedings in the remaining seven suits remain in the discovery
stage. We do not believe that any of these suits has merit and
are vigorously defending them.
Other Litigation. In Australia, we are in
arbitration with SteriCorp Limited over the ETD equipment that
we sold to them. Discovery is pending in these proceedings. We
currently expect that the arbitration hearing will be held
during the second quarter of 2006.
During 2005, we were in arbitration regarding various disputes
under an exclusive marketing and distribution license agreement
with a licensor of software. The licensor claimed, among other
things, that our license had ceased to be exclusive because of
our failure to pay minimum royalties under the license agreement
and we claimed, among other things, that the licensors
actions entitled us to rescind the license agreement and to be
repaid the $1.8 million license fee that we had paid. On
March 1, 2006, the arbitrator awarded the licensor
$0.4 million in damages for breach of the license agreement
and denied all of the parties other claims, including our
claim for rescission, and the license agreement was effectively
terminated. As a result of the arbitrators decision we
wrote-off the remaining $1.4 million unamortized portion of
our license intangible asset.
|
|
Note 16
|
Products
and Services and Geographic Information
|
FAS 131, Disclosures about Segments of an Enterprise and
Related Information, requires segment information to be reported
based on information utilized by executive management to
internally assess performance and make operating decisions. In
determining our reportable operating segments, management
54
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
determined that we have two reportable segments, United States
and foreign operations, based on our consideration of the
following criteria:
|
|
|
|
|
the same services are provided,
|
|
|
|
the same types of customers are serviced,
|
|
|
|
the same types of medical waste collection, transportation and
treatment methods are utilized,
|
|
|
|
their regulatory environments are similar but vary based upon
country specific regulations, and
|
|
|
|
they employ the same sales and marketing techniques and
activities.
|
Summary information for our reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
508,247
|
|
|
$
|
449,501
|
|
|
$
|
429,638
|
|
Foreign countries
|
|
|
101,210
|
|
|
|
66,727
|
|
|
|
23,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
609,457
|
|
|
$
|
516,228
|
|
|
$
|
453,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
102,286
|
|
|
$
|
119,387
|
|
|
$
|
103,339
|
|
Foreign countries
|
|
|
9,694
|
|
|
|
9,177
|
|
|
|
5,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
111,980
|
|
|
$
|
128,564
|
|
|
$
|
108,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
978,027
|
|
|
$
|
775,476
|
|
|
$
|
694,818
|
|
Foreign countries
|
|
|
69,633
|
|
|
|
58,665
|
|
|
|
12,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,047,660
|
|
|
$
|
834,141
|
|
|
$
|
707,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
859,497
|
|
|
$
|
689,178
|
|
|
$
|
602,009
|
|
Foreign countries
|
|
|
44,121
|
|
|
|
29,471
|
|
|
|
7,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
903,618
|
|
|
$
|
718,649
|
|
|
$
|
609,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to countries based on the location of
customers. Intercompany revenues recorded by the United States
for work performed in Canada are eliminated prior to reporting
United States revenues. The amounts eliminated were
$0.1 million, $0.1 million and $0.3 million for
2005, 2004 and 2003 respectively. The same accounting principles
and critical accounting policies are used in the preparation of
the financial statements for both reporting segments.
55
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
Detailed information for our United States reporting
segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Medical waste management services
|
|
$
|
495,469
|
|
|
$
|
448,485
|
|
|
$
|
429,638
|
|
Pharmaceutical returns services
|
|
|
12,778
|
|
|
|
1,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
508,247
|
|
|
$
|
449,501
|
|
|
$
|
429,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
11,621
|
|
|
|
9,340
|
|
|
|
11,964
|
|
Debt extinguishment and refinancing
|
|
|
197
|
|
|
|
4,574
|
|
|
|
3,268
|
|
3CI settlement of class action
litigation
|
|
|
36,481
|
|
|
|
|
|
|
|
|
|
Licensing legal settlement
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
102,286
|
|
|
|
119,387
|
|
|
|
103,339
|
|
Income taxes
|
|
|
41,298
|
|
|
|
50,136
|
|
|
|
43,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
60,988
|
|
|
$
|
69,251
|
|
|
$
|
60,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
16,317
|
|
|
$
|
17,029
|
|
|
$
|
15,526
|
|
Detailed information for our Foreign reporting segment is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Medical waste management services
|
|
$
|
100,147
|
|
|
$
|
58,590
|
|
|
$
|
20,774
|
|
Proprietary equipment and
technology license sales
|
|
|
1,063
|
|
|
|
8,137
|
|
|
|
2,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
101,210
|
|
|
$
|
66,727
|
|
|
$
|
23,587
|
|
Net interest expense
|
|
|
626
|
|
|
|
1,288
|
|
|
|
334
|
|
Debt extinguishment and refinancing
|
|
|
250
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
9,694
|
|
|
|
9,177
|
|
|
|
5,390
|
|
Income taxes
|
|
|
3,528
|
|
|
|
250
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6,166
|
|
|
$
|
8,927
|
|
|
|
5,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
5,114
|
|
|
$
|
4,774
|
|
|
$
|
1,729
|
|
56
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
|
|
Note 17
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table summarizes our unaudited consolidated
quarterly results of operations as reported for 2005 and 2004
(in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
Revenues
|
|
$
|
140,578
|
|
|
$
|
149,148
|
|
|
$
|
153,176
|
|
|
$
|
166,555
|
|
Gross profit
|
|
|
60,933
|
|
|
|
65,279
|
|
|
|
67,588
|
|
|
|
74,237
|
|
Income from operations
|
|
|
39,095
|
|
|
|
41,983
|
|
|
|
41,952
|
|
|
|
45,325
|
|
3CI legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,481
|
|
Licensing legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,823
|
|
Write-down of note receivable with
former joint venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,495
|
|
Net income (loss)
|
|
|
21,815
|
|
|
|
22,982
|
|
|
|
23,383
|
|
|
|
(1,026
|
)
|
*Basic earnings per common share
|
|
|
0.49
|
|
|
|
0.52
|
|
|
|
0.53
|
|
|
|
(0.02
|
)
|
*Diluted earnings per common share
|
|
|
0.48
|
|
|
|
0.51
|
|
|
|
0.52
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
Revenues
|
|
$
|
117,556
|
|
|
$
|
123,793
|
|
|
$
|
135,989
|
|
|
$
|
138,890
|
|
Gross profit
|
|
|
53,155
|
|
|
|
55,335
|
|
|
|
59,167
|
|
|
|
60,549
|
|
Income from operations
|
|
|
34,691
|
|
|
|
34,606
|
|
|
|
38,214
|
|
|
|
38,144
|
|
Net income
|
|
|
19,124
|
|
|
|
18,867
|
|
|
|
21,128
|
|
|
|
19,059
|
|
*Basic earnings per common share
|
|
|
0.44
|
|
|
|
0.43
|
|
|
|
0.47
|
|
|
|
0.42
|
|
*Diluted earnings per common share
|
|
|
0.42
|
|
|
|
0.41
|
|
|
|
0.46
|
|
|
|
0.42
|
|
|
|
|
|
|
The fourth quarter of 2005 includes $36.5 million
($23.4 million after tax) in 3CI legal settlement expenses,
$1.8 million ($1.1 million after tax) in licensing
legal settlement, $2.5 million ($1.5 million after
tax) in non-cash write-down of a note receivable with a former
joint venture.
|
|
|
|
The third quarter of 2005 includes $0.9 million
($0.5 million after tax) in a non-cash write-down of
impaired building and property.
|
|
|
|
The fourth quarter of 2004 includes $3.1 million
($1.9 million after tax) in redemption premium expense and
$1.1 million ($0.7 million after tax) in non-cash
accelerated amortization of financing fees. See Note 5-Long Term
Debt Senior Subordinated Notes.
|
|
|
|
The second quarter of 2004 includes a $1.2 million
($0.7 million after tax) non-cash write-down of idled
incinerator equipment and related spare parts.
|
|
|
|
Earnings per share are calculated on a quarterly basis, and, as
such, the amounts may not total the calculated full-year
earnings per share.
|
Note 18 Subsequent
Event
On February 27, 2006 we completed the acquisition of
Sterile Technologies Group Limited, a leading provider of
medical waste management services in Ireland and the United
Kingdom, for approximately $131 million, of which
$114 million was paid in cash and $17 million was paid
by assumption of debt. Sterile
57
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
Technologies Group Limited is headquartered in Dublin, Ireland
and provides medical waste management services to customers in
Ireland, Scotland, England and Wales.
During 2005 we were in arbitration proceedings regarding various
disputes under an exclusive marketing and distribution license
agreement with a licensor of software. See Note 15, Legal
Proceedings Other Litigation. On March 1,
2006, after we had announced our 2005 results on
February 7, 2006, the arbitrator awarded the licensor
$0.4 million in damages for breach of the agreement and
denied all of the parties other claims, and the license
agreement was effectively terminated. As a result of the
arbitrators award, we are required to record a
pre-tax cash
charge of $0.4 million and a
pretax
non-cash
charge of $1.4 million, representing the
write-off of
the unamortized portion of the license fee that we had paid.
Although the arbitrators award is a subsequent event that
occurred after the end of the year, we were required to record
these charges for the quarter and year ended December 31,
2005. As a result, our net income for the quarter and year ended
December 31, 2005 are reduced by $1.1 million, net of
tax, from the net income for the quarter and year that we
announced on February 7, 2006. We have included a new line
item, licensing legal settlement, on the consolidated statements
of income and have made related changes to the other
consolidated financial statements, to which these notes are an
integral part.
58
STERICYCLE,
INC. AND SUBSIDIARIES
SCHEDULE II VALUATION
AND ALLOWANCE ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Charges
|
|
|
Other
|
|
|
Write-offs/
|
|
|
Balance
|
|
|
|
12/31/02
|
|
|
to Expenses
|
|
|
Charges(1)
|
|
|
Payments
|
|
|
12/31/03
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,779
|
|
|
$
|
1,953
|
|
|
$
|
263
|
|
|
$
|
(1,846
|
)
|
|
$
|
4,149
|
|
Accrued severance and closure costs
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
(110
|
)
|
|
|
15
|
|
Accrued transition expenses
|
|
|
|
|
|
|
670
|
|
|
|
|
|
|
|
(670
|
)
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
7,050
|
|
|
$
|
(6,128
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Charges
|
|
|
Other
|
|
|
Write-offs/
|
|
|
Balance
|
|
|
|
12/31/03
|
|
|
to Expenses
|
|
|
Charges(1)
|
|
|
Payments
|
|
|
12/31/04
|
|
|
Allowance for doubtful accounts
|
|
$
|
4,149
|
|
|
$
|
763
|
|
|
$
|
175
|
|
|
$
|
(899
|
)
|
|
$
|
4,188
|
|
Accrued severance and closure costs
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
922
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Charges
|
|
|
Other
|
|
|
Write-offs/
|
|
|
Balance
|
|
|
|
12/31/04
|
|
|
to Expenses
|
|
|
Charges(1)
|
|
|
Payments
|
|
|
12/31/05
|
|
|
Allowance for doubtful accounts
|
|
$
|
4,188
|
|
|
$
|
2,645
|
|
|
$
|
1,215
|
|
|
$
|
(3,238
|
)
|
|
$
|
4,810
|
|
Deferred tax valuation allowance
|
|
$
|
922
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(922
|
)
|
|
$
|
|
|
|
|
|
(1) |
|
Amounts consist primarily of costs assumed from acquired
companies recorded prior to the date of acquisition |
59
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Statement Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
|
|
(a)
|
Evaluation
of disclosure controls and procedures.
|
Our management, with the participation of our President and
Chief Executive Officer and our Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure
controls and procedures as of the end of the fiscal year covered
by this Report. On the basis of this evaluation, our President
and Chief Executive Officer and our Chief Financial Officer each
concluded that our disclosure controls and procedures were
effective.
The term disclosure controls and procedures is
defined in
Rule 13a-14(e)
of the Securities Exchange Act of 1934 as controls and
other procedures designed to ensure that information required to
be disclosed by the issuer in the reports, files or submits
under the Act is recorded, processed, summarized and reported,
within the time periods specified in the [Securities and
Exchange] Commissions rules and forms. Our
disclosure controls and procedures are designed to ensure that
material information relating to us and our consolidated
subsidiaries is accumulated and communicated to our management,
including our President and Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely
decisions regarding our required disclosures.
|
|
(b)
|
Internal
control over financial reporting
|
Managements Report on Internal Control over Financial
Reporting and our Independent Registered Public Accounting
Firms Attestation Report are included in Item 8.
|
|
(c)
|
Changes
in internal controls
|
There were no significant changes in our internal controls or in
other factors that could significantly affect those controls
during the quarter ended December 31, 2005.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by this Item regarding our directors is
incorporated by reference to the information contained under the
caption Election of Directors in our definitive
proxy statement for our 2006 Annual Meeting of Stockholders to
be held on May 3, 2006, to be filed pursuant to
Regulation 14A.
The information required by this Item regarding our executive
officers is contained under the caption Executive Officers
of the Registrant in Part I of this Report.
The information required by this Item regarding compliance with
Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the information contained under the
caption Section 16(a) Beneficial Ownership Reporting
Compliance in our definitive proxy statement for our 2006
Annual Meeting of Stockholders to be held on May 3, 2006,
to be filed pursuant to Regulation 14A.
We have adopted a code of business conduct that applies
generally to all of our employees and, in addition, we have a
adopted a finance department code of ethics that applies
specifically to our President and Chief Executive Office, Chief
Financial Officer, Vice President-Finance and the members of our
finance department. Both codes are available on our website,
www.stericycle.com, under About Us/Corporate
60
Overview, Any amendment to or waiver of the finance
department code of ethics will be posted on our website within
five business days after the date of the amendment or waiver.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference to the information contained under the caption
Executive Compensation in our definitive proxy
statement for our 2006 Annual Meeting of Stockholders to be held
on May 3, 2006, to be filed pursuant to Regulation 14A.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item is incorporated by
reference to the information contained under the captions
Stock Ownership and Executive
Compensation in our definitive proxy statement for our
2006 Annual Meeting of Stockholders to be held on May 3,
2006 to be filed pursuant to Regulation 14A.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
No information is required by this Item.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Audit
Fees
The aggregate fees billed by our independent public accountants,
Ernst & Young LLP, for professional services rendered
in connection with the audit of our annual financial statements
and review of our interim financial statements included in our
quarterly reports on
Form 10-Q
for the fiscal year ended December 31, 2005 were
approximately $568,000. This amount includes approximately
$34,000 for the statutory audit of the financial statements of
our subsidiary operating in Puerto Rico and approximately
$63,000 for the specific scope audit and statutory audit of our
subsidiary operating in the United Kingdom. In addition Ernst
and Young LLP billed us approximately $297,000 in connection
with the audit of our internal controls over financial reporting.
The aggregate fees billed by our independent public accountants,
Ernst & Young LLP, for professional services rendered
in connection with the audit of our annual financial statements
and review of our interim financial statements included in our
quarterly reports on
Form 10-Q
for the fiscal year ended December 31, 2004 were
approximately $484,000. This amount includes approximately
$24,000 for the statutory audit of the financial statements of
our subsidiary operating in Puerto Rico and approximately
$64,000 for the specific scope audit and statutory audit of our
subsidiary operating in the United Kingdom. In addition Ernst
and Young LLP billed us approximately $230,000 in connection
with the audit of our internal controls over financial reporting.
Audit
Related Fees
In the years ended December 31, 2005 and 2004
Ernst & Young LLP did not bill us for any audit related
fees. Ernst & Young LLP did not perform any other
assurance or related services during either of these two fiscal
years.
Tax
Fees
Ernst & Young LLP did not provide any tax compliance,
tax advice or tax planning services to us during the fiscal
years ended December 31, 2005 and 2004.
All Other
Fees
Ernst & Young LLP did not provide any other services to
us during the fiscal years ended December 31, 2005 and 2004.
61
In accordance with policies adopted by the Audit Committee of
our Board of Directors, all audit and non-audit related services
to be performed for us by our independent public accountants
must be approved in advance by the Committee.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) List of Financial Statements, Financial Statement
Schedule and Exhibits
We have filed the following financial statements and financial
statement schedule as part of this report:
|
|
|
|
|
|
|
Page
|
Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial
Reporting
|
|
|
29
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
30
|
|
Consolidated Financial
Statements Stericycle, Inc. and Subsidiaries
|
|
|
|
|
Consolidated Balance Sheets at
December 31, 2005 and 2004
|
|
|
31
|
|
Consolidated Statements of Income
for Each of the Years in the Three-Year Period Ended
December 31, 2005
|
|
|
32
|
|
Consolidated Statements of Cash
Flows for Each of the Years in the Three-Year Period Ended
December 31, 2005
|
|
|
33
|
|
Consolidated Statements of Changes
in Shareholders Equity For Each of the Years in the
Three-Year Period Ended December 31, 2005
|
|
|
34
|
|
Notes to Consolidated Financial
Statements
|
|
|
35
|
|
Schedule II Valuation
and Allowance Accounts
|
|
|
57
|
|
We have filed the following exhibits with this report:
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
Exhibit
|
|
|
|
Electronic
|
Index
|
|
Description
|
|
Submission
|
|
|
3
|
.1*
|
|
Amended and restated certificate
of incorporation (incorporated by reference to Exhibit 3.1
to our 1996
Form S-1)
|
|
|
|
3
|
.2*
|
|
First certificate of amendment to
amended and restated certificate of incorporation (incorporated
by reference to Exhibit 3.1 to our current report on
Form 8-K
filed November 29, 1999)
|
|
|
|
3
|
.3*
|
|
Second certificate of amendment to
amended and restated certificate of incorporation (incorporated
by reference to Exhibit 3.4 to our annual report on
Form 10-K
for 2002)
|
|
|
|
3
|
.4
|
|
Amended and restated bylaws
|
|
x
|
|
4
|
.1*
|
|
Specimen certificate for shares of
our common stock, par value $.01 per share (incorporated by
reference to Exhibit 4.1 to our 1996
Form S-1)
|
|
|
|
10
|
.1
|
|
Credit Agreement dated as of
June 30, 2005 entered into by us and certain subsidiaries
of ours as borrowers or guarantors, Bank of America, N.A., as
administrative agent, swing line lender, a lender and letter of
credit issuer, other lenders party to the Credit Agreement,
JPMorgan Chase Bank, N.A., as syndication agent, and Fortis
Capital Corp. and Calyon-New York Branch, as co-documentation
agents (incorporated by reference to our current report on
Form 8-K
filed July 7, 2005
|
|
|
|
10
|
.2
|
|
Amendment No. 1 to Credit
Agreement, dated as of December 29, 2005, entered into by
us and certain subsidiaries of ours as borrowers or guarantors),
various lenders party to the Credit Agreement, Bank of America,
N.A. and Comerica Bank, as letter of credit issuers, Bank of
America, N.A., as swingline lender and Bank of America, N.A., as
administrative agent
|
|
x
|
|
10
|
.3*
|
|
Directors Stock Option Plan
(Amended and Restated) (Directors Plan)
(incorporated by reference to Exhibit 4.1 to our
registration statement on
Form S-8
filed August 2, 2001 (Registration
No. 333-66542))
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
Exhibit
|
|
|
|
Electronic
|
Index
|
|
Description
|
|
Submission
|
|
|
10
|
.4*
|
|
First amendment to Directors Plan
(incorporated by reference to Exhibit 10.9 to our annual
report on
Form 10-K
for 2001)
|
|
|
|
10
|
.5*
|
|
Form of stock option agreement for
option grant under Directors Plan (incorporated by reference to
Exhibit 10.1 to our quarterly report on
Form 10-Q
for the quarter ended September 30, 2004)
|
|
|
|
10
|
.6*
|
|
1997 Stock Option Plan (1997
Plan) (incorporated by reference to Exhibit 10.3 to
our annual report on
Form 10-K
for 1997)
|
|
|
|
10
|
.7*
|
|
First amendment to 1997 Plan
(incorporated by reference to Exhibit 10.9 to our 1999
Form S-3)
|
|
|
|
10
|
.8*
|
|
Second amendment to 1997 Plan
(incorporated by reference to Exhibit 10.12 to our annual
report on
Form 10-K
for 2001)
|
|
|
|
10
|
.9*
|
|
Third amendment to 1997 Plan
(incorporated by reference to Exhibit 10.16 to our annual
report on
Form 10-K
for 2003)
|
|
|
|
10
|
.10*
|
|
2000 Nonstatutory Stock Option
Plan (2000 Plan) (incorporated by reference to
Exhibit 10.13 to our annual report on
Form 10-K
for 2001)
|
|
|
|
10
|
.11*
|
|
First amendment to 2000 Plan
(incorporated by reference to Exhibit 10.14 to our annual
report on
Form 10-K
for 2001)
|
|
|
|
10
|
.12*
|
|
Second amendment to 2000 Plan
(incorporated by reference to Exhibit 10.15 to our annual
report on
Form 10-K
for 2001)
|
|
|
|
10
|
.13*
|
|
Third amendment to 2000 Plan
(incorporated by reference to Exhibit 4.2 to our
registration statement on
Form S-8
filed December 20, 2002 (Registration
No. 333-102097))
|
|
|
|
10
|
.14*
|
|
2005 Incentive Stock Plan
(2005 Plan) (incorporated by reference to
Exhibit 4.1 to our registration statement on
Form S-8
filed August 9, 2005 (Registration
No. 333-127353)
|
|
|
|
10
|
.15
|
|
Form of stock option agreement for
option grant under 1997 Plan, 2000 Plan and 2005 Plan
|
|
x
|
|
10
|
.16
|
|
Form of stock option agreement for
bonus conversion option grant under 1997 Plan, 2000 Plan and
2005 Plan
|
|
x
|
|
10
|
.17*
|
|
Employee Stock Purchase Plan
(ESPP) (incorporated by reference to
Exhibit 4.1 to our registration statement on
Form S-8
filed August 2, 2001 (Registration
No. 333-66544)
|
|
|
|
10
|
.18*
|
|
First amendment to ESPP
(incorporated by reference to Exhibit 10.21 to our annual
report on
Form 10-K
for 2002)
|
|
|
|
14
|
|
|
Code of ethics (incorporated by
reference to Exhibit 10.14 to our annual report on
Form 10-K
for 2003)
|
|
|
|
21
|
|
|
Subsidiaries
|
|
x
|
|
23
|
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
x
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
|
|
x
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
|
|
x
|
|
32
|
|
|
Section 1350 Certification of
Chief Executive Officer and Chief Financial Officer
|
|
x
|
|
|
|
* |
|
Previously filed |
|
|
|
Management contract or compensatory plan required to be filed
pursuant to Item 601 of
Regulation S-K |
References to our 1996
Form S-1
are to our registration statement on
Form S-1
as declared effective on August 22, 1996 (Registration
No. 333-05665);
and references to our 1999
Form S-3
are to our registration statement on
Form S-3
as declared effective on February 4, 1999 (Registration
No. 333-60591).
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Stericycle, Inc.
Mark C. Miller
President and Chief Executive Officer
Date: March 6, 2006.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons in
the capacities and on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/ Jack
W. Schuler
Jack
W. Schuler
|
|
Chairman of the Board of Directors
|
|
March 6, 2006
|
|
|
|
|
|
/s/ Mark
C. Miller
Mark
C. Miller
|
|
President and Chief Executive
Officer
and a Director (Principal
Executive Officer)
|
|
March 6, 2006
|
|
|
|
|
|
/s/ Frank
J.M. ten Brink
Frank
J.M. ten Brink
|
|
Executive Vice President and
Chief
Financial Officer (Principal Financial
and Accounting Officer)
|
|
March 6, 2006
|
|
|
|
|
|
/s/ Rod
F. Dammeyer
Rod
F. Dammeyer
|
|
Director
|
|
March 6, 2006
|
|
|
|
|
|
/s/ Patrick
F. Graham
Patrick
F. Graham
|
|
Director
|
|
March 6, 2006
|
|
|
|
|
|
/s/ Jonathan
T. Lord, M.D.
Jonathan
T. Lord, M.D.
|
|
Director
|
|
March 6, 2006
|
|
|
|
|
|
/s/ John
Patience
John
Patience
|
|
Director
|
|
March 6, 2006
|
|
|
|
|
|
/s/ THOMAS
R. REUSCHÉ
Thomas
R. Reusché
|
|
Director
|
|
March 6, 2006
|
|
|
|
|
|
/s/ L.
John Wilkerson, Ph.D.
L.
John Wilkerson, Ph.D.
|
|
Director
|
|
March 6, 2006
|
|
|
|
|
|
/s/ Peter
Vardy
Peter
Vardy
|
|
Director
|
|
March 6, 2006
|
64
exv3w4
Exhibit 3.4
Amended and Restated Bylaws of
Stericycle, Inc.
Table of Contents
|
|
|
|
|
Article 1 Offices |
|
|
1 |
|
1.1 Registered Office |
|
|
1 |
|
1.2 Other Offices |
|
|
1 |
|
|
|
|
|
|
Article 2 Stockholders |
|
|
1 |
|
2.1 Annual Meeting |
|
|
1 |
|
2.2 Special Meetings |
|
|
1 |
|
2.3 Place of Meetings |
|
|
1 |
|
2.4 Notice of Meetings |
|
|
1 |
|
2.5 Quorum |
|
|
2 |
|
2.6 Voting |
|
|
2 |
|
2.7 Proxies |
|
|
2 |
|
2.8 Voting List |
|
|
2 |
|
2.9 Inspectors |
|
|
2 |
|
2.10 Adjournments |
|
|
3 |
|
2.11 Business at Annual Meetings of Stockholders |
|
|
3 |
|
2.12 Action by Consent |
|
|
4 |
|
|
|
|
|
|
Article 3 Directors |
|
|
4 |
|
3.1 General Powers |
|
|
4 |
|
3.2 Number and Term of Office |
|
|
4 |
|
3.3 Regular Meetings |
|
|
4 |
|
3.4 Special Meetings |
|
|
5 |
|
3.5 Notice of Special Meetings |
|
|
5 |
|
3.6 Quorum |
|
|
5 |
|
3.7 Participation by Telephone |
|
|
5 |
|
3.8 Voting |
|
|
5 |
|
3.9 Resignation |
|
|
5 |
|
3.10 Removal |
|
|
5 |
|
3.11 Vacancies |
|
|
6 |
|
3.12 Compensation |
|
|
6 |
|
3.13 Committees |
|
|
6 |
|
3.14 Action by Consent |
|
|
6 |
|
|
|
|
|
|
Article 4 Officers |
|
|
6 |
|
4.1 Principal Officers |
|
|
6 |
|
|
|
|
|
|
4.2 Election and Term of Office |
|
|
7 |
|
4.3 Resignation |
|
|
7 |
|
4.4 Removal |
|
|
7 |
|
4.5 Vacancies |
|
|
7 |
|
4.6 Chairman of the Board |
|
|
7 |
|
4.7 President |
|
|
7 |
|
4.8 Chief Operating Officer |
|
|
8 |
|
4.9 Chief Financial Officer |
|
|
8 |
|
4.10 Vice Presidents |
|
|
8 |
|
4.11 Secretary |
|
|
8 |
|
4.12 Assistant Officers |
|
|
8 |
|
4.13 Salaries |
|
|
9 |
|
|
|
|
|
|
Article 5 Indemnification |
|
|
9 |
|
|
|
|
|
|
Article 6 Stock |
|
|
10 |
|
6.1 Stock Certificates |
|
|
10 |
|
6.2 Endorsements |
|
|
10 |
|
6.3 Transfers |
|
|
10 |
|
6.4 Lost Certificates |
|
|
11 |
|
6.5 Stockholders of Record |
|
|
11 |
|
6.6 Record Date |
|
|
11 |
|
|
|
|
|
|
Article 7 General Provisions |
|
|
12 |
|
7.1 Contracts |
|
|
12 |
|
7.2 Loans |
|
|
12 |
|
7.3 Checks |
|
|
12 |
|
7.4 Depositories |
|
|
12 |
|
7.5 Fiscal Year |
|
|
12 |
|
7.6 Corporate Seal |
|
|
12 |
|
7.7 Waiver of Notice |
|
|
12 |
|
7.8 Evidence of Authority |
|
|
12 |
|
7.9 Transactions with Interested Parties |
|
|
13 |
|
7.10 Use of Words |
|
|
13 |
|
|
|
|
|
|
Article 8 Amendments |
|
|
13 |
|
8.1 By Board of Directors |
|
|
13 |
|
8.2 By Stockholders |
|
|
14 |
|
Amended and Restated Bylaws of
Stericycle, Inc.
Article 1
Offices
1.1 Registered Office
The Corporations registered office in the State of Delaware shall be located at 1209 Orange
Street, Wilmington, Delaware 19801 (New Castle County), and its registered agent shall be The
Corporation Trust Company. The Corporations registered office and registered agent may be changed
at any time by the board of directors.
1.2 Other Offices
The Corporation may also have other offices, either within or outside the State of Delaware,
as the board of directors determines or as the Corporations business requires.
Article 2
Stockholders
2.1 Annual Meeting
An annual meeting of stockholders for the election of directors and the transaction of any
other business which properly comes before the meeting shall be held between March 31 and October
31 of each year, on the date fixed by the board of directors.
2.2 Special Meetings
A special meeting of stockholders may be called for any purpose or purposes by the chairman of
the board, the president or the board of directors. The business transacted at any special meeting
of stockholders shall be limited to matters relating to the purpose or purposes stated in the
notice of the meeting.
2.3 Place of Meetings
Meetings of stockholders shall be held at the place designated by the board of directors,
which may be within or outside the State of Delaware. If the Board does not designate a place, the
place shall be the Corporations principal office.
2.4 Notice of Meetings
Written notice of each meeting of stockholders shall be given to all stockholders entitled to
vote at the meeting at least 10 but not more than 60 days prior to the meeting (unless otherwise
provided by law). The notice shall state the date, place and time of the meeting, and in the case
of a special meeting of stockholders, the purpose or purposes for which the meeting is
called. If mailed, the notice shall be considered given when deposited in the United States
mail, proper postage prepaid, directed to the stockholder at his address as it appears on the
Corporations records.
2.5 Quorum
The holders of a majority of the shares entitled to vote at a meeting of stockholders, present
in person or represented by proxy, shall constitute a quorum for the transaction of business at the
meeting, except as otherwise provided by law or by the Corporations certificate of incorporation.
2.6 Voting
Each holder of common stock shall be entitled to one vote for each share of common stock that
he holds of record. When a quorum is present at any meeting of stockholders, the affirmative vote
of holders of a majority of the shares present in person or represented by proxy, entitled to vote
on a matter and voting shall decide the matter, except in the case of the election of directors or
when a different vote is required by law or by the Corporations certificate of incorporation.
Directors shall be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of directors.
2.7 Proxies
Each stockholder entitled to vote at a meeting of stockholders, or to consent to corporate
action without a meeting, may authorize another person to act for him by a written proxy signed by
him or his authorized agent and delivered to the secretary of the Corporation prior to or at the
time of the meeting or other action. No proxy may be voted or acted on more than three years after
its date, unless the appointment expressly provides for a longer period. A stockholder may revoke
his appointment of a proxy by written notice to the secretary of the Corporation, by a subsequent
appointment or by attendance at the meeting and voting in person.
2.8 Voting List
At least 10 days before every meeting of stockholders, the secretary of the Corporation shall
prepare a complete alphabetical list of the stockholders entitled to vote at the meeting, showing
the address of each stockholder and the number of shares registered in his name. This list shall be
open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least 10 days prior to the meeting. The place of inspection shall
be either the place where the meeting is to be held or a place within the city where the meeting is
to be held, in which case the notice of the meeting shall specify the place of inspection. This
list shall also be produced and kept open during the meeting of stockholders and may be inspected
by any stockholder who is present.
2.9 Inspectors
The board of directors shall appoint in advance of any meeting of stockholders one or more
inspectors to act at the meeting. If no inspector appointed is able to act at the meeting, the
-2-
chairman of the meeting shall appoint one or more inspectors. Each inspector shall take and
sign an oath faithfully to carry out the duties of inspector with strict impartiality and according
to the best of his ability. The inspectors shall determine the number of shares outstanding and the
voting power of each, determine the shares represented at the meeting and the validity of proxies
and ballots, count all votes and ballots, determine (and retain for a reasonable period a record
of) the disposition of any challenges made to any determination of the inspectors, and certify
their determination of the number of shares represented at the meeting and their count of all votes
and ballots.
2.10 Adjournments
Any meeting of stockholders may be adjourned to another time or place by the holders of a
majority of the shares present or represented by proxy at the meeting and entitled to vote, even
though less than a quorum. Notice need not be given of the adjourned meeting if the time and place
of the adjourned meeting are announced at the meeting at which the adjournment is taken, unless the
adjournment is for more than 30 days or, after the adjournment, a new record date is fixed for the
adjourned meeting. The Corporation may transact any business at the adjourned meeting which might
have been transacted at the original meeting.
2.11 Business at Annual Meetings of Stockholders
(a) Only such business shall be conducted at an annual meeting of stockholders as may
be properly brought before the meeting. To be properly brought before an annual meeting, the
business must be either (i) specified in the Corporations notice of the meeting pursuant to
Section 2.4 of these Bylaws or (ii) proposed to be brought before the meeting by any
stockholder of record (i) who is entitled to vote at the meeting, (ii) who gives timely
notice of the proposed business in compliance with this Section 2.11, and (iii) who is a
stockholder of record at the time of giving notice. In addition, for any business to be
properly brought before an annual meeting by a stockholder, the business must be a proper
matter for stockholder action.
(b) To be timely, a stockholders notice of proposed business must be addressed to the
secretary of the Corporation and received at the Corporations principal executive offices
no later than the close of business on the 90th day, and no earlier than the close of
business on the 120th day, prior to the first anniversary of the preceding years annual
meeting of stockholders. If, however, the date of the annual meeting is more than 30 days
before or after the first anniversary, the stockholders notice must be received no later
than the close of business on the 90th day, and no earlier than the 120th day, prior to the
annual meeting.
(c) The stockholders notice to the secretary shall include, for each item of business
that the stockholder proposes to bring before the annual meeting, a brief description of the
business and the reasons for conducting the business at the annual meeting. The
stockholders notice shall also include the stockholders name and address as they appear on
the Corporations books, the name and address of the of the beneficial owner, if any, on
whose behalf the stockholder is acting and the number of shares of the
-3-
Corporations stock beneficially owned by the beneficial owner, and a statement of any
interest of the stockholder or beneficial owner in the business proposed to be brought
before the meeting.
(d) The chairman of the annual meeting shall have the power to determine whether any
business was not properly brought before the annual meeting in accordance with the
procedures in this Section 2.11. If the chairman determines that any business was not
properly brought before the meeting, the chairman shall inform the meeting that the business
was not brought properly before the meeting and that the business may not be transacted.
2.12 Action by Consent
Any action which may be taken at a meeting of stockholders may be taken without a meeting (and
without prior notice) if a written consent or consents, setting forth the action taken, are signed
by the holders of outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take the action at a meeting at which all shares entitled to vote were
present and voted. Prompt notice of the taking of any corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not consented.
Article 3
Directors
3.1 General Powers
The Corporations business and affairs shall be managed by or under the direction of a board
of directors, which may exercise all of the powers of the Corporation except as otherwise provided
by law or by the Corporations certificate of incorporation.
3.2 Number and Term of Office
The number of directors constituting the board of directors shall be nine. The number of
directors may be changed by a resolution of the board of directors or the stockholders, but if
changed, no decrease in the number of directors shall affect the term of any incumbent. Directors
shall be elected at the annual meeting of stockholders, and each director shall hold office until
his successor is elected or until his earlier death, resignation or removal. Despite the expiration
of a directors term, the director shall continue to serve in office until the next meeting of
stockholders at which directors are elected. Directors need not be stockholders of the Corporation.
3.3 Regular Meetings
Regular meetings of the board of directors shall be held, at least once each fiscal quarter,
at the times and places determined by the board of directors. Notice of a regular meeting of the
board of directors need not be given (except to a director who was absent when the determination of
the time and place was made).
-4-
3.4 Special Meetings
Special meetings of the board of directors may be held at any time at the call of the chairman
of the board, the president or any two directors. Special meetings shall be held at the
Corporations principal office unless the board of directors designates a different location.
3.5 Notice of Special Meetings
Written notice of a special meeting of the board of directors shall be given to each director
at his business address by the secretary of the Corporation, or by the officer or one of the
directors calling the meeting, by personal delivery, telecopier, overnight courier service or mail
at least 48 hours prior to the meeting. The notice shall state the time and place of the meeting
but need not specify the purpose of the meeting.
3.6 Quorum
A majority of the total number of directors shall constitute a quorum to transact business at
all meetings of the board of directors. In the absence of quorum at any meeting, a majority of the
directors present may adjourn the meeting without further notice other than announcement of the
time and place of the adjourned meeting.
3.7 Participation by Telephone
A director or member of any committee designated by the board of directors may participate in
any meeting of the board of directors or of such committee by conference telephone or similar
communications equipment which enables all persons participating in the meeting to hear one
another, and participation in this manner shall constitute presence in person at the meeting.
3.8 Voting
The vote of a majority of the directors present at any meeting of the board of directors at
which a quorum is present shall be the act of the board of directors, unless the vote of a greater
number is required by the Corporations certificate of incorporation.
3.9 Resignation
A director may resign at any time by written notice to the Corporation at its principal office
or to the chairman of the board, president or secretary. Unless otherwise specified in the
directors notice, his resignation shall be effective on receipt by the Corporation or designated
officer.
3.10 Removal
Any director may be removed, with or without cause, at any special meeting of stockholders
called for that purpose, by the affirmative vote of holders of a majority of the shares then
entitled to vote at an election of directors.
-5-
3.11 Vacancies
Any vacancy in the board of directors created by a directors resignation, death or removal,
or any vacancy arising because of an increase in the number of directors may be filled by the
incumbent directors. A director elected to fill a vacancy shall hold office for the balance of the
term for which he was elected.
3.12 Compensation
The board of directors may establish reasonable fees to be paid to directors for their
services, and may also authorize the payment of their expenses, if any, reasonably incurred in
attending meetings of the board of directors.
3.13 Committees
The board of directors, by resolution passed by a majority of the whole Board, may create one
or more committees (for example, a Compensation Committee or an Audit Committee) of two or more
directors to serve at the Boards pleasure. The board of directors may designate one or more
directors as alternate members of any committee who may replace any absent or disqualified member
of the committee at any meeting of the committee. To the extent provided in the resolution creating
each committee, and subject to the limitations imposed by law, the committee shall have and may
exercise all of the powers and authority of the board of directors in respect of matters within the
scope of the committees authority. Unless the resolution creating any committee specifies a
greater number, a majority of the members of the committee shall constitute a quorum, and a
majority of a quorum shall be necessary for committee action. Subject to the direction of the board
of directors, each committee shall determine the time and place of its meetings and establish
appropriate rules to govern its activities.
3.14 Action by Consent
Any action which may be taken at a meeting of the board of directors or of any committee of
the board of directors may be taken without a meeting (and without prior notice) if a written
consent or consents, setting forth the action taken, are signed by all of the directors or members
of the committee and filed with minutes of proceedings of the board of directors or the committee.
Article 4
Officers
4.1 Principal Officers
The principal officers of the Corporation shall consist of a president, chief financial
officer and secretary. The board of directors may elect a chairman of the board from among the
directors and may appoint such other officers and assistant officers, including one or more vice
presidents, assistant treasurers and assistant secretaries as the Board considers advisable. More
than one office may be held by the same person.
-6-
4.2 Election and Term of Office
The president, chief financial officer and secretary shall be elected annually by the board of
directors at the first meeting of the board of directors following the annual meeting of
stockholders. A chairman of the board and other officers may be elected or appointed at this
meeting or at any other meeting. Each officer shall hold office until his successor is elected and
qualified or until his earlier death, resignation or removal. The election or appointment of an
officer shall not of itself create any contract rights.
4.3 Resignation
An officer may resign at any time by written notice to the Corporation at its principal office
or to the chairman of the board, president or secretary. Unless otherwise specified in the
officers notice, his resignation shall be effective on receipt by the Corporation or designated
officer.
4.4 Removal
Any officer may be removed by the board of directors, with or without cause, whenever in its
judgment the officers removal would serve the Corporations best interests. Unless the board of
directors determines otherwise, no officer who is removed shall have any right to compensation as
an officer for any period following his removal except as provided in an authorized contract with
the Corporation.
4.5 Vacancies
The board of directors may fill a vacancy in any office occurring for any reason or may leave
any vacant office unfilled other than the offices of president, Treasurer or secretary.
4.6 Chairman of the Board
The chairman of the board, if one is elected, shall confer with the president on matters of
general policy affecting the day- to-day management of the Corporations business and have such
other powers and duties as the board of directors assigns. The chairman of the board shall preside
at all meetings of the board of directors.
4.7 President
The president shall be the Corporations chief executive officer and, subject to the direction
of the board of directors and such supervisory powers, if any, that the board may give to the
chairman of the board, shall have general charge of the Corporations business and day-to-day
management. He shall also supervise the Corporations other officers and see that all resolutions
and orders of the board of directors are carried into effect. He shall preside at all meetings of
the stockholders and, in the absence of the chairman of the board or if one is not elected, at all
meetings of the board of directors. In general, the president shall have the powers and duties
usually vested in the office of president of a corporation and such other powers and duties as the
board of directors assigns.
-7-
4.8 Chief Operating Officer
The chief operating officer of the Corporation shall be responsible, under the presidents
direction, for overseeing the Corporations day-to-day business operations. The chief operating
officer shall have the powers and duties usually vested in the office of chief operating officer of
a corporation and such other powers and duties as the president or the board of directors assigns.
4.9 Chief Financial Officer
The chief financial officer of the Corporation shall be responsible, under the presidents
direction, for all financial and accounting matters, including custody of the Corporations funds
and securities and responsibility for depositing, investing and disbursing the Corporations funds.
The chief financial officer shall have the powers and duties usually vested in the office of chief
financial officer of a corporation and such other powers and duties as the president or board of
directors assigns.
4.10 Vice Presidents
The vice president, if one is appointed, or, if there is more than one, the vice presidents,
shall assist the president as he directs in the management of the Corporations business and the
implementation of resolutions and orders of the board of directors. If there is more than one vice
president, the board of directors may give them titles that are descriptive of their respective
functions or indicative of their relative seniority. In the event of the absence or inability to
act of the president, the vice president, or if there is more than one, the vice presidents in the
order of their seniority as indicated by their titles or as otherwise determined by the board of
directors, shall perform the duties of president. The vice president or vice presidents shall also
have such other powers and duties as the president or board of directors assigns.
4.11 Secretary
The secretary shall the powers and duties usually vested in the office of secretary of a
corporation, including custody of the Corporations corporate records and responsibility for
sending all notices to stockholders and directors required by law or by these Bylaws and recording
all proceedings of meetings of the stockholders and the directors. The secretary shall have
authority to certify copies of these Bylaws, resolutions of the stockholders and directors and
other documents of the Corporation as true and correct and shall also such other powers and duties
as the president or board of directors assigns.
4.12 Assistant Officers
The assistant treasurer and the assistant secretary (or if more than one is appointed, the
assistant treasurers and assistant secretaries in the order determined by the board of directors)
shall perform the duties of the treasurer or secretary, as the case may be, in the event of his
absence or inability to act. Each assistant treasurer or assistant secretary shall also have such
powers and duties as the president or board of directors assigns.
-8-
4.13 Salaries
Officers of the Corporation shall be entitled to such salaries, compensation or reimbursement
as the board of directors determines. No officer shall be prevented from receiving a salary by
reason of the fact that he is also a director.
Article 5
Indemnification
The Corporation shall indemnify each person who was or is made a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, other than an action by or in the right of the
Corporation (a proceeding) by reason of the fact that he, or the person of whom he is the legal
representative, is or was a director or officer of the Corporation or, while a director or officer,
is or was serving at the Corporations request as a director, officer, trustee, employee or agent
of another corporation or of a partnership, joint venture, trust or other enterprise, against all
expenses (including attorneys fees), judgments, fines and amounts paid in settlement that he
reasonably incurs in connection with the proceeding, to the fullest extent authorized by the
Delaware General Corporation Law, as it now exists and as it may be amended (but in the case of any
amendment, only to the extent that the amendment authorizes the Corporation to provide broader
indemnification rights than were permitted prior to the amendment). This right to indemnification
shall continue as to a person who has ceased to be a director or officer of the Corporation and
shall inure to the benefit of his heirs and legal representatives.
The Corporation shall be required to indemnify a director or officer in connection with any
proceeding initiated that the director or officer initiated only if the initiation of the
proceeding was authorized by the board of directors.
The right to indemnification shall include the right to be paid by the Corporation the
expenses incurred in defending any proceeding in advance of its final disposition. Payment of such
expenses shall be made, however, only upon delivery of an undertaking by the director or officer to
repay all amounts advanced if it is ultimately determined that he is not entitled to
indemnification under this Article (or otherwise).
The right to indemnification under this Article shall not be exclusive of any other rights
that a director or officer may have by law, under the corporations certificate of incorporation,
these Bylaws or any contract or by vote of the stockholders or disinterested directors or
otherwise.
The Corporation, by action of its board of directors, may provide indemnification to its
employees and agents with the same scope and effect as the indemnification provided to its
directors and officers in this Article.
The Corporation may purchase and maintain insurance on its own behalf and on behalf of any
person who is or was a director, officer, employee or agent of the Corporation or is or was serving
at the Corporations request as a director, officer, trustee, employee or agent of another
-9-
corporation or of a partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, whether or not the
Corporation would have the power to indemnify such person against such liability under this Article
5 or the General Corporation Law of the State of Delaware.
Article 6
Stock
6.1 Stock Certificates
The shares of the Corporation shall be represented by certificates. The board of directors may
provide by resolution that some or all of the Corporations stock shall be uncertificated shares,
but any such resolution shall not apply to any shares represented by a certificate until the
certificate is surrendered to the Corporation. In any case, every holder of stock represented by
certificates, and upon request every holder of uncertificated shares, shall be entitled to a
certificate representing the number of shares registered in his name. Each certificate shall be
signed by or in the name of the Corporation by the chairman of the board or the president or a vice
president and by the secretary or an assistant secretary. Any or all of the signatures on the
certificate may be a facsimile. If any officer, transfer agent or registrar who has signed a
certificate, or whose facsimile signature has been placed upon a certificate, ceases to serve
before the certificate is issued, the certificate may be issued with the same effect as if the
officer, transfer agent or registrar were still serving at the time of issuance. All certificates
shall be in the form prescribed by the board of directors, and shall be consecutively numbered or
otherwise identified. The name and post office address of the person to whom the shares represented
by the certificate are issued, with the number of shares and date of issuance, shall be entered on
the Corporations stock transfer books.
6.2 Endorsements
Each certificate for shares of stock which are subject to any restriction on transfer pursuant
to the Corporations certificate of incorporation, these Bylaws, applicable securities laws or an
agreement between the Corporation and any number of stockholders shall have conspicuously noted on
the face or back of the certificate either the full text of the restriction or a statement that the
shares of stock represented by the certificate are subject to the restriction.
6.3 Transfers
Shares of stock of the Corporation may be transferred on the books of the Corporation by the
surrender to the Corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney properly executed,
with such proof of authority or authenticity of signature as may be required by rules and
regulations adopted by the board of directors. Whenever any transfer of shares is made for
collateral security and not absolutely, it shall be so expressed in the entry in the Corporations
stock transfer books if, when the certificate is presented for transfer, both the transferor and
the transferee request the Corporation to do so.
-10-
6.4 Lost Certificates
The Corporation may issue a new certificate of stock in place of any certificate previously
issued which is alleged to have been lost, stolen or destroyed on such terms and conditions as the
board of directors may prescribe, including presentation of reasonable evidence of such loss, theft
or destruction and such bond or other indemnity as the board of directors requires for the
protection of the Corporation and its transfer agent.
6.5 Stockholders of Record
Except as may be otherwise required by law, the Corporation shall be entitled to treat the
holder of record of any shares of its stock as shown on its stock transfer records as the owner of
those shares for all purposes, including the payment of dividends and the right to vote, until the
shares have been transferred on the Corporations stock transfer records in accordance with these
Bylaws, regardless of any intervening transfer, pledge or other disposition of the shares.
6.6 Record Date
The board of directors may fix a date in advance as the record date for purposes of
determining the stockholders entitled to notice of or to vote at any meeting of stockholders, to
consent to corporate action without a meeting, to receive payment of any dividend or other
distribution, to exercise any rights in respect of any change, conversion or exchange of stock, or
for purposes of any other lawful action. The record date may be fixed within these limits:
(i) the record date for determining the stockholders entitled to notice of and to vote
at any meeting of stockholders shall not be less than 10 or more than 60 days prior to the
date of the meeting;
(ii) the record date for determining the stockholders entitled to consent to corporate
action without a meeting shall not be earlier than the date of the resolution fixing the
record date or more than 10 days after such date; and
(iii) the record date for determining the stockholders for any other purpose shall not
be earlier than the date of the resolution fixing the record date or more than 60 days prior
to the action for which the determination is being made.
If the board of directors does not fix a record date:
(i) the record date for determining the stockholders entitled to notice of or to vote
at a meeting of stockholders shall be at the close of business on the day before the date on
which notice is given;
(ii) the record date for determining stockholders entitled to consent to corporate
action without a meeting shall be the first date on which a signed consent setting forth the
action taken or proposed to be taken is delivered to the Corporation; and
(iii) the record date for determining the stockholders for any other purpose shall be
-11-
the close of business on the day that the board of directors adopts the resolution
authorizing the action with respect to which the determination is being made.
Article 7
General Provisions
7.1 Contracts
The board of directors may authorize any officer or officers to enter into any contract or
agreement for the Corporation. This authorization may be general or confined to specific instances.
7.2 Loans
The Corporation shall not borrow money unless authorized by the board of directors. This
authorization may be general or confined to specific instances.
7.3 Checks
All checks, drafts and other orders for the payment of money, and all promissory notes and
other evidences of indebtedness issued in the Corporations name, shall be signed by the officer or
officers and in the manner authorized by the board of directors.
7.4 Depositories
All funds of the Corporation shall be deposited in its name in the banks, trust companies or
other depositories authorized by the board of directors.
7.5 Fiscal Year
The Corporations fiscal year shall be fixed by the board of directors.
7.6 Corporate Seal
The corporate seal shall be in such form as the board of directors approves.
7.7 Waiver of Notice
Whenever notice is required to be given by law, the Corporations certificate of incorporation
or these Bylaws, a written waiver, signed by the person entitled to notice at any time before or
after the time stated in the waiver, shall be considered equivalent to proper notice. Attendance of
a person at any meeting shall constitute a waiver of notice of the meeting, unless the person
attends for the express purpose of objecting, at the beginning of the meeting, to transacting any
business the meeting because the meeting was not lawfully called or convened.
7.8 Evidence of Authority
A certificate by the secretary or an assistant secretary as to any action taken by the
-12-
stockholders or board of directors or any committee of the board of directors or officer of
the Corporation shall be conclusive evidence of such action as to all persons who rely on the
certificate in good faith.
7.9 Transactions with Interested Parties
No contract or transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or officers or have a
financial interest, shall be void or voidable solely for this reason, or solely because the
director or officer is present at or participates in the meeting of the board of directors or
committee which authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose, if:
(a) the material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the board of directors or the committee, and the
Board or committee in good faith authorizes the contract or transaction by the affirmative
vote of a majority of the disinterested directors, even though the disinterested directors
are less than a quorum;
(b) the material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote on the matter,
and the contract or transaction is specifically approved in good faith by the vote of the
stockholders; or
(c) the contract or transaction is fair as to the Corporation as of the time that it is
authorized, approved or ratified by the board of directors, committee or stockholders.
Interested directors may be counted in determining the presence of a quorum at a meeting of
the board of directors or of a committee of directors which authorizes the contract or transaction.
7.10 Use of Words
Whenever the context requires, words used in these Bylaws in the singular shall be considered
to be in the plural, and conversely. Similarly, the words he, his and him shall be considered
she or her or it or its when appropriate to the reference.
Article 8
Amendments
8.1 By Board of Directors
These Bylaws may be amended or repealed or new bylaws may be adopted by the affirmative vote
of a majority of the directors present at any regular or special meeting of the board of directors
at which a quorum is present.
-13-
8.2 By Stockholders
These Bylaws may be amended or repealed or new bylaws may be adopted by the affirmative vote
of holders of a majority of the shares entitled to vote at any annual meeting of stockholders or at
any special meeting of stockholders at which notice of the meeting included a statement or
description of the proposed amendment, repeal or adoption of new bylaws.
-14-
exv10w2
Exhibit 10.2
AMENDMENT NO. 1 TO CREDIT AGREEMENT
This AMENDMENT NO. 1 TO CREDIT AGREEMENT (the Agreement) is dated as of December 29,
2005 by and among Stericycle, Inc., a Delaware corporation (the Company), Stericycle
International, Ltd. (the Designated Borrower), the Subsidiaries of the Company named as
signatories hereto (collectively, the Subsidiary Guarantors), the financial institutions
from time to time party to the Credit Agreement referred to and defined below (collectively, the
Lenders), the New Lender referred to and defined below, Bank of America, N.A. and
Comerica Bank, as letter of credit issuers (in such capacity, the L/C Issuers), Bank of
America, N.A., as swingline lender (in such capacity, the Swing Line Lender) and Bank of
America, N.A., as representative of the L/C Issuers and Lenders party to the Credit Agreement
referred to and defined below (in such capacity, the Administrative Agent). Undefined
capitalized terms used herein shall have the meanings ascribed to such terms in such Credit
Agreement referred to and defined below.
W I T N E S S E T H:
WHEREAS, the Company, the Designated Borrower, the Lenders, the L/C Issuers, the
Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, and Fortis Capital Corp. and
Calyon-New York Branch, as Co-Documentation Agents, have entered into that certain Credit Agreement
dated as of June 30, 2005 (as amended prior to the date hereof, the Credit Agreement),
pursuant to which, among other things, the Lenders have agreed to provide, subject to the terms and
conditions contained therein, certain loans and other financial accommodations to the Company, the
Designated Borrower and the other Designated Borrowers from time to time party thereto;
WHEREAS, the Company has requested that the Administrative Agent, the L/C Issuers and the
Lenders amend the Credit Agreement to, among other things, (i) increase the Letter of Credit
Sublimit from $125,000,000 to $150,000,000, (ii) increase the amount by which the Aggregate
Commitment can be increased pursuant to Section 2.15 of the Credit Agreement from $50,000,000 to
$250,000,000 and (iii) amend Section 7.10 of the Credit Agreement to remove certain restrictions on
the ability of the Designated Borrower to refinance Indebtedness incurred or assumed by it to
finance, directly or indirectly, the acquisition of shares in the Designated Borrower or any of its
Subsidiaries and, subject to the terms and conditions of this Agreement, the Administrative Agent,
the L/C Issuers and the Lenders hereby agree to such amendments to the Credit Agreement;
WHEREAS, immediately upon the effectiveness of the amendments to the Credit Agreement
contemplated in this Agreement, the Company has requested that (i) the Aggregate Commitment be
increased by $150,000,000 from $400,000,000 to $550,000,000 (the Increase) and (ii)
Citibank, N.A. (the New Lender) become party to the Credit Agreement as a Lender (the
Joinder) pursuant to Section 2.15 of the Credit Agreement; and
WHEREAS, in connection with the Increase and the Joinder, (i) each Lender which has an
Applicable Percentage, as in effect immediately prior to giving effect to the
amendments and the Increase contemplated by this Agreement, that is greater than its
Applicable Percentage proposed pursuant to this Agreement to be in effect immediately after giving
effect to such amendments and such Increase (the Assignor Lenders) desires to sell and
assign to the New Lender and each other Lender which has an Applicable Percentage, as in effect
immediately prior to giving effect to the amendments and the Increase contemplated by this
Agreement, that is less than its Applicable Percentage proposed pursuant to this Agreement to be in
effect immediately after giving effect to such amendments and such Increase (together with the New
Lender, the Assignee Lenders), and each Assignee Lender desires to purchase and acquire
from each Assignor Lender, portions of the interests in the outstanding Loans and L/C Obligations
of each such Assignor Lender as constituted immediately prior to the effectiveness of the Increase
as may be necessary to result in all Lenders holding shares of such interests consistent with such
proposed resulting Applicable Percentage and (ii) the Lenders have agreed to reallocate their
Commitments, in each case, in accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, the terms and conditions stated
herein and other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the Company, the Designated Borrower, the Subsidiary Guarantors, the L/C Issuers,
the Swing Line Lender, the Lenders, the New Lender and the Administrative Agent, such parties
hereby agree as follows:
1. Amendments to the Credit Agreement. Subject to the satisfaction of each of the
conditions set forth in Section 3 of this Agreement, the Credit Agreement is hereby amended
as follows:
(a) The defined term Letter of Credit Sublimit set forth Section 1.01 of the Credit
Agreement is hereby amended to delete the reference to the dollar amount $125,000,000 set
forth in such defined term and to replace such dollar amount with the dollar amount
$150,000,000.
(b) Section 2.15(a) of the Credit Agreement is hereby amended to delete the reference
to the dollar amount $50,000,000 set forth in the first sentence of such section and to
replace such dollar amount with the dollar amount $250,000,000.
(c) Section 2.15(a) of the Credit Agreement is hereby further amended to delete the
reference to the number amount two set forth in clause (ii) of the proviso to the first
sentence of such section and to replace such number with the number three.
(d) Section 7.10 of the Credit Agreement is hereby amended and restated in its entirety
to read as follows:
7.10 Use of Proceeds. Other than to the extent permitted under
Section 7.06, use the proceeds of any Credit Extension, whether
directly or indirectly, and whether immediately, incidentally or ultimately,
to purchase or carry margin stock (within the meaning of Regulation U of the
FRB) or to extend credit to others for the purpose of purchasing or carrying
margin stock or to refund indebtedness originally incurred for such purpose.
2
2. Increase in the Aggregate Commitment. Subject to the satisfaction of each of the
conditions set forth in Section 3 of this Agreement and immediately after giving effect to
the provisions of Section 1 of this Agreement, the parties hereto agree as follows
notwithstanding anything in Section 2.15 of the Credit Agreement to the contrary:
(a) The Aggregate Commitment is increased by $150,000,000 from $400,000,000 to
$550,000,000 and, subject to the terms and conditions of this Agreement, such increase shall
be deemed to have been effected in compliance with Section 2.15. After giving effect to the
amendments effected pursuant to Section 1 of this Agreement and the foregoing
increase, the Company may from time to time request, pursuant to Section 2.15, further
increases in the aggregate commitments by an amount (for all further requests) not exceeding
$100,000,000; provided that (i) any such request for an additional increase shall be
in a minimum amount of $25,000,000 and (ii) the Company may make a maximum of two more such
requests.
(b) The Assignee shall become a party to the Credit Agreement as a Lender and shall
have all of the rights and obligations of a Lender thereunder and shall thereupon have a
Commitment and an Applicable Percentage under and for purposes of the Credit Agreement in
the amounts set forth opposite the New Lenders name on Schedule I hereof. The
Administrative Agent acknowledges that this Agreement constitutes a joinder agreement in
form and substance acceptable to the Administrative Agent pursuant to Section 2.15(c) of the
Credit Agreement and each of the parties hereto hereby approve the New Lender as an Eligible
Assignee under the Credit Agreement.
(c) Each of the Assignor Lenders hereby sells and assigns to the Assignee Lenders, and
each of the Assignee Lenders hereby purchases and assumes from each of the Assignor Lenders,
ratable portions of each Assignor Lenders interests in the outstanding Loans and the L/C
Obligations (collectively the Interests), and each of the Lenders and the New
Lender hereby agrees to reallocate among themselves their respective Commitments and
interests in the outstanding Loans and L/C Obligations, in each case such that after giving
effect to such sales, assignments, purchases, assumptions and reallocations contemplated in
this paragraph, each Lender and the New Lender shall have the resulting Commitments and
Applicable Percentages as are set forth on Schedule I opposite such Persons name
therein. In addition, the Lenders risk participations in outstanding L/C Obligations and
Swing Line Loans shall be reallocated among the Lenders and the New Lender in such a manner
as may be necessary to result in such participations being held ratably in accordance with
such revised Applicable Percentages. The sales, assignments, purchases, assumptions and
reallocations to be effected pursuant to this paragraph shall be without recourse to, or
representation or warranty (except as expressly provided in this Agreement) by, any of the
Lenders or the New Lender. As consideration for such sales, assignments, purchases,
assumptions and reallocations, each Assignee Lender shall pay to the Administrative Agent,
by wire transfer of immediately available funds, the positive amount set forth beside such
Assignee Lenders name on Schedule I under the heading Change in Outstandings,
and, upon receipt of such amounts, the Administrative Agent shall pay to each Assignor
Lender the negative amounts set forth beside each Assignor Lenders name Schedule I
under the heading Change in Outstandings.
3
(d) Each of the Assignor Lenders (i) represents and warrants that it is the legal and
beneficial owner of the Interests being sold and assigned by it hereunder and that such
Interests are free and clear of any Liens or any adverse claims; (ii) makes no
representation or warranty and assumes no responsibility with respect to any statements,
warranties or representations made by any the Company or any of its Affiliates in or in
connection this Agreement or the Credit Agreement; and (iii) makes no representation or
warranty and assumes no responsibility with respect to the financial condition of the
Company or its Affiliates or the performance or observance by the Company or its Affiliates
of any of their respective obligations under the Credit Agreement or any other instrument or
document furnished pursuant thereto.
(e) The Company hereby agrees to compensate each Lender and the New Lender, in
immediate available funds on date of this Agreement, for any losses, expenses and
liabilities incurred by such Lender or New Lender in connection with the sales, assignments,
purchases, assumptions and reallocations contemplated by this Agreement with respect to any
Eurocurrency Rate Loan subject to such transactions.
(f) The New Lender hereby (i) confirms that it has received a copy of the Credit
Agreement, together with copies of the financial statements and such other documents and
information as it has deemed appropriate to make its own credit analysis and decision to
enter into this Agreement; (ii) agrees that it will, independently and without reliance upon
the Administrative Agent or any other Lender and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit decisions in taking
or not taking action under the Credit Agreement; (iii) appoints and authorizes the
Administrative Agent to take such action as contractual representative on its behalf and to
exercise such powers under the Credit Agreement and the other Loan Documents as are
delegated to the Administrative Agent by the terms thereof, together with such powers as are
reasonably incidental thereto; and (iv) agrees that it will perform in accordance with their
terms all of the obligations which by the terms of the Credit Agreement are required to be
performed by it as a Lender.
(g) The Administrative Agent shall make all payments under the Credit Agreement in
respect of the Interests and other interests under the Credit Agreement assigned or
reallocated hereby and the Commitments and Applicable Percentages as reallocated hereby
(including all payments of principal, interest and fees with respect thereto).
(h) Schedule 2.01 of the Credit Agreement shall be amended and restated in its entirety
as Schedule I hereto.
3. Effectiveness of this Agreement; Conditions Precedent. The provisions of
Sections 1 and 2 of this Agreement shall be effective upon the Administrative
Agents receipt of:
(a) an originally-executed counterpart (or facsimile thereof) of this Agreement duly
executed and delivered by authorized officers of the Company, the Designated Borrower, the
L/C Issuers, the Swing Line Lender, the Subsidiary Guarantors, the New Lender and each other
Lender;
4
(b) Notes, in form and substance acceptable to the Administrative Agent, made payable
to each Lender (including the New Lender) whose Commitment is increased pursuant to this
Agreement that requests a Note reflecting its Commitment, as amended hereby;
(c) a certificate signed by an officer of the Company and the Designated Borrower,
dated as of the date hereof, certifying (i) the currency and authenticity of the resolutions
of the board of directors (or the equivalent thereof) of such Person authorizing its
execution and delivery of this Agreement and the performance hereof and of the Credit
Agreement as to be amended hereby and (ii) that, both before and after giving effect to the
increase in the Aggregate Commitment contemplated by Section 2 of this Agreement, (A) the
representations and warranties of such Person contained in Article V of the Credit Agreement
and the other Loan Documents to which such Person is a party are true and correct as of the
date hereof (except (1) to the extent that such representations and warranties specifically
refer to an earlier date, in which case they refer to an earlier date and (2) the
representations and warranties contained in subsections (a) and (b) of Section 5.05 of the
Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant
to such subsections (a) and (b), respectively, of Section 6.01 of the Credit Agreement) and
(B) no Default exists;
(d) an opinion letter of Johnson & Colmar, counsel for the Company, addressing matters
related to this Agreement and the Credit Agreement as amended by this Agreement;
(e) a good standing certificate of the Company certified as a recent date by the
Secretary of State of the State of Delaware;
(f) evidence that all of the payments required to be made by the Assignee Lenders under
Section 2(e) hereof have been made; and
(g) payment in full from the Company, in immediately available funds, of (i) a
commitment increase fee payable to each Lender (including, without limitation, the New
Lender) in an amount equal to 0.125% of the amount, if any, by which such Lenders
Commitment is to be increased pursuant to this Agreement and (ii) the arrangement fee
required under that certain letter agreement dated the date hereof by and among Bank of
America, N.A., Banc of America Securities LLC, and the Company, all of which aforementioned
fees shall be fully earned and non-refundable when due and payable (collectively, the
Amendment Fees).
4. Representations, Warranties and Covenants.
(a) Each of the Company, the Designated Borrower and each Subsidiary Guarantor hereby
represents and warrants that this Agreement and the Credit Agreement, as applicable,
constitute the legal, valid and binding obligations of such Person enforceable against such
Person in accordance with their terms.
(b) Each of the Company, the Designated Borrower and each Subsidiary Guarantor hereby
represents and warrants that its execution, delivery and performance of
5
this Agreement and the Credit Agreement, as applicable, have been duly authorized by
all proper corporate action, do not violate any provision of its certificate of
incorporation or bylaws, will not violate any law, regulation, court order or writ
applicable to it, and will not require the approval or consent of any governmental agency,
or of any other third party under the terms of any contract or agreement to which such
Person or any such Persons Affiliates is bound.
(c) Each of the Company and the Designated Borrower hereby represents and warrants
that, before and after giving effect to the provisions of this Agreement, (i) no Default or
Event of Default has occurred and is continuing or will have occurred and be continuing and
(ii) all of the representations and warranties of the Company and the Designated Borrower
contained in the Credit Agreement and in each other Loan Document (other than
representations and warranties which, in accordance with their express terms, are made only
as of an earlier specified date) are, and will be, true and correct as of the date of the
Companys or the Designated Borrowers, as applicable, execution and delivery hereof or
thereof in all material respects as though made on and as of such date.
(d) The Company hereby agrees to pay the Amendment Fees to the Administrative Agent,
for the benefit of the Lenders, and to the Administrative Agent, for the Arrangers sole
account, upon the Companys execution and delivery of this Agreement.
5. Reaffirmation, Ratification and Acknowledgment; Reservation. The Company, the
Designated Borrower and each Subsidiary Guarantor hereby (a) ratifies and reaffirms all of its
payment and performance obligations, contingent or otherwise, under each Loan Document to which it
is a party, (b) agrees and acknowledges that such ratification and reaffirmation is not a condition
to the continued effectiveness of such Loan Documents, and (c) agrees that neither such
ratification and reaffirmation, nor the Administrative Agents, any L/C Issuers, the Swing Line
Lenders or any Lenders solicitation of such ratification and reaffirmation, constitutes a course
of dealing giving rise to any obligation or condition requiring a similar or any other ratification
or reaffirmation from the Company, the Designated Borrower or such Subsidiary Guarantors with
respect to any subsequent modifications to the Credit Agreement or the other Loan Documents. The
Credit Agreement is in all respects ratified and confirmed. Each of the Loan Documents shall
remain in full force and effect and are hereby ratified and confirmed. Neither the execution,
delivery nor effectiveness of this Agreement shall operate as a waiver of any right, power or
remedy of the Administrative Agent or the Lenders, or of any Default or Event of Default (whether
or not known to the Administrative Agent, the L/C Issuers, the Swing Line Lender or the Lenders),
under any of the Loan Documents, all of which rights, powers and remedies, with respect to any such
Default or Event of Default or otherwise, are hereby expressly reserved by the Administrative
Agent, the L/C Issuers, the Swing Line Lender and the Lenders. This Agreement shall constitute a
Loan Document for purposes of the Credit Agreement.
6. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF ILLINOIS.
6
7. Administrative Agents Expenses. The Company hereby agrees to promptly reimburse
the Administrative Agent for all of the reasonable out-of-pocket expenses, including, without
limitation, attorneys and paralegals fees, it has heretofore or hereafter incurred or incurs in
connection with the preparation, negotiation and execution of this Agreement and the related Loan
Documents.
8. Counterparts. This Agreement may be executed in counterparts, each of which shall
be an original and all of which together shall constitute one and the same agreement among the
parties.
9. Service of Process. Each of the Designated Borrower and White Rose Environmental
Limited hereby appoints the Company as its agent for any service of process relating to any
proceedings in any Federal or State court located in the State of Illinois arising out of or in
connection with any Loan Document to which such Person is party and the Company hereby accepts such
appointment.
* * * * *
7
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above
written.
|
|
|
|
|
|
STERICYCLE, INC., as the Company
|
|
|
By: |
/s/ Frank J.M. ten Brink
|
|
|
|
Name: |
Frank J.M. ten Brink |
|
|
|
Title: |
Executive Vice President and Chief
Financial Officer |
|
|
|
STERICYCLE INTERNATIONAL, LTD., as
the a Designated Borrower
|
|
|
By: |
/s/ Frank J.M. ten Brink
|
|
|
|
Name: |
Frank J.M. ten Brink |
|
|
|
Title: |
Director |
|
|
|
STERICYCLE INTERNATIONAL, LLC, as a
Subsidiary Guarantor
|
|
|
By: |
/s/ Frank J.M. ten Brink
|
|
|
|
Name: |
Frank J.M. ten Brink |
|
|
|
Title: |
Vice President and Manager |
|
|
|
WHITE ROSE ENVIRONMENTAL LIMITED,
as a Subsidiary Guarantor
|
|
|
By: |
/s/ Frank J.M. ten Brink
|
|
|
|
Name: |
Frank J.M. ten Brink |
|
|
|
Title: |
Director |
|
|
|
|
|
|
|
BANK OF AMERICA, N.A., as a Lender, an L/C
Issuer and as Swing Line Lender
|
|
|
By: |
/s/ Richard D. Hill, Jr.
|
|
|
|
Name: |
Richard D. Hill, Jr. |
|
|
|
Title: |
Managing Director |
|
|
|
BANK OF AMERICA, N.A., as Administrative
Agent
|
|
|
By: |
/s/ Paul L. Folino
|
|
|
|
Name: |
Paul L. Folino |
|
|
|
Title: |
Assistant Vice President |
|
|
|
CITIBANK, N.A., as the New Lender
|
|
|
By: |
/s/ James M. Buchanan
|
|
|
|
Name: |
James M. Buchanan |
|
|
|
Title: |
Vice President |
|
|
|
JPMORGAN CHASE BANK, N.A., as a Lender
|
|
|
By: |
|
|
|
|
Name: |
|
|
|
|
Title: |
|
|
|
|
|
|
|
|
FORTIS CAPITAL CORP., as a Lender
|
|
|
By: |
/s/ Trond Rokholt
|
|
|
|
Name: |
Trond Rokholt |
|
|
|
Title: |
Managing Director |
|
|
|
U. S. BANK NATIONAL ASSOCIATION, as a Lender
|
|
|
By: |
/s/ Kathleen D. Schurr
|
|
|
|
Name: |
Kathleen D. Schurr |
|
|
|
Title: |
Vice President |
|
|
|
UBS AG, STAMFORD BRANCH, as a Lender
|
|
|
By: |
/s/ Joselin Fernandez
|
|
|
|
Name: |
Joselin Fernandez |
|
|
|
Title: |
Associate Director, Banking
Products Services, US |
|
|
|
|
|
|
By: |
/s/ Doris Mesa
|
|
|
|
Name: |
Doris Mesa |
|
|
|
Title: |
Associate Director, Banking
Products Services, US |
|
|
|
|
|
|
|
CALYON NEW YORK BRANCH, as a Lender
|
|
|
By: |
/s/ F. Frank Herrera
|
|
|
|
Name: |
F. Frank Herrera |
|
|
|
Title: |
Director |
|
|
|
AIB DEBT MANAGEMENT LIMITED, as a Lender
|
|
|
By: |
/s/ Rima Terradista
|
|
|
|
Name: |
Rima Terradista |
|
|
|
Title: |
Co-Head Leverage Finance,
Director of corporate Banking
North America |
|
|
|
COMERICA BANK, as a Lender and as an L/C Issuer
|
|
|
By: |
/s/ Felicia M. Maxwell
|
|
|
|
Name: |
Felicia M. Maxwell |
|
|
|
Title: |
Vice President |
|
|
|
|
|
|
|
WELLS FARGO BANK, NATIONAL ASSOCIATION, as a
Lender
|
|
|
By: |
/s/ Rhomes Ritter
|
|
|
|
Name: |
Rhomes Ritter |
|
|
|
Title: |
Vice President |
|
|
|
THE NORTHERN TRUST COMPANY, as a Lender
|
|
|
By: |
/s/ Jeffrey P. Sullivan
|
|
|
|
Name: |
Jeffrey P. Sullivan |
|
|
|
Title: |
Vice President |
|
|
|
HARRIS N.A., as a Lender
|
|
|
By: |
/s/ Patrick McDonnell
|
|
|
|
Name: |
Patrick McDonnell |
|
|
|
Title: |
Managing Director |
|
|
|
FIFTH THIRD BANK (CHICAGO), as a Lender
|
|
|
By: |
/s/ Joseph A. Wernhoff
|
|
|
|
Name: |
Joseph A. Wernhoff |
|
|
|
Title: |
Vice President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule I to Amendment No. 1 to Credit Agreement
COMMITMENTS, APPLICABLE PERCENTAGES, ETC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable |
|
Change in |
Lender |
|
Commitment |
|
Percentage |
|
Outstandings |
Bank of America, N.A. |
|
|
|
|
|
|
|
|
|
|
|
|
Fortis Capital Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
AIB
Debt Management Limited |
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase Bank, N.A. |
|
|
|
|
|
|
|
|
|
|
|
|
UBS Loan Finance LLC |
|
|
|
|
|
|
|
|
|
|
|
|
Calyon New York Branch |
|
|
|
|
|
|
|
|
|
|
|
|
Comerica Bank |
|
|
|
|
|
|
|
|
|
|
|
|
The Northern Trust Company |
|
|
|
|
|
|
|
|
|
|
|
|
Harris N.A. |
|
|
|
|
|
|
|
|
|
|
|
|
Fifth Third Bank (Chicago) |
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Bank National Association |
|
|
|
|
|
|
|
|
|
|
|
|
Wells
Fargo Bank, National Association |
|
|
|
|
|
|
|
|
|
|
|
|
Citibank, N.A. |
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$ |
550,000,000.00 |
|
|
|
100.000000000 |
% |
|
$ |
0.00 |
|
exv10w15
Exhibit 10.15
Stock Option Agreement
([Nonstatutory][Incentive] Stock Option Under
[Stericycle, Inc. 2005 Incentive Stock Plan]
[Stericycle, Inc. 2000 Nonstatutory Stock Option Plan]
[Stericycle, Inc. 1997 Stock Option Plan])
Subject to the following terms, Stericycle, Inc., a Delaware corporation (the Company),
grants to the following employee of the Company or one of its subsidiaries (the Employee), as of
the following grant date (the Option Grant Date), a [nonstatutory][incentive] stock option (the
Option) to purchase the following number of shares of the Companys common stock, par value $.01
per share (the Option Shares), at the following purchase price per share (the Exercise Price),
exercisable in installments in accordance with the following vesting schedule:
|
|
|
|
|
|
|
Employee: |
|
|
|
|
|
|
|
|
|
Grant Date: |
|
|
|
|
|
|
|
|
|
Number of Option Shares: |
|
|
|
|
|
|
|
|
|
Exercise Price Per Share: |
|
|
|
|
|
|
|
|
|
Vesting Schedule:
|
|
One-fifth of the Option Shares will vest on each of the first five
anniversaries of the Option Grant Date. |
|
|
|
|
|
|
|
Expiration Date of Option: |
|
|
Terms of Option
1. Plan. This Option has been granted under the [Stericycle, Inc. 2005 Incentive Stock
Plan][Stericycle, Inc. 2000 Nonstatutory Stock Option Plan][Stericycle, Inc. 1997 Stock Option
Plan] (the Plan), which is incorporated in this Agreement by reference. Capitalized terms used in
this Agreement without being defined (for example, the term Plan Administrator) have the same
meanings that they have in the Plan.
2. Exercisability. The Option may be exercised in whole or in part at any time prior to its
Expiration Date to the extent that it is vested at the time of exercise. The Option shall not
continue to vest after the Employees Termination Date. Any portion of the Option that remains
unexercised shall expire on the Expiration Date. The Option shall be subject to earlier expiration
as provided in Paragraph 5.
The Option shall become fully vested upon a Change in Control, as provided in Article [6][8]
of the Plan.
3. Manner of Exercise. The Option may be exercised in respect of a whole number of Option
Shares (and only in respect of a whole number) by:
(a) written notice of exercise to the Plan Administrator (or its designee) at the
Companys principal executive offices (which are currently located at 28161 North Keith
Drive, Lake Forest, Illinois 60045), which is received prior to the Options Expiration
Date;
(b) full payment of the Exercise Price of the Option Shares in respect of which the
Option is exercised; and
(c) full payment of an amount equal to the Companys federal, state and local
withholding tax obligation, if any, in connection with the exercise.
In addition, the exercise of the Option shall be subject to any procedures and policies that
the Plan Administrator has adopted to administer the Plan which may be in effect at the time of
exercise.
4. Manner of Payment. The Employees payment of the Exercise Price of the Option Shares in
respect of which the Option is exercised, and his or her payment of the Companys withholding tax
obligation, if any, in connection with the exercise, shall be made by certified or bank cashiers
check or by a wire transfer of immediately available funds.
Payment also may be made by means of a cashless net exercise through a broker approved by
the Plan Administrator for the purpose, pursuant to which the full amount due to the Company is
remitted directly by the broker from the net proceeds of the sale of a sufficient number of Option
Shares. In addition, payment may be made in any other manner authorized by the Plan and
specifically permitted by the Plan Administrator at the time of exercise.
5. Early Expiration of Option. If the Employees ceases to serve as an employee of the
Company or a Subsidiary, the unvested portion of the Option shall terminate on the Employees
Termination Date. The vested portion of the Option shall expire shall expire on the earlier of (i)
90 days after the Employees Termination Date or (ii) the Options Expiration Date (or if the
Employees employment terminated by reason of his or her death or Disability, on the earlier of (i)
the first anniversary of the Termination Date or (ii) the Options Expiration Date), unless the
exercisability of the Option is extended by the Plan Administrator (in the Plan Administrators
sole discretion). The Plan Administrator may extend the exercisability of the Option to any date
ending on or before the Options Expiration Date.
6. Transferability. The Option may not be transferred, assigned or pledged (whether by
operation of law or otherwise), except as provided by will or the applicable intestacy laws; and
the Option shall not be subject to execution, attachment or similar process. The Option may be
exercised only by the Employee or, in the case of his or her death, by the person or persons to
whom the Option passes by the Employees will or the applicable intestacy laws (or by the legal
representative of the Employees estate).
-2-
7. Interpretation. This Agreement is subject to the terms of the Plan, as the Plan may be
amended (but except as required by applicable law, no amendment of the Plan after the Option Grant
Date shall adversely affect the Employees rights in respect of the Option without the Employees
consent). If there is a conflict or inconsistency between this Agreement and the Plan, the terms of
the Plan shall control. The Plan Administrators interpretation of this Agreement and the Plan
shall be final and binding.
8. No Employment Right. Nothing in this Agreement shall be considered to confer on the
Employee any right to continue in the employ of the Company or a Subsidiary or to limit the right
of the Company or a Subsidiary to terminate the Employees employment.
9. Governing Law. This Agreement shall be governed in accordance with the laws of the State
of Illinois.
10. Binding Effect. This Agreement shall be binding on the Company and the Employee and on
the Employees heirs, legatees and legal representatives.
11. Effective Date. This Agreement shall not become effective until the Employees acceptance
of this Agreement and the related Confidentiality, Nonsolicitation and Noncompetition Agreement.
Upon the Employees acceptance, this Agreement shall become effective, retroactive to the Option
Grant Date, without the necessity of further action by either the Company or the Employee.
-3-
exv10w16
Exhibit 10.16
Stock Option Agreement
([Nonstatutory][Incentive] Stock Option Under
[Stericycle, Inc. 2005 Incentive Stock Plan]
[Stericycle, Inc. 2000 Nonstatutory Stock Option Plan]
[Stericycle, Inc. 1997 Stock Option Plan])
Subject to the following terms, Stericycle, Inc., a Delaware corporation (the Company),
grants to the following employee of the Company or one of its subsidiaries (the Employee), as of
the following grant date (the Option Grant Date), a [nonstatutory][incentive] stock option (the
Option) to purchase the following number of shares of the Companys common stock, par value $.01
per share (the Option Shares), at the following purchase price per share (the Exercise Price),
exercisable in installments in accordance with the following vesting schedule:
|
|
|
|
|
|
|
Employee: |
|
|
|
|
|
|
|
|
|
Grant Date: |
|
|
|
|
|
|
|
|
|
Number of Option Shares: |
|
|
|
|
|
|
|
|
|
Exercise Price Per Share: |
|
|
|
|
|
|
|
|
|
Vesting Schedule:
|
|
Full vesting as of the Option Grant Date. |
|
|
|
|
|
|
|
Expiration Date of Option: |
|
|
Terms of Option
1. Plan. This Option has been granted under the [Stericycle, Inc. 2005 Incentive Stock
Plan][Stericycle, Inc. 2000 Nonstatutory Stock Option Plan][Stericycle, Inc. 1997 Stock Option
Plan] (the Plan), which is incorporated in this Agreement by reference. Capitalized terms used in
this Agreement without being defined (for example, the term Plan Administrator) have the same
meanings that they have in the Plan.
2. Exercisability. The Option may be exercised in whole or in part at any time prior to its
Expiration Date. Any portion of the Option that remains unexercised shall expire on the Expiration
Date.
3. Manner of Exercise. The Option may be exercised in respect of a whole number of Option
Shares (and only in respect of a whole number) by:
(a) written notice of exercise to the Plan Administrator (or its designee) at the
Companys principal executive offices (which are currently located at 28161 North Keith
Drive, Lake Forest, Illinois 60045), which is received prior to the Options Expiration
Date;
(b) full payment of the Exercise Price of the Option Shares in respect of which the
Option is exercised; and
(c) full payment of an amount equal to the Companys federal, state and local
withholding tax obligation, if any, in connection with the exercise.
In addition, the exercise of the Option shall be subject to any procedures and policies that
the Plan Administrator has adopted to administer the Plan which may be in effect at the time of
exercise.
4. Manner of Payment. The Employees payment of the Exercise Price of the Option Shares in
respect of which the Option is exercised, and his or her payment of the Companys withholding tax
obligation, if any, in connection with the exercise, shall be made by certified or bank cashiers
check or by a wire transfer of immediately available funds.
Payment also may be made by means of a cashless net exercise through a broker approved by
the Plan Administrator for the purpose, pursuant to which the full amount due to the Company is
remitted directly by the broker from the net proceeds of the sale of a sufficient number of Option
Shares. In addition, payment may be made in any other manner authorized by the Plan and
specifically permitted by the Plan Administrator at the time of exercise.
5. Transferability. The Option may not be transferred, assigned or pledged (whether by
operation of law or otherwise), except as provided by will or the applicable intestacy laws; and
the Option shall not be subject to execution, attachment or similar process. The Option may be
exercised only by the Employee or, in the case of his or her death, by the person or persons to
whom the Option passes by the Employees will or the applicable intestacy laws (or by the legal
representative of the Employees estate).
6. Interpretation. This Agreement is subject to the terms of the Plan, as the Plan may be
amended (but except as required by applicable law, no amendment of the Plan after the Option Grant
Date shall adversely affect the Employees rights in respect of the Option without the Employees
consent). If there is a conflict or inconsistency between this Agreement and the Plan, the terms of
the Plan shall control. The Plan Administrators interpretation of this Agreement and the Plan
shall be final and binding.
7. No Employment Right. Nothing in this Agreement shall be considered to confer on the
Employee any right to continue in the employ of the Company or a Subsidiary or to limit the right
of the Company or a Subsidiary to terminate the Employees employment.
8. No Stockholder Rights. The Employee shall not have any rights as a stockholder of the
Company in respect of any of the Option Shares unless and until Option Shares are issued to the
Employee upon the exercise of one or more installments of the Option.
9. Governing Law. This Agreement shall be governed in accordance with the laws of the State
of Illinois.
-2-
10. Binding Effect. This Agreement shall be binding on the Company and the Employee and on
the Employees heirs, legatees and legal representatives.
11. Effective Date. This Agreement shall not become effective until the Employees acceptance
of this Agreement and the related Confidentiality, Nonsolicitation and Noncompetition Agreement.
Upon the Employees acceptance, this Agreement shall become effective, retroactive to the Option
Grant Date, without the necessity of further action by either the Company or the Employee.
-3-
exv21
Exhibit 21
Subsidiaries of the Registrant
3CI Complete Compliance Corporation, a Delaware corporation
American Medical Disposal, Inc., an Oklahoma corporation
BFI Medical Waste, Inc., a Delaware corporation
Biowaste Management Corp., a New York corporation
Bridgeview, Inc., a Pennsylvania corporation
East Coast Medical Waste, Inc., a New Jersey corporation
Enviromed, Inc., a South Carolina corporation
Environmental Health Systems, Inc., a Nebraska corporation
Five Star Waste, Inc., a Florida corporation
Ionization Research Co., Inc., a California corporation
Iowa Medical Waste Reduction Center, Inc., an Iowa corporation
Medam B.A. S.R.L. (Argentina)
Medam S.A. de C.V, a Mexican corporation
Med-Tech Environmental, Inc., a Delaware corporation
Med-Tech Environmental (MA), Inc., a Delaware corporation
Micro-Med Industries, Inc., a Florida corporation
Micro-Med of Georgia, Inc., a Georgia corporation
Micro-Med of North Carolina, Inc., a North Carolina corporation
Micro-Med of Tennessee, Inc., a Tennessee corporation
Nicklin Associates, Inc., a New York corporation
Sanford Motors, Inc., a Pennsylvania corporation
Scherer Laboratories, Inc., a Texas corporation
SDR Holding Corp., a Florida corporation
SDR NNC, Inc., a Delaware corporation
SMI East Coast Medical Waste, Inc., a Pennsylvania corporation
Stericycle Direct Return, Inc., a Florida corporation
Stericycle, Inc., a New Brunswick (Canada) corporation
Stericycle International, LLC, a Delaware limited liability company
Stericycle International, Ltd., an English company
Stericycle of Washington, Inc., a Washington corporation
Stericycle of Puerto Rico, Inc., a Puerto Rico corporation
Sterile Technologies Group Limited, an Irish corporation
Stroud Properties, Inc., a Delaware corporation
Universal Rx Solutions of Delaware, Inc., a Delaware corporation
Universal Rx Solutions of Georgia, Inc., a Georgia corporation
Universal Rx Solutions of New Jersey, Inc., a New Jersey corporation
Universal Solutions International, Inc., a North Carolina corporation
Universal Solutions of North Carolina, Inc., a North Carolina corporation
USI of NJ, L.P., a New Jersey limited partnership
White Rose Environmental Limited, an English company
Waste Systems, Inc., a Delaware corporation
exv23
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement on Form S-8
(Registration No. 333-23695) pertaining to the Amended and Restated Incentive Compensation Plan of
Stericycle, Inc., in the Registration Statement on Form S-8 (Registration No. 333-24185) pertaining
to the Directors Stock Option Plan of Stericycle, Inc., in the Registration Statement on Form S-8
(Registration No. 333-48761) pertaining to the 1997 Stock Option Plan of Stericycle, Inc., in the
Registration Statement on Form S-8 (Registration No. 333-55156) pertaining to the 2000 Nonstatutory
Stock Option Plan of Stericycle, Inc., in the Registration Statement on Form S-8 (Registration No.
333-66542) pertaining to the Directors Stock Option Plan of Stericycle Inc. (Amended and Restated),
in the Registration Statement on Form S-8 (Registration No. 333-66544) pertaining to the 2001
Employee Stock Purchase Plan of Stericycle, Inc., in the Registration Statement on Form S-3
(Registration No. 333-102144) pertaining to the registration of 438,063 shares, in the
Registration Statement on Form S-8 (Registration No. 333-102097) pertaining to the Third Amendment
to 2000 Nonstatutory Stock Option Plan of Stericycle, Inc., and in the Registration Statement on
Form S-8 (Registration No. 333-127353) pertaining to the 2005 Incentive Stock Plan of Stericycle,
Inc., of our reports dated March 1, 2006 with respect to the consolidated financial statements
and schedule of Stericycle, Inc. and Subsidiaries, Stericycle, Inc. managements assessment of the
effectiveness of internal control over financial reporting, and the effectiveness of internal
control over financial reporting of Stericycle, Inc. included in this Annual Report on Form 10-K
for the year ended December 31, 2005.
Chicago, IL
March 1, 2006
exv31w1
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification
Mark C. Miller
President and Chief Executive Officer
I, Mark C. Miller, certify that:
1. I have reviewed this annual report on Form 10-K of Stericycle, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operation and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant, and have:
(a) designed such disclosure controls and procedure, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the registrants internal control
over financial reporting that occurred during the registrants fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting.
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial reporting.
Date:
March 6, 2006.
|
|
|
|
|
|
|
|
|
/s/ Mark C. Miller
|
|
|
Mark C. Miller |
|
|
President and Chief Executive Officer
Stericycle, Inc. |
|
exv31w2
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification
Frank J.M. ten Brink
Executive Vice President and Chief Financial Officer
I, Frank J.M. ten Brink, certify that:
1. I have reviewed this annual report on Form 10-K of Stericycle, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operation and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant, and have:
(a) designed such disclosure controls and procedure, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting.
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial reporting.
Date:
March 6, 2006.
|
|
|
|
|
|
|
|
|
/s/ Frank J.M. ten Brink
|
|
|
Frank J.M. ten Brink |
|
|
Executive Vice President and
Chief Financial Officer
Stericycle, Inc. |
|
exv32
Exhibit 32
SECTION 1350 CERTIFICATION
In reference to this annual report on Form 10-K of Stericycle, Inc. we, Mark C. Miller,
President and Chief Executive Officer of the registrant, and Frank J.M. ten Brink, an Executive
Vice President and the Chief Financial Officer of the registrant, certify as follows, pursuant to
18 U.S.C. § 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002):
(a) the report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(b) the information contained in the report fairly presents, in all material respects,
the financial condition and results of operations of the registrant.
Date:
March 6, 2006.
|
|
|
|
|
|
|
|
|
/s/ Mark C. Miller
|
|
|
Mark C. Miller |
|
|
President and Chief Executive Officer
Stericycle, Inc. |
|
|
|
|
|
|
/s/ Frank J.M. ten Brink
|
|
|
Frank J.M. ten Brink |
|
|
Executive Vice President
and Chief Financial Officer
Stericycle, Inc. |
|
|