e10vkza
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K/A
(Amendment
No. 1)
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission File
Number 0-21229
Stericycle, Inc.
(Exact name of Registrant as
Specified in its Charter)
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Delaware
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36-3640402
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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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.
EXPLANATORY
NOTE
In response to comments raised by the staff of the
U.S. Securities and Exchange Commission, Stericycle, Inc.
is filing this
Form 10-K/A
(Amendment No. 1) (i) to supplement the disclosures in
our
Form 10-K
for year ended December 31, 2005 that we originally filed
on March 6, 2006 (the original
Form 10-K)
relating to the settlement of class action litigation by the
minority shareholders of our then majority-owned (and now
wholly-owned) subsidiary, 3CI Complete Compliance Corporation,
and (ii) to reclassify as an operating expense a
$1.823 million licensing legal settlement that we recorded
in other income in our original
Form 10-K.
We do not consider this latter reclassification to be material.
This
Form 10-K/A
relates to Item 3, Legal Proceedings, Item 6, Selected
Consolidated Data, Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operation, and
Item 8, Consolidated Financial Statements and Supplemental
Data, of our original
Form 10-K.
In accordance with
Rule 12b-15
under the Securities and Exchange Act of 1934, the complete text
of each of these four items as amended is set forth in this
amendment.
The changes to these four items by this
Form 10-K/A
are as follows:
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In Item 3, under the caption, 3CI Litigation,
the first and second paragraphs have been revised and a new
third and sixth paragraphs have been added.
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In Item 6, under the caption, Statements of Income
Data, our income from operations for 2005 has been reduced
to reflect the reclassification of the licensing legal
settlement.
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In Item 7, in the section, Year Ended
December 31, 2005 Compared to Year Ended December 31,
2004, the discussion under the captions Selling
General and Administrative Expenses, Income from
Operations, and Legal Settlements has been
revised to reflect the reclassification of the licensing legal
settlement.
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In Item 8, on our consolidated statements of income, the
line item, Licensing legal settlement, has been
reclassified from Other income (expense) to
Costs and expenses, and the amounts for 2005 for
Total costs and expenses, Income from
operations, and Total other expense have been
adjusted accordingly.
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In Item 8, in Note 15 to our consolidated financial
statements, under the caption, 3CI Litigation, the
first and second paragraphs have been revised and a new third,
fourth and seventh paragraphs have been added.
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In Item 8, in Note 17 to our consolidated financial
statements, the line item, Licensing legal
settlement, has been reclassified as an operating expense,
and the amount for Income from operations for the
fourth quarter of 2005 has been adjusted accordingly.
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In Item 8, in Note 18 to our consolidated financial
statements, the third paragraph has been revised.
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This
Form 10-K/A
does not reflect events occurring after the filing of the
original
Form 10-K
or update any disclosures in the original
Form 10-K.
Information not affected by this amendment is unchanged and
reflects the disclosures made at the time of filing our original
Form 10-K
on March 6, 2006. Accordingly, this
Form 10-K/A
should be read in conjunction with our original
Form 10-K
and with our filings with the U.S. Securities and Exchange
Commission subsequent to the filing of our original
Form 10-K.
Stericycle,
Inc.
2005
ANNUAL REPORT ON
FORM 10-K
(AMENDMENT NO. 1)
INDEX
1
PART I
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Item 3.
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Legal
Proceedings
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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)).
Although we did not believe that any of the plaintiffs
claims had merit, we settled this litigation because of the
uncertainties of trying a complicated corporate law case before
a jury in what we viewed as a hostile state court which had
ruled in October 2005, at a hearing on the plaintiffs
motion to compel discovery and for sanctions, that we would not
be allowed to present evidence at trial on the issue of our
liability.
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))
(together, the 3CI litigation), (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.
On motions by counsel for the plaintiff class, the court has
preliminarily allocated the $32.5 settlement proceeds
principally to (i) payment of fees of $10.8 million to
counsel for the plaintiff class and reimbursement of expenses
not expected to exceed $0.5 million and (ii) the
distribution to class members of settlement proceeds expected to
total approximately $20.0 million. Of the distribution to
class members, a purchase consideration component,
expected to be $0.60 per share, will be distributed to
class members who still own their shares of 3CI stock when the
preliminary settlement receives final approval, and a
damages consideration component will be distributed
to class members in proportion to the time that they held shares
of 3CI stock during the class period (September 30, 1998
through February 10, 2005). The damages consideration to be
distributed to class members who held their shares of 3CI stock
for the entire class period is expected to be at least
$6.00 per share.
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.
The 3CI litigation alleged that we, a wholly-owned subsidiary of
ours and the four directors of 3CI who are or were serving as
our designees (and who are or were also officers or directors of
ours) breached our fiduciary duties, oppressed the minority
stockholders and unjustly enriched Stericycle at the expense of
3CI and its other shareholders. The plaintiffs alleged that we
wrongfully diverted 3CIs cash and assets, manipulated and
increased 3CIs debt to our subsidiary, wrongfully
increased our direct and indirect ownership of 3CI, forced 3CI
to declare significant cash dividends on its preferred stock
payable to our subsidiary, usurped 3CIs corporate
opportunities, misappropriated 3CIs customers, unfairly
competed with 3CI, and operated 3CI with the goal of maximizing
our profitability and furthering a plan to integrate its
operations
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with ours. The plaintiffs sought, among other relief, actual and
punitive damages and an order requiring the buyout of 3CIs
minority shareholders.
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.
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 $1.4 million
unamortized portion of our license intangible asset.
3
PART II
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Item 6.
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Selected
Consolidated Financial Data
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Year Ended December 31,
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2005
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2004
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2003
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2002
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2001
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(Dollars in thousands, except per share amounts)
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Statements of Income
Data(1)
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Revenues
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$
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609,457
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$
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516,228
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$
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453,225
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$
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401,519
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$
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359,024
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Income from operations
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166,532
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145,655
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126,397
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100,832
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73,294
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Net income
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67,154
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78,178
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65,781
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45,724
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14,710
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Net income applicable to Common
Stock
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67,154
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78,178
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65,781
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45,037
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12,167
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Diluted net income per share of
Common Stock(2)
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1.48
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1.69
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1.43
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1.01
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0.35
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Depreciation and amortization
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21,431
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21,803
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17,255
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14,981
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25,234
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Other Data
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Cash provided by operating
activities
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$
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94,327
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$
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114,611
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$
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123,887
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$
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98,731
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$
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64,550
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Cash used in investing activities
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(156,001
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(105,093
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(57,635
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(49,470
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(36,673
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Cash (used in) provided by
financing activities
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59,500
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(6,941
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(66,820
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(53,705
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(17,806
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Balance Sheet Data (at
December 31)(1)
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Cash, cash equivalents and
short-term investments
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$
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8,545
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$
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7,949
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$
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7,881
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$
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8,887
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$
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13,017
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Total assets
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1,047,660
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834,141
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707,462
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667,095
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614,530
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Long-term debt, net of current
maturities
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348,841
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190,431
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163,016
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224,124
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267,365
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Convertible redeemable preferred
stock
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20,944
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28,049
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44,872
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Shareholders equity
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$
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521,634
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$
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495,372
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$
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407,820
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$
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326,729
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$
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232,510
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(1) |
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See Note 4 to the Consolidated Financial Statements for
information concerning our acquisitions during the three years
ended December 31, 2005. |
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(2) |
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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 |
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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. |
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operation
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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).
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
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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.
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.
6
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 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.
7
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
|
%
|
Licensing legal settlement
|
|
|
1,823
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
Write off fixed as sets
|
|
|
872
|
|
|
|
0.1
|
%
|
|
|
1,155
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
166,532
|
|
|
|
27.3
|
%
|
|
|
145,655
|
|
|
|
28.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down of note receivable with
former joint venture
|
|
|
2,495
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
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
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
8
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 $166.5 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. 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. 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 Settlement. 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.
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%.
9
|
|
|
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
10
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.
|
11
|
|
|
|
|
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.
12
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 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
(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.
13
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
14
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,
15
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,
16
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.
17
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
|
|
Licensing legal settlement
|
|
|
(1,823
|
)
|
|
|
|
|
|
|
|
|
Write off of fixed assets
|
|
|
872
|
|
|
|
1,155
|
|
|
|
|
|
Acquisition related expenses
|
|
|
778
|
|
|
|
773
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
442,925
|
|
|
|
370,573
|
|
|
|
326,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
166,532
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
3CI legal settlement
|
|
|
(36,481
|
)
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(2,882
|
)
|
|
|
(1,889
|
)
|
|
|
(2,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(54,552
|
)
|
|
|
(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.
18
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.
19
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
20
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.
21
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.
22
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.
23
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
24
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.
25
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.
26
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.
27
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
|
|
|
|
|
|
|
|
|
|
|
28
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
29
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.
30
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.
31
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.
32
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
|
|
|
|
|
|
|
33
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
34
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
|
|
|
|
|
|
|
35
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
36
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
37
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)).
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))
(together, the 3CI litigation), (ii) canceling
or otherwise acquiring all of the shares of 3CI common stock
held by members of
38
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
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.
We recorded the settlement as a new line item, 3CI legal
settlement, under Other income (expense) on our
consolidated statements of income. The amount recorded
represented the $32.5 million settlement payment plus our
legal fees and expenses of $5.9 million, less
$1.9 million that we allocated to the shares of
3CI common stock to be transferred to us upon final
approval of the settlement and recorded in goodwill. We
accounted for the acquisition of these shares under purchase
accounting. We determined that the fair value of these shares
was $1.9 million on the basis of our determination that
approximately 3,161,000 shares would be transferred to us
upon the courts final approval of the settlement and that
the value of each share was $0.60. A value of $0.60 per
share was consistent with the trading price of 3CI common stock
during the months preceding the preliminary settlement in
November 2005 and is the value that was used by the court as
purchase consideration as described in the next
paragraph.
On motions by counsel for the plaintiff class, the court has
preliminarily allocated the $32.5 settlement proceeds
principally to (i) payment of fees of $10.8 million to
counsel for the plaintiff class and reimbursement of expenses
not expected to exceed $0.5 million and (ii) the
distribution to class members of settlement proceeds expected to
total approximately $20.0 million. Of the distribution to
class members, a purchase consideration component,
expected to be $0.60 per share, will be distributed to class
members who still own their shares of 3CI stock when the
preliminary settlement receives final approval, and a
damages consideration component will be distributed
to class members in proportion to the time that they held shares
of 3CI stock during the class period (September 30, 1998
through February 10, 2005). The damages consideration to be
distributed to class members who held their shares of 3CI stock
for the entire class period is expected to be at least
$6.00 per share.
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.
The 3CI litigation alleged that we, a wholly-owned subsidiary of
ours and the four directors of 3CI who are or were serving as
our designees (and who are or were also officers or directors of
ours) breached our fiduciary duties, oppressed the minority
stockholders and unjustly enriched Stericycle at the expense of
3CI and its other shareholders. The plaintiffs alleged that we
wrongfully diverted 3CIs cash and assets, manipulated and
increased 3CIs debt to our subsidiary, wrongfully
increased our direct and indirect ownership of 3CI, forced 3CI
to declare significant cash dividends on its preferred stock
payable to our subsidiary, usurped 3CIs corporate
opportunities, misappropriated 3CIs customers, unfairly
competed with 3CI, and operated 3CI with the goal of maximizing
our profitability and furthering a plan to integrate its
operations with ours. The plaintiffs sought, among other relief,
actual and punitive damages and an order requiring the buyout of
3CIs minority shareholders.
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
39
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
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
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.
|
40
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005
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.
41
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
|
|
42
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
|
|
Licensing legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,823
|
|
Income from operations
|
|
|
39,095
|
|
|
|
41,983
|
|
|
|
41,952
|
|
|
|
43,502
|
|
3CI legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,481
|
|
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
43
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, under Costs and
expenses 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.
44
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 |
45
PART IV
|
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Item 15.
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Exhibits
and Financial Statement Schedules
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(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:
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|
|
|
|
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Page
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Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial
Reporting
|
|
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15
|
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Report of Independent Registered
Public Accounting Firm
|
|
|
16
|
|
Consolidated Financial
Statements Stericycle, Inc. and Subsidiaries
|
|
|
|
|
Consolidated Balance Sheets at
December 31, 2005 and 2004
|
|
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17
|
|
Consolidated Statements of Income
for Each of the Years in the Three-Year Period Ended
December 31, 2005
|
|
|
18
|
|
Consolidated Statements of Cash
Flows for Each of the Years in the Three-Year Period Ended
December 31, 2005
|
|
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19
|
|
Consolidated Statements of Changes
in Shareholders Equity For Each of the Years in the
Three-Year Period Ended December 31, 2005
|
|
|
20
|
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Notes to Consolidated Financial
Statements
|
|
|
21
|
|
Schedule II
Valuation and Allowance Accounts
|
|
|
45
|
|
We have filed the following exhibits with this report:
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|
|
|
|
|
|
|
|
|
|
Filed with
|
Exhibit
|
|
|
|
Electronic
|
Index
|
|
Description
|
|
Submission
|
|
|
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
|
|
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Section 1350 Certification of
the Chief Executive Officer and Chief Financial Officer
|
|
x
|
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Amendment No. 1 to its report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
Stericycle, Inc.
|
|
|
|
By:
|
/s/ Frank
J.M. Ten Brink
|
Frank J.M. ten Brink
Executive Vice President
and Chief Financial Officer
Date: August 11, 2006.
47