sv4
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
Registration Statement under the Securities Act of 1933
STERICYCLE, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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4953
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36-3640402 |
(State or other jurisdiction
of incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number) |
28161 North Keith Drive, Lake Forest, Illinois 60045
(847) 367-5910
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Mark C. Miller
President and Chief Executive Officer
Stericycle, Inc.
28161 North Keith Drive, Lake Forest, Illinois 60045
(847) 367-5910
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
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Michael Bonn
Craig P. Colmar
Johnson and Colmar
300 South Wacker Drive, Suite 1000
Chicago, Illinois 60606
(312) 922-1980
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Steven R. Block
Christopher M. McNeill
Block & Garden, LLP
12750 Merit Drive
Park Central VII, Suite 770
Dallas Texas 75251
(214) 866-0990 |
Approximate date of commencement of proposed sale of the securities to the public: as soon as
practicable after this registration statement becomes effective and after the effective time of the
merger of TMW Acquisition Corporation, a wholly-owned subsidiary of the registrant, with and into
MedSolutions, Inc., pursuant to the Agreement and Plan of Merger
dated July 6, 2007 entered into
by the registrant, TMW Acquisition Corporation and MedSolutions, Inc.
If the securities being registered on this form are being offered in connection with the
formation of a holding company and there is compliance with General Instruction G, check the
following box. o
If this form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities Act registration
number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. o
Calculation of Registration Fee
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Proposed Maximum |
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Proposed Maximum |
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Title of Each Class of Securities |
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Amount To Be |
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Offering Price Per |
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Aggregate Offering |
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Amount of |
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To Be Registered(1) |
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Registered(2) |
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Note(3) |
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Price(3) |
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Registration Fee(4) |
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4.5%
Promissory Notes
due 2014 |
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$40,761,203 |
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100% |
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$40,761,203 |
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$1,251.37 |
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3.5% Promissory
Notes (Letter of
Credit Supported)
due 2014 |
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$40,761,203 |
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100% |
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$40,761,203 |
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$1,251.37 |
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(1) |
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Under the terms of the Agreement and Plan of Merger dated
July 6, 2007 entered into by
the registrant, TMW Acquisition Corporation and MedSolutions, Inc., the merger consideration
of $2.00 per share is payable $0.50 in cash and $1.50 in promissory notes. Holders of shares
and options to purchase shares of MedSolutions, Inc. common stock will have the right to elect
either 4.5% Promissory Notes due 2014 (4.5% notes) or 3.5% Promissory Notes (Letter of
Credit Supported) due 2014 (3.5% notes), or a combination of 4.5% notes and 3.5% notes, for
the merger consideration payable in promissory notes in respect of their shares or options. |
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(2) |
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Calculated for the 4.5% notes as if none of the 3.5% notes was issued, and calculated for the
3.5% notes as if none of the 4.5% notes was issued. On July 6, 2007, there were outstanding
(i) 26,470,646 shares of MedSolutions, Inc. common stock, in respect of which the registrant
will issue promissory notes in the aggregate principal amount of $39,705,969, and (ii) options
to purchase 964,682 shares with an aggregate value of $1,172,003, net of the exercise price of
the options, in respect of which the registrant will issue promissory notes in the aggregate
principal amount of $879,002. In addition, there were outstanding convertible promissory notes
which will be converted into 117,488 shares of MedSolutions, Inc. common stock prior to the
effective time of the merger, in respect of which the registrant will issue promissory notes
in the aggregate principal amount of $176,232. |
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The maximum offering price per note is the stated principal amount of the note. |
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Calculated in accordance with Rule 457(f)(2) and (3) using the merger consideration of $2.00
per share as the value of the shares to be received by the registrant. |
The registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
The information in this proxy statement/prospectus is not complete and may be changed.
Stericycle, Inc. may not issue these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This proxy statement/prospectus is not an offer to
sell these securities and Stericycle, Inc. is not soliciting offers to buy these securities in any
jurisdiction where the offer or sale is not permitted.
(Subject
to completion dated July 16, 2007)
Preliminary Prospectus
[MedSolutions letterhead]
_______________, 2007
Dear MedSolutions, Inc. Shareholder:
The Board of Directors of MedSolutions, Inc. (MedSolutions) has unanimously approved a
merger agreement with Stericycle, Inc. (Stericycle). If MedSolutions shareholders approve and
adopt the merger agreement and the merger is subsequently completed, MedSolutions will merge with a
subsidiary of Stericycle and shareholders of MedSolutions will receive (i) $0.50 in cash and (ii) a
promissory note in the principal amount of $1.50 for each share of MedSolutions common stock owned.
You will be asked to vote on the merger proposal at a special meeting of MedSolutions
shareholders to be held on ___, 2007, at [10:00] a.m., Dallas, Texas time, at
MedSolutions corporate headquarters located at 12750 Merit Drive, Park Central VII, Suite 770,
Dallas, Texas 75251. Only holders of record of MedSolutions common stock at the close of business
on ___, 2007, the record date for the special meeting, are entitled to vote at the
special meeting.
After careful consideration, MedSolutions Board of Directors has unanimously determined that
the merger is advisable and in the best interests of MedSolutions and its shareholders and
unanimously recommends that MedSolutions shareholders vote FOR approval and adoption of the merger
agreement.
Your vote is very important. Because approval and adoption of the merger agreement requires
the affirmative vote of the holders of a majority of the outstanding shares of MedSolutions common
stock entitled to vote at the special meeting, a failure to vote will have the same effect as a
vote against approval and adoption of the merger agreement.
Whether or not you plan to attend the special meeting, please complete, sign, date and return
the enclosed proxy card in the enclosed envelope as soon as possible so that your shares are
represented at the meeting. This action will not limit your right to vote in person if you wish to
attend the special meeting and vote in person.
This document is a prospectus related to the issuance of the Stericycle promissory notes in
connection with the merger and a proxy statement for MedSolutions to use in soliciting proxies for
its special meeting of shareholders. Attached to this letter is an important document containing
answers to frequently asked questions and a summary description of the merger, followed by more
detailed information about MedSolutions, Stericycle, the proposed merger and the merger agreement.
We urge you to read this document carefully and in its entirety. In particular, you should consider
the matters discussed under Risk Factors beginning on page 14 of this proxy statement/prospectus.
MedSolutions Board of Directors very much appreciates and looks forward to your support.
Sincerely,
Matthew H. Fleeger
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of the securities to be issued in connection with the merger or passed upon
the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is
a criminal offense.
This proxy statement/prospectus is dated ___, 2007 and is first being mailed to
shareholders of MedSolutions on or about ___, 2007.
REFERENCES TO ADDITIONAL INFORMATION
As used in this proxy statement/prospectus, Stericycle refers to Stericycle, Inc. and its
consolidated subsidiaries and MedSolutions refers to MedSolutions, Inc. and its consolidated
subsidiaries, in each case, except where the context otherwise requires or as otherwise indicated.
This proxy statement/prospectus incorporates important business and financial information about
Stericycle from documents that Stericycle has filed with the Securities and Exchange Commission.
Two of these documents have been delivered with this proxy statement/prospectus, but the others
have not. For a listing of all documents incorporated by reference into this proxy
statement/prospectus, please see the section entitled Where You Can Find More Information
beginning on page 202 of this proxy statement/prospectus.
Stericycle will provide you with copies of the documents incorporated by reference, without
charge, if you request copies in writing or by telephone from:
Stericycle, Inc.
28161 North Keith Drive
Lake Forest, Illinois 60045
Attention: Investor Relations
(847) 367-5910
You may also request copies by email to investor@stericycle.com.
In order for you to receive timely delivery of the documents in advance of the MedSolutions
special meeting, Stericycle should receive your request no later than ___, 2007.
Delivered with this proxy statement/prospectus are (i) Stericycles annual report on Form 10-K
for the year ended December 31, 2006 and (ii) its quarterly report on Form 10-Q for the quarter
ended March 31, 2007, each as filed with the Securities and Exchange Commission. For convenience,
Stericycles Form 10-K is referred to in this proxy statement/prospectus as Stericycles 2006 Form
10-K and its Form 10-Q is referred to as its 2007 First Quarter Form 10-Q.
Stericycle has supplied all information contained in this proxy statement/prospectus relating
to Stericycle, and MedSolutions has supplied all information contained in this proxy
statement/prospectus relating to MedSolutions. Stericycle and MedSolutions have both contributed to
information relating to the merger.
MedSolutions, Inc.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ___________, 2007
TO THE SHAREHOLDERS OF MEDSOLUTIONS, INC.:
You are cordially invited to attend the special meeting of shareholders of MedSolutions, Inc.,
a Texas corporation (MedSolutions), to be held on ___, 2007, at [10:00] a.m., Dallas, Texas
time, at MedSolutions corporate headquarters located at 12750 Merit Drive, Park Central VII, Suite
770, Dallas, Texas 75251. As described in this proxy statement/prospectus, the special meeting will
be held for the following purposes:
1. to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger
dated as of July 6, 2007, by and among Stericycle, Inc., TMW Acquisition Corporation and
MedSolutions, Inc.;
2. to consider and vote upon a proposal to adjourn or postpone the special meeting, if
necessary, to solicit additional proxies in favor of the approval and adoption of the merger
agreement; and
3. to consider and transact any other business as may properly be brought before the special
meeting or any adjournments or postponements thereof.
THE BOARD OF DIRECTORS OF MEDSOLUTIONS HAS CAREFULLY CONSIDERED THE TERMS OF THE MERGER
AGREEMENT AND THE MERGER AND BELIEVES THAT THE MERGER IS ADVISABLE AND FAIR TO, AND IN THE BEST
INTERESTS OF MEDSOLUTIONS AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF
THE MERGER AGREEMENT.
The Board of Directors of MedSolutions has fixed the close of business on ___, 2007 as
the record date for the determination of shareholders entitled to notice of, and to vote at, the
MedSolutions special meeting or any reconvened meeting following an adjournment or postponement
thereof. Only shareholders of record at the close of business on such record date are entitled to
notice of and to vote at such meeting. A complete list of such shareholders will be available for
examination at the MedSolutions special meeting and at MedSolutions offices at 12750 Merit Drive,
Park Central VII, Suite 770, Dallas, Texas 75251, during ordinary business hours, after
___, 2007, for the examination by any such shareholder for any purpose germane to the
special meeting.
It is important that your stock be represented at the special meeting regardless of the number
of shares you hold. Please promptly mark, date, sign and return the enclosed proxy in the
accompanying envelope, whether or not you intend to be present at the special meeting. See
Information About the Special Meeting and Voting beginning on page 29. Your proxy is revocable at
any time prior to its use at the special meeting.
Please do not send your MedSolutions common stock certificates with the enclosed proxy. If the
merger is completed, the payment agent will send you instructions regarding the surrender of your
stock certificates.
By order of the Board of Directors,
Beverly Fleeger
Corporate Secretary
___, 2007
TABLE OF CONTENTS
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TABLE OF CONTENTS
(cond)
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ii
TABLE OF CONTENTS
(cond)
ANNEXES
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Annex A
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Agreement and Plan of Merger dated as of July 6, 2007, by and among
Stericycle, Inc., TMW Acquisition Corporation, and MedSolutions, Inc. |
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Annex B
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Opinion of Van Amburgh Valuation Associates, Inc., dated June 30, 2007 |
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Annex C
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Appraisal and Dissenters Rights under the Texas Business Corporation Act |
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Annex D
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Indenture dated as of July 12, 2007 between Stericycle, Inc. and LaSalle Bank National Association
as trustee in respect of Stericycles 4.5% Promissory Notes due 2014 |
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Annex E
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Indenture dated as of July 12, 2007 between Stericycle, Inc. and LaSalle Bank National Association
as trustee in respect of Stericycles 3.5% Promissory Notes (Letter of
Credit Supported) due 2014 |
No person is authorized to give any information or to make any representation with respect to
the matters described in this proxy statement/prospectus other than those contained herein or in
the documents incorporated by reference herein and, if given or made, such information or
representation must not be relied upon as having been authorized by Stericycle or MedSolutions.
This proxy statement/prospectus does not constitute an offer to sell or a solicitation of an offer
to buy the securities offered by this proxy statement/prospectus or a solicitation of a proxy in
any jurisdiction where, or to any person whom, it is unlawful to make such an offer or
solicitation. Neither the delivery hereof nor any distribution of securities made hereunder shall,
under any circumstances, create an implication that there has been no change in the affairs of
Stericycle or MedSolutions since the date hereof or that the information contained or incorporated
by reference into this proxy statement/prospectus is correct as of any time subsequent to the date
hereof.
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
The following questions and answers briefly address some commonly asked questions about the
special meeting and the merger. They may not include all the information that is important to you.
We urge you to read carefully this entire proxy statement/prospectus, including the annexes and the
other documents we refer to in this proxy statement/prospectus.
Frequently Used Terms
We have generally avoided the use of technical defined terms in this proxy
statement/prospectus, but a few frequently used terms may be helpful for you to have in mind at the
outset. We refer to:
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Stericycle, Inc., a Delaware corporation, as Stericycle; |
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MedSolutions, Inc., a Texas corporation, as MedSolutions; |
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TMW Acquisition Corporation, a newly-formed Texas corporation and a wholly-owned
subsidiary of Stericycle, as Merger Sub; |
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the merger of MedSolutions with Merger Sub and the conversion of shares of MedSolutions
common stock into the right to receive cash and promissory notes as the merger; |
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the promissory notes to be issued by Stericycle to holders of MedSolutions common stock
in connection with the merger as the promissory notes; |
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the Agreement and Plan of Merger dated as of July 6, 2007 by and among Stericycle,
Merger Sub and MedSolutions as the merger agreement; and |
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the Texas Business Corporation Act as the TBCA. |
In addition, we have already noted that Stericycles Form 10-K for the year ended December 31,
2006 is referred to in this proxy statement/prospectus as Stericycles 2006 Form 10-K and its
Form 10-Q for the quarter ended March 31, 2007 is referred to as its 2007 First Quarter Form
10-Q.
About the Merger
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Q1:
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What am I voting on? |
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A1:
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Stericycle is proposing to acquire MedSolutions. You are being asked
to vote to approve and adopt the merger agreement. In the merger,
MedSolutions will merge with Merger Sub. MedSolutions would be the
surviving corporation in the merger and would become a wholly-owned
subsidiary of Stericycle. |
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MedSolutions is also seeking your approval of a proposal to adjourn or
postpone the special meeting, if necessary, to solicit additional
proxies in favor of approval and adoption of the merger agreement and
any other matters that may come before the special meeting. |
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Q2:
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What will I receive in exchange for my MedSolutions shares? |
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A2:
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Upon completion of the merger, you will receive a combination of $0.50
in cash, without interest, and a promissory note in the principal
amount of $1.50 for each share of MedSolutions common stock that you
own. We refer to the aggregate amount of the cash consideration and
note consideration to be received by MedSolutions shareholders
pursuant to the merger as the merger |
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consideration. The aggregate merger consideration is subject to adjustment after the
closing of the merger in certain events. See The Merger Agreement Adjustments to Merger
Consideration beginning on page 54 of this proxy statement/prospectus. At the closing of
the merger, $250,000 of the aggregate cash consideration will be placed into an escrow
account for use by MedSolutions shareholder representative for the costs and expenses of
fulfilling its duties under the merger agreement. See The Merger Agreement Shareholder
Representative beginning on page 57 of this proxy statement/prospectus. |
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The promissory notes will be payable in seven installments of interest only due on each of
the first seven anniversaries of the date on which the merger closes and one
installment of principal due on the seventh anniversary of such closing date,
and will bear interest, at the election of each holder of shares of MedSolutions common
stock, at the annual rate of either 3.5% (if such shareholder elects to have such promissory
note supported by a master letter of credit) or 4.5% (if such shareholder does not elect
such support). See Description of Promissory Notes beginning on page 65 of this proxy
statement/prospectus for a full description of the promissory notes. The promissory notes
will be subject to offset or reduction in principal amount pursuant to the merger
consideration principal adjustment, litigation payment principal reduction and
indemnification provisions of the merger agreement or in the event that the expenses of the
payment agent and the indenture trustee exceed $80,000. See The Merger Agreement Payment
Procedures, The Merger Agreement Representations and Warranties and Indemnification,
and The Merger Agreement Adjustments to Merger Consideration beginning on pages 51, 52
and 54 of this proxy statement/prospectus, respectively. |
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Q3:
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Do I have the option to receive all cash consideration or all note
consideration for my MedSolutions shares? |
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A3:
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No. All MedSolutions shareholders will receive the fixed combination
of the cash consideration and the note consideration for each share of
MedSolutions common stock that they own. |
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Q4:
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What are the tax consequences of the merger to me? |
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A4:
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For a discussion of certain material United States federal income tax
consequences of the merger, see Material United States Federal Income
Tax Consequences beginning on page 47 of this proxy
statement/prospectus. |
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Tax matters are very complicated and the consequences of the merger to
any particular MedSolutions shareholder will depend on that
shareholders particular facts and circumstances. You are urged to
consult your own tax advisor to determine your own tax consequences
from the merger. |
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Q5:
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What is the required vote to approve and adopt the merger agreement? |
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A5:
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Holders representing a majority of the outstanding shares of
MedSolutions common stock entitled to vote at the special meeting must
vote to approve and adopt the merger agreement to complete the merger.
No vote of Stericycle stockholders is required in connection with the
merger. |
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Q6:
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What happens if I do not vote? |
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A6:
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Because the required vote of MedSolutions shareholders is based upon
the number of outstanding shares of MedSolutions common stock entitled
to vote rather than upon the number of shares actually voted,
abstentions from voting and broker non-votes will have the same
effect as a vote |
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AGAINST approval and adoption of the merger agreement. If you return a properly signed proxy
card but do not indicate how you want to vote, your proxy will be counted as a vote FOR
approval and adoption of the merger agreement and FOR approval of any proposal to adjourn or
postpone the special meeting, if necessary, to solicit additional proxies in favor of
approval and adoption of the merger agreement. |
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Q7:
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How does the MedSolutions Board of Directors recommend I vote? |
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A7:
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The Board of Directors of MedSolutions unanimously recommends that MedSolutions shareholders vote FOR approval and
adoption of the merger agreement. The MedSolutions Board of Directors believes the merger is advisable and in the best
interests of MedSolutions and its shareholders. |
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Q8:
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Do I have dissenters or appraisal rights with respect to the merger? |
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A8:
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Yes. Under Texas law, you have the right to dissent from the merger and, in lieu of receiving the merger consideration,
obtain payment in cash of the fair value of your shares of MedSolutions common stock as determined by a Texas state court.
To exercise appraisal rights, you must strictly follow the procedures prescribed by Article 5.12 of the TBCA. See The
Merger Appraisal and Dissenters Rights beginning on page 41 of this proxy statement/prospectus. In addition, the full
text of the applicable provisions of Texas law dealing with
dissenters rights is included as Annex C to this proxy
statement/prospectus. |
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Q9:
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Are there risks associated with the merger that I should consider in deciding how to vote? |
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A9:
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Yes. There are risks associated with all business combinations, including the merger of our two companies. There are a
number of risks that are discussed in this document and in other documents incorporated by reference into this document.
Please read with particular care the more detailed description of the risks associated with the merger discussed under
Risk Factors beginning on page 14 of this proxy statement/prospectus. |
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Q10:
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When do you expect the merger to be completed? |
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A10:
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We are working on completing the merger as quickly as possible. To complete the merger, we must obtain the approval of the
MedSolutions shareholders and satisfy or waive all other closing conditions under the merger agreement, which we currently
expect should occur in the third quarter of 2007. However, we cannot assure you when or if the merger will occur. See The
Merger Agreement Conditions Precedent beginning on page 60 of this proxy statement/prospectus. If the merger occurs, we
will promptly make a public announcement of this fact. |
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Q11:
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What will happen to my MedSolutions shares after completion of the merger? |
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A11:
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Upon completion of the merger, your shares of MedSolutions common stock will be canceled and will represent only the right
to receive your portion of the merger consideration (or the fair value of your MedSolutions common stock if you seek
appraisal rights). |
3
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Q12:
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Who will represent the interests of MedSolutions shareholders under the merger agreement after the effective time of the
merger? |
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A12:
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Pursuant to the merger agreement, at the effective time of the merger Matthew H. Fleeger, MedSolutions President and
Chief Executive Officer, and Winship B. Moody, Sr., MedSolutions Chairman of the Board, will be appointed as the joint
agents and attorneys-in-fact, for the holders of shares of MedSolutions common stock who have duly surrendered or may duly
surrender their stock certificates to the payment agent, to give and receive notices and communications and to take any
and all action on behalf of such holders pursuant to the merger agreement and in connection with the promissory notes,
including without limitation asserting, prosecuting, or settling any claim against the surviving corporation or Stericycle
or defending or settling any claim asserted by the surviving corporation or Stericycle. In this capacity, Mr. Fleeger and
Mr. Moody are collectively referred to as the shareholder representative in this proxy statement/prospectus. By voting
to approve and adopt the merger agreement each holder of MedSolutions common stock agrees that the shareholder
representative will not be liable to such holder or any other person for any action taken, or declined to be taken, in
good faith and in the exercise of reasonable judgment. |
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At the closing of the merger, Stericycle will place $250,000 of the aggregate cash merger consideration into an escrow
account with Park Cities Bank, Dallas, Texas, which amount will be made available for use by the shareholder
representative for the costs and expenses incurred by the shareholder representative in fulfilling its duties under the
merger agreement. Such costs and expenses will include $5,000 per year compensation paid to each of Messrs. Fleeger and
Moody for their service as shareholder representative. The $250,000 will be deducted on a pro rata basis from the cash
consideration distributable to the holders of shares of MedSolutions common stock and holders of options to purchase
shares of MedSolutions common stock in connection with the merger. Any funds remaining in such escrow account on the date
of the last payment payable under the promissory notes will be distributed on a pro rata basis to holders of shares of
MedSolutions common stock who have duly surrendered or may duly surrender their stock certificates to the payment agent
and holders of options to purchase shares of MedSolutions common stock who have received merger consideration in respect
of the in-the-money value of their options. |
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See The Merger Agreement Shareholder Representative beginning on page 57 of this proxy
statement/prospectus. |
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About the Special Meeting |
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Q13:
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When and where is the MedSolutions special shareholder meeting? |
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A13:
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The MedSolutions special shareholder meeting will take place on
___, 2007, at [10:00] a.m., Dallas, Texas time, at
MedSolutions corporate headquarters located at 12750 Merit Drive,
Park Central VII, Suite 770, Dallas, Texas 75251. |
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Q14:
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What will happen at the special meeting? |
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A14:
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At the MedSolutions special meeting, MedSolutions shareholders will
vote on a proposal to adopt the merger agreement and on a proposal to
approve adjournments or postponements of the special meeting, if
necessary, to permit further solicitation of proxies if there are not
sufficient votes at the time of the special meeting to approve the
merger proposal. We cannot complete the merger unless, among other
things, MedSolutions shareholders vote to adopt the merger
agreement. |
4
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Q15:
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Who is entitled to vote at the special meeting? |
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A15:
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Only holders of record of MedSolutions common stock at the close of
business on ___, 2007, which is the date MedSolutions Board
of Directors has fixed as the record date for the special meeting,
are entitled to receive notice of and vote at the special meeting. |
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Q16:
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What is a quorum? |
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A16:
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A quorum is the number of shares that must be present to hold the
meeting. The quorum requirement for the MedSolutions special meeting
is one-third of the issued and outstanding shares of MedSolutions
common stock as of the record date, present in person or represented
by proxy and entitled to vote at the special meeting. A proxy
submitted by a shareholder may indicate that all or a portion of the
shares represented by the proxy are not being voted with respect to a
particular matter. Proxies that are marked abstain or for which
votes have otherwise been withheld and proxies relating to street
name shares that are returned to MedSolutions but not voted will be
treated as shares present for purposes of determining the presence of
a quorum on all matters. |
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Q17:
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How many shares can vote? |
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A17:
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On the record date, MedSolutions had outstanding 26,470,646 shares of
common stock, which constitute MedSolutions only outstanding voting
securities. Each MedSolutions shareholder is entitled to one vote on
each proposal for each share of MedSolutions common stock held as of
the record date. |
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Q18:
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What vote is required? |
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A18:
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The affirmative vote of the holders of a majority of the outstanding
shares of MedSolutions common stock entitled to vote at the
MedSolutions special meeting is required to adopt the merger
agreement. The approval of a proposal to adjourn or postpone the
special meeting, if necessary, to permit further solicitation of
proxies, if there are not sufficient votes at the time of the special
meeting to approve the merger agreement, requires the vote of a
majority of shares present in person or by proxy at the special
meeting and actually voted at that special meeting. |
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If a quorum is not present at the MedSolutions special meeting, the
holders of a majority of the shares entitled to vote who are present
in person or by proxy at the meeting may adjourn the meeting. |
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In conjunction with the execution of the merger agreement, 50
MedSolutions shareholders entered into a voting agreement with
Stericycle and Merger Sub which obligates them to vote their shares
of common stock FOR the merger agreement. As of the record date,
the shareholders subject to the voting agreement with Stericycle and
Merger Sub were entitled to vote an aggregate of 15,102,594 shares of
MedSolutions, which represented approximately 57.1% of the
MedSolutions common stock outstanding and entitled to vote as of the
record date. |
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Even if there are sufficient votes to approve the merger at the
special meeting, we cannot assure you that the merger will be
completed, because the completion of the merger is subject to the
satisfaction or waiver of other conditions discussed in this proxy
statement/prospectus. |
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5
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Q19:
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What do I need to do now? |
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A19:
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After carefully reading and considering the information contained and
referred to in this proxy statement/prospectus, including its
annexes, please authorize your shares of MedSolutions common stock to
be voted by returning your completed, dated and signed proxy card in
the enclosed return envelope as soon as possible. To be sure that
your vote is counted, please submit your proxy as instructed on your
proxy card even if you plan to attend the special meeting in person.
DO NOT enclose or return your stock certificate(s) with your proxy
card. If you hold shares registered in the name of a broker, bank or
other nominee, that broker, bank or other nominee will provide a
voting instruction card for use in directing your broker, bank or
other nominee how to vote those shares. |
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Q20:
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May I vote in person? |
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A20:
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Yes. You may attend the special meeting of MedSolutions shareholders
and vote your shares in person rather than by signing and returning
your proxy card. If you wish to vote in person and your shares are
held by a broker, bank or other nominee, you need to obtain a proxy
from the broker, bank or nominee authorizing you to vote your shares
held in the brokers, banks or nominees name. |
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Q21:
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If my shares are held in street name, will my broker, bank or other
nominee vote my shares for me? |
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A21:
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Yes, but your broker, bank or other nominee may vote your shares of
MedSolutions common stock only if you instruct your broker, bank or
other nominee how to vote. If you do not provide your broker, bank or
other nominee with instructions on how to vote your street name
shares, your broker, bank or other nominee will not be permitted to
vote them on the merger agreement. You should follow the directions
your broker, bank or other nominee provides to ensure your shares are
voted at the special meeting. |
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Q22:
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May I change my vote? |
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A22:
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Yes. You may change your vote at any time before your proxy is voted
at the special meeting. If your shares of MedSolutions common stock
are registered in your own name, you can do this in one of three
ways: |
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First, you can deliver to MedSolutions, prior to the special meeting, a written notice
stating that you want to revoke your proxy. The notice should be sent to the attention of
Ms. Beverly Fleeger, Corporate Secretary, MedSolutions, Inc., 12750 Merit Drive, Park
Central VII, Suite 770, Dallas, Texas 75251, to arrive by the close of business on
___, 2007. |
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Second, prior to the special meeting, you can complete and deliver a new proxy card. The
proxy card should be sent to Ms. Beverly Fleeger, Corporate Secretary, MedSolutions, Inc.,
12750 Merit Drive, Park Central VII, Suite 770, Dallas, Texas 75251 to arrive by the close
of business on ___, 2007. The latest dated and signed proxy actually received by this
addressee before the special meeting will be counted, and any earlier proxies will be
considered revoked. |
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Third, you can attend the MedSolutions special meeting and vote in person. Any earlier
proxy will thereby be revoked automatically. Simply attending the special meeting, however,
will not revoke your proxy, as you must vote at the special meeting to revoke a prior
proxy. |
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If you have instructed a broker to vote your shares, you must follow directions you receive
from your broker to change or revoke your vote. |
6
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If you are a street-name shareholder and you vote by proxy, you may later revoke your proxy
instructions by informing the holder of record in accordance with that entitys procedures. |
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Q23:
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How will the proxies vote on any other business brought up at the special meetings? |
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A23:
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By submitting your proxy, you authorize the persons named on the proxy card to use their judgment to determine how to vote
on any other matter properly brought before the special meeting. The proxies will vote your shares in accordance with your
instructions. If you sign, date and return your proxy without giving specific voting instructions, the proxies will vote
your shares FOR approval and adoption of the merger agreement and FOR approval of any proposal to adjourn or postpone
the special meeting, if necessary, to solicit additional proxies in favor of approval and adoption of the merger
agreement. If you do not return your proxy, or if your shares are held in street name and you do not instruct your bank,
broker or nominee on how to vote, your shares will not be voted at the special meeting. |
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The Board of Directors of MedSolutions does not intend to bring any other business before the meeting, and it is not aware
that anyone else intends to do so. If any other business properly comes before the meeting, it is the intention of the
persons named on the proxy cards to vote as proxies in accordance with their best judgment. |
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Q24:
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What is a broker non-vote? |
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A24:
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A broker non-vote occurs when a bank, broker or other nominee submits a proxy that indicates that the broker does not
vote for some or all of the proposals, because the broker has not received instructions from the beneficial owners on how
to vote on these proposals and does not have discretionary authority to vote in the absence of instructions. |
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Q25:
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Will broker non-votes or abstentions affect the results? |
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A25:
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If you are a MedSolutions shareholder, broker non-votes and abstentions will have the same effect as a vote against the
proposal to adopt the merger agreement, but will have no effect on the outcome of the proposal relating to adjournments or
postponements of the special meeting, if necessary, to permit further solicitation of proxies. If your shares are held in
street name, we urge you to instruct your bank, broker or nominee on how to vote your shares. |
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Q26:
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What happens if I choose not to submit a proxy or to vote? |
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A26:
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If a MedSolutions shareholder does not submit a proxy or vote at the MedSolutions special meeting, it will have the same
effect as a vote against the proposal to adopt the merger agreement, but will have no effect on the outcome of a proposal
to adjourn or postpone the special meeting, if necessary, to permit further solicitation of proxies. |
7
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Q27:
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Why is it important for me to vote? |
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A27:
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We cannot complete the merger without holders of a majority of the outstanding shares of MedSolutions common stock
entitled to vote voting in favor of the approval and adoption of the merger agreement. |
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Q28:
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What happens if I sell my shares of MedSolutions common stock before the special meeting? |
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A28:
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The record date for the special meeting is ___, 2007, which is earlier than the date of the special meeting. If
you hold your shares of MedSolutions common stock on the record date you will retain your right to vote at the special
meeting. If you transfer your shares of MedSolutions common stock after the record date but prior to the date on which the
merger is completed, you will lose the right to receive the merger consideration for shares of MedSolutions common stock.
The right to receive the merger consideration will pass to the person who owns your shares of MedSolutions common stock
when the merger is completed. |
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General |
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Q29:
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Should I send in my MedSolutions stock certificates now? |
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A29:
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No. PLEASE DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARD. After the merger is completed, you will receive
written instructions informing you how to send in your stock certificates to receive the merger consideration. |
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Q30:
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What does it mean if I get more than one proxy card? |
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A30:
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Your shares are probably registered in more than one account. You should vote each proxy card you receive. |
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Q31:
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Where can I find more information about the special meeting, the merger, MedSolutions or Stericycle? |
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A31:
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You can find more information about MedSolutions or Stericycle in each of the companies respective filings with the
Securities and Exchange Commission and, with respect to Stericycle, with the Nasdaq National Market. Information about
Stericycle is also available on its website, www.stericycle.com, where many of its filings with the Securities and
Exchange Commission can be viewed and downloaded. If you have any questions about the special meeting, the merger or how
to submit your proxy, or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card, you
should contact MedSolutions at the address or phone number below. If your broker holds your shares, you can also call your
broker for additional information. |
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MedSolutions, Inc. |
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12750 Merit Drive |
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Park Central VII, Suite 770 |
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Dallas, Texas 75251 |
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Attn: Ms. Beverly Fleeger |
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(972) 931-2374 |
8
SUMMARY
This summary highlights selected information from this proxy statement/prospectus,
including material terms of the merger, and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete description of the legal
terms of the merger, you should carefully read this entire document, including its Annexes, and the
documents to which we refer you. See Where You Can Find More Information beginning on page 202 of
this proxy statement/prospectus.
The Companies (page 70 for Stericycle and page 72 for MedSolutions)
Stericycle, Inc.
28161 North Keith Drive
Lake Forest, Illinois 60045
(847) 367-5910
Stericycle, Inc., headquartered in Lake Forest, Illinois, is in the business of managing
regulated medical waste and providing an array of related services. Stericycle operates in the
United States, Canada, Mexico, the United Kingdom, Ireland and Argentina.
MedSolutions, Inc.
12750 Merit Drive
Park Central VII, Suite 770
Dallas, Texas 75251
(972) 931-2374
MedSolutions, Inc., headquartered in Dallas, Texas, is a diversified holding company that
provides complete and effective regulated medical waste management outsource solutions,
concentrating in the southern and northeastern portions of the United States.
The Merger (page 33)
General
On July 6, 2007, the companies agreed to the merger between MedSolutions and Merger Sub under
the terms of the merger agreement described in this proxy statement/prospectus and attached as
Annex A. The merger agreement is the legal document that governs the merger, and we urge
you to read that agreement.
At the effective time of the merger, Merger Sub will merge with and into MedSolutions.
MedSolutions will be the surviving corporation in the merger and will become a wholly-owned
subsidiary of Stericycle. The separate corporate existence of Merger Sub will cease at the
effective time of the merger.
Exchange of MedSolutions Shares (page 51)
At the effective time of the merger, each outstanding share of MedSolutions common stock
(other than any shares owned directly or indirectly by MedSolutions, Stericycle, or Merger Sub and
those shares held by dissenting shareholders) will be converted into the right to receive a
combination of $0.50 in cash and a promissory note in the principal amount of $1.50. As already
noted, we refer to the aggregate
9
amount of the cash consideration and the note consideration to be received by MedSolutions
shareholders pursuant to the merger as the merger consideration.
Treatment of MedSolutions Stock Options (page 51)
All MedSolutions stock options have vested. At the effective time of the merger, the
MedSolutions stock options will be canceled and converted to a right to receive the merger
consideration for each deemed outstanding MedSolutions option share. The number of deemed
outstanding MedSolutions option shares attributable to each MedSolutions stock option will be equal
to the net number of shares of MedSolutions common stock (rounded down to the next whole share)
that would have been issued upon a cashless exercise of that MedSolutions stock option immediately
before the effective time of the merger. That net number of shares will be computed by deducting
from the shares of MedSolutions common stock that would be issued to the option holder a number of
deemed surrendered shares of MedSolutions common stock which is equal to the fair value of (i) the
exercise price of a MedSolutions stock option to be paid by the option holder and (ii) all amounts
required to be withheld and paid by MedSolutions for federal taxes and other payroll withholding
obligations as a result of such exercise (using an assumed tax rate of 35%). The fair value of each
deemed surrendered share of MedSolutions common stock, for purposes of determining the net number
of shares, will be equal to $2.00.
Material United States Federal Income Tax Consequences of the Merger to MedSolutions Shareholders
(page 47)
For a discussion of the United States federal income tax consequences of the merger, see
Material United States Federal Income Tax Consequences beginning on page 47.
Tax matters can be complicated and the tax consequences of the merger to MedSolutions
shareholders will depend on each shareholders particular tax situation. You should consult your
tax advisors to understand fully the tax consequences of the merger to you.
MedSolutions Board of Directors Recommendation to Shareholders (page 36)
The MedSolutions Board of Directors has unanimously determined that the merger is advisable
and in your best interests and unanimously recommends that you vote FOR the approval and adoption
of the merger agreement and any adjournment or postponement of the special meeting.
Opinion of MedSolutions Valuation Advisor (page 37)
In connection with the proposed merger, MedSolutions valuation advisor, Van Amburgh Valuation
Associates, Inc. (Van Amburgh), delivered to MedSolutions Board of Directors a written opinion,
dated June 30, 2007, as to the fairness, from a financial point of view, to the holders of
MedSolutions common stock of the merger consideration. The full text of Van Amburghs written
opinion is attached to this proxy statement/prospectus as Annex B. We encourage you to read
that opinion carefully in its entirety for a description of the procedures followed, assumptions
made, matters considered and limitations on the review undertaken by Van Amburgh in rendering its
opinion. Van Amburghs opinion was provided to MedSolutions Board of Directors in connection with
its evaluation of the merger and does not constitute a recommendation to any shareholder as to how
he, she or it should vote on the merger or any matter relevant to the merger agreement.
10
Stericycles Reasons for the Merger (page 9)
Stericycle anticipates that the acquisition of MedSolutions will increase Stericycles
revenues and improve its operating profits through the integration of MedSolutions operations with
those of Stericycle. The addition of MedSolutions customers will improve route densities, and the
addition of MedSolutions facilities will shorten travel distances, thereby reducing overall
transportation costs. Stericycle also anticipates a reduction in overhead costs as a result of the
integration.
These anticipated benefits depend on several factors and on other uncertainties. See Risk
Factors beginning on page 14.
Board of Directors and Executive Officers of Stericycle and the Surviving Corporation Following the
Merger (page 52)
Stericycles directors and executive officers will not change by reason of the merger. The
officers and directors of Merger Sub immediately prior to the effective time will become the
directors and officers of the surviving corporation following the merger.
Interests of Certain MedSolutions Officers and Directors in the Merger (page 45)
When you consider the MedSolutions Board of Directors recommendation that MedSolutions
shareholders vote in favor of the merger agreement and any adjournment or postponement of the
special meeting, you should be aware that some MedSolutions officers and directors may have
interests in the merger that may be different from, or in addition to, the interests of other
MedSolutions shareholders generally. The MedSolutions Board of Directors was aware of these
interests and considered them, among other matters, in unanimously approving and adopting the
merger agreement and unanimously recommending that MedSolutions shareholders vote to approve and
adopt the merger agreement. At the close of business on the record date for the MedSolutions
special meeting, directors and executive officers of MedSolutions and their affiliates beneficially
owned approximately 13.6% of the shares of MedSolutions common stock outstanding on that date.
11
Conditions to Completion of the Merger (page 60)
Completion of the merger depends on a number of conditions being satisfied or waived. These
conditions include the following:
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adoption of the merger agreement by the holders of at least a majority of the
outstanding MedSolutions shares entitled to vote at the MedSolutions special meeting; |
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continued effectiveness of the registration statement of which this proxy
statement/prospectus is a part, the absence of a stop order by the Securities and Exchange
Commission suspending the effectiveness of the registration statement and the absence of
any continuing action, suit, proceeding or investigation by the SEC to suspend such
effectiveness; |
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absence of any temporary restraining order, preliminary or permanent injunction or other
order issued by a court or other governmental authority making the merger illegal or
otherwise prohibiting the consummation of the merger; |
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absence of MedSolutions shareholders exercising their appraisal and dissenters rights
with respect to greater than 7.5% of the outstanding shares of MedSolutions common stock
immediately prior to the effective time of the merger; |
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entry by Stericycle into consulting agreements and/or noncompetition agreements with
certain of the officers, directors, employees and shareholders of MedSolutions; |
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accuracy as of the closing of the merger of the representations and warranties made by
each of MedSolutions, Stericycle and Merger Sub to the extent specified in the merger
agreement; and |
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MedSolutions, Stericycles and Merger Subs performance in all material respects of
their respective obligations, agreements and conditions under the merger agreement. |
Termination of the Merger Agreement (page 61)
Before the effective time of the merger, the merger agreement may be terminated:
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by mutual written consent of Stericycle, Merger Sub and MedSolutions; |
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by either Stericycle or MedSolutions, if: |
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adoption of the merger agreement and approval of the merger by the MedSolutions
shareholders is not obtained; |
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the parties fail to consummate the merger on or before September 30, 2007, unless
the failure is the result of a breach of the merger agreement by the party seeking the
termination; or |
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any governmental authority has issued a final and nonappealable order, decree or
ruling or has taken any other final and nonappealable action that restrains, enjoins or
otherwise prohibits the merger, unless the party seeking the termination has not used
its reasonable best efforts to oppose such order or decision or to have such order or
decision vacated or made inapplicable to the merger; |
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MedSolutions materially breaches any of its representations, warranties, covenants
or agreements set forth in the merger agreement, and MedSolutions has not cured such
breach within 15 business days of receiving written notice from Stericycle of such
breach; |
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one or more of Stericycles conditions precedent to closing the merger are not
satisfied or capable of being satisfied on or before September 30, 2007 as a result of
MedSolutions failure to comply with its obligations under the merger agreement; |
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MedSolutions Board of Directors withdraws or materially and adversely to Stericycle
modifies its approval of the merger agreement and the merger, other than (i) as a
result of a material breach by Stericycle or Merger Sub of a representation, warranty
or covenant under the merger agreement which remains uncured for a period of two
business days after receipt of notice from MedSolutions of such breach, or (ii) as a
result of the failure of any of MedSolutions conditions precedent to closing the
merger not being met; or |
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MedSolutions enters into a definitive agreement (other than the merger agreement) to
implement: |
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an investment in MedSolutions representing (on a post-investment basis) more
than 25% of MedSolutions capital stock or a purchase from MedSolutions of more
than 25% of the shares of its capital stock or any debt securities convertible into
or exchangeable for more than 25% of the shares of its capital stock; |
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a merger, consolidation, share exchange, recapitalization, business combination
or other similar transaction involving all of MedSolutions equity interests or all
shares of the MedSolutions common stock; |
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the sale, lease, exchange, mortgage, pledge, transfer or other disposition of
all or substantially all of MedSolutions assets in a single transaction or a
series of related transactions; |
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a tender offer or exchange offer for 25% or more of the outstanding shares of
MedSolutions capital stock or the filing of a registration statement under the
Securities Act of 1933, as amended, in connection with such a tender offer or
exchange offer; or |
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any public announcement of a proposal, plan or intention to do so, or any
agreement to engage in, any of the matters described immediately above; |
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adoption of the merger agreement and approval of the merger by the MedSolutions
shareholders is not obtained by reason of the violation of the voting agreement by one
or more of MedSolutions shareholders who are party to the voting agreement; |
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either Stericycle or Merger Sub materially breaches any of its representations,
warranties, covenants or agreements set forth in the merger agreement, and Stericycle
or Merger Sub, as the case may be, has not cured such breach within 15 business days of
receiving written notice from MedSolutions of such breach; |
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one or more of MedSolutions conditions precedent to closing the merger are not
satisfied or capable of being satisfied on or before September 30, 2007 as a result of
either Stericycles or Merger Subs failure to comply with its obligations under the
merger agreement; or |
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MedSolutions enters into a definitive agreement providing for the implementation of
a superior proposal, which is defined as the acquisition by a third party of more than
50% of the voting power of MedSolutions equity securities or more than 50% of
MedSolutions assets, pursuant to a tender or exchange offer, merger, consolidation,
liquidation or dissolution, recapitalization, sale of assets or otherwise, if
MedSolutions Board of Directors has determined in its good faith judgment, after
consultation with MedSolutions valuation advisor and after considering the likelihood
and timing of the consummation of such third party transaction and any amendments or
modifications to the merger agreement that Stericycle has offered or proposed within
five days of learning of such proposed transaction, that such transaction is more
favorable from a financial point of view to MedSolutions shareholders than the merger
with Stericycle. |
If the merger agreement is validly terminated, the merger agreement will become void without
any liability on the part of any party unless that party is in breach. However, certain provisions
of the merger agreement, including, among others, those provisions relating to expenses and
termination fees, will continue in effect notwithstanding termination of the merger agreement.
Fees and Expenses (page 63)
MedSolutions must pay to Stericycle a termination fee of $2,500,000 in the following
circumstances:
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if MedSolutions terminates the merger agreement because MedSolutions enters into a
definitive agreement providing for the implementation of a superior proposal, which is
defined as the acquisition by a third party of more than 50% of the voting power of
MedSolutions equity securities or more than 50% of MedSolutions assets, pursuant to a
tender or exchange offer, merger, consolidation, liquidation or dissolution,
recapitalization, sale of assets or otherwise, if MedSolutions Board of Directors has
determined in its good faith judgment, after consultation with MedSolutions valuation
advisor and after considering the likelihood and timing of the consummation of such third
party transaction and any amendments or modifications to the merger agreement that
Stericycle has offered or proposed within five days of learning of such proposed
transaction, that such transaction is more favorable from a financial point of view to
MedSolutions shareholders than the merger with Stericycle; or |
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if Stericycle terminates the merger agreement because: |
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MedSolutions Board of Directors withdraws or materially and adversely to Stericycle
modifies its approval of the merger agreement and the merger, other than (i) as a
result of a material breach by Stericycle or Merger Sub of a representation, warranty
or covenant under |
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the merger agreement which remains uncured for a period of two business days after
receipt of notice from MedSolutions of such breach, or (ii) as a result of the failure
of any of MedSolutions conditions precedent to closing the merger not being met; |
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MedSolutions enters into a definitive agreement (other than the merger agreement) to
implement: |
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an investment in MedSolutions representing (on a post-investment basis) more
than 25% of MedSolutions capital stock or a purchase from MedSolutions of more
than 25% of the shares of its capital stock or any debt securities convertible into
or exchangeable for more than 25% of the shares of its capital stock; |
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a merger, consolidation, share exchange, recapitalization, business combination
or other similar transaction involving all of MedSolutions equity interests or all
shares of the MedSolutions common stock; |
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the sale, lease, exchange, mortgage, pledge, transfer or other disposition of
all or substantially all of MedSolutions assets in a single transaction or a
series of related transactions; |
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a tender offer or exchange offer for 25% or more of the outstanding shares of
MedSolutions capital stock or the filing of a registration statement under the
Securities Act of 1933, as amended, in connection with such a tender offer or
exchange offer; or |
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any public announcement of a proposal, plan or intention to do so, or any
agreement to engage in, any of the matters described immediately above; or |
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adoption of the merger agreement and approval of the merger by the MedSolutions
shareholders is not obtained by reason of the violation of the voting agreement by one
or more of MedSolutions shareholders who are party to the voting agreement. |
In general, each of Stericycle, Merger Sub and MedSolutions will bear its own expenses in
connection with the merger agreement and the related transactions. If the merger is consummated,
the surviving corporation to the merger will pay MedSolutions transaction expenses up to $100,000.
If the merger is not consummated, all expenses incurred in connection with the merger agreement and
the related transactions will be paid by the party incurring them. If the merger is consummated,
Stericycle will pay the fees and expenses of the payment agent selected to distribute the merger
consideration and the fees and expenses of the indenture trustee in respect of the promissory
notes, up to $80,000 in the aggregate. Any reasonable fees and expenses of the payment agent and
indenture trustee in excess of $80,000 in the aggregate will be paid by Stericycle and reimbursed
by reducing the principal amount of the promissory notes by the amount of such expenses.
No Solicitation by MedSolutions (page 58)
The merger agreement restricts the ability of MedSolutions to solicit or engage in discussions
or negotiations with a third party regarding a proposal to merge with or acquire a significant
interest in MedSolutions. However, if MedSolutions receives an acquisition proposal from a third
party that is more favorable to MedSolutions shareholders than the terms of the merger agreement
and MedSolutions complies with specified procedures contained in the merger agreement, MedSolutions
may furnish nonpublic information to that third party and engage in negotiations regarding an
acquisition proposal with that third party, subject to specified conditions.
Accounting Treatment (page 41)
Stericycle will account for the merger using the purchase method of accounting.
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RISK FACTORS
In addition to the other information included and incorporated by reference into this proxy
statement/prospectus, including the matters addressed under the caption Cautionary Statement
Regarding Forward-Looking Statements beginning on page 23, you should carefully read and consider
the following risk factors in evaluating the proposals to be voted on at the special meeting of
MedSolutions shareholders and in determining whether to vote for approval and adoption of the
merger agreement. Please also refer to the additional risk factors identified in the periodic
reports and other documents incorporated by reference into this proxy statement/prospectus and see
Where You Can Find More Information beginning on page 202.
Risks Relating to the Merger
The merger is subject to certain conditions to closing that, if not satisfied or waived, will
result in the merger not being completed.
The merger is subject to customary conditions to closing, as set forth in the merger
agreement. The conditions to the merger include, among others, the receipt of the required approval
of MedSolutions shareholders. If any of the conditions to the merger are not satisfied or, if
waiver is permissible, not waived, the merger will not be completed. In addition, under
circumstances specified in the merger agreement, Stericycle or MedSolutions may terminate the
merger agreement. As a result, we cannot assure you that we will complete the merger. See The
Merger Agreement Conditions Precedent beginning on page 60 for a discussion of the conditions to
the completion of the merger.
Certain directors and executive officers of MedSolutions have interests and arrangements that are
different from, or in addition to, those of MedSolutions shareholders and that may influence or
have influenced their decision to support or approve the merger.
When considering the recommendation of MedSolutions Board of Directors with respect to the
merger, holders of MedSolutions common stock should be aware that certain of MedSolutions
directors and executive officers have interests in the merger that are different from, or in
addition to, their interests as MedSolutions shareholders and the interests of MedSolutions
shareholders generally. These interests include, among other things, the following:
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One or more officers of MedSolutions will enter into consulting agreements with
Stericycle upon effectiveness of the merger; |
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pursuant to the merger agreement, all employment agreements entered into between
MedSolutions and its officers will be terminated at or prior to closing, and such officers
will be paid all severance benefits payable in connection with such terminations; |
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the merger agreement provides for the cashless exercise of all MedSolutions stock
options held by directors and officers as of the effective time of the merger; |
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all debt owed by MedSolutions to its officers and directors will be paid in full within
30 days of the effective time of the merger; and |
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certain officers and directors of MedSolutions will be indemnified by Stericycle as of
the effective time of the merger and released from their personal guarantees of
MedSolutions debt no later than 30 days after the effective time. |
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As a result, these directors and executive officers may be more likely to support and to vote
to approve the merger than if they did not have these interests. Holders of MedSolutions common
stock should consider whether these interests may have influenced these directors and officers to
support or recommend approval of the merger. As of the close of business on the record date for the
MedSolutions special meeting, these directors and executive officers and their affiliates
beneficially owned approximately 13.6% of the shares of MedSolutions common stock outstanding on
that date. These and additional interests of certain directors and executive officers of
MedSolutions are more fully described in the sections entitled Interests of MedSolutions Directors
and Executive Officers in the Merger beginning on page 45 of this proxy statement/prospectus.
We may face difficulties in achieving the expected benefits of the merger.
Stericycle and MedSolutions currently operate as separate companies. Stericycles management
has no experience running the combined business, and Stericycle may not be able to realize the
operating efficiencies, synergies, cost savings or other benefits expected from the merger. In
addition, the costs Stericycle incurs in implementing synergies, including its ability to amend,
renegotiate or terminate prior contractual commitments of MedSolutions, may be greater than
expected. Stericycle also may suffer a loss of customers or suppliers, a loss of revenues, or an
increase in operating or other costs or other difficulties relating to the merger.
MedSolutions will be subject to business uncertainties and contractual restrictions while the
merger is pending.
Uncertainty about the effect of the merger on employees, suppliers, partners, regulators and
customers may have an adverse effect on MedSolutions and potentially on Stericycle. These
uncertainties may impair MedSolutions ability to attract, retain and motivate key personnel until
the merger is consummated, and could cause suppliers, customers and others that deal with
MedSolutions to defer purchases or other decisions concerning MedSolutions, or to seek to change
existing business relationships with MedSolutions. Employee retention may be particularly
challenging during the pendency of the merger, as employees may experience uncertainty about their
future roles with Stericycle. If key employees depart because of issues relating to the uncertainty
and difficulty of integration or a desire not to remain with Stericycle, Stericycles business
following the merger could be harmed. In addition, the merger agreement restricts MedSolutions from
making certain acquisitions and taking other specified actions until the merger occurs. These
restrictions may prevent MedSolutions from pursuing attractive business opportunities that may
arise prior to the completion of the merger. See The Merger Agreement Covenants and Agreements
beginning on page 58 for a description of the restrictive covenants applicable to MedSolutions.
The merger agreement limits MedSolutions ability to pursue alternatives to the merger.
The merger agreement contains provisions that could adversely impact competing proposals to
acquire MedSolutions. These provisions include the prohibition on MedSolutions generally from
soliciting any acquisition proposal or offer for a competing transaction and the requirement that
MedSolutions pay to Stericycle $2.5 million if the merger agreement is terminated in specified
circumstances in connection with an alternative transaction. In addition, even if the Board of
Directors of MedSolutions determines that a competing proposal to acquire MedSolutions is superior,
MedSolutions may not exercise its right to terminate the merger agreement unless it notifies
Stericycle of its intention to do so and gives Stericycle at least five days to propose revisions
to the terms of the merger agreement or to make another proposal in response to the competing
proposal. See The Merger Agreement Covenants and Agreements beginning on page 58 and The
Merger Agreement Termination beginning on page 61.
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Stericycle required MedSolutions to agree to these provisions as a condition to Stericycles
willingness to enter into the merger agreement. These provisions, however, might discourage a third
party that might have an interest in acquiring all or a significant part of MedSolutions from
considering or proposing that acquisition, even if that party were prepared to pay consideration
with a higher value than the current proposed merger consideration. Furthermore, the termination
fee may result in a potential competing acquirer proposing to pay a lower per share price to
acquire MedSolutions than it might otherwise have proposed to pay.
Failure to complete the merger could negatively impact the stock value and the future business and
financial results of MedSolutions.
Although MedSolutions has agreed that its Board of Directors will, subject to fiduciary
exceptions, recommend that its shareholders approve and adopt the merger agreement, there is no
assurance that the merger agreement and the merger will be approved, and there is no assurance that
the other conditions to the completion of the merger will be satisfied. If the merger is not
completed, MedSolutions will be subject to several risks, including the following:
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MedSolutions may be required to pay Stericycle $2.5 million if the merger agreement is
terminated under certain circumstances and MedSolutions enters into or completes an
alternative transaction; |
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Certain costs relating to the merger (such as legal, accounting and valuation advisory
fees) are payable by MedSolutions whether or not the merger is completed; |
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There may be substantial disruption to the business of MedSolutions and a distraction of
its management and employees from day-to-day operations, because matters related to the
merger may require substantial commitments of time and resources, which could otherwise
have been devoted to other opportunities that could have been beneficial to MedSolutions; |
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MedSolutions business could be adversely affected if it is unable to retain key
employees or attract qualified replacements; and |
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MedSolutions would continue to face the risks that it currently faces, as described
below in the section entitled Information About MedSolutions beginning on page 72 of this
proxy statement/prospectus. |
In addition, MedSolutions would not realize any of the expected benefits of having completed
the merger. If the merger is not completed, these risks may materialize and materially adversely
affect MedSolutions business, financial results, financial condition and stock value.
The opinion obtained by MedSolutions from its valuation advisor does not reflect changes in
circumstances between signing the merger agreement and the completion of the merger.
Van Amburgh, MedSolutions valuation advisor, delivered a fairness opinion to the
MedSolutions Board of Directors. The opinion states that, as of June 30, 2007, the consideration to
be received by MedSolutions shareholders pursuant to the merger agreement was fair from a financial
point of view to MedSolutions shareholders. The opinion does not reflect changes that may occur or
may have occurred after June 30, 2007, including changes to the operations and prospects of
MedSolutions or Stericycle, changes in general market and economic conditions or other factors. Any
such changes, or other factors on which the opinion is based, may significantly alter the value of
MedSolutions or Stericycle by the time the merger is completed. The opinion does not speak as of
the time the merger will be completed or as of any date other than the date of such opinion. For a
description of the opinion that MedSolutions received
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from its valuation advisor, see The Merger Opinion of MedSolutions Valuation Advisor
beginning on page 37. For a description of the other factors considered by MedSolutions Board of
Directors in determining to approve the merger, see The Merger MedSolutions Reasons for the
Merger beginning on page 35 and The Merger Recommendation of the MedSolutions Board of
Directors beginning on page 36.
Risks Relating to the Promissory Notes
The promissory notes are not secured obligations of Stericycle. The 3.5% notes are supported by a
letter of credit, however.
The promissory notes are not secured by any assets of Stericycle and thus are general
unsecured obligations. They do not have priority over any of Stericycles other indebtedness, and
in the event of any bankruptcy proceedings, holders of the promissory notes would be in the same
position as all of Stericycles other unsecured creditors.
Stericycles obligations under the 3.5% notes are supported by a letter of credit to the
indenture trustee. In the event of any default by Stericycle in payment of the 3.5% notes, the
indenture trustee, either on the trustees own initiative or at the direction of the shareholder
representative, may declare all of the indebtedness represented by the 3.5% notes to be due and
draw on the letter of credit for full payment of the amount owed. Accordingly, payment of the 3.5%
notes is not ultimately dependent on Stericycles ability to make the payments due on the
promissory notes.
Stericycle may not be able to generate sufficient cash to make the payments due on the promissory
notes and its other indebtedness.
Stericycles ability to make the payments due on the promissory notes depends on its financial
and operating performance, which is subject to prevailing economic and competitive conditions and
certain financial, business and other factors beyond Stericycles control. Stericycle cannot assure
you that its cash flows from operations and other sources of liquidity will be sufficient to permit
it to make the payments due on the promissory notes and the payments due on its other indebtedness.
Stericycle may incur substantial additional debt, which could increase its difficulty in making the
payments due on the promissory notes.
The promissory notes and the indentures under which they will be issued do not contain any
restrictions preventing Stericycle from incurring additional debt. To the extent that Stericycle
does so, Stericycle may find it more difficult, and may be unable, to make the payments due on the
promissory notes and the payments due on its other indebtedness.
You may find it difficult to sell your promissory notes, on favorable terms or at all.
There will be no public market for the promissory notes, and thus you may be unable to sell
your promissory notes.
If you are able to sell your promissory notes in a privately negotiated transaction, the
purchaser may be expected to require a discount from the face amount of the promissory notes. This
discount is likely to be very substantial because of:
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the interest rate on the promissory notes, which may be less than prevailing market
rates; |
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the maturity date of the promissory notes, which is not for seven years after the
closing of the merger; |
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the potential reduction in the principal of the promissory notes, in one case
retroactive to the date of issuance, by reason of a merger consideration principal
reduction or litigation payment principal reduction; or |
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the potential reduction in the interest payments on the promissory notes (and possibly
even the principal of the promissory notes), by reason of an indemnification claim payment
reduction. |
See Merger AgreementAdjustments to Merger Consideration beginning on page 54 of this proxy
statement/prospectus.
Payments under the promissory notes are subject to reduction
Payments under the promissory notes are subject to reduction by reason of an indemnification
claim payment reduction. This reduction is in the nature of a dollar-for-dollar offset. See The
Merger AgreementRepresentations and Warranties and Indemnification on page 52 of this proxy
statement/prospectus.
The principal amount of the promissory notes is subject to reduction
The principal amount of the promissory notes is subject to reduction, retroactive to the date
of issuance of the promissory notes, by reason of a merger consideration principal reduction. The
principal amount of the promissory notes is also subject to reduction, effective as of the date of
payment, by reason of a litigation payment principal reduction and by an expense payment principal
reduction. See The Merger AgreementAdjustments to Merger Consideration, The Merger Agreement
Payment Procedures, Adjustments to Merger ConsiderationApplication of Closing Balance Sheet
and Revenue Adjustments and Litigation Adjustment on pages 54, 51, 55 and 56 of this proxy
statement/prospectus.
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Risks Relating to MedSolutions in the Event the Merger Does Not Occur
MedSolutions has historically had a history of losses.
MedSolutions expenses have historically exceeded its revenues and MedSolutions has had losses
in all previous fiscal years of operation except for 2005. MedSolutions has been a developing
company concentrating on the development of its products and business plan. In the event that the
merger does not occur, MedSolutions management believes that MedSolutions can be profitable and
that its business plan will be successful; however, there is no assurance that MedSolutions will be
successful in implementing its business plan or that it will be profitable now or in the future.
Future governmental actions, including the issuance of new regulations, could significantly affect
MedSolutions business.
Governmental authorities may take future actions that could pose obstacles in the waste
disposal industry and require methods or technology different from the methods currently developed
or utilized by MedSolutions. MedSolutions is not able to predict the outcome of any such actions,
controls, regulations or laws on its operations and any significant reduction in revenues due to
such changes could result in operating income becoming insufficient to cover operating expenses.
MedSolutions faces significant competition in its industry.
The medical/special waste disposal, document destruction, reusable sharps management and OSHA
compliance services industries are extremely competitive. MedSolutions competes with a number of
competitors offering similar technologies or services for the treatment of medical waste as well as
those using similar or dissimilar technologies or products. Some of these competitors have
significantly greater financial, advertising and marketing resources than MedSolutions.
The development of new technologies may make MedSolutions current waste treatment technologies
obsolescent.
Development of new, improved waste destruction devices or methods may make MedSolutions
devices and/or methods obsolete, less competitive or require substantial capital outlays by
MedSolutions to purchase or license such new technologies, if available.
MedSolutions business is subject to significant uninsured business and environmental risks.
MedSolutions business plan is to engage in business opportunities that involve the handling
of infectious medical and related waste. As insurance is available and within the financial means
of MedSolutions, MedSolutions intends to insure itself from risks related to its business.
However, if insurance is not available, is available and beyond the financial means of
MedSolutions, or insurance is purchased but loss limits are not adequate to cover all liabilities,
then MedSolutions would not be financially capable of paying a substantial judgment or claim
against MedSolutions, thereby placing MedSolutions in a financially adverse position or forcing its
closure.
MedSolutions business is dependent upon the effectiveness of governmental permits.
MedSolutions is subject to extensive and frequently changing federal, state and local laws and
regulations. This statutory and regulatory framework imposes compliance burdens and risks on
MedSolutions, including requirements to obtain and maintain government permits. These permits grant
MedSolutions the authority, among other things, to construct and operate treatment and transfer
facilities,
transport medical waste within and between relevant jurisdictions, and to handle particular
regulated substances. MedSolutions permits must be periodically renewed and are subject to
modification or revocation by the regulatory authorities. The loss of any of these permits could
have a material adverse effect on MedSolutions operations.
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Risks Relating to Stericycle
Stericycle is subject to extensive governmental regulation, which is frequently difficult,
expensive and time-consuming to comply with.
The regulated waste management industry is subject to extensive federal, state and local laws
and regulations relating to the collection, transportation, packaging, labeling, handling,
documentation, reporting, treatment and disposal of regulated waste. Stericycles business requires
it to obtain many permits, authorizations, approvals, certificates or other types of governmental
permission from every jurisdiction where it operates. Stericycle believes that it currently
complies in all material respects with all applicable permitting requirements. State and local
regulations change often, however, and new regulations are frequently adopted. Changes in the
regulations could require Stericycle to obtain new permits or to change the way in which it
operates under existing permits. Stericycle might be unable to obtain the new permits that it
requires, and the cost of compliance with new or changed regulations could be significant.
Many of the permits that Stericycle requires, especially those to build and operate processing
plants and transfer facilities, are difficult and time-consuming to obtain. They may also contain
conditions or restrictions that limit Stericycles ability to operate efficiently, and they may not
be issued as quickly as Stericycle needs them (or at all). If Stericycle cannot obtain the permits
that it needs when it needs them, or if they contain unfavorable conditions, it could substantially
impair Stericycles operations and reduce its revenues.
The handling and treatment of regulated waste carries with it the risk of personal injury to
employees and others.
Stericycles business requires it to handle materials that may be infectious or hazardous to
life and property. While Stericycle tries to handle such materials with care and in accordance with
accepted and safe methods, the possibility of accidents, leaks, spills, and acts of God always
exists. Examples of possible exposure to such materials include:
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improper storage of regulated waste by customers; |
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improper placement by customers of materials into the waste stream that Stericycle is
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Human beings, animals or property could be injured, sickened or damaged by exposure to
regulated waste. This in turn could result in lawsuits in which Stericycle is found liable for such
injuries, and substantial damages could be awarded against Stericycle.
While Stericycle carries liability insurance intended to cover these contingencies, particular
instances may occur that are not insured against or that are inadequately insured against. An
uninsured or underinsured loss could be substantial and could impair Stericycles profitability and
reduce Stericycles liquidity.
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The handling of regulated waste exposes Stericycle to the risk of environmental liabilities, which
may not be covered by insurance.
As a company engaged in regulated waste management, Stericycle faces risks of liability for
environmental contamination. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or CERCLA, and similar state laws impose strict liability on current or
former owners and operators of facilities that release hazardous substances into the environment as
well as on the businesses that generate those substances and the businesses that transport them to
the facilities. Responsible parties may be liable for substantial investigation and clean-up costs
even if they operated their businesses properly and complied with applicable federal and state laws
and regulations. Liability under CERCLA may be joint and several, which means that if Stericycle
were found to be a business with responsibility for a particular CERCLA site, Stericycle could be
required to pay the entire cost of the investigation and clean-up even though Stericycle was not
the party responsible for the release of the hazardous substance and even though other companies
might also be liable.
Stericycles pollution liability insurance excludes liabilities under CERCLA. Thus, if
Stericycle were to incur liability under CERCLA and if it could not identify other parties
responsible under the law whom it is able to compel to contribute to its expenses, the cost to
Stericycle could be substantial and could impair its profitability and reduce its liquidity.
Stericycles customer service agreements make clear that the customer is responsible for making
sure that only appropriate materials are disposed of. However, if there were a claim against
Stericycle that a customer might be legally liable for, Stericycle might not be successful in
recovering our damages from the customer.
The level of governmental enforcement of environmental regulations has an uncertain effect on
Stericycles business and could reduce the demand for its services.
Stericycle believes that the governments strict enforcement of laws and regulations relating
to regulated waste collection and treatment has been good for its business. These laws and
regulations increase the demand for Stericycles services. A relaxation of standards or other
changes in governmental regulation of regulated waste could increase the number of competitors or
reduce the need for Stericycles services.
If Stericycle is unable to acquire other regulated waste businesses, its revenue and profit growth
may be slowed.
Historically Stericycles growth strategy has been based in substantial part on its ability to
acquire other regulated waste businesses. Stericycle does not know whether in the future it will be
able to:
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identify suitable businesses to buy; |
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complete the purchase of those businesses on terms acceptable to Stericycle; |
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improve the operations of the businesses that Stericycle does buy and successfully
integrate their operations into Stericycles; or |
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avoid or overcome any concerns expressed by regulators. |
Stericycle competes with other potential buyers for the acquisition of other regulated waste
companies. This competition may result in fewer opportunities to purchase companies that are for
sale. It may also result in higher purchase prices for the businesses that Stericycle wants to
purchase.
Stericycle also does not know whether its growth strategy will continue to be effective.
Stericycles business is significantly larger than before, and new acquisitions may not have the
desired benefits that it has obtained in the past.
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The implementation of Stericycles acquisition strategy could be affected in certain instances by
the concerns of state regulators, which could result in Stericycles not being able to realize the
full synergies or profitability of particular acquisitions.
Stericycle may become subject to inquiries and investigations by state antitrust regulators
from time to time in the course of completing acquisitions of other regulated waste businesses. In
order to obtain regulatory clearance for a particular acquisition, Stericycle could be required to
modify certain operating practices of the acquired business or to divest itself of one or more
assets of the acquired business. Changes in the terms of Stericycles acquisitions required by
regulators or agreed to by Stericycle in order to settle regulatory investigations could impede its
acquisition strategy or reduce the anticipated synergies or profitability of its acquisitions. The
likelihood and outcome of inquiries and investigations from state regulators in the course of
completing acquisitions cannot be predicted.
Aggressive pricing by existing competitors and the entrance of new competitors could drive down
Stericycles profits and slow its growth.
The regulated waste industry is very competitive because of low barriers to entry, among other
reasons. This competition has required Stericycle in the past to reduce its prices, especially to
large account customers, and may require it to reduce its prices in the future. Substantial price
reductions could significantly reduce its earnings.
Stericycle faces direct competition from a large number of small, local competitors. Because
it requires very little money or technical know-how to compete with Stericycle in the collection
and transportation of regulated waste, there are many regional and local companies in the industry.
Stericycle faces competition from these businesses, and competition from them is likely to exist in
the new locations to which it may expand in the future. In addition, large national companies with
substantial resources may decide to enter the regulated waste industry. For example, Waste
Management, Inc., a major solid waste treatment company, announced in February 2005 that it
intended to begin offering regulated waste management services to hospitals and possibly other
large quantity generators of regulated waste.
Stericycles competitors could take actions that would hurt its growth strategy, including the
support of regulations that could delay or prevent it from obtaining or keeping permits. They might
also give financial support to citizens groups that oppose Stericycles plans to locate a
treatment or transfer facility at a particular location.
Restrictions in Stericycles senior unsecured credit facility may limit its ability to pay
dividends, incur additional debt, make acquisitions and make other investments.
Stericycles senior unsecured credit facility contains covenants that restrict its ability to
make distributions to stockholders or other payments unless it satisfies certain financial tests
and complies with various financial ratios.
It also contains covenants that limit Stericycles ability to incur additional indebtedness,
acquire other businesses and make capital expenditures, and imposes various other restrictions.
These covenants could affect Stericycles ability to operate its business and may limit its ability
to take advantage of potential business opportunities as they arise.
24
The loss of Stericycles senior executives could affect its ability to manage its business
profitably.
Stericycle depends on a small number of senior executives. Its future success will depend
upon, among other things, its ability to keep these executives and to hire other highly qualified
employees at all levels. Stericycle competes with other potential employers for employees, and it
may not be successful in hiring and keeping the executives and other employees that it needs.
Stericycle does not have written employment agreements with any of its executive officers, and
officers and other key employees could leave Stericycle with little or no prior notice, either
individually or as part of a group. Stericycles loss of or inability to hire key employees could
impair its ability to manage its business and direct its growth.
Stericycles expansion into foreign countries exposes it to unfamiliar regulations and may expose
it to new obstacles to growth.
Stericycle plans to grow both in the United States and in foreign countries. It has
established substantial operations in Canada, Mexico and the United Kingdom. Foreign operations
carry special risks. Although Stericycles business in foreign countries has not yet been affected,
its business in the countries in which it currently operates and those in which it may operate in
the future could be limited or disrupted by:
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government controls; |
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|
import and export license requirements; |
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political or economic insecurity; |
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trade restrictions; |
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changes in tariffs and taxes; |
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exchange rate fluctuations; |
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Stericycles unfamiliarity with local laws, regulations, practices and customs; |
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restrictions on repatriating foreign profits back to the United States; or |
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difficulties in staffing and managing international operations. |
Foreign governments and agencies often establish permit and regulatory standards different
from those in the United States. If Stericycle cannot obtain foreign regulatory approvals, or if it
cannot obtain them when it expects, its growth and profitability from international operations
could be limited. Fluctuations in currency exchange could have similar effects.
Stericycles earnings could decline if it writes off intangible assets, such as goodwill.
As a result of purchase accounting for its various acquisitions, Stericycles balance sheet at
December 31, 2006 contains goodwill of $814.0 million and other intangible assets, net of
accumulated amortization, of $115.9 million (including indefinite lived intangibles of $32.2
million). In accordance with Statement of Financial Accounting Standards No.142 Goodwill and Other
Intangible Assets, Stericycle evaluates on an ongoing basis, using the fair value of reporting
units, whether facts and circumstances indicate any impairment of the value of indefinite-lived
intangible assets such as goodwill. As circumstances after an acquisition can change, Stericycle
may not realize the value of these intangible assets. If Stericycle were to determine that a
significant impairment has occurred, it would be required to incur non-cash write-offs of the
impaired portion of goodwill and other unamortized intangible assets, which could have a material
adverse effect on its results of operations in the period in which the write-off occurs.
25
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus, including the documents incorporated by reference, contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are generally accompanied by words such as anticipate, expect, intend, plan,
believe, seek, could, should, will, project, estimate, look forward to and similar
expressions which convey uncertainty of future events or outcomes.
The expectations set forth in this proxy statement/prospectus and the documents incorporated
by reference regarding, among other things, accretion, returns on invested capital, achievement of
annual savings and synergies, achievement of strong cash flow, sufficiency of cash flow to fund
capital expenditures and achievement of debt reduction targets are only the parties expectations
regarding these matters. Actual results could differ materially from these expectations depending
on factors such as:
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the factors described under Risk Factors beginning on page 14 of this proxy
statement/prospectus; |
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the factors that generally affect Stericycles and MedSolutions businesses as further
outlined in Managements Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this proxy statement/prospectus with respect to
MedSolutions and included in Stericycles 2006 Form 10-K and 2007 First Quarter Form 10-Q
in respect of Stericycle, including the performance of contracts by suppliers, customers
and partners; employee management issues; and complexities of global political and economic
developments; and |
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|
the fact that, following the merger, the actual results of the combined company could
differ materially from the expectations set forth in this proxy statement/prospectus and
the documents incorporated by reference depending on additional factors such as: |
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the combined companys cost of capital; |
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the ability of the combined company to identify and implement cost savings,
synergies and efficiencies in the time frame needed to achieve these expectations; |
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the combined companys actual capital needs, the absence of any material incident of
property damage or other hazard that could affect the need to effect capital
expenditures and any currently unforeseen merger or acquisition opportunities that
could affect capital needs; and |
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|
the costs incurred in implementing synergies including, but not limited to, our
ability to terminate, amend or renegotiate prior contractual commitments of
MedSolutions. |
Actual actions that the combined company may take may differ from time to time as the combined
company may deem necessary or advisable in the best interest of the combined company and its
shareholders to attempt to achieve the successful integration of the companies, the synergies
needed to make the transaction a financial success and to react to the economy and the combined
companys customer market.
26
STATEMENT REGARDING RATIO OF EARNINGS TO FIXED CHARGES
The following table shows the ratio of Stericycles earnings to fixed charges for the periods
shown.
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Three Months Ended |
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Year Ended December 31, |
|
March 31, |
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2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2007 |
Ratio of earnings to fixed charges(1) |
|
|
6.57 |
|
|
|
8.40 |
|
|
|
10.64 |
|
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|
8.60 |
|
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|
4.33 |
|
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|
6.78 |
|
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|
|
(1) |
|
For the purpose of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges consist of (i)
interest on all indebtedness (including capital leases) and amortization of debt discount
and deferred financing fees, (ii) the interest factor attributable to rentals and (iii)
interest on liabilities associated with Financial Accounting
Standards Board Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. |
27
SELECTED HISTORICAL FINANCIAL INFORMATION
Selected Stericycle Historical Financial Data
Stericycle derived the following historical information from its audited consolidated
financial statements for the years ended December 31, 2002, 2003, 2004, 2005 and 2006, and from its
unaudited condensed consolidated financial statements for the three months ended March 31, 2007 and
2006. The unaudited condensed consolidated financial statements have been prepared by Stericycle on
a basis consistent with the audited financial statements and include, in the opinion of
Stericycles management, all adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of the information. Operating results for the three months ended March 31, 2007
are not necessarily indicative of the results that may be expected for the entire year ending
December 31, 2007. You should read this information in conjunction with (i) Stericycles
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
audited consolidated financial statements and accompanying notes included in its 2006 Form 10-K and
(ii) Stericycles Managements Discussion and Analysis of Financial Condition and Results of
Operations and the unaudited condensed consolidated financial statements and accompanying notes
included in 2007 First Quarter Form 10-Q. Both Stericycles 2006 Form 10-K and its 2007 First
Quarter Form 10-Q are incorporated by reference in this proxy statement/prospectus.
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Three Months Ended |
|
|
Year Ended December 31, |
|
March 31 |
|
|
2006(3) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2007 |
|
2006 |
|
|
(In thousands except per share data) |
|
Unaudited |
Statements of Income Data(1) |
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|
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|
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Revenues |
|
$ |
789,637 |
|
|
$ |
609,457 |
|
|
$ |
516,228 |
|
|
$ |
453,225 |
|
|
$ |
401,519 |
|
|
$ |
211,049 |
|
|
$ |
179,279 |
|
Income from operations |
|
|
201,762 |
|
|
|
166,532 |
|
|
|
145,655 |
|
|
|
126,397 |
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|
|
100,832 |
|
|
|
55,449 |
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|
|
44,756 |
|
Net income |
|
|
105,270 |
|
|
|
67,154 |
|
|
|
78,178 |
|
|
|
65,781 |
|
|
|
45,724 |
|
|
|
29,387 |
|
|
|
23,525 |
|
Net income applicable to common stock |
|
|
105,270 |
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|
|
67,154 |
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|
|
78,178 |
|
|
|
65,781 |
|
|
|
45,037 |
|
|
|
29,387 |
|
|
|
23,525 |
|
Diluted net
income per share of common stock(2)(5) |
|
|
1.17 |
|
|
|
0.74 |
|
|
|
0.85 |
|
|
|
0.72 |
|
|
|
0.51 |
|
|
|
0.33 |
|
|
|
0.26 |
|
Depreciation and amortization |
|
|
27,036 |
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|
|
21,431 |
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|
|
21,803 |
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|
|
17,255 |
|
|
|
14,981 |
|
|
|
7,138 |
|
|
|
6,295 |
|
Other Data |
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|
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Cash provided by operating activities |
|
$ |
160,162 |
|
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$ |
94,327 |
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$ |
114,611 |
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$ |
123,887 |
|
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$ |
98,731 |
|
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$ |
52,890 |
|
|
$ |
31,182 |
|
Cash provided by/(used in) investing activities |
|
|
(201,425 |
) |
|
|
(156,001 |
) |
|
|
(105,093 |
) |
|
|
(57,635 |
) |
|
|
(49,470 |
) |
|
|
2,246 |
|
|
|
(134,031 |
) |
Cash (used in) provided by financing activities |
|
|
52,547 |
|
|
|
59,500 |
|
|
|
(6,941 |
) |
|
|
(66,820 |
) |
|
|
(53,705 |
) |
|
|
(47,852 |
) |
|
|
101,961 |
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Balance Sheet Data(1)(4) |
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Cash, cash equivalents and short-term
investments |
|
$ |
16,040 |
|
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$ |
8,545 |
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$ |
7,949 |
|
|
$ |
7,881 |
|
|
$ |
8,887 |
|
|
$ |
19,953 |
|
|
$ |
10,756 |
|
Total assets |
|
|
1,327,906 |
|
|
|
1,047,660 |
|
|
|
834,141 |
|
|
|
707,462 |
|
|
|
667,095 |
|
|
|
1,325,309 |
|
|
|
1,212,411 |
|
Long-term debt, net of current maturities |
|
|
443,115 |
|
|
|
348,841 |
|
|
|
190,431 |
|
|
|
163,016 |
|
|
|
224,124 |
|
|
|
448,547 |
|
|
|
473,930 |
|
Convertible redeemable preferred stock |
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|
|
|
|
|
|
|
|
|
|
|
|
|
20,944 |
|
|
|
28,049 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
625,081 |
|
|
$ |
521,634 |
|
|
$ |
495,372 |
|
|
$ |
407,820 |
|
|
$ |
326,729 |
|
|
$ |
613,820 |
|
|
$ |
543,818 |
|
|
|
|
(1) |
|
See Note 4 to Stericycles consolidated financial
statements included in its 2006 Form 10-K for information concerning Stericycles acquisitions during the three years ended
December 31, 2006. |
|
(2) |
|
See Note 10 to Stericycles consolidated financial
statements included in its 2006 Form 10-K for information concerning the computation of net income per common share. In 2006, net
income includes costs (net of tax) related to a fixed asset write-down of equipment of $0.2
million, a write-down of an investment in securities of $0.6 million and acquisition-related |
28
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|
costs of $2.1 million, partially offset by income recorded from insurance proceeds related to
the settlement of the 3CI Complete Compliance Corporation class action litigation (3CI
litigation) of $0.6 million, which negatively impacted
earnings per share (EPS) by $0.09 per
share. Of the total of $8.8 million of such items, $7.3 million were non-cash items. In 2005,
net income includes costs (net of tax) related to the preliminary settlement of the 3CI
litigation of $23.4 million, a write-down of a note receivable of $1.5 million, fixed asset
impairments of $0.5 million, acquisition-related costs of $0.5 million, settlement of licensing
litigation of $1.1 million and items related to debt restructuring of $0.3 million, which
negatively impacted EPS by $0.30 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, fixed asset write-offs of $0.7 million and items related to debt restructuring and
redemption of senior subordinated debt of $2.8 million, which
negatively impacted EPS by $0.05
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 (net of tax) of $0.4 million and items
related to debt restructuring and subordinated debt repurchases of $2.0 million, which
negatively impacted EPS by $0.02 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 (net of
tax) of $0.2 million, fixed asset write-offs of $1.8 million and items related to debt
restructuring and subordinated debt repurchases of $1.4 million, which negatively impacted EPS
by $0.04 per share. Of the total of $3.4 million of such items, $2.0 million were non-cash
items. |
|
(3) |
|
On January 1, 2006, Stericycle adopted the provisions of Statement of Financial Accounting
Standards No. 123R, Share-Based Payment (SFAS No. 123R) using the modified prospective
method to account for stock compensation costs. SFAS No. 123R requires the measurement and
recognition of compensation expense for all stock-based payment awards made to Stericycles
employees and directors. During the year ended December 31, 2006, Stericycle recognized stock
compensation expense of $6.5 million, net of tax. See Note 11 to Stericycles consolidated
financial statements included in its 2006 Form 10-K for additional information related to
its stock compensation expense. |
|
(4) |
|
Balance sheet data is as of December 31 of the year in question or as of March 31 for the
three months ended March 31, 2007 and 2006. |
|
(5) |
|
Per share data adjusted to reflect a 2-for-1 stock split
effective May 31, 2007. |
29
COMPARATIVE
HISTORICAL AND PRO FORMA PER SHARE INFORMATION
The
following table sets
forth selected historical per share data for Stericycle, selected historical data for MedSolutions,
and pro forma combined data giving effect to the merger, as if the merger had taken place on
January 1, 2006 and as if the merger had taken place on January 1, 2007.
The data
presented below should be read in conjunction with the historical financial statements and related
notes of Stericycle and MedSolutions that have been included in this proxy statement/prospectus
or incorporated by reference. The pro forma combined data below is for illustrative purposes only.
The pro forma combined per share data may not be indicative of the operating results or financial
position that would have occurred if the merger had been consummated at the beginning of the
periods indicated, and may not be indicative of future operating results or financial position.
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|
|
Three Months Ended March 31, 2007 |
|
|
Year Ended December 31, 2006 |
|
|
|
(in thousands except share and per share data) |
|
|
(in thousands except share and per share data) |
|
|
|
Stericycle historical |
|
|
MedSolutions historical |
|
|
Pro Forma |
|
|
Stericycle historical |
|
|
MedSolutions historical |
|
|
Pro Forma |
|
Net Income |
|
$ |
29,387 |
|
|
$ |
60 |
|
|
$ |
29,447 |
|
|
$ |
105,270 |
|
|
$ |
(807 |
) |
|
$ |
104,499 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common
Shares Outstanding: (1) |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
88,284,526 |
|
|
|
23,530,785 |
|
|
|
88,284,526 |
|
|
|
88,150,072 |
|
|
|
22,875,017 |
|
|
|
88,150,072 |
|
Diluted |
|
|
90,436,694 |
|
|
|
23,802,651 |
|
|
|
90,436,694 |
|
|
|
90,213,080 |
|
|
|
22,875,017 |
|
|
|
90,213,080 |
|
Earning Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.33 |
|
|
$ |
0.00 |
|
|
$ |
0.33 |
|
|
$ |
1.19 |
|
|
$ |
(0.04 |
) |
|
$ |
1.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
$ |
0.33 |
|
|
$ |
0.00 |
|
|
$ |
0.33 |
|
|
$ |
1.17 |
|
|
$ |
(0.04 |
) |
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
1,325,309 |
|
|
$ |
10,532 |
|
|
$ |
1,335,841 |
|
|
$ |
1,327,906 |
|
|
$ |
10,837 |
|
|
$ |
1,338,743 |
|
Total Debt |
|
|
472,024 |
|
|
|
4,017 |
|
|
|
476,041 |
|
|
|
465,796 |
|
|
|
4,738 |
|
|
|
470,534 |
|
Owners Equity Book Value |
|
$ |
613,820 |
|
|
$ |
4,607 |
|
|
$ |
618,427 |
|
|
$ |
625,081 |
|
|
$ |
3,311 |
|
|
$ |
628,392 |
|
Book Value Per Common Share |
|
$ |
7.01 |
|
|
$ |
0.18 |
|
|
$ |
7.07 |
|
|
$ |
7.06 |
|
|
$ |
0.14 |
|
|
$ |
7.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock cash dividends declared |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock cash dividend declared (3) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
35.50 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Dividends declared per share |
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$ |
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|
$ |
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|
$ |
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|
$ |
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|
$ |
0.37 |
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$ |
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|
|
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|
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Common Shares outstanding (1) |
|
|
87,528,922 |
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|
|
26,002,619 |
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|
|
87,528,922 |
|
|
|
88,503,930 |
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|
23,780,785 |
|
|
|
88,503,930 |
|
Preferred Shares outstanding (3) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
96,667 |
|
|
|
0 |
|
|
|
|
Note (1): Shares adjusted to reflect a Stericycle 2-for-1 stock split effective
May 31, 2007. |
|
Note (2): Net income less preferred stock
dividends paid of $35,500 as those shares would be
canceled. |
|
Note (3): Pro forma assumption that preferred stock would be canceled and no dividends
would be declared consistent with Stericycle history. |
30
COMPARATIVE MARKET VALUE INFORMATION
Stericycle
As
of July 6, 2007, Stericycle had approximately 180 stockholders of record. Its common stock
trades on the NASDAQ National Market under the ticker symbol SRCL. The closing price of a share of
Stericycle common stock on July 5, 2007, the day prior to the date that the merger agreement was
signed, was $44.93.
MedSolutions
There were approximately 750 holders of MedSolutions common stock on July 6, 2007. There is no
established trading market for MedSolutions common stock. In the opinion of MedSolutions, due to
the lack of an active market for the MedSolutions common stock, transactions in the MedSolutions
common stock of which MedSolutions is aware are not significant enough to produce representative
prices.
31
INFORMATION ABOUT THE SPECIAL MEETING AND VOTING
This proxy statement/prospectus is being furnished to MedSolutions shareholders by
MedSolutions Board of Directors in connection with the solicitation of proxies from the holders of
MedSolutions common stock for use at the special meeting of MedSolutions shareholders and any
adjournments or postponements of the special meeting. This proxy statement/prospectus also is being
furnished to MedSolutions shareholders as a prospectus from Stericycle in connection with its
issuance of the promissory notes to MedSolutions shareholders in connection with the merger.
Date, Time and Place
The special meeting of shareholders of MedSolutions will be held on [___], 2007 at [10:00]
a.m., Dallas, Texas time, at MedSolutions corporate headquarters located at 12750 Merit Drive,
Park Central VII, Suite 770, Dallas, Texas 75251.
Matters to Be Considered
At the special meeting, MedSolutions shareholders will be asked:
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to consider and vote upon a proposal to approve and adopt the merger agreement; |
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to consider and vote upon a proposal to adjourn or postpone the special meeting, if
necessary, to solicit additional proxies in favor of the approval and adoption of the
merger agreement; and |
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to consider and transact any other business as may properly be brought before the
special meeting or any adjournments or postponements thereof. |
At this time, the MedSolutions Board of Directors is unaware of any matters, other than those
set forth in the preceding sentence, that may properly come before the special meeting.
Shareholders Entitled to Vote
The close of business on [___], 2007 has been fixed by MedSolutions board as the record
date for the determination of those holders of MedSolutions common stock who are entitled to notice
of, and to vote at, the special meeting and at any adjournments or postponements thereof.
At the close of business on the record date, there were 26,470,646 shares of MedSolutions
common stock outstanding and entitled to vote, held by approximately 750 holders of record. A list
of the shareholders of record entitled to vote at the special meeting will be available for
examination by MedSolutions shareholders for any purpose germane to the meeting. The list will be
available at the meeting and for 10 days prior to the meeting during ordinary business hours by
contacting MedSolutions Corporate Secretary at 12750 Merit Drive, Park Central VII, Suite 770,
Dallas, Texas 75251.
Quorum and Required Vote
Each holder of record of shares of MedSolutions common stock as of the record date is entitled
to cast one vote per share at the special meeting on each proposal. The presence, in person or by
proxy, of the holders of one-third of the issued and outstanding shares of MedSolutions common
stock outstanding as of the record date constitutes a quorum for the transaction of business at the
special meeting. The affirmative vote of the holders of a majority of the shares of MedSolutions
common stock entitled to vote at the special meeting is required to approve and adopt the merger
agreement.
32
In conjunction with the execution of the merger agreement, 50 MedSolutions shareholders
entered into a voting agreement with Stericycle and Merger Sub which obligates them to vote their
shares of common stock FOR the merger agreement. As of the record date, the shareholders subject
to the voting agreement with Stericycle and Merger Sub were entitled to vote an aggregate of
15,102,594 shares of MedSolutions, which represented approximately 57.1% of the MedSolutions common
stock outstanding and entitled to vote as of the record date.
As of the record date for the special meeting, directors and executive officers of
MedSolutions and their affiliates beneficially owned an aggregate of
3,718,662 shares of
MedSolutions common stock entitled to vote at the special meeting. These shares represent
approximately 13.6% of the MedSolutions common stock outstanding and entitled to vote as of the
record date. Certain of the directors and executive officers of MedSolutions are party to the
voting agreement with Stericycle and Merger Sub pursuant to which they have agreed to vote in favor
of the approval and adoption of the merger agreement. Although the remaining directors and
executive officers of MedSolutions are not party to any such voting agreements with Stericycle or
Merger Sub and do not have any obligations to vote in favor of the approval and adoption of the
merger agreement, they have indicated their intention to vote their outstanding shares of
MedSolutions common stock in favor of the approval and adoption of the merger agreement.
As of July 6, 2007, Stericycle and its directors, executive officers and their affiliates did
not own any of the outstanding shares of MedSolutions common stock.
How Shares Will Be Voted at the Special Meeting
All shares of MedSolutions common stock represented by properly executed proxies received
before or at the special meeting, and not properly revoked, will be voted as specified in the
proxies. Properly executed proxies that do not contain voting instructions will be voted FOR the
approval and adoption of the merger agreement and any adjournment or postponement of the special
meeting.
A properly executed proxy marked Abstain with respect to any proposal will be counted as
present for purposes of determining whether there is a quorum at the special meeting. However,
because the approval and adoption of the merger agreement requires the affirmative vote of the
holders of a majority of the outstanding shares entitled to vote at the special meeting, an
abstention will have the same effect as a vote AGAINST approval and adoption of the merger
agreement.
If you hold shares of MedSolutions common stock in street name through a bank, broker or
other nominee, the bank, broker or nominee may vote your shares only in accordance with your
instructions. If you do not give specific instructions to your bank, broker or nominee as to how
you want your shares voted, your bank, broker or nominee will indicate that it does not have
authority to vote on the proposal, which will result in what is called a broker non-vote. Broker
non-votes will be counted for purposes of determining whether there is a quorum present at the
special meeting, but because approval and adoption of the merger agreement requires the affirmative
vote of the holders of a majority of the outstanding shares entitled to vote at the special
meeting, broker non-votes will have the same effect as a vote AGAINST the merger agreement.
If any other matters are properly brought before the special meeting, the proxies named in the
proxy card will have discretion to vote the shares represented by duly executed proxies in their
sole discretion.
33
How To Vote Your Shares
You may vote in person at the special meeting or by proxy. We recommend you vote by proxy even
if you plan to attend the special meeting. You can always change your vote at the special meeting.
You may vote by proxy card by completing and mailing the enclosed proxy card. If you properly
submit your proxy card in time to vote, one of the individuals named as your proxy will vote your
shares of common stock as you have directed. You may vote for or against the proposals submitted at
the special meeting or you may abstain from voting.
If you hold shares of MedSolutions common stock through a broker or other custodian, please
follow the voting instructions provided by that firm. If you do not return your proxy card, or if
your shares are held in a stock brokerage account or held by a bank, broker or nominee, or, in
other words, in street name and you do not instruct your bank, broker or nominee on how to vote
those shares, those shares will not be voted at the special meeting.
If you submit your proxy but do not make specific choices, your proxy will be voted FOR each
of the proposals presented.
How To Change Your Vote
If you are a registered shareholder, you may revoke your proxy at any time before the shares
are voted at the special meeting by:
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completing, signing and timely submitting a new proxy to Ms. Beverly Fleeger, Corporate
Secretary, at 12750 Merit Drive, Park Central VII, Suite 770, Dallas, Texas 75251 to arrive
by the close of business on ___, 2007; the latest dated and signed proxy actually
received by such addressee before the special meeting will be counted, and any earlier
proxies will be considered revoked; |
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notifying MedSolutions Corporate Secretary, at 12750 Merit Drive, Park Central VII,
Suite 770, Dallas, Texas 75251, in writing, by the close of business on [___], 2007,
that you have revoked your earlier proxy; or |
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voting in person at the special meeting. |
Merely attending the special meeting will not revoke any prior votes or proxies; you must vote
at the special meeting to revoke a prior proxy.
If you hold shares of MedSolutions common stock through a broker or other custodian and you
vote by proxy, you may later revoke your proxy instructions by informing the holder of record in
accordance with that entitys procedures.
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees of MedSolutions may
solicit proxies for the special meeting from MedSolutions shareholders personally or by telephone,
facsimile and other electronic means without compensation other than reimbursement for their actual
expenses.
The expenses incurred in connection with the filing of this document will be paid for by
Stericycle. The expenses incurred in connection with the printing and mailing this proxy
statement/prospectus will be paid for by MedSolutions. Arrangements also will be made with
brokerage firms and other custodians, nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of shares of
34
MedSolutions stock held of record by those persons, and MedSolutions will, if requested,
reimburse the record holders for their reasonable out-of-pocket expenses in so doing.
Recommendation of the MedSolutions Board of Directors
The MedSolutions Board of Directors has unanimously approved the merger agreement and the
transactions it contemplates, including the merger. The MedSolutions Board of Directors determined
that the merger is advisable and in the best interests of MedSolutions and its shareholders and
unanimously recommends that you vote FOR approval and adoption of the merger agreement. See The
Merger MedSolutions Reasons for the Merger beginning on page 35 and The Merger
Recommendation of the MedSolutions Board of Directors beginning on page 36 for a more detailed
discussion of the MedSolutions Board of Directors recommendation.
Special Meeting Admission
If you wish to attend the special meeting in person, you must present either an admission
ticket or appropriate proof of ownership of MedSolutions stock, as well as a form of personal
identification. If you are a registered shareholder and plan to attend the meeting in person,
please mark the attendance box on your proxy card and bring the tear-off admission ticket with you
to the meeting. If you are a beneficial owner of MedSolutions common stock that is held by a bank,
broker or other nominee, you will need proof of ownership to be admitted to the meeting. A recent
brokerage statement or a letter from your bank or broker are examples of proof of ownership.
No cameras, recording equipment, electronic devices, large bags, briefcases or packages will
be permitted in the meeting.
PLEASE DO NOT SEND IN ANY MEDSOLUTIONS STOCK CERTIFICATES WITH YOUR PROXY CARD. After the
merger is completed, you will receive written instructions from the payment agent informing you how
to surrender your stock certificates to receive the merger consideration.
Adjournment and Postponements
The special meeting may be adjourned from time to time, to reconvene at the same or some other
place, by approval of the holders of common stock representing a majority of the votes present in
person or by proxy at the special meeting, whether or not a quorum exists, without further notice
other than by an announcement made at the special meeting, so long as the new time and place for
the special meeting are announced at that time. If the adjournment is for more than 30 days, or if
after the adjournment a new record date is determined for the adjourned special meeting, a notice
of the adjourned special meeting must be given to each shareholder of record entitled to vote at
the special meeting. If a quorum is not present at the MedSolutions special meeting, holders of
MedSolutions common stock may be asked to vote on a proposal to adjourn or postpone the
MedSolutions special meeting to solicit additional proxies. If a quorum is not present at the
MedSolutions special meeting, the holders of a majority of the shares entitled to vote who are
present in person or by proxy may adjourn the meeting. If a quorum is present at the MedSolutions
special meeting but there are not sufficient votes at the time of the special meeting to approve
the merger agreement, holders of MedSolutions common stock may also be asked to vote on a proposal
to approve the adjournment or postponement of the special meeting to permit further solicitation of
proxies.
35
THE MERGER
General
MedSolutions Board of Directors is using this document to solicit proxies from the holders of
MedSolutions common stock for use at the MedSolutions special meeting, at which holders of
MedSolutions common stock will be asked to vote upon approval and adoption of the merger agreement.
In addition, Stericycle is sending this document to MedSolutions shareholders as a prospectus in
connection with its issuance of the promissory notes in exchange for shares of MedSolutions common
stock in the merger.
The respective Boards of Directors of MedSolutions and Stericycle have unanimously approved
the merger agreement providing for the merger of Merger Sub into MedSolutions. MedSolutions will be
the surviving corporation in the merger, and upon completion of the merger, the separate corporate
existence of Merger Sub will terminate. We expect to complete the merger in the third quarter of
2007.
Background of the Merger
During the month of March 2006, Mr. Jim Karls, Stericycles Vice President Corporate Mergers &
Acquisitions, contacted Mr. Matthew H. Fleeger, MedSolutions President and Chief Executive
Officer, by telephone to arrange a meeting at the Waste Expo conference to be held in Las Vegas,
Nevada in April 2006. Mr. Fleeger agreed to meet with Stericycles representatives at such
conference.
On April 6, 2006, Mr. Fleeger met with Mr. Frank J.M. ten Brink, Stericycles Executive Vice
President and Chief Financial Officer, Mr. Karls and two additional Stericycle representatives at
the Waste Expo conference in Las Vegas, Nevada to discuss the possibility of a business combination
between MedSolutions and Stericycle. Mr. Fleeger informed Stericycle that MedSolutions was not
currently for sale but that he would be amenable to further discussions in the future.
On May 1, 2006, Mr. ten Brink sent a letter to Mr. Fleeger reaffirming Stericycles interest
in pursuing a potential business combination between MedSolutions and Stericycle.
Prior to traveling to Chicago, Illinois on other business in October 2006, Mr. Fleeger
contacted Mr. ten Brink to arrange a meeting to further discuss the possibility of a business
combination between MedSolutions and Stericycle. Mr. Fleeger and Mr. ten Brink agreed to meet at
Stericycles offices in Lake Forest, Illinois on October 4, 2006. Mr. ten Brink stated that, to
formulate a proposal, Stericycle needed to review and evaluate certain non-public MedSolutions
operational and financial data, and requested that Mr. Fleeger provide such information at the
October 4th meeting. Mr. Fleeger stated that he would provide such information if
Stericycle entered into a confidentiality agreement with MedSolutions.
On October 4, 2006, Mr. ten Brink and Mr. Karls met with Mr. Fleeger and Mr. Alan Larosee,
MedSolutions Vice President, Operations, at Stericycles office in Lake Forest, Illinois.
Stericycle and MedSolutions entered into a confidentiality agreement at this meeting, and Mr.
Fleeger provided to Mr. ten Brink the information regarding MedSolutions that had been requested.
During the meeting, Mr. ten Brink expressed an interest in a business combination between
MedSolutions and Stericycle. Mr. ten Brink suggested that Stericycle would be willing to pay a
yet-to-be determined premium for the common stock of MedSolutions. Mr. Fleeger responded that he
would discuss with the MedSolutions Board of Directors Stericycles indication of interest.
On or about October 19, 2006, the Board of Directors of MedSolutions met by telephonic
conference and Mr. Fleeger reported to the directors the discussions with Mr. ten Brink at the
October 4, 2006
36
meeting. Following a discussion of the matter, the MedSolutions Board of Directors authorized
MedSolutions to conduct exploratory communications with Stericycles management regarding a
possible business combination.
On October 12, 2006, Mr. Fleeger and Mr. J. Steven Evans, MedSolutions Vice President
Finance, received a letter from Mr. Karls requesting additional information regarding MedSolutions.
MedSolutions subsequently provided additional information responsive to Mr. Karls request to
Stericycle.
On December 18, 2006, Mr. ten Brink sent proposed terms for a business combination between
Stericycle and MedSolutions to Mr. Fleeger by facsimile. The proposed terms provided for a price
per share of approximately $1.56, to be paid approximately 50% in cash and 50% in promissory notes.
On
December 19, 2006, a regulary scheduled meeting of the Board of Directors of
MedSolutions was held, during which Mr. Fleeger updated the directors on the conversations to date
with Stericycle. The directors discussed the Stericycle level of interest and concluded that the
tentative indication of value at approximately $1.56 per share of MedSolutions common stock
warranted continued dialogue with Stericycle. Upon deliberation, the MedSolutions Board of
Directors determined that MedSolutions management should continue discussions with Stericycle and
that MedSolutions and its advisors should seek an increase in the consideration to be paid by
Stericycle. The MedSolutions Board of Directors also authorized MedSolutions management to conduct
discussions with a third party that had expressed interest in a potential business combination with
MedSolutions. On December 23, 2006, Mr. Fleeger communicated to Mr. ten Brink that MedSolutions
Board of Directors had reviewed Stericycles tentative proposal but had not reached a conclusion on
it.
During January 2007, MedSolutions management conducted negotiations with a third party that
had expressed an interest in either acquiring MedSolutions by way of merger or purchasing
substantially all of the assets and assuming certain of the liabilities of MedSolutions. The third
partys management initially proposed to pay approximately $45,000,000 (approximately $1.66 per
share of MedSolutions common stock) in either a merger transaction or an asset transaction,
approximately 70% of which would be in the form of cash and 30% of which would be in the form of
notes payable over five years. However, after failing to obtain the approval of its board of
directors for the proposed transaction terms, the third partys management lowered its proposed
purchase price for MedSolutions. After consultation with MedSolutions Board of Directors,
MedSolutions management informed the third party that the newly proposed terms were unacceptable
and terminated negotiations with such third party.
On February 19, 2007, Mr. ten Brink sent revised proposed terms for a business combination
between Stericycle and MedSolutions to Mr. Fleeger by email. The proposed terms provided for a
price per share of approximately $2.00, to be paid 25% in cash and 75% in promissory notes. After
receipt of such proposal, the Board of Directors of MedSolutions met by telephonic conference in
order to consider Stericycles revised proposal. After deliberation, the MedSolutions Board of
Directors directed Mr. Fleeger to continue to negotiate the terms for a proposed business
combination with Stericycle.
Several drafts of the proposed terms for the business combination were negotiated and revised
by Stericycle, MedSolutions and their respective legal counsel between February 19 and March 7,
2007. In a telephone conversation regarding such revised drafts, Mr. ten Brink requested that
Stericycle and MedSolutions enter into an additional confidentiality agreement permitting
Stericycle to conduct additional due diligence, and an exclusivity agreement providing for an
exclusivity period of 75 days during which MedSolutions would not seek or consider alternative
business combination transactions. Stericycles legal counsel provided drafts of the proposed
confidentiality agreement and exclusivity agreement to legal counsel for MedSolutions on March 7,
2007. Additional revisions were made by legal
37
counsel for each of Stericycle and MedSolutions to the proposed terms for the business
combination, the confidentiality agreement and the exclusivity agreement on March 7 and March 8,
2007.
On March 7, 2007, the MedSolutions Board of Directors met by telephonic conference to discuss
the proposed terms for the business combination, the confidentiality agreement and the exclusivity
agreement. After deliberation, the MedSolutions Board of Directors authorized Mr. Fleeger to
execute the confidentiality agreement and the exclusivity agreement on behalf of MedSolutions,
subject to review of the definitive confidentiality agreement and exclusivity agreement by outside
legal counsel to MedSolutions.
During the week of March 12, 2007, Mr. Karls and a team of Stericycle representatives met with
Mr. Fleeger, Mr. Evans, Mr. Larosee and other MedSolutions representatives at MedSolutions offices
in Dallas, Texas to conduct due diligence on MedSolutions and further discuss the prospect of a
merger between the companies. During March and April 2007, Stericycle completed its due diligence
of MedSolutions.
On April 16, 2007, MedSolutions engaged Van Amburgh to render a written opinion to the Board
of Directors of MedSolutions regarding the fairness of the merger consideration to be received in
connection with the merger by the holders of MedSolutions common stock from a financial point of
view.
On April 4, 2007, Stericycle distributed a draft merger agreement and a draft voting agreement
prepared by Johnson and Colmar, Stericycles outside legal counsel, to MedSolutions and its outside
legal counsel at that time, Fish & Richardson P.C. Over the following three months, the managements
of MedSolutions and Stericycle and their respective financial advisors and outside legal counsel
engaged in negotiations with respect to the merger agreement.
MedSolutions Board of Directors held a telephonic meeting on July 5, 2007 to review the
proposed transaction. MedSolutions valuation advisor and Block & Garden, LLP, MedSolutions new
outside legal counsel, also attended the meeting. At the meeting, MedSolutions Board of Directors
discussed various aspects of the proposed transaction, including the proposed merger consideration,
the terms of the merger agreement, and the written fairness opinion rendered by Van Amburgh that,
as of the date of the opinion and based on and subject to the matters described in the opinion, the
merger consideration to be received in the merger by the holders of MedSolutions common stock was
fair, from a financial point of view, to such holders. MedSolutions outside legal counsel
presented a summary of the terms of the merger agreement and discussed various legal issues with
MedSolutions directors, including without limitation their fiduciary duties to MedSolutions
shareholders. After further discussion on certain aspects of the proposed transaction,
MedSolutions Board of Directors unanimously approved the merger, the terms of the merger agreement
and the transactions contemplated by the merger agreement, and determined to recommend adoption of
the merger agreement to the shareholders of MedSolutions.
The Board of Directors of Stericycle approved the merger agreement in its then current form
and the transaction contemplated by the merger agreement by the directors unanimous written
consent as of June 14, 2007. The directors consent authorized Stericycles executive officers to
enter into a merger agreement in a form and on terms substantially consistent with the form and
terms approved by the directors.
On July 6, 2007, following the approval by the boards of directors of both companies,
Stericycle and MedSolutions executed the merger agreement. On July 6,
2007, MedSolutions publicly
announced the execution of the merger agreement.
38
MedSolutions Reasons for the Merger
The MedSolutions Board of Directors, at a special meeting held on July 5, 2007, unanimously
determined that the merger and the merger agreement are advisable, fair to and in the best
interests of MedSolutions and its shareholders. The MedSolutions Board of Directors has approved
the merger agreement and unanimously recommends MedSolutions shareholders vote FOR approval and
adoption of the merger agreement and the merger.
In reaching its decision, the MedSolutions Board of Directors consulted with MedSolutions
management and its valuation and legal advisors in this transaction. In concluding that the merger
is in the best interests of MedSolutions and its shareholders, the MedSolutions Board of Directors
considered a variety of factors, including the following:
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the financial presentation of Van Amburgh, including its opinion dated June 30, 2007, to
the MedSolutions Board of Directors as to the fairness, from a financial point of view and
as of the date of the opinion, of the merger consideration, as more fully described below
under Opinion of MedSolutions Valuation Advisor; |
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the MedSolutions Board of Directors familiarity with, and understanding of,
MedSolutions business, financial condition, results of operations, current business
strategy, earnings and prospects, and its understanding of Stericycles business, financial
condition, results of operations, business strategy and earnings; |
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the possible alternatives to the merger, including: |
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other acquisition or combination possibilities for MedSolutions; and |
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the possibility of continuing to operate as an independent regulated medical waste
management company under its current model focused in the southern and northeastern
United States; and |
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the range of possible benefits to MedSolutions shareholders of those alternatives and
the timing and likelihood of accomplishing the goal of any of those alternatives, and the
Boards assessment that the merger with Stericycle presents an opportunity superior to
those alternatives; |
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the fact that MedSolutions shareholders will receive substantial and adequate total
consideration for their shares; |
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the MedSolutions Board of Directors understanding, following its review together with
MedSolutions management and valuation advisors, of overall market conditions, and the
Boards determination that, in light of these factors, the timing of a potential
transaction was favorable to MedSolutions and its shareholders; and |
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the consideration by the MedSolutions Board of Directors, with the assistance of its
advisors, of the general terms and conditions of the merger agreement, including the
parties representations, warranties and covenants, the conditions to their respective
obligations as well as the likelihood of consummation of the merger, the proposed
transaction structure, the termination provisions of the agreement and the MedSolutions
Board of Directors evaluation of the likely time period necessary to close the
transaction. |
The MedSolutions Board of Directors also considered potential risks associated with the merger
in connection with its evaluation of the proposed transaction, including:
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the risks of the type and nature described under Risk Factors beginning on page 14; |
39
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the risk, which is common in transactions of this type, that the terms of the merger
agreement, including provisions relating to Stericycles right to obtain information with
respect to any alternative proposals and to a five-day negotiating period after receipt by
MedSolutions of a superior proposal and MedSolutions payment of a termination fee under
specified circumstances, might discourage other parties that could otherwise have an
interest in a business combination with, or an acquisition of, MedSolutions from proposing
such a transaction; |
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the interests of certain of MedSolutions executive officers and directors described
under Interests of MedSolutions Directors and Executive Officers in the Merger beginning
on page 45; |
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the restrictions on the conduct of MedSolutions business prior to the consummation of
the merger, requiring MedSolutions to conduct its business in the ordinary course
consistent with past practices subject to specific limitations, which may delay or prevent
MedSolutions from undertaking business opportunities that may arise pending completion of
the merger; and |
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the risks and contingencies related to the announcement and pendency of the merger, the
possibility that the merger will not be consummated and the potential negative effect of
public announcement of the merger on MedSolutions business and relations with customers
and service providers, and operating results and MedSolutions ability to retain key
management and personnel. |
The foregoing discussion of the information and factors discussed by the MedSolutions Board of
Directors is not exhaustive but does include material factors considered by the MedSolutions Board
of Directors. The MedSolutions Board of Directors did not quantify or assign any relative or
specific weight to the various factors that it considered. Rather, the MedSolutions Board of
Directors based its recommendation on the totality of the information presented to and considered
by it. In addition, individual members of the MedSolutions Board of Directors may have given
different weight to different factors.
Recommendation of the MedSolutions Board of Directors
After careful consideration of the matters discussed above, the MedSolutions Board of
Directors concluded that the proposed merger is in the best interest of the shareholders of
MedSolutions.
FOR THE REASONS SET FORTH ABOVE, THE BOARD OF DIRECTORS OF MEDSOLUTIONS HAS UNANIMOUSLY
ADOPTED THE MERGER AGREEMENT AS IN THE BEST INTERESTS OF MEDSOLUTIONS AND ITS SHAREHOLDERS, AND
UNANIMOUSLY RECOMMENDS THAT MEDSOLUTIONS SHAREHOLDERS VOTE FOR THE ADOPTION OF THE MERGER
AGREEMENT.
Stericycles Reasons for the Merger
Stericycle anticipates that the acquisition of MedSolutions will increase Stericycles
revenues and improve its operating margins by increasing route densities and expanding the
geographic areas that it is able to serve efficiently. Because Stericycle uses a hub and spoke
configuration of treatment facilities and transfer stations, the addition of MedSolutions
customers and facilities will increase the number of customers that can be served by Stericycles
existing routes or by new routes resulting from a realignment as appropriate of Stericycles and
MedSolutions routes, thereby reducing per-stop collection costs, and the addition of MedSolutions
facilities will shorten travel distances, thereby reducing overall transportation costs.
40
Opinion of MedSolutions Valuation Advisor
Van Amburgh has rendered its written opinion, dated June 30, 2007, to the Board of Directors
of MedSolutions to the effect that, as of that date and subject to the assumptions, limitations,
qualifications and other matters described in its opinion, the merger consideration to be received
in connection with the merger by the holders of MedSolutions common stock was fair, from a
financial point of view, to such holders.
The full text of Van Amburghs written opinion to MedSolutions Board of Directors, which sets
forth the procedures followed, the assumptions made, qualifications and limitations on the review
undertaken and other matters, is attached to this proxy statement/prospectus as Annex B.
The summary of Van Amburghs opinion in this proxy statement/prospectus is qualified in its
entirety by reference to the full text of the opinion, which is incorporated by reference into this
proxy statement/prospectus. Holders of MedSolutions common stock are encouraged to read the opinion
in its entirety.
The opinion of Van Amburgh does not constitute a recommendation as to how any shareholder
should vote on the merger or any matter relevant to the merger agreement.
General
Van Amburgh was selected by MedSolutions Board of Directors based on Van Amburghs
qualifications, expertise and reputation. Van Amburgh is a nationally recognized valuation firm,
and is regularly engaged in the evaluation of capital structures, valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private placements, financial
restructurings and other financial services.
In the past, Van Amburgh and its affiliates have provided financial advisory services to
MedSolutions unrelated to the merger for which they have received compensation, and Van Amburgh or
its affiliates may, in the future, provide investment banking and financial advisory services to
Stericycle for which they would expect to receive compensation.
Pursuant to an engagement letter between MedSolutions and Van Amburgh dated April 16, 2007,
Van Amburgh was retained to render a written opinion to the Board of Directors of MedSolutions
regarding the fairness of the merger consideration to be received in connection with the merger by
the holders of MedSolutions common stock from a financial point of view. On June 30, 2007, Van
Amburgh rendered its written opinion to the Board of Directors of MedSolutions that, as of that
date and subject to the assumptions, limitations, qualifications and other matters described in its
opinion, the merger consideration to be received in connection with the merger by the holders of
MedSolutions common stock was fair, from a financial point of view, to such holders. Van Amburgh
received a fee of $17,500 for rendering such opinion, which was not contingent upon the completion
of the merger. MedSolutions and Van Amburgh mutually determined the amount of the fee payable to
Van Amburgh for rendering such opinion.
The opinion of Van Amburgh was one of many factors taken into consideration by MedSolutions
Board of Directors in making its determination to approve the merger and should not be considered
determinative of the views of MedSolutions Board of Directors or management with respect to the
merger or the merger consideration.
41
Van Amburgh did not establish the amount of cash or the principal amount of the promissory
note that will be received in exchange for each share of MedSolutions common stock as consideration
for the merger. These amounts were determined pursuant to negotiations between MedSolutions and
Stericycle and were approved by the Board of Directors of MedSolutions.
Procedures Followed
In connection with rendering its opinion, Van Amburgh has, among other things:
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reviewed a draft of the merger agreement and discussed with the officers of MedSolutions
the course of other negotiations with Stericycle; |
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reviewed certain financial and other information about MedSolutions that was publicly
available and that Van Amburgh deemed relevant; |
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reviewed certain internal financial and operating information, including financial
projections relating to MedSolutions that were provided to Van Amburgh by MedSolutions,
taking into account (a) the growth prospects of MedSolutions, (b) MedSolutions historical
and current fiscal year financial performance and track record of meeting its forecasts,
and (c) MedSolutions forecasts going forward and its ability to meet them; |
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met with MedSolutions management regarding the business prospects, financial outlook
and operating plans of MedSolutions, and held discussions concerning the impact on
MedSolutions and its prospects of the economy and the conditions in MedSolutions industry; |
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compared the valuation in the public market of companies Van Amburgh deemed similar to
that of MedSolutions in market, services offered, and size; |
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reviewed public information concerning the financial terms of certain recent
transactions that Van Amburgh deemed comparable to the merger; and |
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performed a discounted cash flow analysis to analyze the present value of the future
cash flow streams that MedSolutions has indicated it expects to generate. |
In addition, Van Amburgh conducted such other studies, analyses and investigations and
considered such other financial, economic and market factors and criteria as they considered
appropriate in arriving at their opinion. Van Amburghs analyses must be considered as a whole.
Considering any portion of such analyses or factors, without considering all analyses and factors,
could create a misleading or incomplete view of the process underlying the conclusions expressed in
the opinion delivered by Van Amburgh.
Assumptions Made and Qualifications and Limitations on Review Undertaken
In rendering its opinion, Van Amburgh assumed and relied upon the accuracy and completeness of
all of the financial information, forecasts and other information provided to or otherwise made
available to Van Amburgh by MedSolutions or that was publicly available to Van Amburgh, and did not
attempt, or assume any responsibility, to independently verify any of such information. The opinion
of Van Amburgh is expressly conditioned upon such information, whether written or oral, being
complete and accurate. In addition, in rendering its opinion, Van Amburgh assumed that the
forecasts provided by MedSolutions had been reasonably prepared on bases reflecting the best
currently available information, estimates and judgments of MedSolutions management as to the
future financial performances of MedSolutions.
42
Van Amburgh assumed that the merger will be consummated in accordance with the merger
agreement. In addition, Van Amburghs opinion noted that:
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they have not conducted a physical inspection of MedSolutions properties and
facilities; |
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they have not made nor obtained any evaluations or appraisals of the assets or
liabilities (including without limitation any potential environmental liabilities) of
MedSolutions; |
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their opinion is based upon market, economic and other conditions as they exist on, and
can be evaluated as of, the date of the opinion; |
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they assumed that there were no significant events impacting MedSolutions historical
profitability between March 31, 2007 and June 30, 2007; and |
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their opinion does not address the relative merits of the merger as compared to other
transactions or business strategies that might be available to MedSolutions, nor does it
address MedSolutions underlying business decision to proceed with the merger. |
Summary of Financial and Other Analyses
The following is a summary of the material financial and other analyses presented by Van
Amburgh to MedSolutions Board of Directors in connection with Van Amburghs opinion dated June 30,
2007. The financial and other analyses summarized below include information presented in tabular
format. In order to fully understand Van Amburghs analyses, the tables must be read together with
the text of each summary. The tables alone do not constitute a complete description of the
analyses. Considering the data in the tables below without considering the full narrative
description of the financial and other analyses, including the methodologies underlying and the
assumptions, qualifications and limitations affecting each analysis, could create a misleading or
incomplete view of Van Amburghs analyses.
Overview
Van Amburgh analyzed the value of MedSolutions in accordance with the following methodologies,
each of which is described in more detail below:
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Discounted Cash Flow Analysis; |
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Guideline Company Analysis; and |
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Adjusted Book Value Analysis. |
These methodologies were used to determine an implied price range per share of MedSolutions
common stock, which was then compared to the merger consideration. The following table summarizes
the results of the analyses and should be read together with the more detailed descriptions set
forth below:
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Fair Market Value |
Methodology |
|
Estimate Range |
Discounted Debt-Free Net Cash Flow (Income) Approach to Value |
|
$ |
37,100,000 to $45,400,000 |
|
Guideline Company (Market) Approach to Value |
|
$ |
38,600,000 to $41,700,000 |
|
Adjusted Book Value (Cost) Approach to Value |
|
|
N/A |
|
Total Range |
|
$ |
37,100,000 to $45,400,000 |
|
43
Discounted Cash Flow Analysis
Van Amburghs first valuation analysis was based upon the Discounted Debt-Free Net Cash Flow
(Income) Approach to Value. This approach involved a projection of future revenues and expenses
based upon present operations and expectations. The calculated earnings stream was discounted back
to present value at discount rates ranging from 14% to 16%, a weighted average cost of capital
(discount rate) range believed by Van Amburgh to balance the potential risks with the potential
rewards as viewed by an objective investor. Values in a range from $37,100,000 (using a 16%
discount rate) to $45,400,000 (using a 14% discount rate) were determined using this approach.
Guideline Company Analysis
Van Amburghs second analysis was based upon the Guideline Company (Market) Approach to Value.
Values determined from recent minority public guideline company trades, private sale transactions,
possible transaction indicators, planned trades, and/or trades of equivalent assets were considered
under this approach. Fair market value estimates in a range from $38,600,000 to $41,700,000 were
determined using this approach.
The selected companies used by Van Amburgh in the Guideline Company Analysis were:
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Donno Compant; |
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SteriLogic Waste Systems, Inc.; |
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Miners Group; |
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A&J Cartage, Inc.; |
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Waste Stream Environmental, Inc.; |
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Romic Environmental Technologies Corporation; |
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Bonham Management Group, Inc.; |
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Liberty Disposal, Inc.; |
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Incendere, Inc.; |
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7-7, Inc.; |
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Stericycle, Inc.; |
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American Ecology Corporation; |
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Microtek Medical Holdings, Inc.; and |
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Steris Corporation. |
Adjusted Book Value Analysis
Van Amburghs third analysis was based upon the Adjusted Book Value (Cost) Approach to Value.
This analysis required adjusting each asset and each actual and potential liability of MedSolutions
to present fair market value in order to establish the present estimated cost of duplicating the
assets and liabilities of its business. The value indicated by this analysis often understates the
fair market value of the subject company because it does not consider goodwill and other elements
of intangible value. Due to the earnings potential of MedSolutions and the presence of significant
intangible asset value, the Adjusted Book Value (Cost) Approach to Value was calculated more for
informational purposes than for value
44
indication purposes. The book value of MedSolutions shareholders equity was $4,606,561 as of
the date of Van Amburghs opinion. Van Amburgh disregarded this valuation method because it did not
believe it accurately reflected MedSolutions value.
After these three approaches to value were considered, the applicability and practical
application of each were examined by Van Amburgh and other relevant factors were weighted. Based
upon Van Amburghs personnels experience in valuing closely-held companies, the most
representative value of 100% of MedSolutions common stock, as of the date of their opinion, was in
a range from $37,100,000 to $45,400,000. The total amount to be paid by Stericycle to MedSolutions
shareholders pursuant to the merger agreement is $54,348,270.
Conclusion
Van Amburgh determined and issued its written opinion to the Board of Directors of
MedSolutions to the effect that as of June 30, 2007, and subject to the assumptions, limitations,
qualifications and other matters described in its opinion, the merger consideration to be received
in connection with the merger by the holders of MedSolutions common stock was fair, from a
financial point of view, to such holders.
Accounting Treatment
Stericycle will account for the merger using the purchase method of accounting.
Regulatory Matters
Other than as we describe in this document, the merger does not require the approval of any
other U.S. federal or state or foreign agency.
Appraisal and Dissenters Rights
Under the Texas Business Corporation Act (the TBCA), you have the right to demand appraisal
in connection with the merger and to receive, in lieu of the merger consideration, payment in cash,
without interest, for the fair value of your shares of MedSolutions common stock as determined by
an appraiser selected in a Texas state court proceeding. Holders of MedSolutions common stock
electing to exercise appraisal rights must comply with the provisions of Article 5.12 of the TBCA
in order to perfect their rights. MedSolutions will require strict compliance with the statutory
procedures.
The following is intended as a brief summary of the material provisions of the Texas statutory
procedures required to be followed by a MedSolutions shareholder in order to demand and perfect
appraisal rights. This summary, however, is not a complete statement of all applicable requirements
and is qualified in its entirety by reference to Article 5.12 of the TBCA, the full text of which
appears in Annex C to this proxy statement/prospectus.
This proxy statement/prospectus constitutes MedSolutions notice to its shareholders of the
availability of appraisal rights in connection with the merger in compliance with the requirements
of Article 5.12 of the TBCA. If you wish to consider exercising your appraisal rights, you should
carefully review the text of Article 5.12 contained in Annex C since failure to timely and
properly comply with the requirements of Article 5.12 will result in the loss of your appraisal
rights under Texas law.
If you elect to demand appraisal of your shares of MedSolutions common stock, you must satisfy
each of the following conditions:
45
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prior to the special meeting you must deliver to MedSolutions a written objection to the
merger and your intention to exercise your right to dissent in the event that the merger is
effected and setting forth the address at which notice shall be delivered in that event; |
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this written objection must be in addition to and separate from any proxy or vote
abstaining from or voting against the adoption of the merger agreement. Voting against or
failing to vote for the adoption of the merger agreement by itself does not constitute a
demand for appraisal within the meaning of Article 5.12; |
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you must not vote in favor of the adoption of the merger agreement. A vote in favor of
the adoption of the merger agreement, by proxy or in person, will constitute a waiver of
your appraisal rights in respect of the shares so voted and will nullify any previously
filed written demands for appraisal. Failing to vote against adoption of the merger
agreement will not constitute a waiver of your appraisal rights; |
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you must continuously hold your shares through the effective time of the merger. |
If you fail to comply with any of these conditions and the merger is completed, you will be
entitled to receive the fixed combination of the cash consideration and the note consideration for
each share of MedSolutions common stock as provided for in the merger agreement if you are the
holder of record at the effective time of the merger, but you will have no appraisal rights with
respect to your shares of MedSolutions common stock. A proxy card which is signed and does not
contain voting instructions will, unless revoked, be voted FOR the adoption of the merger
agreement and will constitute a waiver of your right of appraisal and will nullify any previous
written demand for appraisal.
All written objections should be addressed to MedSolutions Secretary at 12750 Merit Drive,
Park Central VII, Suite 770, Dallas, Texas 75251, and should be executed by, or on behalf of, the
record holder of the shares in respect of which appraisal is being demanded. The written objection
must reasonably inform MedSolutions of the identity of the shareholder and the intention of the
shareholder to demand appraisal of his, her or its shares.
To be effective, a written objection by a holder of MedSolutions common stock must be made by
or on behalf of the shareholder of record. The written objection should set forth, fully and
correctly, the shareholder of records name as it appears on his or her stock certificate(s) and
should specify the holders mailing address and the number of shares registered in the holders
name. The written objection must state that the person intends to exercise his, her or its right to
dissent under Texas law in connection with the merger. Beneficial owners who do not also hold the
shares of record may not directly make appraisal demands to MedSolutions. The beneficial holder
must, in such cases, have the record owner submit the required demand in respect of those shares.
If shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of a written objection should be made in that capacity; and if the shares are owned of
record by more than one person, as in a joint tenancy or tenancy in common, the written objection
should be executed by or for all joint owners. An authorized agent, including an authorized agent
for two or more joint owners, may execute the written objection for appraisal for a shareholder of
record; however, the agent must identify the record owner or owners and expressly disclose the fact
that, in executing the written objection, he or she is acting as agent for the record owner. A
record owner, such as a broker, who holds shares as a nominee for others, may exercise his or her
right of appraisal with respect to the shares held for one or more beneficial owners, while not
exercising this right for other beneficial owners. In that case, the written objection should state
the number of shares as to which appraisal is sought. Where no number of shares is expressly
mentioned, the written objection will be presumed to cover all shares held in the name of the
record owner.
46
If you hold your shares of MedSolutions common stock in a brokerage account or in other
nominee form and you wish to exercise appraisal rights, you should consult with your broker or the
other nominee to determine the appropriate procedures for the making of a demand for appraisal by
the nominee.
Within 10 days after the effective time of the merger, the surviving corporation to the merger
must give written notice that the merger has become effective to each MedSolutions shareholder who
has properly filed a written objection and who did not vote in favor of the merger agreement. Each
shareholder who has properly filed a written objection has 10 days from the delivery or mailing of
the notice to make written demand for payment of the fair value for the shareholders shares. The
written demand must state the number of shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder who fails to make written demand within 10
days of the delivery or mailing of the notice from the surviving corporation that the merger has
become effective will not be entitled to any appraisal rights. Any shareholder making a written
demand for payment must submit to the surviving corporation for notation any certificated shares
held by that shareholder which are subject to the demand within 20 days after making the written
demand. The failure by any shareholder making a written demand to submit its certificates may
result in the termination of the shareholders appraisal rights.
The surviving corporation has 20 days after its receipt of a demand for payment to provide
notice that the surviving corporation (i) accepts the amount claimed in the written demand and
agrees to pay the amount claimed within 90 days from effective time of the merger, or (ii) offers
to pay its estimated fair value of the shares within 90 days after the effective time.
If, within 60 days after the effective time of the merger, the surviving corporation and a
shareholder who has delivered written demand in accordance with Article 5.12 do not reach agreement
as to the fair value of the shares, either the surviving corporation or the shareholder may file a
petition in any Texas state court, with a copy served on the surviving corporation in the case of a
petition filed by a shareholder, demanding a determination of the fair value of the shares held by
all shareholders entitled to appraisal. The surviving corporation has no obligation and has no
present intention to file such a petition if there are objecting shareholders. Accordingly, it is
the obligation of MedSolutions shareholders to initiate all necessary action to perfect their
appraisal rights in respect of shares of MedSolutions common stock within the time prescribed in
Article 5.12. The failure of a shareholder to file such a petition within the period specified
could nullify the shareholders previously written demand for appraisal.
If a petition for appraisal is duly filed by a shareholder and a copy of the petition is
delivered to the surviving corporation, the surviving corporation will then be obligated, within 10
days after receiving service of a copy of the petition, to provide the office of the clerk of the
court in which the petition was filed with a list containing the names and addresses of all
shareholders who have demanded an appraisal of their shares and with whom agreements as to the
value of their shares have not been reached.
After notice to dissenting shareholders, the court will conduct a hearing upon the petition,
and determine those shareholders who have complied with Article 5.12 and who have become entitled
to the appraisal rights provided thereby.
After determination of the shareholders entitled to appraisal of their shares of MedSolutions
common stock, the court will appraise the shares, determining their fair value. When the value is
determined, the court will direct the payment of such value to the shareholders entitled to receive
the same, immediately to the holders of uncertificated shares and upon surrender by holders of the
certificates representing shares.
47
Pursuant to Article 5.12, the fair value of your shares is the value of such shares as of the
day immediately preceding the date of the special meeting, excluding any appreciation or
depreciation in anticipation of the merger. You should be aware that the fair value of your shares
as determined under Article 5.12 could be more, the same, or less than the value that you are
entitled to receive under the terms of the merger agreement.
Costs of the appraisal proceeding may be imposed upon the surviving corporation and the
shareholders participating in the appraisal proceeding by the court as the court deems equitable in
the circumstances. Upon the application of a shareholder, the court may order all or a portion of
the expenses incurred by any shareholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys fees and the fees and expenses of experts, to be charged
pro rata against the value of all shares entitled to appraisal. Any shareholder who had demanded
appraisal rights will not, after the effective time of the merger, be entitled to vote shares
subject to that demand for any purpose or to receive payments of dividends or any other
distribution with respect to those shares, other than with respect to payment as of a record date
prior to the effective time; however, if no petition for appraisal is filed within 120 days after
the effective time, or if the shareholder delivers a written withdrawal of such shareholders
demand for appraisal and an acceptance of the terms of the merger prior to the filing of a petition
for appraisal, then the right of that shareholder to appraisal will cease and that shareholder will
be entitled to receive the cash and note consideration for shares of his, her or its MedSolutions
common stock pursuant to the merger agreement. Any withdrawal of a demand for appraisal made after
the filing of a petition for appraisal may only be made with the written approval of the surviving
corporation.
Failure to comply with all of the procedures set forth in Article 5.12 will result in the loss
of a shareholders statutory appraisal rights. In view of the complexity of Article 5.12,
MedSolutions shareholders who may wish to dissent from the merger and pursue appraisal rights
should consult their legal advisors.
If the number of shares of dissenting stock exceeds 7.5% of the outstanding shares of
MedSolutions common stock outstanding immediately prior to the effective time of the merger, then
Stericycle may elect not to consummate the merger.
Deregistration of MedSolutions Common Stock
If the merger is completed, the shares of MedSolutions common stock will be deregistered under
the Securities Exchange Act of 1934.
48
INTERESTS OF MEDSOLUTIONS DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
In considering the recommendation of the MedSolutions Board of Directors with respect to the
merger, MedSolutions shareholders should be aware that some directors and executive officers of
MedSolutions have interests in the merger that are different from, or in addition to, the interests
of MedSolutions shareholders generally. The MedSolutions Board of Directors was aware of those
interests and took them into account in approving and adopting the merger agreement and
recommending that MedSolutions shareholders vote to approve and adopt the merger agreement. Those
interests are summarized below.
Stock Options
All options to purchase MedSolutions common stock granted under MedSolutions equity
compensation plans that are outstanding immediately prior to the effective time of the merger are
fully vested. At the effective time of the merger, each outstanding MedSolutions stock option will
be cancelled and converted into the right to receive the cash consideration and the note
consideration in respect of the in-the-money value of the option. See The Merger Agreement
Treatment of MedSolutions Options beginning on page 51.
The following table shows, as of July 6, 2007, the number of shares of MedSolutions common
stock subject to vested and unexercised stock options held by MedSolutions named executive
officers and directors.
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Value of Stock |
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Number of |
|
Options |
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Stock |
|
(At $2.00 per share |
Name and Principal Position |
|
Options |
|
net of exercise price) |
Matthew H. Fleeger, President, Chief Executive
Officer & Director |
|
|
0 |
|
|
$ |
0.00 |
|
Winship B. Moody, Sr., Chairman of the Board of Directors |
|
|
0 |
|
|
$ |
0.00 |
|
Ajit S. Brar, Director |
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193,208 |
|
|
$ |
110,510.00 |
|
David L. Mack, Director |
|
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62,222 |
|
|
$ |
77,777.50 |
|
Steven R. Block, Director |
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0 |
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$ |
0.00 |
|
Lonnie P. Cole, Sr., Senior Vice PresidentSales |
|
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0 |
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$ |
0.00 |
|
J. Steven Evans, Vice PresidentFinance |
|
|
145,665 |
|
|
$ |
178,998.25 |
|
Alan E. Larosee, Vice PresidentOperations |
|
|
221,666 |
|
|
$ |
273,332.50 |
|
James M. Treat, Vice PresidentBusiness Development |
|
|
173,333 |
|
|
$ |
216,666.25 |
|
Mark M.
Altenau, Former Director in 2006 |
|
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69,833 |
|
|
$ |
77,166.25 |
|
Severance Payments
Pursuant to the merger agreement, all employment agreements entered into between MedSolutions
and its employees, including its executive officers, will be terminated at or prior to closing, and
such employees will be paid all severance benefits payable in connection with such terminations.
The following table sets forth the lump sum cash payments that MedSolutions named executive
officers will receive if the merger is consummated.
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|
Cash Severance |
Executive Officer |
|
Payments |
Matthew H. Fleeger |
|
$ |
600,000.00 |
|
Lonnie P. Cole, Sr. |
|
$ |
100,000.00 |
|
J. Steven Evans |
|
$ |
109,000.00 |
|
Alan E. Larosee |
|
$ |
109,537.50 |
|
James M. Treat |
|
$ |
111,300.00 |
|
49
Positions of Certain MedSolutions Executive Officers After the Merger
Stericycle intends to retain, pursuant to a letter agreement to be executed in connection with
the closing of the merger, Matthew H. Fleeger, MedSolutions President and Chief Executive Officer,
or a company affiliated with Mr. Fleeger as a consultant for a period of six months beginning on
the closing date of the merger to provide transition management and other services. Mr. Fleeger or
his affiliated company will receive aggregate consulting fees of
$96,900 for such services as well
as health insurance coverage for Mr. Fleeger and his dependents. Subject to landlord approval,
Stericycle also intends to sublease MedSolutions current corporate office space to Mr. Fleeger
beginning on the six-month anniversary of the closing date of the merger, at the rental rates and
for the remaining term as specified in MedSolutions current office lease.
Stericycle may also retain additional officers or employees of MedSolutions to provide
transitional services on a consulting basis after the closing of the merger.
Ownership of MedSolutions Common Stock
MedSolutions directors and executive officers and their affiliates beneficially owned, as of
the record date, approximately 13.6% of the outstanding MedSolutions common stock, including those
shares of MedSolutions common stock underlying outstanding stock options and convertible debt.
50
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain material U.S. federal income tax consequences of
the merger to U.S. holders. This discussion is based upon the Internal Revenue Code of 1986, as
amended, Treasury Regulations promulgated under the Internal Revenue Code, court decisions,
published positions of the Internal Revenue Service and other applicable authorities, all as in
effect on the date of this document and all of which are subject to change or differing
interpretations, possibly with retroactive effect. This discussion is limited to U.S. holders who
hold MedSolutions shares as capital assets for U.S. federal income tax purposes (generally, assets
held for investment). This discussion does not address all of the U.S. federal income tax
consequences that may be relevant to holders in light of their particular circumstances or to
holders who may be subject to special treatment under U.S. federal income tax laws, such as tax
exempt organizations, foreign persons or entities, S corporations or other pass-through entities,
financial institutions, insurance companies, broker-dealers, holders who hold MedSolutions shares
as part of a hedge, straddle, wash sale, synthetic security, conversion transaction, or other
integrated investment comprised of MedSolutions shares and one or more investments, holders with a
functional currency (as defined in the Internal Revenue Code) other than the U.S. dollar, persons
who exercise appraisal rights, and persons who acquired MedSolutions shares in compensatory
transactions. Further, this discussion does not address any aspect of state, local or foreign
taxation. No ruling has been or will be obtained from the Internal Revenue Service regarding any
matter relating to the merger. No assurance can be given that the Internal Revenue Service will not
assert, or that a court will not sustain, a position contrary to any of the tax aspects described
below. Holders are urged to consult their own tax advisors as to the U.S. federal income tax
consequences of the merger, as well as the effects of state, local and foreign tax laws.
As used in this summary, a U.S. holder includes:
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an individual U.S. citizen or resident alien; |
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a corporation, partnership or other entity created or organized under U.S. law (federal or state); |
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an estate whose worldwide income is subject to U.S. federal income tax; or |
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a trust if a court within the United States of America is able to exercise primary
supervision over the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust. |
If a partnership (including for this purpose any entity treated as a partnership for U.S.
federal income tax purposes) is a beneficial owner of MedSolutions shares, the tax treatment of a
partner in that partnership will generally depend on the status of the partner and the activities
of the partnership. Holders of MedSolutions shares that are partnerships and partners in these
partnerships are urged to consult their tax advisors regarding the U.S. federal income tax
consequences of owning and disposing of MedSolutions shares in the merger.
THIS SUMMARY IS NOT A SUBSTITUTE FOR AN INDIVIDUAL ANALYSIS OF THE TAX CONSEQUENCES OF THE
MERGER TO YOU. WE URGE YOU TO CONSULT A TAX ADVISOR REGARDING THE PARTICULAR FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN LIGHT OF YOUR OWN SITUATION.
This summary of certain material U.S. federal income tax considerations, and any other
discussion in this proxy statement/prospectus of the tax consequences or tax risks of the merger to
U.S. holders of MedSolutions common stock (collectively, written discussion) is not intended nor
written to be used, and cannot be used, by any person for the purpose of avoiding tax penalties
that
may be imposed on such person. The written discussion was prepared to support the marketing of
the transaction(s) or matter(s) addressed by such written discussion, and the taxpayer should seek
advice based on the taxpayers particular circumstances from an independent tax advisor.
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Tax Consequences of the Merger to U.S. Holders of MedSolutions Common Stock
The Merger
The receipt of the merger consideration in the merger will result in a taxable transaction for
United States federal income purposes and also may result in a taxable transaction under applicable
state, local and other income tax laws. In general, under Section 1001 of the Internal Revenue Code
of 1986, as amended (the Code), a holder of MedSolutions common stock will recognize gain or
(subject to the limitations under Section 267 of the Code) loss equal to the difference between his
or her adjusted tax basis in the MedSolutions common stock surrendered as determined under Section
1011 of the Code and the fair market value of the cash and promissory notes received, if any.
If a MedSolutions shareholder effectively dissents from the merger and receives cash for
his, her or its shares, such cash will be treated as having been received by that shareholder as a
distribution in redemption of his, her or its MedSolutions common stock, subject to the provisions
and limitations of Section 302 of the Code, which determines whether a distribution in redemption
of stock is treated as a payment in exchange for the stock or as a dividend. Where as a result of
such distribution, a shareholder owns no MedSolutions common stock, either directly or through the
application of Section 318(a) of the Code, the redemption will be a complete termination of
interest within the meaning of Section 302(b)(3) of the Code and such cash will be treated as a
distribution in full payment in exchange for his or her MedSolutions common stock, and not as a
dividend.
Assuming that the shares of MedSolutions common stock have been held as a capital asset, the
gain or loss recognized by a MedSolutions shareholder generally will constitute a capital gain or
loss, other than, with respect to the exercise of dissenters rights, amounts, if any, which are
treated as a dividend under Section 302 of the Code (and taxable as such), or which constitute
interest or are deemed to constitute interest for federal income tax purposes (which amounts will
be taxable as ordinary income). The gain will constitute short-term capital gain or loss subject to
ordinary income tax rates if, at the effective time of the merger, the shares of MedSolutions
common stock were held for one year or less. If the shares were held for more than one year, the
capital gain or loss would be long-term, subject in the case of individual shareholders, estates
and certain trusts to tax at a maximum United States federal income tax rate of 15% for 2007.
With certain exceptions, installment sale treatment under Section 453 of the Code may be
available for purposes of reporting gain attributable to the promissory note portion of the merger
consideration received pursuant to the Merger. The installment method permits gain (but not loss)
from installment sales to be taxed as the shareholder receives installment payments instead of
being taxed in full in the year of the merger.
A shareholder may elect out of installment sale treatment. If a shareholder makes such an
election, taxable gain will be recognized to the same extent as if the shareholders shares had
been exchanged for cash in the amount of the face value of the promissory note.
The benefits of the installment method of reporting gain on installment sales are limited by a
number of statutory rules including the following: (i) the pledge of certain installment
obligations is treated as a payment resulting in the recognition of gain; (ii) a disposition of an
installment obligation generally triggers the recognition of any deferred gain remaining on the
sale; and (iii) the installment method is generally not available in respect of dispositions by
dealers. Furthermore, where the installment method does apply, a special interest rule applicable
to an installment obligation arising from a disposition of property with a sales price in excess of
$150,000 may apply, with the possible effect of diminishing or eliminating the economic benefit of
the deferral.
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If the Internal Revenue Service were to successfully assert that the promissory notes do not
qualify for installment treatment, then MedSolutions shareholders would not be able to defer the
recognition of a portion of their gain during the term of the promissory notes. Taxpayers are urged
to consult their own independent tax advisors to consider the possible effects of installment
reporting of gain allocated to the promissory note portion of the payments received pursuant to the
merger, and the possible effects of electing out of the installment method.
Because the stated interest rate payable on the promissory notes is less than the relevant
applicable federal rate (AFR), additional interest under the promissory notes will be imputed by
reason of the imputed interest rules of Sections 1274 or 483 of the Code, as applicable. The
relevant AFR is calculated by determining the appropriate term of the debt instrument (short-, mid-
or long-term) and applying the lowest AFR during the three-month
periods ending with the month in
which the merger agreement was signed and the month in which the
merger occurs. The promissory notes will be considered mid-term
debt for these purposes. The lowest AFR for mid-term debt during May, June and July, 2007 was
4.62%.
The imputed interest rules will have the effect of re-characterizing as interest, for federal
income tax purposes, a portion of the principal to be paid on the promissory notes because the
relevant AFR exceeds the nominal interest of 4.5% or 3.5% payable on the promissory notes. You are
urged to consult your own tax advisor to determine how the imputed interest rules will affect you.
Backup Withholding
United States federal income tax law requires that a holder of MedSolutions shares provide the
payment agent with his or her correct taxpayer identification number, which is, in the case of a
U.S. holder who is an individual, a social security number, or, in the alternative, establish a
basis for exemption from backup withholding. Exempt holders, including, among others, corporations
and some foreign individuals, are not subject to backup withholding and reporting requirements. If
the correct taxpayer identification number or an adequate basis for exemption is not provided, a
holder will be subject to backup withholding on any reportable payment. Any amounts withheld under
the backup withholding rules from a payment to a U.S. holder will be allowed as a credit against
that U.S. holders U.S. federal income tax and may entitle the U.S. holder to a refund, if the
required information is furnished to the Internal Revenue Service.
To prevent backup withholding, each holder of MedSolutions shares must complete the Substitute
Form W-9 which will be provided by the payment agent with the transmittal letter and certify under
penalties of perjury that:
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the taxpayer identification number provided is correct or that the holder is awaiting a
taxpayer identification number, and |
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the holder is not subject to backup withholding because |
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the holder is exempt from backup withholding, |
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the holder has not been notified by the Internal Revenue Service that he is subject
to backup withholding as a result of the failure to report all interest or dividends,
or |
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the Internal Revenue Service has notified the holder that he is no longer subject to
backup withholding. |
The Substitute Form W-9 must be completed, signed and returned to the payment agent.
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THE MERGER AGREEMENT
The following summary of the merger agreement is qualified by reference to the complete text
of the merger agreement, which is attached as Annex A and incorporated by reference into
this proxy statement/prospectus.
The merger agreement contains representations and warranties Stericycle and MedSolutions made
to each other. The assertions embodied in MedSolutions representations and warranties are
qualified by information in confidential disclosure schedule that MedSolutions has provided to
Stericycle in connection with signing the merger agreement. The disclosure schedule contain
information that modifies, qualifies and creates exceptions to MedSolutions representations and
warranties set forth in the attached merger agreement. Accordingly, you should keep in mind that
MedSolutions representations and warranties are modified in important part by the underlying
disclosure schedule. The disclosure schedule contain information that has been included in
MedSolutions general prior public disclosures, as well as additional information, some of which is
non-public. Neither Stericycle nor MedSolutions believe that MedSolutions disclosure schedule
contains information that the securities laws require them to publicly disclose except as discussed
in this proxy statement/prospectus. Moreover, information concerning the subject matter of the
representations and warranties may have changed since the date of the merger agreement, and that
information may or may not be fully reflected in the companies public disclosures.
Structure of the Merger
Upon the terms and subject to the conditions of the merger agreement, and in accordance with
the TBCA, at the effective time of the merger, TMW Acquisition Corporation, a wholly-owned
subsidiary of Stericycle, which we refer to as Merger Sub, will be merged with and into
MedSolutions. MedSolutions will continue as the surviving corporation and a wholly-owned subsidiary
of Stericycle. The separate corporate existence of Merger Sub will cease. The effectiveness of the
merger will not affect the separate corporate existence of MedSolutions subsidiaries, which will
remain subsidiaries of MedSolutions following the merger.
Timing of Closing
The closing date of the merger will occur as soon as possible following the date on which all
conditions to the merger, other than those conditions that by their nature are to be satisfied at
the closing, have been satisfied or waived. Stericycle and MedSolutions expect to complete the
merger during the third quarter of 2007. However, we do not know how long after the MedSolutions
special meeting the closing of the merger will take place. Stericycle and MedSolutions hope to have
the significant conditions satisfied so that the closing can occur immediately following the
special meeting. However, there can be no assurance that such timing will occur or that the merger
will be completed during the third quarter of 2007 as expected.
As soon as practicable after the closing of the merger, Merger Sub and MedSolutions will file
a certificate of merger with the Secretary of State of the State of Texas. The effective time of
the merger will be the time Merger Sub and MedSolutions file the certificate of merger with the
Secretary of State of the State of Texas or at a later time as we may agree and specify in the
certificate of merger.
Merger Consideration
At the effective time of the merger, each outstanding share of MedSolutions common stock
(other than any shares owned directly or indirectly by MedSolutions, Stericycle or Merger Sub and
those shares
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held by dissenting shareholders) will be converted into the right to receive $0.50 in cash,
without interest, and a promissory note in the principal amount of $1.50. We refer to the aggregate
amount of the cash consideration and the note consideration to be received by MedSolutions
shareholders pursuant to the merger as the merger consideration. The aggregate merger consideration
is subject to adjustment after the closing of the merger in certain events. See The Merger
Agreement Adjustments to Merger Consideration beginning on page 54 of this proxy
statement/prospectus. At the closing of the merger, $250,000 of the aggregate cash consideration
will be placed into an escrow account for use by the shareholder representative for the costs and
expenses of fulfilling its duties under the merger agreement. See The Merger Agreement
Shareholder Representative beginning on page 57 of this proxy statement/prospectus.
The promissory notes will be payable in seven installments of interest only due on each of the
first six anniversaries of the date on which the merger closes and one final installment of
principal and interest due on the seventh anniversary of such closing date, and will bear interest,
at the election of each holder of shares of MedSolutions common stock, at the annual rate of either
3.5% (if such shareholder elects to have such promissory note supported by a master letter of
credit) or 4.5% (if such shareholder does not elect such support). Holders of the promissory notes
will not have any voting rights with respect to Stericycle. See Description of Promissory Notes
beginning on page 65 of this proxy statement/prospectus.
The promissory notes will be subject to payment offset and reduction and principal reduction
pursuant to the merger consideration adjustment, litigation payment adjustment and indemnification
provisions of the merger agreement or in the event that the expenses of the payment agent and the
indenture trustee exceed $80,000. See The Merger Agreement Payment Procedures, The Merger
Agreement Representations and Warranties and Indemnification, and The Merger Agreement
Adjustments to Merger Consideration Application of Closing Balance Sheet and Revenue Adjustments
and Litigation Adjustment beginning on pages 51, 52 and 54 of this proxy statement/prospectus,
respectively.
Treatment of MedSolutions Options
All MedSolutions stock options have vested. At the effective time of the merger, the
MedSolutions stock options will be canceled and converted to a right to receive the merger
consideration for each deemed outstanding MedSolutions option share. The number of deemed
outstanding MedSolutions option shares attributable to each MedSolutions stock option will be equal
to the net number of shares of MedSolutions common stock (rounded down to the next whole share)
that would have been issued upon a cashless exercise of that MedSolutions stock option immediately
before the effective time of the merger. That net number of shares will be computed by deducting
from the shares of MedSolutions common stock that would be issued to the option holder a number of
deemed surrendered shares of MedSolutions common stock which is equal to the fair value of (i) the
exercise price of a MedSolutions stock option to be paid by the option holder and (ii) all amounts
required to be withheld and paid by MedSolutions for federal taxes and other payroll withholding
obligations as a result of such exercise (using an assumed tax rate of 35%). The fair value of each
deemed surrendered share of MedSolutions common stock, for purposes of determining the net number
of shares, will be equal to $2.00.
Conversion of Shares
At the effective time of the merger, each outstanding share of MedSolutions common stock
(other than shares held by MedSolutions, Stericycle or Merger Sub and shareholders who properly
exercise their dissenters rights) will automatically be canceled and retired, will cease to exist
and will be converted into
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the right to receive the merger consideration. Shares of MedSolutions common stock owned by
MedSolutions will be canceled in the merger without payment of any merger consideration.
Prior to the completion of the merger, Stericycle will deposit with the payment agent, for the
benefit of the holders of MedSolutions common stock and stock options to purchase MedSolutions
common stock, an amount in cash and promissory notes sufficient to effect the conversion of
MedSolutions common stock and exercised stock options into the cash and note consideration to be
paid in the merger. Stericycle has appointed LaSalle Bank National Association, Chicago, Illinois
to act as payment agent for the merger.
Payment Procedures
As soon as reasonably practicable after the effective time of the merger, the payment agent
will send to each holder of MedSolutions common stock a letter of transmittal for use in the
payment of the merger consideration and instructions explaining how to surrender MedSolutions
shares to the payment agent. Holders of MedSolutions common stock who surrender their certificates
to the payment agent, together with a properly completed letter of transmittal, will receive the
appropriate merger consideration.
At the effective time of the merger, the stock transfer books of MedSolutions will be closed
and no further issuances or transfers of MedSolutions common stock will be made. If, after the
effective time, valid MedSolutions stock certificates are presented to the surviving corporation
for any reason, they will be cancelled and exchanged as described above to the extent allowed by
applicable law.
The payment agent will deliver to MedSolutions, as the surviving corporation, any promissory
notes to be issued in the merger and any funds set aside by Stericycle to pay the cash
consideration that are not claimed by former MedSolutions shareholders within six months after the
effective time of the merger. Thereafter, the surviving corporation will act as the payment agent
and former MedSolutions shareholders may look only to the surviving corporation for payment of
their merger consideration, provided that the payment agent will continue to disburse payments due
under the promissory notes that have been duly issued to holders of MedSolutions common stock. None
of MedSolutions, Stericycle, the surviving corporation, the payment agent or any other person will
be liable to any former MedSolutions shareholder for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
Stericycle will pay for the expenses of the payment agent and the indenture trustee incurred
in connection with the payment of the merger consideration in an
aggregate amount up to $80,000.
Any reasonable expenses of the payment agent in excess of $80,000 will be paid by Stericycle and
reimbursed by reducing the principal amount of the promissory notes by the amount of such expenses
on a pro rata basis. Any such principal reduction is referred to in this proxy statement/prospectus
as an expense payment principal reduction.
MEDSOLUTIONS STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY CARD.
MEDSOLUTIONS STOCK CERTIFICATES SHOULD BE RETURNED WITH THE TRANSMITTAL LETTER AND ACCOMPANYING
INSTRUCTIONS WHICH WILL BE PROVIDED TO MEDSOLUTIONS SHAREHOLDERS BY THE PAYMENT AGENT FOLLOWING THE
EFFECTIVE TIME OF THE MERGER.
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Directors and Officers of the Surviving Corporation After the Merger
Under the merger agreement, the directors and officers of Merger Sub immediately prior to the
effective time of the merger will be the directors and officers of the surviving corporation at and
after the effective time of the merger.
Representations and Warranties and Indemnification
The merger agreement contains customary and substantially reciprocal representations and
warranties made by each party to the other. MedSolutions representations and warranties to
Stericycle and Merger Sub relate to, among other things:
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corporate organization, qualification and good standing; |
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corporate power and authority to enter into the merger agreement, and due execution,
delivery and enforceability of the merger agreement; |
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the ownership of equity interests in other entities, including the ownership of the
equity interests of MedSolutions subsidiaries; |
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the absence of proxies or voting agreements with respect to the stock of our
subsidiaries and the absence of any option, warrant or other commitment obligating
MedSolutions or any of its subsidiaries to issue, sell, redeem or repurchase any equity
interest in any of our subsidiaries; |
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the participation by MedSolutions and its subsidiaries in joint ventures; |
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absence of a breach of charter documents, bylaws, material agreements, instruments or
obligations, or applicable law as a result of the merger; |
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consents, approvals, orders, authorizations, registrations, declarations, filings and
permits required to enter into the merger agreement or to complete the transactions
contemplated by the merger agreement; |
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timely and accurate filings with the Securities and Exchange Commission in compliance
with applicable rules and regulations; |
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financial statements; |
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capital structure; |
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list of MedSolutions equipment; |
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MedSolutions real property and real property leases; |
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absence of undisclosed liabilities; |
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absence of specified adverse changes or events since January 1, 2007; |
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material contracts; |
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compliance with laws, material agreements and permits; |
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governmental regulation; |
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material litigation, material judgments or injunctions and absence of undisclosed
investigations or litigation; |
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absence of certain restrictive agreements or arrangements; |
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tax matters; |
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the amount of MedSolutions net operating loss for federal tax purposes as of December
31, 2006; |
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employee benefit plans and labor matters; |
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employee contracts and benefits; |
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insurance matters; |
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intellectual property; |
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title to assets; |
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environmental matters; |
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brokers and finders fees; |
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required vote of MedSolutions shareholders to approve the merger; |
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recommendation of MedSolutions Board of Directors; |
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absence of preferential purchase or repurchase rights; |
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inapplicability of Texas anti-takeover statute; |
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accuracy of information provided for inclusion in this proxy statement/prospectus. |
The representations and warranties in the merger agreement are subject to materiality and
knowledge qualifications in many respects and survive the closing of the merger agreement until the
first anniversary of the closing date of the merger, with the exception of MedSolutions
representations and warranties relating to environmental and tax matters, which will survive the
closing and continue until the date that is 90 days after the expiration of the underlying statutes
of limitations for such matters.
Pursuant to the merger agreement, Stericycle may assert an indemnification claim for any loss,
damage, cost or expense (including reasonable attorneys fees) that is caused by, arises out of or
relates to any breach of any representation and warranty by MedSolutions in the merger agreement or
in the officers certificate to be delivered by MedSolutions to Stericycle at closing. Any such
indemnification claim must be asserted prior to the expiration of the representation or warranty in
question. Except in certain limited instances, Stericycle may not assert an indemnification claim
until the aggregate amount for which indemnification is sought exceeds $100,000, and if such
threshold is reached, may then assert its claim only for the portion of the indemnification claim
in excess of $100,000. Any subsequent indemnification claims after the $100,000 threshold is met
are not subject to any further thresholds.
Stericycle may assert an indemnification claim by providing written notice to the shareholder
representative. If the shareholder representative does not object to an indemnification claim
within 30 days of its receipt of such written notice, Stericycles indemnification claim will be
considered undisputed. If the shareholder representative gives written notice to Stericycle within
such 30-day period that the shareholder representative objects to Stericycles indemnification
claim, Stericycle and the shareholder representative will attempt in good faith to resolve their
differences. If Stericycle and the shareholder representative fail to resolve their disagreement
within 30 days of the date on which Stericycle receives notice of the shareholder representatives
objection, either party may submit the disputed indemnification claim for binding arbitration
before the American Arbitration Association in Chicago, Illinois or Dallas, Texas.
To the extent that any indemnification claim by Stericycle is undisputed or is resolved in
Stericycles favor, either by agreement with the shareholder representative or by binding
arbitration, the
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indemnification claim will reduce the aggregate amounts next becoming due under the promissory
notes on a pro rata basis. This reduction will be Stericycles sole means of satisfying an
indemnification claim. Any such reduction is referred to in this proxy statement/prospectus as an
indemnification claim payment reduction.
Adjustments to Merger Consideration
Closing Balance Sheet Adjustment
Pursuant to the merger agreement, following the closing of the merger, Stericycle and the
shareholder representative will determine MedSolutions adjusted liabilities (as defined below) and
adjusted current assets (as defined below), in each case as of the date of the closing. If the
excess of MedSolutions adjusted liabilities over its adjusted current assets as of the closing
date (the liability excess) is less than $4,340,000 (including no more than $90,000 in capital
expenditures since May 31, 2007), the aggregate merger consideration will be increased by an amount
equal to the difference between $4,340,000 and the liability excess. If the liability excess as of
the closing date is more than $4,340,000, the aggregate merger consideration will be reduced by an
amount equal to the difference between the liability excess and $4,340,000. The $4,340,000
threshold referred to in the preceding two sentences will be reduced, however, on a
dollar-for-dollar basis to the extent that the sum of the aggregate merger consideration payable
with respect to shares of MedSolutions common stock and merger consideration and tax withholdings
with respect to the exercise of stock options to purchase MedSolutions common stock in connection
with the merger exceeds $54,350,000. Any adjustment will be applied as described under the heading
Application of Adjustments below. This adjustment is referred to in this proxy
statement/prospectus as the closing balance sheet adjustment.
Adjusted liabilities means MedSolutions consolidated total liabilities determined in
accordance with United States generally accepted accounting principles (GAAP), as increased by
(except to the extent already accrued) (i) severance payments and other termination liabilities
under employment agreements with MedSolutions employees or otherwise, (ii) MedSolutions unpaid
transaction expenses relating to the merger, and as reduced by the first $100,000 of MedSolutions
unpaid transaction expenses relating to the merger. Adjusted current assets means MedSolutions
total current assets as determined in accordance with GAAP.
Stericycle will prepare a schedule of adjusted liabilities and adjusted current assets as of
the closing date within 75 days after the closing, and will promptly furnish a copy of such
schedule to the shareholder representative. If the shareholder representative accepts Stericycles
schedule, or if the shareholder representative fails to give written notice to Stericycle of any
objection within 30 days after receipt of a copy of such schedule, Stericycles schedule will
become binding. If the shareholder representative gives written notice to Stericycle within such
30-day period that the shareholder representative objects to Stericycles schedule of adjusted
liabilities and adjusted current assets, Stericycle and the shareholder representative will attempt
in good faith to resolve their differences. If Stericycle and the shareholder representative fail
to resolve their disagreement within 30 days of the date on which Stericycle receives notice of the
shareholder representatives objection, either party may submit the disputed items to a mutually
acceptable accounting firm for a determination of the correct amounts, which determination will be
binding on Stericycle and the shareholder representative. If Stericycle and the shareholder
representative are unable to agree upon a mutually acceptable accounting firm within 10 days of the
date on which both parties become aware of such dispute, Stericycle will select an accounting firm
that is not Stericycles regular accounting firm, the shareholder representative will select an
accounting firm that was not the regular accounting firm of MedSolutions, and the two firms so
selected will select a third accounting firm that is not the regular accounting firm of either
Stericycle or MedSolutions to resolve the disputed items.
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Revenue Adjustment
Pursuant to the merger agreement, following the closing of the merger Stericycle and the
shareholder representative will determine MedSolutions measured revenues (as defined below). If
the measured revenues are $16,000,000 or more, there will be no adjustment to the aggregate merger
consideration. If the measured revenues are less than $16,000,000, the aggregate merger
consideration will be reduced by an amount equal to the difference between the product of (i)
$16,000,000 less the amount of measured revenues multiplied by (ii) 3.375. Any adjustment will be
applied as described under the heading Application of Adjustments below. This adjustment is
referred to in this proxy statement/prospectus as the revenue adjustment.
Measured revenues means the sum of $15,655,352 plus the aggregate annualized gross revenues
(net of returns, rebates and chargebacks) received by MedSolutions from certain scheduled customers
during the first three full calendar months after the closing. Such net revenues will be annualized
on a customer-by-customer basis as follows: (i) if there are three full calendar months of service
to such customer during the measurement period, the net revenues will be annualized by multiplying
them by four; (ii) if there are only two full calendar months of service to such customer during
the measurement period, the net revenues will be annualized by multiplying them by six; (iii) if
there is only one full calendar month of service to such customer during the measurement period,
the net revenues will be annualized by multiplying them by 12; and (iv) if there is less than one
full calendar month of service, the average weekly net revenues for such month will be annualized
by multiplying them by 52.
Stericycle will prepare a schedule of measured revenues within 45 days after the end of the
three full calendar month measurement period described above, and will promptly furnish a copy of
such schedule to the shareholder representative. If the shareholder representative accepts
Stericycles schedule, or if the shareholder representative fails to give written notice to
Stericycle of any objection within 30 days after receipt of a copy of such schedule, Stericycles
schedule will become binding. If the shareholder representative gives written notice to Stericycle
within such 30-day period that the shareholder representative objects to Stericycles schedule of
measured revenues, Stericycle and the shareholder representative will attempt in good faith to
resolve their differences. If Stericycle and the shareholder representative fail to resolve their
disagreement within 30 days of the date on which Stericycle receives notice of the shareholder
representatives objection, either party may submit the disputed items to a mutually acceptable
accounting firm for a determination of the correct amounts, which determination will be binding on
Stericycle and the shareholder representative. If Stericycle and the shareholder representative are
unable to agree upon a mutually acceptable accounting firm within 10 days of the date on which both
parties become aware of such dispute, Stericycle will select an accounting firm that is not
Stericycles regular accounting firm, the shareholder representative will select an accounting firm
that was not the regular accounting firm of MedSolutions, and the two firms so selected will select
a third accounting firm that is not the regular accounting firm of either Stericycle or
MedSolutions to resolve the disputed items.
Application of Closing Balance Sheet and Revenue Adjustments
When both the closing balance sheet adjustment and revenue adjustment have been finally
determined as described above, the aggregate merger consideration will be adjusted as follows:
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If there is an increase in the aggregate merger consideration due to the closing balance
sheet adjustment and no adjustment pursuant to the revenue adjustment, Stericycle will,
within three days of such determination, deposit cash equal to the increase in the
aggregate merger consideration with the payment agent for distribution on a pro rata basis
to holders of |
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MedSolutions common stock who have duly surrendered or may duly surrender their stock
certificates for payment and holders of MedSolutions options; |
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If there is an increase in the aggregate merger consideration due to the closing balance
sheet adjustment and a reduction in the aggregate merger consideration pursuant to the
revenue adjustment, the two amounts will be added together to determine the net adjustment
to the aggregate merger consideration, and |
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if the net adjustment is an increase in the aggregate merger consideration,
Stericycle will, within three days of such determination, deposit cash equal to the
increase in the aggregate merger consideration with the payment agent for distribution
on a pro rata basis to holders of MedSolutions common stock who have duly surrendered
or may duly surrender their stock certificates for payment and holders of MedSolutions
option; or |
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if the net adjustment is a reduction in the aggregate merger consideration, the
principal amounts of the promissory notes will be reduced, retroactive to the closing
date, on a pro rata basis in an aggregate amount equal to the reduction in the
aggregate merger consideration; and |
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If there is a reduction in the aggregate merger consideration due to both the closing
balance sheet adjustment and the revenue adjustment, the two amounts shall be added
together to determine the combined reduction in the aggregate merger consideration, and the
principal amounts of the promissory notes will be reduced, retroactive to the closing date,
on a pro rata basis in an aggregate amount equal to the reduction in the aggregate merger
consideration. |
Any such reduction in the principal amount of the promissory notes is referred to in this
proxy statement/prospectus as a merger consideration principal reduction.
Litigation Adjustment
On May 14, 2007, a Texas jury found EnviroClean Management Services, Inc., a Texas corporation
and a subsidiary of MedSolutions (EMSI), liable in connection for approximately $9.8 million in
actual damages and $10 million in punitive damages in connection with a 2004 traffic accident
involving one of EMSIs trucks. The punitive damages awarded by the jury were subsequently reduced
by the trial court to approximately $4.6 million. Approximately $5.4 million of such damages are
covered by EMSIs insurance coverage. MedSolutions intends through its insurance provider, Zurich
American Insurance (Zurich), to vigorously appeal the judgment. This process is likely to take
considerable time and may extend past the closing date of the merger. If MedSolutions or the
Surviving Corporation, as the case may be, is unsuccessful or only partially successful on appeal,
to the extent that the amount of any award exceeds EMSIs insurance coverage, MedSolutions has been
advised by its legal counsel that EMSI has a valid claim against Zurich that, pursuant to
applicable Texas law, should result in Zurichs being held responsible for the amount of any award
in excess of the policy limits.
Pursuant to the merger agreement, following the closing of the merger the shareholder
representative will have the sole power and authority on behalf of EMSI, which will become a
subsidiary of the Surviving Corporation in connection with the merger, to appeal the judgment
rendered in connection with the lawsuit described above on behalf of EMSI, pursue any claims
against Zurich for the amount of any judgment in excess of EMSIs policy limits, and settle any of
the litigation described above. The shareholder representative will also have the sole power and
authority to select and retain legal counsel and any other consultants as it deems necessary or
proper for the prosecution, defense or settlement of such litigation, to incur costs and expenses
in connection with such litigation to be paid out of the $250,000 to be placed into an escrow
account to be used by the shareholder representative, and to take any and all other actions it
deems necessary or proper to resolve or settle such litigation.
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The shareholder representative will have the authority on behalf of EMSI to enter into a
binding settlement agreement with respect to the lawsuit described above, without the prior written
consent of Stericycle, if and only if such settlement provides for payment by EMSI of an aggregate
amount after the application of all available insurance coverage not to exceed the then outstanding
aggregate principal and interest owing under the promissory notes to be issued by Stericycle to
holders of MedSolutions common stock in connection with the merger and for the complete release of
EMSI and its affiliates, including without limitation the Surviving Corporation and Stericycle. If
any proposed settlement does not meet such requirements, the shareholder representative must obtain
the prior written consent of Stericycle, which consent may be granted or withheld by Stericycle in
its absolute discretion, prior to entering into any binding settlement agreement on behalf of EMSI
with respect to the lawsuit.
Pursuant to the merger agreement, Stericycle has agreed to pay for all costs and expenses
incurred in connection with the prosecution, defense or settlement of the litigation described
above in excess of the $250,000 escrow account, and the aggregate principal amount of the
promissory notes to be issued by Stericycle to holders of MedSolutions common stock in connection
with the merger will be reduced by all such excess litigation expenses that Stericycle pays. To the
extent that EMSIs liability with respect to the lawsuit after the litigation described above has
been finally resolved exceeds EMSIs available insurance coverage, the aggregate principal amount
of the promissory notes will be reduced by the amount of EMSIs payment (or the payment by the
surviving corporation or Stericycle on EMSIs behalf) in excess of EMSIs insurance coverage.
Additionally, in the event that the litigation described above has not been finally resolved
(including without limitation by way of settlement) on or before the 90th day immediately preceding
the seventh anniversary of the closing date of the merger, the surviving corporation may satisfy
the judgment rendered in connection with the lawsuit (as reduced by any successful appeal) in full
without the prior consent of the shareholder representative, and to the extent that EMSIs
liability with respect to the lawsuit exceeds its available insurance coverage, the aggregate
principal amount of the promissory notes will be reduced by the amount of EMSIs payment (or the
payment by the surviving corporation or Stericycle on EMSIs behalf) in excess of EMSIs insurance
coverage.
If the aggregate principal amount of the promissory notes to be issued by Stericycle in
connection with the merger is reduced by reason of EMSIs, the surviving corporations or
Stericycles payment of any of the expenses or liabilities described in the preceding paragraph,
any such reduction will be effective as of the date of payment of such expense or liability. In
addition, the amount of any such reduction of the aggregate principal amount of the promissory
notes will be increased by the amount of interest that would accrue on the amount of such reduction
between the date of payment of such expense or liability and the maturity date of the promissory
notes, using an interest rate equal to 8.0% less the weighted average interest rate of all
promissory notes outstanding as of the date of payment. Any reduction of the aggregate principal
amount of the promissory notes made on account of the litigation described above will be made on a
pro rata basis in respect of the principal amounts of all such promissory notes.
Any such reduction in the principal amount of the promissory notes is referred to in this
proxy statement/prospectus as a litigation payment principal reduction.
Shareholder Representative
Pursuant to the merger agreement, at the effective time of the merger Matthew H. Fleeger and
Winship B. Moody, Sr. will be appointed as the joint agents and attorneys-in-fact, for the holders
of shares of MedSolutions common stock who have duly surrendered or may duly surrender their stock
certificates to the payment agent, to give and receive notices and communications and to take any
and all
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action on behalf of such holders pursuant to the merger agreement and in connection with the
promissory notes, including without limitation asserting, prosecuting, or settling any claim
against the surviving corporation or Stericycle or defending or settling any claim asserted by the
surviving corporation or Stericycle. In this capacity, Mr. Fleeger and Mr. Moody are referred to as
the shareholder representative in this proxy statement/prospectus. The shareholder representative
may be changed from time to time by the consent of holders representing a majority of the shares of
MedSolutions common stock immediately prior to the effective time of the merger upon written notice
to the surviving corporation and the shareholder representative. Any vacancy in the position of
shareholder representative may be filled by the remaining shareholder representative, if any,
subject to the rights of holders representing a majority of the shares of MedSolutions common stock
immediately prior to the effective time of the merger to replace any shareholder representative so
appointed. Any notices or communications to or from the shareholder representative will constitute
notice to or from each of the holders of shares of MedSolutions common stock who have duly
surrendered or may duly surrender their stock certificates to the payment agent. Any decision, act,
consent or instruction of the shareholder representative (acting in such capacity) will constitute
a decision of all of the holders of shares of MedSolutions common stock who have duly surrendered
or may duly surrender their stock certificates to the payment agent, and will be final, binding and
conclusive upon each such holder. The surviving corporation and Stericycle are authorized to rely
upon any such decision, act, consent or instruction of the shareholder representative as being the
decision, act, consent or instruction of each such holder. No bond is being required of the
shareholder representative, and by voting to approve and adopt the merger agreement each holder of
MedSolutions common stock agrees that the shareholder representative will not be liable to such
holder or any other person for any action taken, or declined to be taken, in good faith and in the
exercise of reasonable judgment.
At closing of the merger, Stericycle will place $250,000 of the aggregate merger consideration
into an escrow account with Park Cities Bank, Dallas, Texas, which amount will be made available
for use by the shareholder representative for the costs and expenses incurred by the shareholder
representative in fulfilling its duties under the merger agreement. Such costs and expenses will
include $5,000 per year compensation paid to each of Messrs. Fleeger and Moody for their service as
shareholder representative. The $250,000 will be deducted on a pro rata basis from the cash
consideration distributable to the holders of shares of MedSolutions common stock in connection
with the merger. Any funds remaining in such escrow account on the date of the last payment payable
under the promissory notes will be distributed on a pro rata basis to holders of shares of
MedSolutions common stock who have duly surrendered or may duly surrender their stock certificates
to the payment agent.
Covenants and Agreements
Each of Stericycle and MedSolutions has undertaken various covenants in the merger agreement.
The following summarizes the more significant of these covenants:
Operating Covenants MedSolutions
Prior to the effective time of the merger MedSolutions has agreed that it and its subsidiaries
will conduct their operations in the ordinary course consistent with past practices. Prior to the
effective time of the merger, unless Stericycle consents otherwise in writing, with certain
exceptions, MedSolutions has agreed that neither MedSolutions nor any of its subsidiaries will:
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sell, lease, transfer or dispose of any of its assets used, held for use or useful in
conduct of MedSolutions medical waste business except in the ordinary course consistent
with past practices; |
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enter into any contract, other than any contracts relating to the merger, relating to
MedSolutions medical waste business except in the ordinary course consistent with past
practices; |
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terminate, accelerate or modify any material contract relating to MedSolutions medical
waste business to which it is or was a party or by which it is or was bound, or agree to do
so, except in the case of contracts that expire in accordance with their terms or that
terminate in the ordinary course consistent with past practices; |
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impose or permit any lien (other than liens permitted under the merger agreement) on any
of its assets except in the ordinary course consistent with past practices; |
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delay or postpone beyond its normal practice payment of its vendor accounts payable and
other liabilities; |
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cancel, compromise, waive or release any claim or right outside of the ordinary course
consistent with past practices; |
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experience any damage, destruction or loss to any material portion of its assets used,
held for use or useful in conduct of MedSolutions medical waste business (whether or not
covered by insurance); |
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change the base compensation or other terms of employment of any of its employees except
in the ordinary course consistent with past practices; |
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pay a bonus to any employee; |
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adopt a new employee benefit plan, terminate any existing plan or increase the benefits
under or otherwise modify any existing plan except as contemplated by the merger agreement; |
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amend its organizational documents; |
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issue, sell, redeem or repurchase, or effect any split, combination or reclassification
of, any shares of its capital stock or other securities or retire any indebtedness; |
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grant any stock options; |
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declare or pay any dividends or make any other distributions in respect of its capital stock; |
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make, or guarantee, any loans or advances to another person, other than MedSolutions or
one of its subsidiaries, or make any investment or commitment to invest in any person other
than MedSolutions or one of its subsidiaries; |
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make any capital expenditures in excess of $25,000 in the aggregate; |
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make any change in its accounting principles or methods; or |
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enter into any contract to do any of the matters described in the preceding clauses. |
Acquisition Proposals
MedSolutions has agreed that, except as specifically permitted in the merger agreement, it
will not, and it will not authorize or permit its subsidiaries or its representatives to:
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solicit, initiate or knowingly encourage the submission of any acquisition proposal (as
defined below); |
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participate in any discussions or negotiations regarding, or furnish to any person any
information in respect of, or take any other action to facilitate, any acquisition proposal
or any inquiries or the |
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making of any proposal that constitutes, or reasonably would be expected to lead to, any
acquisition proposal; |
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approve or recommend to MedSolutions shareholders any acquisition proposal. |
An acquisition proposal is any inquiry, offer or proposal regarding any of the following
matters (other than the transactions contemplated by the merger agreement or the merger):
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an investment in MedSolutions representing (on a post-investment basis) more than 25% of
MedSolutions capital stock or a purchase from MedSolutions of more than 25% of the shares
of its capital stock or any debt securities convertible into or exchangeable for more than
25% of the shares of its capital stock; |
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a merger, consolidation, share exchange, recapitalization, business combination or other
similar transaction involving all of MedSolutions equity interests or all shares of the
MedSolutions common stock; |
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the sale, lease, exchange, mortgage, pledge, transfer or other disposition of all or
substantially all of MedSolutions assets in a single transaction or a series of related
transactions; |
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a tender offer or exchange offer for 25% or more of the outstanding shares of
MedSolutions capital stock or the filing of a registration statement under the Securities
Act of 1933, as amended, in connection with such a tender offer or exchange offer; or |
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any public announcement of a proposal, plan or intention to do so, or any agreement to
engage in, any of the matters described immediately above. |
Except as specifically permitted in the merger agreement, MedSolutions has also agreed to, and
will cause its affiliates and their respective officers, directors and representatives to,
immediately terminate any activities, discussions or negotiations existing as of the date of the
merger agreement with any person (other than Stericycle) conducted with respect to any acquisition
proposal.
However, if MedSolutions receives a superior proposal (as defined below), MedSolutions may
terminate the merger agreement if:
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MedSolutions notifies Stericycle of the superior proposal; |
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MedSolutions gives Stericycle at least five days to propose revisions to the terms of
the merger agreement or to make another proposal in response to the competing proposal; and |
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MedSolutions pays to Stericycle a termination fee of $2,500,000. |
A superior proposal is any proposal by a third party to acquire more than 50% of the voting
power of MedSolutions equity securities or more than 50% of MedSolutions assets, pursuant to a
tender or exchange offer, merger, consolidation, liquidation or dissolution, recapitalization, sale
of assets or otherwise, if MedSolutions Board of Directors determines in its good faith judgment
(after consultation with MedSolutions valuation advisor and after considering the likelihood and
timing of the consummation of such third party transaction and any amendments or modifications to
the merger agreement that Stericycle has offered or proposed within five days of learning of such
proposed transaction) that such transaction is more favorable from a financial point of view to
MedSolutions shareholders than the merger with Stericycle.
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Additional Agreements
In addition to those covenants described above, the merger agreement contains additional
agreements between Stericycle and MedSolutions relating to, among other things:
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convening and holding the MedSolutions special meeting; |
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preparing, filing and distributing this proxy statement/prospectus and filing the
registration statement of which this proxy statement/prospectus is a part; |
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providing access to information; |
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using their reasonable best efforts to take all actions and to do all things necessary
in order to consummate the merger, including the satisfaction of all closing conditions to
the merger in such partys control; |
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providing notices, making filings and obtaining permits or consents required in
connection with the merger; |
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providing notice of (i) any representation or warranty in the merger agreement becoming
untrue or inaccurate, (ii) the occurrence of any event or development that would cause any
representation or warranty to be untrue or inaccurate at the time of the closing of the
merger or (iii) the failure to materially comply with or satisfy any covenant, condition or
agreement in the merger agreement; |
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making public announcements; |
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payment of fees and expenses in connection with the merger; |
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the termination of all of MedSolutions existing employment agreements and accrual of
all severance payments and other termination liabilities to its employees at or prior to
closing; |
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payment of certain MedSolutions liabilities within 30 days of closing; |
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release of certain officers and directors of MedSolutions from their personal guarantees
of MedSolutions debt at the effective time of the merger; and |
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appointment, duties and replacement of MedSolutions shareholder representative after
the closing. |
Conditions Precedent
Conditions to Obligations of Stericycle and Merger Sub
Unless waived in whole or in part by Stericycle and Merger Sub, the obligations of Stericycle
and Merger Sub to effect the merger are subject to the following conditions:
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accuracy as of the closing of the merger of the representations and warranties made by
MedSolutions to the extent specified in the merger agreement; |
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MedSolutions performance in all material respects of its covenants and agreements under
the merger agreement; |
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holders of shares of MedSolutions common stock representing no more than 7.5% of the
outstanding shares of MedSolutions common stock have exercised (and not withdrawn or
otherwise forfeited) the rights of a dissenting owner under Section 5.11 of the TBCA with
respect to their shares of MedSolutions common stock; |
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the approval of the merger by MedSolutions shareholders has been obtained; |
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Stericycle has entered into consulting agreements and noncompetition agreements with
certain officer, directors, employees and shareholders of MedSolutions; |
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no temporary restraining order, preliminary or permanent injunction or other order
issued by a court or governmental authority has been issued and is in effect making the
merger illegal or otherwise prohibiting consummation of the merger; and |
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the registration under the Securities Act of 1933, as amended, of the promissory notes
to be issued by Stericycle to holders of MedSolutions common stock in connection with the
merger has been declared effective by the SEC. |
Conditions to Obligations of MedSolutions
Unless waived in whole or in part by MedSolutions, the obligations of MedSolutions to effect
the merger are subject to the following conditions:
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accuracy as of the closing of the merger of the representations and warranties made by
Stericycle and Merger Sub to the extent specified in the merger agreement; |
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Stericycles and Merger Subs performance in all material respects of their respective
covenants and agreements under the merger agreement; |
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the approval of the merger by MedSolutions shareholders has been obtained; and |
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no temporary restraining order, preliminary or permanent injunction or other order
issued by a court or governmental authority has been issued and is in effect making the
merger illegal or otherwise prohibiting consummation of the merger. |
Termination
Before the effective time of the merger, the merger agreement may be terminated:
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by mutual written consent of Stericycle, Merger Sub and MedSolutions; |
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by either Stericycle or MedSolutions, if: |
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adoption of the merger agreement and approval of the merger by the MedSolutions
shareholders is not obtained; |
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the parties fail to consummate the merger on or before September 30, 2007, unless
the failure is the result of a breach of the merger agreement by the party seeking the
termination; or |
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any governmental authority has issued a final and nonappealable order, decree or
ruling or has taken any other final and nonappealable action that restrains, enjoins or
otherwise prohibits the merger, unless the party seeking the termination has not used
its reasonable best efforts to oppose such order or decision or to have such order or
decision vacated or made inapplicable to the merger; |
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MedSolutions materially breaches any of its representations, warranties, covenants
or agreements set forth in the merger agreement, and MedSolutions has not cured such
breach within 15 business days of receiving written notice from Stericycle of such
breach; |
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one or more of Stericycles conditions precedent to closing the merger are not
satisfied or capable of being satisfied on or before September 30, 2007 as a result of
MedSolutions failure to comply with its obligations under the merger agreement; |
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MedSolutions Board of Directors withdraws or materially and adversely to Stericycle
modifies its approval of the merger agreement and the merger, other than as a result of
a material breach by Stericycle or Merger Sub of a representation, warranty or covenant
under the merger agreement which remains uncured for a period of two business days
after receipt of notice from MedSolutions of such breach, or as a result of the failure
of any of MedSolutions conditions precedent to closing the merger not being met; or |
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MedSolutions enters into a definitive agreement (other than the merger agreement) to
implement: |
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an investment in MedSolutions representing (on a post-investment basis) more
than 25% of MedSolutions capital stock or a purchase from MedSolutions of more
than 25% of the shares of its capital stock or any debt securities convertible into
or exchangeable for more than 25% of the shares of its capital stock; |
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a merger, consolidation, share exchange, recapitalization, business combination
or other similar transaction involving all of MedSolutions equity interests or all
shares of the MedSolutions common stock; |
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the sale, lease, exchange, mortgage, pledge, transfer or other disposition of
all or substantially all of MedSolutions assets in a single transaction or a
series of related transactions; |
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a tender offer or exchange offer for 25% or more of the outstanding shares of
MedSolutions capital stock or the filing of a registration statement under the
Securities Act of 1933, as amended, in connection with such a tender offer or
exchange offer; or |
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any public announcement of a proposal, plan or intention to do so, or any
agreement to engage in, any of the matters described immediately above; |
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adoption of the merger agreement and approval of the merger by the MedSolutions
shareholders is not obtained by reason of the violation of the voting agreement by one
or more MedSolutions shareholders who are party to the voting agreement. |
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either Stericycle or Merger Sub materially breaches any of its representations,
warranties, covenants or agreements set forth in the merger agreement, and Stericycle
or Merger Sub, as the case may be, has not cured such breach within 15 business days of
receiving written notice from MedSolutions of such breach; |
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one or more of MedSolutions conditions precedent to closing the merger are not
satisfied or capable of being satisfied on or before September 30, 2007 as a result of
either Stericycles or Merger Subs failure to comply with its obligations under the
merger agreement; or |
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MedSolutions enters into a definitive agreement providing for the implementation of
a superior proposal, which is defined as the acquisition by a third party of more than
50% of the voting power of MedSolutions equity securities or more than 50% of
MedSolutions assets, pursuant to a tender or exchange offer, merger, consolidation,
liquidation or dissolution, recapitalization, sale of assets or otherwise, if
MedSolutions Board of Directors has determined in its good faith judgment, after
consultation with MedSolutions valuation advisor and after considering the likelihood
and timing of the consummation of such third |
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party transaction and any amendments or modifications to the merger agreement that
Stericycle has offered or proposed within five days of learning of such proposed
transaction, that such transaction is more favorable from a financial point of view to
MedSolutions shareholders than the merger with Stericycle. |
If the merger agreement is validly terminated, the merger agreement will become void without
any liability on the part of any party unless that party is in breach. However, certain provisions
of the merger agreement, including, among others, those provisions relating to expenses and
termination fees, will continue in effect notwithstanding termination of the merger agreement.
Fees and Expenses
MedSolutions must pay to Stericycle a termination fee of $2,500,000 in the following
circumstances:
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if MedSolutions terminates the merger agreement because MedSolutions enters into a
definitive agreement providing for the implementation of a superior proposal, which is
defined as the acquisition by a third party of more than 50% of the voting power of
MedSolutions equity securities or more than 50% of MedSolutions assets, pursuant to a
tender or exchange offer, merger, consolidation, liquidation or dissolution,
recapitalization, sale of assets or otherwise, if MedSolutions Board of Directors has
determined in its good faith judgment, after consultation with MedSolutions valuation
advisor and after considering the likelihood and timing of the consummation of such third
party transaction and any amendments or modifications to the merger agreement that
Stericycle has offered or proposed within five days of learning of such proposed
transaction, that such transaction is more favorable from a financial point of view to
MedSolutions shareholders than the merger with Stericycle; or |
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if Stericycle terminates the merger agreement because: |
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MedSolutions Board of Directors withdraws or materially and adversely to Stericycle
modifies its approval of the merger agreement and the merger, other than as a result of
a material breach by Stericycle or Merger Sub of a representation, warranty or covenant
under the merger agreement which remains uncured for a period of two business days
after receipt of notice from MedSolutions of such breach, or as a result of the failure
of any of MedSolutions conditions precedent to closing the merger not being met; |
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MedSolutions enters into a definitive agreement (other than the merger agreement) to
implement: |
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an investment in MedSolutions representing (on a post-investment basis) more
than 25% of MedSolutions capital stock or a purchase from MedSolutions of more
than 25% of the shares of its capital stock or any debt securities convertible into
or exchangeable for more than 25% of the shares of its capital stock; |
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a merger, consolidation, share exchange, recapitalization, business combination
or other similar transaction involving all of MedSolutions equity interests or all
shares of the MedSolutions common stock; |
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the sale, lease, exchange, mortgage, pledge, transfer or other disposition of
all or substantially all of MedSolutions assets in a single transaction or a
series of related transactions; |
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a tender offer or exchange offer for 25% or more of the outstanding shares of
MedSolutions capital stock or the filing of a registration statement under the
Securities Act of 1933, as amended, in connection with such a tender offer or
exchange offer; or |
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any public announcement of a proposal, plan or intention to do so, or any
agreement to engage in, any of the matters described immediately above; or |
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adoption of the merger agreement and approval of the merger by the MedSolutions
shareholders is not obtained by reason of the violation of the voting agreement by one
or more of MedSolutions shareholders who are party to the voting agreement. |
In general, each of Stericycle, Merger Sub and MedSolutions will bear its own expenses in
connection with the merger agreement and the related transactions. If the merger is consummated,
the surviving corporation to the merger will pay MedSolutions transaction expenses up to $100,000.
If the merger is not consummated, all expenses incurred in connection with the merger agreement and
the related transactions will be paid by the party incurring them. If the merger is consummated,
Stericycle will pay for the expenses of the payment agent selected to distribute the merger
consideration and the indenture trustee for the notes up to
$80,000.
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Amendment
Stericycle, Merger Sub and MedSolutions, by action taken or authorized by their respective
boards of directors, may amend the merger agreement in writing at any time before the effective
time of the merger. However, after the approval of the merger agreement by the MedSolutions
shareholders, no amendment may be made that by law would require further approval by the
MedSolutions shareholders without such further approval.
Extension; Waiver
Stericycle, Merger Sub and MedSolutions may at any time before the effective time of the
merger and to the extent legally allowed:
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extend the time for the performance of any of the obligations or the other acts of the
other parties; |
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waive any inaccuracies in the representations and warranties contained in the merger
agreement or in any document delivered pursuant to the merger agreement; or |
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waive compliance with any of the agreements or conditions contained in the merger
agreement. |
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DESCRIPTION OF PROMISSORY NOTES
The following description summarizes certain material terms of the promissory notes. The
promissory notes consist of 4.5% Promissory Notes Due 2014 (the 4.5% notes) and 3.5% Promissory
Notes (Letter of Credit Supported) Due 2014 (the 3.5% notes). This summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the indenture relating
to the 4.5% notes (the 4.5% indenture) and the indenture relating to the 3.5% notes (the 3.5%
indenture) (together, the indentures), which Stericycle has entered into with LaSalle Bank
National Association, Chicago, Illinois as indenture trustee.
We urge you read the indentures because they, and not this description, will define your
rights as a holder of promissory notes (a noteholder). The terms and provisions of the promissory
notes include the terms and provisions set out in the indentures and the terms and provisions made
part of the indentures by reference to the Trust Indenture Act of 1939. The 4.5% indenture is
included in this proxy statement/prospectus as Annex D, and the 3.5% indenture is included as Annex
E. The form of the 4.5% notes is Exhibit A to the 4.5% indenture; the form of the 3.5% notes is
Exhibit A to the 3.5% indenture.
General
Stericycle will issue promissory notes up to the aggregate principal amount of $40,761,202.50
in connection with the merger. The promissory notes will be in registered form. The promissory
notes will be transferable or exchangeable only upon registration of the transfer or exchange with
LaSalle Bank National Association as the registrar as under the indentures.
Stericycle will issue promissory notes to each shareholder of MedSolutions and each holder of
MedSolutions stock options upon the shareholders or option holders compliance with the
requirements of the letter of transmittal in connection with payment of the merger consideration.
See The Merger AgreementMerger Consideration, Treatment of MedSolutions Options and Payment
Procedures on pages 50, 51 and 51, respectively, of this proxy statement/prospectus.
The promissory notes will be issued without coupons and will mature on the seventh anniversary
of the closing of the merger, which will fall in 2014. The promissory notes will be general
obligations of Stericycle. They will not be secured by any of Stericycles assets.
Payment of the 3.5% notes will be supported by a letter of credit issued by Bank of America,
N.A., any other lender party to the Stericycles current credit agreement, or any other bank or
financial institution approved by the shareholder representative, and paid for by Stericycle.
Payment of the 4.5% notes will not be supported by a letter of credit.
When returning their completed letters of transmittal, shareholders of MedSolutions and
holders of MedSolutions stock options may elect to receive either 3.5% notes or 4.5% notes or a
combination of 3.5% notes and 4.5% notes. Once the promissory notes have been issued, however,
noteholders may not exchange 4.5% notes for 3.5% notes or 3.5% notes for 4.5% notes.
The promissory notes are not subject to any sinking fund provisions.
Interest
Interest on the unpaid principal balance of the 3.5 % promissory notes will accrue at the rate
of 3.5% per annum, and interest on the unpaid principal balance of the 4.5% promissory notes will
accrue at the rate of 4.5% per annum.
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Interest will be payable annually in arrears on each anniversary of the closing date of the
merger falling in 2008, 2009, 2010, 2011, 2012, 2013 and 2014.
Principal
The unpaid principal balance of the 3.5% and 4.5% notes will be due and payable on the seventh
anniversary of the closing date of the merger, which will fall in 2014.
Method of Payment
Stericycle will pay interest on the promissory notes to the persons who are registered
holders of promissory notes as of the close of business on the record date for the interest payment
on or immediately before the interest payment date.
Holders of promissory notes will be required to surrender their notes to the payment agent to
collect principal payments. Stericycle has appointed the indenture trustee as the payment agent.
Letter of Credit
Payment of the 3.5% notes will be supported by a letter of credit issued to the indenture
trustee. The issuer of the initial letter of credit will be Comerica Bank.
The initial letter of credit will be for a one-year term, subject to being renewed
automatically for additional one-year terms unless the issuer gives the indenture trustee,
Stericycle and the shareholder representative 30 days prior notice of the issuers intent not to
renew the letter of credit upon the expiry of its current one-year term.
If the issuer of the current letter of credit gives the indenture trustee, Stericycle and the
shareholder representative at least 30 days prior notice of the issuers intent not to renew the
letter of credit upon the expiry of its current one-year term, Stericycle is required by the 3.5%
indenture to deliver a new letter of credit to the indenture trustee no later than 15 days prior to
the expiry of the current letter of credit.
Stericycle may at any time substitute a new letter of credit for the current letter of credit.
Any new letter of credit is required to be issued by Bank of America, N.A., any other lender party
to Stericycles credit agreement for its senior unsecured credit facility, or any other bank or
financial institution approved by the shareholder representative (whose approval may not be
unreasonably withheld), and conform in substance to the current letter of credit that it replaces.
Reduction in Payments
Payments under the promissory notes are subject to reduction by reason of an indemnification
claim payment reduction. This reduction is in the nature of a dollar-for-dollar offset. See The
Merger AgreementRepresentations and Warranties and Indemnification on page 52 of this proxy
statement/prospectus.
In the event of an indemnification claim payment reduction, the payments otherwise next
becoming due under all outstanding promissory notes will be reduced on a pro rata basis.
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Reduction in Principal
The principal amount of the promissory notes is subject to reduction, retroactive to the date
of issuance of the promissory notes, by reason of a merger consideration principal reduction. The
principal amount of the promissory notes is also subject to reduction, effective as of the date of
payment, by reason of a litigation payment principal reduction or an expense payment principal
reduction. See The Merger AgreementAdjustments to Merger Consideration, The Merger Agreement
Payment Procedures, Adjustments to Merger ConsiderationApplication of Closing Balance Sheet
and Revenue Adjustments and Litigation Adjustment on pages 54, 51, 55 and 56 of this proxy
statement/prospectus.
In the event of a merger consideration principal reduction, a litigation payment principal
reduction or an expense payment principal reduction, the principal amount of all outstanding
promissory notes will be reduced on a pro rata basis.
Prepayment
Stericycle, at its option, may prepay all or any portion of the principal amount of the
promissory notes without penalty at any time prior to the maturity date if it concurrently pays all
accrued interest on the principal amount being prepaid. Any prepayment of principal will be made in
respect of all outstanding promissory notes on a pro rata basis determined by the promissory notes
respective principal amounts.
Merger and Sale of Assets
Each indenture provides that Stericycle may not consolidate or merge with or into or transfer
all or substantially all of its assets to a third party unless (i) Stericycle is the resulting or
surviving entity, or (ii) if Stericycle is not the resulting or surviving entity, the resulting or
surviving entity is a U.S. corporation and assumes all of Stericycles obligations under the
promissory notes and the indenture and, in either case (i) or (ii), (iii) immediately before and
immediately after the transaction there is no default under the indenture.
No Financial Covenants
The indentures and the promissory notes do not contain any financial covenants by Stericycle.
There are no provisions requiring the maintenance of any asset ratio or restricting the incurrence
of additional debt or restricting the declaration of dividends.
Events of Default
Under each indenture, an event of default occurs in respect of the promissory notes issued
pursuant to the indenture if:
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Stericycle fails to pay interest on any promissory note when it becomes due and payable
and its failure continues for a period of 10 days; |
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Stericycle fails to pay the principal of any promissory note when it becomes due and
payable at maturity; |
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Stericycle fails to comply with any of its other agreements in the promissory notes or
the indenture and its failure continues for a period of 30 days after the indenture trustee
or the shareholder representative gives Stericycle notice of the default; |
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an event of bankruptcy, insolvency or liquidation specified in the indenture has
occurred; |
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in the case of the 3.5% indenture, there is an event of default under the 4.5%
indenture, and in the case of the 4.5% indenture, there is an event of default under the
3.5% indenture; or |
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in the case of the 3.5% indenture, Stericycle fails to deliver a new letter of credit
when required by the terms of the indenture. |
Acceleration of Notes
Under each indenture, if an event of default occurs, the indenture trustee by notice to
Stericycle, or the shareholder representative by notice to Stericycle and the indenture trustee,
may declare the principal of and accrued interest on all outstanding promissory notes issued
pursuant to the indenture to be due and payable.
The indenture trustee is required to declare the principal of and accrued interest on all
outstanding promissory notes issued pursuant to one indenture to be due and payable if the
principal of and accrued interest on all outstanding promissory notes issued pursuant to the other
indenture have been declared to be due and payable.
The shareholder representative may direct (i) the time, method and place of conducting any
proceeding for any remedy available to the indenture trustee or (ii) the exercise of any trust or
other power conferred on the indenture trustee, including drawing on the letter of credit
supporting the 3.5% Notes.
The shareholder representative by notice to Stericycle and the indenture trustee may rescind
an acceleration and its consequences if the rescission would not conflict with any judgment or
decree and if all existing events of default have been cured or waived except the nonpayment of
principal or interest that became due solely because of the acceleration.
Modification and Waiver
Stericycle and the indenture trustee may amend each indenture or the promissory notes issued
pursuant to the indenture without the consent of any noteholder in order to:
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cure any ambiguity, defect or inconsistency; |
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comply with provisions of the indenture relating to the circumstances in which
Stericycle is permitted to merge with a third party; or |
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make any change that does not adversely affect the rights of any noteholder. |
Stericycle and the indenture trustee may amend each indenture or the promissory notes issued
pursuant to the indenture with the written consent of the shareholder representative. Without the
consent of each affected noteholder, however, no amendment may:
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reduce the interest on or change the time for payment of interest on any promissory
note, except in limited circumstances as expressly set forth in the merger agreement (see
The Merger AgreementAdjustments to Merger Consideration beginning on page 54 of this
proxy statement/prospectus); |
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reduce the principal of or change the fixed maturity of any promissory note, except in
limited circumstances as expressly set forth in the merger agreement (see The Merger
AgreementAdjustments to Merger Consideration beginning on page 54 of this proxy
statement/prospectus); |
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make any promissory note payable in money other than that stated in the promissory note;
or |
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make any change in the provisions of the indenture relating to waiver of past defaults,
limitations on noteholders right to sue, or actions requiring the consent of the
noteholders. |
Reporting Obligations
Under each indenture, Stericycle is required to file with the indenture trustee copies of all
annual, quarterly and current reports that it required to file with the SEC. Stericycle is also
required to file with the indenture trustee an annual compliance certificate signed by its
principal executive office, principal financial officer or principal accounting officer certifying
to Stericycles compliance with the conditions and covenants of the indenture to the signing
officers knowledge.
Governing Law
The indentures and the promissory notes will be governed by the laws of the State of Illinois.
Information Concerning the Trustee
LaSalle Bank National Association is the indenture trustee under the indentures. Its address
is 135 South LaSalle Street, Suite ___, Chicago, Illinois 60603. Stericycle has also appointed the
indenture trustee as the initial registrar and payment agent under the indentures.
Stericycle may maintain banking and other commercial relationships with the indenture trustee
and its affiliates in the ordinary course of business. The indenture trustee in its individual or
any other capacity may become the owner or pledgee of promissory notes and may otherwise deal with
Stericycle or its affiliates with the same rights that it would have had if it were not indenture
trustee.
The indenture trustee may refuse to follow any direction by the shareholder representative
that conflicts with law or the indentures, is unduly prejudicial to the rights of noteholders, or
would involve the trustee in personal liability or expense for which the trustee has not received a
satisfactory indemnity.
The indenture trustee may refuse to perform any duty or exercise any right or power under the
indentures that would require it to expend its own funds or risk any liability if it reasonably
believes that repayment of such funds or adequate indemnity against such risk is not reasonably
assured to it.
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INFORMATION ABOUT STERICYCLE
General
Stericycle is in the business of managing regulated waste and providing an array of related
services. Stericycle operates in the United States, Canada, Mexico, the United Kingdom, Ireland and
Argentina.
For large-quantity generators of regulated waste such as hospitals and for pharmaceutical
companies and distributors, Stericycle offers:
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its institutional regulated waste management services |
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its Bio Systems® management services to reduce the risk of needle sticks |
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a variety of products and services for infection control |
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its regulated returns management services for expired or recalled healthcare products |
For small-quantity generators of regulated waste such as doctors offices and for retail
pharmacies, Stericycle offers:
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its regulated waste management services |
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its Steri-Safe® Occupational Safety and Health Act and Health Insurance Portability and
Accountability Act (HIPAA) compliance programs |
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a variety of products and services for infection control |
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its regulated returns management services for expired or recalled healthcare products |
Stericycle operates integrated national regulated waste management networks in the United
States, Canada, Mexico, Argentina, the United Kingdom and Ireland. Stericycles national networks
include a total of 76 processing or combined processing and collection sites and 104 additional
transfer, collection or combined transfer and collection sites.
Stericycles regulated waste processing technologies include autoclaving, Stericycles
proprietary electro-thermal-deactivation system (ETD), chemical treatment and incineration.
Stericycle serves approximately 351,700 customers worldwide, of which approximately 8,600 are
large-quantity generators, such as hospitals, blood banks and pharmaceutical manufacturers, and
approximately 343,100 are small-quantity generators, such as outpatient clinics, medical and dental
offices, long-term and sub-acute care facilities and retail pharmacies.
Stericycle benefits from significant customer diversification. No one customer accounts for
more than 2% of Stericycles total revenues, and its top 10 customers account for approximately 9%
of total revenues.
Additional information about Stericycle is provided in its 2006 Form 10-K, which has been
delivered with this proxy statement/prospectus, and in the other documents that Stericycle has
filed with the Securities and Exchange Commission and incorporated by reference in this proxy
statement/prospectus. See Where You Can Find More Information on page 202.
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Directors and Executive Officers
For information about Stericycles directors and executive officers, please see Stericycles
2006 Form 10-K, which has been delivered with and incorporated by reference in this proxy
statement/prospectus, and Stericycles proxy statement for its 2007
Annual Meeting of Stockholders, which has been incorporated by
reference in this proxy statement/prospectus.
Beneficial Ownership of Stericycle Stock
For information about beneficial ownership of Stericycles common stock, please see
Stericycles 2006 Form 10-K, which has been delivered with and incorporated by reference in this
proxy statement/prospectus, and Stericycles proxy statement for
its 2007 Annual Meeting of Stockholders, which has been incorporated
by reference in this proxy statement/prospectus.
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INFORMATION ABOUT MEDSOLUTIONS
Description of MedSolutions Business
Company Overview
MedSolutions, a Texas corporation that was organized on November 11, 1993, is a diversified
holding company that provides complete and effective waste management outsource solutions marketed
and serviced through four wholly owned subsidiaries and one substantially owned subsidiary.
Through EnviroClean Management Services, Inc. (EMSI), from which MedSolutions currently derives
virtually all of its revenue, MedSolutions is primarily engaged in regulated medical waste (RMW)
management services, which include collecting, transporting, treating and disposing of regulated
medical waste from a variety of healthcare customers. Through SharpsSolutions, Inc.
(SharpsSolutions), MedSolutions offers a reusable sharps container service program to healthcare
facilities that it expects will virtually eliminate the current method of utilizing disposable
sharps containers. Through ShredSolutions, Inc., MedSolutions markets a fully integrated,
comprehensive service for the collection, transportation and destruction of protected healthcare
Information (PHI) and other confidential documents, primarily those generated by healthcare
providers and regulated under the Health Insurance Portability and Accountability Act (HIPAA).
Through Positive Impact Waste Servicing, Inc. doing business as EnviroClean On-Site, MedSolutions
provides a patented mobile treatment process that uses Cold-Ster®, a proprietary dry chemical
product approved by the U.S. Environmental Protection Agency (EPA) for the treatment of RMW.
Through the acquisition of SteriLogic Waste Systems, Inc., located in Syracuse, New York
(SteriLogic), MedSolutions operates a regulated medical waste management company that provides
collection, transportation and disposal of regulated medical waste services in addition to
providing a reusable sharps container program to its customers who are primarily located in the
States of New York and Pennsylvania. SteriLogic also designs, manufactures and markets reusable
sharps containers to medical waste service providers who provide a reusable sharps container
program to their medical waste customers.
MedSolutions is a fully integrated regulated medical waste management company providing
medical waste and PHI collection, transportation, treatment and disposal, sharps container
management, and related consulting, training and education services and products. MedSolutions
three principal groups of customers include (i) outpatient clinics, medical and dental offices,
biomedical companies, municipal entities, long-term and sub-acute care facilities and other
smaller-quantity generators (SQG) of regulated medical waste, (ii) blood banks, surgery centers,
dialysis centers and other medium quantity generators (MQG) of regulated medical waste and (iii)
hospitals, diagnostic facilities and other larger-quantity generators (LQG) of regulated medical
waste. MedSolutions believes that the services it offers are compelling to its customers because
they allow its customers to avoid the significant capital and operating costs that they would have
to incur if they were to manage their regulated medical waste, sharps container management, on-site
treatment, or PHI destruction internally. Moreover, by outsourcing waste management, sharps
container management, on-site treatment, PHI destruction, regulatory compliance and other services
to MedSolutions, its customers reduce or eliminate their risk of the large fines associated with
regulatory non-compliance.
Business Background
MedSolutions was originally incorporated as Advanced EnviroTech Systems, Inc. for the purpose
of developing, designing and manufacturing a patented solid waste treatment technology, the
EnviroClean® Thermal Oxidation System, which may sometimes be referred to in this proxy
statement/prospectus as the EnviroClean® System, for the destruction of regulated medical and
other specialized waste streams generated by the medical, commercial and industrial business
communities in an environmentally sound
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manner. MedSolutions subsequently changed its name to EnviroClean International, Inc.
MedSolutions has two issued patents (No. 5,680,820 and No. 5,730,072) and a trademark regarding the
EnviroClean® System. Although MedSolutions was established for the purpose of developing,
manufacturing and marketing the EnviroClean® System, its success in that regard has been marginal,
and MedSolutions has not produced significant revenue or any profit from such activities. Lack of
funds for the development, modification and marketing of the EnviroClean® System, coupled with the
general lack of acceptance and demand, and the cost of production and operation of the product,
contributed to MedSolutions disappointing results in prior periods. There are no plans to
reactivate the development of the EnviroClean System. In 1999, MedSolutions altered its focus from
the development of the EnviroClean® System to the development of its regulated medical waste
management service business, changed its corporate name and modified its business model. In
addition, MedSolutions subsequently began to focus on the creation and development of subsidiaries
to provide its large base of healthcare provider customers with other healthcare related waste
management services and regulatory compliance programs. From the point MedSolutions elected to
implement these changes in its business strategy, MedSolutions business has seen a dramatic
turnaround and a much more receptive market.
Industry Overview
The regulated medical waste industry arose with the Medical Waste Tracking Act of 1988, or
MWTA, which Congress enacted in response to media attention after medical waste washed ashore on
ocean beaches, particularly in New York and New Jersey. Since the 1980s, government regulation has
increasingly required the proper handling and disposal of the medical waste generated by the
healthcare industry. Regulated medical waste is generally described as any medical waste that can
cause an infectious disease, including single-use disposable items, such as needles, syringes,
gloves and other medical supplies; cultures and stocks of infectious agents; and blood and blood
products.
According to publicly available information, the size of the regulated medical waste market in
the United States is approximately $3.0 billion and is in excess of $10.0 billion when ancillary
services such as PHI destruction, reusable sharps container programs, training, education, product
sales and regulatory compliance programs are taken into consideration. Industry growth is driven by
a number of factors. These factors include:
Pressure To Reduce Hospital Costs. The healthcare industry is under pressure to reduce costs
and improve efficiency. To accomplish this reduction, outside contractors are being hired to
perform some services, including medical waste management, PHI destruction and reusable sharps
container programs. MedSolutions believes that its medical waste management services help
healthcare providers reduce costs by reducing their medical waste tracking, handling and compliance
costs, reducing their potential liability related to employee exposure to blood borne pathogens and
other infectious materials, and reducing the amount of money invested in on-site treatment of
medical waste and/or PHI destruction.
Shift to Off-Site Treatment. MedSolutions believes that managed care and other healthcare
cost-containment pressures are causing patient care to shift from institutional, higher-cost,
acute-care settings to less expensive, smaller, off-site treatment alternatives. Many common
diseases and conditions are now being treated in smaller non-institutional settings. MedSolutions
believes that these non-institutional, alternate-site, healthcare expenditures will continue to
grow as cost-cutting pressures increase. Typically these type of settings generate only small
amounts of medical waste; thus, the potential risks of non-compliance with applicable state and
federal medical waste regulations is disproportionate to the cost of services MedSolutions can
provide.
Aging of U.S. Population. The relative size of the baby boom generation should continue to
result in an increase in the average age of the population, while falling mortality rates ensure
that the average
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person should live longer. As people age, they typically require more medical attention and a
wider variety of tests and procedures. In addition, as technology improves more tests and
procedures become available. All of these factors lead to increased generation of medical waste.
Environmental and Safety Regulation. MedSolutions industry is subject to extensive
regulation beyond the MWTA. For example, the Clean Air Act Amendments of 1990 (the Clean Air Act)
regulations adopted in 1997 limit the discharge into the atmosphere of pollutants released by
medical waste incineration. These regulations have increased the costs of operating medical waste
incinerators and have resulted in the closures of several on-site treatment facilities, thereby
increasing the demand for off-site treatment services. In addition, the Occupational Safety and
Health Administration (OSHA) has issued regulations concerning employee exposure to blood borne
pathogens and other potentially infectious materials that require, among other things, special
procedures for the handling and disposal of medical waste and annual training of all personnel who
may be exposed to blood and other bodily fluids. These regulations underlie the expansion of
MedSolutions service offerings to include OSHA compliance services for healthcare providers.
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Services and Operations
MedSolutions services and operations are comprised of the collection, transportation,
treatment, and disposal of regulated medical waste, reusable sharps containers and PHI, together
with regulatory compliance training and education programs and consulting services. To service its
customers, MedSolutions has one collection/treatment facility and two transfer sites in the State
of Texas, one collection/treatment/transfer facility in the State of Oklahoma and one transfer site
and one collection/treatment facility in the state of Kansas. MedSolutions offers programs to
assist its customers in the proper handling, separating, packaging and disposing of medical waste.
MedSolutions also advises its healthcare customers in the proper methods of recording and
documenting their medical waste management to comply with federal, state and local regulations. In
addition, MedSolutions offers consulting services to its healthcare customers for OSHA and HIPAA
compliance and to assist them in reducing the amount of medical waste they generate. MedSolutions
has approximately 10,000 medical waste disposal agreements with customers for the collection of
their regulated medical waste, sharps management, and/or PHI. MedSolutions customers include the
Texas Health Resources Hospital System, the Greater Ozarka Health Care System, St. Joseph
Hospitals, Carter Blood Care, Tenet Healthcare System, Quest Diagnostics, Inc., East Texas Medical
Center, St. Lukes Episcopal Health System, The Methodist Health System, Hospital Corporation of
America and many others.
Collection and Transportation. MedSolutions considers efficiency of collection and
transportation to be a critical element of its operations because it represents approximately
one-half of MedSolutions cost of revenues. MedSolutions has sophisticated routing software to
optimize its routes. MedSolutions tries to maximize the number of stops on each route. MedSolutions
use a global positioning system (GPS) for certain of its collection vehicles to improve
efficiency. MedSolutions attempts to correlate the size of its collection vehicles to the amount of
medical waste to be collected at a particular stop or on a particular route. MedSolutions collects
reusable containers or corrugated boxes of medical waste from its customers at intervals depending
upon customer requirements, terms of service and volume of medical waste produced. The containers
or boxes are inspected at each customers site prior to pickup. The waste is then transported
directly to one of MedSolutions treatment facilities or to one of its transfer stations where it
is combined with other medical waste and transported to a treatment facility. In some select
circumstances MedSolutions transports medical waste to other permitted medical waste treatment
facilities.
As part of its collection operations, MedSolutions supplies specially designed containers for
use by most of its customers. MedSolutions has reusable plastic containers that are leak and
puncture resistant. The plastic containers enable MedSolutions customers to reduce costs by
reducing the number of times that medical waste is handled, eliminating the cost (and weight) of
corrugated boxes and potentially reducing liability resulting from human contact with medical
waste. The plastic containers are designed to maximize the loads that will fit within the cargo
compartments of MedSolutions standard trucks and trailers. If a customer generates a large volume
of waste, MedSolutions will place a large temporary storage container or trailer on the customers
premises. In order to maximize regulatory compliance and minimize potential liability, MedSolutions
will not accept medical waste unless it is properly packaged by customers in containers that
MedSolutions has either supplied or approved.
Treatment and Disposal. Upon arrival at a treatment facility, containers or boxes of medical
waste are typically scanned to verify that they do not contain any unacceptable substances such as
radioactive materials. Any container or box that is discovered to contain unacceptable waste is
returned to the customer. After inspection, the waste is treated using one of MedSolutions
treatment technologies. Upon completion of the particular process, the resulting waste or
incinerator ash is transported for disposal in a landfill operated by parties unaffiliated with
MedSolutions. After the plastic containers have been emptied, they are washed, sanitized and
returned to customers for re-use. MedSolutions also receives medical waste to process from third
party transporters which provides another source of revenue.
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Treatment Technologies. MedSolutions currently uses autoclaving, incineration and chemical
mobile technologies for treating regulated medical waste.
Autoclaving. Autoclaving treats medical waste with steam at high temperature and
pressure to kill pathogens. Autoclaving alone does not change the appearance of waste, and
recognizable medical waste may not be accepted by some landfill operators, but autoclaving may be
combined with a shredding or grinding process to render the medical waste unrecognizable.
Incineration. Incineration burns medical waste at elevated temperatures and reduces it
to ash. Incineration reduces the volume of waste, and it is the recommended treatment and disposal
option for some types of medical waste such as anatomical waste or residues from chemotherapy
procedures. However, air emissions from incinerators can contain certain byproducts, which are
subject to federal, state and, in some cases, local regulation. In addition, the ash byproduct of
incineration may be regulated in some instances.
Chemical Mobile Treatment. MedSolutions employs a chemical mobile treatment process
which treats medical waste that uses Cold-Ster®, a proprietary dry chemical product approved by the
EPA for the treatment of regulated medical waste. The features of this treatment come from an
exclusive long-term, proven mobile technology that treats RMW, reduces its volume by 70% and
transforms the waste into a shredded material that is unrecognizable, HIPPA-compliant and ready for
the general waste stream.
MedSolutions currently treats regulated medical waste using three treatment methods, which
are approximately divided in the following percentages:
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Autoclaving |
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Incineration |
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Chemical Mobile |
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MedSolutions varies its treatment of medical waste among available treatment technologies
based on the type of waste and capacity and pricing considerations in each service area, in order
to minimize operating costs and capital investments.
Disposal Operations. MedSolutions operates multiple permitted treatment/transfer facilities.
MedSolutions treatment/transfer facility located in Garland, Texas (a suburb of Dallas) services
North Texas, Oklahoma, Arkansas and Louisiana (the Garland Facility). Its treatment facility in
Emporia, Kansas currently services the Kansas, Oklahoma, Missouri and Northern Arkansas markets.
MedSolutions has a transfer facility located in Houston, Texas which services customers located in
South Texas and Southern Louisiana with an emphasis on the Greater Houston, Corpus Christi and San
Antonio/Austin service areas. MedSolutions also operates transfer sites in Oklahoma City, Oklahoma;
and Wichita, Kansas.
On June 8, 2006, the operating agreement between MedSolutions and the University of Texas
Medical Branch (UTMB) expired. The operating agreement allowed MedSolutions to manage the UTMB
incineration facility and process their waste for a fee as well as provided a facility for
MedSolutions to treat waste generated from EMSI South Texas and Louisiana customers in return for a
fee paid to UTMB. Currently, MedSolutions is taking waste generated from South Texas and Louisiana
customers to other third party facilities in South Texas and Northern Louisiana and to its Garland
facility.
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Chemical Mobile Treatment Technology. Positive Impact Waste Servicing, Inc. doing business as
EnviroClean On-Site, Inc., which was acquired by MedSolutions from Positive Impact Waste Solutions,
LLC in 2005, employs a patented mobile treatment process that uses Cold-Ster, a proprietary dry
chemical product approved by the U.S. EPA for the treatment of RMW. EnviroClean On-Site features an
exclusive long-term, proven mobile technology that treats RMW, reduces its volume by 70%, and
transforms the waste into a shredded material that is unrecognizable, HIPPA-compliant and ready for
the general waste stream. The mobile treatment technology affords MedSolutions the opportunity of
reduced permitting constraints and allows for the rapid establishment of a customer base and
recurring revenue stream in new markets. This approach is superior to the conventional method of
permitting a fixed facility to allow for geographical market expansion that requires significant
time and capital expenditures prior to the establishment of a revenue stream. In addition, it
allows MedSolutions to compete for those LQG customers that prefer on-site treatment for liability
reasons.
Consulting Services. Before medical waste is picked up by its trucks, MedSolutions integrated
waste management approach attempts to build in efficiencies that will yield advantages for its
customers. For example, MedSolutions consulting services can assist its customers in reducing the
volume of medical waste that they generate or assist them with regulatory compliance training. In
addition, MedSolutions provides customers with the documentation necessary for compliance with
laws, which, if they complete the documentation properly, will reduce interruptions to their
businesses to verify compliance.
Documentation. MedSolutions provides complete documentation to its customers for all medical
waste and PHI that MedSolutions collects, including the name of the generator, date of pick-up and
date of delivery to a treatment facility. MedSolutions believes that its documentation system meets
all applicable federal, state and local regulations regarding the packaging and labeling of medical
waste, including regulations issued by the U.S. Department of Transportation (DOT), OSHA and
state and local authorities. This documentation is sometimes used by MedSolutions customers to
prove that they are in compliance with these regulations.
SharpsSolutions, Inc.Reusable Sharps Container Program. MedSolutions reusable sharps
container program is perhaps one of the most significant investments and opportunities that
MedSolutions is currently undertaking. Sharps management is defined as the management and treatment
of sharp-edged medical waste such as syringes, needles, razors, scissors and scalpels that may have
come into contact with blood born pathogens, such as HIV or hepatitis. The most common sharps
management is where the hospital employees dispose of sharps in various containers that are then
collected by other hospital employees and disposed (container and sharps content together) within
the hospitals waste that is then treated in-house or outsourced to a medical waste service
provider such as MedSolutions. The SharpsSolutions Reusable Sharps Container Program is intended to
be a fully outsourced service offering where hospital employees do not handle the sharps once they
are disposed of at the point of use. This is paramount for hospitals in that hospital personnel
are less subject to needle stick injuries.
Statistically, there are 600,000 to 800,000 needle stick injuries annually, with a third of
them occurring during the disposal process. With each needle stick costing between $5,000 and
$10,000, these incidents alone are costing the industry over one billion dollars annually. In
addition to the cost/liability savings associated with reduced needle stick incidents, the cost of
recycling the containers rather than purchasing them is significant, often saving 15 to 20% for the
generator. The combined savings between direct costs plus costs associated with reduced needle
sticks can reach up to 30% per year.
Currently, the reusable sharps container recycling market is rapidly developing. It is very
popular on the east coast of the United States where approximately 80% of the market utilizes
reusable sharps programs. MedSolutions estimates, based on research conducted by industry analysts
and its own conservative estimates, that there is a total market opportunity in the markets it
services of approximately
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$20 million annually. As of December 31, 2006, MedSolutions provides reusable sharps container
programs to 14 hospitals in the markets it services.
ShredSolutions, Inc. Document Destruction Program. ShredSolutions benefits from HIPPA, a law
that became effective in April 2003 which stipulates that healthcare providers guarantee the
security and privacy of health information by requiring that every identifiable patient record for
individuals be transferred to an electronic medium or destroyed.
EnviroSafe Complete Compliance Program. The EnviroSafe program is a competitive program to
Stericycles extremely lucrative SteriSafe program.
Business Strategy
MedSolutions goals are to strengthen its position as a regional provider of integrated
services in the regulated medical waste industry and to continuously improve its financial
performance. Components of MedSolutions strategy to achieve these goals include:
Improve Margins. MedSolutions continues to actively work to improve its margins by increasing
its base of small quantity generators and focusing on its ancillary service strategies, including
reusable sharps container programs, PHI destruction and regulatory compliance programs. These
services fulfill the needs of MedSolutions large, medium and small quantity generators, and
MedSolutions believes that with the rapid organic and acquisition growth of its customer base, the
opportunity for sales of ancillary services and regulatory compliance products to its customers
will continue to grow and the incremental cost of offering these services will continue to
decrease, thereby improving margins.
Expand Range of Services and Products. MedSolutions believes that it has the opportunity to
expand its business by increasing the range of products and services that it offers to its existing
customers. For example, MedSolutions now offers on-site treatment, reusable sharps container
management, PHI destruction and a broad range of OSHA compliance and consulting services to its
customers. Because MedSolutions drivers call on numerous medical facilities on a routine basis, it
is considering offering single-use disposable medical supplies to its customers.
Seek Strategic and/or Complementary Acquisitions. MedSolutions actively seeks strategic
opportunities to acquire businesses that expand its network of treatment centers and increase its
customer base. MedSolutions believes that strategic acquisitions can enable it to gain operating
efficiencies through increased capacity utilization and increased route density as well as to
expand the geographic service areas in which MedSolutions operates.
Capitalize on Outsourcing Due to Clean Air Regulations. The Clean Air Act regulations have
increased both the capital costs required to bring many existing incinerators into compliance and
the operating costs of continued compliance. MedSolutions plans to continue to try and capitalize
on the anticipated movement by hospitals to outsource medical waste treatment rather than incur the
cost of installing the air pollution control systems necessary to comply with these EPA
regulations.
MedSolutions business strategy and expansion plans will place significant strain on its
management, working capital, financial and management control systems and staff in the event that
the merger does not occur. MedSolutions failure to properly respond to these needs by failing to
maintain or upgrade financial and management control systems, failing to recruit additional staff
or failing to respond effectively to difficulties encountered during expansion could adversely
affect its business, financial condition and results of operations. Based on its experience in the
industry, MedSolutions believes that its management and financial systems and controls are adequate
to address current needs. There can be no
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assurance, however, that MedSolutions systems, controls or staff will be adequate to sustain
future growth.
Acquisitions and Corporate Background
BMI Services, Inc (BMI). BMI, a regulated medical waste and transportation management
company, was acquired by EMSI in April 1996. BMI was based in Houston, Texas and was one of the
largest independent transporters of medical waste in Texas. MedSolutions acquired its primary
waste transportation business, its transfer station in Tyler, Texas and the UTMB arrangement
through the BMI acquisition.
EnviroClean Management Services, Inc (EMSI). MedSolutions formed EMSI in February 1996, as
a consolidation vehicle for the merger or acquisition of BMI and other proposed entities. In
January 1998, MedSolutions exchanged shares of its common stock to acquire 667,375 shares of EMSI
from other shareholders. This transaction gave MedSolutions a controlling interest of
approximately 51.3% of EMSI. In December 1998, MedSolutions offered to exchange one share of its
common stock for each share of EMSI still outstanding. As a result, MedSolutions acquired shares
representing an aggregate of 96.1% of EMSIs stock. Since then MedSolutions has continued the
exchange offer and has acquired additional shares and now owns 100% of EMSI.
AmeriTech Environmental, Inc. (ATE). On November 7, 2003, MedSolutions acquired certain of
the assets of ATE, including the assignment by ATE to MedSolutions of all of its regulated medical
waste disposal customer contracts (which covered approximately 800 customers). The other assets
acquired consisted primarily of equipment associated with ATEs regulated medical waste disposal
business and a parcel of real property permitted as a transfer site located in Houston, Texas. The
purchase price for the acquired assets was $650,000 cash, a promissory note in the original
principal amount of $750,000 bearing interest at a rate per annum of 7%, interest payable monthly,
and all principal and accrued interest due on November 7, 2004, and 705,072 shares of MedSolutions
common stock. The cash portion of the purchase price was funded from the proceeds of sales of
MedSolutions common stock in private placements and $400,000 which was loaned to MedSolutions by
two of its directors in exchange for promissory notes. The purchase price was determined largely
based upon the amount of revenues ATE had generated from its regulated medical waste disposal
business during the first three quarters of 2003.
During 2004 and in accordance with the acquisition agreement, MedSolutions calculated a
purchase price adjustment with respect to the customer list acquired from ATE. The calculation
resulted in a purchase price reduction of $254,433, which lowered the assigned value of the
customer list acquired. In addition, MedSolutions further determined there was an impairment of
$139,330 in 2004 to the customer list acquired from ATE. Accordingly, MedSolutions recorded a
charge of $139,330 during 2004, to reflect the decrease in net carrying value of the customer list.
As part of the acquisition, MedSolutions also recorded goodwill of approximately $1,000,000.
A settlement was reached between ATE and MedSolutions on February 11, 2005 due to numerous
disputes and disagreements that arose in relation to ATEs representations in the asset purchase
agreement. The settlement called for the modification of the promissory note to ATE from
MedSolutions to reduce the amount owed from $750,000 to $150,000, payable in two installments of
$75,000 each beginning at the time that ATE delivered audited financial statements of its books and
records for the nine-month period ended September 30, 2003 allowing MedSolutions to comply with its
Form 8-K reporting requirements with the SEC. MedSolutions recorded a reduction (included in other
income) of debt of approximately $650,000 during the three months ended March 31, 2005 for
compensatory damages that resulted from breaches committed by ATE. Since the February 11, 2005
settlement was reached, ATE could not deliver audited financial statements as required; therefore,
the settlement
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agreement was amended so that the remaining balance of $150,000 owed to ATE was converted into
150,000 shares of the MedSolutions common stock and all remaining disputes with ATE were settled.
Bray Medical Waste Service (Bray). On January 1, 2004, MedSolutions acquired the customer
contracts and took over the regulated medical waste operations of Bray. The purchase price for the
acquired assets was (i) $11,200 cash and (ii) 29,867 shares of MedSolutions common stock valued at
$22,400 for a total purchase price of $33,600. The purchase price allocation was $30,000 to
customer list and $3,600 to goodwill.
Med-Con Waste Solutions, Inc. (Med-Con). On September 30, 2004, MedSolutions acquired
certain assets, including a customer list, of Med-Con in an acquisition accounted for as a purchase
for a total purchase price of $1,149,000. The purchase price for the acquired assets was (i)
$250,000 cash, (ii) a promissory note in the original principal amount of $500,000 bearing interest
at a rate per annum of 7%, payable in 30 equal monthly installments of principal and interest with
the first such installment due on January 1, 2005, (iii) a promissory note in the original
principal amount of $250,000, with no interest, and with the principal amount and the due date
subject to adjustment based upon the delivery by Med-Con to MedSolutions of consents to the
assignment of the customer contracts acquired from Med-Con within 75 days of the closing of the
transaction, (iv) and 149,000 shares of MedSolutions common stock. The principal amount of the
$500,000 promissory note was subject to adjustment depending upon the amount of revenues realized
by MedSolutions from the customer contracts acquired from Med-Con for the ensuing 90 days following
the closing of the transaction. MedSolutions assigned $497,610, based on an independent appraisal,
to the customer list acquired and established a useful life of five years over which to amortize
the assigned cost. Amortization expense of the customer list for each year will approximate
$99,522.
During the year ended December 31, 2004 and in accordance with the acquisition agreement,
MedSolutions calculated a purchase price adjustment of $153,780, which lowered the assigned value
of the assets acquired. This reduction reduced the note payable to Med-Con by $153,780.
As part of the acquisition, MedSolutions also recorded goodwill of approximately $499,610, net
of the purchase price reduction.
On May 18, 2005, MedSolutions and Med-Con restructured the two notes payable that were in
default. The agreement called for the $346,220 note (originally $500,000) plus accrued interest of
$10,000 to be paid in 48 equal monthly payments of $8,896, and an increase of the original interest
rate from seven percent (7%) to eight (8%). With regard to the second note of $145,000 (originally
$250,000), the agreement called for 24 equal monthly installments of $6,691 with the note bearing
interest at ten percent (10%). In accordance with EITF 96-19, Debtors Accounting for a
Modification or Exchange of Debt Instruments, the modification to the debt agreement was not
determined to be a substantial modification.
On Call Medical Waste Service (On Call). On August 29, 2005, MedSolutions acquired certain
assets including customer contracts from On Call for a total purchase price of $1,155,500. The
purchase price for the acquired assets was (i) $375,000 cash, (ii) a promissory note in the
original principal amount of $250,000 bearing interest at a rate per annum of 8%, payable in 24
equal monthly installments of principal and interest with the first such installment due on
December 27, 2005, (iii) a promissory note in the original principal amount of $375,000 with no
interest, (iv) 166,667 shares of MedSolutions common stock, and (v) $30,500 of transaction costs
incurred by MedSolutions. The cash portion of the purchase price was funded from the proceeds of a
sale of MedSolutions common stock in a private placement to, and a loan to MedSolutions pursuant to
a promissory note from, one of its shareholders.
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Cooper Biomed, Ltd. (Cooper). On September 30, 2005, MedSolutions acquired certain assets,
principally customer contracts, from Cooper for a total purchase price of $120,000. The purchase
price for the acquired assets was (i) $40,000 cash, (ii) a promissory note in the original
principal amount of $40,000 with no interest, (iii) a promissory note in the original principal
amount of $25,000, without interest, payable in one installment of principal in the amount of
$25,000 due on the 120th day after the closing date of the acquisition subject to adjustment, (iv)
10,000 shares of MedSolutions common stock, and (v) $5,000 of transaction costs incurred by
MedSolutions. The purchase price was allocated to customer list ($114,505) and to accounts
receivable ($5,495). The cash portion of the purchase price was funded from the proceeds of a sale
of MedSolutions common stock in a private placement to, and a loan to MedSolutions pursuant to a
promissory note from, one of its shareholders. As provided for in the agreement MedSolutions
calculated a $8,500 purchase price adjustment and reduced the principal due under the $25,000
promissory note and the amount assigned to customer list, accordingly.
Positive Impact Waste Solutions, LLC (PIWS). On November 30, 2005, MedSolutions acquired
certain assets, including customer contracts for approximately 250 PIWS customers plus six mobile
treatment units, and took over the regulated medical waste operations of PIWS for a purchase price
of $1,820,000. The purchase price for the acquired assets was (i) $700,000 cash, (ii) a promissory
note in the original principal amount of $300,000 bearing no interest and payable in three equal
installments of principal in the amount of $100,000 each, with the first such installment due on
March 30, 2006, the second such installment due on July 28, 2006, and the third such installment
due on November 30, 2006, (iii) a promissory note in the original principal amount of $550,000,
bearing interest at the annual rate of 8%, and payable in six equal installments of interest only
in the amount of $3,666.66 each due monthly beginning on December 30, 2005, and 54 monthly
installments of principal and interest in the amount of $12,161.83 each thereafter; (iv) and
360,000 shares of MedSolutions common stock. The cash portion of the purchase price was funded from
the proceeds of a sale of MedSolutions common stock in a private placement to, and a loan to
MedSolutions pursuant to a promissory note from, one of its shareholders, and loans from two
additional shareholders. The purchase price was determined largely based upon the amount of
revenues PIWS has generated from its regulated medical waste disposal business and the value of the
equipment acquired. Pursuant to the asset purchase agreement and the transaction documents related
thereto, PIWS granted MedSolutions the exclusive right to service customers located within the
States of Texas and Kansas with PIWS mobile treatment units, and also granted MedSolutions certain
rights of first refusal with respect to such exclusive right in additional states.
Subsequent to MedSolutions acquisition of PIWS assets, it was determined that PIWS had not
complied with certain terms of the asset purchase agreement. On June 30, 2006, a settlement was
reached and executed between MedSolutions and PIWS relating to such noncompliance. As a result of
this noncompliance and in accordance with the terms of the asset purchase agreement, a reduction of
the total purchase price by $169,000 was agreed to by both parties. The purchase price adjustment
reduced the amount assigned to customer list by $169,000.
SteriLogic Waste Systems, Inc. On August 16, 2006, MedSolutions acquired SteriLogic Waste
Systems, Inc., a Pennsylvania corporation (SteriLogic) located in Syracuse, New York. SteriLogic
is a regulated medical waste management company that provides collection, transportation and
disposal of regulated medical waste services in addition to providing a reusable sharps container
program to its customers who are primarily located in the states of New York and Pennsylvania.
SteriLogic also designs, manufactures and markets reusable sharps containers to medical waste
service providers who provide a reusable sharps container program to their medical waste customers.
The acquisition was effected by the merger of SteriLogic with and into a wholly-owned subsidiary of
MedSolutions. At the effective time of the merger, each share of SteriLogic common stock issued and
outstanding immediately prior to such time was converted into the right to receive 200 shares of
MedSolutions common stock, for an aggregate of 1,000,000 shares. In addition, MedSolutions paid the
sole shareholder of SteriLogic (i) $50,000 in
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readily available funds, and (ii) a convertible promissory note in the principal amount of
$250,000 with simple interest at the annual rate of 8% accruing from the effective time and payable
in 12 equal installments of interest only in the amount of $1,666.67 each due monthly beginning on
the 30th day after the effective time, and 24 equal installments of principal and interest in the
amount of $11,306.82 each due monthly thereafter. The unpaid principal and interest under such note
was convertible at any time on or prior to August 16, 2007 into shares of the MedSolutions common
stock at the conversion price $1.50 per share (subject to certain anti-dilution adjustments). The
merger consideration may be adjusted downward depending upon the amount of sales or earnings
realized by MedSolutions from the customer contracts acquired through the acquisition of SteriLogic
for the twelve months following the closing of the transaction. Any such adjustment to the merger
consideration will be deducted 25% from the principal amount of the $250,000 promissory note, and
75% from the shares of MedSolutions common stock issued in connection with the merger at the rate
of $1.50 per share; provided, that MedSolutions may not deduct more than 400,000 of such shares
with respect to the adjustment. The cash portion of the merger consideration was funded from
working capital. The merger consideration was determined largely based upon the amount of revenues
SteriLogic had generated from its regulated medical waste disposal business and the value of the
net assets acquired.
On January 15, 2007, MedSolutions and the former owners of SteriLogic agreed by mutual consent
to amend the original merger agreement whereby the former owners of SteriLogic agreed to reduce the
number of shares of MedSolutions common stock issued by MedSolutions from 1,000,000 to 700,000
shares and to terminate the conversion feature of the $250,000 promissory note issued by
MedSolutions as part of the purchase price. As a result of these amendments, MedSolutions recorded
a reduction in the purchase price with regard to the SteriLogic acquisition by $264,000 reflecting
the return of the 300,000 shares issued by MedSolutions. The corresponding reduction reduced the
value assigned to SteriLogics customer list by $264,000.
Expansion Plans and Acquisition Targets
MedSolutions has been issued a treatment permit by the Oklahoma Department of Environmental
Quality (ODEQ) for its transfer site in Oklahoma City. MedSolutions subleases a facility and has
a first right of refusal on a site in Odessa, Texas that has been issued a permit by the Texas
Commission on Environmental Quality (the TCEQ) for the treatment of medical waste. MedSolutions
has also submitted applications to treat regulated medical waste in Kansas City, Kansas and
Syracuse, New York. These permits should allow MedSolutions to more effectively service the upper
New York, Northern Pennsylvania, Oklahoma, Kansas, Missouri and West Texas markets. MedSolutions
has currently ceased discussions with potential acquisition and/or merger candidates pending
completion of the merger. However, in the event that the merger does not occur, MedSolutions may
renew various discussions with potential acquisition and/or merger candidates to densify and/or
expand the markets it services.
Evaluation and Integration. MedSolutions believes that its management team can evaluate
potential acquisition candidates and determine whether a particular medical waste management
business can be successfully integrated into MedSolutions business. In determining whether to
proceed with a business acquisition, MedSolutions will evaluate a number of factors including:
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the financial impact of the proposed acquisition, including the effect on MedSolutions
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the historical and projected financial results of the target company; |
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the purchase price negotiated with the seller and MedSolutions expected internal rate
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the structure of the purchase with regard to offering one or the combination of the
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the composition and size of the target companys customer base and the opportunity value
of integrating MedSolutions service, ancillary service and regulatory compliance programs
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the efficiencies that MedSolutions can achieve by integrating the target company with
its existing operations; |
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the potential for enhancing or expanding MedSolutions geographic service area and
allowing MedSolutions to make other acquisitions in the same service area; |
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the experience, reputation and personality of the target companys management; |
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the target companys reputation for customer service and relationships with the
communities that it serves; and |
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whether the acquisition gives MedSolutions any strategic advantages over its
competition. |
Once a business is acquired, MedSolutions will implement programs designed to improve customer
service, sales, marketing, routing, equipment utilization, employee productivity, operating
efficiencies and cash flow.
Marketing and Sales
Marketing Strategy. MedSolutions uses both telemarketing and direct sales efforts to obtain
new customers. In addition, MedSolutions has a large database of potential new large and small
quantity generators, which it believes gives it a competitive advantage in identifying and reaching
these higher-margin accounts. MedSolutions drivers participate in its marketing and sales efforts
by actively soliciting small quantity generators while they service their routes.
Small Quantity Generators (SQG). MedSolutions has targeted SQGs as a growth area.
MedSolutions believes that these customers offer high profit potential compared to other potential
customers. Typical small quantity generators are individual or small groups of doctors, dentists
and other healthcare providers who are widely dispersed and generate only small amounts of medical
waste. These customers are very concerned about having the medical waste picked up and disposed of
in compliance with applicable state and federal regulations. MedSolutions believes that these
customers view the potential risks of non-compliance with applicable state and federal medical
waste regulations as disproportionate to the cost of the services that MedSolutions provides.
MedSolutions believes that this factor has been the basis for the significantly higher gross
margins that it has achieved with its SQGs as opposed to its LQGs. In addition, MedSolutions
EnviroSafe program offers a total compliance solution that combines medical waste management, OSHA
and HIPPA compliance and training in one simple program. EnviroSafe guarantees small account
customers who abide by its training, counsel and advice that they will have protection from
regulatory compliance issues.
Medium Quantity Generators (MQG). The medium quantity generators segment of MedSolutions
business currently provides it with the opportunity for substantial growth and better profit
margins than LQGs. These customers are typically blood banks, dialysis centers, surgery centers
and other high volume specialty facilities.
Large Quantity Generators (LQG). MedSolutions believes that it has been successful in
servicing LQGs and plans to continue to serve those customers as long as they establish route
anchors that open
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the door for opportunities for MedSolutions ancillary services and/or maintain satisfactory
levels of profitability. In addition, MedSolutions believes that the implementation of more
stringent Clean Air Act and other federal regulations directly and indirectly affecting medical
waste will enable it to improve its marketing efforts to large quantity generators because the
additional costs that they will incur to comply with these regulations will make the costs of
MedSolutions services more attractive, particularly relative to their use of their own
incinerators. MedSolutions marketing and sales efforts to large quantity generators are conducted
by full-time account executives whose responsibilities include identifying and attracting new
customers and serving MedSolutions existing account base of large quantity generators. In addition
to securing new contracts, MedSolutions marketing and sales personnel provide consulting services
to its healthcare customers, assisting them in reducing the amount of medical waste that they
generate, training their employees on safety issues and implementing programs to audit, classify
and segregate medical waste in a proper manner.
Contract and Service Agreements. MedSolutions has long-term contracts with substantially all
of its customers. MedSolutions negotiates individual service agreements with each large quantity
and small quantity generator. Although MedSolutions has a standard form of agreement, particularly
for small quantity generators, terms may vary depending upon the customers service requirements
and the volume of medical waste generated and, in some jurisdictions, requirements imposed by
statute or regulation. Service agreements typically include provisions relating to the types of
containers, frequency of collection, pricing, treatment and documentation for tracking purposes.
Each agreement also specifies the customers obligation to pack its medical waste in approved
containers. Substantially all of MedSolutions agreements with customers contain automatic renewal
and price increase provisions.
Service agreements are generally for a period of one to five years, although customers may
terminate on written notice and, in most cases, upon payment of a penalty. MedSolutions may set its
prices on the basis of the number of containers that it collects, the weight of the medical waste
that it collects and treats, the number of collection stops that it makes on the customers route,
the number of collection stops that it makes for a particular multi-site customer, and other
factors.
Competition. There are several regulated medical waste management companies operating in
MedSolutions service areas and the surrounding regions, and the market is highly competitive.
MedSolutions primary competitor is Stericycle. Stericycle provides a variety of services other
than collection, transportation, treatment and disposal. As such, Stericycle has a larger scope of
business opportunities and substantially greater financial resources than MedSolutions possesses.
According to public filings, Stericycle is the largest medical waste management company in the
United States. Stericycle initially developed and utilized a proprietary electro-thermal
deactivation (ETD) process in a national strategy. However, Stericycle, like MedSolutions,
primarily utilizes autoclave technologies to process a majority of its waste stream and to a lesser
degree incineration technologies.
In the event that the merger does not occur, based on its experience in the industry,
MedSolutions believes that it can successfully compete with Stericycle and other competitors by
concentrating its operations in the southern and northeastern portions of the United States.
MedSolutions believes that it gains a competitive advantage by offering better customer service
than its competitors, attractive ancillary services and regulatory compliance programs and, if
necessary, the ability to reduce the price of waste disposal services to customers to an amount
below that of MedSolutions competitors. MedSolutions believes this can be accomplished as a result
of having its facilities in closer geographic proximity to the generators of medical waste, its
cost reduction efforts, its ability to offer ancillary services and programs and the expansion of
its operations through acquisitions.
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In addition, MedSolutions faces potential competition from businesses that are attempting to
commercialize alternate treatment technologies or products designed to reduce or eliminate the
generation of medical waste, such as reusable or degradable medical products.
MedSolutions competes for service agreements primarily on the basis of cost-effectiveness,
quality of service and geographic location. MedSolutions also attempts to compete by demonstrating
to customers that it can do a better job in reducing their potential liability. MedSolutions
ability to obtain new service agreements may be limited by the fact that a potential customers
current vendor may have an excellent service history or a long-term service contract or may offer
prices to the potential customer that are lower than MedSolutions.
Competitive Strengths
MedSolutions believes that it benefits from the following competitive strengths:
Broad Range of Services. MedSolutions offers its customers a broad range of services to help
them develop internal systems and processes, which allow them to manage their medical waste, sharps
containers and PHI destruction efficiently and safely from the point of generation through
treatment and disposal. MedSolutions has also developed regulatory compliance programs to help
train its customers employees on the proper methods of handling medical waste in order to reduce
potential employee exposure. Other regulatory compliance programs such as MedSolutions EnviroSafe
Program include those designed to help clients ensure and maintain compliance with OSHA, HIPAA and
other relevant regulations.
Strong Sales Network and Proprietary Database. MedSolutions uses both telemarketing and
direct sales efforts to obtain new customers. In addition, MedSolutions has a large database of
potential new small and large quantity generators, which it believes gives it a competitive
advantage in identifying and reaching these higher-margin and route anchor accounts.
Experienced Senior Management Team. MedSolutions senior executives collectively have over 50
years of management experience in the waste management and healthcare industries.
Governmental Regulation
MedSolutions is subject to extensive and frequently changing federal, state and local laws and
regulations. This statutory and regulatory framework imposes compliance burdens and risks on
MedSolutions, including requirements to obtain and maintain government permits. These permits grant
MedSolutions the authority, among other things:
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to transport medical waste within and between relevant jurisdictions; and |
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to handle particular regulated substances. |
MedSolutions permits must be periodically renewed and are subject to modification or
revocation by the regulatory authorities. MedSolutions is also subject to regulations that govern
the definition, generation, segregation, handling, packaging, transportation, treatment, storage
and disposal of medical waste. MedSolutions is also subject to extensive regulations designed to
minimize employee exposure to medical waste.
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Federal Regulation. There are at least four federal agencies that have authority over medical
waste. These agencies are the EPA, OSHA, the DOT and the U.S. Postal Service. These agencies
regulate medical waste under a variety of statutes and regulations.
Medical Waste Tracking Act of 1988. In the late 1980s, the EPA outlined a two-year
demonstration program pursuant to MWTA, which was added to the Resource Conservation and Recovery
Act of 1976. The MWTA was adopted in response to health and environmental concerns over infectious
medical waste after medical waste washed ashore on beaches, particularly in New York and New
Jersey, during the summer of 1988. Public safety concerns grew following media reports of careless
management of medical waste. The MWTA was intended to be the first step in addressing these
problems. The primary objective of the MWTA was to ensure that medical wastes which were generated
in a covered state and which posed environmental problems, including an unsightly appearance, were
delivered to disposal or treatment facilities with minimum exposure to waste management workers and
the public. The MWTAs tracking requirements included accounting for all waste transported and
imposed civil and criminal sanctions for violations.
In regulations implementing the MWTA, the EPA defined medical waste and established guidelines
for its segregation, handling, containment, labeling and transport. The MWTA demonstration program
expired in 1991, but the MWTA established a model followed by many states in developing their
specific medical waste regulatory frameworks.
Occupational Safety and Health Act of 1970. The Occupational Safety and Health Act of 1970
authorizes OSHA to issue occupational safety and health standards. OSHA regulations are designed to
minimize the exposure of employees to hazardous work environments. Various standards apply to
certain aspects of MedSolutions operations. These regulations govern, among other things:
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exposure to blood borne pathogens and other potentially infectious materials; |
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lock out/tag out procedures; |
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medical surveillance requirements; |
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use of respirators and personal protective equipment; |
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emergency planning; |
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hazard communication; |
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noise; |
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ergonomics; and |
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forklift safety. |
MedSolutions employees are required by its policy to receive new employee training, annual
refresher training and training in their specific tasks. As part of MedSolutions medical
surveillance program, employees receive pre-employment physicals, including drug testing, annually
required medical surveillance and exit physicals. MedSolutions also subscribes to a drug-free
workplace policy. In addition, MedSolutions is subject to unannounced OSHA Safety inspections at
any time.
Resource Conservation and Recovery Act of 1976. In 1976, Congress passed the Resource
Conservation and Recovery Act of 1976, or RCRA, as a response to growing public concern about
problems associated with the handling and disposal of solid and hazardous waste. RCRA required the
EPA to promulgate regulations identifying hazardous wastes. RCRA also created standards for the
generation, transportation, treatment, storage and disposal of solid and hazardous wastes. These
standards
93
included a documentation program for the transportation of hazardous wastes and a permit
system for solid and hazardous waste disposal facilities. Medical wastes are currently considered
non-hazardous solid wastes under RCRA. However, some substances collected by MedSolutions from some
of its customers, including photographic fixer developer solutions, lead foils and dental amalgam,
are considered hazardous wastes.
MedSolutions uses landfills operated by parties unrelated to it for the disposal of
incinerator ash, autoclaved and chemically treated waste.
Waste is not regulated as hazardous under RCRA unless it contains hazardous substances
exceeding certain quantities or concentration levels, meets specified descriptions, or exhibits
specific hazardous characteristics. Following autoclave treatment, waste is disposed of as
non-hazardous waste. After incineration treatment, MedSolutions tests ash from the incineration
process to determine whether it must be disposed of as hazardous waste.
MedSolutions employs quality control measures to check incoming medical waste for specific
types of hazardous substances. MedSolutions customer agreements also require its customers to
exclude different kinds of hazardous substances or radioactive materials from the medical waste
they provide MedSolutions.
DOT Regulations. The DOT has put regulations into effect under the Hazardous Materials
Transportation Authorization Act of 1994 which require MedSolutions to package and label medical
waste in compliance with designated standards, and which incorporate blood borne pathogens
standards issued by OSHA. Under these standards, MedSolutions must, among other things, identify
its packaging with a biohazard marking on the outer packaging, and MedSolutions medical waste
container must be sufficiently rigid and strong to prevent tearing or bursting and must be
puncture-resistant, leak-resistant, properly sealed and impervious to moisture.
DOT regulations also require that a transporter be capable of responding on a 24-hour-a-day
basis in the event of an accident, spill, or release to the environment of a hazardous material.
MedSolutions has entered into an agreement with an organization that provides 24-hour emergency
spill response to provide this service.
MedSolutions drivers are trained on topics such as safety, hazardous materials, medical
waste, hazardous chemicals and infectious substances. Employees are trained to deal with emergency
spills and releases of hazardous materials, and MedSolutions has a written contingency plan for
these events. MedSolutions vehicles are outfitted with spill control equipment and the drivers are
trained in its use.
Comprehensive Environmental Response, Compensation and Liability Act of 1980. The
Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA,
established a regulatory and remedial program to provide for the investigation and cleanup of
facilities that have released or threaten to release hazardous substances into the environment.
CERCLA and state laws similar to it may impose strict, joint and several liability on the current
and former owners and operators of facilities from which releases of hazardous substances have
occurred and on the generators and transporters of the hazardous substances that come to be located
at these facilities. Responsible parties may be liable for substantial site investigation and
cleanup costs and natural resource damages, regardless of whether they exercised due care and
complied with applicable laws and regulations. If MedSolutions were found to be a responsible party
for a particular site, it could be required to pay the entire cost of the site investigation and
cleanup, even though other parties also may be liable. This result would be the case if
MedSolutions were unable to identify other responsible parties, or if those parties were
financially unable to contribute money to the cleanup.
94
State and Local Regulation. MedSolutions currently conducts all of its business in Texas,
Oklahoma, Louisiana, Arkansas, Kansas, Missouri, New York and Pennsylvania. In the event that the
merger does not occur, at some point in the future, MedSolutions may conduct business in other
states. Other states have different regulations regarding medical waste, medical waste transport
and medical waste incineration. If at any time MedSolutions expands its business into other
states, MedSolutions believes, because of the stringent standards applicable in the states
MedSolutions currently operates, that the costs of bringing its business into compliance with the
regulations of other states will be minimal.
Regulated Medical Waste. The Texas Department of Health retains authority to define what
waste will be regulated and how it may be treated. These rules, which were updated in December
1994, can be found in Title 25 Texas Administrative Code (TAC) Sections 1.131-1.137. Under Texas
law, the term special waste from health-care facilities (SWFHCRF) is used to define medical
waste regulated by state agencies. Only five categories of waste are regulated:
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animal waste from animals intentionally exposed to pathogens; |
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bulk human blood and blood products; |
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pathological waste; |
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microbiological waste; and |
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sharps. |
The criteria for selection of these categories were based primarily on environmental concerns
rather than occupational concerns. A chain of events is necessary to produce disease from contact
with medical waste. The items selected for regulation were deemed to have the highest potential
for disease production provided all of the required events took place. Sharps, due to their
inherent ability to provide a portal of entry, must be managed properly regardless of their
contamination status.
Transportation of Regulated Medical Waste. Subchapter Y, 30 TAC § 330.1001-1010 defines rules
for medical waste management, disposal, transportation, collection and storage. These rules were
updated in December 2006. The responsibility for these regulations rests with the Office of Waste
Management of the TCEQ. Under Subchapter Y, the TCEQ regulates and registers transporters of
medical waste by, among other things, requiring specific documentation of transportation of all
medical waste. Currently, MedSolutions is a registered medical waste transporter. The
registration is subject to annual renewal, and though MedSolutions believes, based on its
experience in the industry, that it is in compliance with all of the statutory guidelines, there is
no guarantee that the TCEQ will continually grant renewal registration to MedSolutions.
MedSolutions is also registered as a medical waste transporter in the states of Louisiana,
Oklahoma, Kansas Missouri, Arkansas, New York and Pennsylvania.
Treatment of Regulated Medical Waste. Approved methods of treatment of SWFHCRF can be found
in Title 25 TAC Section 1.133. There are currently six approved treatment methods:
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steam disinfection; |
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chlorine disinfection/maceration; |
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chemical disinfection; |
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moist disinfection; |
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thermal inactivation; and |
95
MedSolutions employs the steam disinfection (i.e. autoclave), chemical disinfection and
incineration methods for the treating of medical waste. MedSolutions has been successful in
obtaining permits for its current medical waste transfer, treatment and processing facilities and
for its transportation operations. Currently, MedSolutions operates two autoclaves at its Garland
facility.
MedSolutions is responsible for complying with the maintenance obligations pursuant to
numerous governmental permits and licenses held by it or under which it conducts its business.
MedSolutions is also responsible for complying with permits maintained by others. These permits
include:
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transport permits for solid waste, medical waste and hazardous substances; |
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permits to construct and operate treatment facilities; |
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permits to construct and operate transfer stations; |
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permits governing discharge of sanitary water and registration of equipment under air
regulations; |
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approvals for the use of ETD and other technologies to treat medical waste; and |
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various business operators licenses. |
MedSolutions believes that it is currently in compliance in all material respects with its
permits and applicable laws and regulations. If MedSolutions expands its services to other states,
it will have to comply with such states specific permitting process to obtain the necessary
permits to operate in such state, including, but not limited to obtaining zoning approval and local
and state operating authority. Most communities rely on state authorities to provide operating
rules and safeguards for their community. Usually the state provides public notice of the project
and, if enough public interest is shown, a public hearing may be held. If the applicant is
successful in meeting all regulatory requirements, the state may issue a permit to construct the
new treatment facility or transfer station. Once the facility is constructed, the state may again
issue public notice of its intent to issue an operating permit and may provide an opportunity for
public opposition or other action that may impede the applicants ability to construct or operate
the planned facility. Permitting for transportation operations frequently involves registration of
vehicles, inspection of equipment, and background investigations on MedSolutions drivers.
Patents and Proprietary Rights
MedSolutions relies on unpatented and unregistered trade secrets, proprietary know-how and
continuing technological innovation. MedSolutions tries to protect this information, in part, by
confidentiality agreements with its employees, vendors and consultants. There can be no assurance
that these agreements will not be breached, that MedSolutions would have adequate remedies for any
breach, or that it trade secrets or know-how will not otherwise become known or independently
discovered by other parties.
MedSolutions commercial success may also depend on its not infringing patents issued to other
parties. There can be no assurance that patents belonging to other parties will not require
MedSolutions to alter its processes, pay licensing fees, or cease using any current or future
processes. In addition, there can be no assurance that MedSolutions would be able to license the
technology rights that it may require at a reasonable cost or at all. If MedSolutions could not
obtain a license to any infringing technology that it currently uses, it could have a material
adverse effect on MedSolutions business.
96
Potential Liability and Insurance
The medical waste industry involves potentially significant risks of statutory, contractual,
tort and common law liability claims. Potential liability claims could involve, for example:
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cleanup costs; |
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personal injury; |
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damage to the environment; |
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employee matters; |
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property damage; or |
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alleged negligence or professional errors or omissions in the planning or performance of
work. |
MedSolutions could also be subject to fines or penalties in connection with violations of
regulatory requirements.
MedSolutions carries $10 million of liability insurance (including umbrella coverage), and $5
million of aggregate pollution and legal liability insurance ($1 million per incident), which it
considers sufficient to meet regulatory and customer requirements and to protect its employees,
assets and operations. MedSolutions pollution liability insurance excludes liabilities under
CERCLA. There can be no assurance that MedSolutions will not face claims under CERCLA or similar
state laws resulting in substantial liability for which it is uninsured and which could have a
material adverse effect on MedSolutions business.
Employees
As of June 30, 2007, MedSolutions, primarily through EMSI, had 141 employees. Five of the
employees are employed in executive capacities; the remaining employees are in transportation and
plant operations, sales positions and administrative and clerical capacities. None of MedSolutions
employees are subject to collective bargaining agreements.
Description of Property
MedSolutions leases approximately 6,800 square feet of administrative office space at 12750
Merit Drive-Park Central VII, Suite 770, Dallas, Texas 75251. The lease expires May 31, 2012, and
the monthly rent ranges from $8,100 to $10,000 through 2012.
MedSolutions owns its Garland facility, which consists of real property, building and
improvements, furniture and equipment. The Garland facility includes 17,450 square feet of space
(2,450 square feet of office space and 15,000 square feet of warehouse space), and is located on
approximately three acres of land. The building is approximately 30 years old, and was extensively
remodeled in 1996 at a cost of more than $500,000 to upgrade the facility to accommodate the
EnviroClean® System and to showcase its operation for sales and marketing purposes. The
EnviroClean® System was removed during 2004 in order to use the space in the Garland facility more
efficiently for MedSolutions autoclave process. Prior to the installation of the autoclave in
2002, the Garland facility was used solely as a transfer station. MedSolutions bank debt is
secured by a first lien on the Garland facility which is personally guaranteed by MedSolutions
President/Chief Executive Officer, and two loans from MedSolutions shareholders are secured by
second liens on the Garland facility. The net carrying value of the Garland facility is
approximately $263,000.
97
MedSolutions owns its Houston facility, which consists of real property, building and
improvements, furniture and equipment. The Houston facility includes approximately 7,500 square
feet of administrative office and warehouse space in Houston, Texas. MedSolutions, through its
subsidiary EMSI, purchased the Houston facility on August 3, 2005. The facility was previously
being leased and was contiguous to vacant land that was already owned by EMSI and was being used as
a transfer station. The total purchase price, including transaction costs, was approximately
$350,000 and is financed by a promissory note to a bank in the amount of $325,000, payable in 60
monthly installments of $3,656 based upon a straight line amortization of 240 payments and accrues
interest per annum at the prime rate as published in the Wall Street Journal from time to time plus
2%. The promissory note has a maturity date of August 3, 2010 and is secured by a first lien deed
of trust on the building and the adjacent land already owned by EMSI. The promissory note is
personally guaranteed by MedSolutions President/Chief Executive Officer.
On August 9, 2006, MedSolutions, through its subsidiary EMSI, secured additional financing
from a bank to expand its Houston facility. The facility is currently being used as a transfer
facility for the South Texas operations. The expansion will allow EMSI to treat medical waste at
the facility once the permitting process is completed from the state of Texas. The total costs of
expansion will be approximately $275,000 with $200,000 of those funds coming from bank financing
and the remainder from working capital. The promissory note to the bank is payable in 60 monthly
installments of $822 in principal plus interest accruing at the prime rate as published in the Wall
Street Journal from time to time plus 1%, with the balance of the principal and all accrued and
unpaid interest due upon maturity of the loan on July 19, 2011. The note is secured by a second
lien on the Houston facility and is personally guaranteed by both MedSolutions President/Chief
Executive Officer and MedSolutions Chairman of the Board. As of December 31, 2006, MedSolutions
has drawn $55,634 against the promissory note and the funds were used for the commencement phase of
expansion. The amount outstanding at December 31, 2006 is $52,347 and the net carrying value of the
Houston facility is approximately $370,000.
In the opinion of MedSolutions management, its properties are adequately covered by
insurance.
Legal Proceedings
MedSolutions operates in a highly regulated industry and is exposed to regulatory inquiries or
investigations from time to time. Government authorities can initiate investigations for a variety
of reasons. MedSolutions has been involved in certain legal and administrative proceedings that
have been settled or otherwise resolved on terms acceptable to MedSolutions, without having a
material adverse effect on its business.
On May 14, 2007, a Texas jury found EMSI liable for approximately $9.8 million in actual
damages and $10 million in punitive damages in connection with a 2004 traffic accident involving
one of EMSIs trucks. Approximately $5.4 million of such damages are covered by EMSIs insurance
coverage. The Company has been advised that the punitive damages awarded by the jury will be
reduced by the trial court under applicable Texas law to between approximately $1.3 and $2.1
million. Although a judgment has not yet been entered by the trial court, the Company intends
through its insurance provider, Zurich American Insurance (Zurich), to vigorously appeal the
judgment. This process is likely to take considerable time. If the Company is unsuccessful or only
partially successful on appeal, to the extent that the amount of any award exceeds EMSIs insurance
coverage, the Company has been advised by its counsel that EMSI has a valid Stowers claim against
Zurich that, pursuant to applicable Texas law, should result in Zurichs being held responsible for
the amount of any award in excess of the policy limits. If such a claim against Zurich were
unsuccessful, any amount of the final award to the plaintiffs in excess of EMSIs insurance
coverage could have a material adverse impact on the Companys financial condition and results of
operations. The financial statements for MedSolutions included within this proxy
98
statement/prospectus do not include any adjustment which may result from this significant
uncertainty should the Company not be successful in the appeals process and/or its Stowers claim
against Zurich.
MedSolutions is also a party to various legal proceedings arising in the ordinary course of
business. However, except as described above, there are no legal proceedings pending or, to
MedSolutions knowledge, threatened against or that could adversely affect its financial condition
or its ability to carry on its business.
Market for Common Equity and Related Shareholder Matters
There is currently no public trading market for MedSolutions common stock.
At [___], 2007, the record date for the special meeting, MedSolutions had 26,470,646
shares of common stock outstanding and had approximately 750 shareholders of record.
MedSolutions has no fixed dividend policy with respect to its common stock. MedSolutions
Board of Directors is authorized to consider dividend distributions on MedSolutions common stock
from time to time, upon its assessment of MedSolutions operating results, capital requirements and
general financial condition and requirements. MedSolutions has not paid a dividend on its common
stock since its inception. Pursuant to the Investment Agreement (the Investment Agreement)
entered into by MedSolutions and Tate Investments, LLC (the Investor) on July 15, 2005,
MedSolutions is prohibited from paying any dividends or making any distributions in cash or in kind
on shares of its common stock until all of the common stock held by the Investor is registered with
the SEC. The outstanding principal amount of the convertible debt issued by MedSolutions pursuant
to the Investment Agreement was subsequently converted by the Investor into shares of MedSolutions
common stock on March 30, 2007, and MedSolutions has no further obligations to the Investor under
the promissory note issued in connection with the Investment Agreement.
MedSolutions Series A 10% Convertible Preferred Stock (the Series A Preferred Stock) ranked
senior to its common stock with respect to the payment of dividends, redemption, and payment and
rights upon liquidation, dissolution or winding-up of the affairs of MedSolutions. At July 6, 2007,
MedSolutions had zero shares of Series A Preferred Stock outstanding. All of MedSolutions
previously issued and outstanding shares of Series A Preferred Stock were converted into shares of
MedSolutions common stock on a one-for-one basis on or prior to March 31, 2007.
Equity Compensation Plan Information (as of December 31, 2006)
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Number of |
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securities |
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remaining |
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available for |
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Number of |
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|
future issuance |
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securities to be |
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|
under equity |
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issued upon |
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Weighted-average |
|
compensation |
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|
exercise of |
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exercise price of |
|
plans (excluding |
|
|
outstanding |
|
outstanding |
|
securities |
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|
options, warrants |
|
options, warrants |
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reflected in |
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|
and rights (a) |
|
and rights (b) |
|
column (a)) (c) |
Equity compensation
plans approved by
security
holders |
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|
1,328,796 |
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|
$ |
0.80 |
|
|
|
1,671,204 |
|
Equity compensation
plans not approved
by security
holders |
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|
|
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Total |
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|
1,328,796 |
|
|
$ |
0.80 |
|
|
|
1,671,204 |
|
99
Managements Discussion and Analysis or Plan of Operation.
The following discussion of the financial condition and results of operations of MedSolutions
should be read in conjunction with MedSolutions Historical Consolidated Financial Statements and
Supplementary Data and the notes to such financial statements included in this proxy
statement/prospectus.
Background
MedSolutions was incorporated in November 1993. MedSolutions provides regulated medical waste,
reusable sharps containers and PHI collection, transportation and treatment services to its
customers and related training and education programs and consulting services.
MedSolutions revenues increased to $12,799,132 in 2006 from $9,415,558 in 2005. MedSolutions
derives its revenues from services to three principal groups of customers: (i) outpatient clinics,
medical and dental offices, biomedical companies, municipal entities, long-term and sub-acute care
facilities and other smaller-quantity generators of regulated medical waste (SQG), (ii) blood
banks, surgery centers, dialysis centers and other medium quantity generators of regulated medical
waste (MQG) and (iii) hospitals, diagnostic facilities and other larger-quantity generators of
regulated medical waste (LQG). Substantially all of MedSolutions services are provided pursuant
to customer contracts specifying either scheduled or on-call regulated medical waste management
services, or both. Contracts with small quantity generators generally provide for annual price
increases and have an automatic renewal provision unless the customer notifies MedSolutions prior
to completion of the contract. Contracts with medium quantity generators and large quantity
generators, which may run for more than one year, typically include price escalator provisions,
which allow for price increases generally tied to an inflation index or implemented at a fixed
percentage. At December 31, 2006, MedSolutions served approximately 10,000 customers.
Critical Accounting Policies and Procedures
MedSolutions discussion and analysis of its financial condition and results of operations are
based upon its 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 MedSolutions make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and
liabilities (see Note 3 to MedSolutions consolidated financial statements for the fiscal year
ended December 31, 2006 included within MedSolutions Historical Consolidated Financial Statements
and Supplementary Data and the notes to such financial statements included in this proxy
statement/prospectus). MedSolutions believes that of its significant accounting policies (see Note
3 to MedSolutions consolidated financial statements for the fiscal year ended December 31, 2006),
the following may involve a higher degree of judgment on MedSolutions part and complexity of
reporting:
Accounts Receivable. Accounts receivable consist primarily of amounts due to MedSolutions from
its normal business activities. MedSolutions maintains an allowance for doubtful accounts which
reflects managements best estimate of probable losses inherent in the account receivable balance.
Management determines the allowance based on known troubled accounts, historical experience, and
other currently available evidence. With respect to trade receivables, ongoing credit evaluations
of customers financial condition are performed and generally, no collateral is required.
MedSolutions maintains a reserve for potential credit losses and such losses, in the aggregate,
have not exceeded managements expectations.
Revenue Recognition and Processing Costs. MedSolutions recognizes revenue for its medical
waste services at the time the medical waste is collected from its customers. Revenue is only
recognized for
100
arrangements with customers in which (1) there is persuasive evidence of a contract or
agreement which sets forth the terms of the arrangement; (2) services have been rendered; (3)
MedSolutions prices are fixed, determinable and agreed upon; and, (4) collectibility is reasonably
assured.
Goodwill and Intangible Assets. To determine the adequacy of the carrying amounts on an
ongoing basis, MedSolutions performs its annual impairment test at the end of the year each
December 31, unless triggering events indicate that an event has occurred which would require the
test to be performed sooner. MedSolutions monitors the performance of its intangibles by analyzing
the expected future cash flows generated from such related intangibles to ensure their continued
performance. If necessary, MedSolutions may hire an outside independent consultant to appraise the
fair value of such assets.
Convertible Notes and Convertible Preferred Stock. MedSolutions accounts for conversion
options embedded in convertible notes and convertible preferred stock in accordance with Statement
of Financial Accounting Standard (SFAS) No. 133 Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) and EITF 00-19 Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock (EITF 00-19). SFAS 133 generally requires
companies to bifurcate conversion options embedded in convertible notes and preferred shares from
their host instruments and to account for them as free standing derivative financial instruments in
accordance with EITF 00-19. SFAS 133 provides for an exception to this rule when convertible notes
and mandatorily redeemable preferred shares, as host instruments, are deemed to be conventional as
that term is described in the implementation guidance provided in paragraph 61(k) of Appendix A to
SFAS 133 and further clarified in EITF 05-2 The Meaning of Conventional Convertible Debt
Instrument in Issue No. 00-19. SFAS 133 provides for an additional exception to this rule when
the economic characteristics and risks of the embedded derivative instrument are clearly and
closely related to the economic characteristics and risks of the host instrument.
MedSolutions accounts for convertible notes (deemed conventional) and non-conventional
convertible debt instruments classified as equity under EITF 00-19 Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19)
and in accordance with the provisions of Emerging Issues Task Force Issue (EITF) 98-5 Accounting
for Convertible Securities with Beneficial Conversion Features, (EITF 98-5), EITF 00-27
Application of EITF 98-5 to Certain Convertible Instruments. Accordingly, MedSolutions records,
as a discount to convertible notes, the intrinsic value of such conversion options based upon the
differences between the fair value of the underlying common stock at the commitment date of the
note transaction and the effective conversion price embedded in the note. Debt discounts under
these arrangements are amortized over the term of the related debt to their earliest date of
redemption.
Results of Operations Year 2006 Compared to 2005
Revenues. MedSolutions revenues increased $3,383,574 or 35.9%, to $12,799,132 during the
year ended December 31, 2006, from $9,415,558 during the year ended December 31, 2005. The increase
in revenue from 2005 was mostly attributable to the three acquisitions in 2005 and the SteriLogic
acquisition in 2006 which contributed approximately $2,600,000 of the 2006 revenue increase. Other
contributing factors that caused the revenue increase in 2006 were an annual price increase in
January 2006 to the majority of MedSolutions SQG customers and a fuel surcharge increase in March
2006. All price increases and fee charges are provided for under MedSolutions customer contracts.
The increases in revenues for the twelve months ended December 31, 2006 were partially offset by a
loss of revenue from an LQG customer in MedSolutions South Texas market and from the loss of its
operating agreement with UTMB as discussed in Note 12 to MedSolutions consolidated financial
statements for the fiscal year ended December 31, 2006 included within MedSolutions Historical
Consolidated Financial
101
Statements and Supplementary Data and the notes to such financial statements included in this
proxy statement/prospectus.
Cost of revenues. MedSolutions cost of revenues increased $2,244,707 or 39.5%, to $7,925,086
during 2006, from $5,680,379 in 2005. Gross margin for MedSolutions decreased to 38.1% in 2006 from
39.7% in 2005. The increase in cost of revenues was caused by increases in container costs
resulting from higher prices for paper products, fuel and other transportation costs relating to
additions to MedSolutions transportation fleet as its markets and customer base expand. As a
result of the PIWS acquisition on November 30, 2005, MedSolutions entered new markets located in
West Texas, Kansas and Missouri and incurred costs associated with added personnel, facilities,
transportation, and treatment costs in each of those markets. Other costs associated with the
increase are attributable to repair and maintenance costs of operating MedSolutions mobile
treatment units acquired in the PIWS acquisition.
Selling, general and administrative expenses. MedSolutions selling, general and
administrative expenses increased $1,380,029, or 56.3%, to $3,829,489 during 2006, from $2,449,460
in 2005. The increase was caused by costs associated with an increased sales force including
MedSolutions new markets in West Texas, Kansas and Missouri in 2006 as compared to 2005, increases
in director compensation, increased administrative personnel and a non-cash charge of $240,000
related to stock compensation granted to executive employees in 2005. Other increases are
associated with higher travel costs from MedSolutions executive staff seeking acquisition and
market opportunities to expand MedSolutions business and market share and administrative costs
associated with the SteriLogic acquisition.
Depreciation and amortization. Depreciation and amortization increased by $622,061 or 82.8%,
to $1,373,318 during 2006 from $751,257 during 2005. The primary cause for the increase was from
depreciation expense resulting from the purchases of fixed assets from the PIWS acquisition and
increases in amortization expense from higher carrying values of customer lists purchased from the
three acquisitions in 2005 and SteriLogic in 2006.
Interest expense. MedSolutions interest expense increased $108,225 or 28.9%, to $482,485 in
2006 from $374,260 during 2005. Interest expense increased primarily due to the capitalization and
amortization of certain debt conversion costs related to the Investment Agreement that was modified
during the three months ended June 30, 2006 (see Note 7) and the addition of $500,000 of new debt
under the Investment Agreement closed in March 2006. In connection with such transactions related
to the debt conversion costs, MedSolutions paid financing fees that were deferred and are being
amortized on a straight line method over the remaining life of the convertible debt. The
outstanding principal amount of the convertible debt issued by MedSolutions pursuant to the
Investment Agreement was subsequently converted by the Investor into shares of MedSolutions common
stock on March 30, 2007. Interest expense for the year ended December 31, 2006 was reduced from the
conversion of approximately $1.2 million in shareholder loans and advances into MedSolutions
equity on June 30, 2005.
Gain on ATE settlement. During the year ended December 31, 2005, MedSolutions recorded a one
time gain of $650,468 resulting from a settlement and extinguishment of debt with AmeriTech
Environmental, Inc. on February 11, 2005.
Other Income. Other income of $40,135 was recorded in 2006 due to the extinguishment of
convertible debentures discussed in Note 10 to MedSolutions consolidated financial statements for
the fiscal year ended December 31, 2006 included within MedSolutions Historical Consolidated
Financial Statements and Supplementary Data and the notes to such financial statements included in
this proxy statement/prospectus.
102
Net income (loss). MedSolutions net loss was ($771,111) in 2006 compared to net income of
$810,670 in 2005. The net loss in 2006 was due to the factors described above.
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
Revenues. MedSolutions revenues increased $573,576, or 18.0% to $3,762,330 during the three
months ended March 31, 2007 from $3,188,754 during the three months ended March 31, 2006. The
increase in revenue was attributed in part to the SteriLogic acquisition completed in August 2006
that increased revenue by approximately $360,000 during the current period plus additions in
revenue from new business from Sharps and EnviroSafe customers and new customers in the Missouri
market. However, the increases in revenue for the three months ended March 31, 2007 were partially
offset by a loss of revenue from two LQG customers in our South Texas market during the second
fiscal quarter of 2006.
Cost of Revenues. MedSolutions cost of revenues increased $435,788 or 24.8% to $2,195,409
during the three months ended March 31, 2007 from $1,759,621 during the three months ended March
31, 2006. Gross margin for MedSolutions decreased to 41.6% for the three months ended March 31,
2007 from 44.8% for the three months ended March 31, 2006. The increase in cost of revenues was
caused by new cost of revenues associated with the SteriLogic acquisition, increases in
transportation costs primarily in Kansas and Missouri as we expand in those markets, and higher
processing costs as MedSolutions uses third party vendors to process its customer waste from South
Texas.
Selling, general and administrative expenses. MedSolutions selling, general and
administrative expenses increased $54,928, or 6.7% to $870,038 during the three months ended March
31, 2007 from $815,110 during the three months ended March 31, 2006. The increase was primarily
caused by new selling, general and administrative expenses associated with the SteriLogic
acquisition.
Depreciation and Amortization. Depreciation and amortization increased by $58,825 or 19.2% to
$365,268 during the three months ended March 31, 2007 from $306,443 during the three months ended
March 31, 2006. The primary cause for the increase was from higher depreciation expense resulting
from the purchases of fixed assets in 2006 related to new equipment purchased to expand and service
new Sharps business and assets purchased related to the SteriLogic acquisition.
Interest expense. MedSolutions interest expense increased $174,853 or 179.9% to $272,033
during the three months ended March 31, 2007 from $97,180 during the three months ended March 31,
2006. Interest expense increased significantly due to the immediate expense of deferred financing
fees related to the Investor notes that were converted into MedSolutions common stock on March 30,
2007. The excess amount of deferred financing fees charged to interest expense during the current
period was approximately $104,000. Other increases to interest expense were due to additional debt
issued by MedSolutions to shareholders for working capital and new equipment financing plus new
debt issued to the sellers of SteriLogic for part of the acquisition purchase price.
Net income. Net income decreased $150,818 or 71.7% to $59,582 during the three months ended
March 31, 2007 from $210,400 during the three months ended March 31, 2006. MedSolutions net income
decreased in 2007 due to the factors described above.
103
Liquidity and Capital Resources
Source of Funds for Operations and Capital Expenditures.
MedSolutions principal source of liquidity is collections on accounts receivable from waste
management service revenue, from sales of its common stock and Series A Preferred Stock through
private offerings to certain individuals, primarily existing shareholders, and from loans and
advances received from certain shareholders. Revenues during 2006 were approximately $280,000 per
month higher than in 2005, stemming primarily from the acquisitions in 2005 and 2006 discussed
previously. The principal uses of liquidity are payments for labor, fuel, material and expenses,
and debt and lease obligations to carry out MedSolutions regulated medical waste management
services.
Historically, MedSolutions has met its cash requirements based on a combination of revenues
from operations, shareholder loans and advances, and proceeds from the sale of debt and equity
securities. Based on the projected operations for 2007, MedSolutions management believes cash to
be generated from operations and funds raised from other alternative sources if needed, will be
sufficient to satisfy MedSolutions historical and current cash obligations.
Discussion of Liquidity Year 2006 Compared to 2005
At December 31, 2006, MedSolutions working capital deficit was $(1,899,921), compared to a
working capital deficit of $(2,397,992) at December 31, 2005.
Net cash provided (used) in operating activities for the year ended December 31, 2006 was
$597,729 during 2006, compared to $(311,414) for 2005. This increase was caused primarily from an
increase in accounts payable and accrued liabilities resulting from the accrual of director fees
not paid at December 31, 2006; the accrual of year-end payroll costs and taxes paid in January
2007; and the assumption of liabilities from the SteriLogic acquisition.
Net cash used in investing activities for the year ended December 31, 2006 was $(621,043)
compared to ($1,340,713) for the year ended December 31, 2005. The lesser amount in 2006 was caused
by the decrease in the cash portion used for an acquisition in 2006 of $24,283 compared to
$1,115,000 used in 2005. Also, MedSolutions invested $596,760 in fixed asset additions in 2006
compared to $225,713 in 2005.
Net cash provided by financing activities was $23,314 during the year ended December 31, 2006,
compared to $1,652,127 for the year ended December 31, 2005. Cash proceeds from the sale of
MedSolutions common stock and Series A Preferred Stock were $809,000 compared to $1,338,968 in
2005. Proceeds from shareholder loans were $1,150,000 in 2006 compared to $1,375,000 in 2005.
Offsetting the proceeds from the sale of MedSolutions stock and new shareholder loans were payments
to shareholders and others on existing debt totaling $1,787,054 in 2006 compared to $974,148 in
2005.
March 31, 2007 Compared to December 31, 2006
At March 31, 2007, MedSolutions working capital deficit was $1,063,349 compared to a working
capital deficit of $1,899,921 at December 31, 2006, a favorable increase of $836,572 for the three
month period ended March 31, 2007. The increase in working capital was primarily caused by the new
long term working capital loan provided to MedSolutions by Park Cities Bank. Other increases were
from increased accounts receivable resulting from higher revenue during the three month period
ended March 31, 2007 versus 2006 and from the conversion of the Investor debt into MedSolutions
common stock.
March 31, 2007 Compared to March 31, 2006
Net cash used in operating activities was $242,388 during the three months ended March 31,
2007 as compared to net cash provided of $133,670 during the three months ended March 31, 2006. The
decrease
104
in cash provided in operating activities was due to increases in MedSolutions net accounts
receivable and reducing its accounts payable and accrued liabilities during the period.
Net cash used in investing activities during the three months ended March 31, 2007, was
$89,783 attributable to additions to property and equipment compared to $265,435 during the three
months ended March 31, 2006.
Net cash provided by financing activities was $332,771 during the three months ended March 31,
2007 compared to $387,959 during the three months ended March 31, 2006. Proceeds from advances from
the working capital loan totaled approximately $669,000 and a new shareholder loan of $175,000
contributed to the cash provided by financing activities during the current period but were offset
by payments on existing debt to shareholders and other bank financing of approximately $508,000 for
the three months ended March 31, 2007. During the three months ended March 31, 2006, MedSolutions
sold $260,000 in Common Stock and issued $600,000 in new debt to shareholders which was offset by
approximately $420,000 in payments to shareholders and third parties on existing debt.
Net cash did not change during the three months ended March 31, 2007 based upon the factors
discussed above.
Other Liquidity Matters
At March 31, 2007, MedSolutions long-term obligations were $4,016,585, including bank debt
and equipment financing of $1,815,306 and notes payable to shareholders and seller promissory notes
from acquisitions totaling $2,201,279.
105
Tate Investments, LLC
On July 15, 2005, MedSolutions entered into the definitive Investment Agreement with the
Investor. Pursuant to the terms of the Investment Agreement, the Investor committed to lend up to
$1,000,000 to MedSolutions according to the terms of a 10% Senior Secured Promissory Note (the
Note) dated as of July 15, 2005. The Note was secured by MedSolutions and its subsidiaries
accounts receivable and by a second-lien deed of trust mortgage on MedSolutions Garland facility
pursuant to the terms of a General Business Security Agreement and a Deed of Trust, respectively,
each dated as of July 15, 2005. All outstanding amounts under the Note bore interest at the rate of
10% per year, unless MedSolutions was in default pursuant to the terms of the Investment Agreement,
in which event all outstanding amounts under the Note bore interest at a rate equal to the prime
rate as published in the Wall Street Journal from time to time plus 8%. The outstanding principal
amount of the Note and any accrued but unpaid interest thereon were convertible at the option of
the Investor into shares of MedSolutions common stock at the initial conversion price of $0.65 per
share, as subject to certain adjustments from time to time. MedSolutions was permitted to prepay
any or all of the outstanding principal amount of the Note and any accrued but unpaid interest
thereon on or after January 15, 2007 without the prior consent of the Investor and without any
prepayment premium or penalty; provided, however, that MedSolutions first provided the Investor
with 30 days prior written notice of its intent to prepay any or all of such outstanding principal
amount accompanied by either an irrevocable written financing commitment or other evidence of
MedSolutions ability to make the proposed prepayment. The Investor was permitted to, after receipt
of such a prepayment notice, elect to convert any or all of such outstanding principal amount
proposed to be prepaid into shares of MedSolutions common stock as discussed above. Also pursuant
to the terms of the Investment Agreement, the Investor committed to purchase, and MedSolutions
committed to sell, up to $1,000,000 of MedSolutions common stock to the Investor at the initial
purchase price of $0.65 per share (as subject to certain adjustments from time to time) pursuant to
the terms of a Subscription Agreement (the Subscription Agreement) dated as of July 15, 2005. The
entire outstanding principal amount of the Note was converted into MedSolutions common stock on
March 30, 2007.
Pursuant to the terms of the Investment Agreement, MedSolutions, the Investor and certain
shareholders of MedSolutions entered into an Investors Rights Agreement (the Rights Agreement)
pursuant to which MedSolutions has granted certain demand registration rights to the Investor with
respect to any shares of MedSolutions common stock obtained pursuant to the Note or the
Subscription Agreement. The Rights Agreement grants the Investor one demand registration
exercisable after December 31, 2006, and in the event such demand registration is exercised
MedSolutions must use its best efforts to register the Investors shares of MedSolutions common
stock until either the shares are either registered or sold pursuant to SEC Rule 144 or another
applicable registration exemption. The Rights Agreement contains no penalty provisions or
settlement alternatives that would result in the issuance of additional shares of MedSolutions
common stock or a cash payment to the Investor in the event that MedSolutions is unable to register
the Investors shares. The Rights Agreement also provides unlimited piggyback registration rights
to the Investor. The Rights Agreement also grants the Investor the right to designate one nominee
for election to MedSolutions Board of Directors, or two nominees in the event that Mr. Joseph
Tate, the beneficial owner of the Investor, is designated as a nominee by the Investor. On
September 15, 2005, MedSolutions Board of Directors selected David Mack to fill a vacancy on the
Board of Directors based upon the nomination by Mr. Tate. Pursuant to the terms of the Rights
Agreement, MedSolutions may not, prior to the registration of the MedSolutions common stock owned
by the Investor with the SEC, increase the size of its Board of Directors to more than five members
unless the Investor also designates Mr. Joseph Tate as a nominee, in which event the Board of
106
Directors may have no more than seven members. Certain MedSolutions shareholders who are party
to the Rights Agreement have also granted certain rights of co-sale to the Investor and agreed to
vote their shares of MedSolutions common stock in favor of the election of the Investors
nominee(s). The Investors right to designate nominees to MedSolutions Board of Directors
continues until such time as: (i) the Investor effectuates, in one or a series of transactions, a
transfer of shares of MedSolutions common stock whereby the number of shares of such common stock
owned by the Investor after such transfer is less than 75% of the number of shares of common stock
owned by the Investor before the transfer, at which such time the Investors right to designate
nominees to MedSolutions Board of Directors will be reduced to the right to designate one nominee
to MedSolutions Board of Directors; (ii) the Investor effectuates, in one or a series of
transactions, a transfer of shares of MedSolutions common stock whereby the number of shares of
such common stock owned by the Investor after the transfer is less than 50% of the number of shares
of common stock owned by the Investor prior to the transfer, at which such time the Investors
right to designate nominees to MedSolutions Board of Directors will terminate; or (iii) the
MedSolutions common stock owned by the Investor has been registered with the SEC.
On March 15, 2006, MedSolutions issued another convertible promissory note in the amount
of $500,000 to the Investor. The promissory note was payable in 35 monthly installments of interest
only with all principal and interest due on March 31, 2009. The note accrued interest at 10% for
the first 12 months, 11% for months 13 through 24 and 12% for months 25 through maturity. The
effect of the increasing interest rate under EITF 86-15 Increasing-Rate Debt was determined to be
de minimus. MedSolutions was permitted to prepay a portion or all of the amount outstanding under
the terms of the note after March 31, 2007, provided that MedSolutions first notified the Investor
of its intent to prepay, after which the Investor was permitted 30 days to convert the note into
shares of MedSolutions common stock. The Investor had the right to convert the amount outstanding
plus accrued but unpaid interest at the time of conversion. The conversion price for the $500,000
note agreed to was $0.85 per share during the period beginning March 15, 2006 through March 31,
2007, $1.00 per share during the period beginning April 1, 2007 through March 31, 2008, and $1.15
per share during the period April 1, 2008 through maturity. The promissory note was secured by two
PIWS mobile units and was cross-collateralized by the Investors liens on MedSolutions accounts
receivable and its Garland facility pursuant to the Investment Agreement. The proceeds from the
promissory note were used by MedSolutions to purchase equipment. The entire outstanding principal
amount of the promissory note was converted into MedSolutions common stock on March 30, 2007.
On May 22, 2006, MedSolutions and the Investor agreed to amend the Investment Agreement
to lower the conversion price for the $1,000,000 Note to $0.55 per share from $0.65 per share in
exchange for the Investor retroactively (as of July 15, 2005, the date the Investment Agreement was
executed) eliminating the requirements for MedSolutions to achieve certain earnings targets
thereunder. In connection with the conversion price adjustment, MedSolutions was required to record
a beneficial conversion charge of $153,846. The beneficial conversion charge represents the
incremental fair value of the impact from lowering the conversion rate and was to be amortized over
the remaining life of the note. As of December 31, 2006, the remaining amount of the beneficial
conversion charge to amortize was $102,564.
As of December 31, 2006, the total principal amount owed by MedSolutions to the Investor was
$1,397,436 (net of discount of $102,564), all of which was subsequently converted by the Investor
into shares of MedSolutions common stock on March 30, 2007.
MedSolutions is obligated under various installment notes payable for the purchase of
equipment with an aggregate cost of $864,261. The notes, which bear interest at rates ranging from
8.0% to 16.1%, are due at various dates through 2011 and are payable in monthly installments
totaling approximately $30,549 consisting of principal and interest. The equipment acquired
collateralizes the notes.
107
Extinguishment of Convertible Debentures
MedSolutions issued an aggregate of $1,100,000 of 15% Convertible Redeemable Subordinated
Debentures (the Series I Debentures) in 1994 and 1995 with a final maturity date of March 31,
1999, and containing a provision for conversion of the Series I Debentures, at the option of the
holders thereof, into shares of MedSolutions common stock. MedSolutions also issued an aggregate of
$256,125 of 10% Convertible Redeemable Debentures (Series II Debentures, and together with the
Series I Debentures, the Debentures) in 1998 with a maturity date of November 1, 1999, and
containing a provision for conversion of the Series II Debentures, at the option of the holders
thereof, into shares of MedSolutions common stock.
Due to cash constraints, MedSolutions was not able to redeem the Debentures in 1999 pursuant
to their respective terms. MedSolutions offered (the Conversion Offering) the holders of the
Debentures the opportunity to convert their Series I Debentures and Series II Debentures into
shares of MedSolutions common stock at a conversion rate of $1.50 and $1.75, respectively.
Certain holders of Debentures did not respond to the Conversion Offering in 1999, and the
offer to convert the Debentures into MedSolutions common stock has since expired and any
contractual claims for rights pursuant to the Debentures have been time-barred by the applicable
statute of limitations. Accordingly, MedSolutions extinguished the Debentures on November 15, 2006
and any obligation owed under their terms. MedSolutions recorded other income of $40,135 and
reversed all accrued interest as a result of extinguishment.
On January 1, 2007, MedSolutions issued promissory notes to its directors for payment of their
2006 board compensation. Additional promissory notes were issued to the Chairman of the Board and
the President/Chief Executive Officer of MedSolutions for payment of compensation for giving their
personal guaranties related to certain indebtedness by MedSolutions to various third parties. The
total amount of the promissory notes issued is $292,005 and the notes accrue interest at 12% with
final payment of all principal and accrued interest due on July 1, 2007.
On January 2, 2007, MedSolutions issued a promissory note to the Investor, which loaned
$175,000 to MedSolutions for equipment expansion purposes. The promissory note bears interest at
12% and is payable in 24 equal monthly installments of principal and interest in the amount of
$5,813 each, with the balance of the principal and any accrued and unpaid interest due upon
maturity of the note on December 28, 2008.
On January 31, 2007, MedSolutions renewed and extended for six months a $175,000 promissory
note to On Call. The note accrues interest at 12% and is payable in monthly installments of
interest only with the principal and any accrued and unpaid interest due upon maturity of the note
on July 31, 2007. As consideration for this extension, MedSolutions agreed to enter into an
agreement with Medical Waste of North Texas, LLC (MWNT an entity owned by the former owner of On
Call) for MedSolutions to treat and dispose of regulated medical waste that is brought to
MedSolutions Garland facility by MWNT, effective September 1, 2007. The initial term of this
agreement is for 24 months, and the agreement automatically renews for additional one-year
extensions unless either party notifies the other party in writing at least 30 days but not more
than 90 days prior to any such renewal date of its desire not to renew the agreement.
On March 27, 2007, EMSI entered into a $1,500,000 secured, one-year loan and security
agreement with Park Cities Bank, Dallas, Texas. The terms of the loan and security agreement
provide EMSI with a $1,500,000 revolving line of credit, subject to certain downward adjustments
from time to time based upon the value of the collateral securing the line of credit. The
performance by EMSI of its obligations
108
under the loan and security agreement is secured by all of EMSIs personal property, including
without limitation its account receivables, and a first-lien mortgage deed of trust on EMSIs
Garland facility, and is unconditionally guaranteed by MedSolutions President/Chief Executive
Officer and its Chairman of the Board. The proceeds of the borrowings under the loan and security
agreement may only be used for general corporate purposes, including without limitation providing
working capital to EMSI for the purposes of financing its operations, production and marketing and
sales efforts, costs related to the expansion of EMSIs business operations, and the acquisition of
the assets of businesses engaged in businesses the same as, similar to, or complementary to EMSIs
business operations. Borrowings under the loan and security agreement bear interest at the lesser
of (1) a fluctuating rate of interest equal to 1.0% in excess of the prime rate as designated in
the Money Rates Section of the Wall Street Journal from time to time or (2) the maximum rate
permissible by applicable law. Accrued and unpaid interest under the loan and security agreement is
payable on the first day of each month commencing on April 1, 2007. In addition, EMSI paid an
origination fee to the Park cities Bank in the amount of $15,000. The loan and security agreement
contains, among other provisions, conditions precedent, covenants, representations and warranties
and events of default customary for facilities of this size, type and purpose. Negative covenants
with respect to EMSI include certain restrictions or limitations on, among other provisions, the
incurrence of indebtedness; liens; investments, loans and advances; restricted payments, including
dividends; consolidations and mergers; sales of assets (subject to customary exceptions for sales
of inventory in the ordinary course and sales of equipment in connection with the replacement
thereof in the ordinary course); and changes of ownership or control. Affirmative covenants with
respect to EMSI include covenants regarding, among other provisions, financial reporting. The loan
and security agreement will mature and expire on April 1, 2008, at which time all outstanding
amounts under such agreement will be due and payable. The outstanding amounts under the loan and
security agreement may be prepaid by EMSI at any time without penalty, and any principal amounts
borrowed and repaid thereunder may be reborrowed by EMSI prior to the maturity date so long as the
aggregate principal amount outstanding at any time does not exceed the $1,500,000 maximum loan
commitment (as subject to downward adjustment based on the value of the collateral as described
above). Under certain conditions the loan commitment under the loan and security agreement may be
terminated by Park Cities Bank and amounts outstanding under such agreement may be accelerated.
Bankruptcy and insolvency events with respect to EMSI or either of the guarantors will result in an
automatic termination of lending commitments and acceleration of the indebtedness under such
agreement. Subject to notice and cure periods in certain cases, other events of default under the
loan and security agreement will result in termination of lending commitments and acceleration of
indebtedness under such agreement at the option of Park Cities Bank. Such other events of default
include failure to pay any principal and/or interest when due, failure to comply with covenants,
breach of representations or warranties in any respect, non-payment or acceleration of other
material debt of EMSI or the guarantors, the death of either guarantor of the termination of either
of their guaranties, certain judgments against EMSI or a guarantor, a material adverse change in
the business or financial condition of EMSI or either guarantor, or if Park Cities Bank in good
faith deems itself insecure. In connection with providing his personal guarantee and previous
guarantees, MedSolutions paid its Chairman of the Board $15,506 in the form of a promissory note
which accrues interest at 12% and matures on July 1, 2007 when all principal and accrued interest
is due and payable. Also, MedSolutions accrued $17,506 for the benefit of its President/Chief
Executive Officer in payment for his personal guarantee for this loan and other company
indebtedness.
On March 1, 2007, MedSolutions provided written notice to the Investor that MedSolutions
intended to prepay in full on April 2, 2007 all outstanding principal and interest owed by
MedSolutions to the Investor pursuant to the $1,000,000 Note and the $500,000 note issued by
MedSolutions to the Investor, each as described above. MedSolutions intended to use the proceeds of
the loan from Park Cities Bank described above to prepay the such notes.
109
On March 31, 2007, 96,667 shares of MedSolutions Series A Preferred Stock were converted into
96,667 shares of the MedSolutions common stock in accordance with the certificate of designation
for the Series A Preferred Stock. The terms of the certificate of designation required the holders
of the Series A Preferred Stock to convert their shares into MedSolutions common stock on a share
for share basis on the second anniversary from the date of issuance of the Series A Preferred
Stock. All dividends declared with regard to the issuance of the Series A Preferred Stock have been
paid. As of March 31, 2007, there were no shares of Series A Preferred Stock outstanding.
Material Commitments for Capital Expenditures
MedSolutions currently has no significant commitments for capital expenditures.
Off-Balance Sheet Arrangements
During the year ended December 31, 2006, MedSolutions had off balance sheet arrangements
related to its lease obligations. MedSolutions is obligated under such lease arrangements for
$1,095,753 through 2012. The amount obligated under the lease arrangements is one operating lease
totaling $548,229 payable through 2010 to a leasing firm that specializes in heavy transportation
equipment financing and has financed the majority of MedSolutions transportation equipment. A
second obligation is an operating lease with a remaining balance of $547,524 as of December 31,
2006 and is payable through 2012 to MedSolutions landlord for its corporate headquarters. Both
leases are routine and typical in nature and yet critical to MedSolutions operations in that they
provide financing that is necessary for us to provide services to its customers and house the
corporate functions and operations of MedSolutions. The operating leases are beneficial from a
financial perspective in that they do not add to the liabilities of MedSolutions as shown on its
balance sheet; however, the costs of such leases are included in MedSolutions statement of
operations and statement of cash flows for each period reported.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
MedSolutions had no changes in or disagreements with accountants on accounting and financial
disclosure during the fiscal years ended December 31, 2005 and 2006.
110
Security Ownership of Certain MedSolutions Beneficial Owners and Management
The following table sets forth each certain information concerning the number of shares of
MedSolutions common stock owned beneficially as of July 6, 2007, the record date for the special
meeting, by: (i) persons known to us to own more than five percent of any class of MedSolutions
voting securities; (ii) each of MedSolutions directors and the executive officers; and (iii) all
MedSolutions directors and executive officers as a group. Unless otherwise indicated, the
shareholders listed possess sole voting and investment power with respect to the shares shown.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Name and Address of Beneficial Owner |
|
Beneficially Owned(1) |
|
Percent of Class(2) |
Matthew H. Fleeger, President, CEO and Director
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
1,170,416 |
(3) |
|
|
4.4 |
% |
Winship B. Moody, Sr., Chairman of the Board of
Directors
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
836,485 |
|
|
|
3.2 |
% |
Ajit S. Brar, Director
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
909,875 |
(4) |
|
|
3.4 |
% |
David L. Mack, Director
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
62,222 |
(5) |
|
|
0.2 |
% |
Steven R. Block, Director
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
50,000 |
|
|
|
0.2 |
% |
Lonnie P. Cole, Sr., Senior Vice President, Sales
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
149,000 |
(6) |
|
|
0.6 |
% |
Steve Evans, Vice President, Finance
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
145,665 |
(7) |
|
|
0.5 |
% |
Alan Larosee, Vice President, Operations
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
221,666 |
(8) |
|
|
0.8 |
% |
James M. Treat, Vice President, Business Development
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
173,333 |
(9) |
|
|
0.6 |
% |
All Directors and Executive
Officers as a Group (9 persons) |
|
|
3,718,662 |
|
|
|
13.6 |
%(10) |
|
|
|
|
|
|
|
|
|
Tate Investments, LLC
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
3,944,880 |
|
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
|
Mark Altenau, M.D.
12750 Merit Drive Park Central VII, Suite 770
Dallas, Texas 75251 |
|
|
2,153,292 |
(11) |
|
|
8.1 |
% |
|
|
|
(1) |
|
Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial
ownership of any securities as to which such person, directly or indirectly, through any contract,
arrangement, undertaking, relationship |
111
|
|
|
|
|
or otherwise, has or shares voting power and/or investment power as to which such person has the
right to acquire such voting and/or investment power within 60 days. Percentage of beneficial
ownership as to any person as of a particular date is calculated by dividing the number of shares
beneficially owned by such person by the sum of the number of shares outstanding as of such date
and the number of unissued shares as to which such person has the right to acquire voting and/or
investment control within 60 days. The number of shares shown includes outstanding shares owned as
of July 6, 2007, by the person indicated and shares underlying warrants, options and/or convertible
debt and accrued interest thereon owned by such person on July 6, 2007, that were exercisable
within 60 days of that date. |
|
(2) |
|
Applicable percentage ownership is based on 26,470,646 shares of MedSolutions
common stock outstanding on July 6, 2007, and on shares issuable to such holder within 60 days of
July 6, 2007. |
|
(3) |
|
Includes 670,790 shares owned by Preston Harris Interests, Inc., a Texas
corporation, of which Mr. Fleeger is the president. |
|
(4) |
|
Includes 100,000 shares of MedSolutions common stock underlying convertible debt
and accrued interest thereon and options for 93,208 shares of common stock. |
|
(5) |
|
Includes options for 62,222 shares of MedSolutions common stock. |
|
(6) |
|
Includes 149,000 shares owned by Med-Con Waste Solutions, Inc., a Texas
corporation, of which Mr. Cole was the President and Chief Executive Officer. |
|
(7) |
|
Includes options for 145,665 shares of MedSolutions common stock. |
|
(8) |
|
Includes options for 221,666 shares of MedSolutions common stock. |
|
(9) |
|
Includes options for 173,333 shares of MedSolutions common stock. |
|
(10) |
|
Applicable percentage ownership is based on 26,470,646 shares of MedSolutions
common stock issued and outstanding on July 6, 2007, and on shares issuable to such holders within
60 days of July 6, 2007. |
|
(11) |
|
Includes options for 69,833 shares of MedSolutions common stock, and 725,826 shares
of MedSolutions common stock held in his individual retirement
account. |
112
MEDSOLUTIONS HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
|
|
|
|
|
|
Page |
2005-2006 Audited Financial Statements |
|
|
|
|
|
|
|
114 |
|
|
|
|
115 |
|
|
|
|
116 |
|
|
|
|
117 |
|
|
|
|
119 |
|
|
|
|
121 |
|
|
|
|
|
|
2004-2005 Audited Financial Statements |
|
|
|
|
|
|
|
154 |
|
|
|
|
155 |
|
|
|
|
156 |
|
|
|
|
157 |
|
|
|
|
159 |
|
|
|
|
161 |
|
|
|
|
|
|
Unaudited Interim Financial Statements |
|
|
|
|
|
|
|
198 |
|
|
|
|
199 |
|
|
|
|
201 |
|
|
|
|
202 |
|
113
To the Board of Directors
MedSolutions, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of MedSolutions, Inc. (the Company)
as of December 31, 2006 and 2005, and the related consolidated statements of operations,
stockholders equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements 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 consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of MedSolutions, Inc. as of December 31,
2006 and 2005, and the results of its operations and cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
MARCUM & KLIEGMAN, LLP
New York, New York
March 17, 2007
114
MEDSOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
Current Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
|
|
|
$ |
|
|
Accounts receivable trade, net of allowance of $174,989 and $69,240 |
|
|
1,847,541 |
|
|
|
1,405,603 |
|
Prepaid expenses and other current assets |
|
|
366,141 |
|
|
|
258,523 |
|
Supplies |
|
|
26,109 |
|
|
|
14,106 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
2,239,791 |
|
|
|
1,678,232 |
|
Property and equipment at cost, net of accumulated
depreciation of $2,805,851 and $1,836,756 |
|
|
3,586,766 |
|
|
|
3,150,504 |
|
Intangible assets Customer list, net of accumulated
amortization of $1,028,993 and $624,770 |
|
|
1,408,189 |
|
|
|
1,437,912 |
|
Intangible assets Goodwill |
|
|
3,403,025 |
|
|
|
2,597,021 |
|
Intangible assets permits |
|
|
152,749 |
|
|
|
65,007 |
|
Other assets |
|
|
46,943 |
|
|
|
102,126 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
10,837,463 |
|
|
$ |
9,030,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current Liabilities: |
|
|
|
|
|
|
|
|
Convertible debentures |
|
$ |
|
|
|
$ |
40,135 |
|
Current maturities of long-term obligations |
|
|
372,552 |
|
|
|
145,628 |
|
Accounts payable |
|
|
1,507,220 |
|
|
|
1,130,155 |
|
Accrued liabilities |
|
|
1,281,443 |
|
|
|
962,327 |
|
Current maturities notes payable to Tate Investments, LLC |
|
|
|
|
|
|
250,000 |
|
Current maturities notes payable to Med-Con |
|
|
127,703 |
|
|
|
157,861 |
|
Current maturities notes payable to On Call |
|
|
294,541 |
|
|
|
495,819 |
|
Current maturities notes payable to Positive Impact |
|
|
97,705 |
|
|
|
360,669 |
|
Current maturities notes payable to Abele-Kerr Investments, LLC |
|
|
38,948 |
|
|
|
|
|
Current maturities notes payable stockholders |
|
|
419,600 |
|
|
|
487,891 |
|
Current maturities litigation settlements |
|
|
|
|
|
|
26,735 |
|
Advances from stockholders |
|
|
|
|
|
|
19,004 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
4,139,712 |
|
|
|
4,076,224 |
|
|
Long-term obligations, less current maturities |
|
|
1,003,174 |
|
|
|
806,952 |
|
Notes payable Tate Investments, LLC, less current maturities, net of discount of $102,564 and $0 |
|
|
1,397,436 |
|
|
|
725,000 |
|
Notes payable Med-Con, less current maturities |
|
|
147,047 |
|
|
|
274,749 |
|
Notes payable On Call, less current maturities |
|
|
|
|
|
|
119,541 |
|
Notes payable Positive Impact, less current maturities |
|
|
333,796 |
|
|
|
489,331 |
|
Notes payable Abele-Kerr Investments, LLC, less current maturities |
|
|
211,052 |
|
|
|
|
|
Notes payable stockholders, less current maturities |
|
|
294,267 |
|
|
|
359,131 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
7,526,484 |
|
|
|
6,850,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock (par value $.001) 100,000,000
shares authorized at December 31, 2006 and December 31,2005,respectively, 96,667
shares issued and outstanding at December 31,2006 and 283,172 shares issued at December
31, 2005 (liquidation preference $145,001 2006; $424,758 2005) |
|
|
97 |
|
|
|
283 |
|
Common stock (par value $.001) - 100,000,000 shares authorized at December 31, 2006
and December 31,2005; 23,792,985 shares issued and 23,780,785 outstanding at
December 31, 2006 and 22,228,980 shares issued and 22,216,780 outstanding at
December 31, 2005 |
|
|
23,793 |
|
|
|
22,229 |
|
Additional paid-in capital |
|
|
26,558,608 |
|
|
|
24,657,770 |
|
Accumulated deficit |
|
|
(23,253,519 |
) |
|
|
(22,482,408 |
) |
Treasury stock, at cost - 12,200 shares at December 31, 2006
and December 31, 2005 |
|
|
(18,000 |
) |
|
|
(18,000 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
3,310,979 |
|
|
|
2,179,874 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
10,837,463 |
|
|
$ |
9,030,802 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
115
MEDSOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
12,799,132 |
|
|
$ |
9,415,558 |
|
Cost of revenues * |
|
|
7,925,086 |
|
|
|
5,680,379 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,874,046 |
|
|
|
3,735,179 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses** |
|
|
3,829,489 |
|
|
|
2,449,460 |
|
Depreciation and amortization |
|
|
1,373,318 |
|
|
|
751,257 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,202,807 |
|
|
|
3,200,717 |
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(328,761 |
) |
|
|
534,462 |
|
|
|
|
|
|
|
|
|
|
Other (income) expenses: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
482,485 |
|
|
|
374,260 |
|
ATE settlement |
|
|
|
|
|
|
(650,468 |
) |
Other income |
|
|
(40,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442,350 |
|
|
|
(276,208 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(771,111 |
) |
|
$ |
810,670 |
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend |
|
|
(35,500 |
) |
|
|
(40,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders |
|
$ |
(806,611 |
) |
|
$ |
769,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share attributable to common stockholders |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share attributable to common stockholders |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
used in basic income (loss) per share |
|
|
22,875,017 |
|
|
|
19,857,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
and dilutive securities used in diluted
income (loss) per share |
|
|
22,875,017 |
|
|
|
20,691,501 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Excludes depreciation of $969,095 and $501,865 for the years ended December 31, 2006 and 2005,
respectively. |
|
** |
|
Includes stock compensation charge of $240,000 for the year ended December 31, 2006. |
The accompanying notes are an integral part of these consolidated financial statements.
116
MEDSOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSI Preferred Stock |
|
|
|
|
|
|
Series A |
|
|
MSI Common Stock |
|
Year Ended December 31, 2006 |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
Balance December 31, 2005 |
|
|
283,172 |
|
|
$ |
283 |
|
|
|
22,228,980 |
|
|
$ |
22,229 |
|
MSI preferred stock converted into common stock |
|
|
(186,505 |
) |
|
|
(186 |
) |
|
|
186,505 |
|
|
|
186 |
|
MSI common stock sold for cash net of transaction
costs of $106,132 |
|
|
|
|
|
|
|
|
|
|
429,500 |
|
|
|
430 |
|
MSI common stock returned due to PIWS settlement |
|
|
|
|
|
|
|
|
|
|
(52,000 |
) |
|
|
(52 |
) |
MSI conversion price adjustment on convertible debt
To Tate Investments, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSI common stock issued for acquisition |
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
1,000 |
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006 |
|
|
96,667 |
|
|
$ |
97 |
|
|
|
23,792,985 |
|
|
$ |
23,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
****************************
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
|
Accumulated |
|
|
Treasury |
|
|
|
|
Year Ended December 31, 2006 |
|
Capital |
|
|
Deficit |
|
|
Stock |
|
|
Total |
|
Balance December 31, 2005 |
|
$ |
24,657,770 |
|
|
$ |
(22,482,408 |
) |
|
$ |
(18,000 |
) |
|
$ |
2,179,874 |
|
MSI preferred stock converted into
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSI common stock sold for cash net of
transaction costs of $106,132 |
|
|
702,438 |
|
|
|
|
|
|
|
|
|
|
|
702,868 |
|
MSI common stock returned due to PIWS
settlement |
|
|
(38,948 |
) |
|
|
|
|
|
|
|
|
|
|
(39,000 |
) |
MSI conversion price adjustment on
Convertible debt to Tate
Investments, LLC |
|
|
153,848 |
|
|
|
|
|
|
|
|
|
|
|
153,848 |
|
MSI common stock issued for
acquisition |
|
|
879,000 |
|
|
|
|
|
|
|
|
|
|
|
880,000 |
|
MSI stock compensation charge |
|
|
240,000 |
|
|
|
|
|
|
|
|
|
|
|
240,000 |
|
Preferred stock dividend |
|
|
(35,500 |
) |
|
|
|
|
|
|
|
|
|
|
(35,500 |
) |
Net loss |
|
|
|
|
|
|
(771,111 |
) |
|
|
|
|
|
|
(771,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006 |
|
$ |
26,558,608 |
|
|
$ |
(23,253,519 |
) |
|
$ |
(18,000 |
) |
|
$ |
3,310,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
117
MEDSOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSI Preferred Stock |
|
|
|
|
|
|
Series A |
|
|
MSI Common Stock |
|
Year Ended December 31, 2005 |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
Balance December 31, 2004 |
|
|
143,333 |
|
|
$ |
143 |
|
|
|
18,515,755 |
|
|
$ |
18,516 |
|
MSI preferred stock sold for cash |
|
|
139,839 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
MSI common stock sold for cash
net of transaction costs of $50,443 |
|
|
|
|
|
|
|
|
|
|
1,667,672 |
|
|
|
1,668 |
|
MSI common stock issued for ATE settlement |
|
|
|
|
|
|
|
|
|
|
60,746 |
|
|
|
61 |
|
MSI common stock returned by directors |
|
|
|
|
|
|
|
|
|
|
(20,000 |
) |
|
|
(20 |
) |
MSI common stock issued for debt conversions |
|
|
|
|
|
|
|
|
|
|
1,468,140 |
|
|
|
1,468 |
|
MSI common stock issued for acquisitions |
|
|
|
|
|
|
|
|
|
|
536,667 |
|
|
|
536 |
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005 |
|
|
283,172 |
|
|
$ |
283 |
|
|
|
22,228,980 |
|
|
$ |
22,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
****************************
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
|
Accumulated |
|
|
Treasury |
|
|
|
|
Year Ended December 31, 2005 |
|
Capital |
|
|
Deficit |
|
|
Stock |
|
|
Total |
|
Balance December 31, 2004 |
|
$ |
21,595,239 |
|
|
$ |
(23,293,078 |
) |
|
$ |
(18,000 |
) |
|
$ |
(1,697,180 |
) |
MSI preferred stock sold for cash |
|
|
209,618 |
|
|
|
|
|
|
|
|
|
|
|
209,758 |
|
MSI common stock sold for cash
net of transaction costs of $50,443 |
|
|
1,077,099 |
|
|
|
|
|
|
|
|
|
|
|
1,078,767 |
|
MSI common stock issued for ATE
settlement |
|
|
83,006 |
|
|
|
|
|
|
|
|
|
|
|
83,067 |
|
MSI common stock issued for director
fees |
|
|
100,689 |
|
|
|
|
|
|
|
|
|
|
|
100,689 |
|
MSI common stock returned by directors |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(22 |
) |
MSI common stock issued for debt conversions |
|
|
1,228,532 |
|
|
|
|
|
|
|
|
|
|
|
1,230,000 |
|
MSI common stock issued for acquisitions |
|
|
404,464 |
|
|
|
|
|
|
|
|
|
|
|
405,000 |
|
Preferred stock dividend |
|
|
(40,875 |
) |
|
|
|
|
|
|
|
|
|
|
(40,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
810,670 |
|
|
|
|
|
|
|
810,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005 |
|
$ |
24,657,770 |
|
|
$ |
(22,482,408 |
) |
|
$ |
(18,000 |
) |
|
$ |
2,179,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
118
MEDSOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(771,111 |
) |
|
$ |
810,670 |
|
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,373,318 |
|
|
|
751,258 |
|
Provision for bad debts |
|
|
112,000 |
|
|
|
3,000 |
|
Gain on ATE settlement |
|
|
|
|
|
|
(650,468 |
) |
Litigation settlement |
|
|
|
|
|
|
(53,023 |
) |
Stock compensation |
|
|
240,000 |
|
|
|
100,667 |
|
Amortization of finance fees and debt discount |
|
|
29,527 |
|
|
|
|
|
Cancellation of convertible debentures, advances
from stockholders and related accrued interest |
|
|
(130,135 |
) |
|
|
|
|
Changes in assets (increase) decrease: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(441,125 |
) |
|
|
(375,950 |
) |
Supplies |
|
|
12,247 |
|
|
|
(2,195 |
) |
Prepaid expenses and other current assets |
|
|
95,565 |
|
|
|
128,244 |
|
Other non-current assets |
|
|
(108,851 |
) |
|
|
(64,335 |
) |
Changes in liabilities increase (decrease) |
|
|
|
|
|
|
|
|
Accounts payable, accrued liabilities & litigation
settlements |
|
|
186,294 |
|
|
|
(959,282 |
) |
|
|
|
|
|
|
|
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES |
|
|
597,729 |
|
|
|
(311,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(596,760 |
) |
|
|
(225,713 |
) |
Asset acquisition of On Call Medical Waste, Ltd. |
|
|
|
|
|
|
(375,000 |
) |
Asset acquisition of Cooper Biomed, Ltd. |
|
|
|
|
|
|
(40,000 |
) |
Asset acquisition of Positive Impact Waste Solutions |
|
|
|
|
|
|
(700,000 |
) |
Asset acquisition of SteriLogic Waste Systems, Inc. |
|
|
(24,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(621,043 |
) |
|
|
(1,340,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sale of preferred stock |
|
|
|
|
|
|
209,758 |
|
Proceeds from sale of common stock |
|
|
809,000 |
|
|
|
1,129,210 |
|
Proceeds from note payable stockholders |
|
|
1,150,000 |
|
|
|
1,375,000 |
|
Cash paid for transaction costs associated with equity
transactions |
|
|
(106,132 |
) |
|
|
(50,443 |
) |
Dividend on preferred stock |
|
|
(42,500 |
) |
|
|
(37,250 |
) |
Payments on long-term obligations to stockholders |
|
|
(1,516,833 |
) |
|
|
(521,053 |
) |
(Repayments to) advances from stockholders |
|
|
(19,005 |
) |
|
|
(152,840 |
) |
Payments on long-term obligations to others |
|
|
(251,216 |
) |
|
|
(300,255 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
23,314 |
|
|
|
1,652,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS BEGINNING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS END |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
119
MEDSOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
493,440 |
|
|
$ |
430,803 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Issuance of notes payable for property & equipment |
|
$ |
570,463 |
|
|
$ |
601,518 |
|
|
|
|
|
|
|
|
Common stock reclaimed in connection to clawback
provision regarding the PIWS acquisition |
|
|
39,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in notes payable from PIWS purchase price
settlement |
|
$ |
130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable converted into MSI common stock |
|
$ |
|
|
|
$ |
775,843 |
|
|
|
|
|
|
|
|
Accrued salaries and related interest converted
into MSI common stock and stock options |
|
$ |
|
|
|
$ |
454,157 |
|
|
|
|
|
|
|
|
Insurance premiums financed with debt |
|
$ |
169,363 |
|
|
$ |
163,804 |
|
|
|
|
|
|
|
|
Director fees paid with non plan stock options |
|
$ |
|
|
|
$ |
100,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired and liabilities assumed (See
Acquisitions Note 4) |
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
1,267,500 |
|
|
$ |
3,150,900 |
|
Less: cash consideration paid for acquisition |
|
|
(24,284 |
) |
|
|
(1,115,000 |
) |
Less: cash acquired |
|
|
(25,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
Non-cash consideration |
|
$ |
1,217,500 |
|
|
$ |
2,035,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term note |
|
$ |
|
|
|
$ |
740,000 |
|
Long term note |
|
|
250,000 |
|
|
|
800,000 |
|
Common stock issued |
|
|
880,000 |
|
|
|
405,000 |
|
Acquisition costs |
|
|
87,500 |
|
|
|
90,900 |
|
|
|
|
|
|
|
|
Allocation of non-cash consideration |
|
$ |
1,217,500 |
|
|
$ |
2,035,900 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
120
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 1 DESCRIPTION OF BUSINESS
MedSolutions, Inc. (MSI or the Company) was incorporated in Texas in 1993, and through its
subsidiary, EnviroClean Management Services, Inc. (EMSI), principally collects, transports and
disposes of regulated medical waste in north Texas, south Texas, Oklahoma, Louisiana and Arkansas.
MSI markets, through its wholly-owned subsidiary SharpsSolutions, Inc. (Sharps), a reusable
sharps container service program to healthcare facilities that we expect will virtually eliminate
the current method of utilizing disposable sharps containers. Another subsidiary of MSI,
ShredSolutions, Inc. (Shred), markets a fully integrated, comprehensive service for the
collection, transportation and destruction of Protected Healthcare Information (PHI) and other
confidential documents, primarily those generated by health care providers and regulated under the
Health Insurance Portability and Accountability Act (HIPAA). The Company operates another wholly
owned subsidiary, Positive Impact Waste Servicing, Inc., which uses mobile treatment equipment to
treat and dispose of regulated medical waste on site. Positive Impact Waste Servicing, Inc. was
acquired by the Companys from its asset acquisition from Positive Impact Waste Solutions, Ltd.
(PIWS) on November 30, 2005. The assets acquired by the Company from PIWS included customer
contracts and equipment. The Company operates another wholly owned subsidiary, SteriLogic Waste
Systems, Inc. (SteriLogic), in Syracuse, New York which services RMW and Sharps customers in the
New York and Pennsylvania markets. SteriLogic was acquired by the Company on August 21, 2006 and
the stock acquisition included customer contracts, equipment and a rented facility in Syracuse, New
York.
Liquidity and Capital Resources
Our principal source of liquidity is collections on accounts receivable from waste management
service revenue, from sales of our Common and Preferred Stock through private offerings to certain
individuals, primarily existing stockholders, and from loans and advances received from certain
stockholders. Revenues during 2006 were approximately $282,000 per month higher, stemming primarily
from organic growth and from an acquisition in the second half of 2006. The Company continues to
pursue acquisition targets to expand its existing business. The principal uses of liquidity are
payments for labor, fuel, material and expenses, and debt and lease obligations to carry out our
regulated medical waste management services.
Historically, we have met our cash requirements based on a combination of revenues from operations,
stockholder loans and advances, and proceeds from the sale of debt and equity securities. Based on
the projected operations for 2007, management believes cash to be generated from operations and
funds raised from other alternative sources if needed, will be sufficient to satisfy the Companys
historical and current cash obligations.
121
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company, its
subsidiaries, EMSI, SharpsSolutions, Inc., ShredSolutions, Inc., Positive Impact Waste Servicing,
Inc. doing business as EnviroClean On-Site, Inc., SteriLogic Waste Systems, Inc. and EnviroClean
Transport, Inc. All significant inter-company balances and transactions between the Company and its
subsidiaries have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company considers all investments
with an original maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
The Companys trade accounts receivable is stated net of an allowance for doubtful accounts of
$174,989 and $69,240 at December 31, 2006 and 2005, respectively. Our assumptions in determining
the adequacy of the allowance for doubtful accounts include reviewing historical charge-offs over
the previous two years, and analyzing current aging reports by performing a specific review of
customer balances for possible payment problems. Based on our review, the allowance for doubtful
accounts is adjusted accordingly.
Supplies
Supplies are stated at the lower of average cost or fair value and consist primarily of medical
waste containers and supplies provided to our medical waste generator customers.
Property and Equipment
Property and equipment are stated at cost less appropriate valuation allowances and accumulated
depreciation and amortization. Depreciation is provided on the straight-line method over the
estimated useful lives of the related assets, generally three to twenty years. Amortization of
leasehold improvements is provided on the straight-line method over the lesser of the estimated
useful lives of the improvements or the initial term of the lease. Gain or loss is recognized upon
sale or other disposition of property and equipment.
122
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill and Intangible Assets
In accordance with the requirements of Statement of Financial Accounting Standards No. 141 (SFAS
No. 141), Business Combinations, the Company recognizes certain intangible assets acquired in
acquisitions, primarily goodwill and customer lists. To determine the adequacy of the carrying
amounts on an ongoing basis, the Company, in accordance with the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, performs its annual impairment test at the end of the year
each December 31, unless triggering events indicate that an event has occurred which would require
the test to be performed sooner. The Company monitors the performance of its intangibles by
analyzing the expected future cash flows generated from such related intangibles to ensure their
continued performance. If necessary, the Company may hire an outside independent consultant to
appraise the fair value of such assets.
As of December 31, 2006, goodwill totaled $3,234,025. This amount is a result of seven acquisitions
where goodwill was recorded in six of those acquisitions as part of the purchase price. With regard
to the AmeriTech Environmental, Inc. (ATE) acquisition, closed on November 7, 2003, goodwill was
recorded in the amount of $969,387. With regard to the B. Bray Medical Waste Service (Bray)
acquisition, closed on January 1, 2004, goodwill was recorded in the amount of $3,600. Our third
acquisition, Med-Con Waste Solutions, Inc. (Med-Con), was closed on September 30, 2004 and
goodwill was recorded in the amount of $522,186. Our fourth acquisition, On Call Medical Waste,
Ltd. (On Call), was closed on August 29, 2005 and goodwill was recorded in the amount of
$653,922. Our sixth acquisition, Positive Impact Waste Solutions, Ltd. (PIWS) was closed on
November 30, 2005 and goodwill was originally recorded in the amount of $447,926. The goodwill
assigned to the PIWS acquisition was subsequently increased by $50,000 to $497,925 during the
quarter ended September 30, 2006 due to additional estimated acquisition costs. Our seventh
acquisition, SteriLogic was closed on August 21, 2006 and $756,004 was assigned to goodwill based
upon an independent appraisal of the intangible assets acquired. All of the goodwill associated
with these acquisitions is deductible for income tax purposes.
As of December 31, 2006, intangible assets associated with customer lists were $1,408,189 net of
accumulated amortization of $1,028,993. All values assigned to customer list were derived by
independent appraisals and were assigned lives of 5 years over which to amortize the assigned cost.
123
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The amortization of customer lists for the 5 years ending December 31, 2011 is as follows:
|
|
|
|
|
Year Ended December 31, |
|
Amount |
|
2007 |
|
$ |
440,125 |
|
2008 |
|
|
413,374 |
|
2009 |
|
|
302,246 |
|
2010 |
|
|
197,244 |
|
2011 |
|
|
55,200 |
|
|
|
|
|
|
|
$ |
1,408,189 |
|
|
|
|
|
Both the goodwill and customer list values are subject to an annual impairment test.
Amortization expense for the years ended December 31,2006 and 2005, was $404,223 and $249,392
respectively.
As of December 31, 2006, the Company determined there was no impairment of its goodwill or
intangible assets.
Convertible Notes and Convertible Preferred
The Company accounts for conversion options embedded in convertible notes and convertible preferred
stock in accordance with Statement of Financial Accounting Standard (SFAS) No. 133 Accounting for
Derivative Instruments and Hedging Activities (SFAS 133) and EITF 00-19 Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock
(EITF 00-19). SFAS 133 generally requires Companies to bifurcate conversion options embedded in
convertible notes and preferred shares from their host instruments and to account for them as free
standing derivative financial instruments in accordance with EITF 00-19. SFAS 133 provides for an
exception to this rule when convertible notes and mandatorily redeemable preferred shares, as host
instruments, are deemed to be conventional as that term is described in the implementation guidance
provided in paragraph 61 (k) of Appendix A to SFAS 133 and further clarified in EITF 05-2 The
Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19. SFAS 133 provides for an
additional exception to this rule when the economic characteristics and risks of the embedded
derivative instrument are clearly and closely related to the economic characteristics and risks of
the host instrument.
124
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company accounts for convertible notes (deemed conventional) and non-conventional convertible
debt instruments classified as equity under EITF 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19)and in
accordance with the provisions of Emerging Issues Task Force Issue (EITF) 98-5 Accounting for
Convertible Securities with Beneficial Conversion Features, (EITF 98-5), EITF 00-27 Application
of EITF 98-5 to Certain Convertible Instruments. Accordingly, the Company records, as a discount
to convertible notes, the intrinsic value of such conversion options based upon the differences
between the fair value of the underlying common stock at the commitment date of the note
transaction and the effective conversion price embedded in the note. Debt discounts under these
arrangements are amortized over the term of the related debt to their earliest date of redemption.
During 2005, the Company issued $1,000,000 in principal of convertible notes with an embedded
conversion option, which was classified as equity. There was no intrinsic value related to the
embedded conversion option and accordingly, there was no recorded debt discount.
The Company determined that the conversion option embedded in its Series A Preferred stock is not a
free standing derivative in accordance with the implementation guidance provided in paragraph 61
(l) of Appendix A to SFAS 133.
Impairment of Long-Lived Assets
The Company continuously monitors events and changes in circumstances that could indicate carrying
amounts of long-lived assets, including intangible assets, may not be recoverable. An impairment
loss is recognized when expected cash flows are less than the assets carrying value. Accordingly,
when indicators of impairment are present, the Company evaluates the carrying value of such assets
in relation to the operating performance and future undiscounted cash flows of the underlying
business. The Companys policy is to record an impairment loss when it is determined that the
carrying amount of the asset may not be recoverable. At December 31, 2006, there were no indicators
of impairment present.
Revenue Recognition and Processing Costs
We recognize revenue for our medical waste services at the time the medical waste is collected from
our customers. Revenue is only recognized for arrangements with customers in which (1), there is
persuasive evidence of a contract or agreement which sets forth the terms of the arrangement; (2),
services have been rendered; (3), our prices are fixed, determinable and agreed upon; and, (4),
collectibility is reasonably assured.
125
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments
The recorded carrying values of accounts receivable, accounts payable, and other long-term
obligations are considered to approximate the fair values of such financial instruments because of
the short maturities.
Provisions for Income Taxes
No provisions have been made for federal or state income taxes since the Company has incurred net
operating losses since its inception. The Company is subject to certain local minimum taxes.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS 123R which replaces SFAS 123, Accounting for
Stock-Based Compensation and supersedes Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS 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. Pro forma disclosure is no longer an alternative to financial statement
recognition.
The Company has selected the Black-Scholes method of valuation for share-based compensation and has
adopted the modified prospective transition method under SFAS 123R, which requires that
compensation cost be recorded, as earned, for all unvested stock options outstanding as of the
beginning of the first quarter of adoption of SFAS 123R. As permitted by SFAS 123R, prior periods
have not been restated. The charge is generally recognized as compensation cost on a straight-line
basis over the remaining service period after the adoption date based on the options original
estimate of fair values.
Prior to the adoption of SFAS 123R, the Company applied the intrinsic-value-based method of
accounting prescribed by APB 25 and related interpretations, to account for its stock options to
employees. Under this method, compensation cost was recorded only if the market price of the
underlying stock on the date of grant exceeded the exercise price. As permitted by SFAS 123, the
Company elected to continue to apply the intrinsic-value-based method of accounting described
above, and adopted only the disclosure requirements of SFAS 123. The fair-value-based method used
to determine historical pro forma amounts under SFAS 123 was similar in most respects to the method
used to determine stock-based compensation expense under SFAS 123R.
126
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
|
|
|
|
Periods Ended December 31, 2005 (in thousands) |
|
2005 |
|
Net income (loss) applicable to common stockholders,
Prior to stock-based employee compensation |
|
$ |
770 |
|
Stock-based employee compensation cost |
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders,
as reported |
|
$ |
770 |
|
Stock-based employee compensation cost
determined under fair value method,
net of tax effects |
|
|
(291 |
) |
|
|
|
|
Pro-forma net income (loss) under
fair value method Basic |
|
$ |
479 |
|
Effect of dilutive securities |
|
|
|
|
Preferred Stock |
|
|
41 |
|
Convertible notes payable and advances
interest expense |
|
|
45 |
|
Pro-forma net
income (loss) under fair value method Dilutive |
|
$ |
565 |
|
|
|
|
|
Net income (loss) per share applicable to
common stockholders Basic |
|
$ |
0.04 |
|
Stock-based employee compensation cost
determined under fair value method,
net of tax effects |
|
|
(0.01 |
) |
Pro-forma loss per share applicable to
common stockholders- Basic |
|
$ |
0.03 |
|
|
|
|
|
Net income (loss) per share applicable to
common stockholders- Diluted |
|
$ |
0.04 |
|
Stock-based employee compensation cost
determined under fair value method,
net of tax effects |
|
|
(0.01 |
) |
Pro-forma net income (loss) per share
attributable to common stockholder Diluted |
|
$ |
0.03 |
|
|
|
|
|
127
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The fair value of each option grant was estimated at the date of grant using the Black-Scholes
option valuation model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions and are fully
transferable. During the year ended December 31, 2006 and 2005, the Company granted 478,796 and
674,336 stock options,(fair value $0.00 and $0.51 per share for 2006 and 2005, respectively)
respectively to employees under an adopted 2002 Employee Stock Option Plan. The exercise prices of
the stock options were $0.75 and $1.00 and vest immediately. The options may be exercised over a
period of ten years. The Company recorded a non cash charge of $240,000 during the year ended
December 31, 2006 because the options granted in 2005 to executives exceeded the authorized amount
of options to grant that was in effect as of December 31, 2005. The authorized amount was increased
from 850,000 shares to 3,000,000 shares in October, 2006 by a majority of the Companys
shareholders. Because the Companys 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 models do not necessarily
provide a reliable single measure of the fair value estimate of its stock options. During the years
ended December 31, 2006 and 2005, respectively, the Company granted its directors 0 and 215,431,
plan stock options, respectively. The options were granted in lieu of payment of director fees. The
total number of stock options outstanding as of December 31, 2006 and 2005, was 1,328,796. In
calculating the fair values of the stock options, the following assumptions were used:
|
|
|
|
|
|
|
|
|
|
|
YEAR |
|
YEAR |
|
|
2006 GRANTS |
|
2005 GRANTS |
Dividend yield |
|
|
|
|
|
|
|
|
Weighted average expected life: |
|
5 years |
|
5 years |
Weighted average risk-free interest rate |
|
|
4.75 |
% |
|
|
4.25 |
% |
Expected volatility |
|
|
101.00 |
% |
|
|
92.00 |
% |
Income (Loss) Per Share of Common Stock
Basic net income (loss) per share of common stock has been computed based on the weighted average
number of common shares outstanding during the periods presented.
Diluted net income per share of common stock has been computed based on the weighted average number
of common shares outstanding during the periods presented plus any dilutive securities outstanding
unless such combination of shares and dilutive securities were determined to be anti-dilutive. The
numerator and denominator for basic and diluted earnings per share (EPS) consist of the
following:
128
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(771,111 |
) |
|
$ |
810,670 |
|
Convertible preferred stock
dividends |
|
|
(35,500 |
) |
|
|
(40,875 |
) |
|
|
|
|
|
|
|
Numerator
for basic earnings per share income available to
common stockholders |
|
$ |
(806,611 |
) |
|
$ |
769,795 |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Preferred stock dividends |
|
|
|
|
|
|
40,875 |
|
Convertible notes payable
and advances interest expense |
|
|
|
|
|
|
44,987 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
85,862 |
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share income available to common stockholders
after assumed conversions |
|
$ |
(806,611 |
) |
|
$ |
855,657 |
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted average shares |
|
|
22,875,017 |
|
|
|
19,857,233 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Convertible accrued salaries |
|
|
|
|
|
|
35,060 |
|
Preferred convertible stock |
|
|
|
|
|
|
250,528 |
|
Convertible debentures and unpaid interest |
|
|
|
|
|
|
58,334 |
|
Note payable to stockholders and accrued interest |
|
|
|
|
|
|
34,283 |
|
Note payable to Tate Investments, LLC |
|
|
|
|
|
|
407,070 |
|
Advances from stockholders |
|
|
|
|
|
|
48,992 |
|
|
|
|
|
|
|
|
Total potentially dilutive
securities |
|
|
|
|
|
|
834,267 |
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted weighted average shares and assumed
conversions |
|
|
22,875,017 |
|
|
|
20,691,501 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
For the year ended December 31, 2005, 850,000 shares attributable to outstanding stock options
were excluded from the calculation of diluted earnings per share because the exercise prices of the
stock options were greater than or equal to the average price of the common shares ($0.75), and
therefore their
inclusion would have been anti-dilutive. For the year ended December 31, 2006, common stock
equivalents totaling 4,216,035 that consisted of options, convertible preferred shares and
convertible notes were not included in the calculation of diluted loss per share because their
inclusion would have had the effect of decreasing the loss per share otherwise compute.
129
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising Expenses
Advertising costs are charged to expense when incurred. Advertising expense for the years ended
December 31, 2006 and 2005 approximated $28,991 and $20,256, respectively.
Environmental Expenditures
Environmental expenditures are capitalized if the costs mitigate or prevent future environmental
contamination or if the costs improve existing assets environmental safety or efficiency. All
other environmental expenditures are expensed. Liabilities for environmental expenditures are
accrued when it is probable that such obligations have been incurred and the amounts can be
reasonably estimated. Currently, there are no ongoing environmental issues or activities. At
December 31, 2006 and 2005, there have been no amounts recorded as capitalized assets related to
any environmental costs.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the related periods. Actual results could differ
from such estimates.
NOTE 3 RECENTLY ISSUED ACCOUNTING STANDARDS
The following pronouncements have been issued by the Financial Accounting Standards Board (FASB).
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard 155 Accounting for Certain Hybrid Financial Instruments (SFAS 155), which
eliminates the exemption from applying SFAS 133 Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) to interests in securitized financial assets so that similar instruments
are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the
election of fair value measurement at acquisition, at issuance, or when a previously recognized
financial instrument is subject to a remeasurement event. Adoption is effective for all financial
instruments acquired or issued after the beginning of the first fiscal year that begins after
September 15, 2006. Early adoption is permitted. The adoption of SFAS 155 is not expected to have a
material effect on the Companys consolidated financial position, results of operations or cash
flows.
130
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 3 RECENTLY ISSUED ACCOUNTING STANDARDS (continued)
In March 2006, the FASB issued Statement of Financial Accounting Standard 156 Accounting for
Servicing of Financial Assets (SFAS 156), which requires all separately recognized servicing
assets and servicing liabilities be initially measured at fair value. SFAS 156 permits, but does
not require, the subsequent measurement of servicing assets and servicing liabilities at fair
value. Adoption is required as of the beginning of the first fiscal year that begins after
September 15, 2006. Early adoption is permitted. The adoption of SFAS 156 is not expected to have a
material effect on the Companys consolidated financial position, results of operations or cash
flows.
In July 2006, the FASB released FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting and
reporting for uncertainties in income tax law. FIN 48 prescribes a comprehensive model for the
financial statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Earlier adoption is permitted as of the beginning of an
enterprises fiscal year, provided the enterprise has not yet issued financial statements,
including financial statements for any interim period for that fiscal year. The cumulative effects,
if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the
beginning of the period of adoption. The adoption of FIN 48 is not expected to have a material
effect on the Companys consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, Accounting for Fair Value Measurements (SFAS
157). SFAS 157 defines fair value, and establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosure about fair value measurements. SFAS
157 is effective for financial statements issued by the Company for fiscal years beginning after
November 15, 2007. The Company does not expect the new standard to have a material impact on the
Companys financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (SFAS 158). SFAS 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit
organization. SFAS 158 also requires an employer to measure the funded status of a plan as of the
date of its year-end statement of financial position, with limited exceptions. SFAS 158 is
effective for the Company for the year ended December 31, 2006. The adoption of this pronouncement
did not have a material effect on the Companys financial statements.
131
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 3 RECENTLY ISSUED ACCOUNTING STANDARDS (continued)
In September 2006, the staff of the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (SAB 108), which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in quantifying a current
year misstatement. SAB 108 becomes effective for the first fiscal year ending after November 15,
2006. The adoption of SAB 108 is not expected to have a material impact on the Companys
consolidated financial position, results of operations or cash flows.
In December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2, Accounting for
Registration Payment Arrangements (FSP EITF 00-19-2), which specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured in accordance with SFAS
No. 5, Accounting for Contingencies. FSP EITF 00-19-2 also requires additional disclosure
regarding the nature of any registration payment arrangements, alternative settlement methods, the
maximum potential amount of consideration and the current carrying amount of the liability, if any.
The guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative
Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, and FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, to include scope exceptions for registration payment arrangements.
FSP EITF 00-19-2 is effective immediately for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified subsequent to the
issuance date of this FSP, or for financial statements issued for fiscal years beginning after
December 15, 2006, and interim periods within those fiscal years, for registration payment
arrangements entered into prior to the issuance date of this FSP. The adoption of this
pronouncement is not expected to have an impact on the Companys consolidated financial position,
results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 provides companies with an option to report selected
financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both
complexity in accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally accepted accounting principles
have required different measurement attributes for different assets and liabilities that can create
artificial volatility in earnings. The FASB has indicated it believes that SFAS 159 helps to
mitigate this type of accounting-induced volatility by enabling companies to report related assets
and liabilities at fair value, which would likely reduce the need for companies to comply with
detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure
requirements designed to
132
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 3 RECENTLY ISSUED ACCOUNTING STANDARDS (continued)
facilitate comparisons between companies that choose different measurement attributes for similar
types of assets and liabilities. SFAS 159 does not eliminate disclosure requirements included in
other accounting standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
SFAS 159 is effective for the Company as of the beginning of fiscal year 2009. The Company has not
yet determined the impact SFAS 159 may have on its consolidated financial position, results of
operations, or cash flows.
NOTE 4 ACQUISITIONS
Med-Con Waste Solutions, Inc. (Med-Con)
At December 31, 2006, the Company owed $274,749 in two promissory notes to Med-Con as payment for
part of the purchase price for the Companys acquisition of certain Med-Con assets completed on
September 30, 2004. The first promissory note has a balance of $235,749 as of December 31, 2006 and
accrues interest at 8%. The Company pays monthly installments of $8,696 including principal and
interest and the note matures on May 1, 2009. The second promissory note has a balance of $39,001
as of December 31, 2006 and accrues interest at 10%. The Company pays monthly installments of
$6,691 including principal and interest and the note matures on May 1, 2007.
On Call Medical Waste Service (On Call)
On August 29, 2005, we acquired certain assets including customer contracts from On Call for a
total purchase price of $1,155,500. The purchase price for the acquired assets was (i) $375,000
cash, (ii) a promissory note in the original principal amount of $250,000 bearing interest at a
rate per annum of 8%, payable in 24 equal monthly installments of principal and interest with the
first such installment due on December 27, 2005, (iii) a promissory note in the original principal
amount of $375,000 with no interest, (iv) 166,667 shares of Common Stock, and (v) $30,500 of
transaction costs incurred by the Company. The cash portion of the purchase price was funded from
the proceeds of a sale of the Companys Common Stock in a private placement to, and a loan to the
Company pursuant to a promissory note from, one of its shareholders.
Positive Impact Waste Solutions, Ltd. (PIWS)
On November 30, 2005, the Company acquired certain assets, including customer contracts, and took
over the regulated medical waste operations of Positive Impact Waste Solutions, LLC, a Delaware
limited liability company (PIWS). Subsequent to the Companys acquisition of PIWS assets, it was
determined that PIWS had not complied with certain terms of the asset purchase agreement (the PIWS
Agreement). On June 30, 2006, a settlement was reached and executed between the Company and PIWS
relating to such noncompliance. As a result of this noncompliance and in accordance with the terms
of the PIWS Agreement, a reduction of the total purchase price by $169,000 was agreed to by both
parties. The purchase price adjustment reduced the amount assigned to customer list by $169,000.
The goodwill assigned to the PIWS acquisition was subsequently increased by $50,000 to $497,925
during the quarter ended September 30, 2006 due to additional estimated acquisition costs.
133
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 4 ACQUISITIONS (continued)
At December 31, 2006, the Company owed $431,501 in a promissory note to PIWS as payment for part of
the purchase price. The promissory note accrues interest at 8% and the Company pays monthly
installments of $10,725 including principal and interest. The note matures on November 30, 2010.
Cooper Biomed, Ltd. (Cooper)
On September 30, 2005, we acquired certain assets, principally customer contracts, from Cooper. On
March 31, 2006, the Company calculated a purchase price reduction of $8,500 in accordance with the
asset purchase agreement and reduced the $40,000 promissory note to Cooper accordingly. The
promissory note has subsequently been paid and all obligations of the Company to Cooper pursuant to
such agreement have been satisfied. The cash portion of the purchase price was funded from the
proceeds of a sale of the Companys Common Stock in a private placement to, and a loan to the
Company pursuant to a promissory note from, one of its stockholders. As provided for in the
agreement the Company calculated a $8,500 purchase price adjustment and reduced the principal due
under the $25,000 promissory note and the amount assigned to customer list, accordingly.
SteriLogic Waste Systems, Inc. (SteriLogic)
On August 16, 2006, MedSolutions, Inc., a Texas corporation (the Company), acquired SteriLogic
Waste Systems, Inc., a Pennsylvania corporation (SteriLogic) located in Syracuse, New York.
SteriLogic is a regulated medical waste management company that provides collection, transportation
and disposal of regulated medical waste services in addition to providing reusable sharps container
programs to its customers who are primarily located in the states of New York and Pennsylvania.
SteriLogic also designs, manufactures and markets reusable sharps containers to medical waste
service providers who provide reusable sharps container programs to their medical waste customers.
The acquisition was effected pursuant to a Merger Agreement and Plan of Reorganization dated as of
August 16, 2006, by and between the Company, SteriLogic Acquisition Subsidiary, Inc., a Texas
corporation and wholly-owned subsidiary of the Company (Subsidiary), and SteriLogic, by the
merger (the Merger) of SteriLogic with and into Subsidiary, with Subsidiary continuing as the
surviving corporation. At the effective time of the Merger, each share of SteriLogic common stock,
par value $0.01 per share, issued and outstanding immediately prior to such time was converted into
the right to receive 200 shares of the Companys common stock, par value $0.001 per share (Merger
Shares), for an aggregate of 1,000,000 Merger Shares.
134
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 4 ACQUISITIONS (continued)
In addition, the Company paid Abele-Kerr Investments, LLC (i) $50,000 in readily available funds,
and (ii) a convertible promissory note in the principal amount of $250,000 with simple interest at
the annual rate of 8% accruing from the effective time and payable in 12 equal installments of
interest only in the amount of $1,666.67 each due monthly beginning on the 30th day after the
effective time, and 24 equal installments of principal and interest in the amount of $11,306.82
each due monthly thereafter. The note holder may convert the unpaid principal and interest at any
time, but prior to August 16, 2007, into the Companys common stock at $1.50 per share. The Merger
consideration may be adjusted downward depending upon the amount of sales or earnings realized by
the Company from the customer contracts acquired through the acquisition of SteriLogic for the 12
months following the closing of the transaction. Any such adjustment to the Merger consideration
will be deducted 25% from the principal amount of the $250,000 promissory note, and 75% from the
Merger Shares, pro rata against each former holder of SteriLogic common stock that received Merger
Shares in proportion to the percentage of the Merger Shares received by each such holder, at the
rate of $1.50 per share; provided, that the Company may not deduct more than 400,000 Merger Shares
with respect to the adjustment. The cash portion of the Merger consideration was funded from
working capital. The Merger consideration was determined largely based upon the amount of revenues
SteriLogic has generated from its regulated medical waste disposal business and the value of the
net assets acquired.
On January 15, 2007, the former owners of SteriLogic and the Company agreed by mutual consent to
amend the original Merger Agreement whereby the former owners of SteriLogic agreed to reduce the
number of Merger Shares issued by the Company from 1,000,000 to 700,000 shares and to terminate the
conversion feature of the $250,000 promissory note issued by the Company as part of the purchase
price. As a result of these amendments, the Company recorded a reduction in the purchase price with
regard to the SteriLogic acquisition by $264,000 reflecting the return of the 300,000 shares issued
by the Company. The corresponding reduction reduced the value assigned to SteriLogics customer
list by $264,000.
135
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 4 ACQUISITIONS (continued)
MedSolutions purchased the following assets in the following table in exchange for the amount paid.
|
|
|
|
|
Description |
|
Amount |
|
Purchase price: |
|
|
|
|
|
|
|
|
|
Cash paid |
|
$ |
50,000 |
|
Promissory note |
|
|
250,000 |
|
MSI Common Stock issued, 1,000,000 shares |
|
|
880,000 |
|
Acquisition related costs |
|
|
87,500 |
|
|
|
|
|
Total purchase price |
|
$ |
1,267,500 |
|
|
|
|
|
|
|
|
|
|
Assets acquired and liabilities assumed: |
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
25,716 |
|
Accounts Receivable, Inventory,
and other assets |
|
|
155,336 |
|
Equipment at Fair Value |
|
|
100,000 |
|
Liabilities assumed |
|
|
(321,557 |
) |
Allocation to customer list, to be amortized
over 5 years |
|
|
552,000 |
|
Allocation to goodwill |
|
|
756,005 |
|
|
|
|
|
Total assets acquired |
|
$ |
1,267,500 |
|
|
|
|
|
136
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 4 ACQUISITIONS (continued)
Pro Forma Results
The following table presents the unaudited pro-forma combined results of operations of the Company
for its 2006 results and acquisitions as if they had been combined from the beginning of 2006 and
2005.
|
|
|
|
|
|
|
|
|
|
|
Pro forma Combined |
|
|
Pro forma Combined |
|
|
|
For the year ended |
|
|
for the year ended |
|
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
13,381,088 |
|
|
$ |
12,124,379 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(670,674 |
) |
|
$ |
157,744 |
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share |
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
23,499,674 |
|
|
|
21,296,703 |
|
|
|
|
|
|
|
|
Weight average common shares outstanding diluted |
|
|
23,499,674 |
|
|
|
22,130,972 |
|
|
|
|
|
|
|
|
The pro forma combined results are not necessarily indicative of the results that actually
would have occurred if the acquisition had been completed as of the beginning of the 2006 and 2005
years, nor are they necessarily indicative of future consolidated results.
137
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Useful Life |
|
Land |
|
$ |
151,180 |
|
|
$ |
151,180 |
|
|
|
|
|
Building |
|
|
1,124,276 |
|
|
|
1,050,711 |
|
|
20 years |
|
Furniture and equipment |
|
|
5,117,161 |
|
|
|
3,785,369 |
|
|
|
3 to 5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,392,617 |
|
|
|
4,987,260 |
|
|
|
|
|
Less: Accumulated depreciation |
|
|
2,805,851 |
|
|
|
1,836,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net |
|
$ |
3,586,766 |
|
|
$ |
3,150,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment for the years ended December 31, 2006 and 2005 amounted
to $969,095 and $501,685, respectively.
NOTE 6 INCOME TAXES
The current years Federal and State income tax provision consists substantially of minimum taxes.
The principal reasons for the variation between income taxes at the statutory federal rate and that
shown in the statement of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
2006 |
|
|
2005 |
|
Statutory federal income tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
State income taxes, net of
federal income tax benefit |
|
|
6.0 |
% |
|
|
6.0 |
% |
Adjustment for change in valuation
allowance |
|
|
(40.0 |
) |
|
|
(40.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary differences between the financial statement and tax basis of assets and liabilities
which give rise to a significant portion of deferred tax assets and deferred tax liabilities were
as follows:
138
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 6 INCOME TAXES (continued)
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
2006 |
|
|
2005 |
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
Operating loss carryforwards |
|
$ |
8,000,000 |
|
|
$ |
7,500,000 |
|
Accounts receivable allowance |
|
|
70,000 |
|
|
|
28,000 |
|
|
|
|
|
|
|
|
Total Tax Assets |
|
$ |
8,070,000 |
|
|
$ |
7,528,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
Fixed Assets |
|
$ |
286,000 |
|
|
$ |
238,000 |
|
Goodwill and intangibles |
|
|
409,000 |
|
|
|
213,000 |
|
|
|
|
|
|
|
|
Total Tax Liabilities |
|
|
695,000 |
|
|
|
451,000 |
|
Less- Valuation Allowance |
|
|
(7,375,000 |
) |
|
|
(7,077,000 |
) |
|
|
|
|
|
|
|
Net Deferred Tax Asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The valuation allowance primarily relates to the Federal and State net operating losses for
which utilization in future periods is uncertain. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. The Company considers projected future taxable income and
tax planning strategies in making this assessment. Based on the historical taxable income and
projections for future taxable income over the periods that the deferred tax assets are deductible,
the Company believes it is more likely than not that the Company will not realize all of its tax
benefits in the near future and therefore a valuation allowance was established in 2006 in the
amount of $7,375,000.
As of December 31, 2006 the Company has approximately $19.9 million of federal and state net
operating losses available to offset future taxable income, which if not utilized will expire
through 2025. The Companys ability to utilize its carryforwards may be subject to an annual
limitation in future periods pursuant to Section 382 of the Internal Revenue Code, as amended.
139
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 7 ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
Salaries and other taxes |
|
$ |
347,545 |
|
|
$ |
244,268 |
|
Accrued director fees |
|
|
269,891 |
|
|
|
|
|
Interest |
|
|
27,408 |
|
|
|
116,598 |
|
Insurance |
|
|
169,363 |
|
|
|
254,042 |
|
Other accrued liabilities |
|
|
467,236 |
|
|
|
347,419 |
|
|
|
|
|
|
|
|
|
|
$ |
1,281,443 |
|
|
$ |
962,327 |
|
|
|
|
|
|
|
|
140
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 8 LONG-TERM OBLIGATIONS
Long-term obligations are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
Bank notes EMSI facilities |
|
$ |
511,465 |
|
|
$ |
505,216 |
|
Installment notes equipment |
|
|
864,261 |
|
|
|
447,364 |
|
|
|
|
|
|
|
|
Total indebtedness to bank and
financial institutions |
|
|
1,375,726 |
|
|
|
952,580 |
|
|
|
|
|
|
|
|
|
|
Less: Current maturities |
|
|
372,552 |
|
|
|
145,628 |
|
|
|
|
|
|
|
|
Total Long-Term Obligations |
|
$ |
1,003,174 |
|
|
$ |
806,952 |
|
|
|
|
|
|
|
|
On August 9, 2006, the Company, through its subsidiary EMSI, secured additional financing from a
bank to expand its Houston facility. The facility is currently being used as a transfer facility
for the South Texas operations. The expansion will allow EMSI to treat medical waste at the
facility once the permitting process is completed from the state of Texas. The total costs of
expansion will be approximately $275,000 with $200,000 of those funds coming from bank financing
and the remainder from working capital. The promissory note to the bank is payable in 60 monthly
installments of $822 in principal plus interest accruing at the Prime Rate as published in the Wall
Street Journal from time to time plus 1%, with the balance of the principal and all accrued and
unpaid interest due upon maturity of the loan on July 19, 2011. The note is secured by a second
lien on the Houston facility and is personally guaranteed by both our President/Chief Executive
Officer and our Chairman of the Board. As of December 31, 2006, the Company has drawn $55,634
against the promissory note and the funds were used for the commencement phase of expansion. The
amount outstanding at December 31, 2006 is $52,347 and the net carrying value of our Houston
facility is approximately $370,000.
On August 3, 2005, the Company, through its subsidiary EMSI, borrowed $325,000 from a bank. The
note is secured by a first lien on EMSIs facility in Houston, Texas and accrues interest at a
variable rate based on the national prime rate, plus 2.0%, aggregating 10.25% at December 31, 2006.
The note is payable in 60 minimum monthly installments of $3,656, including principal and interest,
based upon a straight line amortization of 240 payments, and matures on August 3, 2010, with a
balloon payment of $243,750. The promissory note is personally guaranteed by our President/Chief
Executive Officer. The total amount outstanding at December 31, 2006 is $303,333.
In July 1996, the Company borrowed $367,500 from a bank. The note is secured by a first lien on
EMSIs facility in Garland, Texas, and accrues interest at a variable rate based on the national
prime rate, plus 0.5%, aggregating 8.75% at December 31, 2006. The note is payable in minimum
monthly installments of principal and interest totaling $3,459 and matures in July 2011. The
promissory note is personally
guaranteed by our President/Chief Executive Officer. The total amount outstanding at December 31,
2006 is $155,785 and the net carrying value of the Garland facility is approximately $263,000.
141
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 8 LONG-TERM OBLIGATIONS (continued)
The Company is obligated under various installment notes payable for the purchase of equipment
with an aggregate cost of $864,261. The notes, which bear interest at rates ranging from 8.0% to
16.1%, are due at various dates through 2011 and are payable in monthly installments totaling
approximately $30,549 consisting of principal and interest. The equipment acquired collateralizes
the notes.
Aggregate maturities of long-term indebtedness (including the notes payable stockholders
described in Note 9 below) at December 31, 2006 are as follows:
|
|
|
|
|
Year Ended December 31, |
|
Amount |
|
2007 |
|
$ |
1,351,050 |
|
2008 |
|
|
1,845,110 |
|
2009 |
|
|
1,047,873 |
|
2010 |
|
|
531,812 |
|
2011 and thereafter |
|
|
64,538 |
|
|
|
|
|
Total Annual Payments |
|
$ |
4,840,383 |
|
|
|
|
|
|
Less: Debt Discount |
|
|
102,564 |
|
|
|
|
|
Total (Net of Discount) |
|
$ |
4,737,819 |
|
|
|
|
|
142
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 9 NOTES PAYABLE STOCKHOLDERS
On March 15, 2006, the Company issued a convertible promissory note in the amount of $500,000 to
Tate Investments LLC (the Investor). The promissory note is payable in 35 monthly installments of
interest only with all principal and interest due on March 31, 2009. The note accrues interest at
10% for the first 12 months, 11% for months 13 through 24 and 12% for months 25 through maturity.
The effect of the increasing interest rate under EITF 86-15 Increasing-Rate Debt was determined
to be de minimus. The Company may prepay a portion or all of the amount outstanding under the terms
of the note after March 31, 2007, provided that the Company notify the Investor of the Companys
intent to prepay after which, the Investor will have 30 days to convert the note into the Companys
Common Stock. The Investor has the right to convert the amount outstanding plus accrued but unpaid
interest at the time of conversion. The conversion price agreed to is $0.85 per share during the
period beginning March 15, 2006 through March 31, 2007, $1.00 per share during the period beginning
April 1, 2007 through March 31, 2008, and $1.15 per share during the period April 1, 2008 through
maturity. The promissory note is secured by two PIWS mobile units, with a net carrying value of
$271,867 and is cross-collateralized by the Investors liens on the Companys accounts receivable
and its Garland facility pursuant to the Investment Agreement dated July 15, 2005, between the
Company and the Investor (Investment Agreement). The proceeds from the promissory note were used
by the Company to purchase equipment.
On May 22, 2006, the Company and the Investor agreed to amend the Investment Agreement to lower the
conversion price for the $1,000,000 Promissory Note to $0.55 per share from $0.65 per share in
exchange for the Investor retroactively (as of July 15, 2005, the date the Investment Agreement was
executed) eliminating the requirements for the Company to achieve certain earnings targets
thereunder. In connection with the conversion price adjustment, the Company was required to record
a beneficial conversion charge of $153,846. The beneficial conversion charge represents the
incremental fair value of the impact from lowering the conversion rate and will be amortized over
the remaining life of the note. The note accrues interest at 10% and matures on July 15, 2008 when
all outstanding principal and accrued interest is due. As of December 31, 2006, the remaining
amount of the beneficial conversion charge to amortize was $102,564.
As of December 31, 2006, the total principal amount owed by the Company to the Investor was
$1,397,436, net of discount of $102,564.
On October 3, 2006, the Company issued a convertible promissory note to our Chairman of the Board
who loaned $100,000 for the purpose of providing working capital to the Company. The promissory
note is payable in interest only monthly installments for three months and afterwards, it begins
paying 24 equal monthly installments of principal and interest in the amount of $4,707 each. The
note accrues interest at 12% and at the option of the holder, any unpaid principal and accrued
interest may be converted into Common Stock at the conversion price of $1.00 per share. The note
matures on January 3, 2009 at which time all unpaid principal and accrued interest thereon is due.
On December 28, 2006, the Company issued a promissory note to our Chairman of the Board who loaned
$175,000 for the purpose of providing equipment financing to the Company. The promissory note is
payable in 24 equal monthly installments of principal and interest in the amount of $5,813 each.
The note accrues interest at 12% and matures on December 28, 2008.
143
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 9 NOTES PAYABLE STOCKHOLDERS (continued)
On October 3, 2006, the Company issued a convertible promissory note to one of our
directors/shareholders who loaned $100,000 for the purpose of providing working capital to the
Company. The promissory note is payable in interest only monthly installments for 24 months at
$1,000 per installment. The note accrues interest at 12% and at the option of the holder, any
unpaid principal and accrued interest may be converted into Common Stock at the conversion of $1.00
per share. The note matures on October 3, 2008.
NOTE 10 EXTINGUISHMENT OF CONVERTIBLE DEBENTURES
The Company issued an aggregate of $1,100,000 of 15% Convertible Redeemable Subordinated Debentures
(the Series I Debentures) in 1994 and 1995 with a final maturity date of March 31, 1999, and
containing a provision for conversion of the Series I Debentures, at the option of the holders
thereof, into shares of Common Stock. The Company also issued an aggregate of $256,125 of 10%
Convertible Redeemable Debentures (Series II Debentures, and together with the Series I
Debentures, the Debentures) in 1998 with a maturity date of November 1, 1999, and containing a
provision for conversion of the Series II Debentures, at the option of the holders thereof, into
shares of Common Stock.
Due to cash constraints, the Company was not able to redeem the Debentures in 1999 pursuant to
their respective terms. The Company offered (the Conversion Offering) the holders of the
Debentures the opportunity to convert their Series I Debentures and Series II Debentures into
shares of Common Stock at a conversion rate of $1.50 and $1.75, respectively.
Certain holders of Debentures did not respond to the Conversion Offering in 1999, and the offer to
convert the Debentures into the Companys Common Stock has since expired and any contractual claims
for rights pursuant to the Debentures have been time-barred by the applicable statute of
limitations. Accordingly, the Company extinguished the Debentures on November 15, 2006 and any
obligation owed under their terms. The Company recorded other income of $40,135 and reversed all
accrued interest as a result of extinguishment.
144
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 11 STOCKHOLDERS EQUITY
Stock Issuances
During the year ended December 31, 2006, the Company sold 429,500 shares of its Common Stock to new
stockholders for a total consideration of $809,000, less $106,132 in transaction costs.
During the year ended December 31, 2006, 186,505 shares of Series A Preferred Stock were converted
into 186,505 shares of the Companys Common Stock in accordance with the Certificate of Designation
for the Series A Preferred Stock (the Certificate of Designation). The terms of the Certificate
of Designation required the holders of the Preferred Stock to convert their shares into the
Companys Common Stock on a share for share basis on the second anniversary from the date of
issuance of the Preferred Stock. The remaining shares of 96,667 shares of Preferred Stock sold
under the Certificate of Designation will convert into shares of Common Stock during the 3 month
period ended March 31, 2007.
The total amount of dividends declared to the holders of Preferred Stock was $35,500 during the
year ended December 31, 2006.
Stock Grants and Options
At the annual meeting of stockholders of the Company on December 18, 2002, the stockholders
approved the adoption of the MedSolutions, Inc. 2002 Stock Plan. The purpose of the plan is to
attract and retain the best available personnel for positions of substantial responsibility, to
provide additional incentive to employees, directors and consultants and to promote the success of
the Companys business. Options granted under the plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Board of Directors at the time of grant. On August
17, 2006, the Board of Directors approved an increase in the number of shares available for future
grants and awards under the 2002 Stock Plan to 3,000,000 shares from 850,000 shares. The
shareholders of the Company approved the amendment to the 2002 Stock Plan at their Annual
Shareholders Meeting on October 19, 2006.
The option grants have a contractual life up to ten years. Options for 478,796 and 674,336 shares
were granted to directors and employees during 2006 and 2005, respectively. During the year ended
December 31, 2006 and 2005, respectively, the Company granted its directors 134,223 and 81,208,
respectively, stock options in lieu of payment of director fees. As of December 31, 2006, all stock
options outstanding are fully vested. The amount of stock options available for future issuance is
1,671,204 shares as of December 31, 2006.
145
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 11 STOCKHOLDERS EQUITY (continued)
Stock Grants and Options (continued)
A summary of activity involving options on the Companys common stock follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Value |
|
Balance outstanding at December 31, 2004 |
|
|
268,118 |
|
|
$ |
1.00 |
|
|
|
|
|
|
Granted |
|
|
674,336 |
|
|
$ |
0.82 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired |
|
|
92,454 |
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at December 31, 2005 |
|
|
850,000 |
|
|
$ |
0.82 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
478,796 |
|
|
$ |
0.75 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at December 31, 2006 |
|
|
1,328,796 |
|
|
$ |
0.80 |
|
|
$ |
106,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable at December 31, 2006 |
|
|
1,328,796 |
|
|
$ |
0.80 |
|
|
$ |
106,303 |
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at December 31, 2006 for each of the following classes of options,
by exercise price, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE |
|
|
|
|
NUMBER OF |
|
REMAINING |
|
NUMBER OF OPTIONS |
EXERCISE PRICE |
|
OPTIONS |
|
CONTRACTUAL LIFE |
|
CURRENTLY EXERCISABLE |
|
$1.00 |
|
|
80,164 |
|
|
7.00 years |
|
|
80,164 |
|
$1.00 |
|
|
95,500 |
|
|
8.00 years |
|
|
95,500 |
|
$1.00 |
|
|
79,173 |
|
|
8.50 years |
|
|
79,173 |
|
$0.75 |
|
|
289,736 |
|
|
8.51 years |
|
|
289,736 |
|
$0.75 |
|
|
305,427 |
|
|
9.00 years |
|
|
305,427 |
|
$0.75 |
|
|
478,796 |
|
|
9.80 years |
|
|
478,796 |
|
146
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 12 WASTE MANAGEMENT FACILITY AGREEMENT
On June 8, 2006, the operating agreement between the Company and the University of Texas Medical
Branch (UTMB) expired. The operating agreement allowed the Company to manage the UTMB
incineration facility and process their waste for a fee as well as provided a facility for the
Company to treat waste generated from EMSI South Texas and Louisiana customers in return for a fee
paid to UTMB. Currently, the Company is taking generated waste from South Texas and Louisiana to
other third party facilities in South Texas and Northern Louisiana and to its Garland facility.
NOTE 13 COMMITMENTS AND CONTINGENCIES
Risks and Concentrations
Financial instruments, which potentially subject the Company to concentrations of credit risk, are
primarily cash and cash equivalents, trade accounts receivable and related party notes.
The Company carries $10 million of liability insurance (including umbrella coverage), and $5
million of aggregate pollution and legal liability insurance ($1 million per incident), which the
Company considers sufficient to meet regulatory and customer requirements and to protect its
employees, assets and operations. The Companys pollution liability insurance excludes liabilities
under CERCLA. There can be no assurance that the Company will not face claims under CERCLA or
similar state laws resulting in substantial liability for which the Company is uninsured and which
could have a material adverse effect on its business.
Lease Obligations
Effective February 10, 2005, the Company extended and renewed its lease at its corporate
headquarters in Dallas, Texas. The Company has leases for its corporate office and other facilities
for terms which expire through December 2012. Minimum annual rentals under the leases are as
follows:
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
Amount |
|
2007 |
|
$ |
97,547 |
|
2008 |
|
|
99,491 |
|
2009 |
|
|
99,491 |
|
2010 |
|
|
103,118 |
|
2011 |
|
|
104,384 |
|
Thereafter |
|
|
43,493 |
|
|
|
|
|
|
|
$ |
547,524 |
|
|
|
|
|
147
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 13 COMMITMENTS AND CONTINGENCIES (continued)
During the year ended December 31, 2002, the Company entered into an operating lease agreement for
the use of new vehicles to use in the transportation segment of its business. The monthly lease
payments range from $713 to $1,237 and the lease periods range from 60 to 84 months for the
vehicles. In addition, the Company pays a per-mile maintenance fee of $0.065 to $0.070 for the use
of the vehicles. The following table shows the future minimum operating lease payments that are due
under the contracts:
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
Amount |
|
2007 |
|
$ |
213,378 |
|
2008 |
|
|
201,458 |
|
2009 |
|
|
121,255 |
|
2010 |
|
|
12,138 |
|
2011 & thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
548,229 |
|
|
|
|
|
Rent expense for all operating leases during the years ended December 31, 2006 and 2005 was
$924,029 and $729,045, respectively.
Environmental Matters
The Company operates within the medical waste management industry, which is subject to various
federal, state and local laws and regulations. Management is not aware of any significant
contingent liabilities relative to these activities.
Litigation
The Company operates in a highly regulated industry and are exposed to regulatory inquiries or
investigations from time to time. Government authorities can initiate investigations for a variety
of reasons. We have been involved in certain legal and administrative proceedings that have been
settled or otherwise resolved on terms acceptable to us, without having a material adverse effect
on our business.
148
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 13 COMMITMENTS AND CONTINGENCIES (continued)
The Company, EMSI and one of the Companys employees have been named in a civil action filed in the
Dallas County Court, Dallas County, Texas as a result of a traffic accident involving one of EMSIs
trucks. The complaint, Case No. cc-05-04255-E, was filed on April 8, 2005 and is a civil action
titled Kathleen Bohne and David Ross, Independent Executor of the Estate of Robert E. Bohne v.
MedSolutions, Inc., EnviroClean Management Services, Inc. and Turner Bruce Yarbrough. The complaint
seeks damages from the Company for losses suffered by the plaintiffs as a result of an accidental
death. The Company denies responsibility for the claims alleged by the plaintiffs and is vigorously
defending the action through its insurance carrier. The Company believes that this lawsuit is
adequately covered by insurance; however, to the extent that the amount of any award exceeds the
Companys insurance coverage, such excess amounts could have a material impact on the Companys
financial condition or results of operations. The plaintiffs are litigating for damages, which
could exceed $4.4 million plus punitive damages. The Company maintains $6 million of insurance
coverage to cover potential claims. If the suit is settled for an amount exceeding $6 million the
Company will be responsible for this excess.
We are also a party to various legal proceedings arising in the ordinary course of business.
However, except as described above, there are no legal proceedings pending or, to our knowledge,
threatened against us that could adversely affect our financial condition or our ability to carry
on the business.
Employment Agreements
Matthew H. Fleeger serves as the Companys President and Chief Executive Officer and entered into a
three-year employment agreement dated December 30, 2004 to be effective as of January 1, 2005. Mr.
Fleeger is entitled to receive an annual base salary of $200,000, increased 5% annually, and is
also entitled to be paid a cash bonus of $25,000 on April 15, 2005. Pursuant to the Executive
Target Bonus Program, Mr. Fleeger is also eligible for an annual bonus based on the Company
achieving certain goals related to EBITDA. Any such bonus will be paid to Mr. Fleeger in the form
of a stock option to purchase a number of shares of Common Stock equal to the amount of such bonus
at an exercise price per share of Common Stock equal to the fair market value (as such term is
defined in the Companys 2002 Stock Option Plan or any successor plan thereto) of such Common Stock
as of the effective date that such option is granted; provided, however, that in the event that Mr.
Fleeger becomes the owner of equity securities of the Company representing more than 10% of the
total combined voting power of all classes of equity securities of the Company, the exercise price
per share of Common Stock shall be equal to 110% of the fair market value of such Common Stock as
of the effective date that such option is granted; provided further, however, that Mr. Fleeger
shall have the option, in his sole discretion, to receive up to 50% of the amount of any such
bonus in the form of cash in lieu of such stock option.
Mr. Lonnie P. Cole, Sr. serves as a Senior Vice President in charge of our Sales Department. Mr.
Cole entered into a three-year employment agreement dated September 30, 2004 to be effective as of
October 1, 2004. Mr. Cole is to receive a base salary of $100,000 annually and is eligible for
bonus incentives based on the Company achieving certain goals related to revenue growth.
149
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 13 COMMITMENTS AND CONTINGENCIES (continued)
Mr. J. Steven Evans serves as Vice President of Finance in charge of our Finance and Accounting
Department. Mr. Evans entered into a three-year employment agreement dated February 1, 2005. Mr.
Evans is to receive a base salary of $95,000 annually and is eligible for bonus incentives based on
personal performance and the Company achieving certain financial goals.
Mr. Alan Larosee serves as Vice President of Operations. Mr. Larosee entered into a three-year
employment agreement dated March 1, 2005. Mr. Larosee is to receive a base salary of $95,000
annually and is eligible for bonus incentives based on personal performance and the Company
achieving certain financial goals.
Mr. James M. Treat serves as Vice President of Business Development. Mr. Treat entered into a
three-year employment agreement dated December 1, 2005. Mr. Treat is to receive a base salary of
$100,000 annually and is eligible for bonus incentives based on personal performance and the
Company achieving certain financial goals.
NOTE 14 RELATED PARTY TRANSACTIONS
Related party expenses included in the accompanying consolidated statements of operations are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Interest expense |
|
$ |
183,082 |
|
|
$ |
139,705 |
|
|
|
|
|
|
|
|
150
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 15 SUBSEQUENT EVENTS
On January 1, 2007, the Company issued promissory notes to its directors for payment of their 2006
board compensation. Additional promissory notes were issued to the Chairman of the Board and the
President/Chief Executive Officer of the Company for payment of compensation for giving their
personal guaranties related to certain indebtedness by the Company to various third parties. The
total amount of the promissory notes issued is $292,005 and the notes accrue interest at 12% with
final payment of all principal and accrued interest due on July 1, 2007.
On January 2, 2007, the Company issued a promissory note to Tate Investments, LLC, which loaned
$175,000 to the Company for equipment expansion purposes. The promissory note bears interest at 12%
and is payable in 24 equal monthly installments of principal and interest in the amount of $5,813
each, with the balance of the principal and any accrued and unpaid interest due upon maturity of
the note on December 28, 2008.
On January 31, 2007, the Company renewed and extended for six months a $175,000 promissory note to
On Call Medical Waste Services, Ltd (On Call). The note accrues interest at 12% and is payable in
monthly installments of interest only with the principal and any accrued and unpaid interest due
upon maturity of the note on July 31, 2007. As consideration for this extension, the Company
agreed to enter into an agreement with Medical Waste of North Texas, LLC (MWNT an entity owned by
the former owner of On Call) for the Company to treat and dispose of regulated medical waste that
is brought to its Garland Facility by MWNT, effective September 1, 2007. The initial term of this
agreement is for 24 months, and the agreement automatically renews for additional one-year
extensions unless either party notifies the other party in writing at least 30 days but not more
than 90 days prior to any such renewal date of its desire not to renew the agreement.
On March 27, 2007, EMSI entered into a $1,500,000 secured, one-year loan and security agreement
(the Loan Agreement) with Park Cities Bank, Dallas, Texas (the Bank), and Mr. Matthew H.
Fleeger and Mr. Winship B. Moody, Sr. (collectively, the Guarantors). The terms of the Loan
Agreement provide EMSI with a $1,500,000 revolving line of credit, subject to certain downward
adjustments from time to time based upon the value of the collateral securing the line of credit.
The performance by EMSI of its obligations under the Loan Agreement is secured by all of EMSIs
personal property, including without limitation its account receivables, and a first-lien mortgage
deed of trust on EMSIs facility located in Garland, Texas, and is unconditionally guaranteed by
the Guarantors. The proceeds of the borrowings under the Loan Agreement may only be used for
general corporate purposes, including without limitation providing working capital to EMSI for the
purposes of financing its operations, production and marketing and sales efforts, costs related to
the expansion of EMSIs business operations, and the acquisition of the assets of businesses
engaged in businesses the same as, similar to, or complementary to EMSIs business operations.
Borrowings under the Loan Agreement will bear interest at the lesser of (1) a fluctuating rate of
interest equal to 1.0% in excess of the prime rate as designated in the Money Rates Section of the
Wall Street Journal from time to time or (2) the maximum rate permissible by applicable law.
Accrued and unpaid interest under the Loan Agreement is payable on the first day of each month
commencing on April 1, 2007. In addition, EMSI paid an
151
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 15 SUBSEQUENT EVENTS (continued)
origination fee to the Bank in the amount of $15,000. The Loan Agreement contains, among other
provisions, conditions precedent, covenants, representations and warranties and events of default
customary for facilities of this size, type and purpose. Negative covenants include certain
restrictions or limitations on, among other provisions, the incurrence of indebtedness; liens;
investments, loans and advances; restricted payments, including dividends; consolidations and
mergers; sales of assets (subject to customary exceptions for sales of inventory in the ordinary
course and sales of equipment in connection with the replacement thereof in the ordinary course);
and changes of ownership or control of EMSI. Affirmative covenants include covenants regarding,
among other provisions, financial reporting. The Loan Agreement will mature and expire on April 1,
2008, at which time all outstanding amounts under the Loan Agreement will be due and payable. The
outstanding amounts under the Loan Agreement may be prepaid by EMSI at any time without penalty,
and any principal amounts borrowed and repaid thereunder may be reborrowed by EMSI prior to the
maturity date so long as the aggregate principal amount outstanding at any time does not exceed the
$1,500,000 maximum loan commitment (as subject to downward adjustment based on the value of the
collateral as described above). Under certain conditions the loan commitment under the Loan
Agreement may be terminated by the Bank and amounts outstanding under the Loan Agreement may be
accelerated. Bankruptcy and insolvency events with respect to EMSI or either of the Guarantors will
result in an automatic termination of lending commitments and acceleration of the indebtedness
under the Loan Agreement. Subject to notice and cure periods in certain cases, other events of
default under the Loan Agreement will result in termination of lending commitments and acceleration
of indebtedness under the Loan Agreement at the option of the Bank.
Such other events of default include failure to pay any principal and/or interest when due, failure
to comply with covenants, breach of representations or warranties in any respect, non-payment or
acceleration of other material debt of EMSI or the Guarantors, the death of either Guarantor of the
termination of either of their guaranties, certain judgments against EMSI or a Guarantor, a
material adverse change in the business or financial condition of EMSI or either Guarantor, or if
the Bank in good faith deems itself insecure.
On March 1, 2007, the Company provided written notice to the Investor, that the Company intended to
prepay in full on April 2, 2007 all outstanding principal and interest owed by the Company to the
Investor pursuant to (1) that certain 10% Senior Convertible Note issued by the Company to the
Investor on July 15, 2005 in the principal amount of $1,000,000 (the 2005 Note), and (2) that
certain Convertible Secured Promissory Note issued by the Company to the Investor on March 15, 2006
in the principal amount of $500,000 (the 2006 Note, and together with the 2005 Note, the
Notes). The 2005 Note was issued by the Company in connection with the Investment Agreement. The
Company intended to use the proceeds of the Loan Agreement described above to prepay the Notes.
152
MEDSOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 15 SUBSEQUENT EVENTS (continued)
On March 31, 2007, 96,667 shares of the Companys Series A 10% Convertible Preferred Stock (the
Series A Preferred Stock) were converted into 96,667 shares of the Companys Common Stock in
accordance with the Certificate of Designation for the Series A Preferred Stock (the Certificate
of Designation). The terms of the Certificate of Designation required the holders of the Preferred
Stock to convert their shares into the Companys Common Stock on a share for share basis on the
second anniversary from the date of issuance of the Series A Preferred Stock. All dividends
declared with regard to the issuance of the Series A Preferred Stock have been paid. As of March
31, 2007, there were no shares of Series A Preferred Stock outstanding.
153
To the Board of Directors
MedSolutions, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of MedSolutions, Inc. (the Company)
as of December 31, 2005 and 2004, and the related consolidated statements of operations,
stockholders equity (deficiency) and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements 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 consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of MedSolutions, Inc. as of December 31,
2005 and 2004, and the results of its operations and cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
MARCUM & KLIEGMAN, LLP
New York, New York
March 17, 2006
154
MEDSOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
ASSETS
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
|
|
|
$ |
|
|
Accounts
receivable trade, net of allowance of $69,240 and $88,835 |
|
|
1,405,603 |
|
|
|
979,080 |
|
Prepaid expenses and other current assets |
|
|
258,523 |
|
|
|
240,428 |
|
Supplies |
|
|
14,106 |
|
|
|
11,911 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
1,678,232 |
|
|
|
1,231,419 |
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost, net of accumulated
depreciation of $1,836,756 and |