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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
COMMISSION FILE NUMBER 0-21229
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STERICYCLE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3640402
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
1419 LAKE COOK ROAD, SUITE 410, DEERFIELD, ILLINOIS 60015
(Address of principal executive offices)
(847) 945-6550
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
On February 11, 1997, the aggregate market value of the Registrant's voting
stock held by non-affiliates of the Registrant was $66,306,120.
On February 11, 1997, there were 10,000,264 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Items 10, 11, 12 and 13 of Part III of this Report
is incorporated by reference to the Registrant's definitive Proxy Statement for
the 1997 Annual Meeting of Stockholders to be held on April 28, 1997.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Stericycle, Inc. (the "Company") is a multi-regional integrated company
employing proprietary technology to provide environmentally-responsible
management of regulated medical waste for the health care industry. The Company
is the second-largest provider of regulated medical waste management services in
the United States. Because of the Company's health care orientation, proprietary
technology and breadth of service, the Company believes that it is in a unique
position to meet the fundamental need of the health care industry to manage
regulated medical waste in a safe and cost-effective manner and to capitalize on
the current consolidation trend in the regulated medical waste management
industry. The Company believes that its exclusive focus on regulated medical
waste and the experience of its management in the health care industry
distinguish the Company from its chief competitors, most of whom participate in
multiple businesses and most of whose management experience is primarily in the
solid waste business.
The Company believes that its regulated medical waste management system,
including its proprietary ELECTRO-THERMAL-DEACTIVATION ("ETD") treatment
process, is the only commercially-proven system that provides all of the
following benefits: (i) it kills human pathogens in regulated medical waste
without generating liquid effluents or regulated air emissions; (ii) it affords
certain operating cost advantages over the principal competing treatment
methods; (iii) it reduces the volume of regulated medical waste by up to 85%;
(iv) it renders regulated medical waste unrecognizable; (v) it permits the
recovery and recycling of usable plastics from regulated medical waste; and (vi)
it enables the remaining regulated medical waste to be safely landfilled or used
as an alternative fuel in energy production. The Company's full-service program
is designed to help to protect its customers and their employees against
potential liabilities and injuries in connection with the handling,
transportation and disposal of regulated medical waste.
The Company's integrated services include regulated medical waste
collection, transportation, treatment, disposal, reduction, reuse and recycling
services, together with related training and education programs, consulting
services and product sales, in eight geographic service areas: (i) Arizona,
California and Utah; (ii) Idaho, Oregon, Washington and British Columbia; (iii)
Colorado; (iv) Texas; (v) Kentucky and Tennessee; (vi) Illinois, Indiana,
Michigan, Ohio and Wisconsin; (vii) Connecticut, Massachusetts, Maine, New
Hampshire, Rhode Island and Vermont; and (viii) Maryland, New Jersey, New York,
North Carolina, South Carolina, Pennsylvania and the District of Columbia. As of
December 31, 1996, the Company served approximately 27,000 customers, consisting
of two principal types of generators of regulated medical waste. Approximately
67% of the Company's 1996 revenues were derived from hospitals, blood banks and
pharmaceutical manufacturers ("Core" generators), and approximately 33% of its
revenues were derived from long-term and subacute care facilities, outpatient
clinics, medical and dental offices, industrial clinics, dialysis centers,
laboratories, biotechnology and biomedical companies, veterinary offices,
municipal health departments, ambulance, fire and police departments,
correctional facilities, schools, park districts and funeral homes ("Alternate
Care" generators).
Regulated medical waste is generally defined as any waste that can cause an
infectious disease or that can reasonably be suspected of harboring human
pathogenic organisms. Regulated medical waste includes single-use disposable
items such as needles, syringes, gloves and laboratory, surgical, emergency room
and other supplies which have been in contact with blood or bodily fluids;
cultures and stocks of infectious agents; and blood and blood products. An
independent study published in 1995 estimated that the size of the regulated
medical waste management market in the United States in 1995 was approximately
$1 billion.
TRENDS IN THE HEALTH CARE AND MEDICAL WASTE INDUSTRIES
The Company believes that the demand for its services will grow as a
consequence of certain trends in the health care and regulated medical waste
industries.
INCREASED AWARENESS OF REGULATED MEDICAL WASTE. The handling and disposal
of the large quantities of regulated medical waste generated by the health care
industry has attracted increased public awareness and regulatory attention. The
proper management of potentially infectious medical waste gained national
attention in 1988 when disposable syringes and other medical waste washed ashore
on New Jersey and New York coastlines.
These events raised concerns about the potential transmission of hepatitis
B, HIV and other infectious diseases. The Medical Waste Tracking Act of 1988
("MWTA") was enacted in response to this problem and established a two-year
demonstration program for the proper tracking and treatment of medical waste.
Many states have enacted legislation modeled on MWTA's requirements.
In addition, OSHA has issued regulations concerning employee exposure to
bloodborne pathogens and other potentially infectious material that require,
among other things, special procedures for the handling and disposal of
regulated medical waste and annual training of all personnel who are potentially
exposed to blood and other bodily fluids. The Company believes that the scope of
these regulations will help to expand the market for the Company's services
beyond traditional providers of health care.
As a consequence of these legislative and regulatory initiatives, the
Company believes that health care providers and other generators of regulated
medical waste have become increasingly concerned about the handling, treatment
and disposal of regulated medical waste. These concerns are reflected by their
desire: (i) to reduce on-site handling of regulated medical waste in order to
minimize employee contact; (ii) to assure safe transportation of regulated
medical waste to treatment sites; (iii) to assure destruction of potentially
infectious human pathogens; (iv) to render the treated regulated medical waste
non-recognizable in order to reduce liability and to increase disposal options;
(v) to minimize the impact of the treatment process on the environment and the
volume of solid waste deposited in landfills; and (vi) to participate in
recycling programs where possible.
GROWING IMPORTANCE OF ALTERNATE CARE GENERATORS. The Company believes that
in response to managed care and other health care cost-containment pressures,
patient care is increasingly shifting from higher-cost acute-care settings to
less expensive off-site treatment alternatives. According to a report published
by the U.S. Health Care Financing Authority, total alternate-site health care
expenditures in the United States increased from approximately $5 billion in
1985 to approximately $22 billion in 1994. The Company believes that
alternate-site health care expenditures will continue to grow in response to
governmental and private cost-containment initiatives. Many common diseases and
conditions, including pulmonary diseases, neurological conditions, infectious
diseases, digestive disorders, AIDS and various forms of cancer are now being
treated in alternate-site settings.
Alternate Care generators have become an increasingly important source of
revenues in the regulated medical waste industry. An independent report in 1990
estimated that approximately 23% (by weight) of regulated medical waste was
produced by Alternate Care generators. Based on the Company's experience, the
Company believes both that this percentage has increased significantly and that
Alternate Care generators account for a greater percentage of regulated medical
waste treatment revenues than the percentage of regulated medical waste volume
that they generate. Individual Alternate Care generators typically do not
produce a sufficient volume of regulated medical waste to justify substantial
capital expenditures on their own waste treatment facilities or the expense of
hiring regulatory compliance personnel. Accordingly, the Company believes that
Alternate Care generators are extremely service-sensitive, relying on their
regulated medical waste management provider for timely waste removal, creative
solutions for safer regulated medical waste handling, establishment of regulated
medical waste management protocols, education on regulated medical waste
reduction techniques and assistance with compliance and recordkeeping. The
Company believes that growth in the number of Alternate Care generators will
generate growth in the overall regulated medical waste market and may provide
growth opportunities for the Company.
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HEALTH CARE COST CONTAINMENT INITIATIVES. The health care industry is under
increasing pressure to reduce costs and improve efficiency. The Company believes
that its regulated medical waste management services facilitate cost containment
by health care providers by reducing their regulated medical waste tracking,
handling and compliance costs, reducing their potential liability related to
employee exposure to bloodborne pathogens and other potentially infectious
material, and significantly reducing the amount of capital invested in on-site
treatment of regulated medical waste.
SHIFT FROM ON-SITE INCINERATION TO OFF-SITE TREATMENT. The Company believes
that during the past five years, government clean air regulations have increased
both the capital costs required to bring many existing incinerators into
compliance with such regulations and the operating costs of continued
compliance. As a result, many hospitals have shut down their incinerators. This
trend is expected to accelerate when the U.S. Environmental Protection Agency
("EPA") adopts proposed regulations which are currently being revised and are
scheduled to be released in July 1997. These regulations are expected to limit
the discharge into the atmosphere of nine pollutants released by hospital waste
incineration. The EPA had predicted that under the regulations as initially
proposed, many of the nation's hospital-based incinerators would be shut down
and that many planned medical waste incinerators would not be built due to the
increased costs of installing air pollution control systems. The Company expects
to benefit from this trend as former users of incinerators seek alternatives for
the treatment of their regulated medical waste.
INDUSTRY CONSOLIDATION. Although the regulated medical waste management
industry remains fragmented, the number of competitors is rapidly decreasing as
a result of industry consolidation. National attention on regulated medical
waste in the late 1980s led to rapid growth in the industry and a highly-
fragmented competitive structure. Entrants into the industry included several
large municipal waste companies and many independent haulers and incinerator
operators. Since 1990, however, government clean air regulations and public
concern about the environment have increased the costs and public opposition to
both on- and off-site regulated medical waste incineration. As a result, the
Company believes that independent haulers and incinerator operators have
encountered increasing difficulty competing with integrated companies like the
Company, which typically have their own low-cost treatment plants located within
the geographic areas that they serve. The Company believes that many of these
independent haulers and incinerator operators are withdrawing from the regulated
medical waste industry. The Company's internal estimates show that in its
geographic service areas, the number of competitors has fallen from
approximately 50 in 1991 to approximately 30 in 1996, a decline of 40%. As a
result of industry consolidation, the Company believes that it has increasing
opportunities to acquire regulated medical waste management businesses.
GROWTH STRATEGY
The Company is currently the second-largest provider of regulated medical
waste management services in the United States. The Company's goals are to
accelerate its revenue growth through penetration of existing geographic service
areas and expansion into new areas and to become profitable and increase profits
through the more efficient use of its existing infrastructure.
INCREASED PENETRATION OF EXISTING SERVICE AREAS. All of the Company's
treatment facilities are currently operating below capacity. Due to the high
fixed costs associated with the collection and treatment of regulated medical
waste, the Company's operating margins would increase with incremental volume
gains. Accordingly, the Company is currently implementing a number of programs
to increase customer density and penetration of its existing geographic service
areas in order to maximize operating efficiencies. The Company focuses its
telemarketing and direct sales efforts at securing agreements with new customers
among both Core and Alternate Care generators. The Company intends to acquire
competitors and enter into marketing alliances with various hospitals, health
maintenance organizations, medical suppliers and others.
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GEOGRAPHIC EXPANSION. In order to expand its geographic coverage, the
Company plans, among other things, to develop additional transfer stations,
acquire independent haulers and integrated competitors, expand its telemarketing
and direct sales efforts and where appropriate construct new treatment
facilities. The Company estimates that its existing transportation and treatment
system enables it to serve effectively an area encompassing approximately 45% of
the U.S. population. The Company believes that expanding its "hub and spoke"
transportation strategy would allow it to maximize the utilization of existing
treatment facilities by channeling waste through existing and additional
transfer stations. In order to reach new geographic service areas, the Company
is exploring acquiring independent haulers and integrated competitors. The
Company believes that expanding telemarketing and direct sales efforts will
increase customer density in existing and new geographic service areas. A
combination of these factors may lead to the construction of additional
treatment and other facilities.
OTHER GROWTH OPPORTUNITIES. The Company believes that it has the
opportunity to expand its business by increasing the range of products and
services that it offers to its existing customers and by adding new customer
categories. The Company, for example, may expand its collection, treatment,
disposal and recycling of regulated medical waste generated by health care
providers to include wastes that are currently handled by the Company only on a
limited basis, such as photographic chemicals, lead foils and amalgam used in
dental and radiology laboratories. In addition, the Company may decide to offer
single-use disposable medical supplies to its customers. The Company is
exploring marketing alliances with organizations that focus on Alternate Care
generators. The Company is also investigating expansion into international
markets. In June 1996, the Company entered into an agreement with a Brazilian
company to assist it in exploring opportunities for the commercialization of the
Company's medical waste management technology in certain territories in South
America.
ACQUISITION PROGRAM
The acquisition of other regulated medical waste management businesses,
including both independent haulers and integrated competitors, is a key element
of the Company's strategy to increase the number of customers in its current
markets and to expand its operations geographically. Many of these potential
acquisition candidates participate in both the solid waste industry as well as
the regulated medical waste industry. The Company believes that its exclusive
focus on the regulated medical waste industry makes it an attractive buyer for
the medical waste operations of these companies. The Company believes that its
expansion strategy also makes it an attractive buyer to haulers whose owners may
wish to remain active in their businesses, both as managers and as equity
holders, while participating in the growth potential inherent in an industry
consolidation. In addition, the Company believes that its customer-service focus
makes it an attractive buyer to owners who place significant importance on the
assurance that their customers will receive quality service following the sale
of their businesses.
During 1996, the Company completed the acquisition of five regulated medical
waste management businesses: Bio-Med of Oregon, Inc. in Portland, Oregon in
January; WMI Medical Services of New England, Inc. (a subsidiary of Waste
Management, Inc.) in Hudson, New Hampshire, also in January; Sharps Incinerator
of Fort, Inc. in Fort Atkinson, Wisconsin in April; Doctors Environmental
Control, Inc. in Santa Ana, California in May; and a majority of the regulated
medical waste management business of Waste Management, Inc. ("WMI") in December.
In the last of these acquisitions, the Company acquired the customer accounts,
customer contracts, trucks and other vehicles, and other associated assets of
WMI's regulated medical waste business at 24 locations in Arizona, California,
Indiana, Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, South Carolina,
Tennessee, Utah and Washington. The purchase price, which is subject to
adjustment to reflect the parties' final agreement on the value of the trucks
and other vehicles acquired by the Company, was approximately $10.7 million. The
Company paid $5.45 million in cash at closing and delivered a note to WMI for
the balance of the purchase price. This note provides for two principal payments
of $2.605 million each in December 1997 and December 1998, respectively, and
quarterly payments of accrued interest at the rate of 7.0% per annum. With the
exception
4
of service obligations arising after closing under the customer contracts that
the Company acquired, the Company did not assume any liabilities in connection
with this acquisition.
The Company's senior management is actively involved in identifying
acquisition candidates and consummating acquisitions. In determining whether to
proceed with a business acquisition, the Company evaluates a number of factors
including: (i) the composition and size of the seller's customer base; (ii) the
efficiencies that may be obtained when the acquisition is integrated with one or
more of the Company's existing operations; (iii) the potential for enhancing or
expanding the Company's geographic service area and allowing the Company to make
other acquisitions in the same service area; (iv) the seller's historical and
projected financial results; (v) the purchase price negotiated with the seller
and the Company's expected internal rate of return; (vi) the experience,
reputation and personality of the seller's management; (vii) the seller's
customer service reputation and relationships with the communities that it
serves; (viii) if the acquisition involves the assumption of liabilities, the
extent and nature of the seller's liabilities, including environmental
liabilities; and (viii) the effect of the proposed acquisition on the Company's
earnings per share.
The Company has established a procedure for efficiently integrating
newly-acquired companies into its business while minimizing disruption of the
continuing operations of both the Company and the acquired business. Once a
medical waste management business is acquired, the Company promptly implements
programs designed to improve customer service, sales, marketing, routing,
equipment utilization, employee productivity, operating efficiencies and overall
profitability.
The Company anticipates that its future acquisitions of other regulated
medical waste management businesses will be made by the payment of cash, the
issuance of debt or equity securities or a combination of these methods. The
Company believes that its acquisition strategy will be enhanced by the fact that
the Company's Common Stock is publicly-traded. Historically, the Company's
acquisition strategy has been to acquire selected assets of regulated medical
waste management businesses, consisting principally of customer lists, customer
contracts, vehicles and related supplies and equipment. Some of the Company's
acquisitions have also involved the Company's assumption of certain liabilities
of the seller.
TREATMENT TECHNOLOGIES
The three most common off-site commercial technologies for treating
regulated medical waste are incineration, autoclaving and the Company's
proprietary ETD treatment process. Alternative technologies and methods, which
have not gained wide commercial acceptance, include chemical treatment,
microwaving and certain specialized or experimental technologies, including the
development and marketing of reusable or degradable medical products designed to
reduce the generation of regulated medical waste. The Company believes that the
ETD treatment process has certain advantages over incineration and autoclaving.
PRINCIPAL TREATMENT TECHNOLOGIES
INCINERATION. Incineration accounts for approximately 70% of permitted
off-site capacity to treat regulated medical waste. Incineration burns regulated
medical waste at elevated temperatures and reduces it to ash. Like ETD,
incineration significantly reduces the volume of waste, and it is the
recommended treatment and disposal option for certain types of regulated medical
waste such as anatomical waste or residues from chemotherapy procedures.
Incineration has come under increasing criticism from the public and from state
and local regulators, however, because of the airborne emissions that it
generates. Emissions from incinerators can contain pollutants such as dioxins,
furans, carbon monoxide, mercury, cadmium, lead and other toxins which are
subject to federal, state and, in some cases, local regulation. The fly-ash
by-product of incineration may also constitute a hazardous substance. As a
result, there is a significant cost to construct new incineration facilities, or
to improve existing facilities, to insure that their operation is in compliance
with regulatory standards.
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AUTOCLAVING. Autoclaving accounts for approximately 22% of permitted
off-site capacity to treat regulated medical waste. Autoclaving treats regulated
medical waste with steam at high temperature and pressure to kill pathogens. The
technology is most effective if all surfaces are uniformly exposed to the steam,
but uniform exposure may not always occur, potentially leaving some pathogens
untreated. In addition, autoclaving alone does not change the appearance of
waste, and recognizable regulated medical waste may not be accepted by landfill
operators. To compensate for this disadvantage, autoclaving may be combined with
a shredding or grinding process to render the regulated medical waste
non-recognizable. The high temperatures generated in the autoclaving process
occasionally change the physical properties of plastic waste, prohibiting its
recycling.
ETD TREATMENT PROCESS. The Company's patented ETD treatment process
accounts for approximately 7% of permitted off-site capacity to treat regulated
medical waste. ETD also includes a proprietary system for grinding regulated
medical waste. ETD uses an oscillating energy field of low-frequency radio waves
to heat regulated medical waste to temperatures that destroy pathogens such as
viruses, vegetative bacteria, fungi and yeast without melting the plastic
content of the waste. ETD is most effective on materials with low electrical
conductivity that contain polar molecules, including all human pathogens. Polar
molecules are molecules that have an asymmetric electronic structure and tend to
align themselves with an imposed electric field. When the polarity of the
applied field changes rapidly, the molecules try to keep pace with the
alternating field direction, thus vibrating and in the process dissipating
energy as heat. The Company believes that the electric field created by ETD
produces high molecular agitation and thus rapidly creates high temperatures.
All of the molecules exposed to the field are agitated simultaneously, and
accordingly, heat is produced evenly throughout the waste instead of being
imposed from the surface as in conventional heating. This phenomenon, called
volumetric heating, transfers energy directly to the waste, resulting in uniform
heating throughout the entire waste material and eliminating the inherent
inefficiency of transferring heat first from an external source to the surface
of the waste and then from the surface to the interior of the waste material.
ETD employs low-frequency radio waves because they can penetrate deeper than
high-frequency waves, such as microwaves, which can penetrate regulated medical
waste of a typical density only to a depth of approximately five inches. ETD
uses specific frequencies that match the physical properties of regulated
medical waste generally enabling the ETD treatment process to kill pathogens
while maintaining the temperature of the non-pathogenic waste at temperatures as
low as 900 C. Although ETD is effective in destroying pathogens present in
anatomical waste, the Company does not currently treat anatomical waste through
the ETD process.
ADVANTAGES OF THE COMPANY'S ETD TREATMENT PROCESS.
The Company believes that its proprietary ETD treatment process provides
certain advantages over incineration and certain advantages over autoclaving.
PERMITTING. It is difficult and time-consuming to obtain the permits
necessary to construct and operate any regulated medical waste treatment
facility, regardless of the treatment technology to be employed at the proposed
facility. Local residents, citizen groups and elected officials frequently
object to the construction and operation of proposed regulated medical waste
treatment facilities solely because regulated medical waste will be transported
to and stored and handled at the facility. The Company believes, however, that
the fact that the ETD treatment process does not generate liquid effluents or
regulated air emissions may enable the Company to locate treatment facilities
near dense population centers, where greater numbers of potential customers are
found, with less difficulty than would be encountered by a competitor attempting
to locate an incinerator in the same area.
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COST. The Company believes that it is less expensive to construct and
operate an ETD treatment facility than to construct and operate either a
like-capacity incinerator or a like-capacity autoclave with shredding
capability, which may enable the Company to price its treatment services
competitively. The Company believes that the comparative advantage that it
possesses in its ability to locate treatment facilities near dense population
centers may also provide transportation and operating efficiencies.
VOLUME REDUCTION AND UNRECOGNIZABILITY. The Company's regulated medical
waste management program reduces the overall volume of regulated medical waste
in several ways. The Company's patented reusable container, used under the
trademark STERI-TUB-Registered Trademark-, replaces the use of corrugated
containers for many Core and Alternate Care generators of large amounts of
regulated medical waste, thus reducing waste volume by as much as 10-15%. Once
medical waste has undergone the ETD treatment process, the original cubic volume
of the waste is reduced by approximately 85% This reduction in the volume of
regulated medical waste is comparable to the volume reduction obtained by
incineration. Autoclaving alone does not reduce the volume of regulated medical
waste or render it unrecognizable. To reduce waste volume and to overcome the
unwillingness of many landfill operators to accept recognizable treated
regulated medical waste, autoclaving must be combined with a shredding or
grinding operation, adding to its cost. A proprietary grinding feature is a
component of the ETD treatment process. The Company believes that the ability of
its ETD treatment process both to reduce the volume of regulated medical waste
and to render it unrecognizable gives the process an advantage over autoclave
operations that do not include shredding or grinding.
REUSE AND RECYCLING. The Company believes that its reuse and recycling
capabilities provide a marketing advantage with customers who prefer to use a
regulated medical waste management provider with a commitment to resource
conservation. The Company's customers can participate in a voluntary recycling
program by source-segregating their regulated medical waste. The
source-segregated regulated medical waste is treated by the ETD treatment
process and then processed through the Company's proprietary systems for the
automatic recovery of polypropylene plastics. The recovered polypropylene
plastics are used by a third party to manufacture a line of "sharps" containers
which are used by health care providers to dispose of sharp objects such as
needles and blades. In addition, in two of the Company's geographic service
areas, the Company's treated regulated medical waste is transported to resource
recovery facilities owned by third parties where it is used as refuse-derived
fuel in "waste-to-energy" plants to produce electricity. The Company is working
to develop a process in conjunction with a cement manufacturer to utilize
treated regulated medical waste as a fossil fuel substitute in cement kilns. As
a result of grinding, reuse and recycling, only approximately 7% of the original
cubic volume of the regulated medical waste treated by the Company during 1996
was disposed of in landfills.
MARKETING AND SALES
MARKETING STRATEGY. The Company's marketing strategy is to provide
customers with a complete cost management and compliance program for their
regulated medical waste. In addition to its regulated medical waste collection,
transportation, treatment and disposal services, the Company also offers a
variety of training and education programs and consulting services to its
customers. The Company's senior management and many of its other employees are
experienced health care professionals able to convey the importance of these
issues in the healthcare marketplace.
The Company's marketing strategy recognizes that its potential customers are
generally health care providers, who approach the problem of regulated medical
waste management from a different perspective than typical generators of solid
or municipal waste. Health care personnel have become increasingly sensitive to
the risk of contracting diseases such as AIDS and hepatitis through accidental
contact with infected patient blood. In addition, patients are increasingly
demanding that practitioners demonstrate continual vigilance against such risks.
Regulations which were recently adopted by OSHA require annual training of all
personnel who potentially can come into contact with bloodborne pathogens and
other potentially infectious materials. These regulations also require
documentation of handling procedures and
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detailed clean-up plans. As a result, there has been heightened awareness by
health care providers of the need to implement safeguards against such risks.
The Company has developed programs to help train employees of customers on
the proper methods of handling, segregating and containing regulated medical
waste in order to reduce their potential exposure. The Company can also advise
health care providers on the proper methods of recording and documenting their
regulated medical waste management in order to comply with federal, state and
local regulations. In addition, the Company offers consulting and review
services to such providers regarding their internal collection and control
systems and assists them in developing systems to provide for the efficient
management of their regulated medical waste from the point of generation through
treatment and disposal. The Company also offers consulting services to its
health care customers to assist them in reducing the amount of regulated medical
waste at the point of generation.
The Company's marketing and sales efforts are an integral part of its
strategy of pursuing opportunities for targeted growth. The Company attempts to
focus its marketing and sales efforts on potential customers that will yield the
greatest transportation and operating advantages.
CORE GENERATORS. The Company's marketing and sales efforts to Core
generators are conducted by account executives whose responsibilities include
identifying and attracting new customers and serving existing customers. In
addition, the Company employs customer service representatives to assist its
account executives. The Company's marketing and sales personnel are trained to
understand the issues confronting Core generators of regulated medical waste. In
addition to securing customer contracts, the Company's marketing and sales
personnel provide consulting services to its health care customers to assist
them in reducing the amount of regulated medical waste that they generate,
training their employees on safety issues and implementing programs to audit,
classify and segregate regulated medical waste in a proper manner.
The Company has secured several large and prestigious hospitals and health
care institutions as customers, including Sharp HealthCare and Stanford
University Medical Center in California; the Kaiser Permanente Medical Care
Program in California, Washington and Oregon; Northwestern Memorial Hospital in
Illinois; and VHA Healthfront in New England. The Company believes that its
relationship with these and other similarly well-known institutions will enhance
its ability to market its services to other Core generators and surrounding
Alternate Care generators.
The Company's marketing and sales efforts directed to Core generators are
supplemented by several strategic marketing alliances. In October 1993, the
Company entered into an alliance agreement with Baxter Healthcare Corporation
("Baxter"). A key component of this agreement is the expansion of Baxter's
procedure-based delivery system ("PBDS") to include regulated medical waste
disposal by the Company. Under PBDS, Baxter hospital supplies are custom-packed
in containers provided by the Company based on the requirements of a specific
hospital and, in many cases, the requirements of a specific medical provider.
Baxter's agreement to include regulated medical waste disposal as part of PBDS
was intended to assist its customers in consolidating the specific costs of a
patient procedure. The alliance agreement enables the Company potentially to
benefit from Baxter's marketing efforts and promotion of PBDS to link the sale
of the Company's regulated medical waste disposal services to Baxter's sale of
certain of its disposable hospital supplies. In connection with the alliance
agreement, Baxter paid $8,000,000 to purchase shares of the Company's preferred
stock, of which the Company was required to spend $1,000,000 for research and
development related to enhancements of the Company's technology to increase
recycling of Baxter's products. In November 1995, Baxter's parent corporation,
Baxter International Inc., announced that it intended to spin off its domestic
hospital supply and health care cost management businesses, which had sales of
approximately $4.58 billion in 1995, to a new company, Allegiance Corporation
("Allegiance"). This spin-off was completed in September 1996, and in connection
with the spin-off Baxter transferred its interest in the alliance agreement to
Allegiance. In addition to the
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Baxter alliance, the Company has entered into strategic marketing alliances with
several hospital associations pursuant to which the Company may receive
endorsements or marketing assistance.
ALTERNATE CARE GENERATORS. The Company's marketing and sales efforts for
Alternate Care generators are conducted by telemarketing representatives who use
the Company's proprietary database to identify and qualify potential customers
and set appointments for the Company's trained field sales representatives.
These field sales representatives provide follow-up customer service and
ancillary product sales. The Company has refined its telemarketing system and
believes it to be a cost-effective means to reach the numerous Alternate Care
generators of small quantities of regulated medical waste. The Company's sales
efforts are supplemented by several strategic marketing agreements with, for
example, the Massachusetts Dental Society and the Sisters of Providence Health
System in Washington and Oregon, under which the Company may receive
endorsements or marketing assistance.
SERVICE AGREEMENTS. The Company negotiates individual service agreements
with each Core and Alternate Care generator customer. Although the Company has a
standard form of agreement, terms vary depending upon the customer's service
requirements and volume of regulated medical waste generated. Service agreements
typically include provisions relating to types of containers, frequency of
collection, pricing, treatment and documentation for tracking purposes. Each
agreement also specifies the customer's obligation to pack its regulated medical
waste in approved containers. Service agreements are generally for a period of
one to five years and include renewal options, although customers may terminate
on written notice and typically upon payment of a penalty. Many payment options
are available including flat monthly or quarterly charges. The Company may set
its prices on the basis of the number of containers that it collects, the weight
of the regulated medical waste that it collects and treats, the number of
collection stops that it makes on the customer's route, the number of collection
stops that it makes for a particular multi-site customer, and other factors.
The Company has a diverse customer base, with no single customer accounting
for more than three percent of the Company's 1996 revenues. The Company does not
believe that the loss of any single customer would have a material adverse
effect on its business, financial condition or results of operations.
LOGISTICS
An important element of the Company's business strategy is to maximize the
efficiency with which it collects and transports a large volume of regulated
medical waste and directs the deployment of many collection vehicles. This
aspect of the Company's operations--referred to as logistics--represents the
Company's single largest operating cost. Accordingly, the Company considers
logistics to be a critical component of its operating plan. The Company's
integrated approach to regulated medical waste management is designed to provide
it with numerous logistic advantages in the process of managing regulated
medical waste.
PRE-COLLECTION. Before regulated medical waste is collected, the Company's
integrated waste management approach can "build in" efficiencies that will yield
logistic advantages. For example, the Company's consulting services can assist
its customers in minimizing their regulated medical waste volume at the point of
generation. In addition, the Company provides customers with the documentation
necessary for regulatory compliance which, if properly completed, will minimize
interruptions in the regulated medical waste treatment cycle for verification of
regulatory compliance.
CONTAINERS. A key element of the Company's pre-collection measures is the
use of specially-designed containers by most of the Company's Core and Alternate
Care generators of large volumes of regulated medical waste. The Company has
developed and patented a reusable leak- and puncture-resistant container, called
a STERI-TUB, made from recycled plastic. The STERI-TUB enables regulated medical
waste generators to reduce costs by reducing the number of times that regulated
medical waste is handled, eliminating the cost (and weight) of corrugated boxes
and potentially reducing workers' compensation
9
liability resulting from human contact with regulated medical waste. The Company
recently introduced two smaller sizes of STERI-TUBS that are popular in certain
areas of hospitals, such as the laboratory, and with many Alternate Care
generators. The Company has also developed a step-on lid opener and a sliding
lid that fit the various sizes of STERI-TUBS and make STERI-TUBS even safer and
more convenient to use. STERI-TUBS are designed to maximize the loads that will
fit within the cargo compartments of standard trucks and trailers. The Company
believes these features to be an improvement over its competitors' reusable
point-of-generation" containers. The Company's customers are responsible for
packing their regulated medical waste in a STERI-TUB or approved corrugated
container and placing the loaded containers at a designated collection area on
their premises. If a customer generates a large volume of waste, the Company
will place a large temporary storage container or trailer on the customer's
premises. In order to maximize regulatory compliance and minimize potential
liability, the Company will not accept medical waste unless it is properly
packaged by customers in Company-supplied or Company-approved containers.
COLLECTION AND TRANSPORTATION. Efficiency of collection and transportation
is a critical element of the Company's logistics. The Company seeks to maximize
route density and the number of stops on each route. The Company also employs a
tracking system for its collection vehicles which is designed to maximize
logistic efficiency. The Company deploys dedicated collection vehicles of
different capacities depending upon the amount of regulated medical waste to be
collected at a particular stop or on a particular route. The Company collects
containers of regulated medical waste from its customers at intervals depending
upon customer requirements, terms of the service agreement and the volume of
regulated medical waste produced. All containers are inspected at the customer's
site prior to pickup. The waste is then transported directly to one of the
Company's treatment facilities or to one of the Company's transfer stations
where it is aggregated with other regulated medical waste and then transported
to a treatment facility. In certain circumstances, the Company transports waste
to other specially-licensed regulated medical waste treatment facilities. The
Company transports small quantities of hazardous substances, such as
photographic fixer, lead foils and amalgam, from certain of its customers to a
metals recycling operation.
TRANSFER STATIONS. The use of transfer stations is another important
component of the Company's logistics. The Company utilizes transfer stations in
a "hub and spoke" configuration which allows the Company to expand its
geographic service area and increase the volume of regulated medical waste that
can be treated at a particular facility. Smaller loads of waste containers are
stored at the transfer stations until they can be consolidated into full
truckloads and transported to a treatment facility.
INSPECTION, TREATMENT AND DISPOSAL. Upon arrival at a treatment facility,
each container of regulated medical waste is scanned to verify that it does not
contain any unacceptable materials such as hazardous substances or radioactive
material. Any container which is discovered to contain hazardous substances
or~radioactive material is returned to the customer. In some cases the Company's
operating permits require that unacceptable waste be reported to the appropriate
regulatory authorities. After inspection, the regulated medical waste is loaded
into the processing system and ground, compacted and treated using the Company's
ETD treatment process. Upon completion of this process, the treated medical
waste is transported for resource recovery, recycling or disposal in a
nonhazardous waste landfill. After the STERI-TUBS have been emptied, they are
washed, sanitized and returned to customers for re-use.
DOCUMENTATION. The Company provides complete documentation to its customers
for all regulated medical waste that it collects, including the name of the
generator, date of pick-up and date of delivery to a treatment facility. The
Company's documentation system meets all applicable federal, state and local
regulations regarding the packaging and labeling of regulated medical waste,
including, but not limited to, all relevant regulations issued by the U.S.
Department of Transportation, OSHA and state and local authorities.
10
COMPETITION
The regulated medical waste services industry is highly competitive,
fragmented, and requires substantial labor and capital resources. Intense
competition exists within the industry not only for customers but also for
businesses to acquire. The Company's largest competitor is Browning-Ferris
Industries, Inc. Other significant competitors include Laidlaw Waste Systems,
Inc. and USA Waste Services, Inc. A large number of regional and local companies
also compete in the industry. The Company faces competition from these national
waste management companies and from many regional and local businesses in its
present locations and will be confronted with such competition in the future in
each location where it intends to expand. In addition, the Company faces
competition from businesses and other organizations that are attempting to
commercialize alternate treatment technologies or products designed to reduce or
eliminate the generation of regulated medical waste, such as reusable or
degradable medical products.
The Company competes for service agreements primarily on the basis of cost
effectiveness, quality of service, geographic location and generator-perceived
liability risks. The Company's ability to obtain new service agreements may be
limited by the fact that a potential customer's current vendor may have an
excellent service history or may reduce its prices to the potential customer.
GOVERNMENTAL REGULATION
The Company operates within the regulated medical waste management industry,
which is subject to extensive and frequently changing federal, state and local
laws and regulations. This statutory and regulatory framework imposes compliance
burdens and risks on the Company, including requirements to obtain and maintain
government permits. These permits grant the Company the authority, among other
things, to construct and operate treatment and transfer facilities, to transport
regulated medical waste within and between relevant jurisdictions, and to handle
particular regulated substances. The Company's permits must be periodically
renewed and are subject to modification or revocation by the issuing regulatory
authority. In addition to the requirement that it obtain and maintain permits,
the Company is subject to extensive federal, state and local laws and
regulations that, among other things, govern the definition, generation,
segregation, handling, packaging, transportation, treatment, storage and
disposal of regulated medical waste. The Company is also subject to extensive
regulation designed to minimize employee exposure to regulated medical waste. In
addition, the Company is subject to certain foreign laws, rules and regulations.
FEDERAL REGULATION
There are at least four federal agencies that have authority over medical
waste. These agencies are the EPA, OSHA, Department of Transportation ("DOT")
and Postal Service. These agencies regulate medical waste under a variety of
statutory and regulatory authority.
MEDICAL WASTE TRACKING ACT OF 1988. In the late 1980s, the EPA outlined a
two-year demonstration program pursuant to the Medical Waste Tracking Act of
1988 ("MWTA"), which was added as Subtitle J to the Resource Conservation and
Recovery Act of 1976 ("RCRA"). The MWTA was adopted in response to health and
environmental concerns over infectious medical waste after medical waste washed
ashore on beaches, particularly in New York and New Jersey during the summer of
1988. Public safety concerns were amplified by media reports of careless
management of medical waste. The MWTA was intended to be the first step in
addressing these problems. The primary objective of the MWTA was to ensure that
regulated medical wastes which were generated in a covered state and which posed
environmental (including aesthetic) problems were delivered to disposal or
treatment facilities with a minimum of exposure to waste management workers and
the public. The MWTA's tracking requirements included accounting for all waste
transported and imposed civil and criminal sanctions for violations.
In its regulations implementing the MWTA, the EPA defined regulated medical
waste and established guidelines for its segregation, handling, containment,
labeling and transport. Under the MWTA, the EPA
11
was to deliver three reports to Congress on different aspects of regulated
medical waste management and the success of the demonstration program for
tracking regulated medical waste. Two of these reports were completed; the third
report has not yet been issued. The third report is expected to cover the use of
alternative medical waste treatment technologies, including the Company's ETD
technology. There can be no assurance that if and when the third report is
issued, it will not contain findings or make recommendations that are adverse to
the Company's medical waste treatment technology. Any such adverse findings or
recommendations could have a material adverse effect on the Company's business,
financial condition and results of operations.
The MWTA demonstration program expired in 1991, but the MWTA established a
model followed by many states in developing their specific medical waste
regulatory frameworks.
RESOURCE CONSERVATION AND RECOVERY ACT OF 1976. In 1976, Congress passed
RCRA as a response to growing public concern about problems associated with the
handling and disposal of solid and hazardous waste. RCRA required the EPA to
promulgate regulations identifying hazardous wastes. RCRA also created standards
for the generation, transportation, treatment, storage and disposal of solid and
hazardous wastes, including a manifest program for the transportation of
hazardous wastes and a permit system for solid and hazardous waste disposal
facilities. Regulated medical wastes are currently considered non-hazardous
solid wastes under RCRA. However, certain substances collected by the Company
from some of its customers, including photographic fixer developer solutions,
lead foils and amalgam, are considered hazardous wastes, for which the Company
provides transportation services for metals recycling.
DEPARTMENT OF TRANSPORTATION REGULATIONS. The DOT has implemented
regulations under the Hazardous Materials Transportation Authorization Act of
1994 governing the transportation of hazardous materials, regulated medical
waste and infectious substances. Under these regulations, the Company is
required to package regulated medical waste in compliance with the bloodborne
pathogens standards issued by OSHA. Under these standards, the Company must
identify its packaging with a biohazard" marking on the outer packaging, and its
regulated medical waste container must be rigid, puncture-resistant,
leak-resistant, properly sealed and impervious to moisture.
The transportation of infectious substances is subject to additional
packaging standards. However, the Company is presently party to an exemption to
these standards which authorizes the transportation of certain cultures and
stocks of infectious substances if they are described and properly packaged. The
exemption issued by DOT is scheduled to expire on December 31, 1997. The Company
believes that it would be able to fully comply with the stricter packaging
standards applicable to the infectious substances it transports if and when the
exemption expires. DOT regulations also require that a transporter of hazardous
substances be capable of responding on a 24 hour-per-day basis in the event of
an accident, spill or release to the environment of a hazardous material. The
Company has entered into an agreement with CHEMTREC, an organization that
provides 24-hour emergency spill coverage in the United States and Canada, to
provide spill cleanup services in all of the Company's service areas.
The Company's drivers are specifically trained on topics such as safety,
hazardous materials, specifically-regulated medical waste, hazardous chemicals
and infectious substances. Employees are trained to deal with emergency
situations including spills, accidents and releases in to the environment, and
the Company has a written contingency plan for these events. The Company's
vehicles are outfitted with spill control equipment and the drivers are trained
in their use.
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF
1980. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), established a regulatory and remedial program to
provide for the investigation and clean-up of facilities from which there has
been an actual or threatened release of hazardous substances into the
environment. CERCLA and similar state laws, impose strict, joint and several
liability on the current and former owners and operators of facilities from
which releases of hazardous substances have occurred and on the
12
generators and transporters of the hazardous substances that come to be located
at such facilities. Responsible parties may be liable for substantial waste site
investigation and clean-up costs and natural resource damages, regardless of
whether they exercised due care and complied with applicable laws and
regulations. If the Company were found to be a responsible party for a
particular site, it could be required to pay the entire cost of waste site
investigation and clean-up, even though other parties also may be liable. The
Company's ability to obtain contribution from other responsible parties may be
limited by the Company's inability to identify those parties and by their
financial inability to contribute to investigation and clean-up costs.
The Company utilizes landfills for disposal of treated regulated medical
waste from three of its facilities. Following treatment by the Company, the
waste is considered non-hazardous solid waste. Non-hazardous solid waste is not
regulated as hazardous unless it has been contaminated with a hazardous
substance. The Company employs quality control measures to check incoming
regulated medical waste for hazardous substances. Customer contracts also
require the exclusion of hazardous substances or radioactive materials from the
regulated medical waste. Separate customer contracts govern the Company's
transportation for recycling of limited quantities of its customers' hazardous
substances.
OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970. The Occupational Safety and
Health Act of 1970, as amended, authorizes OSHA to promulgate occupational
safety and health standards. Various standards apply to certain aspects of the
Company's operations. These standards include rules governing exposure to
bloodborne pathogens and other potentially infectious materials, lock out/tag
out procedures, medical surveillance requirements, use of respirators and
personal protective equipment, emergency planning, hazard communication, noise,
ergonomics, and forklift safety, among others. OSHA regulations are designed to
minimize the exposure of employees to hazardous work environments. The Company
is subject to unannounced safety inspections at any time. Employees are required
by Company policy to receive new employee training, annual refresher training
and training in their specific tasks. As part of the Company's medical
surveillance program, employees receive pre-employment physicals, including drug
testing, annually-required medical surveillance and exit physicals. The Company
also subscribes to a drug-free workplace policy.
UNITED STATES POSTAL SERVICE. The Company was required to obtain a permit
from the U. S. Postal Service to conduct its "mail-back" program, pursuant to
which customers mail appropriately packaged sharps containers which contain
regulated medical waste directly to the Company's treatment facilities.
STATE AND LOCAL REGULATION
The Company currently conducts some type of business activity in 26 states.
These activities include the collection, transportation, processing,
transferring or recycling of regulated medical waste and, in some cases,
hazardous substances. Each state has its own regulations related to the
handling, treatment and storage of regulated medical waste. Although there are
many differences among the various state laws and regulation, many states have
followed the regulated medical waste model under the MWTA and are implementing
programs under RCRA. Regulations cover the Company's transportation of regulated
medical waste both intrastate and interstate. In each of the states where the
Company operates a treatment facility or transfer station, it is required to
comply with numerous state and local laws and regulations as well as its
site-specific operating plan. Agencies writing regulations at the state level
typically include departments of health and state environmental protection
agencies. In addition, many municipalities have ordinances, local laws and
regulations affecting the Company's operations, including but not limited to
zoning and health measures.
13
In recent years, a number of communities have instituted "flow control"
requirements, which typically require that waste collected within a particular
area be deposited at a designated facility. In May 1994, the U.S. Supreme Court
ruled that a flow control ordinance was inconsistent with the Commerce Clause of
the Constitution of the United States. A number of lower federal courts have
struck down similar measures. Although the U. S. Senate passed a bill proposing
the Interstate Transportation of Municipal Solid Waste Act of 1995, which would
have partially granted flow control authority to states under the Commerce
Clause, the U. S. House of Representatives rejected the bill in January 1996.
The Company believes that the U.S. Congress will continue to consider other
bills that could at least partially overturn these court decisions and immunize
particular governmental actions from Commerce Clause scrutiny.
Similarly, the U. S. Supreme Court has consistently held that state and
local measures that seek to restrict the importation of extraterritorial waste
or tax imported waste at a higher rate are unconstitutional. To date,
congressional efforts to enable states, under certain circumstances, to impose
differential taxes on out-of-state waste or restrict waste importation have been
unsuccessful. At present, a bill that would partially grant flow control
authority to states and authorize certain restrictions on interstate waste
disposal is being considered by a committee of the U.S. House of
Representatives.
In the absence of federal legislation, certain local laws that direct waste
flows to designated facilities may be unenforceable, and discriminatory taxes
and waste importation restrictions should continue to be subject to judicial
invalidation. If the U. S. Congress adopts legislation allowing for certain
types of flow control or restricting the importation of waste, or if legislation
affecting interstate transportation of waste is adopted at the federal or state
level, such legislation could adversely affect the Company's medical waste
collection, transport, treatment and disposal operations and hence would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In 1993, the Company challenged an ordinance enacted by the City of Delavan,
Wisconsin, which sought to prohibit transporting regulated medical waste into
Delavan. The Company succeeded at trial in having the Delavan ordinance declared
unconstitutional. Despite this favorable outcome, however, the Company abandoned
its plans to construct and operate a regulated medical waste treatment facility
in Delavan. The Company incurred significant expense in its abandoned efforts,
and there can be no assurance that other municipalities will not attempt to
block or discourage the Company from locating a treatment or transfer facility
within their limits by passing similar ordinances, even though the Company may
ultimately prevail in challenging the constitutionality of such ordinances.
States predominantly regulate medical waste as a solid or "special" waste
and not as a hazardous waste under RCRA. State definitions of medical waste
include, but are not limited to, microbiological waste (cultures and stocks of
infectious agents); pathology waste (human body parts from surgical and autopsy
waste); blood and blood products; and sharps.
Most states require segregation of different types of regulated medical
waste at the point of generation. A majority of states require that the
universal biohazard symbol or related label appear on medical waste containers.
Storage regulations may apply to the generator, the treatment facility, the
transport vehicle, or all three. Storage rules center on identifying and
securing the storage area for public safety as well as setting standards for the
manner and length of storage. Many states mandate employee training for safe
environmental clean-up through emergency spill and decontamination plans. Many
states mandate that transporters carry spill equipment in their vehicles. Those
states whose regulatory framework relies on the MWTA model have tracking
document systems in place.
In the State of Washington, the Company is subject to regulation by the
Utilities and Transportation Commission, which regulates all businesses engaged
in transportation in the state. As a regulated business, the Company must
receive approval from the Utilities and Transportation Commission for the prices
that it charges for its services in Washington.
14
The Company maintains numerous permits and licenses to conduct its business
from various state and local authorities. The Company's permits vary from state
to state based upon the Company's activities within that state and on the
applicable state and local laws and regulations. These permits include transport
permits for solid waste, regulated medical waste and hazardous substances,
permits to construct and operate treatment facilities, permits to construct and
operate transfer stations, permits governing discharge of sanitary water and
registration of equipment under air regulations, specific approval for the use
of ETD to treat regulated medical waste, a bulk pool irradiator operator's
license for the Company's currently inactive irradiator at its West Memphis,
Arkansas facility and various business operator's licenses. The Company believes
that it is in substantial compliance with all applicable state and local laws
and regulations.
The Company's treatment technology is an alternative to the conventional
treatment technologies of incineration and autoclaving and has not been approved
in all states for the treatment of regulated medical waste. The Company has been
permitted to operate its treatment technology in 13 states with additional
applications pending. There can be no assurance, however, that the Company's
treatment technology will be approved for the treatment of regulated medical
waste in each state or other jurisdiction where the Company may seek regulatory
approval in the future to construct and operate a treatment facility. The
Company's inability to obtain any such regulatory approval could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FOREIGN REGULATION
The Company presently conducts business in only one foreign jurisdiction,
British Columbia, Canada, where it collects regulated medical waste in the
Vancouver area and transports it to the Company's Morton, Washington treatment
facility. The Company's activities in British Columbia are governed at the
federal level by the Canadian Transportation of Dangerous Goods Act, 1992, and
at the provincial level by the British Columbia Waste Management Act. The
federal Transportation of Dangerous Goods Act, 1992, regulates the movement of
dangerous goods, including infectious substances and other "specified dangerous
goods," by all modes of transportation, and imposes joint and several liability
on all persons who are responsible for, or who caused or contributed to, the
release of any "specified dangerous good" into the environment. Any business
engaged in a regulated activity is presumed to be liable for any such release,
unless the business can demonstrate that it acted reasonably. The provincial
Waste Management Act regulates the storage, transportation and disposal of
waste, including biomedical waste, and imposes strict, joint and several
liability for all clean-up costs associated with the release of hazardous
substances into the environment. The Company has obtained all permits required
by these two acts. There can be no assurance, however, that the Company will not
be required in the future to pay for waste clean-up costs incurred under either
act on a joint and several basis.
If the Company expands its operations into other foreign jurisdictions, it
will be required to comply with the laws and regulations of each such
jurisdiction.
PERMITTING PROCESS
Each state in which the Company operates, and each state in which the
Company may operate in the future, has a specific permitting process. After the
Company has identified a geographic area in which it wishes to locate a
treatment or transfer facility, the Company will identify one or more locations
for a potential new site. Typically, the Company will develop a site contingent
on obtaining zoning approval and local and state operating authority. Most
communities rely on state authorities to provide operating rules and safeguards
for their community. Usually the state provides public notice of the project
and, if a sufficient threshold of public interest is shown, a public hearing may
be held. If the Company is successful in meeting all regulatory requirements,
the state may issue a permit to construct the treatment facility or transfer
station. Once the facility is constructed, the state may again issue public
notice of its intent to issue
15
an operating permit and provide an opportunity for public opposition or other
action that may impede the Company's ability to construct or operate the planned
facility.
The Company has been successful in obtaining permits for its current
regulated medical waste transfer, treatment and processing facilities and for
its transportation operations. Several of the Company's past attempts to
construct and operate regulated medical waste treatment facilities, however,
have met with significant community opposition. In some of these cases, the
Company has withdrawn from the permitting process. Permitting for transportation
operations frequently involves registration of vehicles, inspection of equipment
and background investigations on the Company's officers and directors.
POTENTIAL LIABILITY AND INSURANCE
The regulated medical waste management industry involves potentially
significant risks of statutory, contractual, tort and common law liability.
Potential liability could involve, for example, claims for clean-up costs,
personal injury or damage to the environment, claims of employees, customers or
third parties for personal injury or property damages occurring in the course of
the Company's operations, or claims alleging negligence or professional errors
or omissions in the planning or performance of work. The Company could also be
subject to fines in connection with violations of regulatory requirements.
The Company carries liability insurance coverage which it considers
sufficient to meet regulatory and customer requirements and to protect the
Company's employees, assets and operations. The availability of liability
insurance within the regulated medical waste industry has been adversely
affected by the constrained market for environmental liability and other
insurance. More aggressive enforcement of environ-
mental and management regulations, as well as legal decisions and judgments
adverse to companies exposed to pollution damage claims, could lead to a
substantial reduction in the availability and extent of insurance coverage. In
the future, available insurance may be at significantly increased premiums with
less extensive coverage. If the Company is unable to obtain adequate insurance
coverage at a reasonable cost, it may become exposed to potential liability
claims. In this event, a successful claim of sufficient magnitude could have a
material adverse effect on the Company's business, financial condition or
results of operation.
CERCLA and similar state statutes impose strict, joint and several liability
on the present and former owners and operators of facilities from which releases
of hazardous substances have occurred and on the generators and transporters of
the hazardous substances that come to be located at such facilities. Responsible
parties may be liable for waste site investigation, waste site clean-up costs
and natural resource damages, which costs could be substantial, regardless of
whether they exercised due care and complied with all relevant laws and
regulations. There can be no assurance that the Company will not face claims
under CERCLA or similar state laws resulting in substantial liability for which
the Company is uninsured and which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
pollution liability insurance excludes liabilities under CERCLA.
PATENTS AND PROPRIETARY RIGHTS
The Company considers the protection of its technology relating to the
processing of regulated medical waste to be material to its business. The
Company's policy is to protect its technology by a variety of means, including
applying for patents in the United States and in appropriate foreign countries.
The Company holds four United States patents and has three additional patent
applications pending in the United States relating to the ETD treatment process
and other aspects of processing regulated medical waste. The Company has filed
counterpart patent applications in several foreign countries and has received
patents in Mexico and Australia. The Company also holds one United States patent
for its reusable container, used under the trademark STERI-TUBS.
In November 1995, the Company entered into a cross-license agreement with
lIT Research Institute ("IITRI"). Under this agreement, IITRI granted to the
Company a royalty-free exclusive license in North
16
America, Europe, Japan and other industrialized countries throughout the world
to use and commercialize certain patent rights and know-how held by IITRI
relating to the use of radio-frequency technology in the treatment of regulated
medical waste, and the Company issued 4,144 shares of Common Stock to IITRI and
granted to IITRI a royalty-free exclusive license in the remaining countries of
the world to use and commercialize certain corresponding patent rights and
know-how held by the Company. The agreement continues until the expiration of
the last-to-expire of any of the subject patents held by either IITRI or the
Company.
An issued patent grants to the owner the right to exclude others from
practicing the inventions claimed in the patent. In the United States, a patent
filed before June 8, 1995 is enforceable for 17 years from the date of issuance
or 20 years from the effective date of filing, whichever is longer. Patents
issued on applications filed on or after June 8, 1995 expire 20 years from the
effective date of filing. The last-to-expire of the Company's existing United
States patents relating to its ETD treatment process will expire in April 2013.
In addition, the Company has additional proprietary technology relating to
the processing of regulated medical waste that the Company believes is
patentable. The Company has chosen, however, not to file for patent protection
for this technology at this time.
There can be no assurance that any claims which are included in pending or
future patent applications will be issued, that any issued patents will provide
the Company with competitive advantages or will not be challenged by third
parties or that the existing or future patents of third parties will not have an
adverse effect on the ability of the Company to carry out its business. In
addition, there can be no assurance that other companies will not independently
develop similar processes or engineer around patents that may have been issued
to the Company. Litigation or administrative proceedings may be necessary to
enforce the patents issued to the Company or to determine the scope and validity
of others' proprietary rights. Any litigation or administrative proceeding could
result in substantial cost to the Company and distraction of the Company's
management. An adverse ruling in any litigation or administrative proceeding
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The commercial success of the Company will also depend in part upon the
Company's not infringing patents issued to competitors. There can be no
assurance that patents belonging to competitors will not require the Company to
alter its processes, pay licensing fees or cease development of its current or
future processes. Litigation or administrative proceedings may be necessary to
enforce the patents issued to the Company or to determine the scope and validity
of others' proprietary rights. Any litigation or administrative proceeding could
result in substantial cost to the Company and distraction of the Company's
management. An adverse ruling in any litigation or administrative proceeding
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance that
the Company would be able to license the technology rights that it may require
at a reasonable cost or at all. Failure by the Company to obtain a license to
any technology that the Company currently uses to process regulated medical
waste would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, to determine the priority of
inventions or patent applications the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office or in
proceedings before foreign agencies, any of which would result in substantial
costs to the Company and distraction of the Company's management.
The Company holds federal registrations of the trademarks "Steri-Fuel,"
"Steri-Plastic," "Steri-Tub" and "Steri-Cement" and the service marks
"Stericycle" and a mark consisting of a graphic the Company uses in association
with its name and services in the United States. There can be no assurance that
the registered or unregistered trademarks or service marks of the Company will
not infringe upon the rights of third parties. The requirement to change any
trademark, service mark or trade name of the Company would result in the loss of
any goodwill associated with that trademark, service mark or trade name and
could entail significant expense.
17
The Company has become aware that there may be a user in the State of Oregon
of the mark "Stericycle" with rights prior to those of the Company. No claim
against the Company has been asserted by this third party with respect to any
such rights. Although the Company currently is unable to evaluate whether any
such rights exist or, if they exist, whether they are superior to those of the
Company, the Company believes that any claims asserted by the third party would
not have a material adverse effect on the Company's business, financial
condition or results of operations.
The Company also relies on unpatented and unregistered trade secrets,
trademarks, proprietary know-how and continuing technological innovation that it
seeks to protect, in part, by confidentiality agreements with its employees,
vendors and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets or know-how will not otherwise become known or
independently discovered by third parties.
EMPLOYEES
At December 31, 1996, the Company employed 295 full-time employees and 35
part-time employees engaged primarily in sales and marketing.
The Company's production and maintenance employees at its Morton, Washington
facility have voted to affiliate with the International Brotherhood of
Teamsters, AFL-CIO. The Company will be required to negotiate a collective
bargaining agreement covering these employees. None of the Company's other
employees is covered by a collective bargaining agreement. The Company considers
its employee relations generally to be satisfactory.
ITEM 2. FACILITIES
The Company leases office space for its corporate offices in Deerfield,
Illinois. The Company owns and operates treatment facilities in Morton,
Washington and Yorkville, Wisconsin and leases a treatment facility in
Woonsocket, Rhode Island which the Company has an option to purchase for $2,000
upon the expiration of the lease in June 2017. The Company also owns and
operates a recycling and research development facility in West Memphis,
Arkansas.
The Company leases three transfer stations in California, at Loma Linda, San
Leandro and Valencia. The Company also utilizes three transfer stations, in New
York, New York, Haverhill, Massachusetts and Vancouver, British Columbia, at
facilities owned by third parties licensed to operate transfer stations. In
addition, all of the Company's treatment facilities are authorized to transfer
regulated medical waste. The Company also leases sales and customer service
centers in Kirkland, Washington, Salem, New Hampshire, Santa Ana, California and
Middletown, Connecticut, and a depot in Valparaiso, Indiana. In connection with
the Company's acquisition of the major portion of WMI's regulated medical waste
business in December 1996 (see Item 1, "Business--Acquisition Program"), the
Company will enter into subleases from WMI for facilities in Baltimore,
Maryland, Chandler, Arizona, Henderson, Colorado and Terrell, Texas, if and when
the necessary landlord consents and regulatory approvals have been obtained.
The Company's lease of its treatment facility at Woonsocket, Rhode Island
expires in June 2017 upon the maturity of the last to mature of the industrial
development revenue bonds which were issued to finance the acquisition and
equipping of the facility. The Company's leasehold interest in the facility and
the Company's machinery and equipment at the facility are pledged as collateral
to secure the Company's obligations in connection with these bonds. As noted,
the Company has an option to purchase the facility for $2,000 upon the repayment
of all of the bonds. The Company's machinery and equipment at its Yorkville,
Wisconsin treatment facility are leased under an equipment lease expiring in
February 1999 and are pledged as collateral to secure the Company's obligations
under the lease. Substantially all of the Company's property and equipment
provide collateral for the Company's obligations under its revolving credit
facility with Silicon Valley Bank. The Company believes that its existing
facilities are generally adequate for its current needs.
18
ITEM 3. LEGAL PROCEEDINGS
In August 1995, the Company entered into a voluntary settlement with the
Rhode Island Department of Environmental Management ("RIDEM") pursuant to which,
without admitting liability, the Company agreed to pay $400,000 over a
seven-year period and to perform community services and conduct seminars over a
five-year period. The settlement arose from certain notices of violation that
RIDEM issued in September 1994 and April 1995 pursuant to which RIDEM sought
penalties of $3,356,000, claiming that the Company had violated state medical
waste and solid waste regulations by, among other things, mishandling and
improperly treating medical waste and endangering its employees' health by
failing to provide proper training and protective clothing. RIDEM has recently
contacted the Company's local counsel and informally suggested that it may issue
additional notices of violation. The Company believes that there is no basis for
the issuance of any such additional notices and that the resolution of the
matter will be favorable to the Company. There can be no assurance, however,
that if the resolution is unfavorable to the Company, the Company's obligations
as a result of any such additional notices of violation would not have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company believes that the Massachusetts Attorney General inquired into
the Company's activities in Massachusetts but does not know whether the inquiry,
if any, is still pending. The Company believes, however, that if there is or was
any such inquiry, it was begun following the adverse publicity that the Company
received in connection with the notices of violation from RIDEM.
In September 1995, the Connecticut Department of Revenue Services notified
the Company that it was being assessed for sales and use tax of $219,000 as the
successor in interest to Safe Way Disposal Systems, Inc. ("Safe Way"), whose
regulated medical waste management business the Company acquired in September
1994. The Company appealed the assessment on the ground that, as a purchaser of
assets, it was not legally obligated to pay Safe Way's debts. The Company has
been informed that its appeal has been denied by the Department of Revenue
Services. Safe Way has indemnified the Company for any liability as a result of
Safe Way's obligations arising prior to closing. Safe Way's indemnification
obligation is secured first by 166,153 shares of Common Stock issued to Safe Way
which are currently held in escrow and then by off-set rights under a note from
the Company to Safe Way delivered in payment of the purchase price of the
acquired business.
The Company operates in a highly competitive industry and may be exposed to
regulatory inquiries or investigations from time to time. Investigations can be
initiated for a variety of reasons. The Company has been involved in several
legal and administrative proceedings that have been settled or otherwise
resolved on terms acceptable to the Company, without having a material adverse
effect on the Company's business, financial condition or results of operations.
From time to time the Company may consider it more cost-effective to settle such
proceedings than to involve itself in costly and time-consuming administrative
actions or litigation. The Company is also a party to various legal proceedings
arising in the ordinary course of its business. The Company believes that the
resolution of these other matters will not have a material adverse effect on the
Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended December 31, 1996.
19
SUPPLEMENTAL INFORMATION
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides certain information regarding the six executive
officers of the Company:
NAME POSITION WITH COMPANY AGE
- ------------------------------------------ -------------------------------------- ---
Mark C. Miller............................ President, Chief Executive Officer and 41
a Director
Anthony J. Tomasello...................... Vice President, Operations 50
Linda D. Lee.............................. Vice President, Regulatory Affairs and 40
Quality Assurance
Richard O. Shea........................... Vice President, Western Region 44
Michael J. Bernert........................ Vice President, Eastern Region 43
James F. Polark........................... Vice President, Finance and Chief 47
Financial Officer
MARK C. MILLER has served as President and Chief Executive Officer and a
director since joining the Company in May 1992. From May 1989 until he joined
the Company, Mr. Miller served as Vice President for the Pacific, Asia and
Africa in the International Division of Abbott Laboratories, which he joined in
1976 and where he held a number of management and marketing positions. He is a
director of Affiliated Research Centers, Inc., which provides clinical research
for pharmaceutical companies. Mr. Miller received a B.S. degree in computer
science from Purdue University, where he graduated Phi Beta Kappa.
ANTHONY J. TOMASELLO has served as the Company's Vice President, Operations
since August 1990. For five years prior to joining the Company, Mr. Tomasello
was President and Chief Operating Officer of Pi Enterprises and Orbital Systems,
companies providing process and automation services. From 1980 to 1985, he
served as Vice President of Operations for Spang and Company, an operating
service firm specializing in resource recovery and recycling for manufacturing
and process industries. Mr. Tomasello received a B.S. degree in mechanical
engineering from the University of Pittsburgh.
LINDA D. LEE has served as the Company's Vice President, Regulatory Affairs
and Quality Assurance since June 1990. She previously served as the Company's
Executive Director for Regulatory Compliance. Prior to joining the Company in
November 1989, she served for six years as Director of Environmental Health and
Safety for Medical Services at the University of Arkansas. Ms. Lee has served as
the chairperson of the American Hospital Association's Environmental Advocacy
Committee and on the American Society for Hospital Engineers' Safety Committee.
She has also served on a number of government committees, including the Arkansas
Governor's Task Force on Medical Waste, and has written several books and
articles on safety and waste disposal. Ms. Lee received a B.S. degree in
environmental health sciences from Indiana State University and an M.S. degree
in operations management from the University of Arkansas.
RICHARD O. SHEA has served as the Company's Vice President, Western Region,
with responsibility for sales and service in the Pacific Northwest and
California, since April 1991. From September 1989 to March 1991, he was Vice
President of Sales and Marketing for Microprobe Corporation in Bethell,
Washington. He previously held several management positions with the Diagnostics
Division of Abbott Laboratories. Mr. Shea received a B.S. degree in marketing
from Nichols College.
MICHAEL J. BEMERT has served as the Company's Vice President, Eastern
Region, with responsibility for sales and service in New England and the
Midwest, since February 1992. Prior to joining the Company in 1992, he held a
series of management positions with Abbott Laboratories. Mr. Bernert received a
B.A. degree in economics from Brown University and an M.B.A. degree from the
University of Dallas.
20
JAMES F. POLARK has served as the Company's Vice President, Finance and
Chief Financial Officer since July 1993. From 1980 until joining the Company, he
served in various capacities with Sara Lee Corporation, most recently as Chief
Financial Officer of Superior Coffee and Foods, Inc., one of Sara Lee'
divisions. Prior to joining Sara Lee Corporation, Mr. Polark was a member of the
audit staff at Price Waterhouse. He received a B.S. degree in accounting from
the University of Northern Iowa.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "SRCL." On February 11, 1997, there were approximately 180 stockholders
of record.
The following table provides the high and low sales prices of the Company's
Common Stock during the periods from (i) August 23, 1996, when the Common Stock
was first publicly traded, through September 30, 1996 ("Third Quarter 1996") and
(ii) October 1 through December 31, 1996 ("Fourth Quarter 1996"):
QUARTER HIGH LOW
- -------------------------------------------------------------------------------- --------- ---
Third Quarter 1996.............................................................. 11 8 3/4
Fourth Quarter 1996............................................................. 11 3/4 7
The Company did not pay any dividends during 1996 and has never paid any
dividends on its capital stock. The Company currently expects that it will
retain future earnings for use in the operation and expansion of its business
and does not anticipate paying any cash dividends in the foreseeable future. The
Company is prohibited from paying cash dividends under the terms of its
revolving credit facility with Silicon Valley Bank and is restricted from paying
cash dividends under an agreement in connection with the industrial development
bonds issued to finance the Company's construction of its treatment facility at
Woonsocket, Rhode Island. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1992(1) 1993 1994 1995 1996
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA (2)
Revenues................................................ $ 5,010 $ 9,141 $ 16,141 $ 21,339 $ 24,542
Loss from operations.................................... (11,679) (5,984) (5,708) (4,276) (2,437)
Net loss................................................ (11,640) (6,028) (5,812) (4,544) (2,389)
Loss applicable to Common Stock......................... (14,377) (9,761) (10,293) (4,544) (2,389)
Net loss per common share (3)........................... $ (6.81) $ (4.63) $ (4.88) $ (0.65) $ (0.30)
BALANCE SHEET DATA (AT DECEMBER 31) (2)
Cash, cash equivalents and short-term investments....... $ 11,343 $ 7,690 $ 1,206 $ 138 $ 17,749
Total assets............................................ 21,368 21,355 27,809 23,491 55,155
Long-term debt, net of current maturities............... 2,935 2,293 4,838 5,622 4,591
Convertible redeemable preferred stock (4).............. 40,353 52,708 62,909 -- --
Shareholders' equity (net capital deficiency)........... $ (25,662) $ (35,106) $ (45,363) $ 12,574 $ 40,014
- ------------------------
(1) During the year ended December 31, 1992, the Company approved a
restructuring plan which resulted in a nonrecurring charge of $2,747,000,
primarily to write-off assets associated with a technology used by the
Company prior to the development of its ETD treatment process.
21
(2) See Note 5 to the Consolidated Financial Statements for information
concerning the Company's acquisitions during the three years ended December
31, 1996.
(3) See Note 2 to the Consolidated Financial Statements for information
concerning the computation of net loss per common share.
(4) See Note 8 to the Consolidated Financial Statements for information
concerning the elimination of the liquidation preference on the Company's
preferred stock, and the reclassification of the preferred stock as Class A
common stock, in connection with a recapitalization during the year ended
December 31, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES IN ITEM 8 OF THIS REPORT.
BACKGROUND
The Company was incorporated in March 1989. The Company provides regulated
medical waste collection, transportation, treatment, disposal, reduction, reuse
and recycling services to its customers, together with related training and
education programs and consulting services. The Company also sells ancillary
supplies and transports pharmaceuticals, photographic chemicals, lead foil and
amalgam for recycling in selected geographic service areas. As part of its
recycling services, the Company supplies recycled treated medical waste plastics
to a plastics manufacturer and supplies treated medical waste as a
refuse-derived fuel for use in the production of electricity.
The Company's revenues have increased from $1,563,000 in 1991 to $24,542,000
in 1996. The Company derives its revenues from services to two principal types
of generators of regulated medical waste: (i) hospitals, blood banks and
pharmaceutical manufacturers ("Core" generators) and (ii) long-term and subacute
care facilities, outpatient clinics, medical and dental offices, industrial
clinics, dialysis centers, laboratories, biotechnology and biomedical companies,
veterinary offices, municipal health departments, ambulance, fire and police
departments, correctional facilities, schools and park districts and funeral
homes ("Alternate Care" generators). Substantially all of the Company's services
are provided pursuant to customer contracts specifying either scheduled or
on-call regulated medical waste management services, or both. Contracts with
hospitals and other Core generators, which may run for more than one year,
typically include price escalator provisions which allow for price increases
generally tied to an inflation index or set at a fixed percentage. Contracts
with Alternate Care generators generally provide for annual price increases and
have an automatic renewal provision unless the customer notifies the Company
prior to completion of the contract. As of December 31, 1996, the Company had
approximately 27,000 customers.
As part of the Company's marketing strategy, the Company offers reduction,
resource recovery and recycling services to customers. Accordingly, the Company
has invested funds to treat and recover the plastics from single-use products,
and as a part of that strategy, the Company has entered into an agreement with a
plastic products manufacturer to provide recycled regulated medical waste
plastics for use in a line of medical waste sharps containers. The Company has
delivered the recycled plastics as required under the agreement and continues to
recycle plastics as part of the Company's commitment to provide environmentally
sound alternatives to other regulated medical waste treatment methods. The
demand for recycled treated regulated medical waste plastics is currently
limited. The Company continues to search for additional uses and users of
recycled plastics.
In 1994, as a result of increasing demand for customer service from the
growing number of Alternate Care generators, the Company began implementing a
transition from the use of a national contract carrier
22
to its own transportation of regulated medical waste. The Company has obtained
its own permits, hired and trained its own drivers, purchased or leased its own
trucks and trailers and obtained approvals for and opened transfer stations. The
Company believes that since it has assumed control of transportation, it has
been able to improve service levels, equipment utilization and route density and
provide more efficient dispatching.
The Company expenses as incurred all permitting and design costs associated
with its facilities. The Company elects to expense rather than to capitalize the
costs of obtaining permits and approvals for each proposed facility regardless
of whether the Company is ultimately successful in obtaining the desired permits
and approvals and developing the facility. The Company recognizes as a current
expense all legal fees and other costs related to obtaining and maintaining
permits and approvals.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased $3,203,000, or 15%, to $24,542,000 during the
year ended December 31, 1996 from $21,339,000 during the year ended December 31,
1995 as the Company continued to implement its strategy of focusing on
higher-margin Alternate Care generators while simultaneously paring certain
higher-revenue but lower-margin accounts with Core generators. This increase
also reflects the inclusion of a full year's revenues from the Safetech Health
Care, Inc. ("Safetech") acquisition, which was completed in June 1995, eleven
months of revenues from the WMI Medical Services of New England, Inc. ("WMI-NE")
acquisition, which was completed in January 1996, and eight months of revenues
from the Doctors Environmental Control, Inc. ("DEC") and Sharps Incinerator of
Fort, Inc. ("Sharps") acquisitions, both of which were completed in May 1996,
and the inclusion of revenues for the last 10 days of 1996 resulting from the
Company's purchase in December 1996 of a major portion of the regulated medical
waste business of Waste Management Inc. ("WMI"). The increase in revenues was
partially offset by a decline in revenues attributable to a lack of any
miscellaneous product sales during 1996 and the sale in April 1995 of certain
unprofitable customer accounts and related assets obtained through acquisitions.
COST OF REVENUES. Cost of revenues increased $1,945,000, or 11.1%, to
$19,423,000 during the year ended December 31, 1996 from $17,478,000 during the
year ended December 31, 1995. The principal reasons for the increase were higher
transportation costs as a result of the Safetech, WMI-NE, DEC, Sharps and WMI
acquisitions and start-up expenses related to the Company's expansion into new
geographic service areas where the Company primarily serves Alternate Care
generators. Cost of revenues as a percentage of revenues decreased to 79.1%
during 1996 from 81.9% during 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $7,556,000 during the year ended December
31, 1996 from $8,137,000 during the year ended December 31, 1995. This decrease
was primarily attributable to a reduction in expenditures to develop treated
medical waste as an alternate fuel for the production of cement and to savings
from the integration into the Company's operations of the Safe Way Disposal
Systems, Inc. ("Safe Way") acquisition in 1994. These savings resulted from the
elimination of redundant employee and staff positions and the reallocation of
resources to Alternate Care generators. In addition, corporate costs and
permitting expenses were at lower levels during the current period than they
were during the comparable period in 1995. Selling, general and administrative
expenses as a percentage of revenues decreased to 30.8% during 1996 from 38.1%
during 1995.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to
$373,000 during the year ended December 31, 1996 from $277,000 during the year
ended December 31, 1995. This increase was primarily attributable to higher
indebtedness under the Company's revolving credit facility and interest expense
on notes issued for acquisitions. Interest income increased to $421,000 during
1996 from $9,000 during 1995 due to interest earned on the invested cash
proceeds from the Company's initial public offering ("IPO") in August 1996.
23
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased $5,198,000, or 32.2%, to $21,339,000 during
the year ended December 31, 1995 from $16,141,000 during the year ended December
31, 1994. This increase was attributable primarily to the inclusion of a full
year's revenues from customers acquired as a result of the Recovery Corporation
of Illinois ("RCI") acquisition, which was completed in March 1994, and the Safe
Way acquisition, which was completed in September 1994. Revenues for 1995
reflected only a partial year of revenues from the Safetech acquisition, which
was completed in June 1995.
COST OF REVENUES. Cost of revenues increased $3,556,000, or 25.5%, to
$17,478,000 during the year ended December 31, 1995 from $13,922,000 during the
year ended December 31, 1994. The principal reasons for the increase were higher
transportation costs, processing costs, disposal volumes and container costs
attributable to additional customers acquired during 1995. Cost of revenues as a
percentage of revenues decreased to 81.9% in 1995 from 86.3% in 1994. This
percentage decrease was primarily due to increased utilization of the Company's
treatment facilities and transportation equipment as a result of increased
volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $8,137,000 during the year ended December
31, 1995 from $7,927,000 during the year ended December 31, 1994. The increase
was primarily attributable to an increase in amortization expense as a result of
additional goodwill from the Company's acquisitions. Selling, general and
administrative expenses as a percentage of revenues decreased to 38.1% in 1995
from 49.1% in 1994. This percentage decrease was due primarily to lower
permitting costs and reduced administrative expenses, as partially offset by
higher goodwill amortization expense.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increase to $277,000
during the year ended December 31, 1995 from $260,000 during the year ended
December 31, 1994, primarily as a result of commitment fees and higher interest
rates associated with the Company's revolving credit facility. In addition, the
Company incurred higher levels of indebtedness during 1995. Interest income
decreased to $9,000 in 1995 from $156,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been financed principally through the sale of stock to
investors. Prior to the Company's IPO, purchasers of stock invested more than
$50,137,000 in capital which has been used to fund research and development,
acquisitions, capital expenditures, ongoing operating losses and working capital
requirements. The Company's IPO in August 1996 raised $31,050,000, excluding
offering costs, which will be used primarily to fund acquisitions. The Company
has also been able to secure plant and equipment leasing or financing in
connection with some of its facilities. These debt facilities are secured by
security interests in the financed assets. In addition, during 1995 the Company
was able to obtain a $2,500,000 revolving line of credit secured by accounts
receivable and a secured interest in all other assets of the Company.
During 1995 the Company's stockholders approved a plan of recapitalization,
pursuant to which all of the Company's outstanding shares of preferred stock
were reclassified as shares of common stock. As a result, the Company was able
to eliminate any liability for accrued but unpaid dividends on its preferred
stock and the preferential rights on liquidation of holders of preferred stock.
At December 31, 1996, the Company's working capital was $14,617,000 compared
to $439,000 at December 31, 1995. This increase was primarily due to the
proceeds from the Company's IPO offset by an increase in debt as a result of the
WMI acquisition in December 1996.
The Company's other financial obligations include industrial development
revenue bonds issued on behalf of and guaranteed by the Company to finance its
Woonsocket, Rhode Island treatment facility and
24
equipment. These bonds, which had an outstanding aggregate balance of $1,492,000
as of December 31, 1996 at fixed interest rates ranging from 6.00% to 7.375%,
are due in various amounts through June 2017.
Capital expenditures for the year ended December 31, 1996 were $995,000,
primarily for containers and transportation equipment. Capital expenditures were
$726,000 in 1995 and $1,910,000 in 1994. The Company did not open any new
treatment facilities during 1995 and 1996. The Company may decide to build
additional treatment facilities as volumes increase in the Company's current
geographic services areas or as the Company enters new areas. The Company also
may elect to increase capacity in its existing treatment facilities, which would
require additional capital expenditures. In addition, capital requirements for
transportation equipment will continue to increase as the Company grows. The
amount and level of these expenditures cannot be determined currently as they
will depend upon the nature and extent of the Company's growth and acquisition
opportunities. The Company currently believes that its cash, cash equivalents
and short-term investments and cash flow from operations will fund its capital
requirements through 1997.
Net cash provided by operations increased to $57,000 during the year ended
December 31, 1996 from cash used for operations of ($871,000) during the year
ended December 31, 1995. The improvement primarily reflects a smaller net loss.
Net cash used in investing activities was $13,310,000 during the year ended
December 31, 1996 compared to $393,000 during the year ended December 31, 1995.
The increase in 1996 is due primarily to the DEC, Sharps, WMI-NE and WMI
acquisitions and to the temporary investment of proceeds from the Company's IPO.
Net cash provided by financing activities increased to $25,065,000 during
the year ended December 31, 1996 from $196,000 during the year ended December
31, 1995, primarily as a result of the Company's IPO in August 1996.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Stericycle, Inc.
We have audited the accompanying consolidated balance sheets of Stericycle,
Inc. and Subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity (net
capital deficiency), and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Stericycle, Inc. and Subsidiaries at December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 7, 1997
26
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 138 $ 11,950
Short-term investments.................................................................... -- 5,799
Accounts receivable, less allowance for doubtful accounts of $138 in 1995 and $178 in
1996..................................................................................... 3,731 4,756
Parts and supplies........................................................................ 468 360
Prepaid expenses.......................................................................... 431 426
Other..................................................................................... 424 490
---------- ----------
Total current assets.................................................................. 5,192 23,781
---------- ----------
Property, plant and equipment:
Land...................................................................................... 90 90
Buildings and improvements................................................................ 5,394 5,598
Machinery and equipment................................................................... 7,644 10,702
Office equipment and furniture............................................................ 406 463
Construction in progress.................................................................. 281 362
---------- ----------
13,815 17,215
Less accumulated depreciation and amortization............................................ (3,587) (5,208)
---------- ----------
Property, plant and equipment-net..................................................... 10,228 12,007
---------- ----------
Other assets:
Goodwill, less accumulated amortization of $417 in 1995 and $807 in 1996.................. 7,517 18,834
Other..................................................................................... 554 533
---------- ----------
Total other assets.................................................................... 8,071 19,367
---------- ----------
Total assets...................................................................... $ 23,491 $ 55,155
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................................... $ 297 $ 3,215
Accounts payable.......................................................................... 1,868 1,510
Accrued liabilities....................................................................... 1,956 3,769
Deferred revenue.......................................................................... 632 670
---------- ----------
Total current liabilities......................................................... 4,753 9,164
---------- ----------
Long-term debt:
Industrial development revenue bonds and other............................................ 2,284 1,986
Note payable to bank...................................................................... 858 --
Note payable.............................................................................. 2,480 2,605
---------- ----------
Total long-term debt.............................................................. 5,622 4,591
---------- ----------
Other liabilities......................................................................... 542 1,386
Shareholders' Equity:
Common stock (par value $.01 per share, 30,000,000 shares authorized, 5,582,385 issued and
outstanding in 1995, 10,000,264 issued and outstanding in 1996).......................... 55 100
Additional paid-in capital................................................................ 49,621 79,409
Notes receivable for common stock purchases............................................... -- (4)
Accumulated deficit....................................................................... (37,102) (39,491)
---------- ----------
Total shareholders' equity............................................................ 12,574 40,014
---------- ----------
Total liabilities and shareholders' equity........................................ $ 23,491 $ 55,155
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
27
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
Revenues................................................................ $ 16,141 $ 21,339 $ 24,542
Costs and expenses:
Cost of revenues........................................................ 13,922 17,478 19,423
Selling, general and administrative expenses............................ 7,927 8,137 7,556
------------ ------------ ------------
Total costs and expenses.............................................. 21,849 25,615 26,979
------------ ------------ ------------
Loss from operations.................................................... (5,708) (4,276) (2,437)
Other income (expense):
Interest income......................................................... 156 9 421
Interest expense........................................................ (260) (277) (373)
------------ ------------ ------------
Total other income (expense).......................................... (104) (268) 48
------------ ------------ ------------
Net loss................................................................ (5,812) (4,544) (2,389)
Less cumulative preferred dividends..................................... (4,481) -- --
------------ ------------ ------------
Loss applicable to common stock......................................... $ (10,293) $ (4,544) $ (2,389)
------------ ------------ ------------
------------ ------------ ------------
Net loss per common share............................................... $ (4.88) $ (0.65) $ (.30)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares outstanding.................... 2,108,368 6,974,820 8,049,723
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
28
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
COMMON STOCK
ACCUMULATED NOTES
DIVIDENDS ON RECEIVABLE
ISSUED AND ADDITIONAL CONVERTIBLE FOR COMMON
OUTSTANDING PAID-IN REDEEMABLE STOCK ACCUMULATED
SHARES AMOUNT CAPITAL PREFERRED STOCK PURCHASES DEFICIT
------------- ----------- ----------- --------------- ------------- ------------
BALANCES AT DECEMBER 31, 1993............ 369 $ 4 $ 811 $ (8,520) $ (655) $ (26,746)
Issuance of common stock................. 1
Accumulated dividends.................... (4,481)
Principal payments under notes 36
receivable.............................
Net loss................................. (5,812)
------ ----- ----------- --------------- ----- ------------
BALANCES AT DECEMBER 31, 1994............ 370 $ 4 $ 811 $ (13,001) $ (619) $ (32,558)
Common stock issued in exchange for
preferred stock........................ 5,043 50 49,439
Issuance of common stock................. 350 3
Accumulated dividends canceled........... 13,001
Notes receivable canceled................ (181) (2) (629) 619
Net loss................................. (4,544)
------ ----- ----------- --------------- ----- ------------
BALANCES AT DECEMBER 31, 1995............ 5,582 $ 55 $ 49,621 $ -- $ -- $ (37,102)
Initial public offering of common stock
(net of offering costs)................ 3,450 35 27,586
Issuance of common stock for exercise of
options and warrants and employee stock
purchases.............................. 870 9 717 (64)
Note payable exchanged for common 98 1 1,485
stock..................................
Principal payments under note 60
receivable.............................
Net loss................................. (2,389)
------ ----- ----------- --------------- ----- ------------
BALANCES AT DECEMBER 31, 1996............ 10,000 $ 100 $ 79,409 $ -- $ (4) $ (39,491)
------ ----- ----------- --------------- ----- ------------
------ ----- ----------- --------------- ----- ------------
TOTAL
SHAREHOLDERS'
EQUITY (NET
CAPITAL
DEFICIENCY)
-------------
BALANCES AT DECEMBER 31, 1993............ $ (35,106)
Issuance of common stock.................
Accumulated dividends.................... (4,481)
Principal payments under notes 36
receivable.............................
Net loss................................. (5,812)
-------------
BALANCES AT DECEMBER 31, 1994............ $ (45,363)
Common stock issued in exchange for
preferred stock........................ 49,489
Issuance of common stock................. 3
Accumulated dividends canceled........... 13,001
Notes receivable canceled................ (12)
Net loss................................. (4,544)
-------------
BALANCES AT DECEMBER 31, 1995............ $ 12,574
Initial public offering of common stock
(net of offering costs)................ 27,621
Issuance of common stock for exercise of
options and warrants and employee stock
purchases.............................. 662
Note payable exchanged for common 1,486
stock..................................
Principal payments under note 60
receivable.............................
Net loss................................. (2,389)
-------------
BALANCES AT DECEMBER 31, 1996............ $ 40,014
-------------
-------------
The accompanying notes are an integral part of these financial statements.
29
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss......................................................................... $ (5,812) $ (4,544) $ (2,389)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization.................................................. 1,306 1,916 2,064
Settlement with regulatory agency.............................................. -- 273 --
Other, net..................................................................... -- 129 --
Change in net operating assets, net of effect of acquisitions and divestitures:
Accounts receivable............................................................ (3,126) 866 (554)
Parts and supplies............................................................. (241) 135 144
Prepaid expenses............................................................... (486) 196 (18)
Other assets................................................................... (278) 128 (37)
Accounts payable............................................................... 879 570 (428)
Accrued liabilities............................................................ 766 (838) 1,178
Deferred revenue and other liabilities......................................... 280 298 97
--------- --------- ----------
Net cash (used in) provided by operating activities.............................. (6,712) (871) 57
--------- --------- ----------
INVESTING ACTIVITIES:
Capital expenditures........................................................... (1,910) (726) (995)
Payments for acquisitions, net of cash acquired................................ (1,530) (459) (6,516)
Purchase of short-term investments............................................. -- -- (5,799)
Proceeds from divestitures..................................................... -- 792 --
--------- --------- ----------
Net cash used in investing activities............................................ (3,440) (393) (13,310)
--------- --------- ----------
FINANCING ACTIVITIES:
Repayment of long-term debt.................................................... (79) (171) (3,275)
Net proceeds from (payment of) note payable to bank............................ -- 858 (858)
Proceeds from sale and leaseback of equipment.................................. 882 -- --
Principal payments under capital lease obligations............................. (629) (482) (397)
Proceeds from issuance of convertible redeemable preferred stock............... 3,458 -- --
Proceeds from long-term debt................................................... -- -- 1,000
Principal payments on notes receivable for common stock purchases.............. 36 -- 60
Issuance of common stock....................................................... -- 18 28,535
Other.......................................................................... -- (27) --
--------- --------- ----------
Net cash provided by financing activities........................................ 3,668 196 25,065
--------- --------- ----------
Net (decrease) increase in cash and cash equivalents............................. (6,484) (1,068) 11,812
Cash and cash equivalents at beginning of year................................... 7,690 1,206 138
--------- --------- ----------
Cash and cash equivalents at end of year......................................... $ 1,206 $ 138 $ 11,950
--------- --------- ----------
--------- --------- ----------
The accompanying notes are an integral part of these financial statements.
30
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--DESCRIPTION OF BUSINESS
Stericycle, Inc. (the "Company") was incorporated in Delaware in March 1989
for the purpose of providing collection, transportation, treatment, disposal,
reduction, reuse and recycling services for regulated medical waste to hospitals
and other healthcare providers in the United States and Canada.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Stericycle,
Inc. and its wholly-owned subsidiaries, Stericycle of Arkansas, Inc., Stericycle
of Washington, Inc. and SWD Acquisition Corporation. All significant
intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION:
The Company recognizes revenue when the treatment of the infectious medical
waste is completed on-site or the waste is shipped off-site for processing and
disposal. For waste shipped off-site, all associated costs are recognized at
time of shipment.
CASH EQUIVALENT AND SHORT-TERM INVESTMENTS:
The Company considers all highly liquid instruments with a maturity of less
than three months when purchased to be cash equivalents. Short-term investments
consist of highly liquid investments in corporate debt obligations which mature
in less than one year and are classified as held-to-maturity since management
has the positive intent and ability to hold the securities to maturity. These
obligations are stated at amortized cost, which approximates fair market value.
Interest income is recognized as earned.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation and
amortization, which includes the amortization of assets recorded under capital
leases, are computed using the straight-line method over the estimated useful
lives of the assets as follows:
Buildings and Improvements--10 to 30 years
Machinery and Equipment--3 to 10 years
Office Equipment and Furniture--5 to 10 years.
GOODWILL:
Goodwill is amortized using the straight-line method over 15 to 25 years.
The Company periodically assesses whether a change in circumstances has occurred
subsequent to an acquisition which would indicate that the future useful life or
carrying value of goodwill should be revised. The Company considers the future
earnings potential of the acquired business in assessing the recoverability of
goodwill.
NEW PLANT DEVELOPMENT AND PERMITTING COSTS:
The Company expenses costs associated with the operations of new plants
prior to the commencement of services to customers and all initial and on-going
costs related to permitting.
31
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS:
The Company expenses costs associated with research and development as
incurred. Research and development expense for 1994, 1995 and 1996 was
$1,082,000, $975,000, and $194,000, respectively.
INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
LONG-LIVED ASSETS:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"),
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. FAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company adopted FAS 121 in 1996, the
effect of which was not material to the Company's financial position or results
of operations.
FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable and payable and long-term debt. The
fair values of these financial instruments were not materially different from
their carrying values, except for long-term debt as discussed in Note 6.
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses. These losses, when incurred, have been within the range
of management's expectations.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER COMMON SHARE:
Net loss per common share is computed based upon the weighted-average number
of common shares outstanding. Common and common equivalent shares issued during
the 12-month period prior to the August 23, 1996 initial public offering have
been included in the calculation as if they were outstanding for all periods
presented using the treasury stock method and an initial public offering price
of $9 per share. No effect has been give to common equivalent shares issued
subsequent to the August 23, 1996 initial public offering as the effect would be
antidilutive.
32
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 3--INITIAL PUBLIC OFFERING
On August 28 and August 30, 1996 the Company successfully completed an
initial public offering of 3,450,000 shares of common stock at $9 per share. The
Company received total proceeds from the offering, net of offering costs, of
approximately $27,621,000.
NOTE 4--INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $38,000,000, expiring beginning in 2004.
Based on the Internal Revenue Code of 1986, as amended, and changes in the
ownership of the Company, utilization of the net operating loss carryforwards
may be subject to annual limitations, which could significantly restrict or
partially eliminate the utilization of the net operating losses.
The Company's deferred tax liabilities and assets as of December 31, 1995
and 1996 are as follows:
1995 1996
-------------- --------------
Deferred tax liabilities:
Capital lease obligations........................................... $ -- $ (324,000)
Property, plant, and equipment...................................... (319,000) (694,000)
Goodwill............................................................ (122,000) (160,000)
-------------- --------------
Total deferred tax liabilities.......................................... (441,000) (1,178,000)
Deferred tax assets:
Accrued liabilities................................................. 298,000 835,000
Research and development costs...................................... 324,000 324,000
Other............................................................... 190,000 198,000
Net operating tax loss carryforward................................. 14,597,000 15,102,000
-------------- --------------
Total deferred tax assets............................................... 15,409,000 16,459,000
-------------- --------------
Net deferred tax assets................................................. 14,968,000 15,281,000
Valuation allowance..................................................... (14,968,000) (15,281,000)
-------------- --------------
Net deferred tax assets............................................. $ -- $ --
-------------- --------------
-------------- --------------
NOTE 5--ACQUISITIONS AND DIVESTITURES
In December 1996, the Company purchased the customer lists, vehicles and
certain other assets of the major portion of the medical waste business of Waste
Management Inc. ("WMI") for $5,450,000 cash and a note payable of $5,210,000.
The note payable is subject to adjustment based on the final appraised value of
the vehicles. At December 31, 1996, the vehicles have been preliminarily valued
at $1,760,000. Not reflected is the effect, if any, resulting from adjustments
to the purchase price based on actual revenues achieved by the Company from
acquired customers. The purchase price is to be increased by an amount equal to
20% of acquired customer revenues which exceed $15,170,000 for the year ended
December 31, 1997. In the event that average actual monthly revenues for January
through March 1997 are less than $1,264,000, the purchase price will be
decreased by seven times the deficiency. Additionally, in the event a
significant acquired customer, as defined, is lost prior to July 1997, the
purchase price will be decreased. The decrease will be measured as seven times
the actual average monthly revenues achieved by WMI from the significant
acquired customer during September through November 1996, less 20% of actual
revenues
33
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5--ACQUISITIONS AND DIVESTITURES (CONTINUED)
achieved by the Company from the significant acquired customer. Any adjustment
will be made to the goodwill and the note payable.
In May 1996, the Company purchased the customer list and certain other
assets of Doctors Environmental Control, Inc. for $400,000 in cash and notes
payable issued for $600,000, which are payable on May 1, 1998 with an interest
rate of 6% per annum. In addition, the Company assumed two vehicle leases
totaling $77,000, which were paid off in May 1996, and delivered option
agreements to shareholders of the seller giving them an option to purchase up to
a total of 53,816 shares of the Company's common stock. The price for the
purchase of the common stock upon exercise of each option was the surrender and
cancellation of the note payable. The options were exercised in August 1996.
In April 1996, the Company purchased the customer list and certain other
assets of Sharps Incinerator of Fort, Inc. for $757,000 in cash of which
$562,000 was payable at closing and the balance plus interest was paid off in
November 1996.
In January 1996, the Company purchased the customer list and certain other
assets of WMI Medical Services of New England, Inc. for $100,000 in cash and
$492,000 in notes payable issued to the seller. The notes bear interest at the
rate of 7.5% per annum with $150,000 payable in 1996, $157,000 payable in
January 1997 and $185,000 payable in January 1998.
In July 1995, the Company sold selected customer lists and related assets
for $248,000. The Company recognized a gain of $50,000 on this transaction,
which is included in the 1995 Consolidated Statement of Operations as Selling,
General and Administrative Expense.
In June 1995 the Company purchased the customer list and transportation
equipment and assumed certain contract obligations of Safetech Health Care for
$160,000.
In April 1995, the Company sold the St. Louis portion of its business to a
competitor. The Company received $544,000 as payment for the customer list and
concurrently agreed to resolve an anti-trust lawsuit brought against this
competitor by the Company. The Company recognized a gain on this transaction of
$408,000, which is included in the 1995 Consolidated Statement of Operations as
Selling, General and Administrative Expense.
In September 1994, SWD Acquisition Corporation, a wholly owned subsidiary of
the Company, purchased selected assets and assumed certain liabilities of Safe
Way Disposal Systems, Inc. ("Safe Way"). The assets purchased consisted of Safe
Way's customer list, containers, transportation equipment and office equipment.
In payment, the Company issued a $2,480,000 note and 25,228 shares of preferred
stock with a liquidation value of $100 per share. The Company assumed
liabilities of $2,271,000 related to this acquisition.
In March 1994, the Company purchased the customer list, containers and
transportation equipment of Recovery Corporation of Illinois for $630,000 in
cash and 5,000 shares of preferred stock with a liquidation value of $100 per
share.
For financial reporting purposes, each acquisition was accounted for as a
purchase, and the purchase price was allocated to assets acquired and
liabilities assumed based on the estimated fair market value at the date of
acquisition. The excess of the purchase price over the fair market value of the
net assets acquired is reflected in the accompanying consolidated balance sheets
as goodwill. The WMI purchase
34
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5--ACQUISITIONS AND DIVESTITURES (CONTINUED)
price allocation was based on preliminary information and is subject to
adjustment. The results of operations of these acquired businesses are included
in the consolidated statements of operations from the date of acquisition. The
effect of these acquisitions would not have a significant effect on the
Company's operations, except for the Safe Way and WMI acquisitions.
The following unaudited pro forma results of operations assumes the
acquisition of Safe Way occurred as of January 1, 1994 and the acquisition of
WMI occurred as of January 1, 1995, after giving effect to certain adjustments
including amortization of goodwill, and in the case of WMI, increased interest
expense on debt incurred in connection with the acquisition and an adjustment to
record the incremental recurring costs associated with the consolidation of the
operations as the historical statement of revenue and direct expenses of WMI did
not reflect these costs:
YEAR ENDED DECEMBER 31
--------------------------------
1994 1995 1996
---------- --------- ---------
(IN THOUSANDS)
Revenues.............................................................. $ 20,494 $ 36,839 $ 40,321
Loss applicable to common stock....................................... (10,729) (4,270) (1,716)
Net loss per common share............................................. $ (5.09) $ (0.61) $ (0.21)
The pro forma financial information does not purport to be indicative of the
results of operations that would have occurred had the transactions taken place
at the beginning of the periods indicated or of future results of operations.
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1995 1996
--------- ---------
(IN THOUSANDS)
Industrial development revenue bonds................................................. $ 1,633 $ 1,492
Obligations under capital leases..................................................... 488 517
Note payable to bank................................................................. 858 --
Notes payable........................................................................ 2,480 5,552
Mortgage payable and other........................................................... 460 245
--------- ---------
5,919 7,806
Less: Current portion................................................................ 297 3,215
--------- ---------
Total............................................................................ $ 5,622 $ 4,591
--------- ---------
--------- ---------
In connection with the Company's December 1996 purchase of WMI's medical
waste business, a note payable totaling $5,210,000 was issued to WMI. The note
is payable in two equal installments due on December 20, 1997 and December 20,
1998. The note bears interest at the rate of 7% per annum.
On October 31, 1995, the Company entered into a revolving line of credit
with Silicon Valley Bank. To secure this line of credit, the Company granted the
bank a lien on all of the Company's assets. Borrowings under the line of credit
are limited to the lesser of $2,500,000 or a specified percentage of the
Company's eligible receivables, as defined in the loan and security agreement.
Outstanding borrowings bear interest at
35
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6--LONG-TERM DEBT (CONTINUED)
the bank's prime rate plus 3.0%. This agreement has a maturity date of October
31, 1997 and is subject to automatic renewal for additional one year periods,
unless 60 days written notice is provided by either party in advance of the
maturity date. Under the terms of the loan and security agreement, the Company
is, among other things, restricted from paying dividends and is required to
maintain minimum levels of tangible net worth and debt to tangible net worth.
The Company had no borrowings against the line of credit as of December 31,
1996.
In 1995, an agreement was reached with the Rhode Island Department of
Environmental Management regarding two notices of violation issued in 1994 and
1995. Although the Company believed that the allegations were meritless, the
agreement was entered into in order to resolve the matter in the best interests
of the Company and its customers in a timely manner. The Company agreed to pay
$35,000 each year from 1995 to 1998, $50,000 in 1999, $60,000 in 2000 and
$150,000 in 2001 to the Rhode Island Air and Water Protection Fund. In addition,
the Company agreed to perform community services and conduct seminars over a
five-year period. The Company recorded this obligation based on the discounted
cash flows expected to be paid over the term of agreement, using a discount rate
of 11.75%. The recorded obligation of $245,000 at December 31, 1996 has been
included in mortgage payable and other long-term debt. An expense of $458,000 is
included in the 1995 Consolidated Statement of Operations as Selling, General
and Administrative Expense. This amount reflects the recorded obligation and
legal fees incurred in the settlement.
In 1994, a non-interest bearing note in the amount of $2,480,000 was issued
as part of the purchase of the net assets of Safe Way. As a result of the
Company's initial public offering in August 1996, a portion of the note was
converted into 98,001 shares of common stock and the remainder was paid in cash.
During 1992, the Company entered into an obligation to finance the
development of its Woonsocket, Rhode Island facility. The development and
purchase of substantially all of the property and equipment for the Woonsocket,
Rhode Island facility was financed from the issuance of industrial development
revenue bonds. The bonds are due in various amounts through 2017 at fixed
interest rates ranging from 6.0% to 7.375% and are collateralized by the
property and equipment at the Woonsocket, Rhode Island facility. The terms of an
agreement entered into in connection with the issuance of the bonds contain,
among other provisions, requirements for maintaining defined levels of working
capital and various financial ratios including debt to net worth.
Payments due on long-term debt, excluding capital lease obligations, during
each of the five years subsequent to December 31, 1996 are as follows:
(IN
THOUSANDS)
1997..................................................................................... $ 2,922
1998..................................................................................... 2,965
1999..................................................................................... 200
2000..................................................................................... 215
2001..................................................................................... 315
The Company paid interest of $271,000, $262,000 and $352,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
36
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6--LONG-TERM DEBT (CONTINUED)
The fair value of the Company's long term debt was estimated using a
discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. At December 31,
1996 the fair value of the Company's debt was approximately $7,791,000.
CAPITAL LEASES:
In February 1994, the Company entered into a sale and leaseback transaction
for equipment acquisitions at the Yorkville, Wisconsin facility in the amount of
$882,000. No gain or loss was recognized on the sale and leaseback. The lease
arrangement has a term of 60 months and at the end of the lease, the Company
will have the option to renew the lease, return the equipment or purchase the
equipment at a fair market value not to exceed 11% of the original purchase
price. In January 1996, the Company entered into a capital lease obligation of
$364,000 for equipment. The lease expires in 1998.
At December 31, property under capital leases included with Property, Plant
and Equipment in the accompanying Consolidated Balance Sheets is as follows:
1995 1996
--------- ---------
(IN THOUSANDS)
Machinery and equipment............................................................... $ 882 $ 1,246
Less-Accumulated depreciation and amortization........................................ (169) (293)
--------- ---------
$ 713 $ 953
--------- ---------
--------- ---------
Minimum future lease payments under capital leases are as follows:
(IN THOUSANDS)
1997..................................................................................... $ 314
1998..................................................................................... 204
1999..................................................................................... 29
-----
Total minimum lease payments............................................................. 547
Less--Amounts representing interest...................................................... (30)
-----
Present value of net minimum lease payments.............................................. 517
Less--Current portion.................................................................... (293)
-----
Long-term obligations under capital leases............................................... $ 224
-----
-----
NOTE 7--LEASE COMMITMENTS
The Company leases various plant equipment, office furniture and equipment,
motor vehicles and office and warehouse space under operating lease agreements
which expire at various dates over the next six years. The leases for most of
the properties contain renewal provisions.
Rent expense for 1994, 1995 and 1996 was $1,643,000, $1,739,000 and
$2,462,000, respectively.
37
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 7--LEASE COMMITMENTS (CONTINUED)
Minimum future rental payments under non-cancelable operating leases that
have initial or remaining terms in excess of one year as of December 31, 1996
for each of the next five years and in the aggregate are as follows:
(IN
THOUSANDS)
1997........................................................................... $ 1,132
1998........................................................................... 998
1999........................................................................... 630
2000........................................................................... 481
2001........................................................................... 372
Thereafter..................................................................... 109
------
Total minimum rental payments.............................................. $ 3,722
------
------
NOTE 8--COMMON AND PREFERRED STOCK
In August 1995, the Board of Directors adopted a plan of recapitalization
which was approved by the Company's stockholders in September 1995, pursuant to
which the Company reclassified its outstanding convertible redeemable preferred
stock as common stock. As part of the plan of recapitalization, all conversion,
redemption and liquidation rights associated with the convertible redeemable
preferred stock were terminated in exchange for the issuance of shares of common
stock.
All common shares, per share, weighted average shares outstanding, stock
option and warrant data have been adjusted to reflect a 1-for-5.3089 reverse
stock split effective August 19, 1996. In connection with this reverse stock
split, each outstanding share of the Company's Class A and Class B stock was
redesignated as a share of common stock, and the Company's authorized common
stock was reduced from 58,000,000 shares to 30,000,000 shares, also effective
August 19, 1996.
Shares of the Company's common stock have been reserved for issuance upon
the exercise of warrants and options. These shares have been reserved as follows
at December 31, 1996:
1993 Plan options.................................................. 4,938
1995 Plan options.................................................. 483,058
1996 Directors Plan options........................................ 49,170
Warrants........................................................... 301,683
---------
Total shares reserved.......................................... 838,849
---------
---------
NOTE 9--STOCK OPTIONS AND WARRANTS
STOCK OPTIONS:
In September 1993, the Company's shareholders approved an amended and
restated stock option plan (the "1993 Plan"), which provided for the granting of
options to purchase up to 113,018 shares of common stock. In November 1995, the
outstanding options of all current employees were canceled in conjunction with
the Company's recapitalization.
38
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 9--STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes option activity for the 1993 Plan through
December 31, 1996:
PER SHARE
EXERCISE PRICE # SHARES EXERCISABLE
-------------- ----------- -----------
Outstanding at December 31, 1994................................ $ 5.31-$42.47 109,729 39,864
Canceled........................................................ (99,786)
-----------
Outstanding at December 31, 1995................................ $ 5.31-$42.47 9,943 4,938
Canceled........................................................ (5,005)
-----------
Outstanding at December 31, 1996................................ $ 5.31-$42.47 4,938 4,938
-----------
-----------
In 1995, the Company's Board of Directors and shareholders approved an
incentive compensation plan (the "1995 Plan"), which provides for the granting
of 1,500,000 shares of common stock in the form of stock options and restricted
stock to employees, officers, directors and consultants of the Company. The
exercise price of options granted under the 1995 Plan must be at least equal to
the fair market value of the common stock on the date of grant. In 1995, the
Board of Directors authorized the grant to officers and employees of options to
purchase 923,292 shares of the Company's common stock at an exercise price of
$.53 per share. All options granted to date have 10 year terms and vest over
periods of up to 4 years after the date of grant.
The following table summarizes stock option activity and related information
for the 1995 Plan through December 31, 1996:
PER SHARE
EXERCISE
PRICE # OPTIONS EXERCISABLE
------------- ----------- -----------
Outstanding at December 31, 1995................................ $.53 923,292 537,682
Granted:
January....................................................... .53 49,073
March......................................................... 2.12 30,826
April......................................................... 1.99 149,984
Exercised:
.............................................................. .53 (636,534)
.............................................................. 2.12 (24,233)
Canceled:
.............................................................. .53 (8,427)
.............................................................. 1.99 (923)
-----------
Outstanding at December 31, 1996................................ $.53-$2.12 483,058 307,262
-----------
-----------
The weighted average exercise price of the options outstanding at December
31, 1996 is $1.00 per share. The weighted average contractual life of the
options outstanding at December 31, 1996 is 9 years.
39
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 9--STOCK OPTIONS AND WARRANTS (CONTINUED)
In June 1996, the Company's Board of Directors adopted the Directors Stock
Option Plan. The plan authorizes stock options for a total of 285,000 shares of
common stock to be granted to eligible directors of the Company, consisting of
directors who are neither officers nor employees of the Company. Each of the six
incumbent eligible directors automatically received an option as of the date of
closing of the Company's initial public offering for 8,195 shares of common
stock with an exercise price of $10.25. As of each annual meeting of the
Company's stockholders, each incumbent eligible director who is re-elected as a
director at the annual meeting will automatically receive an option grant based
on a predetermined formula. The exercise price of each option will be the
closing price on the date of grant. The term of each option will be six years
from the date of grant and will vest in 16 equal quarterly installments and may
be exercised only when it is vested and only while the holder of the option
remains a director of the Company or during the 90-day period following the date
that he or she ceases to serve as a director.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"'), requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options approximates the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net loss and net loss per common share is
required by FAS 123 as if the Company has accounted for its employee stock
options granted subsequent to December 31, 1994 under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using the minimum value method with the following assumptions for 1995 and
1996: risk-free interest rates ranging from 5.5% to 5.7% in 1995 and 5.1% to
6.7% in 1996; a dividend yield of 0%; and a weighted-average expected life of
the option of 31 months. The weighted-average fair values of options granted
during 1995 and 1996 were $.09 per share and $.79 per share, respectively.
Option value models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate in management's
opinion, the existing method does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. The Company's
pro forma information follows (in thousands except for net loss per common share
information):
1995 1996
--------- ---------
Pro forma net loss....................................................... $ (4,559) $ (2,474)
Pro forma net loss per common share...................................... $ (.65) $ (.31)
Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma affect will not be fully reflected until 1997.
40
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 9--STOCK OPTIONS AND WARRANTS (CONTINUED)
WARRANTS:
The Company, in conjunction with a lease financing agreement, issued the
lessor warrants to purchase up to 15,064 shares of common stock at $18.58 per
share. At December 31, 1996, all of these warrants were outstanding and expire
on March 3, 1998.
The Company, in connection with the issuance of preferred stock, which was
subsequently reclassified as common stock issued warrants to purchase up to
6,773 shares of common stock at an exercise price of $69.02 per share. At
December 31, 1996, all of these warrants were outstanding. These warrants expire
on March 16, 1999.
During 1995, several of the Company's shareholders and directors provided a
bridge loan to the Company. The loan totaled $830,000 with interest at prime
plus 3% and was repaid. In addition to the interest, the lenders received
warrants to purchase 220,559 shares of common stock at $1.59 per share. These
warrants expire on July 31, 2000. In 1996, the lenders exercised warrants to
purchase 166,749 shares of common stock. At December 31, 1996, warrants to
purchase 53,810 shares of common stock remained outstanding.
In May 1996, the Company obtained a $1,000,000 bridge loan from certain
shareholders, directors and officers to provide working capital and to finance
additional acquisitions. The bridge loan was repaid in August 1996. In
connection with this loan, the Company issued warrants to members of the lending
group to purchase an aggregate of 226,036 shares of common stock at $7.96 per
share. The warrants expire in May 2001. At December 31, 1996 all of these
warrants were outstanding.
NOTE 10--EMPLOYEE STOCK PURCHASE PLAN
Under a plan for 1996 approved by the Board of Directors, employees of
Stericycle could purchase shares of common stock at a price of $2.12 per share.
Under the terms of the plan, employees were allowed to purchase shares by
December 31, 1995 and to pay for the stock during 1996. Employees elected to
purchase a total of 30,232 shares of common stock.
NOTE 11--REGISTRATION AGREEMENT
The Company is a party to a Registration Agreement which gives certain
shareholders of the Company registration rights for their shares. The parties to
the Registration Agreement are the original holders of the Company's prior Class
A, B, C, D, E, F, H, and I preferred stock and a holder of a warrant to purchase
up to 15,064 shares of common stock which the Company issued in conjunction with
a lease financing agreement. After the Company's 1995 recapitalization, the
Registration Agreement was amended to provide that the registration rights
applied to the shares of common stock that the parties to the Registration
Agreement received pursuant to the recapitalization, shares issuable under
certain warrants issued to purchasers of the Company's prior Class F preferred
stock, shares issuable under the warrant issued in conjunction with the lease
financing agreement and the common stock to be delivered by the Company in
payment of the Safe Way Note, for a total of 5,227,608 shares. According to the
Registration Agreement (i) at any time, the holders of a majority of the shares
which are subject to the registration rights can request registration of their
shares on Form S-1 (a "Long-Form Registration") and the holders of at least 25%
of these shares can request registration of their shares on Form S-2 or S-3,
41
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 11--REGISTRATION AGREEMENT (CONTINUED)
(ii) at any time, one shareholder who is a party to the Registration Agreement
may request a Long Form registration, (iii) at any time, another shareholder who
is a party to the Registration Agreement can request a Long Form registration,
and (iv) the parties to the Registration Agreement have the right to include
their shares in any registration which is requested or in any other registration
that the Company may otherwise undertake. If any registration is requested, the
Company will use its best efforts to effect the requested registration at its
own expense.
NOTE 12--EMPLOYEE BENEFIT PLAN
The Company has a defined contribution retirement savings plan covering
substantially all employees of the Company. Each participant may elect to defer
a portion of his or her compensation subject to certain limitations. The Company
may match up to 30% of the first $1,000 contributed to the retirement savings
plan by each employee. The Company's contributions for the years ended December
31, 1994, 1995 and 1996 were approximately $13,000, $14,000, and $14,000,
respectively.
NOTE 13--RELATED PARTIES
In October 1993, the Company entered into an Alliance Agreement ("Alliance")
with an investor in the Company. The purpose of the Alliance was to develop new
technologies and procedures for recycling regulated medical waste. The Company
devoted resources to the Alliance research and development program during the
first 18 months of the Alliance. The investor has rights with respect to the
development of any Alliance technology as part of the research and development
program. During the initial 18 months of the Alliance, the Company provided for
$1 million of research and development costs under this agreement. A license
agreement is effective upon the non-renewal of the Alliance and grants the
investor a license to use the Alliance technology subject to certain conditions.
Under the Alliance, the investor and the Company have an ongoing
relationship to provide services and products to the healthcare market place.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL STATEMENT DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors of the Company is
incorporated by reference to the information contained under the caption
"Election of Directors--Nominees for Director" in the Company's definitive proxy
statement for the 1997 Annual Meeting of Stockholders to be held on April 28,
1997, to be filed pursuant to Regulation 14A.
The information required by this Item regarding executive officers of the
Company is contained under the caption "Executive Officers of the Registrant" in
Part I of this Report.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the
information contained under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement for the 1997
Annual Meeting of Stockholders to be held on April 28, 1997, to be filed
pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information contained under the caption "Executive Compensation" in the
Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders
to be held on April 28, 1997, to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information contained under the caption "Stock Ownership--Stock Ownership of
Directors and Executive Officers" in the Company's definitive proxy statement
for the 1997 Annual Meeting of Stockholders to be held on April 28, 1997, to be
filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information contained under the caption "Election of Directors--Certain
Transactions" in the Company's definitive proxy statement for the 1997 Annual
Meeting of Stockholders to be held on April 28, 1997, to be filed pursuant to
Regulation 14A.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS (ITEM 14(A)(1) AND (2))
The following financial statements have been filed with this Report:
PAGE
-----
Report of Independent Auditors, Ernst & Young LLP................................................ 26
Consolidated Financial Statements--Stericycle, Inc. and Subsidiaries
Consolidated Balance Sheets at December 31, 1995 and 1996...................................... 27
Consolidated Statements of Operations for Each of the Years in the Three-Year Period Ended
December 31, 1996............................................................................ 28
Consolidated Statements of Changes in Shareholders' Equity (Net Capital Deficiency) for Each of
the Years in the Three-Year Period Ended December 31, 1996................................... 29
Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended
December 31, 1996............................................................................ 30
Notes to Consolidated Financial Statements..................................................... 31
EXHIBITS (ITEM 14(A)(3))
The following exhibits are filed with this Report:
FILED WITH
EXHIBIT ELECTRONIC
NUMBER DESCRIPTION SUBMISSION
- --------- ------------------------------------------------------------------------------------------ -----------------
3.1* Amended and Restated Certificate of Incorporation.........................................
3.2* Amended and Restated By-Laws..............................................................
4.1* Specimen certificate for shares of the Registrant's Common Stock, par value $.01 per
share.....................................................................................
4.2* Form of Common Stock Purchase Warrant in connection with July 1995 line of credit.........
4.3* Form of Common Stock Purchase Warrant in connection with May 1996 short-term loan.........
4.4* Amended and Restated Registration Agreement dated October 19, 1994 between the Registrant
and certain of its stockholders, and related First Amendment dated September 30, 1995 and
Second Amendment dated July 1, 1996.......................................................
10.1*+ Amended and Restated Incentive Compensation Plan..........................................
10.2*+ Directors Stock Option Plan...............................................................
10.3* Loan and Security Agreement dated October 31, 1995 between the Registrant and Silicon
Valley Bank, and related Amendments dated March 12, 1996 and June 4, 1996.................
10.4* Guaranty Agreement dated June 1, 1992 among the Registrant, Fleet National Bank, as
Trustee, and Rhode Island Industrial-Recreational Building Authority, and related
Regulatory Agreement dated June 1, 1992 between the Registrant and the Rhode Island
Industrial-Recreational Building Authority................................................
10.5* Radio-Frequency Heating Technology Licensing Agreement dated November 10, 1995 between the
Registrant and IIT Research Institute.....................................................
10.6* Alliance Agreement dated October 12, 1993 between the Registrant and Baxter Healthcare
Corporation and related First Amendment dated August 1, 1996..............................
44
10.7* Agreement dated May 6, 1994 between the Registrant and Sage Products, Inc., and related
letter agreement dated November 7, 1995...................................................
10.8* Office Lease dated December 26, 1991 between the Registrant and American National Bank and
Trust Company of Chicago, as Trustee under Trust No. 57661, relating to the Registrant's
Deerfield, Illinois office space..........................................................
10.9* Standard Form Industrial Lease dated October 1, 1991 between the Registrant and General
American Life Insurance Company, relating to the Registrant's Loma, Linda, California
treatment facility........................................................................
10.10* Lease dated June 1, 1992 between the Registrant and Rhode Island Industrial Facilities
Corporation, relating to the Registrant's Woonsocket, Rhode Island treatment facility.....
10.11* Lease dated February 25, 1992 between the Registrant and EML Associates, relating to the
Registrant's San Leandro, California transfer station.....................................
10.12* Master Lease Agreement dated February 11, 1994 between the Registrant and Ziegler Leasing
Corporation, relating to the machinery and equipment at the Registrant's Yorkville,
Wisconsin treatment facility..............................................................
10.13* Master Lease Agreement dated March 14, 1991 between the Registrant and LINC Venture Lease
Partners II, L.P., and related Equipment Schedule dated January 1, 1996 relating to the
machinery and equipment at the Registrant's West Memphis, Arkansas recycling and research
development facility, its San Leandro, California transfer station, and its Morton,
Washington treatment facility.............................................................
10.14* State of Rhode Island and Providence Plantations Consent Agreement dated August 22, 1995
between the Registrant and the Rhode Island Department of Environmental Management........
10.15* Interim Agreement dated June 28, 1996 between the Registrant and a Brazilian company......
10.16++ Asset Purchase Agreement dated December 20, 1996 between the Registrant and Waste
Management, Inc. and various of its subsidiaries..........................................
11 Statement re computation of per share earnings............................................ x
21 Subsidiaries.............................................................................. x
23.1 Consent of Ernst & Young LLP.............................................................. x
27 Financial data schedule for the year ended December 31, 1996.............................. x
- ------------------------
* Incorporated by reference to the exhibit (with the same exhibit number) to
the Registrant's Registration Statement on Form S-1, as declared effective
on August 22, 1996 (Registration No. 333-05665).
+ Management contract or compensatory plan required to be filed pursuant to
Item 601 of Regulation S-K.
++ Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
(Amended) on Form 8-K/A, dated December 20, 1996, filed on January 23, 1996.
45
REPORTS ON FORM 8-K (ITEM 14(B))
During the quarter ended December 31, 1996, the Company did not file any
reports on Form 8-K. The Company has filed the following reports under Item 5 of
Form 8-K in connection with its acquisition in December 1996 of the major
portion of the regulated medical waste business of Waste Management, Inc.:
(1) Current Report on Form 8-K, dated December 20, 1996, which was filed on
January 4, 1997;
(2) Current Report (Amended) on Form 8-K/A, dated December 20, 1996, which was
filed on January 23, 1997; and
(3) Current Report (Amended) on Form 8-K/A, dated December 20, 1996, which was
filed on March 5, 1997 and included (a) Waste Management, Inc. Regulated
Medical Waste Business Financial Statements as of December 31, 1996 and the
Years Ended December 31, 1996 and 1995 and (b) the Company's Pro Forma
Condensed Consolidated Financial Statements.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1997.
STERICYCLE, INC.
By: /s/ MARK C. MILLER
--------------------------------------
Mark C. Miller
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
NAME TITLE DATE
- ------------------------------------------ -------------------------------------------------- -----------------
/s/ JACK W. SCHULER Chairman of the Board of Directors March 27, 1997
- ---------------------------------
Jack W. Schuler
/s/ MARK C. MILLER President, Chief Executive Officer and March 27, 1997
- --------------------------------- a Director (Principal Executive
Mark C. Miller Officer)
/s/ JAMES F. POLARK Vice President, Finance and Chief March 27, 1997
- --------------------------------- Financial Officer (Principal Financial
James F. Polark and Accounting Officer)
/s/ PATRICK F. GRAHAM Director March 27, 1997
- ---------------------------------
Patrick F. Graham
/s/ JOHN PATIENCE Director March 27, 1997
- ---------------------------------
John Patience
/s/ L. JOHN WILKERSON, PH.D Director March 27, 1997
- ---------------------------------
L. John Wilkerson, Ph.D.
/s/ PETER VARDY Director March 27, 1997
- ---------------------------------
Peter Vardy
EXHIBIT INDEX
FILED WITH
EXHIBIT ELECTRONIC
NUMBER DESCRIPTION SUBMISSION
- --------- ------------------------------------------------------------------------------------------ ---------------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated By-Laws
4.1* Specimen certificate for shares of the Registrant's Common Stock, par value $.01 per share
4.2* Form of Common Stock Purchase Warrant in connection with July 1995 line of credit
4.3* Form of Common Stock Purchase Warrant in connection with May 1996 short-term loan
4.4* Amended and Restated Registration Agreement dated October 19, 1994 between the Registrant
and certain of its stockholders, and related First Amendment dated September 30, 1995 and
Second Amendment dated July 1, 1996
10.1*+ Amended and Restated Incentive Compensation Plan
10.2*+ Directors Stock Option Plan
10.3* Loan and Security Agreement dated October 31, 1995 between the Registrant and Silicon
Valley Bank, and related Amendments dated March 12, 1996 and June 4, 1996
10.4* Guaranty Agreement dated June 1, 1992 among the Registrant, Fleet National Bank, as
Trustee, and Rhode Island Industrial-Recreational Building Authority, and related
Regulatory Agreement dated June 1, 1992 between the Registrant and the Rhode Island
Industrial-Recreational Building Authority
10.5* Radio-Frequency Heating Technology Licensing Agreement dated November 10, 1995 between the
Registrant and IIT Research Institute
10.6* Alliance Agreement dated October 12, 1993 between the Registrant and Baxter Healthcare
Corporation and related First Amendment dated August 1, 1996
10.7* Agreement dated May 6, 1994 between the Registrant and Sage Products, Inc., and related
letter agreement dated November 7, 1995
10.8* Office Lease dated December 26, 1991 between the Registrant and American National Bank and
Trust Company of Chicago, as Trustee under Trust No. 57661, relating to the Registrant's
Deerfield, Illinois office space
10.9* Standard Form Industrial Lease dated October 1, 1991 between the Registrant and General
American Life Insurance Company, relating to the Registrant's Loma, Linda, California
treatment facility
10.10* Lease dated June 1, 1992 between the Registrant and Rhode Island Industrial Facilities
Corporation, relating to the Registrant's Woonsocket, Rhode Island treatment facility
10.11* Lease dated February 25, 1992 between the Registrant and EML Associates, relating to the
Registrant's San Leandro, California transfer station
10.12* Master Lease Agreement dated February 11, 1994 between the Registrant and Ziegler Leasing
Corporation, relating to the machinery and equipment at the Registrant's Yorkville,
Wisconsin treatment facility
10.13* Master Lease Agreement dated March 14, 1991 between the Registrant and LINC Venture Lease
Partners II, L.P., and related Equipment Schedule dated January 1, 1996 relating to the
machinery and equipment at the Registrant's West Memphis, Arkansas recycling and research
development facility, its San Leandro, California transfer station, and its Morton,
Washington treatment facility
10.14* State of Rhode Island and Providence Plantations Consent Agreement dated August 22, 1995
between the Registrant and the Rhode Island Department of Environmental Management
10.15* Interim Agreement dated June 28, 1996 between the Registrant and a Brazilian company
10.16++ Asset Purchase Agreement dated December 20, 1996 between the Registrant and Waste
Management, Inc. and various of its subsidiaries
11 Statement re computation of per share earnings x
21 Subsidiaries x
23.1 Consent of Ernst & Young LLP x
27 Financial data schedule for the year ended December 31, 1996 x
- ------------------------
* Incorporated by reference to the exhibit (with the same exhibit number) to
the Registrant's Registration Statement on Form S-1, as declared effective
on August 22, 1996 (Registration No. 333-05665).
+ Management contract or compensatory plan required to be filed pursuant to
Item 601 of
Regulation S-K.
++ Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
(Amended) on
Form 8-K/A, dated December 20, 1996, filed on January 23, 1996.