<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1996
REGISTRATION NO. 333-05665
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STERICYCLE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4953 36-3640402
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
1419 LAKE COOK ROAD, SUITE 410
DEERFIELD, ILLINOIS 60015
(847) 945-6550
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
MARK C. MILLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STERICYCLE, INC.
1419 LAKE COOK ROAD, SUITE 410
DEERFIELD, ILLINOIS 60015
(847) 945-6550
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Craig P. Colmar, Esq. Geoffrey E. Liebmann, Esq.
Michael Bonn, Esq. Cahill Gordon & Reindel
Johnson and Colmar 80 Pine Street
300 South Wacker Drive New York, New York 10005
Chicago, Illinois 60606
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration Statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
STERICYCLE, INC.
------------------------
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION
IN PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION OR CAPTION IN PROSPECTUS
- -------------------------------------------------- ---------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Forepart of Registration Statement; Outside
Outside Front Cover Page of Prospectus...... Front Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Outside Back Cover
Prospectus.................................. Page
3. Summary Information, Risk Factors and Ratio Prospectus Summary; Risk Factors
of Earnings to Fixed Charges................
4. Use of Proceeds.............................. Use of Proceeds
5. Determination of Offering Price.............. Outside Front Cover Page; Underwriting
6. Dilution..................................... Dilution
7. Selling Security Holders..................... Not Applicable
8. Plan of Distribution......................... Outside and Inside Front Cover Pages;
Underwriting; Outside Back Cover Page
9. Description of Securities to be Registered... Outside Front Cover Page; Prospectus Summary;
Dividend Policy; Capitalization; Description
of Capital Stock; Shares Eligible for Future
Sale
10. Interests of Named Experts and Counsel....... Not Applicable
11. Information with Respect to the Registrant... Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; Use of
Proceeds; Dividend Policy; Capitalization;
Dilution; Selected Consolidated Financial
Data; Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal Stockholders; Shares
Eligible for Future Sale; Description of
Capital Stock; Additional Information;
Consolidated Financial Statements; Outside
Back Cover Page
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities.................................
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 29, 1996
3,000,000 SHARES
STERICYCLE, INC.
Common Stock
The 3,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby (this "Offering") are being offered by Stericycle, Inc.
("Stericycle" or the "Company"). Prior to this Offering there has been no public
market for the Common Stock. It is currently estimated that the initial public
offering price will be between $11.00 and $13.00 per share. See "Underwriting"
for the factors considered in determining the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market ("Nasdaq") under the symbol "SRCL," subject to notice of issuance.
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON
STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 7 TO 14.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS* COMPANY+
<S> <C> <C> <C>
Per Share................................. $ $ $
Total++................................... $ $ $
</TABLE>
- ------------
* The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
+ Before deducting expenses of this Offering payable by the Company estimated
to be $800,000.
++ The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms per share solely
to cover over-allotments, if any. If such option is exercised in full, the
total price to public will be $ , the total underwriting discounts
and commissions will be $ and the total proceeds to the Company will
be $ . See "Underwriting."
-------------------
The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of certificates therefor
will be made at the offices of Dillon, Read & Co. Inc., New York, New York, on
or about , 1996, against payment therefor. The Underwriters include:
DILLON, READ & CO. INC.
SALOMON BROTHERS INC
WILLIAM BLAIR & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[Illustration]
Steri-Cement-Registered Trademark-, Steri-Fuel-Registered Trademark-,
Steri-Plastic-Registered Trademark- and Steri-Tub-Registered Trademark- are
registered trademarks and Stericycle-Registered Trademark- is a registered
service mark of the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I)
REFLECTS A 1-FOR-5.3089 REVERSE STOCK SPLIT, TO BE EFFECTIVE PRIOR TO COMPLETION
OF THIS OFFERING, (II) REFLECTS THE REDESIGNATION OF ALL OF THE COMPANY'S
OUTSTANDING SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK AS A LIKE
NUMBER OF SHARES OF COMMON STOCK, TO BE EFFECTIVE PRIOR TO COMPLETION OF THIS
OFFERING, AND (III) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED. SEE "DESCRIPTION OF CAPITAL STOCK," "CAPITALIZATION" AND
"UNDERWRITING." UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO
"STERICYCLE" AND THE "COMPANY" REFER TO STERICYCLE, INC. AND ITS SUBSIDIARIES.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION UNDER "RISK
FACTORS."
THE COMPANY
Stericycle is a multi-regional integrated company employing proprietary
technology to provide environmentally-responsible management of regulated
medical waste for the health care industry. 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 technologies; (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 four geographic service areas: (i) California;
(ii) Washington, Oregon, Idaho and British Columbia; (iii) Wisconsin, Illinois,
Indiana and Michigan; and (iv) Massachusetts, Maine, New Hampshire, Vermont,
Rhode Island, Connecticut, New York and New Jersey. As of December 31, 1995, the
Company served over 13,000 customers, consisting of two principal types of
regulated medical waste generators. Approximately 70% of the Company's 1995
revenues were derived from hospitals, blood banks and pharmaceutical
manufacturers ("Core" generators), and approximately 30% 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). The
Company's current operations are comprised of four treatment centers, one
recycling center, five transfer stations and four customer service centers.
Regulated medical waste is generally defined as any waste that can cause an
infectious disease or that reasonably can 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.
Generators of regulated medical waste are responsible for that waste from
its origin through its disposal. The Company seeks to offer a single-source
solution to a wide spectrum of regulated medical waste management issues
3
<PAGE>
confronting generators of regulated medical waste, thereby managing the
generators' compliance responsibilities relating to proper packaging, labeling,
handling, treatment, disposal, tracking and reporting. In addition, the Company
offers programs to assist customers in educating their employees on safety,
resource conservation and compliance issues. This full-service approach to
regulated medical waste management assists customers in dealing cost-effectively
with the increasingly complex regulatory framework in which generators of
regulated medical waste operate.
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. Based upon certain public information and the
Company's estimates of its competitors' revenues, the Company believes that it
is the second-largest provider of regulated medical waste management services in
the United States.
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:
- The handling and disposal of the large quantities of regulated medical
waste generated by the health care industry has attracted increasing
public awareness and regulatory attention. The Occupational Health and
Safety Administration ("OSHA") has issued regulations concerning employee
exposure to bloodborne pathogens and other potentially infectious
materials that require, among other things, special procedures for
handling regulated medical waste and annual training of all personnel who
are potentially exposed to blood and bodily fluids.
- Alternate Care generators have become an increasingly important source of
revenues in the regulated medical waste industry. Individual Alternate
Care generators, however, typically do not produce regulated medical waste
in sufficient volumes to justify substantial capital expenditures on their
own waste treatment facilities or the expense of hiring regulatory
compliance personnel. Accordingly, Alternate Care generators often rely on
a regulated medical waste management provider for a broad range of
regulated medical waste management services.
- The health care industry is under increasing pressure to reduce costs and
improve efficiency, which the Company believes can be achieved in the case
of regulated medical waste by obtaining waste management services from
outside sources.
- Governmental clean air regulations and public opposition are combining to
increase the cost and difficulty of obtaining permits to build and operate
incinerators. As a result, many hospitals have shut down their
incinerators, and the Company expects that many more will do so, with a
corresponding increase in demand for off-site alternative treatment
services such as those offered by the Company.
- Although the regulated medical waste management industry remains
fragmented, the number of competitors is rapidly decreasing as a result of
industry consolidation.
The Company believes that it has the opportunity to increase its penetration
of the geographic service areas in which it currently operates as well as to
expand into adjacent service areas and offer additional products and services to
its customers. Since August 1993, the Company has acquired eight regulated
medical waste management businesses. The Company intends to continue to expand
through business acquisitions, in which it will attempt to acquire businesses
that can be integrated into the Company's existing operations and businesses in
new geographic service areas that can be assembled in a "hub and spoke"
configuration using transfer stations and treatment facilities. Through a
combination of logistics and marketing efforts and business acquisitions, the
Company intends to improve its operating efficiency.
Stericycle, Inc. is a Delaware corporation with its principal executive
offices located at 1419 Lake Cook Road, Suite 410, Deerfield, Illinois 60015.
Its telephone number is (847) 945-6550.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 3,000,000 shares
Common Stock to be outstanding after this 9,218,455 shares (1)
Offering........................................
Use of proceeds................................. To repay bank and other debt and for
general corporate purposes, including
capital expenditures, working capital and
potential future acquisitions. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol.......... SRCL
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of June 1, 1996. Excludes
414,030 shares issuable upon the exercise of outstanding stock options
exercisable within 60 days of June 1, 1996, at a weighted average exercise
price of $0.69 per share, and 387,468 shares issuable upon the exercise of
outstanding warrants all of which were exercisable as of June 1, 1996 at a
weighted average exercise price of $5.31 per share. Also excludes 304,413
shares issuable upon the exercise of outstanding stock options, at a
weighted average exercise price of $1.37 per share, and 22,381 shares
issuable upon the exercise of outstanding warrants at a weighted average
exercise price of $33.18 per share, which either were not exercisable within
60 days of June 1, 1996 or were exercisable at prices in excess of $12.00
per share, the mid-point of the price range as set forth on the cover page
of this Prospectus. See "Description of Capital Stock -- Options" and "--
Warrants."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992(4) 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................. $ 1,563 $ 5,010 $ 9,141 $ 16,141 $ 21,339 $ 5,446 $ 5,578
Cost of revenues......................... 2,005 5,466 9,137 13,922 17,478 4,227 4,337
Selling, general and administrative
expenses................................ 3,377 11,223 5,988 7,927 8,137 2,762 1,505
--------- --------- --------- --------- --------- --------- ---------
Loss from operations..................... (3,819) (11,679) (5,984) (5,708) (4,276) (1,543) (264)
Interest expense......................... (77) (244) (245) (260) (277) (54) (83)
Interest income.......................... 243 283 201 156 9 6 --
--------- --------- --------- --------- --------- --------- ---------
Net loss................................. $ (3,653) $ (11,640) $ (6,028) $ (5,812) $ (4,544) $ (1,591) $ (347)
Less cumulative preferred dividends...... (1,351) (2,737) (3,733) (4,481) --(5) (1,573) --
--------- --------- --------- --------- --------- --------- ---------
Loss applicable to common stock.......... $ (5,004) $ (14,377) $ (9,761) $ (10,293) $ (4,544) $ (3,164) $ (347)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per common share (1)............ $ (2.79) $ (7.77) $ (5.28) $ (5.57) $ (0.64) $ (1.71) $ (0.05)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of common shares
outstanding............................. 1,791,662 1,850,445 1,847,432 1,847,808 7,060,438 1,847,808 7,094,703
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma net loss per common share
(2)..................................... $ (0.45) $ (0.03)
--------- ---------
--------- ---------
Pro forma weighted average number of
common shares outstanding (3)........... 10,060,438 10,094,703
--------- ---------
--------- ---------
<CAPTION>
MARCH 31, 1996
-------------------------------
PRO
FORMA,
PRO AS
ACTUAL FORMA(6) ADJUSTED(7)
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 120 $ 120 $ 28,800
Total assets............................................................. 23,876 25,710 54,390
Current portion of long-term debt........................................ 759 2,593 759
Long-term debt, net of current maturities................................ 5,996 5,996 2,342
Shareholders' equity..................................................... 12,228 12,228 46,396
</TABLE>
- ------------------------------
(1) See Note 2 to the Consolidated Financial Statements for information
concerning the computation of net loss per share.
(2) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered hereby and application of the estimated net proceeds to the Company
for contemplated debt repayment, with elimination of the interest expense on
the indebtedness repaid ($64,000 for the year ended December 31, 1995 and
$38,000 for the three months ended March 31, 1996). See "Use of Proceeds."
(3) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered hereby.
(4) During 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 the ETD
process.
(5) In August 1995 and in connection with a recapitalization of the Company, the
liquidation preference on the Company's preferred stock was eliminated and
the Company's preferred stock was reclassified as Class A common stock. See
"Description of Capital Stock -- 1995 Recapitalization."
(6) Adjusted to give effect to the acquisition of certain assets of Sharps
Incinerator of Fort, Inc. in April 1996 and the acquisition of certain
assets of Doctors Environmental Control, Inc. in May 1996. See Note 2 to the
Condensed Consolidated Financial Statements.
(7) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered hereby (at an assumed initial public offering price of $12.00 per
share, the mid-point of the price range as set forth on the cover page of
this Prospectus, and after the deduction of estimated underwriting discounts
and commissions and estimated offering expenses payable by the Company) and
application of the estimated net proceeds to the Company. See "Use of
Proceeds."
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING AN INVESTMENT IN
THE COMMON STOCK OFFERED BY THIS PROSPECTUS.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company is engaged in the regulated medical waste management business.
The Company's operations have not been profitable since the Company began
operations in 1989. As of March 31, 1996, the Company had an accumulated deficit
of approximately $37,449,000. For the year ended December 31, 1995 and the
quarter ended March 31, 1996, the Company had net losses of approximately
$4,544,000, or $0.64 per share, and approximately $347,000, or $0.05 per share,
respectively. The Company estimates that it had a net loss of approximately
$1,100,000 for the six months ended June 30, 1996, on revenues of approximately
$11,600,000. There can be no assurance that the Company will be able to operate
profitably in the future. The Company is subject to the risks and uncertainties
inherent in the growth of a developing business in its industry, including,
among other things, limited access to capital, difficulties and delays in
obtaining necessary government permits and authorizations, other delays in
implementing its business strategy in particular geographic service areas and
significant competition.
IMPACT OF GOVERNMENT REGULATION
The regulated medical waste management industry is subject to extensive
federal, state, local and applicable foreign laws and regulations. The
collection, transportation, treatment and disposal of regulated medical waste
require applicable government permits, authorizations and approvals ("permits"),
the nature of which may vary from jurisdiction to jurisdiction, and continuing
compliance with required packaging, labeling, handling, treatment, disposal and
documentation procedures and notice and reporting obligations. The Company
believes that it has obtained all government permits required to operate its
existing business and that it is in compliance in all material respects with
these permits and all applicable laws and regulations. State and local laws and
regulations change with some frequency, however, and the amendment of existing
laws or regulations or the adoption of new laws or regulations could require the
Company to obtain new government permits or to modify its current methods of
operation in order to comply with these changes. There can be no assurance that
the Company would be able to obtain any such new permits or that the cost of
compliance with any such changes would not have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Governmental Regulation."
The permits that the Company requires, and in particular the permits
required to build and operate treatment and transfer facilities and transport
regulated medical waste, are difficult and time-consuming to obtain and, if and
when issued, may be subject to conditions or restrictions which limit the
Company's ability to operate efficiently in the applicable jurisdiction. There
can be no assurance that the Company will be successful in obtaining the permits
necessary in order to expand the geographic service areas in which it operates
or that any such permits will be obtained when contemplated by the Company's
expansion plans or under conditions or with restrictions acceptable to the
Company. The Company's inability to expand the geographic service areas in which
it operates, either because it is unable to obtain the necessary permits or
because they are issued under conditions or with restrictions which are not
acceptable to the Company, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
applications for treatment and transfer facility permits are frequently subject
to opposition by elected officials, local residents or citizen groups, and
public opposition could force the Company to delay or withdraw its application
and abandon its plans to expand into a particular geographic service area or to
locate a treatment or transfer facility at a particular site. Even after a
permit is issued, opponents may initiate administrative proceedings or
litigation to compel the applicable regulatory agency to modify the conditions
under which the permit was granted or to revoke the issuance of the permit. The
Company's withdrawal of a permit application, after incurring substantial costs
in the preparation and prosecution of the application and underlying market
studies, site selection, facility design and pre-marketing activities, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Governmental Regulation."
The Company's failure to operate in compliance with the requirements and
limitations of any permit, or with the laws and regulations pursuant to which
the permit was issued, could jeopardize the permit. Routine compliance
inspections by the issuing regulatory agency, as well as complaints filed or
anonymously sponsored by the Company's
7
<PAGE>
competitors or others alleging that the Company is not operating in compliance
with a particular permit, could result in administrative proceedings to modify,
suspend or revoke the permit. Any such modification, suspension or revocation
could have a material adverse effect on the Company's business, financial
condition and results of operations. Some permits have to be renewed
periodically, and there can be no assurance that any existing or future permit
which is required to be renewed will be renewed by the issuing regulatory
agency. The failure to obtain any such renewal could have a material adverse
effect on the Company's business, financial condition and results of operations.
Subsequent to the issuance of the Company's original license for its Woonsocket,
Rhode Island treatment facility, the State of Rhode Island enacted legislation
that required the Company to obtain an additional license for its regulated
medical waste operations. The Company has applied for but not yet received this
additional license. Until regulatory action is taken in respect of this
additional license, the Company is permitted to continue to operate under its
current license. There can be no assurance that the Company will receive the
additional license. Denial of this license could result in the Company being
required to cease treatment operations in Rhode Island and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Governmental Regulation."
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. Like any technology, the Company's treatment process may be subject
to certain technological limitations. Although the Company has never been denied
regulatory approval because of any technological limitation on its treatment
process, there can be no assurance that specific limitations will not be
identified by a regulatory agency as a sufficient reason to withhold a necessary
permit in a particular jurisdiction or used by competitors to encourage
customers or potential customers to engage their services rather than those of
the Company. There can be no assurance that any such actions would not have a
material adverse effect on the Company's business, financial condition and
results of operations.
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. While the Commission has
approved the Company's current prices, there can be no assurance that the
Commission will approve the prices that the Company may seek to charge in the
future or that the prices approved will be adequate to enable the Company to
earn an acceptable return on its operations in Washington. There can be no
assurance that the Company will not be regulated in a similar manner in other
states or jurisdictions in the future. Any such regulation could result in the
Company's failure to attain otherwise available levels of profitability and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Governmental Regulation."
GOVERNMENTAL ENFORCEMENT PROCEEDINGS
The Company has been and may continue to be subject from time to time to
governmental enforcement proceedings and has been and may be required to pay
fines and penalties or undertake remedial work at its facilities. The amount of
any such fines and penalties and the cost of any such remedial work could be
substantial and could have a material adverse effect on the Company's business,
financial condition and results of operations. In August 1995, the Company and
the Rhode Island Department of Environmental Management ("RIDEM") entered into a
settlement agreement 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
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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 action by RIDEM prompted regulatory
authorities in all of the other states in which the Company does business to
investigate or inquire into the Company's operations. None of these
investigations or inquiries has resulted in any fines, penalties or remedial
work. 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 1994, when the Company still used a third party for transportation
services prior to obtaining its own California waste transportation permit, the
California Department of Health Services initiated an investigation of possible
violations of the state medical waste management act by the third party and the
Company, including delays in transport and insufficient tracking of regulated
medical waste in transit. In order to resolve this matter, the Company agreed in
April 1995 to pay $75,000 to the California Department of Health Services
Medical Waste Management Fund and to assume direct responsibility for the
transportation of regulated medical waste to the Company's treatment facilities.
In 1993 the Company resolved separate inquiries by the Federal Trade Commission
and state agencies in California and Washington by voluntarily agreeing to
clarify in its promotional materials the proportions of treated regulated
medical waste going to resource recovery and recycling.
There can be no assurance that the Company will be successful in its defense
of any future government enforcement proceeding or in obtaining a settlement of
any fines or penalties sought to be imposed on terms acceptable to the Company.
The expense and time involved in defending against any such enforcement
proceeding, the cost of any fines or penalties imposed or paid in settlement,
and the adverse publicity, loss of customers and additional investigations or
inquiries associated with any proceeding, could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Regulatory and Legal Proceedings."
IMPORTANCE OF GOVERNMENTAL ENFORCEMENT OF ENVIRONMENTAL REGULATIONS
The Company believes that its business prospects are enhanced by the
enforcement of stringent statutory and regulatory requirements relating to the
collection, transportation, treatment and disposal of regulated medical waste.
These laws and regulations are, and will continue to be, a principal factor
affecting demand for the Company's regulated medical waste management services.
In addition, the Company views laws and regulations that make it more difficult
or expensive to use competing regulated medical waste treatment technologies,
such as incineration and autoclaving, as advantageous to its business prospects.
The Company believes that legislative initiatives offering financial incentives
for or otherwise encouraging the recycling of treated medical waste similarly
enhance the Company's business prospects. Changes in the law or regulations that
relax the requirements governing regulated medical waste, including changes that
reduce incentives to landfill diversion and resource recovery or that remove
obstacles to the use of incineration and autoclaving for the treatment of
regulated medical waste, could have a material adverse effect on the Company's
business, financial condition and results of operations. The level of future
enforcement of existing and new laws and regulations, the scope of future laws
and regulations and the impact of technological changes on existing or future
laws and regulations cannot be predicted. The level of enforcement in each
jurisdiction is subject to changing political and budgetary pressures. A
significant reduction in government enforcement in one or more jurisdictions
could have a material adverse effect on the Company's business, financial
condition and results of operations.
INTENSE COMPETITION WITHIN INDUSTRY
The Company operates within the intensely competitive regulated medical
waste management industry. Competition in the industry has resulted in
substantial price reductions in virtually all geographic areas. Although prices
have stabilized in certain areas, there can be no assurance that competitive
pressures within the regulated
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medical waste management industry will not result in continued or accelerated
price reductions. Substantial continued or accelerated price reductions would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company faces competition from several national waste management
companies and many regional and local businesses in its present locations, and
will be confronted in the future with such competition in each location where it
seeks to expand. The Company's business strategy involves selling its services
to customers who may have established relationships with existing regulated
medical waste management businesses and who therefore may be reluctant to use
the Company's services. Several of the Company's competitors are larger and have
substantially greater capital resources, regulatory experience, sales and
marketing capabilities and broader product and service offerings than the
Company and are well established in their respective markets. Among these larger
competitors are Browning-Ferris Industries, Inc. ("BFI"), WMX Technologies,
Inc., Laidlaw Waste Systems, Inc. and USA Waste Services, Inc. The Company's
primary competitor is BFI. BFI or other competitors, either alone or together
with competitors having sufficient resources, could engage in a variety of
actions that may have the effect of delaying or preventing the implementation of
the Company's business strategy. These activities may include aggressive price
competition, bundling of regulated medical waste management services with other
services including solid waste management, lobbying or other government
relations initiatives designed to impede the Company's ability to obtain or
maintain necessary permits and approvals, financial support of citizens' groups
that oppose the Company's plans to locate a facility at a particular site,
offering a higher level of customer service, and efforts to recruit the
Company's customers. There can be no assurance that the Company's competitors
will not substantially increase their commitment of resources devoted to
competing aggressively with the Company or that the Company will be able to
compete profitably with BFI or other competitors. To the extent that the
Company's competitors are able to secure significant numbers of long-term
customer agreements with penalties for early termination in geographic service
areas that the Company targets for growth, the Company may be unable to meet its
growth objectives. In addition, the widespread adoption of long-term regulated
medical waste management agreements among the Company's potential customers may
increase the likelihood that the Company will be accused of wrongful
interference with the contractual rights of a competitor if and when the Company
attempts to persuade a potential customer to terminate its relationship with
that competitor and become a customer of the Company. See "Business --
Competition."
GROWTH STRATEGY DEPENDENT UPON ACQUISITIONS
The Company's growth strategy depends in significant part on its ability to
acquire other regulated medical waste management businesses. There can be no
assurance that the Company will be able to identify suitable businesses to
acquire, successfully negotiate their acquisition, improve the productivity of
their operations or integrate their operations into the Company's business. The
recent consolidation in the regulated medical waste management industry may
increase competition for the acquisition of existing businesses and result in
fewer acquisition opportunities and higher purchase prices. Some of the
Company's competitors for acquisitions are larger companies with significantly
greater resources than the Company. If the Company is successful in identifying
suitable regulated medical waste management businesses to acquire and in
negotiating terms of acquisition acceptable to the Company, there can be no
assurance that any debt or equity financing which may be necessary to complete
their acquisition could be obtained on terms satisfactory to the Company. Any
additional equity financing may be dilutive to the Company's existing
stockholders, and any debt financing, if available, may significantly increase
the Company's debt and involve restrictive covenants which limit the Company's
operations. The Company's failure to implement successfully its growth strategy
could delay the Company's achievement of profitable operations and could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Use of Proceeds" and "Business -- Growth Strategy"
and "-- Acquisition Program."
If the Company is successful in acquiring additional regulated medical waste
management businesses, the Company may experience a period of rapid growth which
could place significant additional demands on the Company's management,
resources and management information systems. The Company's failure to manage
any such rapid growth effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
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POTENTIAL INABILITY TO FUND FUTURE CAPITAL REQUIREMENTS
The Company anticipates that its future acquisitions of other regulated
medical waste management businesses will be made by the payment of cash,
including cash from the net proceeds of this Offering, the issuance of debt or
equity securities or a combination of these methods. In addition, the Company's
growth through internal expansion of its existing business as well as continuing
operations will require substantial expenditures. If the Company is unable to
use debt or equity securities to make business acquisitions after the
substantial exhaustion of the net proceeds of this Offering, there can be no
assurance that the Company will have sufficient capital resources for that
purpose, or other purposes, or that it will be able to obtain additional
resources on terms acceptable to the Company or at all. Any additional equity
financing may be dilutive to the Company's existing stockholders, and any debt
financing, if available, may involve restrictive covenants which limit the
Company's operations. The Company's failure to raise capital if and when needed
could delay or suspend the Company's growth strategy and result in a material
modification of the Company's business strategy. The Company's inability to fund
its capital requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Use of Proceeds"
and "Business -- Growth Strategy" and "-- Acquisition Program."
DEPENDENCE ON PATENTS AND PROPRIETARY INFORMATION
The Company owns four United States patents and is the owner or licensee of
a number of United States and foreign patent applications covering aspects of
the treatment of medical waste through ELECTRO-THERMAL DEACTIVATION and
irradiation. The Company also owns one United States patent for its
STERI-TUB-Registered Trademark- container. The Company believes that its patents
are important to its prospects for success. There can be no assurance, however,
that the Company's patent applications will issue as patents or that any issued
patents will provide competitive advantages to the Company or will not be
successfully challenged or circumvented by competitors or other third parties.
In addition, there can be no assurance that the Company's regulated medical
waste treatment processes do not infringe the patent or other proprietary rights
of third parties. Litigation may be required to enforce the Company's patents,
to defend the Company against claims of infringement by third parties and to
determine the enforceability, validity and scope of third parties' proprietary
rights. Any such litigation could involve a substantial expense to the Company
and require significant time and attention of the Company's management. The
Company also could be required to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine the priority of
inventions, which also could involve a substantial expense. A determination
adverse to the Company in any such litigation or interference proceedings could
result in a substantial liability to the Company or prevent the Company from
continuing to use its regulated medical waste treatment processes. In the former
event, the liability could have a material adverse effect on the Company's
business, financial condition and results of operations. In the latter event,
the Company could seek a license from the third party or attempt to redesign its
regulated medical waste treatment processes to avoid infringement. The Company's
failure to obtain such a license on terms acceptable to the Company, or its
failure to redesign its processes to avoid infringement, similarly could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Patents and Proprietary Rights."
In addition to patent protection, the Company seeks to protect its
proprietary information through confidentiality agreements with its employees,
consultants and collaborators. There can be no assurance that such agreements
will not be breached, that the Company will have adequate remedies for any such
breach or that the Company's proprietary information will not otherwise become
known to or be independently developed by the Company's competitors. See
"Business -- Patents and Proprietary Rights."
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 that 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, could entail significant expense and could have a material adverse effect
on the Company's business, financial condition and results of operation.
POTENTIAL RISK OF PRODUCT LIABILITY AND POTENTIAL UNAVAILABILITY OF INSURANCE
The regulated medical waste management industry involves potentially
significant risks of statutory, contractual, tort and common law liability. The
Company's failure to comply with applicable laws and regulations or to manage
regulated medical waste in an environmentally safe manner could result in
environmental contamination, personal injury and property damage. The Company
maintains pollution liability, general liability and workers'
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compensation insurance which the Company considers adequate to protect its
business and employees. An uninsured or partially insured claim against the
Company, however, could have a material adverse effect on the Company's
business, financial condition and results of operations. The federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), and similar state laws, impose strict, joint and several
liability on current and former owners and operators of facilities from which
releases of hazardous substances have occurred and on 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. There can
be no assurance that the Company will not face claims under CERCLA or similar
state laws, or under other laws, resulting in a substantial liability for which
the Company is unable to obtain contribution from other responsible parties and
for which the Company is uninsured or only partially insured. The Company's
pollution liability insurance excludes liabilities under CERCLA. The Company may
experience difficulty in the future in obtaining adequate insurance coverage on
acceptable terms. A successful claim against the Company for which it is
uninsured or only partially insured, and for which it is unable to obtain
contribution from other responsible parties, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Potential Liability and Insurance."
ALTERNATIVE TECHNOLOGIES; TECHNOLOGICAL OBSOLESCENCE
The regulated medical waste management industry presents continuing
opportunities for the development of alternative treatment and disposal
technologies. These alternative technologies may emphasize operating cost
efficiencies, reductions in the volume of regulated medical waste generated or
other environmental factors. The development and commercialization of
alternative treatment or disposal technologies that are more cost-efficient than
the Company's technologies or that reduce the volume of regulated medical waste
generated or afford other environmental benefits could place the Company at a
competitive disadvantage. The Company is aware of certain new regulated medical
waste management technologies, including the production of reusable or
degradable medical products, which, if successfully developed and
commercialized, could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNPROFITABILITY OF REUSE AND RECYCLING
One of the components of the Company's business and marketing strategy is to
reuse and recycle treated regulated medical waste. The demand for reusable and
recyclable regulated medical waste products can be volatile and subject to
changing market conditions. The Company does not currently make a profit on its
reuse and recycling operations, and there can be no assurance that the Company
will do so in the future. In the event that the cost of operating its reuse and
recycling programs increases significantly in the future, the Company may
abandon those programs. Their abandonment would deprive the Company of what it
considers to be a significant marketing and sales advantage over its competitors
who do not offer such services while increasing the Company's disposal costs
related to such waste, and thus could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon a limited number of key management, technical
and sales personnel. The Company's future success will depend, in part, upon its
ability to attract and retain highly qualified personnel. The Company faces
competition for such personnel from other companies and organizations, and there
can be no assurance that the Company will be successful in hiring or retaining
qualified personnel. The Company does not have written employment agreements
with its officers providing for specific terms of employment, and officers and
other key personnel could leave the Company's employ with little or no prior
notice. The Company's loss of key personnel, especially if the loss is without
advance notice, or the Company's inability to hire or retain key personnel,
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not carry any key man life
insurance.
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BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use approximately $5,964,000 of the estimated net
proceeds of this Offering for debt repayment, development of the Company's
transfer station in San Leandro, California as a combined treatment and transfer
facility, and a project to utilize treated regulated medical waste as a fossil
fuel substitute in cement production. The Company intends to use the remaining
estimated net proceeds of approximately $26,716,000 for general corporate
purposes, including capital expenditures, working capital and potential future
acquisitions of other regulated medical waste management or related businesses.
As of the date of this Prospectus, the Company has no pending agreements,
commitments or understandings to acquire other regulated medical waste
management or related businesses. At the discretion of the Company's Board of
Directors, the Company could use a substantial portion of the net proceeds of
this Offering to make one or more acquisitions, or could apply the net proceeds
for other purposes, which some or even a majority of the Company's stockholders
might oppose but which would not be submitted to a vote of the stockholders for
their approval. See "Use of Proceeds."
CONTINUED CONTROL BY CURRENT OFFICERS, DIRECTORS AND AFFILIATED ENTITIES
Following completion of this Offering, the Company's current executive
officers, directors and entities affiliated with them will beneficially own, in
the aggregate, approximately 32.9% of the Company's outstanding Common Stock. If
they were to act together, these stockholders would be able to control
substantially all matters requiring approval by the Company's stockholders,
including the election of directors and the approval of mergers or other
business combination transactions. This concentration of ownership could prevent
a change in control of the Company. See "Principal Stockholders."
EFFECT OF APPLICABLE ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company has not elected to be excluded from the provisions of Section
203 of the Delaware General Corporation Law, which imposes certain restrictions
on transactions between a corporation and "interested stockholders" (as defined
in Section 203). These restrictions could operate to delay or prevent a change
in control of the Company and to discourage, impede or prevent a merger, tender
offer or proxy contest involving the Company. See "Description of Capital Stock
- -- Anti-Takeover Provisions of Delaware Law."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or, if one develops, that it will be sustained. The initial
public offering price for the shares of Common Stock offered hereby was
determined by negotiation between the Company and the Managing Underwriters
based upon several factors and may not be indicative of the market price of the
Common Stock after this Offering. See "Underwriting." The market price of the
Common Stock may be volatile. The market price of the Common Stock could be
adversely affected by fluctuations in the Company's operating results or the
operating results of the Company's competitors, the failure of the Company's
operating results to meet the expectations of market analysts and investors,
changes in regulated medical waste management laws and regulations, actions by
regulatory authorities, developments in respect of patents or proprietary
rights, changes in market analyst recommendations regarding the Company or the
regulated medical waste management industry generally, general market
conditions, or other events and factors.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
following this Offering could adversely affect the market price of the Common
Stock. Such sales could also make it more difficult for the Company to sell
equity securities or equity-related securities in the future at a time and price
that the Company considers desirable.
Upon completion of this Offering, the Company will have 9,218,455 shares of
Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding stock options and warrants
after June 1, 1996. Of these outstanding shares, the 3,000,000 shares of Common
Stock sold in this Offering will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless they are purchased by an "affiliate" of the Company as
that term is defined in Rule 144 under the Securities Act. The remaining
6,218,455 shares of Common Stock held by the Company's existing stockholders
will be "restricted securities" as that term is defined in Rule 144 under the
Securities Act, and were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. These
shares may be sold in the public market only if they are registered under the
Securities Act or if they
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qualify for an exemption from registration under Rule 144. Holders of 5,571,624
shares of Common Stock, including all of the Company's officers and directors,
have entered into "lock-up" agreements with the Managing Underwriters pursuant
to which such holders have agreed not to offer, sell, contract to sell, grant
any option to purchase or otherwise dispose of, directly or indirectly, any of
their shares of Common Stock, or any shares that they may acquire through the
exercise of stock options or warrants, or to exercise any of their registration
rights in respect of their shares of Common Stock, for a period of 180 days
after the date of this Prospectus without the prior written consent of Dillon,
Read & Co. Inc. on behalf of the Managing Underwriters. A holder of 461,028 of
such shares has certain limited redemption rights. See "Description of Capital
Stock -- Limited Redemption Rights of One Holder." Upon the expiration of these
agreements, 2,218,298 shares will be eligible for sale without restriction
pursuant to Rule 144(k), 3,354,708 shares will be eligible for sale subject to
the volume limitation and other conditions of Rule 144, and the remaining
645,449 shares will become eligible for sale pursuant to Rule 144 upon the
expiration of their respective two-year holding periods on various dates
occurring more than 180 days after the date of this Prospectus. In addition,
holders of 5,107,829 shares of Common Stock, warrants to purchase 6,773 shares
of Common Stock and a note payable upon completion of this Offering by, in part,
the Company's issuance of 98,001 shares of Common Stock, have certain
registration rights in respect of such shares. By virtue of the lock-up
agreements, no registration rights can be exercised for a period of 180 days
after the date of this Prospectus without the prior written consent of Dillon,
Read & Co. Inc. on behalf of the Managing Underwriters. The number of shares of
Common Stock sold in the public market could increase significantly if holders
of registration rights were to exercise their rights following the expiration of
the lock-up agreements. See "Description of Capital Stock -- Registration Rights
of Certain Holders" and "Shares Eligible for Future Sale."
As of June 1, 1996, there were outstanding options under the Company's
Incentive Compensation Plan (the "1995 Stock Plan") to purchase 696,962 shares
of Common Stock, of which options for 397,554 shares were exercisable within 60
days of June 1, 1996, and other options outstanding to purchase 21,481 shares of
Common Stock, of which options for 16,475 shares were exercisable within 60 days
of June 1, 1996. Of the total options exercisable within 60 days of June 1,
1996, options for 286,769 shares were held by officers, directors and employees
of the Company and other parties subject to the lock-up agreements described
above. Shortly after completion of this Offering, the Company intends to
register the 1,500,000 shares of Common Stock issued or issuable under the 1995
Stock Plan and the 285,000 shares of Common Stock issuable under the Company's
Directors Stock Option Plan. The shares registered will be available for
immediate sale in the public market, subject to the volume limitation under Rule
144 in the case of sales by affiliates of the Company, except to the extent that
the shares are subject to the lock-up agreements described above. See
"Management -- Stock Option Plans" and "Shares Eligible for Future Sale."
As of June 1, 1996, there were outstanding warrants to purchase 409,848
shares of Common Stock, all of which were then exercisable. Holders of warrants
to purchase 387,829 shares of Common Stock are subject to the lock-up agreements
described above.
After completion of this Offering, the Company may issue unregistered shares
of Common Stock as full or partial consideration for future business
acquisitions and may grant registration rights to the holders of such shares.
The Company has agreed that no such grant of registration rights would permit
the rights to be exercised for a period of 180 days after the date of this
Prospectus without the prior written consent of Dillon, Read & Co. Inc. on
behalf of the Managing Underwriters. See "Business -- Acquisition Program."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. New investors purchasing Common
Stock in this Offering accordingly will incur immediate dilution of $7.57 in the
net tangible book value per share of Common Stock purchased (at an assumed
initial public offering price of $12.00, the mid-point of the price range as set
forth on the cover page of this Prospectus and after the deduction of estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company). See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."
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USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
approximately $32,680,000 ($37,702,000 if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$12.00 per share, the mid-point of the price range as set forth on the cover
page of this Prospectus, and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by the Company.
Approximately $1,200,000 of the net proceeds will be used to repay the
Company's outstanding indebtedness under its revolving credit facility with
Silicon Valley Bank. The Company's borrowings under this credit facility were
incurred primarily to refinance other debt, to provide working capital and to
finance the Company's acquisitions of certain assets of Bio-Med of Oregon, Inc.
and WMI Medical Services of New England, Inc. in January 1996, and of Doctors
Environmental Control, Inc. ("Doctors") and Sharps Incinerator of Fort, Inc. in
May 1996, at an aggregate cost of $2,426,000, of which an aggregate of
$1,062,000 was paid in cash at the respective closings of these acquisitions.
The Company's revolving credit facility provides for borrowings of up to
$2,500,000, subject to certain limitations based upon eligible accounts
receivable, had a weighted average interest rate of 11.5% per annum at December
31, 1995 and will mature in October 1997.
Approximately $600,000 of the net proceeds will be used to repay the
Company's outstanding indebtedness under certain notes given in connection with
the Doctors acquisition in May 1996. The notes have an interest rate of 6.0% per
annum and are scheduled to mature in May 1998.
Approximately $222,000 of the net proceeds will be used to repay the
Company's outstanding indebtedness under a note to Security State Bank in
connection with a loan to acquire and equip the Company's treatment facility at
Morton, Washington. The note had an interest rate of 9.78% per annum at December
31, 1995 and is scheduled to mature in December 2007.
Approximately $992,000 of the net proceeds will be used to pay the cash
portion of a note (the "Safe Way Note") to Safe Way Disposal Systems, Inc.
("Safe Way") which was given in connection with the Company's purchase of
certain of Safe Way's assets in September 1994. The Safe Way Note is for
$2,480,000, does not bear interest, is due upon completion of this Offering and
is payable in cash for 40% of its face amount and in 98,001 shares of Common
Stock for the balance.
Approximately $1,000,000 of the net proceeds will be used to repay the
Company's outstanding indebtedness to holders of subordinated notes that the
Company issued in May 1996 in connection with a short-term loan to provide
working capital. The subordinated notes are interest-free if paid when due,
subject to certain exceptions, and are due within 30 days after completion of
this Offering. In connection with this loan, the Company issued warrants to the
lenders to purchase an aggregate of 226,036 shares of Common Stock at a price of
$7.96 per share. See "Certain Transactions."
The Company intends to use a portion of the net proceeds to complete the
construction and equipping of a treatment facility at its San Leandro,
California transfer station. The Company currently estimates the cost of
completion at approximately $1,600,000. In addition, the Company currently
intends to use approximately $350,000 of the net proceeds on a project to
utilize treated regulated medical waste as a fossil fuel substitute in cement
production. The remainder of the net proceeds will be used for general corporate
purposes, including capital expenditures, working capital and potential future
acquisitions of other regulated medical waste management or related businesses.
See "Business -- Growth Strategy" and "-- Acquisition Program." After repayment
of the revolving credit facility, the Company also will be able to redraw on the
credit facility for capital expenditures, potential future acquisitions, working
capital and other general corporate purposes. Pending use of the net proceeds,
the Company intends to invest the net proceeds in interest-bearing,
investment-grade securities.
DIVIDEND POLICY
The Company has never paid cash 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
15
<PAGE>
connection with the industrial development revenue bonds issued to finance the
Company's construction of its treatment facility at Woonsocket, Rhode Island.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DILUTION
Dilution is the reduction in the value of a purchaser's investment in Common
Stock measured by the difference between the purchase price per share and the
net tangible book value per share of the Common Stock after the purchase. The
net tangible book value per share of the Common Stock represents the net
tangible book value of the Company divided by the number of shares of Common
Stock outstanding. The net tangible book value of the Company represents its
total assets less its total liabilities and intangible assets (consisting
primarily of goodwill).
As of March 31, 1996, the net tangible book value of the Company was
approximately $4,410,000, and the net tangible book value per share was
approximately $0.79. The pro forma net tangible book value of the Company as of
March 31, 1996 was approximately $38,578,000, and the pro forma net tangible
book value per share was approximately $4.43, after giving effect to (i) the
sale of the 3,000,000 shares of Common Stock offered hereby (at an assumed
initial public offering price of $12.00 per share, the mid-point of the price
range as set forth on the cover page of this Prospectus, and after the deduction
of estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company) and (ii) payment of the Safe Way Note, which
was outstanding as of March 31, 1996 and is payable upon completion of this
Offering by payment of $992,000 in cash and delivery of 98,001 shares of Common
Stock. This difference represents an immediate increase in net tangible book
value per share of $3.64 to existing stockholders and an immediate dilution in
net tangible book value per share of $7.57 to new investors purchasing Common
Stock in this Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share......................... $ 12.00
Net tangible book value per share before this Offering................ 0.79
Increase per share attributable to new investors (1).................. 3.64
Pro forma net tangible book value per share after this Offering......... 4.43
---------
Dilution per share to new investors..................................... $ 7.57
---------
---------
</TABLE>
- ------------------------
(1) After deduction of estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company.
The following table summarizes, on a pro forma basis as of March 31, 1996,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by new investors purchasing Common Stock in this
Offering (at an assumed initial public offering price of $12.00 per share, the
mid-point of the price range as set forth on the cover page of this Prospectus,
before deduction of estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
TOTAL CASH CONSIDERATION
SHARES PURCHASED
---------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................. 5,714,652 65.6% $ 49,749,000 58.0% $ 8.71
New investors.......................... 3,000,000 34.4 36,000,000 42.0 12.00
---------- ----- ------------- -----
Total.............................. 8,714,652 100.0% $ 85,749,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
Both of these tables assume no exercise of outstanding options and warrants
and no exercise of the Underwriters' over-allotment option. As of March 31,
1996, there were outstanding options to purchase 1,013,077 shares of Common
Stock, at a weighted average exercise price of $0.66 per share, and outstanding
warrants to purchase 242,396 shares of Common Stock, at a weighted average
exercise price of $4.52 per share. To the extent that these options and warrants
are exercised, there will be further dilution to new investors.
16
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1996, the actual
capitalization of the Company, the capitalization of the Company on a pro forma
basis, and the capitalization of the Company on a pro forma basis as adjusted to
give effect to the receipt and application by the Company of the estimated net
proceeds from the sale of the 3,000,000 shares of Common Stock offered hereby
(at an assumed initial public offering price of $12.00 per share, the mid-point
of the price range as set forth on the cover page of this Prospectus, and after
the deduction of estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company). The table also gives effect to (i) a
reverse 1-for-5.3089 stock split, (ii) the redesignation of outstanding shares
of Class A and Class B common stock as a like number of shares of Common Stock
and (iii) the decrease in the Company's authorized stock from 58,000,000 to
30,000,000 shares, all of which are to be effective prior to completion of this
Offering:
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------------
PRO FORMA,
ACTUAL PRO FORMA (1) AS ADJUSTED
--------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt...................................... $ 759 $ 2,593 $ 759
Long-term debt:
Industrial development revenue bonds and other......................... 2,564 2,564 2,342
Note payable to bank................................................... 952 952 0
Note payable........................................................... 2,480 2,480 0
--------- -------------- ------------
Total long-term debt................................................. 5,996 5,996 2,342
Shareholders' Equity:
Common Stock, $0.01 par value; 30,000,000 shares authorized actual;
5,616,651 shares issued and outstanding actual, 8,714,652 shares
issued and outstanding pro forma, as adjusted......................... 56 56 87
Additional paid-in-capital............................................. 49,693 49,693 83,830
Notes receivable for common stock purchases............................ (72) (72) (72)
Accumulated deficit.................................................... (37,449) (37,449) (37,449)
--------- -------------- ------------
Total shareholders' equity........................................... 12,228 12,228 46,396
--------- -------------- ------------
Total capitalization............................................... $ 18,983 $ 20,817 $ 49,497
--------- -------------- ------------
--------- -------------- ------------
</TABLE>
- ------------------------
(1) Adjusted to give effect to the acquisition of certain assets of Sharps
Incinerator of Fort, Inc. in April 1996 and the acquisition of certain
assets of Doctors Environmental Control, Inc. in May 1996. See Note 2 to the
Condensed Consolidated Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The statements of operations data for the years ended December 31,
1991, 1992, 1993, 1994 and 1995 and the balance sheet data at December 31, 1991,
1992, 1993, 1994 and 1995 have been derived from the consolidated financial
statements of the Company (the "Consolidated Financial Statements"), which are
included elsewhere in this Prospectus and which have been audited by Ernst &
Young LLP, independent auditors. The statements of operations data for the three
months ended March 31, 1995 and 1996 and the balance sheet data at March 31,
1996 are derived from the unaudited condensed consolidated financial statements
of the Company (the "Condensed Consolidated Financial Statements") included
elsewhere in this Prospectus. The Condensed Consolidated Financial Statements
include all adjustments, consisting of normal recurring adjustments and the
adjustment described in Note 1 to the Condensed Consolidated Financial
Statements, that the Company considers necessary for a fair presentation of the
financial position and results of operations for that period. Operating results
for the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1996. The
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements, Condensed Consolidated Financial Statements
and related Notes thereto included elsewhere in this Prospectus. The Company did
not declare any cash dividends during any of the periods for which consolidated
financial data is presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ----------------------
1991 1992(2) 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues....................... $ 1,563 $ 5,010 $ 9,141 $ 16,141 $ 21,339 $ 5,446 $ 5,578
Cost of revenues............... 2,005 5,466 9,137 13,922 17,478 4,227 4,337
Selling, general and
administrative expenses....... 3,377 11,223 5,988 7,927 8,137 2,762 1,505
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations........... (3,819) (11,679) (5,984) (5,708) (4,276) (1,543) (264)
Interest expense............... (77) (244) (245) (260) (277) (54) (83)
Interest income................ 243 283 201 156 9 6 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss....................... (3,653) (11,640) (6,028) (5,812) (4,544) (1,591) (347)
Less cumulative preferred
dividends..................... (1,351) (2,737) (3,733) (4,481) --(3) (1,573) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss applicable to common
stock......................... $ (5,004) $ (14,377) $ (9,761) $ (10,293) $ (4,544) $ (3,164) $ (347)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss per common share
(1)........................... $ (2.79) $ (7.77) $ (5.28) $ (5.57) $ (0.64) $ (1.71) $ (0.05)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding..... 1,791,662 1,850,445 1,847,432 1,847,808 7,060,438 1,847,808 7,094,703
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 7,046 $ 11,343 $ 7,690 $ 1,206 $ 138 $ 120
Total assets................................ 12,720 21,368 21,355 27,809 23,491 23,876
Long-term debt, net of current maturities... 1,256 2,935 2,293 4,838 5,622 5,996
Convertible redeemable preferred stock...... $ 20,617 $ 40,354 $ 52,079 $ 62,909 -- --
Shareholders' equity (net capital
deficiency)................................ $ (11,068) $ (25,663) $ (35,106) $ (45,363) $ 12,574 $ 12,228
</TABLE>
- ------------------------
(1) See Note 2 to the Consolidated Financial Statements for information
concerning the computation of net loss per share.
(2) During 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 the ETD
process.
(3) In August 1995 and in connection with a recapitalization, the liquidation
preference on the Company's preferred stock was eliminated and the Company's
preferred stock was reclassified as Class A common stock. See "Description
of Capital Stock -- 1995 Recapitalization."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
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
regulated medical waste treatment facilities utilize its patented treatment
technology, ELECTRO-THERMAL DEACTIVATION ("ETD"). The Company opened its first
full-scale ETD treatment facility in Morton, Washington in January 1992 and
opened additional treatment facilities in Loma Linda, California, Woonsocket,
Rhode Island, and Yorkville, Wisconsin in November 1992, December 1992 and
November 1993, respectively.
The Company's results of operations from its inception through December 31,
1995 reflect significant expenditures to develop proprietary treatment and
recycling processes, obtain required governmental permits and approvals, build
and equip the Company's treatment facilities and a recycling and research and
development center, and open its transfer stations. The Company also made
significant expenditures to develop its sales and marketing resources and to
acquire selected assets of other regulated medical waste management businesses.
The Company believes that additional revenues for its existing treatment
facilities, and in particular additional revenues derived from Alternate Care
generators (as defined below), will significantly enhance operating efficiencies
at the Company's treatment facilities, all of which currently operate at levels
below capacity.
The Company's revenues have increased from $1,563,000 in 1991 to $21,339,000
in 1995. From January 1991 to July 1993, the Company relied entirely on its
internal sales force to add new customers in existing geographic service areas
and to develop customers in new areas. The Company's sales force consisted of
sales representatives with backgrounds in the health care industry. Beginning in
1993, these direct sales enabled the Company to generate sufficient revenues to
cover its cost of revenues.
Since August 1993, the Company has acquired selected assets of eight
regulated medical waste management companies. In each of these acquisitions the
Company purchased specific assets of the seller consisting principally of
customer lists, customer contracts, vehicles and related supplies and equipment.
In some of these acquisitions the Company also assumed certain of the seller's
liabilities. The Company did not acquire any of the regulated medical waste
treatment facilities or technology of any of the sellers, and those sellers with
their own regulated medical waste treatment facilities within the service areas
of the acquired businesses subsequently closed their facilities. All of these
acquisitions were accounted for as purchases, and accordingly, the results of
operations of the acquired businesses have been included in the Company's
financial statements only from their respective dates of acquisition and have
affected period-to-period comparisons of the Company's operating results. The
Company seeks to integrate its acquisitions rapidly into its existing
operations. Accordingly, the impact of such acquisitions on the Company's
revenues, cost of revenues and expenses is measured by the Company only to the
extent that this financial information correlates to the operations of a
particular treatment facility or route, which the Company considers to be of
greater financial relevance. The Company anticipates that a significant portion
of its future growth will come from the acquisition of additional regulated
medical waste management or related businesses. Such additional acquisitions
could continue to affect period-to-period comparisons of the Company's operating
results.
19
<PAGE>
RESULTS OF OPERATIONS
GENERAL
Revenues from regulated medical waste collection, transportation, treatment
and disposal accounted for approximately 95% of the Company's revenues of
$21,339,000 during the year ended December 31, 1995. Revenues from the sale of
ancillary supplies and miscellaneous products and services accounted for the
remaining 5% of the Company's 1995 revenues.
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, 1995, the Company had
more than 13,000 customers.
In 1993, the Company began to make acquisitions of selected assets,
including customer lists and customer contracts, of competitors who were
withdrawing in whole or in part from the regulated medical waste management
business. The Company's revenues increased from $5,010,000 in 1992, before the
Company began its acquisition program, to $21,339,000 in 1995. The Company
estimates that approximately $8,500,000 of this increase in revenues was
attributable to the four acquisitions that it completed during this three-year
period. These acquisitions provided the Company with a substantial new base of
customers, principally Alternate Care generators. These new customers provided
the Company with additional volume for its treatment facilities, generally at a
higher unit pricing than the unit pricing of Core generators. Alternate Care
generators typically require greater service and support in relation to the
volume of regulated medical waste produced than do Core generators, and
accordingly, the Company can price its services at levels permitting it to
realize higher gross profit margins on Alternate Care generators than it can
realize on Core generators. The growth in the number of Alternate Care
generators that the Company serves has contributed to an improvement in the
Company's operating results. The Company believes that cost-containment
pressures in the health care industry will result in continued growth in the
number of medical procedures performed by Alternate Care generators. The Company
has continued to pursue acquisitions within the geographic areas in which it
currently operates and to focus on acquisitions that provide the desired
proportion of Core and Alternate Care generators and allow the Company to
improve the efficiency of its transportation, treatment and sales functions.
Prices for the Company's services are determined on the basis of the type
and frequency of the services required, the weight and types of regulated
medical waste to be collected, container count, container volume, type and
quantity of equipment and supplies furnished, distance to collection site, types
of medical waste, special treatments required, state tariffs and prices charged
for similar services by competitors. The Company's ability to pass on cost
increases may be limited by the terms of its contracts. Service agreements are
generally for a period of one to five years with renewal options, although
customers may terminate on written notice and typically upon payment of a
penalty.
The Company's operating expenses for the collection, transportation,
treatment and disposal of regulated medical waste include direct labor wages and
benefits, equipment lease payments, expenses for fuel, electricity, processing,
safety supplies, containers, ancillary supplies and equipment maintenance,
depreciation of plant, equipment, vehicles and containers, and disposal fees
paid to landfills and waste-to-energy facilities.
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
20
<PAGE>
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. See "Risk Factors -- Cost of
Reuse and Recycling."
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 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.
Selling, general and administrative expenses include management salaries and
benefits, clerical and administrative expenses, costs associated with the sales
force, permitting fees, research and development expenses, office rental
expenses, legal and audit expenses, travel expenses, depreciation of office
equipment and amortization of goodwill.
The Company expenses as incurred all permitting, design and start-up costs
associated with all of 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. In addition, the Company
expenses all costs related to research and development as incurred.
The Company has currently invested $1,000,000 and expensed $800,000 against
operating results in a project to utilize treated regulated medical waste as an
alternative fuel for use in the production of cement. The Company may be
required to expend approximately $350,000 or more to complete this project or
may abandon the project if it is unable to incorporate successfully the treated
medical waste into the cement production process.
As of December 31, 1995, the Company had net operating loss carryforwards
for income tax purposes of approximately $36,493,000, expiring beginning in
2004. No income tax expense has been recorded since the Company's inception.
Utilization of the Company's net operating loss carryforwards may be subject to
annual limitations under the Internal Revenue Code of 1986, as amended, as a
result of changes in the Company's ownership, which could significantly restrict
or partially eliminate their utilization.
Inflation has not had a significant impact to date on the Company's
operations.
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
REVENUES. Revenues increased $132,000, or 2.4%, to $5,578,000 during the
quarter ended March 31, 1996 from $5,446,000 during the comparable quarter in
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 quarter of revenues from the Safetech
Health Care, Inc. ("Safetech") acquisition, which was completed in June 1995,
and two months of revenues from the WMI Medical Services of New England, Inc.
("WMI-NE") acquisition, which was completed in January 1996. The increase in
revenues was partially offset by a decline in revenues attributable to a lack of
any miscellaneous product sales during the quarter ended March 31, 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 $110,000, or 2.6%, to
$4,337,000 during the quarter ended March 31, 1996 from $4,227,000 during the
comparable quarter in 1995. The principal reasons for the increase were higher
transportation costs as a result of the Safetech and WMI-NE acquisitions and
start-up expenses related to the Company's expansion into new geographic areas
where the Company primarily serves Alternate Care generators. Cost of revenues
as a percentage of revenues increased slightly to 77.8% during the quarter ended
March 31, 1996 from 77.6% during the comparable quarter in 1995.
21
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $1,505,000 during the quarter ended March
31, 1996 from $2,762,000 during the comparable quarter in 1995. This decrease
was primarily attributable to a reduction in research and development
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
September 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 quarter ended March 31, 1996 than they were during the
comparable quarter in 1995. Selling, general and administrative expenses as a
percentage of revenues decreased to 27.0% during the quarter ended March 31,
1996 from 50.7% during the comparable quarter in 1995.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to $83,000
during the quarter ended March 31, 1996 from $54,000 during the comparable
quarter in 1995. This increase was primarily attributable to higher indebtedness
under the Company's revolving credit facility. Interest income declined to a
negligible amount during the quarter ended March 31, 1996 from $6,000 during the
comparable quarter in 1995.
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 in 1995
from $16,141,000 in 1994. This increase was attributable primarily to the
inclusion of a full year of 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 in 1995 from $13,922,000 in 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 in 1995 from $7,927,000 in 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 increased to
$277,000 in 1995 from $260,000 in 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.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUES. Revenues increased $7,000,000, or 76.6%, to $16,141,000 in 1994
from $9,141,000 in 1993. This increase was attributable primarily to the
inclusion of revenues from customers acquired as a result of the RCI and Safe
Way acquisitions, which were completed in March and September 1994,
respectively, and the addition of Core generators as new customers.
COST OF REVENUES. Cost of revenues increased $4,785,000, or 52.4%, to
$13,922,000 in 1994 from $9,137,000 in 1993. The primary reasons for this
increase were higher transportation costs, processing costs, disposal volumes
and container costs attributable to additional customers and the inclusion of a
full year's depreciation expense for the Company's Yorkville, Wisconsin
treatment facility. Cost of revenues as a percentage of revenues decreased to
86.3% in 1994 from 100.0% in 1993. 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 $7,927,000 in 1994 from $5,988,000 in 1993.
This increase was the result of an increase in sales personnel as a
22
<PAGE>
result of the Safe Way acquisition, additional marketing and sales expenses for
Alternate Care generators and 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 49.1% in 1994
from 65.5% in 1993. This percentage decrease was primarily due to the
integration of sales and administrative personnel resulting from the Company's
Safe Way acquisition.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to
$260,000 in 1994 from $245,000 in 1993 primarily as a result of additional debt
related to equipment financing at the Company's Yorkville, Wisconsin treatment
facility. Interest income decreased to $156,000 in 1994 from $201,000 in 1993.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has been financed principally through the sale of
preferred stock to investors. Purchasers of preferred stock have invested more
than $49,749,000 in capital which has been used to fund research and
development, acquisitions, capital expenditures, ongoing operating losses and
working capital requirements. 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 security 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 new Class A 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 March 31, 1996, the Company's working capital was $39,000 compared to
$1,770,000 at March 31, 1995. This reduction was due to a lower cash position, a
lower level of accounts receivable as a result of improved collections, a lower
level of prepaid insurance and a reduced supply of recycled plastics. The
Company continues to use all available cash and working capital to fund current
operating losses and capital requirements. During the quarter ended March 31,
1996, the Company's loss from operations of $264,000 was exceeded by its
depreciation and amortization expense of $479,000, resulting in cash flow from
operations of $215,000.
The Company is also using its line of credit to fund cash requirements of
any acquisitions. At March 31, 1996, the Company had drawn $952,000 on its line
of credit and had approximately $1,348,000 available. The revolving credit
facility matures in October 1997. The facility requires the Company to maintain
certain financial ratios and consult with the bank on acquisitions and also
includes a prohibition on the payment of dividends. In April 1996, the Company
used substantially all of its remaining line of credit to fund the cash portion
of two additional acquisitions, for Doctors Environmental Control, Inc. and
Sharps Incinerator of Fort, Inc. The bank agreed to revise certain financial
covenants in order to allow the Company to complete the acquisitions. The loan
agreement allows the bank to demand immediate repayment of the Company's
indebtedness if the bank, acting in a commercially reasonable manner, deems
itself insecure.
In May 1996, the Company borrowed $1,000,000 under a short-term loan from a
lending group comprised of certain officers, directors and stockholders of the
Company to provide working capital. The subordinated notes issued in connection
with this loan are interest-free if paid when due, subject to certain
exceptions, and are due within 30 days after completion of this Offering. See
"Certain Transactions."
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 equipment. These bonds, which
had an outstanding aggregate balance of $1,602,000 as of March 31, 1996 at fixed
interest rates ranging from 5.8% to 7.4%, are due in various amounts through
June 2017. An agreement entered into by the Company in connection with the
issuance of these bonds requires the Company to maintain specified levels of
working capital and other debt and net worth ratios. As of December 31, 1995,
the Company reclassified its reusable containers as long-term assets based upon
their expected useful lives, which resulted in a violation of the Company's
requirement to maintain a specified current ratio on December 31, of each year.
The Company received a waiver of this requirement for December 31, 1995, to the
extent of any violation as a result of the Company's
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reclassification of its reusable containers. Any violation of this or the other
requirements of the Company's agreement in connection with the issuance of the
industrial development revenue bonds would constitute a default under the
Company's revolving credit facility with Silicon Valley Bank.
In connection with the Safe Way acquisition, the Company issued the Safe Way
Note which does not bear interest and is due upon completion of this Offering.
The Safe Way Note is payable in cash for 40% of its face amount, or $992,000,
and 60% in stock, or 98,001 shares of Common Stock.
The Company has an obligation to pay the Rhode Island Air and Water
Protection Fund $35,000 each year from 1995 to 1998, $50,000 in 1999, $60,000 in
2000 and $150,000 in 2001. Without admitting liability, the Company agreed to
make these payments as part of a settlement of two notices of violations issued
by the Rhode Island Department of Environmental Management in 1994 and 1995.
Although the Company disputed both the nature and extent of the alleged
violations, the Company entered into the settlement in order to resolve the
matter in the best interests of the Company and its customers in a timely
manner. The Company recorded the present value of all payments to the Air and
Water Protection Fund and the Company's legal fees relating to the matter as
expenses in 1995. Under the settlement agreement, the Company is also required
to perform certain community service and educational projects, including
conducting environmental management seminars. The Company has accrued the
expenses associated with conducting these activities. See "Risk Factors --
Governmental Enforcement Proceedings."
Capital expenditures for 1996 are currently estimated to be approximately
$2,350,000, of which approximately $1,600,000 is for the construction and
equipping of a treatment facility at the Company's San Leandro, California
transfer station and approximately $750,000 is 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. 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 believes that cash
flow from operations and funds provided from this Offering will fund its capital
requirements through 1997.
Net cash used for operations decreased to $871,000 in 1995 from $6,712,000
in 1994. The reduced cash usage reflects a smaller operating loss, higher
depreciation and amortization expenses and improved collections of accounts
receivables.
Net cash used in investing activities was $393,000 in 1995 compared to
$3,440,000 in 1994. The reduction in 1995 from the prior year was due to reduced
plant requirements and fewer business acquisitions. The Company benefitted from
the sale in April 1995 of certain unprofitable customer accounts and related
assets obtained through acquisitions.
Net cash provided by financing activities decreased to $196,000 in 1995 from
$3,668,000 in 1994. The difference is primarily attributable to no issuance of
preferred stock during 1995 compared to the issuance of $3,458,000 in preferred
stock in 1994.
24
<PAGE>
BUSINESS
INTRODUCTION
Stericycle is a multi-regional integrated company employing proprietary
technology to provide environmentally-responsible management of regulated
medical waste for the health care industry. 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 four geographic service areas: (i) California;
(ii) Washington, Oregon, Idaho and British Columbia; (iii) Wisconsin, Illinois,
Indiana and Michigan; and (iv) Massachusetts, Maine, New Hampshire, Vermont,
Rhode Island, Connecticut, New York and New Jersey. As of December 31, 1995, the
Company served over 13,000 customers, consisting of two principal types of
generators of regulated medical waste. Approximately 70% of the Company's 1995
revenues were derived from hospitals, blood banks and pharmaceutical
manufacturers ("Core" generators), and approximately 30% 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). The
Company's current operations are comprised of four treatment centers, one
recycling center, five transfer stations and four customer service centers.
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.
Based upon certain public information and the Company's estimates of its
competitors' revenues, the Company believes that it is the second-largest
provider of regulated medical waste management services in the United States.
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
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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 to (i) reduce on-site handling of regulated medical waste in order to
minimize employee contact; (ii) assure safe transportation of regulated medical
waste to treatment sites; (iii) assure destruction of potentially infectious
human pathogens; (iv) render the treated regulated medical waste
non-recognizable in order to reduce liability and to increase disposal options;
(v) minimize the impact of the treatment process on the environment and the
volume of solid waste deposited in landfills; and (vi) 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 record-keeping. 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.
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
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<PAGE>
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
Stericycle, 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 believes that it 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. See "Use of Proceeds."
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.
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 25% 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. The Company estimates that doing so would enable it to serve
effectively an area encompassing approximately 55% of the U.S. population. 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
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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.
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; and (viii) if the acquisition involves the assumption of liabilities,
the extent and nature of the seller's liabilities, including environmental
liabilities. Following this Offering, the Company will also consider the effect
of the proposed acquisition on the Company's earnings per share as an evaluation
factor.
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,
including cash from the net proceeds of this Offering, 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 will be 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. The following table shows the Company's completed acquisitions since the
Company began its acquisition program in August 1993.
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ACQUISITIONS SINCE AUGUST 1993
<TABLE>
<CAPTION>
STERICYCLE
SELLER ACQUISITION DATE LOCATION TREATMENT FACILITY
- -------------------------------------- ----------------- -------------------- ------------------
<S> <C> <C> <C>
Therm-Tec Destruction Service of August 1993 Portland, OR Morton, WA
Oregon, Inc.
Recovery Corporation of Illinois March 1994 Lombard, IL Yorkville, WI
Safe Way Disposal Systems, Inc. September 1994 Middletown, CT Woonsocket, RI
Safetech Health Care June 1995 Valencia, CA Loma Linda, CA
Bio-Med of Oregon, Inc. January 1996 Portland, OR Morton, WA
WMI Medical Services of New England, January 1996 Hudson, NH Woonsocket, RI
Inc.
Doctors Environmental Control, Inc. May 1996 Santa Ana, CA Loma Linda, CA
Sharps Incinerator of Fort, Inc. May 1996 Fort Atkinson, WI Yorkville, WI
</TABLE>
TREATMENT TECHNOLOGY
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.
- 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
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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 90 DEG. 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 ETD. 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.
- 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
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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 1995
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 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
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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. 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. See "Description of Capital Stock -- Limited Redemption Rights of One
Holder." 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"). The
spin-off is expected to be completed later this year, and the Company
anticipates that Baxter will transfer its interest in the alliance agreement to
Allegiance in connection with the spin-off. In addition to the 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 1995 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.
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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 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-TUB 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.
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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.
FACILITIES
The Company's corporate offices occupy 7,300 square feet under a lease
expiring in April 1999. The Company owns or leases the following facilities:
<TABLE>
<CAPTION>
PRINCIPAL FUNCTION LOCATION OWNED OR LEASED SIZE
- ------------------------ --------------------- -------------------------- -------------------
<S> <C> <C> <C>
Treatment facility Loma Linda, CA Leased; lease expires in 11,500 square feet
December 2001
Treatment facility Morton, WA Owned 15,000 square feet
Treatment facility Woonsocket, RI Leased; lease expires in 24,000 square feet
June 2017; option to
purchase for $2,000
Treatment facility Yorkville, WI Owned 18,000 square feet
Recycling and research West Memphis, AR Owned 10,000 square feet
development facility
Transfer station San Leandro, CA Leased; lease expires in 22,500 square feet
December 2002
Transfer station Valencia, CA Leased; month-to-month 5,900 square feet
</TABLE>
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 and Middletown, Connecticut, and a depot in
Valparaiso, Indiana.
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. 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.
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 BFI. Other
significant competitors include WMX Technologies, Inc., 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.
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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.
See "Risk Factors -- Intense Competition Within Industry."
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.
See "Risk Factors -- Impact of Government Regulation."
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 authorities.
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 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,
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<PAGE>
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 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
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<PAGE>
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 17 states.
These activities include the collection, transportation, processing,
transferring or recycling of regulated medical waste and, in somes 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.
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.
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<PAGE>
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
it charges for its services in Washington. See "Risk Factors -- Impact of
Government Regulation."
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.
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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 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.
REGULATORY AND 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. See "Risk
Factors -- Governmental Enforcement Proceedings."
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. 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 the closing of
the Safe Way acquisition in September 1994. Safe Way's indemnification
obligation is secured first by 129,985 shares of Common Stock issued to Safe Way
which are currently held in escrow and then by off-set rights of the Company
under the Safe Way Note.
In April 1996, Local 174, International Brotherhood of Teamsters, AFL-CIO,
filed an unfair labor practice charge against the Company with the National
Labor Relations Board. The charge arose from an attempt by the union to organize
the the Company's truck drivers in Washington and Oregon, and claims that the
Company's elimination of certain drivers' positions shortly before a union
recognition election, which the union lost, unlawfully discriminated against
employees engaged in protected activity. The Company is defending its actions as
unrelated to any union activity. The Company's production and maintenance
employees at its Morton, Washington facility voted to affiliate with the union.
The Company is challenging the results of that vote.
39
<PAGE>
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. See "Risk
Factors -- Governmental Enforcement Proceedings."
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 environmental 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 such
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. See "Risk
Factors -- Potential Risk of Product Liability and Potential Unavailability of
Insurance."
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.
See "Risk Factors -- Dependence on Patents and Proprietary Information."
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-TUB-Registered Trademark-.
In November 1995, the Company entered into a license agreement with IIT
Research Institute ("IITRI"). Under this agreement, IITRI granted to the Company
a royalty-free exclusive license in North America, Europe, Japan and other
industrialized countries throughout the world to use and commercialize certain
patent rights and
40
<PAGE>
know-how held by IITRI relating to the use of radio-frequency technology in the
treatment of regulated medical waste, and the Company 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.
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.
41
<PAGE>
EMPLOYEES
At December 31, 1995, the Company employed 216 full-time employees and 27
part-time employees engaged primarily in sales and marketing.
The Company considers its employee relations generally to be satisfactory.
None of the Company's employees is covered by a collective bargaining agreement.
The Company's production and maintenance employees at its Morton, Washington
facility have voted to affiliate with a union. See "-- Legal and Regulatory
Proceedings."
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of Stericycle, Inc. and their ages as
of June 1, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------------------------
<S> <C> <C>
Mark C. Miller 40 President, Chief Executive Officer and Director
Anthony J. Tomasello 49 Vice President, Operations
Linda D. Lee 39 Vice President, Regulatory Affairs and Quality Assurance
James F. Polark 46 Vice President, Finance and Chief Financial Officer
Michael J. Bernert 42 Vice President, Eastern Region
Richard O. Shea 43 Vice President, Western Region
Jack W. Schuler (1) 55 Chairman of the Board of Directors
Patrick F. Graham (2) 56 Director
John Patience (2) 48 Director
Lloyd D. Ruth (2) 49 Director
Peter Vardy (1) 66 Director
L. John Wilkerson, Ph.D (1) 52 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
MARK C. MILLER has served as President and Chief Executive Officer and a
director of the Company since 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 Stericycle, 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 July 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.
42
<PAGE>
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, 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.
MICHAEL J. BERNERT 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.
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.
JACK W. SCHULER has served as Chairman of the Board of Directors of the
Company since January 1990. From January 1987 to August 1989, Mr. Schuler served
as President and Chief Operating Officer of Abbott Laboratories, a diversified
health care company which he joined in 1972 and where he held a number of
management and marketing positions and served as a director from April 1985 to
August 1989. Mr. Schuler serves as a director of Chiron Corporation, Medtronic,
Inc. and Somatogen, Inc., and several privately held companies. He is a co-
founder of Crabtree Partners, a private investment partnership in Deerfield,
Illinois, which was formed in June 1995. He received a B.S. degree in mechanical
engineering from Tufts University and an M.B.A. degree from the Stanford
University Graduate School of Business Administration.
PATRICK F. GRAHAM has served as a director of the Company since May 1991. He
is a co-founder of Bain & Company, Inc., a management consulting firm in Boston,
Massachusetts, where he has served in a number of positions since 1973,
including Vice Chairman and Chief Financial Officer. He was previously a Group
Vice President with Boston Consulting Group. Mr. Graham is a director of
WorldCorp, Inc. and several privately held companies. He received a B.A. degree
from Knox College.
JOHN PATIENCE has served as a director of the Company since its
incorporation in March 1989. He is a co-founder and partner of Crabtree
Partners, a private investment partnership in Deerfield, Illinois, which was
formed in June 1995. From January 1988 to March 1995, Mr. Patience was a general
partner of the general partner of Marquette Venture Partners, L.P., a venture
capital fund which he co-founded and which participated in the initial
capitalization of the Company. He was previously a director with McKinsey &
Company, Inc., a general management consulting firm. Mr. Patience is a director
of TRO Learning, Inc., and several privately held companies. He received B.A.
and B.L. degrees from the University of Sydney, Sydney, Australia, and an M.B.A.
degree from the Wharton School of Business of the University of Pennsylvania.
LLOYD D. RUTH has served as a director of the Company since September 1995.
He previously served as a director of the Company from December 1989 to October
1990. Mr. Ruth is a co-founder of Marquette Venture Partners, L.P., a venture
capital fund in Deerfield, Illinois, where he has served as a general partner of
its general partner since January 1988. From 1981 until 1988 he served with the
Sprout Group, a venture capital fund affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation. Mr. Ruth received a B.S. degree in industrial
engineering from Cornell University, an M.S. degree in computer science from the
Naval Postgraduate School in Monterey, California and an M.B.A. degree from
Stanford University.
PETER VARDY has served as a director of the Company since July 1990. He is
the Managing Director of Peter Vardy & Associates, an international
environmental consulting firm in Chicago, Illinois, which he founded in June
1990. From April 1973 to May 1990, Mr. Vardy served at Waste Management, Inc.
(now WMX Technologies, Inc.), a waste management services company, where he was
Vice President, Environmental Management. He is a director of EMCON, which he
co-founded in 1971. Mr. Vardy received a B.S. degree in geological engineering
from the University of Nevada.
43
<PAGE>
L. JOHN WILKERSON, PH.D., has served as a director of the Company since July
1992. He is a consultant to The Wilkerson Group, a health care products
consulting firm in New York, New York, where he has served since 1982. Dr.
Wilkerson also serves as a general partner of the general partner of Galen
Partners, L.P. and Galen Partners International, L.P., affiliated venture
capital funds. He is a director of British Biotech Plc, Gensia, Inc., TheraTx,
Incorporated and several privately held companies. Dr. Wilkerson received a B.S.
degree in biological sciences from Utah State University and a Ph.D. degree in
managerial economics and marketing research from Cornell University.
BOARD OF DIRECTORS
Directors are elected at the annual meeting of stockholders and hold office
until the next annual meeting or until their successors have been elected and
qualified. Members of the Board of Directors receive no cash compensation for
their services as directors. During the year ended December 31, 1995, the
Company granted options to Jack W. Schuler, Patrick F. Graham and Peter Vardy,
all of whom are members of the Board of Directors, to purchase 52,857, 32,723
and 7,120 shares of Common Stock, respectively. These options were granted
pursuant to an equity restructuring program which was intended, among other
purposes, to reverse the dilutive effect of a recapitalization pursuant to which
the Company's outstanding shares of preferred stock were reclassified as common
stock. See "-- 1995 Equity Adjustment Program" and "Description of Capital Stock
- -- 1995 Recapitalization."
Pursuant to the Company's Directors Stock Option Plan, which was adopted by
the Board of Directors in June 1996 and approved by the Company's stockholders
in July 1996, directors who are not officers or employees of the Company will be
eligible to receive periodic option grants. See "-- Stock Option Plans."
The Compensation Committee of the Board of Directors, consisting of Messrs.
Schuler and Vardy and Dr. Wilkerson, makes recommendations to the full Board of
Directors concerning salaries and incentive compensation for employees of the
Company and administers the Company's Incentive Compensation Plan. The Audit
Committee of the Board of Directors, consisting of Messrs. Graham, Patience and
Ruth makes recommendations to the full Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's internal control functions.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company during
the year ended December 31, 1995 to the Company's President and Chief Executive
Officer and its four other most highly compensated executive officers
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL ---------------------
COMPENSATION NUMBER OF SECURITIES
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY UNDERLYING OPTIONS
- ------------------------------------------------------------------ ----------- -------------- ---------------------
<S> <C> <C> <C>
Mark C. Miller.................................................... 1995 $ 212,083 485,620
President and Chief Executive Officer
Anthony J. Tomasello.............................................. 1995 146,875 31,816
Vice President, Operations
Linda D. Lee...................................................... 1995 127,916 28,621
Vice President, Regulatory Affairs and
Quality Assurance
Michael J. Bernert................................................ 1995 108,750 49,515
Vice President, Eastern Region
Richard O. Shea................................................... 1995 113,541 46,353
Vice President, Western Region
</TABLE>
44
<PAGE>
STOCK OPTION INFORMATION
The following table sets forth certain information regarding stock options
that the Company granted to the Named Executive Officers during the year ended
December 31, 1995. In accordance with the rules of the Securities and Exchange
Commission, the following table also sets forth the potential realizable value
over the term of the options (the period from the date of grant to the date of
expiration) based upon assumed rates of stock appreciation of 5% and 10%,
compounded annually. These amounts do not represent the Company's estimate of
future appreciation of the price of its Common Stock. The Company did not grant
stock appreciation rights to any Named Executive Officer during the year ended
December 31, 1995.
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
NUMBER OF GRANTED TO PRICE APPRECIATION FOR
SECURITIES EMPLOYEES IN OPTION TERM(4)
UNDERLYING FISCAL EXERCISE PRICE EXPIRATION ----------------------
OPTIONS(1) YEAR(2) PER SHARE(3) DATE 5% 10%
----------- ------------- --------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mark C. Miller........................ 485,620 52.60% $ 0.53 11/1/05 $ 161,864 $ 410,195
Anthony J. Tomasello.................. 31,816 3.4% 0.53 11/1/05 10,605 26,874
Linda D. Lee.......................... 28,621 3.1% 0.53 11/1/05 9,540 24,176
Michael J. Bernert.................... 49,515 5.4% 0.53 11/1/05 16,504 41,825
Richard O. Shea....................... 46,353 5.0% 0.53 11/1/05 15,450 39,154
</TABLE>
- ------------------------
(1) All of the options granted to the Named Executive Officers were granted
under the Company's Incentive Compensation Plan (the "1995 Stock Plan")
pursuant to an equity adjustment program which was substantially implemented
in November 1995. See "-- Stock Option Plans" and "-- 1995 Equity Adjustment
Program." The options granted were for shares of the Company's Class B
common stock. The number of options granted shown in the table has been
adjusted to reflect the 1-for-5.3089 reverse stock split to be effective
prior to completion of this Offering. Also prior to completion of this
Offering, all of the Company's outstanding options to purchase shares of
Class B common stock will be converted into options to purchase a like
number of shares of Common Stock. See "Description of Capital Stock --
Reverse Stock Split." The options granted to the Named Executive Officers
vest in equal monthly increments over periods of 12, 24 or 36 months.
(2) Based on an aggregate of 923,292 options granted to employees during the
year ended December 31, 1995, all of which were granted under the 1995 Stock
Plan.
(3) The exercise price per share of each option is equal to the fair market
value of the Company's Class B common stock on the date of grant as
determined by the Company's Board of Directors.
(4) The potential realizable value was calculated based on the 10-year term of
each option on its date of grant, assuming that the fair market value of the
underlying stock on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the appreciated
stock price. The potential realizable value of each option was calculated
using the exercise price of the option as the fair market value of the
underlying stock on the date of grant. The actual realizable value of the
options could be considerably higher than the potential realizable values
shown in the table.
45
<PAGE>
OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information with respect to the value
of the stock options held by the Named Executive Officers at December 31, 1995.
No Named Executive Officer exercised any stock options or stock appreciation
rights during the year ended December 31, 1995 or had any stock appreciation
rights outstanding at the end of the year.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS
END(1) AT FISCAL YEAR END(2)
---------------------- ----------------------
VESTED UNVESTED VESTED UNVESTED
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Mark C. Miller....................................................... 333,275 152,345 -- --
Anthony J. Tomasello................................................. 16,383 15,433 -- --
Linda D. Lee......................................................... 12,814 15,808 -- --
Michael J. Bernert................................................... 23,567 25,948 -- --
Richard O. Shea...................................................... 30,627 15,725 -- --
</TABLE>
- ------------------------
(1) All unexercised options at December 31, 1995 were options to purchase shares
of the Company's Class B common stock. The number of unexercised options
shown in the table has been adjusted to reflect a 1-for-5.3089 reverse stock
split to be effective prior to completion of this Offering. See "Description
of Capital Stock -- Reverse Stock Split."
(2) The value of unexercised options was calculated based on the fair market
value of the underlying shares of the Company's Class B common stock at
December 31, 1995 ($0.53 per share), as determined by the Company's Board of
Directors, less the exercise price payable for such shares ($0.53 per
share), adjusting both amounts to reflect the 1-for-5.3089 reverse stock
split to be effective prior to completion of this Offering. Also prior to
completion of this Offering, all of the Company's outstanding options to
purchase shares of Class B common stock will be converted into options to
purchase a like number of shares of Common Stock. See "Description of
Capital Stock -- Reverse Stock Split."
46
<PAGE>
STOCK OPTION PLANS
1995 STOCK PLAN. The Company's Incentive Compensation Plan (the "1995 Stock
Plan") was adopted by the Board of Directors in August 1995 and approved by the
Company's stockholders in September 1995 in connection with a recapitalization
of the Company. See "Description of Capital Stock -- 1995 Recapitalization." As
amended by the Board of Directors in May and July 1996 and approved by the
Company's stockholders in July 1996, the 1995 Stock Plan authorizes a total of
1,500,000 shares of Common Stock to be issued pursuant to options granted and
restricted stock awarded under the plan. If an option granted under the 1995
Stock Plan expires unexercised or is surrendered, or if the Company repurchases
shares of restricted stock awarded under the plan, the shares of Common Stock
subject to the option or repurchased by the Company once again become available
for option grants and restricted stock awards under the 1995 Stock Plan. As of
June 1, 1996, options to purchase an aggregate of 696,962 shares were
outstanding and 31,476 shares were available for future option grants or
restricted stock awards. The 1995 Stock Plan has a 10-year term, and no option
may be granted or shares of restricted stock awarded under the plan after its
expiration in July 2005.
The 1995 Stock Plan provides for the grant of incentive stock options
intended to satisfy the requirements of Section 422 of the Internal Revenue Code
of 1986, as amended, nonstatutory stock options and restricted stock awards.
Incentive stock options may be granted and shares of restricted stock may be
awarded only to employees of the Company. Nonstatutory stock options may be
granted only to employees of and consultants to the Company. The 1995 Stock Plan
is administered by the Compensation Committee of the Board of Directors, which
selects the eligible persons to whom options are granted or restricted stock is
awarded and, subject to the provisions of the plan, determines the terms of each
option or award, including, in the case of an option, the number of shares, type
of option, exercise price and vesting schedule, and, in the case of an award of
restricted stock, the purchase price, if any, and the restrictions applicable to
the award.
The exercise price of options granted under the 1995 Stock Plan must be at
least equal to the fair market value of the Common Stock on the date of grant,
with the exception that the exercise price of an incentive stock option granted
to an employee of the Company holding more than 10% of the outstanding stock of
the Company must be at least 110% of the fair market value. The maximum term of
any option may not exceed 10 years. An option may be exercised only when it is
vested and, in the case of options granted to employees, only while the holder
of the option remains an employee of the Company or during the 90-day period
following the termination of his or her employment. In the Compensation
Committee's discretion, this 90-day period may be extended in the case of
nonstatutory stock options to any date ending on or before the expiration date
of the option. In addition, the Compensation Committee may accelerate the
exercisability of an option at any time. With the approval of the Compensation
Committee, the holder of an option may pay the exercise price by delivering
other shares of Common Stock, or by directing the Company to withhold shares of
Common Stock otherwise issuable upon exercise of the option, having a fair
market value on the date of exercise equal to the exercise price.
DIRECTORS STOCK OPTION PLAN. The Company's Directors Stock Option Plan (the
"Directors Plan") was adopted by the Board of Directors in June 1996 and
approved by the Company's stockholders in July 1996. The Directors Plan
authorizes a total of 285,000 shares of Common Stock to be issued pursuant to
nonstatutory stock options granted under the plan to directors of the Company
other than directors who are officers or employees of the Company ("outside
directors"). Under the Directors Plan, each incumbent outside director will
automatically receive an option as of the date of closing of this Offering for a
number of shares of Common Stock determined by multiplying 7,000 shares by a
fraction, the numerator of which is $12.00 and the denominator of which is the
average of the closing bid and asked prices of a share of Common Stock (the
"closing price") on the date of grant. As of each annual meeting of the
Company's stockholders after the date of this Offering, each incumbent outside
director who is re-elected as a director at the annual meeting will
automatically receive an option for a number of shares of Common Stock
determined by multiplying 7,000 shares by a fraction, the numerator of which is
$12.00 and the denominator of which is closing price on the date of the annual
meeting, and each outside director who is elected as a director for the first
time will automatically receive an option for a number of shares of Common Stock
determined by multiplying 21,000 shares by a fraction, the numerator of which is
$12.00 and the denominator of which is closing price on the date of the annual
meeting. These option grants are subject to a maximum grant of 9,500 shares and
a minimum grant of 4,500 shares (or to a maximum grant of 28,500 shares and a
minimum grant of 13,500 shares in the case an outside director who is elected as
a director for the first time at an annual meeting). In
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<PAGE>
addition, each outside director who is elected as a director for the first time
other than at an annual meeting of the Company's stockholders will automatically
receive, as of the date of his or her election, an option for a number of shares
of Common Stock equal to three times the number of shares of Common Stock for
which each incumbent outside director received an option as of the last annual
meeting. The exercise price of each option granted under the Directors Plan will
be the closing price on the date of grant. The term of each option will be six
years from the date of grant. Each option 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. With the
approval of the full Board of Directors, the holder of an option may pay the
exercise price by delivering other shares of Common Stock, or by directing the
Company to withhold shares of Common Stock otherwise issuable upon exercise of
the option, having a fair market value on the date of exercise equal to the
exercise price. The Directors Plan has a six-year term, and no option may be
granted under the plan after its expiration in June 2002.
1995 EQUITY ADJUSTMENT PROGRAM
In November 1995, the Company substantially implemented a program to adjust
the equity interests of the Company's officers and employees and certain of its
directors to reflect a plan of recapitalization of the Company which was adopted
by the Board of Directors in August 1995 and approved by the Company's
stockholders in September 1995 and which, among other things, authorized the
issuance of Class A and Class B common stock. See "Description of Capital Stock
- -- 1995 Recapitalization." The purpose of the program was to (i) restore the
percentages of potential ownership interests in the Company of participants in
the program to substantially the same percentages that existed prior to the
recapitalization, (ii) substantially restore the potential value of stock in the
Company that participants had previously purchased or for which they had been
granted stock options, (iii) provide additional potential ownership interests by
option grants for voluntary participation in a new salary reduction program
being adopted for the Company's management and (iv) provide the Company's
President and Chief Executive Officer, Mark C. Miller, with the opportunity
potentially to acquire a 5% ownership interest in the Company. In connection
with this equity adjustment program, the Company allowed participants to
surrender their existing options to purchase shares of Class A common stock for
options to purchase a larger number of shares of Class B common stock. The
Company also agreed to reduce the purchase price of Class A common stock being
purchased by participants under non-recourse notes to reflect the stock's
current fair market value, as determined by the Board of Directors, and to
accept shares of Class A common stock in satisfaction of the unpaid balance of
the notes and issue shares of Class B common stock in exchange for the shares of
Class A common stock for which the purchase price had been paid. The following
table sets forth certain information for the year ended December 31, 1995
regarding the Named Executive Officers and the directors of the Company who
participated in the equity adjustment program:
<TABLE>
<CAPTION>
OPTIONS SHARES OF STOCK NEW OPTIONS NEW SHARES OF
NAME SURRENDERED(1) EXCHANGED(1) RECEIVED(2) STOCK RECEIVED(2)
- ------------------------------------ --------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C>
Mark C. Miller...................... 37,989 38,262 485,620 3,868
Anthony J. Tomasello................ 4,031 12,244 31,816 48,974
Linda D. Lee........................ 3,014 8,288 28,621 26,465
Michael J. Bernert.................. 7,791 2,825 49,515 283
Richard O. Shea..................... 4,073 8,476 46,353 11,584
Jack W. Schuler..................... 6,404 80,768 52,857 211,429
Patrick F. Graham................... 1,601 9,306 32,723 --
Peter Vardy......................... 5,463 6,404 7,120 28,480
</TABLE>
- ------------------------
(1) All options surrendered were options to purchase, and all shares of stock
exchanged were, shares of the Company's Class A common stock. The number of
options surrendered and shares of stock exchanged have been adjusted to
reflect a 1-for-5.3089 reverse stock split to be effective prior to
completion of this Offering. See "Description of Capital Stock -- Reverse
Stock Split."
(2) All options received were options to purchase, and all shares of stock
received were, shares of the Company's Class B common stock. The number of
options and shares of stock received have been adjusted to reflect a
1-for-5.3089 reverse stock split to be effective prior to completion of this
Offering. See "Description of Capital
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<PAGE>
Stock -- Reverse Stock Split." Also prior to completion of this Offering,
all of the Company's outstanding shares of Class B common stock and
outstanding options to purchase shares of Class B common stock will be
converted automatically into a like number of shares of Common Stock, or
options to purchase a like number of shares of Common Stock, as the case may
be. See "Description of Capital Stock -- Reverse Stock Split."
OTHER PLANS
The Company maintains a 401(k) plan in which employees who have completed
one year's employment and attained age 21 are eligible to participate. The plan
permits the Company to make matching contributions of a percentage of
participants' deferrals to be determined each year by the Board of Directors.
For 1993, 1994 and 1995, the Company made matching contributions of 30% of the
first $1,000 contributed by participants.
EMPLOYMENT AGREEMENTS
The Company has not entered into written employment agreements with any of
its executive officers or employees. All of the Company's executive officers and
employees have signed confidentiality agreements with the Company.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law, the Company's directors will not be liable for
monetary damages for breach of a director's duty of care to the Company and its
stockholders. This provision does not eliminate a director's duty of care, and
in appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief will remain available under Delaware law. Each
director continues to remain liable for a breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of the law, for improper
distributions to stockholders and for any transaction from which the director
derives an improper personal benefit. This provision also does not affect a
director's liability under other laws, such as the federal securities laws.
The Company's By-Laws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by Delaware law. The Company
believes that indemnification under its By-Laws covers at least negligence and
gross negligence on the part of indemnified parties. The Company's By-Laws also
permit it to enter into indemnification agreements with its directors and
officers and to purchase insurance on behalf of any person whom it is required
or permitted to indemnify. Prior to completion of this Offering, the Company
intends to enter into indemnification agreements with each of its executive
officers and directors, indemnifying them for certain expenses (including
attorneys' fees), judgments, fines and settlement payments in certain
circumstances, and to obtain a policy of directors' and officers' liability
insurance to insure against certain liabilities.
There is no pending litigation or proceeding involving a director or officer
of the Company for which indemnification is required or permitted, and the
Company is not aware of any pending or threatened litigation that may result in
claims for indemnification by any director or officer.
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<PAGE>
CERTAIN TRANSACTIONS
In July 1995, the Company borrowed $830,000 under a 90-day line of credit,
at the prime rate plus 3% per annum, from a lending group comprised of Galen
Partners, L.P., Galen International, L.P. and Marquette Venture Partners, L.P.,
stockholders of the Company, and John Patience, Jack W. Schuler and Peter Vardy,
directors of the Company. The Company's notes to the members of the lending
group were secured by the Company's accounts receivable. In connection with this
line of credit, the Company issued warrants to members of the lending group to
purchase an aggregate of 220,559 shares of Common Stock. These warrants expire
in July 2000 and are exercisable at any time at the price of $1.59 per share (or
70% of the per share purchase price if the Company sells Common Stock in a
single transaction prior to July 27, 1996 in which the aggregate purchase price
is at least $1,000,000). As of June 1, 1996, warrants for 59,128 shares had been
exercised.
In May 1996, the Company borrowed $1,000,000 under a short-term loan from a
lending group comprised of Galen Partners, L.P. and Galen International, L.P.,
stockholders of the Company, Jack W. Schuler, Mark C. Miller, John Patience and
Peter Vardy, directors of the Company (and, in Mr. Miller's case, also an
executive officer) and Michael J. Bernert, James F. Polark and Anthony J.
Tomasello, executive officers of the Company. The Company's notes to the members
of the lending group are interest-free if paid when due, subject to certain
exceptions, and are due within 30 days after completion of this Offering or upon
the occurrence of certain other events. The notes are unsecured and are
subordinated to certain bank and other debt. 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. These warrants expire in May 2001 and are
exercisable at any time at a price of $7.96 per share. The Company will record
as an interest expense the excess over the exercise price of the fair market
value at the time of exercise of the shares of Common Stock for which any
warrant is exercised. Each warrant may be exercised by the holder at any time by
directing the Company to withhold in payment, from the shares of Common Stock
otherwise issuable upon the exercise of the warrant, a number of shares of
Common Stock having a fair market value on the date of exercise equal to the
exercise price. In connection with the loan, the Company also amended the
warrants issued in connection with the July 1995 line of credit held by members
of the lending group to add a similar "cashless exercise" provision to those
warrants.
In June 1996, the Company loaned $31,000 to Richard O. Shea, an executive
officer of the Company. This loan has an interest rate of 11.75% per annum. The
Company previously made two loans to Mr. Shea of $60,000 and $5,000,
respectively, which remain outstanding. These loans have interest rates of 5.54%
per annum. All three loans are due on December 2, 1998 and are secured by a
security interest in all of Mr. Shea's shares of Common Stock, including any
shares issuable upon his exercise of any stock options.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 1, 1996, and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered hereby, by
(i) each person known to the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Executive Officers and (iv) all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED (1)
------------------------
NUMBER OF BEFORE AFTER
NAME OF BENEFICIAL OWNER SHARES (1) OFFERING OFFERING
- ---------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Marquette Venture Partners, L.P. (2) ............................................. 1,154,731 18.7% 12.5%
Corporate 500 Center
520 Lake Cook Road, Suite 450
Deerfield, Illinois 60015
State Farm Mutual Automobile Insurance Company ................................... 937,521 15.3% 10.2%
One State Farm Plaza
Bloomington, Illinois 61710
Missner Venture Partners II, L.P. (3) ............................................ 466,212 7.6% 5.1%
Two First National Bank Plaza, Suite 2020
Chicago, Illinois 60603
Baxter Healthcare Corporation .................................................... 461,028 7.5% 5.0%
One Baxter Parkway
Deerfield, Illinois 60015
Galen Partners, L.P (4) .......................................................... 433,476 7.0% 4.7%
666 West Third Avenue, Suite 1400
New York, New York 10017
Jack W. Schuler (5)............................................................... 813,382 13.0% 8.7%
Mark C. Miller (6)................................................................ 558,171 9.0% 6.0%
Linda D. Lee (7).................................................................. 55,333 * *
Anthony J. Tomasello (8).......................................................... 131,003 2.1% 1.4%
Michael J. Bernert (9)............................................................ 52,590 * *
Richard O. Shea (10).............................................................. 55,315 * *
Patrick F. Graham (11)............................................................ 35,727 * *
John Patience (12)................................................................ 200,858 3.3% 2.2%
Lloyd D. Ruth (2)................................................................. -- * *
Peter Vardy (13).................................................................. 160,107 2.6% 1.7%
L. John Wilkerson, Ph.D. (14)..................................................... -- * *
All officers and directors as a group (11 persons) (15)........................... 2,120,119 31.8% 21.7%
</TABLE>
- ------------------------
* Less than 1%.
(1)Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated in
the footnotes to this table and subject to applicable community property
laws, the persons named in this table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them. Shares of Common Stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of June 1, 1996 are
considered outstanding for purposes of computing the percentage of the
person holding the option or warrant but are not considered for purposes of
computing the percentage of any other person. The 98,001 shares of Common
Stock issuable under the Safe Way Note are considered outstanding after
completion of this Offering.
(2)Includes 53,811 shares issuable under a warrant exercisable within 60 days
of June 1, 1996. Lloyd D. Ruth, a director of the Company, is a general
partner of the general partner of Marquette Venture Partners, L.P.
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<PAGE>
("Marquette"). Mr. Ruth disclaims any beneficial ownership in any of the
shares held by Marquette except to the extent of his pecuniary interest
arising from his general partnership interest in the general partner of
Marquette.
(3)Includes 35,414 shares owned by Richard H. Missner, who is a general partner
and a limited partner of Missner Venture Partners II, L.P. ("Missner
Partners"). Mr. Missner disclaims any beneficial ownership of the shares
held by Missner Partners except to the extent of his individual ownership
and his pecuniary interest arising from his general partnership and limited
partnership interests in Missner Partners.
(4)Includes 81,374 shares issuable under a warrant exercisable within 60 days
of June 1, 1996 and 40,459 shares (including 8,377 shares issuable under a
warrant exercisable within 60 days of June 1, 1996) which are owned by an
affiliate, Galen Partners International, L.P. L. John Wilkerson, Ph.D., a
director of the Company, is a general partner of the general partner of
Galen Partners, L.P. and Galen Partners International, L.P. Dr. Wilkerson
disclaims any beneficial ownership of the shares held by Galen Partners,
L.P. or Galen Partners International, L.P. except to the extent of his
individual ownership and his pecuniary interest arising from his general
partnership interest in their general partner.
(5)Includes 89,524 shares issuable under warrants exercisable within 60 days of
June 1, 1996, 39,643 shares issuable under stock options exercisable within
60 days of June 1, 1996 and 32,716 shares owned by Mr. Schuler's wife or
trusts for the benefit of his children, in respect of which Mr. Schuler
disclaims any beneficial ownership.
(6)Includes 27,509 shares issuable under stock options exercisable within 60
days of June 1, 1996 and 63,290 shares issuable under a warrant exercisable
within 60 days of June 1, 1996, and 75,345 shares owned by trusts for the
benefit of Mr. Miller's children, in respect of which Mr. Miller disclaims
any beneficial ownership.
(7)Includes 25,519 shares issuable under stock options exercisable within 60
days of June 1, 1996.
(8)Includes 29,687 shares issuable under stock options exercisable within 60
days of June 1, 1996 and 12,432 shares issuable under a warrant exercisable
within 60 days of June 1, 1996.
(9)Includes 40,041 shares issuable under stock options exercisable within 60
days of June 1, 1996 and 11,302 shares issuable under a warrant exercisable
within 60 days of June 1, 1996.
(10)Includes 43,544 shares issuable under stock options exercisable within 60
days of June 1, 1996.
(11)Includes 31,087 shares issuable under stock options exercisable within 60
days of June 1, 1996.
(12)Includes 1,627 shares issuable under stock options exercisable within 60
days of June 1, 1996 and 34,583 shares issuable under a warrant exercisable
within 60 days of June 1, 1996.
(13)Includes 22,966 shares issuable under a warrant exercisable within 60 days
of June 1, 1996, 1,780 shares issuable under options exercisable within 60
days of June 1, 1996 and 67,613 shares owned by trusts for the benefit of
Mr. Vardy's children, in respect of which Mr. Vardy disclaims any beneficial
ownership.
(14)L. John Wilkerson, Ph.D., a director of the Company, is a general partner of
the general partner of Galen Partners, L.P. and Galen Partners
International, L.P. Dr. Wilkerson disclaims any beneficial ownership of the
shares held by Galen Partners, L.P. or Galen Partners International, L.P.
except to the extent of his individual ownership and his pecuniary interest
arising from his general partnership interest in their general partner.
(15)Includes 286,769 shares issuable under stock options exercisable within 60
days of June 1, 1996 and 244,269 shares issuable under warrants exercisable
within 60 days of June 1, 1996.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this Offering, the Company's authorized capital stock
will consist of 30,000,000 shares of Common Stock, par value $.01 per share. The
following description reflects (i) a 1-for-5.3089 reverse stock split to be
effective immediately prior to completion of this Offering and (ii) the
automatic redesignation upon completion of this Offering of all of the Company's
outstanding shares of Class A and Class B common stock and outstanding options
to purchase shares of Class A or Class B common stock as a like number of shares
of Common Stock or options to purchase a like number of shares of Common Stock,
as the case may be. See "-- Reverse Stock Split."
COMMON STOCK
As of June 1, 1996, there were 6,218,455 shares of Common Stock outstanding
which were held of record by 139 stockholders.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders but do not have cumulative voting rights in
respect of the election of directors. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Company's Board of Directors out of legally available funds. In the event of
the liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in all of the assets of the Company
remaining after payment or provision for payment of the Company's liabilities.
Holders of Common Stock have no preemptive or other subscription rights to
purchase any securities of the Company, and there are no conversion rights or
redemption or sinking fund provisions in respect the Common Stock. All
outstanding shares of Class A and Class B common stock are, and all shares of
Common Stock to be outstanding upon completion of this Offering will be, fully
paid and non-assessable.
WARRANTS
As of June 1, 1996, there were outstanding warrants to purchase 409,848
shares of Common Stock, all of which were then exercisable at a weighted average
exercise price of $6.83 per share. Of these outstanding warrants, warrants for
15,608 shares of Common Stock, at an exercise price of $17.63 per share, expire
in March 1998; warrants for 6,773 shares of Common Stock, at an exercise price
of $69.02 per share, expire in March 1999; warrants for 161,432 shares of Common
Stock, at an exercise price of $1.59 per share (or 70% of the per share purchase
price if the Company sells Common Stock in a single transaction prior to July
27, 1996 in which the aggregate purchase price is at least $1,000,000), expire
in July 2000; and warrants for 226,036 shares of Common Stock, at an exercise
price of $7.96, expire in May 2001. Holders of the warrants expiring on March
17, 1999 are entitled to certain rights in respect of the registration under the
Securities Act of 1933, as amended (the "Securities Act"), of the shares of
Common Stock issued upon the exercise of the warrants. See "-- Registration
Rights of Certain Holders."
OPTIONS
As of June 1, 1996, there were outstanding options to purchase 718,443
shares of Common Stock, at a weighted average exercise price of $0.97 per share,
of which options for 414,030 shares, at a weighted average exercise price of
$0.69 per share, were exercisable within 60 days of June 1, 1996. With the
exception of options for 9,943 shares, which were granted under terminated plans
and are held by former employees and vendors to the Company and options for
11,537 shares issued to consultants engaged by the Company, all of these
outstanding options were granted under the 1995 Stock Plan. See "Management --
Stock Option Plans."
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Upon completion of this Offering, holders of 5,212,603 shares of Common
Stock (including 6,773 shares issuable upon the exercise of certain of the
Company's outstanding warrants and 98,001 shares to be issued in partial payment
of an outstanding note due upon completion of this Offering) (the "Registrable
Shares") will be entitled to certain rights in respect of the registration of
the Registrable Shares under the Securities Act. Under the Amended and Restated
Registration Agreement dated October 19, 1994, as amended, among the Company and
such holders, holders of a majority of the Registrable Shares have the right,
until the Company is eligible to file a registration statement on Form S-2 or
Form S-3, to request on two occasions that the Company file a registration
statement on Form S-1 to register all or a portion of their Registrable Shares.
If and when the Company is eligible to file a registration statement on Form S-2
or Form S-3, holders of at least 25% of the Registrable Shares have the
53
<PAGE>
right to request on an unlimited number of occasions that the Company file a
registration statement on Form S-2 or Form S-3 to register all or a portion of
their Registrable Shares. In addition, one holder of 937,521 Registrable Shares
has the right, which may be exercised at any time, to request on two occasions
that the Company file a registration statement on any available form to register
all or a portion of its Registrable Shares; and a second holder of 461,028
Registrable Shares has the right, which may be exercised at any time after
completion of this Offering, to request on one occasion that the Company file a
registration statement on any available form to register all or a portion of its
Registrable Shares. If the Company proposes at any time to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, all holders of
Registrable Shares are entitled to notice of the proposed registration and may
request all or a portion of their Registrable Shares to be included in the
registration. In general, the Company is required to pay all of the expenses in
connection with any registration of Registrable Shares, including the fees and
expenses of one counsel for the selling holder or holders of Registrable Shares
but excluding underwriting discounts and commissions. The rights of holders of
Registrable Shares are subject to certain conditions and limitations, including
(i) a prohibition on the registration of any Registrable Shares within six
months after the effective date of any prior registration of Registrable Shares
and (ii) in the case of any proposed registration of the Company's securities
which are to be sold in an underwritten public offering, the right of the
underwriters to limit the number of Registrable Shares that may be included in
the registration.
LIMITED REDEMPTION RIGHTS OF ONE HOLDER
Under the Company's alliance agreement with Baxter, Baxter has the right,
solely until the expiration of its 180-day "lock-up" agreement with the Managing
Underwriters, to require the Company to redeem all of Baxter's 461,028 shares of
Common Stock if the Company willfully breaches or defaults under the alliance
agreement, a competitor of Baxter's acquires control of the Company, the Company
sells or distributes hospital or medical products or services as part of a
program like Baxter's procedure-based delivery system, or the Company enters
into an agreement with a third party to provide regulated medical waste
management services to its customers in connection with a program by the third
party like Baxter's procedure-based delivery system. The redemption price will
not exceed the greater of $15.18 per share plus simple interest at the rate of
10% per annum from October 1993 or the fair market value of the Common Stock
that Baxter owns at the time of redemption. See "Business -- Marketing and Sales
- -- Core Generators" and "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law regulating corporate takeovers. Section 203 prevents certain Delaware
corporations, including those whose securities are listed on Nasdaq, from
engaging in any "business combination" with any "interested stockholder" for a
period of three years following the date that the stockholder became an
interested stockholder, with three exceptions: (i) prior to such date, the board
of directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon the consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time that
the transaction commenced, excluding for purposes of determining the number of
shares outstanding the shares owned by persons who are both directors and
officers of the corporation and the shares owned by employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to the date that the stockholder became an
interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at an annual or special meeting of
stockholders, and not pursuant to written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock of the corporation, excluding
voting stock owned by the interested stockholder. The restrictions in Section
203 also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation (for example, a proposed
tender or exchange offer for 50% or more of the corporation's outstanding voting
stock) which is approved or not opposed by a majority of the corporation's
directors then in office and which is with or by a person who had not been an
interested stockholder during the preceding three years or who became an
interested stockholder with the approval of the corporation's board of
directors.
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Section 203 defines a "business combination" as, in general: (i) any merger
or consolidation involving the corporation and the interested stockholder; (ii)
any sale, lease, transfer, pledge or other disposition to the interested
stockholder of 10% or more of the corporation's assets; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation to the interested stockholder of any stock of the corporation; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series, or of securities
convertible into the stock of any class or series, which is beneficially owned
by the interested stockholder; or (v) the receipt by the interested stockholder
of the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. Section 203 defines an
"interested stockholder" as, in general, any person or entity who or which
directly or indirectly beneficially owns 15% or more of the outstanding voting
stock of the corporation and any person or entity affiliated or associated with
or controlling or controlled by that person or entity.
The provisions of Section 203 could operate to delay or prevent the removal
of incumbent directors of the Company or a change in control of the Company.
They also could discourage, impede or prevent a merger, tender offer or proxy
contest involving the Company, even if such an event would be favorable to the
interests of the Company's stockholders generally. By adopting an amendment to
the Company's certificate of incorporation or by-laws, the Company's
stockholders may elect not to have Section 203 apply to the Company effective 12
months after the adoption of the amendment. Neither the Company's Certificate of
Incorporation nor its By-Laws currently exclude the Company from the
restrictions imposed by Section 203.
1995 RECAPITALIZATION
In order to simplify the Company's capital structure and align stockholder
interests, the Board of Directors adopted a plan of recapitalization in August
1995 which was approved by the Company's stockholders in September 1995.
Pursuant to the plan of recapitalization, the Company authorized the issuance of
Class A and Class B common stock and reclassified its outstanding preferred
stock, consisting of nine classes, as shares of Class A common stock using a
reclassification formula for each class reflecting the conversion rate for that
class and certain other adjustments. The Company also reclassified its
outstanding common stock as a like number of shares of Class A common stock. The
new Class B common stock could be issued only pursuant to the exercise of
options granted and restricted stock awarded under the 1995 Stock Plan. The
Class B common stock was subject to certain first refusal rights in the event of
any proposed sale or transfer at the lower of the original exercise or purchase
price or the price to be paid by the proposed purchaser or transferee.
REVERSE STOCK SPLIT
Prior to completion of this Offering, the Company will effect a 1-for-5.3089
reverse stock split pursuant to which each outstanding share of Class A and
Class B common stock will become 0.1884 shares, and the number of shares and
exercise price of each outstanding option will be adjusted accordingly. All of
the Company's outstanding warrants will be similarly adjusted in accordance with
their terms. Also prior to completion of this Offering, all of the Company's
outstanding shares of Class A and Class B common stock and outstanding options
to purchase shares of Class A or Class B common stock will be redesignated as a
like number of shares of Common Stock or options to purchase a like number of
shares of Common Stock, as the case may be.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of Common Stock. Aside
from the 3,000,000 shares sold in this Offering, only a limited number of shares
will be available for sale immediately following completion of this Offering
because of certain contractual and legal restrictions on resale (as described
below). Accordingly, sales of substantial amounts of Common Stock of the Company
in the public market after these restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
55
<PAGE>
Upon completion of this Offering, the Company will have outstanding an
aggregate of 9,218,455 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding stock options
and warrants. Of these outstanding shares of Common Stock, the 3,000,000 shares
sold in this Offering will be freely tradeable without restriction or further
registration under the Securities Act, unless purchased by an "affiliate" of the
Company as that term is defined in Rule 144 under the Securities Act.
The remaining 6,218,455 shares of Common Stock held by existing stockholders
(the "Restricted Shares") will be "restricted securities" as that term is
defined in Rule 144 under the Securities Act. The Restricted Shares may be sold
in the public market only if they are registered under the Securities Act or if
they qualify for an exemption from registration under Rule 144 under the
Securities Act (which is summarized below). Sales of the Restricted Shares in
the public market, or the availability of the Restricted Shares for sale, could
adversely affect the market price of the Common Stock.
Certain stockholders of the Company, including all executive officers and
directors and the individuals and entities named in the table under "Principal
Stockholders," who will beneficially own in the aggregate 5,571,624 Restricted
Shares after the Offering, have entered into "lock-up" agreements with the
Managing Underwriters pursuant to which they have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, directly
or indirectly, any of their Restricted Shares, or any shares of Common Stock
that they may acquire through the exercise of stock options or warrants, or to
exercise any of their registration rights in respect of their shares of Common
Stock, for a period of 180 days from the date of this Prospectus without the
prior written consent of Dillon, Read & Co. Inc. on behalf of the Managing
Underwriters. As a result of these contractual restrictions, shares of Common
Stock subject to the lock-up agreements are restricted from sale until the
lock-up agreements expire, notwithstanding that they otherwise may be eligible
for sale under Rule 144. Upon the expiration of the lock-up agreements, shares
will be eligible for sale pursuant to Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) who has beneficially owned Restricted Shares for at least two
years (including the holding period of any prior beneficial owner except an
affiliate of the Company) would be entitled to sell during any three-month
period a number of Restricted Shares that does not exceed the greater of (i) 1%
of the number of shares of Common Stock then outstanding or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of the required notice of sale on Form 144. Sales of
Restricted Shares under Rule 144 are also subject to compliance with certain
conditions relating to the manner of sale, the requirement to file notice of the
sale with the Securities and Exchange Commission on Form 144 and the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the
Restricted Shares proposed to be sold for at least three years (including the
holding period of any prior owner except an affiliate), may sell the Restricted
Shares under Rule 144 without regard to any volume limitation or other
conditions or requirements of the rule. Accordingly, unless otherwise
restricted, holders of Restricted Shares who are eligible to use Rule 144(k) may
sell their shares immediately upon completion of this Offering.
As of June 1, 1996, there were outstanding options under the 1995 Stock Plan
to purchase 696,962 shares of Common Stock, of which options for 414,030 shares
were exercisable within 60 days of June 1, 1996. Of the options exercisable
within 60 days of June 1, 1996, options for 286,769 shares were held by officers
and directors of the Company subject to the lock-up agreements described above.
Shortly after completion of this Offering, the Company intends to file a
registration statement on Form S-8 to register the 1,500,000 shares of Common
Stock issued or issuable under the 1995 Stock Plan and the 285,000 shares of
Common Stock issuable under the Directors Plan. This registration statement will
become effective automatically upon filing. Accordingly, shares registered under
this registration statement will be available for sale in the public market,
subject to the volume limitations under Rule 144 in the case of sales by
affiliates of the Company, except to the extent that the shares are subject to
contractual restrictions on sale under the lock-up agreements described above.
As of June 1, 1996, there were also other options outstanding to purchase
21,481 shares of Common Stock, of which options for 16,475 shares were
exercisable within 60 days of June 1, 1996.
As of June 1, 1996, there were outstanding warrants to purchase 409,848
shares of Common Stock, all of which were then exercisable. Holders of warrants
to purchase 387,829 shares of Common Stock are subject to the lock-up agreements
described above.
56
<PAGE>
UNDERWRITING
The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares of Common Stock that each of them has agreed
to purchase from the Company, subject to the terms and conditions specified in
the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Dillon, Read & Co. Inc.....................................................
Salomon Brothers Inc.......................................................
William Blair & Company L.L.C..............................................
--------
Total................................................................ 3,000,000
--------
--------
</TABLE>
The Managing Underwriters are Dillon, Read & Co. Inc., Salomon Brothers Inc
and William Blair & Company L.L.C.
If any shares of Common Stock offered hereby are purchased by the
Underwriters, all such shares will be so purchased. The Underwriting Agreement
contains certain provisions whereby, if any Underwriter defaults in its
obligation to purchase such shares, and the aggregate obligations of the
Underwriters so defaulting do not exceed 10% of the shares offered hereby, the
remaining Underwriters, or some of them, must assume such obligations.
The Common Stock offered hereby is being initially offered severally by the
Underwriters for sale at the price set forth on the cover page of this
Prospectus, or at such price less a concession not to exceed $ per share on
sales to certain dealers. The Underwriters may allow, and such dealers may
reallow, a concession not to exceed $ per share on sales to certain other
dealers. The offering of shares is made for delivery when, as, and if accepted
by the Underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any order for the purchase of the shares. After the initial public
offering, the public offering price, the concession and the reallowance may be
changed by the Managing Underwriters.
The Company has granted to the Underwriters an over-allotment option to
purchase up to an aggregate of 450,000 shares of Common Stock. If the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of the aggregate shares to be purchased as the number of shares to be
purchased by it shown in the above table bears to 3,000,000. The Underwriters
may exercise such option on or before the thirtieth day from the date of the
Underwriting Agreement and only to cover over-allotments made of the shares in
connection with this Offering.
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and certain of its officers, directors and stockholders prior to
this Offering have agreed not to offer, sell, contract to sell, grant any option
to sell, or otherwise dispose of, directly or indirectly, any shares of Common
Stock, or securities convertible into or exercisable or exchangeable for, any
shares of Common Stock or warrants or other rights to purchase shares of Common
Stock, or permit the registration of any shares of Common Stock for a period of
180 days after the date of this Prospectus, without the prior consent of Dillon,
Read & Co. Inc. acting on behalf of the Managing Underwriters.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price was determined
by negotiation between the Company and the Managing Underwriters. Factors
considered in determining this price included, among other things, prevailing
market conditions, the state of the Company's development, the future prospects
of the Company and its industry, market valuations of securities of companies
engaged in activities deemed by the Managing Underwriters to be similar to those
of the Company, and other factors deemed relevant. Consideration was also given
to the general state of the securities market, the market conditions for new
issues of securities and the demand for similar securities of comparable
companies. The Common Stock has been approved for quotation on Nasdaq under the
symbol "SRCL," subject to notice of issuance.
57
<PAGE>
The Underwriters do not expect to confirm sales to accounts over which they
exercise discretionary authority.
At the request of the Company, the Underwriters have reserved up to 150,000
shares of Common Stock for sale at the initial offering price to employees of
the Company and certain other parties. The number of shares available for sale
to the general public will be reduced to the extent such individuals purchase
such reserved shares. Any reserved shares not so purchased will be released for
sale by the Underwriters to the general public no later than the closing date of
this Offering (which is expected to be three business days after the date of
this Prospectus) on the same terms as the other shares offered hereby. Reserved
shares purchased by such individuals will, except as restricted by applicable
securities laws, be available for resale following this Offering.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby are
being passed upon for the Company by Johnson and Colmar, Chicago, Illinois and
for the Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.
EXPERTS
The consolidated financial statements of Stericycle, Inc. and subsidiaries
at December 31, 1994 and 1995, and for each of the three years in the period
ended December 31, 1995, appearing in this Prospectus and in the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report with respect thereto, appearing elsewhere herein and in
the Registration Statement and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
This Prospectus forms part of a Registration Statement on Form S-1 (the
"Registration Statement") which the Company has filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act. In accordance
with the Commission's rules and regulations, this Prospectus omits certain of
the information in the Registration Statement and all of its exhibits, and
reference is made to the Registration Statement and its exhibits for further
information relating to the Company and the Common Stock offered hereby. Copies
of the Registration Statement and its exhibits may be inspected without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of this material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a Web site on the World Wide Web, and copies of the
Registration Statement and its exhibits may be accessed at this Web site
(http://www.sec.gov). Statements in this Prospectus concerning the provisions of
any contract or document are not necessarily complete, and each such statement
is qualified in its entirety by reference to the copy of the relevant contract
or document filed as an exhibit to the Registration Statement.
58
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REPORT OF INDEPENDENT AUDITORS............................................................................. F-2
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1994 AND 1995.................................................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31,
1995...................................................................................................... F-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) FOR EACH OF THE YEARS
IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995.......................................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31,
1995...................................................................................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-7
CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1996 (UNAUDITED)........................................ F-16
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)............................................................................................... F-17
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31,
1996 (UNAUDITED).......................................................................................... F-18
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)............................................................................................... F-19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)........................................... F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Stericycle, Inc.
We have audited the accompanying consolidated balance sheets of Stericycle,
Inc. and Subsidiaries as of December 31, 1994 and 1995, 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, 1995. 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, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Chicago, Illinois
March 20, 1996,
except for the first paragraph of Note 7,
as to which the date is , 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed when the reverse
stock split, decrease in authorized common stock and redesignation of the Class
A and Class B common stock as a like number of shares of common stock all become
effective prior to completion of an initial public offering as described in the
first paragraph of Note 7 to the financial statements.
ERNST & YOUNG LLP
Chicago, Illinois
July 26, 1996
F-2
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 1,206 $ 138
Accounts receivable, less allowance for doubtful accounts
of $150 in 1994 and $138 in 1995......................................................... 4,817 3,731
Parts and supplies........................................................................ 603 468
Prepaid expenses.......................................................................... 405 431
Other current assets...................................................................... 657 424
------- -------
Total current assets.................................................................... 7,688 5,192
Property, plant and equipment:
Land...................................................................................... 90 90
Buildings and improvements................................................................ 5,348 5,394
Machinery and equipment................................................................... 7,240 7,644
Office equipment and furniture............................................................ 390 406
Construction in progress.................................................................. 784 281
------- -------
13,852 13,815
Less accumulated depreciation and amortization............................................ (2,219) (3,587)
------- -------
Property, plant and equipment-net....................................................... 11,633 10,228
------- -------
Other assets:
Organization costs, net................................................................... 75 32
Goodwill, less accumulated amortization
of $97 in 1994 and $417 in 1995.......................................................... 7,782 7,517
Other..................................................................................... 631 522
------- -------
Total other assets...................................................................... 8,488 8,071
------- -------
Total assets.......................................................................... $27,809 $23,491
------- -------
------- -------
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long-term debt......................................................... $ 603 $ 297
Accounts payable.......................................................................... 1,291 1,868
Accrued liabilities....................................................................... 2,655 1,956
Deferred revenue.......................................................................... 629 632
------- -------
Total current liabilities............................................................. 5,178 4,753
------- -------
Long-term debt:
Industrial development revenue bonds and other............................................ 2,358 2,284
Note payable to bank...................................................................... -- 858
Note payable.............................................................................. 2,480 2,480
------- -------
Total long-term debt.................................................................. 4,838 5,622
------- -------
Other liabilities......................................................................... 247 542
Convertible redeemable preferred stock (par value $.01 per share; 550,200 shares
authorized,
489,079 issued and outstanding in 1994; none in 1995).................................... 62,909 --
Shareholders' Equity (net capital deficiency):
Common stock (par value $.01 per share, 30,000,000 shares authorized, 369,808 issued and
outstanding in 1994, 5,582,385 issued and outstanding in 1995)........................... 4 55
Additional paid-in capital................................................................ 811 49,621
Accumulated dividends on convertible redeemable preferred stock........................... (13,001) --
Notes receivable for common stock purchases............................................... (619) --
Accumulated deficit....................................................................... (32,558) (37,102)
------- -------
Total shareholders' equity (net capital deficiency)..................................... (45,363) 12,574
------- -------
Total liabilities and shareholders' equity (net capital deficiency)................... $27,809 $23,491
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................................................... $ 9,141 $ 16,141 $ 21,339
Costs and expenses:
Cost of revenues............................................................ 9,137 13,922 17,478
Selling, general and administrative expenses................................ 5,988 7,927 8,137
---------- ---------- ----------
Total costs and expenses.................................................. 15,125 21,849 25,615
---------- ---------- ----------
Loss from operations........................................................ (5,984) (5,708) (4,276)
Other income (expense):
Interest income............................................................. 201 156 9
Interest expense............................................................ (245) (260) (277)
---------- ---------- ----------
Total other income (expense).............................................. (44) (104) (268)
---------- ---------- ----------
Net loss.................................................................... (6,028) (5,812) (4,544)
Less cumulative preferred dividends......................................... (3,733) (4,481) --
---------- ---------- ----------
Loss applicable to common stock............................................. $ (9,761) $ (10,293) $ (4,544)
---------- ---------- ----------
---------- ---------- ----------
Net loss per common share................................................... $ (5.28) $ (5.57) $ (0.64)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares outstanding........................ 1,847,432 1,847,808 7,060,438
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
COMMON STOCK
<TABLE>
<CAPTION>
ACCUMULATED
DIVIDENDS
ON NOTES TOTAL
CONVERTIBLE RECEIVABLE SHAREHOLDERS'
ISSUED AND ADDITIONAL REDEEMABLE FOR COMMON EQUITY (NET
OUTSTANDING PAID-IN PREFERRED STOCK ACCUMULATED CAPITAL
SHARES AMOUNT CAPITAL STOCK PURCHASES DEFICIT DEFICIENCY)
----------- ------ ---------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1992........... 372 $ 4 $ 813 $ (4,787) $(974) $(20,718) $(25,662)
Issuance of common stock................ 6 35 (4) 31
Shares repurchased and retired.......... (9) (37) 46 9
Accumulated dividends................... (3,733) (3,733)
Principal payments under notes
receivable............................. 277 277
Net loss for the year ended December 31,
1993................................... (6,028) (6,028)
----- ------ ---------- ---------- ----- ----------- -------------
BALANCES AT DECEMBER 31, 1993........... 369 $ 4 $ 811 $ (8,520) $(655) $(26,746) $(35,106)
Issuance of common stock................ 1
Accumulated dividends................... (4,481) (4,481)
Principal payments under notes
receivable............................. 36 36
Net loss for the year ended December 31,
1994................................... (5,812) (5,812)
----- ------ ---------- ---------- ----- ----------- -------------
BALANCES AT DECEMBER 31, 1994........... 370 $ 4 $ 811 $(13,001) $(619) $(32,558) $(45,363)
Common stock issued in exchange for
preferred stock........................ 5,043 50 49,439 49,489
Common stock issued -- $.01 per share... 350 3 3
Accumulated dividends canceled.......... 13,001 13,001
Notes receivable canceled............... (181) (2) (629) 619 (12)
Net loss for the year ended December 31,
1995................................... (4,544) (4,544)
----- ------ ---------- ---------- ----- ----------- -------------
BALANCES AT DECEMBER 31, 1995........... 5,582 $ 55 $49,621 $ -- $ -- $(37,102) $ 12,574
----- ------ ---------- ---------- ----- ----------- -------------
----- ------ ---------- ---------- ----- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................................ $ (6,028) $ (5,812) $ (4,544)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization................................................... 869 1,306 1,916
Settlement with regulatory agency............................................... -- -- 273
Other, net...................................................................... 100 -- 129
Change in net operating assets, net of
effect of acquisitions and divestitures:
Accounts receivable............................................................. (800) (3,126) 866
Parts and supplies.............................................................. (84) (241) 135
Prepaid expenses and other current assets....................................... (174) (486) 196
Other assets.................................................................... (185) (278) 128
Accounts payable................................................................ (464) 879 570
Accrued liabilities............................................................. (1,026) 766 (838)
Deferred revenue and other liabilities.......................................... 2 280 298
--------- --------- ---------
Net cash used in operating activities............................................. (7,790) (6,712) (871)
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures............................................................ (3,368) (1,910) (726)
Payments for acquisitions, net of cash acquired................................. -- (1,530) (459)
Proceeds from divestitures...................................................... -- -- 792
Restricted certificate of deposit............................................... 285 -- --
--------- --------- ---------
Net cash used in investing activities............................................. (3,083) (3,440) (393)
--------- --------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt..................................................... (220) (79) (171)
Net proceeds from note payable to bank.......................................... -- -- 858
Proceeds from sale and leaseback of equipment................................... -- 882 --
Principal payments under capital lease obligations.............................. (586) (629) (482)
Proceeds from issuance of convertible redeemable preferred stock................ 8,000 3,458 --
Repurchase of preferred stock................................................... (8) -- --
Principal payments on notes receivable for common stock purchases............... 319 36 --
Issuance of common stock........................................................ -- -- 18
Other........................................................................... -- -- (27)
--------- --------- ---------
Net cash provided by financing activities......................................... 7,505 3,668 196
--------- --------- ---------
Net decrease in cash and cash equivalents....................................... (3,368) (6,484) (1,068)
Cash and cash equivalents at beginning of year.................................... 11,058 7,690 1,206
--------- --------- ---------
Cash and cash equivalents at end of year.......................................... $ 7,690 $ 1,206 $ 138
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
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 EQUIVALENTS:
The Company considers all highly liquid instruments with a maturity of less
than three months when purchased to be cash equivalents.
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.
ORGANIZATION COSTS:
Organization costs are amortized using the straight-line method over five
years. Accumulated amortization at December 31, 1994 and 1995 was $141,000 and
$184,000, respectively.
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.
STOCK OPTIONS:
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). In accordance with APB 25, as the exercise price of the Company's
employee stock options equals the fair value, as determined by the Company's
Board of Directors, of the underlying stock on the date of grant, no
compensation expense is recorded.
F-7
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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 1993, 1994, and 1995 was
$231,000, $1,082,000, and $975,000, 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 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,
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 5. 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.
EARNINGS PER SHARE:
Earnings per share computations are based on the weighted average number of
shares of common stock outstanding and include the dilutive effect of stock
options and warrants using the treasury stock method. The computations also
reflect the effect of the stock split and the redesignation of Class A common
stock and Class B common stock as common stock as discussed in Note 7.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock options and warrants granted by the Company during the 12 months
immediately preceding the initial filing of a registration statement have been
included as common stock equivalents as if they were outstanding for all periods
presented, whether or not dilutive, because the sale or option price per share
was below the initial public offering price per share.
NOTE 3 -- INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $36,493,000, 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.
F-8
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 3 -- INCOME TAXES (CONTINUED)
The Company's deferred tax liabilities and assets as of December 31, 1994
and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Deferred tax liabilities:
Property, plant, and equipment.............................. $ (280,000) $ (319,000)
Goodwill.................................................... (42,000) (122,000)
-------------- --------------
Total deferred tax liabilities................................ (322,000) (441,000)
Deferred tax assets:
Accrued liabilities......................................... 395,000 298,000
Capital lease obligations................................... 146,000 --
Research and development costs.............................. -- 324,000
Other....................................................... 60,000 190,000
Net operating tax loss carryforward......................... 13,214,000 14,597,000
-------------- --------------
Total deferred tax assets..................................... 13,815,000 15,409,000
-------------- --------------
Net deferred tax assets....................................... 13,493,000 14,968,000
Valuation allowance........................................... (13,493,000) (14,968,000)
-------------- --------------
Net deferred tax assets..................................... $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
NOTE 4 -- ACQUISITIONS AND DIVESTITURES
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 sellers.
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 the
customer list, containers, transportation equipment and office equipment. 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. The note payable and stock are held in
escrow (see Note 5). As part of the agreement, the Company agreed to pay up to
$575,000 of certain current liabilities of Safe Way upon its request. In
consideration for these payments, the preferred stock issued under such
agreement would be reduced. As of December 31, 1995, the Company has paid
$468,000 of additional liabilities.
As a result of the Company's 1995 recapitalization, the 25,228 shares of
preferred stock issued in connection with the Safe Way acquisition were
reclassified as 130,003 shares of common stock. See further discussion in Note
7.
F-9
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 4 -- ACQUISITIONS AND DIVESTITURES (CONTINUED)
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 fair market value of net
assets acquired is reflected in the accompanying consolidated balance sheets as
goodwill. The results of operations of these acquired businesses are included in
the consolidated statements of operations from the date of acquisition. The
effect of these acquisitions would not have a significant effect on the
Company's operations, except for the Safe Way acquisition.
Based on unaudited data, the following table presents selected financial
information for the Company and its subsidiaries on a pro forma basis, assuming
the Company and Safe Way had been combined since January 1, 1993:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994
------------------- -------------------
<S> <C> <C>
Revenues................................................. $ 16,655 $ 20,494
Loss applicable to common stock.......................... (10,604) (10,597)
Net loss per common share................................ $ (3.70) $ (3.70)
</TABLE>
The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the Safe Way acquisition been
made as of January 1, 1993.
NOTE 5 -- LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Industrial development revenue bonds....................................... $ 1,753 $ 1,633
Obligations under capital leases........................................... 970 488
Note payable to bank....................................................... -- 858
Note payable............................................................... 2,480 2,480
Mortgage payable and other................................................. 238 460
--------- ---------
5,441 5,919
Less: Current portion...................................................... 603 297
--------- ---------
TOTAL.................................................................. $ 4,838 $ 5,622
--------- ---------
--------- ---------
</TABLE>
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 the bank's prime rate (8.5% at December
31, 1995), plus 3.0%. At December 31, 1995, the outstanding loan balance was
$858,000 and the Company had unused borrowing capacity of $821,000. 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.
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
F-10
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 5 -- LONG-TERM DEBT (CONTINUED)
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
$240,000 at December 31, 1995 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. Upon maturity, a portion
of the note is payable in 98,001 shares of common stock (see Note 7) and a
portion is payable in cash. The note will mature on the earlier of June 25, 1997
or an initial public offering, as defined in the purchase agreement between the
Company and Safe Way.
During 1992 the Company entered into certain obligations to finance the
development of its Woonsocket, Rhode Island and Morton, Washington facilities.
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 5.75% 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.
As part of the development of the Company's Morton, Washington facility, the
Company entered into a loan agreement with a bank for $255,000. The Company is
required to make monthly payments of $2,361 for principal and interest through
2007. Interest paid is based upon a specified index plus 4.5%. The interest rate
was 9.54% and 9.78% at December 31, 1994 and 1995, respectively. The loan is
collateralized by the property and equipment at the Morton, Washington facility.
Payments due on long-term debt, excluding capital lease obligations, during
each of the five years subsequent to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996................................................................ $ 159
1997................................................................ 3,514
1998................................................................ 182
1999................................................................ 208
2000................................................................ 223
</TABLE>
The Company paid interest of $282,000, $271,000 and $262,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
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,
1995 the fair value of the Company's debt was approximately $4,275,000.
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.
F-11
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 5 -- LONG-TERM DEBT (CONTINUED)
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.
The Company is the lessee of machinery and equipment under capital leases
expiring in 1999. At December 31, property under capital leases included with
Property, Plant and Equipment in the accompanying Consolidated Balance Sheets is
as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment................................................... $ 1,880 $ 882
Less-Accumulated depreciation and amortization............................ (345) (169)
--------- ---
$ 1,535 $ 713
--------- ---
--------- ---
</TABLE>
Minimum future lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996................................................................ $ 176
1997................................................................ 176
1998................................................................ 176
1999................................................................ 26
-----
Total minimum lease payments........................................ 554
Less -- Amounts representing interest............................... (66)
-----
Present value of net minimum lease payment.......................... 488
Less -- Current portion............................................. (138)
-----
Long-term obligations under capital leases.......................... $ 350
-----
-----
</TABLE>
NOTE 6 -- 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 seven years. The leases for most of
the properties contain renewal provisions.
Rent expense for 1993, 1994 and 1995 was $1,930,000, $1,643,000 and
$1,739,000, respectively.
Minimum future rental payments under non-cancelable operating leases that
have initial or remaining terms in excess of one year as of December 31, 1995
for each of the next five years and in the aggregate are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996................................................................ $ 1,324
1997................................................................ 1,132
1998................................................................ 985
1999................................................................ 591
2000................................................................ 442
Thereafter.......................................................... 462
------
Total minimum rental payments................................... $ 4,936
------
------
</TABLE>
F-12
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 7 -- COMMON AND PREFERRED STOCK
STOCK SPLIT:
In June 1996, the Company's Board of Directors authorized a 1-for-5.3089
reverse stock split, to be effective prior to completion of an initial public
offering of the Company's common stock. Also prior to completion of an initial
public offering, 5,236,209 shares of Class A common stock and 346,176 shares of
Class B common stock will be redesignated as a like number of shares of common
stock. In July 1996, the Company's Board of Directors and shareholders
authorized a decrease in the number of authorized shares of common stock from
58,000,000 shares to 30,000,000 shares prior to completion of an initial public
offering. All common shares, per share, weighted average shares outstanding and
stock option data have been adjusted to reflect this reverse stock split,
redesignation of the Class A and Class B common stock as common stock and
decrease in authorized common stock.
The following table details the convertible redeemable preferred stock
activities for each of the years in the three-year period ended December 31,
1995:
<TABLE>
<CAPTION>
SHARES
----------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C> <C>
Balances at December 31, 1992........................................ 356 $ 40,353
Issuance of Class E preferred stock................................ 70 8,000
Shares retired..................................................... -- (8)
Accumulated dividends.............................................. -- 3,733
----- -------
Balances at December 31, 1993........................................ 426 $ 52,078
Issuance of Classes F, G, H & I preferred stock.................... 63 6,350
Accumulated dividends.............................................. -- 4,481
----- -------
Balances at December 31, 1994........................................ 489 $ 62,909
Canceled shares of preferred stock................................. (4) (419)
Common stock issued in exchange for preferred stock................ (485) (62,490)
----- -------
Balances at December 31, 1995........................................ $ -- $ --
----- -------
----- -------
</TABLE>
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 5,043,418 shares of common stock and increased the authorized common
stock to 57,000,000 shares from 9,400,000 shares and in April 1996 authorized a
further increase in the authorized common stock to 58,000,000 (see Note 8).
Shares of the Company's common stock have been reserved for issuance upon
conversion of the Safe Way note payable (see Note 5) and the exercise of
warrants and options. These shares have been reserved as follows at December 31,
1995:
<TABLE>
<S> <C>
Safe Way note payable............................................ 98,001
1993 Plan options................................................ 9,943
1995 Plan options................................................ 923,292
Warrants......................................................... 242,396
---------
Total shares reserved........................................ 1,273,632
---------
---------
</TABLE>
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. The
liquidation preference of the preferred stock as of December 31, 1994 was
$61,909,112 and was canceled by the plan of recapitalization.
F-13
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 8 -- 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 (see Note 7).
The following table summarizes option activity through December 31, 1995:
<TABLE>
<CAPTION>
OPTION PRICE # SHARES EXERCISABLE
-------------- ----------- -----------
<S> <C> <C> <C>
Outstanding at December 31, 1992......................................... $ 5.31-$42.47 35,412 5,274
Granted.................................................................. $ 5.84 45,961
Granted.................................................................. $ 6.90 1,130
-----------
Outstanding at December 31, 1993......................................... $ 5.31-$42.47 82,503 15,626
Granted.................................................................. $ 5.84 377
Granted.................................................................. $ 6.90 29,254
Canceled................................................................. (2,405)
-----------
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
-----------
-----------
</TABLE>
In 1995, the Company's Board of Directors and shareholders approved an
Incentive Compensation Plan (the "1995 Plan"), which provides for the granting
of additional 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. The sale or
transfer of outstanding shares of common stock is subject to the right of first
refusal by the Company. As of December 31, 1995, options to purchase 923,292
shares of common stock at an exercise price of $0.53 per share had been granted
and were outstanding, of which 537,682 were exercisable.
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, 1995, 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 (see Note 7), issued warrants to
purchase up to 6,773 shares of common stock at an exercise price of $69.02 per
share. At December 31, 1995, warrants to purchase 6,773 shares at $69.02 per
share were issued and 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%. 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. The bridge loan was repaid in November 1995 with proceeds from the
Company's revolving line of credit.
NOTE 9 -- 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. After the Company's 1995
recapitalization, the
F-14
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 9 -- REGISTRATION AGREEMENT (CONTINUED)
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 and the common stock to be delivered by the Company in payment of the Safe
Way Note. 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, (ii) at any time after either an initial public
offering or July 10,1996, one shareholder who is a party to the Registration
Agreement may request a Long Form registration, (iii) at any time after an
initial public offering, 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 10 -- 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, 1993, 1994 and 1995 were approximately $9,000, $13,000 and $14,000,
respectively.
NOTE 11 -- 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.
The Alliance also gives the investor the right under certain circumstances
to require the Company to redeem the investor's 461,028 shares of the Company's
common stock at a price not to exceed the greater of $15.18 per share, plus
interest at the rate of 10% per annum from October 1993, or the fair market of
the investor's common stock at the time of redemption. This redemption right
terminates 180 days from the date of the Company's initial public offering of
common stock.
Under the Alliance, the investor and the Company have an ongoing
relationship to provide services and products to the healthcare market place.
F-15
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................. $ 120
Accounts receivable, less allowance for doubtful accounts of $146..................... 3,995
Parts and supplies.................................................................... 436
Prepaid expenses...................................................................... 153
Other current assets.................................................................. 458
--------------
Total current assets................................................................ 5,162
Property, Plant and Equipment:
Land.................................................................................. 90
Buildings and improvements............................................................ 5,406
Machinery and equipment............................................................... 8,171
Office equipment and furniture........................................................ 408
Construction in progress.............................................................. 281
--------------
14,356
Less accumulated depreciation and amortization.......................................... (3,961)
--------------
Property, plant and equipment -- Net................................................ 10,395
Other Assets:
Organization costs, net............................................................... 21
Goodwill, less accumulated amortization of $496....................................... 7,797
Other................................................................................. 501
--------------
Total other assets.................................................................. 8,319
--------------
Total assets...................................................................... $ 23,876
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................................................... $ 759
Accounts payable...................................................................... 1,703
Accrued liabilities................................................................... 2,009
Deferred revenue...................................................................... 652
--------------
Total current liabilities........................................................... 5,123
Long-Term Debt:
Industrial development revenue bonds and other........................................ 2,564
Note payable to bank.................................................................. 952
Note payable.......................................................................... 2,480
--------------
Total long-term debt................................................................ 5,996
Other Liabilities....................................................................... 529
Shareholders' Equity:
Common stock (par value $.01 per share; 30,000,000 shares authorized, 5,616,651 issued
and outstanding)..................................................................... 56
Additional paid-in capital............................................................ 49,693
Notes receivable for common stock purchases........................................... (72)
Accumulated deficit................................................................... (37,449)
--------------
Total shareholders' equity.......................................................... 12,228
--------------
Total liabilities and shareholders' equity........................................ $ 23,876
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
--------------------------
1995 1996
------------ ------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Revenues.................................................................... $ 5,446 $ 5,578
Costs and expenses:
Cost of revenues.......................................................... 4,227 4,337
Selling, general and administrative....................................... 2,762 1,505
------------ ------------
Total costs and expenses................................................ 6,989 5,842
------------ ------------
Loss from operations........................................................ (1,543) (264)
Other income (expense):
Interest income........................................................... 6 --
Interest expense.......................................................... (54) (83)
------------ ------------
Total other income (expense)............................................ (48) (83)
------------ ------------
Net loss.................................................................... (1,591) (347)
Less cumulative preferred dividends......................................... (1,573) --
------------ ------------
Loss applicable to common stock............................................. $ (3,164) $ (347)
------------ ------------
------------ ------------
Net loss per common share................................................... $ (1.71) $ (0.05)
------------ ------------
------------ ------------
Weighted average number of common shares outstanding........................ 1,847,808 7,094,703
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
COMMON STOCK
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
ISSUED AND ADDITIONAL FOR COMMON TOTAL
OUTSTANDING PAID-IN STOCK ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL PURCHASES DEFICIT EQUITY
----------- ------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995........... 5,582 $ 55 $49,621 $ -- $(37,102) $ 12,574
Common stock issued -- $.01 per share... 35 1 72 (72) 1
Net loss for the quarter ended March 31,
1996................................... (347) (347)
----- ------ ---------- ----- ----------- -------------
BALANCES AT MARCH 31, 1996.............. 5,617 $ 56 $49,693 $ (72) $(37,449) $ 12,228
----- ------ ---------- ----- ----------- -------------
----- ------ ---------- ----- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED MARCH 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................................... $ (1,591) $ (347)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Depreciation and amortization.................................................... 443 479
Asset write down................................................................. 503 --
Change in net operating assets,
net of effect of acquisitions and divestitures:
Accounts receivable.............................................................. 64 (81)
Parts and supplies............................................................... 67 48
Prepaid expenses and other....................................................... 128 245
Other assets..................................................................... (115) 32
Accounts payable................................................................. 311 (165)
Accrued liabilities.............................................................. (685) 63
Deferred revenue and other liabilities........................................... 372 7
--------- ---------
Net cash (used in) provided by operating activities.................................. (503) 281
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures............................................................... (9) (169)
Payments for acquisitions, net of cash acquired.................................... -- (100)
--------- ---------
Net cash used in investing activities................................................ (9) (269)
--------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt........................................................ (30) (82)
Net proceeds from note payable to bank............................................. -- 94
Principal payments under capital lease obligations................................. (136) (42)
--------- ---------
Net cash used in financing activities................................................ (166) (30)
--------- ---------
Net decrease in cash and cash equivalents.......................................... (678) (18)
Cash and cash equivalents at beginning of period..................................... 1,206 138
--------- ---------
Cash and cash equivalents at end of period........................................... $ 528 $ 120
--------- ---------
--------- ---------
Supplementary disclosure of cash flow information -- acquisition of machinery and
equipment financed with a capital lease............................................. $ -- $ 364
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
NOTE 1 -- BASIS OF PRESENTATION
The accompanying 1995 and 1996 unaudited interim consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
these disclosures are adequate to make the information presented not misleading.
During the quarter ended March 31, 1995, the Company recorded a write-down in
the carrying value of a project to utilize treated regulated medical waste as an
alternative fuel in the production of cement. The Company realized that the
viability and completion of the project were doubtful and that, if the project
were completed, the economic cost would not permit the Company to recover its
investment. In the opinion of management, all adjustments necessary for a fair
presentation for the periods presented have been reflected and, with the
exception of the asset write-down during the quarter ended March 31, 1995, are
of a normal recurring nature. These interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the three years ended December 31, 1995. The results of
operations for the three-month period ended March 31, 1996 are not necessarily
indicative of the results that may be achieved for the entire year ending
December 31, 1996.
NOTE 2 -- ACQUISITIONS
On April 30, 1996, the Company purchased the customer list and certain other
assets, totaling approximately $200,000, of Sharps Incinerator of Fort, Inc. for
$757,000 in cash of which $562,000 was payable at closing and the balance plus
interest (prime plus 1%) is due on November 1, 1996. This transaction will be
accounted for using the purchase method of accounting.
On May 1, 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. In addition, the
Company assumed two vehicle leases totaling $77,000 and delivered four 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 is (i) the surrender
and cancellation of the note payable, or (ii) in the event that any payments
have been made under the notes payable, the surrender and cancellation of the
note payable and payment of cash such that the cash payment and the outstanding
balance of principal and interest on the note payable together equal the balance
of the note as if no payments had been made on the note payable. The transaction
will be accounted for using the purchase method of accounting.
These acquisitions are not significant to the 1996 first quarter results.
NOTE 3 -- BRIDGE LOAN
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 notes are subordinated to bank debt and bear
interest at the rate of 7% per annum unless repaid prior to January 1997. The
notes are due in May 1997 or within 30 days after completion of an initial
public offering in which the Company raises at least $20,000,000. 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.
NOTE 4 -- STOCK OPTIONS
During the quarter ended March 31, 1996 the Board of Directors granted
options to purchase 49,073 shares of common stock to key employees. The options
will vest over 12 to 36 months at an exercise price of $0.53 per share.
Additionally, during the first quarter the Board approved the options to
purchase 30,826 shares of common stock by various consultants to the Company.
The options carry an exercise price of $2.12 per share.
F-20
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1996
NOTE 4 -- STOCK OPTIONS (CONTINUED)
In April 1996, the Board of Directors granted options to purchase 149,984
shares of common stock to employees. The options will vest over 12 to 36 months
and carry an exercise price of $1.99 per share.
In June 1996, the Company's Board of Directors adopted a 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. Under such
plan, each incumbent eligible director will automatically receive an option as
of the date of closing of an initial public offering of the Company's common
stock for a number of shares of common stock determined by multiplying 7,000
shares by a fraction, the numerator of which is $12.00 and the denominator of
which is the average of the closing bid and asked prices of a share of common
stock (the "closing price") on the date of grant. As of each annual meeting of
the Company's stockholders after the date of such an initial public offering,
each incumbent eligible director who is re-elected as a director at the annual
meeting will automatically receive an option for a number of shares of common
stock determined by multiplying 7,000 shares by a fraction, the numerator of
which is $12.00 and the denominator of which is closing price on the date of the
annual meeting, and each eligible director who is elected as a director for the
first time will automatically receive an option for a number of shares of Common
Stock determined by multiplying 21,000 shares by a fraction, the numerator of
which is $12.00 and the denominator of which is closing price on the date of the
annual meeting. These option grants are subject to a maximum grant of 9,500
shares and a minimum grant of 4,500 shares (or to a maximum grant of 28,500
shares and a minimum grant of 13,500 shares in the case an eligible director who
is elected as a director for the first time at an annual meeting). In addition,
each eligible director who is elected as a director for the first time other
than at an annual meeting of the Company's stockholders will automatically
receive, as of the date of his or her election, an option for a number of shares
of common stock equal to three times the number of shares of common stock for
which each incumbent eligible director received an option as of the last annual
meeting. 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. With the approval of the Company's Board of Directors, the
holder of an option may pay the exercise price by delivering other shares of
common stock, by surrendering exercisable options having a fair market value on
the date of exercise equal to the exercise price, or by directing the Company to
withhold shares of common stock otherwise issuable upon exercise of the option
having a fair market value on the date of exercise equal to the exercise price,
or by a combination of these methods.
NOTE 5 -- STOCK ISSUANCES
In May 1996, warrants to purchase 59,128 shares of common stock were
exercised at a price of $1.59 per share. In May and June 1996, options to
purchase 24,233 shares and 459,844 shares of common stock, respectively, were
exercised at prices of $2.12 per share and $0.53 per share, respectively.
NOTE 6 -- INCOME TAXES
The Company incurred a net operating loss in both the first quarter of 1995
and 1996. Any tax benefit resulting from these net operating losses has been
offset by a valuation allowance.
NOTE 7 -- EMPLOYEE STOCK PURCHASE PLAN
Under a plan approved by the Board of Directors, employees of Stericycle may
purchase shares of common stock at a price of $2.12 per share. Under terms of
the plan employees are allowed to purchase shares by December 31, 1995 and pay
for the stock during 1996. Employees elected to purchase a total of 30,232
shares of common stock.
F-21
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1996
NOTE 8 -- STOCK SPLIT
STOCK SPLIT:
In June 1996, the Company's Board of Directors authorized a 1-for-5.3089
reverse stock split, to be effective prior to completion of an initial public
offering of the Company's common stock. Prior to completion of an initial public
offering, 5,236,209 shares of Class A common stock and 346,176 shares of Class B
common stock will be redesignated as a like number of shares of common stock. In
July 1996, the Company's Board of Directors and shareholders authorized a
decrease in the number of authorized shares of common stock from 58,000,000
shares to 30,000,000 shares prior to completion of an initial public offering of
the Company's common stock. All common shares, per share, weighted average
shares outstanding and stock option data have been adjusted to reflect this
reverse stock split, redesignation of the Class A and Class B common stock as
common stock and decrease in authorized common stock.
F-22
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MAY NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
SHARES OF COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE OF HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 3
RISK FACTORS................................................ 7
USE OF PROCEEDS............................................. 15
DIVIDEND POLICY............................................. 15
DILUTION.................................................... 16
CAPITALIZATION.............................................. 17
SELECTED CONSOLIDATED FINANCIAL DATA........................ 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 19
BUSINESS.................................................... 25
MANAGEMENT.................................................. 42
CERTAIN TRANSACTIONS........................................ 50
PRINCIPAL STOCKHOLDERS...................................... 51
DESCRIPTION OF CAPITAL STOCK................................ 53
SHARES ELIGIBLE FOR FUTURE SALE............................. 55
UNDERWRITING................................................ 57
LEGAL MATTERS............................................... 58
EXPERTS..................................................... 58
ADDITIONAL INFORMATION...................................... 58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
</TABLE>
-------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
STERICYCLE, INC.
---------
3,000,000 SHARES
COMMON STOCK
PROSPECTUS
, 1996
------------------------
DILLON, READ & CO. INC.
SALOMON BROTHERS INC
WILLIAM BLAIR & COMPANY
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered (other than
underwriting discounts and commissions). All amounts shown are estimates except
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq National Market application and listing fee. All of these expenses
will be paid by the Registrant.
<TABLE>
<S> <C>
SEC registration fee........................................... $15,465.00
NASD filing fee................................................ 4,985.00
Nasdaq National Market application and listing fee............. 43,500.00
Legal fees and expenses........................................ 250,000.00
Accounting fees and expenses................................... 160,000.00
Printing and engraving expenses................................ 80,000.00
Blue sky fees and expenses..................................... 20,000.00
Transfer agent fees............................................ 10,000.00
Directors' and officers' liability insurance................... 150,000.00
Miscellaneous.................................................. 66,050.00
----------
Total...................................................... $800,000.00
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides generally that
a person sued as a director, officer, employee or agent of a corporation may be
indemnified by the corporation in non-derivative suits for expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement if such person
acted in good faith and in a manner that he or she reasonably believed to be in
or not opposed to the best interests of the corporation. In the case of criminal
actions and proceedings, the person must also not have had reasonable cause to
believe that his or her conduct was unlawful. Indemnification of expenses is
also authorized in stockholder derivative actions if the person acted in good
faith and in a manner that he or she reasonably believed to be in or not opposed
to the best interests of the corporation and if he or she has not been found
liable to the corporation. Even in this latter instance, the court may determine
that in view of all the circumstances such person is entitled to indemnification
for such expenses as the court deems proper. A person sued as a director,
officer, employee or agent of a corporation who has been successful in defense
of the action must be indemnified by the corporation against expenses.
Article Fifth of the Registrant's By-Laws requires the Company to indemnify
its directors, officers, employees and agents to the maximum extent permitted by
Delaware law. Article Fifth also requires the Registrant to advance the
litigation expenses of a director or officer on receipt of his or her written
undertaking to repay all amounts advanced if it is ultimately determined that he
or she is not entitled to indemnification.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to include a provision in its certificate of incorporation
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for a breach of the director's
fiduciary duty of care. Such a provision may not eliminate or limit the
liability of a director for breaching his or her duty of loyalty, failing to act
in good faith, engaging in intentional misconduct or knowingly violating a law,
declaring an illegal dividend or approving an illegal stock repurchase, or
obtaining an improper personal benefit.
Article Ninth of the Registrant's Certificate of Incorporation eliminates
the personal liability of the Registrant's directors to the fullest extent
permitted by Section 102(b)(7).
The Registrant intends to obtain directors' and officers' liability
insurance to insure the Registrant's directors and officers are insured against
actual liabilities, including liabilities under the federal securities laws, for
acts or omissions related to the conduct of their duties.
II-1
<PAGE>
The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities relating to this
Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In October 1993, the Registrant 750.75 shares of Class B preferred stock and
21,450 shares of common stock to 27 employees for $235,953 and $23,595,
respectively.
In October 1993, the Registrant sold 70,000 shares of Class E preferred
stock to one investor for $8,000,000.
In February 1994, the Registrant issued 4,500 shares of common stock to a
temporary employee for services rendered to the Registrant.
In March 1994, the Registrant sold 9,350 shares of Class F preferred stock
and warrants to purchase 35,959 shares of the Registrant's common stock to 10
investors, including Peter Vardy, a director of the Registrant, for $935,360.
In March 1994, the Registrant issued 5,000 shares of Class G preferred
stock, having a value of $500,000, to Recovery Corporation of Illinois ("RCI")
in connection with the Registrant's purchase of certain of RCI's assets.
In September 1994, the Registrant issued 25,227.71 shares of Class H
preferred stock, having an aggregate value of $2,522,700, and delivered a note
for $2,480,000, payable, in part, by delivery of 14,880 shares of Class H
preferred Stock, to Safe Way Disposal Systems, Inc. ("Safe Way") in connection
with the Registrant's purchase of certain of Safe Way's assets.
In October 1994, the Registrant sold 25,225 shares of Class I preferred
stock for $2,522,500 to 26 investors, including Jack W. Schuler, Peter Vardy and
Mark C. Miller, directors of the Registrant (and in Mr. Miller's case, its
President and Chief Executive Officer).
In July 1994, the Registrant issued 532 shares of common stock pursuant to
the exercise of an option granted to a consultant for services rendered to the
Registrant.
In July 1994, the Registrant issued 673 shares of common stock to a
consultant who rendered services to the Registrant.
In August 1994, the Registrant sold 604.5 shares of Class F preferred stock
for $60,450, and 4,650 shares of common stock for $6,045, to 15 of its
employees.
In July 1995, the Registrant issued warrants to purchase 1,170,926 shares of
Class A common stock, at an exercise price of $0.299 per share, to members of a
group of lenders, including Jack W. Schuler, John Patience and Peter Vardy,
directors of the Registrant. In May 1996, Mr. Patience exercised his warrant and
acquired 133,088 shares of Class A common stock and Mr. Vardy exercised his
warrant and acquired 180,814 shares of Class A common stock.
In September 1995, the Registrant issued 22,000 shares of common stock in
connection with an agreement to settle a dispute with a consultant.
In November 1995, the Registrant issued 505 shares of Class A common stock
to a vendor for services rendered to the Registrant.
In November 1995, the Registrant issued 1,211.5 shares of Class A common
stock to each of two consultants for services rendered to the Registrant.
In December 1995, the Registrant sold 35,750 shares of Class A common stock
for $14,300 to seven employees.
In January 1996, the Registrant sold 160,500 shares of Class A common stock
for $64,200 to 11 of its employees.
In May 1996, the Registrant issued 102,400 shares of Class A common stock to
seven consultants, including Peter Vardy, a director of the Company, pursuant to
the exercise of options exercisable at a price of $0.40 per share.
II-2
<PAGE>
In May 1996, the Registrant issued 2,239,435 shares of Class B common stock
to Mark C. Miller, the Registrant's President and Chief Executive Officer,
pursuant to the exercise of an option exercisable at a price of $0.10 per share.
In May 1996, the Registrant issued 18,900 shares of Class B common stock to
Peter Vardy, a director of the Registrant, pursuant to the exercise of an option
exercisable at a price of $0.10 per share.
In June 1996, the Registrant issued warrants to purchase 1,200,000 shares of
Class A common stock, at an exercise price of $1.50 per share, to members of a
group of lenders, including Jack W. Schuler, John Patience and Peter Vardy,
directors of the Registrant, and Mark C. Miller and James F. Polark, the
Registrant's President and Chief Executive Officer and its Vice President,
Finance and Chief Financial Officer, respectively.
In June 1996, the Registrant issued 26,250 shares of Class A common stock to
two consultants pursuant to the exercise of options exercisable at a price of
$0.40 per share.
In June 1996, the Registrant issued 20,971 shares of Class B common stock to
an employee pursuant to the exercise of an option exercisable at a price of
$0.10 per share.
The sales of these securities were considered to be exempt from registration
under the Securities Act of 1933, as amended, in reliance on Section 4(2), or
Regulation D thereunder, as transactions by an issuer not involving a public
offering. The recipients of these securities represented their intention to
acquire the securities for investment purposes only and not with a view to or
for sale in connection with any further distribution, and appropriate legends
were affixed to the stock certificates and instruments issued to the recipients.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant, as currently in effect.
3.5* By-Laws of the Registrant, as currently in effect.
4.1** Specimen Common Stock Certificate.
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 (previously filed), and related First Amendment dated September 30, 1995
(previously filed) and Second Amendment dated July 1, 1996.
5.1** Opinion of Johnson and Colmar.
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 License 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------------
10.7*+ Agreement dated May 6, 1994 between the Registrant and SAGE Products, Inc., and related letter
agreement dated November 7, 1995.
<C> <S>
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 Registrant, 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.
11 Statement Re Computation of Per Share Earnings.
21.1* Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2** Consent of Johnson and Colmar (to be filed as part of Exhibit 5.1).
24.1* Power of Attorney.
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment requested.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Village of
Deerfield, State of Illinois, on July 26, 1996.
STERICYCLE, INC.
By: /s/ MARK C. MILLER
-------------------------------------
Mark C. Miller
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ ----------------------------------------- --------------
*
------------------------------------------- Chairman of the Board of Directors July 26, 1996
Jack W. Schuler
/s/ MARK C. MILLER
------------------------------------------- President, Chief Executive Officer and a July 26, 1996
Mark C. Miller Director (Principal Executive Officer)
* Vice President, Finance and Chief
------------------------------------------- Financial Officer (Principal Financial July 26, 1996
James F. Polark and Accounting Officer)
*
------------------------------------------- Director July 26, 1996
Patrick F. Graham
*
------------------------------------------- Director July 26, 1996
John Patience
*
------------------------------------------- Director July 26, 1996
Lloyd D. Ruth
*
------------------------------------------- Director July 26, 1996
L. John Wilkerson, Ph.D.
*
------------------------------------------- Director July 26, 1996
Peter Vardy
*By /s/ MARK C. MILLER
---------------------------------------
Mark C. Miller
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant, as currently in effect.
3.5* By-Laws of the Registrant, as currently in effect.
4.1** Specimen Common Stock Certificate.
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 (previously filed), and related First Amendment dated September 30, 1995
(previously filed) and Second Amendment dated July 1, 1996.
5.1** Opinion of Johnson and Colmar.
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 License 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.
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 Registrant, 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------------
10.15*+ Interim Agreement dated June 28, 1996 between the Registrant and a Brazilian company.
<C> <S>
11 Statement Re Computation of Per Share Earnings.
21.1* Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2** Consent of Johnson and Colmar (to be filed as part of Exhibit 5.1).
24.1* Power of Attorney.
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment requested.
<PAGE>
Stericycle, Inc.
3,000,000 Shares
Common Stock
($0.01 Par Value)
UNDERWRITING AGREEMENT
, 1996
<PAGE>
UNDERWRITING AGREEMENT
, 1996
DILLON, READ & CO. INC.
Salomon Brothers Inc,
William Blair & Company L.L.C.
as Managing Underwriters
c/o Dillon, Read & Co. Inc.
535 Madison Avenue
New York, New York 10022
Ladies and Gentlemen:
Stericycle, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the underwriters
named in Schedule A annexed hereto (the "Underwriters") an
aggregate of 3,000,000 shares (the "Firm Shares") of Common
Stock, $0.01 par value (the "Common Stock"), of the Company.
In addition, solely for the purpose of covering
over-allotments, the Company proposes to grant to the
Underwriters the option to purchase from the Company up to an
additional 450,000 shares of Common Stock (the "Additional
Shares"). The Firm Shares and the Additional Shares are
hereinafter collectively sometimes referred to as the "Shares".
The Shares are described in the Prospectus which is referred to
below.
The Company has filed, in accordance with the
provisions of the Securities Act of 1933, as amended, and the
rules and regulations thereunder (collectively called the
"Act"), with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1, including a
prospectus, relating to the Shares. The Company has furnished
to you, for use by the Underwriters and by dealers, copies of
one or more preliminary prospectuses (each thereof being herein
called a "Preliminary Prospectus") relating to the Shares.
Except where the context otherwise requires, the registration
statement, as amended when it becomes effective (together with
any registration statement filed pursuant to Rule 462(b) under
the Act increasing the size of the offering registered under
the Act), including all documents filed as a part thereof, and
including any information contained in a prospectus
subsequently filed with the Commission pursuant to Rule 424(b)
under the Act and deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430(A)
under the Act, is herein called the "Registration Statement",
<PAGE>
and the prospectus, in the form filed by the Company with the
Commission pursuant to Rule 424(b) under the Act or, if no such
filing is required, the form of final prospectus included in
the Registration Statement at the time it became effective, is
herein called the "Prospectus".
The Company and the Underwriters agree as follows:
1. Sale and Purchase. Upon the basis of the
warranties and representations and the other terms and
conditions herein set forth, the Company agrees to sell to the
respective Underwriters and each of the Underwriters, severally
and not jointly, agrees to purchase from the Company the
aggregate number of Firm Shares set forth opposite the name of
such Underwriter in Schedule A attached hereto in each case at
a purchase price of $ per Share. You shall release the
Firm Shares for public sale promptly after this Agreement
becomes effective. You may from time to time increase or
decrease the public offering price after the initial public
offering to such extent as you may determine.
In addition, the Company hereby grants to the several
Underwriters the option to purchase, and upon the basis of the
warranties and representations and the other terms and
conditions herein set forth, the Underwriters shall have the
right to purchase, severally and not jointly, from the Company,
ratably in accordance with the number of Firm Shares to be
purchased by each of them, all or a portion of the Additional
Shares as may be necessary to cover over-allotments made in
connection with the offering of the Firm Shares, at the same
purchase price per share to be paid by the Underwriters to the
Company for the Firm Shares. This option may be exercised at
any time (but not more than once) on or before the thirtieth
day following the date hereof, by written notice from Dillon,
Read & Co. Inc. to the Company. Such notice shall set forth
the aggregate number of Additional Shares as to which the
option is being exercised, and the date and time when the
Additional Shares are to be delivered (such date and time being
herein referred to as the "additional time of purchase");
provided, however, that the additional time of purchase shall
not be earlier than the time of purchase (as defined below) nor
earlier than the second business day1 after the date on which
the option shall have been exercised nor later than the eighth
business day after the date on which the option shall have been
exercised. The number of Additional Shares to be sold to each
Underwriter shall be the number which bears the same proportion
to the aggregate number of Additional Shares being purchased as
the number of Firm Shares set forth opposite the name of such
Underwriter on Schedule A hereto bears to the total number of
_________________________
1 As used herein "business day" shall mean a day on which
the New York Stock Exchange is open for trading.
<PAGE>
Firm Shares (subject, in each case, to such adjustment as you
may determine to eliminate fractional shares).
2. Payment and Delivery. Payment of the purchase
price for the Firm Shares shall be made to the Company by wire
transfer of immediately available funds, against delivery of
the certificates for the Firm Shares to you for the respective
accounts of the Underwriters. Such payment and delivery shall
be made at 10:00 A.M., New York City time, on ,
1996 (unless another time shall be agreed to by you and the
Company or unless postponed in accordance with the provisions
of Section 8 hereof). The time at which such payment and
delivery are actually made is hereinafter sometimes called the
"time of purchase". Certificates for the Firm Shares shall be
delivered to you in definitive form in such names and in such
denominations as you shall specify on the second business day
preceding the time of purchase. For the purpose of expediting
the checking of the certificates for the Firm Shares by you,
the Company agrees to make such certificates available to you
for such purpose at least one full business day preceding the
time of purchase.
Payment of the purchase price for the Additional
Shares shall be made at the additional time of purchase in the
same manner as the payment for the Firm Shares. Certificates
for the Additional Shares shall be delivered to you in
definitive form in such names and in such denominations as you
shall specify on the second business day preceding the
additional time of purchase. For the purpose of expediting the
checking of the certificates for the Additional Shares by you,
the Company agrees to make such certificates available to you
for such purpose at least one full business day preceding the
additional time of purchase.
3. Representations and Warranties of the Company.
The Company represents and warrants to each of the Underwriters
that:
(a) each Preliminary Prospectus filed as a part of
the Registration Statement as originally filed or as part
of any amendment thereto, or filed pursuant to Rule 424
under the Act fully complied when so filed in all material
respects with the Act, and when the Registration Statement
becomes or became effective and at all times subsequent
thereto up to the time of purchase, the Registration
Statement and the Prospectus and any amendments or
supplements thereto, fully complied and will fully comply
in all material respects with the provisions of the Act,
and the Registration Statement at all such times did not
and will not contain an untrue statement of a material
fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein
not misleading, and the Prospectus at all such times did
not and will not contain an untrue statement of a material
<PAGE>
fact or omit to state a material fact required to be
stated therein or necessary to make the statements
therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the
Company makes no warranty or representation with respect
to any statement contained in the Registration Statement
or the Prospectus in reliance upon and in conformity with
information concerning the Underwriters and furnished in
writing by or on behalf of any Underwriter through you to
the Company expressly for use in the Registration
Statement or the Prospectus;
(b) as of the date of this Agreement, the Company
has an authorized capitalization as set forth under the
heading entitled "Actual" in the section of the
Registration Statement and the Prospectus entitled
"Capitalization" and, as of the time of purchase and the
additional time of purchase, as the case may be, the
Company shall have an authorized capitalization as set
forth under the heading entitled "Pro Forma, As Adjusted"
in the section of the Registration Statement and the
Prospectus entitled "Capitalization"; all of the issued
and outstanding shares of capital stock including Common
Stock of the Company have been duly and validly authorized
and issued and are fully paid and non-assessable; the
Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the
State of Delaware, with full power and authority to own
its properties and conduct its business as described in
the Registration Statement and the Prospectus, to execute
and deliver this Agreement and to issue and sell the
Shares as herein contemplated; each of the Subsidiaries
has been duly organized and is validly existing as a
corporation in good standing under the laws of its
jurisdiction of its incorporation with full corporate
power and authority to own its property and conduct the
business in which it is presently engaged;
(c) all of the issued and outstanding shares of the
capital stock of each of the Company's subsidiaries, all
of which are listed on Exhibit 21.1 of the Registration
Statement (the "Subsidiaries"), have been duly and validly
authorized and issued and are fully paid and
non-assessable and are owned by the Company free and clear
of any pledge, lien, encumbrance, security interest,
preemptive rights or other claim; except as described in
the Registration Statement and the Prospectus there are no
outstanding rights subscriptions, warrants, calls, options
or other agreements of any kind with respect to the
capital stock of the Company or of the Subsidiaries; the
Company does not own, directly or indirectly, shares of
capital stock of or other equity interest in any
corporation or other entity other than the Subsidiaries;
<PAGE>
(d) the Company and each of its Subsidiaries are
duly qualified to do business and in good standing in each
jurisdiction in which they conduct their respective
businesses; and the Company and each of its Subsidiaries
are in compliance in all material respects with the laws,
orders, rules, regulations and directives issued or
administered by such jurisdictions;
(e) neither the Company nor any of its Subsidiaries
is in breach of, or in default under (nor has any event
occurred which with notice, lapse of time, or both would
constitute a breach of, or default under), its respective
charter or by-laws or in the performance or observance of
any obligation, agreement, covenant or condition contained
in any material indenture, mortgage, deed of trust, bank
loan or credit agreement or other agreement or instrument
to which the Company or any of its Subsidiaries is a party
or by which any of them or their respective properties are
bound; and the execution, delivery and performance of this
Agreement, the incurrence of the obligations set forth
herein and the consummation of the transactions
contemplated hereby will not conflict with, or result in
any breach of or constitute a default under (nor
constitute any event which with notice, lapse of time, or
both would constitute a breach of, or default under), any
provisions of the charter or by-laws, of the Company or
any of its Subsidiaries or under any provision of any
license, indenture, mortgage, deed of trust, bank loan or
credit agreement or other agreement or instrument to which
the Company or any of its Subsidiaries is a party or by
which any of them or their respective properties may be
bound or affected, or under any federal, state, local or
foreign law, regulation or rule or any decree, judgment or
order applicable to the Company or any of its
Subsidiaries;
(f) neither the Company nor any of its Subsidiaries
is a party to any litigation, and there is no such
litigation pending or to the best knowledge of the Company
or any of its Subsidiaries, threatened or contemplated,
which seeks to enjoin or restrain the execution, delivery
and performance of this Agreement, the incurrence of the
obligations set forth herein or the consummation of the
transactions contemplated hereby;
(g) this Agreement has been duly authorized,
executed and delivered by the Company and is a legal,
valid and binding agreement of the Company enforceable in
accordance with its terms (except as enforcement may be
limited by applicable bankruptcy, insolvency or similar
laws affecting the enforcement of creditors' rights
generally or by legal or equitable limitations on the
availability of specific remedies); the Board of Directors
of the Company or a committee thereof duly authorized by
<PAGE>
the Board of Directors of the Company has duly adopted
resolutions authorizing the issuance and sale of the
Shares by the Company; the Shares to be sold by the
Company, when issued and delivered to the Underwriters as
contemplated hereby, will be duly and validly authorized
and fully paid and non-assessable, and free and clear of
any pledge, lien, charge, encumbrance, security interest,
preemptive right or other claim;
(h) the capital stock of the Company, including the
Shares, conforms in all material respects to the
description thereof contained in the Registration
Statement and Prospectus and the certificates for the
Shares are in due and proper form and the holders of the
Shares will not be subject to personal liability for the
debts or other liabilities or obligations of the Company
by reason of being such holders;
(i) no approval, authorization, consent or order of
or filing with any national, state or local governmental
or regulatory commission, board, body, authority or agency
is required in connection with the issuance and sale of
the Shares as contemplated hereby other than registration
of the Shares under the Act, clearance of the offering of
such Shares with the National Association of Securities
Dealers, Inc. (the "NASD") and any necessary qualification
under the securities or blue sky laws of the various
jurisdictions in which the Shares are being offered by the
Underwriters;
(j) except for rights which have been waived
pursuant to waivers (true and accurate copies of which
have been provided to the Underwriters prior to the date
of this Agreement) which are in full force and effect on
the date of this Agreement, as of the time of purchase and
as of the additional time of purchase, no person has the
right, contractual or otherwise, to cause the Company to
issue to it, or register pursuant to the Act, any shares
of capital stock of the Company upon the issue and sale of
the Shares to the Underwriters hereunder; no person has
preemptive rights, rights of first refusal or other rights
to purchase any of the Shares; no person has any right to
have securities included in or registered pursuant to the
Registration Statement;
(k) Ernst & Young LLP, whose reports on the
consolidated financial statements of the Company and its
Subsidiaries are filed with the Commission as part of the
Registration Statement and Prospectus, are independent
public accountants as required by the Act;
(l) each of the Company and its Subsidiaries has all
necessary licenses, authorizations, consents and approvals
and has made all necessary filings required under any
<PAGE>
federal, state, local or foreign law, regulation or rule,
and has obtained all necessary authorizations, consents
and approvals from other persons, in order to conduct its
respective business; neither the Company nor any of its
Subsidiaries is in violation of, or in default under, any
such license, authorization, consent or approval or any
federal, state, local or foreign law, regulation or rule
or any decree, order or judgment applicable to the Company
or any of its Subsidiaries the effect of which,
individually or in the aggregate, could have a material
adverse effect on the properties, assets, liabilities,
prospects, results of operations, business or condition
(financial or otherwise) of the Company and its
Subsidiaries taken as a whole (a "Material Adverse
Effect");
(m) all legal or governmental proceedings, contracts
or documents of a character required to be described in
the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement have
been so described or filed as required;
(n) there are no actions, suits or proceedings
pending or, to the best knowledge of the Company,
threatened against the Company or any of its Subsidiaries
or any of their respective properties or affiliates, at
law or in equity, or before or by any federal, state,
local or foreign governmental or regulatory commission,
board, body, authority or agency which, individually or in
the aggregate, could result in a judgment, decree or order
having a Material Adverse Effect;
(o) the audited financial statements included in the
Registration Statement and the Prospectus present fairly
the consolidated financial position of the Company and its
Subsidiaries as of the dates indicated and the
consolidated results of operations and changes in
financial position of the Company and its Subsidiaries for
the periods specified; such financial statements have been
prepared in conformity with generally accepted accounting
principles applied on a consistent basis during the
periods involved [additional representation to be inserted
re: pro formas, if required];
(p) subsequent to the respective dates as of which
information is given in the Registration Statement and
Prospectus, and except as may be otherwise stated in the
Registration Statement or Prospectus, there has not been
(A) any material and unfavorable change, financial or
otherwise, in the business, properties, assets, prospects,
regulatory environment, results of operations or condition
(financial or otherwise), present or prospective, of the
Company and its Subsidiaries taken as a whole, (B) any
transaction, which is material to the business,
<PAGE>
properties, assets, prospects, regulatory environment,
results of operations or condition (financial or
otherwise), present or prospective, of the Company and its
Subsidiaries taken as a whole, contemplated or entered
into by the Company or any of its Subsidiaries or (C) any
obligation, contingent or otherwise, directly or
indirectly incurred by the Company or any of its
Subsidiaries which is material to the business,
properties, assets, prospects, regulatory environment,
results of operations or condition (financial or
otherwise), present or prospective, of the Company and its
Subsidiaries taken as a whole;
(q) the Company and its Subsidiaries have good title
to all properties and assets owned or leased by them, in
each case, except as set forth in the Registration
Statement and the Prospectus, free and clear of all
pledges, liens, encumbrances, security interests, charges,
mortgages and defects of title other than liens for taxes
which taxes are not yet due and payable;
(r) each issuance of securities referred to in Item
15 of the Registration Statement (i) was effected in
reliance upon a valid exemption from the registration
requirements of the Act and (ii) was effected in
compliance with the securities or blue sky laws of each
jurisdiction in which such securities were offered or
sold;
(s) except for possible violations of which the
Company is unaware which, individually or in the
aggregate, would not have a Material Adverse Effect, the
business, operations and facilities of the Company and
each of its Subsidiaries have been and are being conducted
in compliance with all applicable federal, state, local,
and foreign laws, ordinances, rules, regulations,
licenses, permits, approvals, plans, authorizations,
orders, judgments, directives, decrees, requirements and
common law relating to occupational safety and health, or
pollution, or protection of health or the environment as
now or previously in effect (including, without
limitation, those relating to, regulating, or imposing
liability or standards of conduct concerning emissions,
discharges, releases or threatened releases of pollutants,
contaminants or hazardous, dangerous, or toxic substances,
materials constituents or wastes or toxins, viruses,
infectious disease agents, or pathogens, into ambient air,
surface water, groundwater or land, or relating to the
generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of
chemical substances, pollutants, contaminants or hazardous
or toxic substances, materials or wastes, including
medical waste, whether solid, gaseous or liquid in nature)
or otherwise relating to remediating real property or
<PAGE>
concerning protection of the outdoor or indoor environment
("Environmental Laws); and neither the Company nor any of
its Subsidiaries has received any notice which is pending
from a governmental instrumentality or any third party
alleging any violation thereof or liability thereunder
(including, without limitation, liability for costs of
investigating or remediating sites containing hazardous
substances and/or damages to natural resources) and all
violations for which the Company or any of its
Subsidiaries has previously received notice have been
remedied;
(t) there is no claim pending or, to the best
knowledge of the Company or any of its Subsidiaries,
threatened or contemplated under any Environmental Laws
against the Company or any of its Subsidiaries which, if
adversely determined, individually or in the aggregate,
would have a Material Adverse Effect; there are no past or
present actions or conditions, including, without
limitation, the release of any hazardous substance or
waste regulated under any Environmental Law that are
likely to form the basis of any such claim against the
Company or any of its Subsidiaries which, if adversely
determined, individually or in the aggregate would have a
Material Adverse Effect;
(u) the Company and each of its Subsidiaries have
filed all federal or state income and franchise tax
returns required to be filed and have paid all taxes shown
thereon as due, and there is no material tax deficiency
which has been or might be asserted against the Company or
any of its Subsidiaries; all material tax liabilities of
the Company and its Subsidiaries are adequately provided
for on the books of the Company and its Subsidiaries;
(v) neither the Company nor any of its affiliates
has incurred any liability for any finder's fees or
similar payments in connection with the transactions
herein contemplated;
(w) the Company and each of its Subsidiaries has in
effect, with financially sound and reputable insurers,
insurance with respect to its business and properties and
the business and properties of its Subsidiaries against
loss or damage of the kind customarily insured against by
corporations of established reputation engaged in the same
or similar businesses and similarly situated, of such type
and in such amounts as are customarily carried under
similar circumstances by such other corporations;
(x) the Company owns each of the patents described
in the Registration Statement and the Prospectus as owned
by the Company (the "Patents") and, except as disclosed in
the Registration Statement and the Prospectus, owns or
<PAGE>
possesses adequate and enforceable rights to use all other
patents, patent applications, trademarks, trademark
applications, service marks, copyrights, copywrite
applications, licenses and other similar rights
(collectively with the Patents, "Intangibles") necessary
for the conduct of the businesses of the Company and its
Subsidiaries as now being conducted and as described in
the Registration Statement and the Prospectus. Neither
the Company nor any of its Subsidiaries has infringed, is
infringing, or has received any notice of infringement of
any Intangible of any other person and neither the Company
nor any of its Subsidiaries knows of any basis therefor;
(y) the Company has obtained the agreement of each
of its directors and officers and certain of its
stockholders designated by you not to sell, contract to
sell, grant any option to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock or
securities convertible into or exchangeable for Common
Stock or warrants or other rights to purchase Common Stock
for a period of 180 days after the date of this Agreement;
and
(z) none of the Company or its Subsidiaries is, or
after application of the proceeds as described under the
caption "Use of Proceeds" in the Registration Statement
and the Prospectus, will be an "investment company" or an
affiliated person of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms
are defined in the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder.
4. Certain Covenants of the Company. The Company
hereby agrees:
(a) to furnish such information as may be required
and otherwise to cooperate in qualifying the Shares for
offering and sale under the securities or blue sky laws of
such states as you may designate and to maintain such
qualifications in effect so long as required for the
distribution of the Shares, provided that the Company
shall not be required to qualify as a foreign corporation
or to consent to the service of process under the laws of
any such state (except service of process with respect to
the offering and sale of the Shares); and to promptly
advise you of the receipt by the Company of any
notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction
or the initiation or threatening of any proceeding for
such purpose; and to make every reasonable effort to
obtain the withdrawal of any order or suspension as soon
as practicable;
<PAGE>
(b) to make available to you in New York City, as
soon as practicable after the Registration Statement
becomes effective, and thereafter from time to time to
furnish to the Underwriters, as many copies of the
Prospectus (or of the Prospectus as amended or
supplemented if the Company shall have made any amendments
or supplements thereto after the effective date of the
Registration Statement) as the Underwriters may reasonably
request for the purposes contemplated by the Act;
(c) to advise you promptly and (if requested by you)
to confirm such advice in writing, (i) when the
Registration Statement has become effective and when any
post-effective amendment thereto becomes effective and
(ii) if Rule 430A under the Act is used, when the
Prospectus is filed with the Commission pursuant to Rule
424(b) under the Act (which the Company agrees to file in
a timely manner under such Rules);
(d) to advise you promptly, confirming such advice
in writing, of any request by the Commission for
amendments or supplements to the Registration Statement or
Prospectus or for additional information with respect
thereto, or of notice of institution of proceedings for,
or the entry of a stop order suspending the effectiveness
of the Registration Statement and, if the Commission
should enter a stop order suspending the effectiveness of
the Registration Statement, to make every reasonable
effort to obtain the lifting or removal of such order as
soon as possible; to advise you promptly of any proposal
to amend or supplement the Registration Statement or
Prospectus and to file no such amendment or supplement to
which you shall object in writing;
(e) to furnish to you and, upon request, to each of
the other Underwriters for a period of five years from the
date of this Agreement (i) copies of any reports or other
communications which the Company shall send to its
stockholders or shall from time to time publish or
publicly disseminate, (ii) copies of all annual, quarterly
and current reports filed with the Commission on Forms
10-K, 10-Q and 8-K, or such other similar form as may be
designated by the Commission, and (iii) such other
information as you may reasonably request regarding the
Company or its Subsidiaries;
(f) to advise the Underwriters promptly of the
happening of any event known to the Company within the
time during which a prospectus relating to the Shares is
required to be delivered under the Act which, in the
judgment of the Company, would require the making of any
change in the Prospectus then being used so that the
Prospectus would not include an untrue statement of
material fact or omit to state a material fact necessary
<PAGE>
to make the statements therein, in the light of the
circumstances under which they are made, not misleading,
and, during such time, to prepare and furnish, at the
Company's expense, to the Underwriters promptly such
amendments or supplements to such Prospectus as may be
necessary to reflect any such change and to furnish you a
copy of such proposed amendment or supplement before
filing any such amendment or supplement with the
Commission;
(g) to make generally available to its security
holders, and to deliver to you, an earnings statement of
the Company (which will satisfy the provisions of Section
11(a) of the Act) covering a period of twelve months
beginning after the effective date of the Registration
Statement but not later than , 1996, as soon as
is reasonably practicable after the termination of such
twelve-month period;
(h) to furnish to you four signed copies of the
Registration Statement, as initially filed with the
Commission, and of all amendments thereto (including all
exhibits thereto) and sufficient conformed copies of the
foregoing (other than exhibits) for distribution of a copy
to each of the other Underwriters;
(i) to furnish to you as early as practicable prior
to the time of purchase and the additional time of
purchase, as the case may be, but not later than two
business days prior thereto, a copy of the latest
available unaudited interim consolidated financial
statements, if any, of the Company and its Subsidiaries
which have been read by the Company's independent
certified public accountants, as stated in their letter to
be furnished pursuant to Section 6(d) of this Agreement;
(j) to apply the net proceeds from the sale of the
Shares in the manner set forth under the caption "Use of
Proceeds" in the Registration Statement and the
Prospectus;
(k) whether or not the transactions contemplated by
this Agreement are consummated or this Agreement otherwise
becomes effective or is terminated, to pay all expenses,
fees and taxes (other than any transfer taxes and fees and
disbursements of counsel for the Underwriters except as
set forth under Section 5 hereof and clauses (iii) and
(iv) below) in connection with (i) the preparation and
filing of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and any amendments or
supplements thereto, and the printing and furnishing of
copies of each thereof to the Underwriters and to dealers
(including costs of mailing and shipment), (ii) the
preparation, issuance, sale and delivery of the Shares,
<PAGE>
(iii) the word processing and/or printing of this
Agreement, any Agreement Among Underwriters, any dealer
agreements, any Statements of Information and Powers of
Attorney and the reproduction and/or printing and
furnishing of copies of each thereof to the Underwriters
and to dealers (including costs of mailing and shipment),
(iv) the qualification of the Shares for offering and sale
under state laws and the determination of their
eligibility for investment under state law as aforesaid
(including the legal fees and filing fees and other
disbursements of counsel for the Underwriters) and the
printing and furnishing of copies of any blue sky surveys
or legal investment surveys to the Underwriters and to
dealers, (v) any listing of the Shares on any securities
exchange or qualification of the Shares for quotation on
NASDAQ National Market and any registration thereof under
the Securities Exchange Act of 1934 (the "Exchange Act"),
(vi) any filing for review of the public offering of the
Shares by the NASD and (vii) the performance of the
Company's other obligations hereunder;
(l) to furnish to you, before filing with the
Commission subsequent to the effective date of the
Registration Statement and during the period referred to
in paragraph (f) above, a copy of any document proposed to
be filed pursuant to Sections 13, 14 or 15(d) of the
Exchange Act;
(m) not to sell, contract to sell, grant any option
to sell or otherwise dispose of, directly or indirectly,
any shares of Common Stock or securities convertible into
or exchangeable for Common Stock or warrants or other
rights to purchase Common Stock or permit the registration
under the Act of any shares of Common Stock, except for
the registration of the Shares and the sales to the
Underwriters pursuant to this Agreement and except for
issuances of Common Stock upon the exercise of outstanding
options, warrants and debentures, for a period of 180 days
after the date hereof, without the prior written consent
of Dillon, Read & Co. Inc. acting on behalf of the
Managing Underwriters;
(n) to use its best efforts to cause the Shares to
be listed on the NASDAQ National Market; and
(o) not to take, directly or indirectly, any action
designed to cause or to result in, or that might
constitute the stabilization or manipulation of the Common
Stock to facilitate the sale or resale of the Shares.
5. Reimbursement of Underwriters' Expenses. If the
Shares are not delivered for any reason other than the
termination of this Agreement pursuant to the first two
paragraphs of Section 8 hereof or the default by one or more of
<PAGE>
the Underwriters in its or their respective obligations
hereunder, the Company shall reimburse the Underwriters for all
of their out-of-pocket expenses, including the fees and
disbursements of their counsel.
6. Conditions of Underwriters' Obligations. The
several obligations of the Underwriters hereunder are subject
to the accuracy of the representations and warranties on the
part of the Company on the date hereof and at the time of
purchase (and the several obligations of the Underwriters at
the additional time of purchase are subject to the accuracy of
the representations and warranties on the part of the Company
on the date hereof and at the time of purchase (unless
previously waived) and at the additional time of purchase, as
the case may be), the performance by the Company of its
obligations hereunder and to the following conditions:
(a) The Company shall furnish to you at the time of
purchase and at the additional time of purchase, as the
case may be, an opinion of Johnson & Colmar, counsel for
the Company, addressed to the Underwriters, and dated the
time of purchase or the additional time of purchase, as
the case may be, with reproduced copies for each of the
other Underwriters and in form satisfactory to Cahill
Gordon & Reindel, counsel for the Underwriters, stating
that:
(i) the Company has been duly incorporated and
is validly existing as a corporation in good standing
under the laws of the State of Delaware, with full
corporate power and authority to own its properties
and conduct its business as described in the
Registration Statement and the Prospectus, to execute
and deliver this Agreement and to issue, sell and
deliver the Shares as herein contemplated;
(ii) each of the Subsidiaries has been duly
incorporated and is validly existing as a corporation
in good standing under the laws of its respective
jurisdiction of incorporation with full corporate
power and authority to own its respective properties
and to conduct its respective business;
(iii) the Company and its Subsidiaries are duly
qualified to do business in and are in good standing
in, each jurisdiction in which they conduct their
respective businesses, own or lease real property or
maintain an office and in which such qualification is
necessary;
(iv) this Agreement has been duly authorized,
executed and delivered by the Company; the Board of
Directors of the Company or a committee thereof duly
authorized by the Board of Directors of the Company
<PAGE>
has duly adopted resolutions authorizing the issuance
and sale of the Shares by the Company;
(v) the Shares, when issued and delivered to
and paid for by the Underwriters in accordance with
the terms hereof, will be duly and validly authorized
and issued and will be fully paid and non-assessable;
(vi) the Company's authorized capital stock
consists of 30,000,000 shares of Common Stock, par
value $.01 per share, as set forth in the
Registration Statement and the Prospectus; the
outstanding shares of capital stock of the Company
have been duly and validly authorized and issued and
are fully paid, non-assessable and free of statutory
and contractual preemptive rights; the Shares when
issued will be free of statutory and contractual
preemptive rights; the certificates for the Shares
are in due and proper form and the holders of the
Shares will not be subject to personal liability for
the debts or other liabilities or obligations of the
Company by reason of being such holders;
(vii) all of the issued and outstanding shares of
the capital stock of each of the Company's
Subsidiaries have been duly and validly authorized
and issued and are fully paid and non-assessable and
are owned by the Company free and clear of any
pledge, lien, encumbrance, security interest,
preemptive rights or other claim known to such
counsel; to the best of such counsel's knowledge,
except as described in the Registration Statement and
the Prospectus there are no outstanding rights
subscriptions, warrants, calls, options or other
agreements of any kind with respect to the capital
stock of the Company or its Subsidiaries; to the best
of such counsel's knowledge, the Company does not
own, directly or indirectly, shares of capital stock
of or equity interest in any corporation or other
entity other than its Subsidiaries;
(viii) the capital stock of the Company, including
the Shares, conforms in all material respects to the
description thereof contained in the Registration
Statement and Prospectus;
(ix) the Registration Statement and the
Prospectus (except as to the financial statements and
schedules and other financial and statistical data
contained or incorporated by reference therein, as to
which such counsel need express no opinion) comply as
to form in all material respects with the
requirements of the Act;
<PAGE>
(x) the Registration Statement has become
effective under the Act and, to the best of such
counsel's knowledge, no stop order proceedings with
respect thereto are pending or threatened under the
Act;
(xi) no approval, authorization, consent or
order of or filing with any national, state or local
governmental or regulatory commission, board, body,
authority or agency is required in connection with
the issuance and sale of the Shares as contemplated
hereby other than registration of the Shares under
the Act and the clearance of the offering of such
shares with the NASD (except such counsel need
express no opinion as to any necessary qualification
under the state securities or blue sky laws of the
various jurisdictions in which the Shares are being
offered by the Underwriters);
(xii) the execution, delivery and performance of
this Agreement by the Company and the consummation by
the Company of the transactions contemplated hereby
do not and will not conflict with, or result in any
breach of, or constitute a default under (nor
constitute any event which with notice, lapse of
time, or both, would constitute a breach of or
default under), any provisions of the charter or
by-laws of the Company or any of its Subsidiaries or
under any provision of any license, indenture,
mortgage, deed of trust, bank loan, credit agreement
or other agreement or instrument known to such
counsel to which the Company or any of its
Subsidiaries is a party or by which any of them or
their respective properties may be bound or affected,
or under any law, regulation or rule applicable to
the Company or any of its Subsidiaries or under any
decree, judgment or order known to such counsel
applicable to the Company or any of its Subsidiaries;
(xiii) to the best of such counsel's knowledge,
neither the Company nor any of its Subsidiaries is a
party to any litigation, and there is no such
litigation pending or threatened, which seeks to
enjoin or restrain the execution, delivery and
performance of this Agreement, the incurrence of the
obligations set forth herein or the consummation of
the transactions contemplated hereby;
(xiv) to the best of such counsel's knowledge,
neither the Company nor any of its Subsidiaries is in
breach of, or in default under (nor has any event
occurred which with notice, lapse of time, or both
would constitute a breach of, or default under), any
license, indenture, mortgage, deed of trust, bank
<PAGE>
loan or any other agreement or instrument known to
such counsel to which the Company or any of its
Subsidiaries is a party or by which any of them or
their respective properties may be bound or affected
or under any law, regulation or rule applicable to
the Company or any of its Subsidiaries or under any
decree, judgment or order known to such counsel
applicable to the Company or any of its Subsidiaries;
(xv) to the best of such counsel's knowledge,
there are no contracts, licenses, agreements, leases
or documents of a character which are required to be
filed as exhibits to the Registration Statement or to
be summarized or described in the Prospectus which
have not been so filed, summarized or described;
(xvi) to the best of such counsel's knowledge,
there are no actions, suits or proceedings pending or
threatened against the Company or any of its
Subsidiaries or any of their respective properties,
at law or in equity or before or by any commission,
board, body, authority or agency which are required
to be described in the Registration Statement and the
Prospectus but are not so described;
(xvii) each issuance of securities referred to in
Item 15 of the Registration Statement (i) was
effected in reliance upon a valid exemption from the
registration requirements of the Act and (ii) was
effected in compliance with the securities or blue
sky laws of each jurisdiction in which such
securities were offered and sold;
(xviii) none of the Company or its Subsidiaries is,
or after application of the proceeds as described
under the caption "Use of Proceeds" in the
Registration Statement and the Prospectus, will be an
"investment company" or an affiliated person of, or
"promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in
the Investment Company Act of 1940, as amended, and
the rules and regulations thereunder; and
(xix) such counsel have participated in
conferences with officers and other representatives
of the Company, representatives of the independent
public accountants of the Company and representatives
of the Underwriters at which the contents of the
Registration Statement and Prospectus were discussed
and, although such counsel is not passing upon and
does not assume responsibility for the accuracy,
completeness or fairness of the statements contained
in the Registration Statement or Prospectus (except
as and to the extent stated in subparagraphs (vi) and
<PAGE>
(viii) above) and has not made any independent
verification or check of such statements (except for
purposes of subparagraphs (vi) and (viii) above), on
the basis of the foregoing (relying as to materiality
to a large extent upon the opinions of officers and
other representatives of the Company) nothing has
come to the attention of such counsel that causes
them to believe that the Registration Statement or
any amendment thereto at the time such Registration
Statement or amendment became effective contained an
untrue statement of a material fact or omitted to
state a material fact required to be stated therein
or necessary to make the statements therein not
misleading, or that the Prospectus or any supplement
thereto at the date of such Prospectus or such
supplement, and at all times up to and including the
time of purchase or additional time of purchase, as
the case may be, contained an untrue statement of a
material fact or omitted to state a material fact
required to be stated therein or necessary to make
the statements therein, in light of the circumstances
under which they were made, not misleading (it being
understood that such counsel need express no belief
with respect to the financial statements and
schedules and other financial and statistical data
included in the Registration Statement or
Prospectus).
(b) The Company shall furnish to you at the time of
purchase and at the additional time of purchase, as the
case may be, an opinion of Brinks Hofer Gilson & Lione,
patent counsel for the Company, addressed to the
Underwriters, and dated the time of purchase or the
additional time of purchase, as the case may be, with
reproduced copies for each of the other Underwriters and
in form satisfactory to Cahill Gordon & Reindel, counsel
for the Underwriters, stating that:
(i) the statements contained in the
Registration Statement and the Prospectus, insofar as
they relate to the Company's and its Subsidiaries'
patent position, have been reviewed and approved by
such counsel, are accurate in all material respects
and fairly present the information set forth therein;
(ii) to the best of such counsel's knowledge,
except as disclosed in the Registration Statement and
the Prospectus, there are no pending or threatened
legal or governmental proceedings relating to
patents, trademarks, service marks or proprietary
information owned or used by the Company or its
Subsidiaries to which the Company or its Subsidiaries
is a party or of which any property of the Company or
its Subsidiaries is the subject;
<PAGE>
(iii) to the best of such counsel's knowledge,
neither the Company nor any of its Subsidiaries is
currently in breach of, or in default under, any
agreement or instrument of which such counsel has
knowledge to which the Company or any of its
Subsidiaries is a party or by which any of them or
any of their property may be bound or affected;
(iv) such counsel has no reason to believe that
either the Registration Statement or the Prospectus
or any amendment thereof or supplement thereto
contains any untrue statement of a material fact or
omits to state any material fact required to be
stated therein or necessary to make the statements
therein not misleading;
(v) the Company owns of record all right, title
and interest in and to the patents and patent
applications described in the Registration Statement
and the Prospectus free and clear of any adverse
claim known by such counsel of any third party; to
the best of such counsel's knowledge, the Company has
not infringed, is not infringing and has not received
any notice of infringement of any patents of any
other person which individually or in the aggregate
could have a Material Adverse Effect;
(vi) to the best of such counsel's knowledge,
there is no litigation or governmental or other
proceeding relating to the Patents, before any court
or before or by any public body or board (other than
the United States Patent and Trademark Office)
pending to which the Company or any of its
Subsidiaries is a party or threatened against the
Company or any of its Subsidiaries which individually
or in the aggregate could have a Material Adverse
Effect; to the best of such counsel's knowledge, the
Company has not given notice to any third party of
any claim of infringement of its patents; and
(vii) the applications and other documents filed
by the Company or any of its Subsidiaries with the
United States Patent and Trademark Office have been
duly and adequately filed and to the best of such
counsel's knowledge, in connection with such
applications, no fraud on such office was practiced
or attempted and the duty of disclosure required by
such office was not violated through bad faith or
gross negligence, and except as specifically
described in the Registration Statement and the
Prospectus such counsel knows of no infringement or
conflict with the existing enforceable rights of
others (or of claims thereof) with respect to the
products or processes covered by such applications or
<PAGE>
documents or utilized by the Company or any of its
Subsidiaries in their respective businesses which,
individually or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, could
have a Material Adverse Effect.
(c) The Company shall furnish to you at the time of
purchase and at the additional time of purchase, as the
case may be, an opinion of local counsel to the Company,
in each of the jurisdictions identified on Schedule B
hereto, addressed to the Underwriters, and dated the time
of purchase or the additional time of purchase, as the
case may be, with reproduced copies for each of the other
Underwriters and in form satisfactory to Cahill Gordon &
Reindel, counsel for the Underwriters, stating that:
(i) the business, operations and facilities of
the Company and each of its Subsidiaries have been
and are being conducted in compliance with all
applicable federal, state, local, and foreign laws,
ordinances, rules, regulations, licenses, permits,
approvals, plans, authorizations, orders, judgments,
directives, decrees, requirements and common law
relating to occupational safety and health, or
pollution, or protection of health or the environment
as now or previously in effect (including, without
limitation, those relating to, regulating, or
imposing liability or standards of conduct concerning
emissions, discharges, releases or threatened
releases of pollutants, contaminants or hazardous,
dangerous, or toxic substances, materials
constituents or wastes or toxins, viruses, infectious
disease agents, or pathogens, into ambient air,
surface water, groundwater or land, or relating to
the generation, manufacture, processing,
distribution, use, treatment, storage, disposal,
transport or handling of chemical substances,
pollutants, contaminants or hazardous or toxic
substances, materials or wastes, including medical
waste, whether solid, gaseous or liquid in nature) or
otherwise relating to remediating real property or
concerning protection of the outdoor or indoor
environment ("Environmental Laws"); and to the best
knowledge of such counsel, neither the Company nor
any of its Subsidiaries has received any notice which
is pending from a governmental instrumentality or any
third party alleging any violation thereof or
liability thereunder (including, without limitation,
liability for costs of investigating or remediating
sites containing hazardous substances and/or damages
to natural resources) and all violations for which
the Company or any of its Subsidiaries has previously
received notice have been remedied;
<PAGE>
(ii) to the best knowledge of such counsel,
there is no claim pending, threatened or contemplated
under any Environmental Laws against the Company or
any of its Subsidiaries which, if adversely
determined, individually or in the aggregate, would
have a Material Adverse Effect; there are no past or
present actions or conditions including, without
limitation, the release of any hazardous substance or
waste regulated under any Environmental Law that are
likely to form the basis of any such claim against
the Company or any of its Subsidiaries which, if
adversely determined, individually or in the
aggregate would have a Material Adverse Effect; and
(iii) the Statements contained in the
Registration Statement and the Prospectus relating to
Environmental Laws have been reviewed and approved by
such counsel, are accurate in all material respects
and fairly present the information set forth therein.
(d) You shall have received from Ernst & Young LLP,
letters dated, respectively, the date of this Agreement
and the time of purchase and additional time of purchase,
as the case may be, and addressed to the Underwriters
(with reproduced copies for each of the Underwriters) in
the forms heretofore approved by the Managing
Underwriters.
(e) You shall have received at the time of purchase
and at the additional time of purchase, as the case may
be, the favorable opinion of Cahill Gordon & Reindel,
counsel for the Underwriters, dated the time of purchase
or the additional time of purchase, as the case may be, in
form and substance reasonably satisfactory to you.
(f) No amendment or supplement to the Registration
Statement or Prospectus shall be filed prior to the time
the Registration Statement becomes effective to which you
object in writing.
(g) The Registration Statement shall become
effective, or if Rule 430A under the Act is used, the
Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) under the Act, at or before 5:00
P.M., New York City time, on the date of this Agreement,
unless a later time (but not later than 5:00 P.M., New
York City time, on the second full business day after the
date of this Agreement) shall be agreed to by the Company
and you in writing or by telephone, confirmed in writing;
provided, however, that the Company and you and any group
of Underwriters, including you, who have agreed hereunder
to purchase in the aggregate at least 50% of the Firm
Shares may from time to time agree on a later date.
<PAGE>
(h) Prior to the time of purchase or the additional
time of purchase, as the case may be, (i) no stop order
with respect to the effectiveness of the Registration
Statement shall have been issued under the Act or
proceedings initiated under Section 8(d) or 8(e) of the
Act; (ii) the Registration Statement and all amendments
thereto, or modifications thereof, if any, shall not
contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
and (iii) the Prospectus and all amendments or supplements
thereto, or modifications thereof, if any, shall not
contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein, in the light of
the circumstances under which they are made, not
misleading.
(i) Between the time of execution of this Agreement
and the time of purchase or the additional time of
purchase, as the case may be, (i) no material and
unfavorable change, financial or otherwise (other than as
referred to in the Registration Statement and Prospectus),
in the properties, assets, liabilities, results of
operations, business, condition (financial or otherwise)
or prospects of the Company and its Subsidiaries taken as
a whole shall occur or become known and (ii) no
transaction which is material and unfavorable to the
Company shall have been entered into by the Company or any
of its Subsidiaries.
(j) The Company will, at the time of purchase or
additional time of purchase, as the case may be, deliver
to you a certificate of its chief executive officer and
chief financial officer to the effect that the
representations and warranties of the Company as set forth
in this Agreement and the conditions set forth in
paragraph (h) and paragraph (i) have been met and that
they are true and correct as of each such date.
(k) You shall have received signed letters from each
of the directors and officers of the Company and certain
stockholders of the Company designated by you to the
effect that such persons shall not sell, contract to sell,
grant any option to sell or otherwise dispose of, directly
or indirectly, any shares of Common Stock of the Company
or securities convertible into or exchangeable for Common
Stock or warrants or other rights to purchase Common Stock
for a period of 180 days after the date of this Agreement
without the prior written consent of Dillon, Read & Co.
Inc. acting on behalf of the Managing Underwriters.
(l) The Company shall have furnished to you such
other documents and certificates as to the accuracy and
<PAGE>
completeness of any statement in the Registration
Statement and the Prospectus as of the time of purchase
and the additional time of purchase, as the case may be,
as you may reasonably request.
(m) The Company shall have performed such of its
obligations under this Agreement as are to be performed by
the terms hereof at or before the time of purchase and at
or before the additional time of purchase, as the case may
be.
(n) The Company shall have taken all actions
necessary to effect a reverse stock split so that each
5.3089 shares of Class A common stock of the Company or
Class B common stock of the Company become one share of
Class A common stock of the Company or Class B common
stock of the Company, as the case may be, and to
redesignate all of the Company's outstanding shares of
Class A common stock of the Company and Class B common
stock of the Company as Common Stock.
(o) The Shares shall have been approved for listing
on the NASDAQ National Market, subject only to notice of
issuance at or prior to the time of purchase.
7. Effective Date of Agreement; Termination. This
Agreement shall become effective (i) if Rule 430A under the Act
is not used, when you shall have received notification of the
effectiveness of the Registration Statement, or (ii) if Rule
430A under the Act is used, when the parties hereto have
executed and delivered this Agreement.
The obligations of the several Underwriters hereunder
shall be subject to termination in the absolute discretion of
you or in the absolute discretion of Dillon, Read & Co. Inc.,
acting on your behalf, or any group of Underwriters (which may
include you) which has agreed to purchase in the aggregate at
least 50% of the Firm Shares, if, at any time prior to the time
of purchase or, with respect to the purchase of any Additional
Shares, the additional time of purchase, as the case may be,
trading in securities on the New York Stock Exchange shall have
been suspended or minimum prices shall have been established on
the New York Stock Exchange, or if a banking moratorium shall
have been declared either by the United States or New York
State authorities, or if the United States shall have declared
war in accordance with its constitutional processes or there
shall have occurred any material outbreak or escalation of
hostilities or other national or international calamity or
crisis of such magnitude in its effect on the financial markets
of the United States as, in your judgment or in the judgment of
Dillon, Read & Co. Inc., acting on your behalf, or in the
judgment of such group of Underwriters, to make it
impracticable to market the Shares.
<PAGE>
If you or Dillon, Read & Co. Inc., acting on your
behalf, or any group of Underwriters elects to terminate this
agreement as provided in this Section 7, the Company and each
other Underwriter shall be notified promptly by letter or
telegram.
If the sale to the Underwriters of the Shares, as
contemplated by this Agreement, is not carried out by the
Underwriters for any reason permitted under this Agreement or
if such sale is not carried out because the Company shall be
unable to comply with any of the terms of this Agreement, the
Company shall not be under any obligation or liability under
this Agreement (except to the extent provided in Sections 4(k),
5 and 9 hereof), and the Underwriters shall be under no
obligation or liability to the Company under this Agreement
(except to the extent provided in Section 9 hereof) or to one
another hereunder.
8. Increase in Underwriters' Commitments. If any
Underwriter shall default in its obligation to take up and pay
for the Firm Shares to be purchased by it hereunder and if the
number of Firm Shares which all Underwriters so defaulting
shall have agreed but failed to take up and pay for does not
exceed 10% of the total number of Firm Shares, the non-
defaulting Underwriters shall take up and pay for (in addition
to the aggregate principal amount of Firm Shares they are
obligated to purchase pursuant to Section 1 hereof) the number
of Firm Shares agreed to be purchased by all such defaulting
Underwriters, as hereinafter provided. Such Shares shall be
taken up and paid for by such non-defaulting Underwriter or
Underwriters in such amount or amounts as you may designate
with the consent of each Underwriter so designated or, in the
event no such designation is made, such Shares shall be taken
up and paid for by all non-defaulting Underwriters pro rata in
proportion to the aggregate number of Firm Shares set opposite
the names of such non-defaulting Underwriters in Schedule A.
Without relieving any defaulting Underwriter from its
obligations hereunder, the Company agrees with the non-
defaulting Underwriters that it will not sell any Firm Shares
hereunder unless all of the Firm Shares are purchased by the
Underwriters (or by substituted Underwriters selected by you
with the approval of the Company or selected by the Company
with your approval).
If a new Underwriter or Underwriters are substituted
by the Underwriters or by the Company for a defaulting
Underwriter or Underwriters in accordance with the foregoing
provision, the Company or you shall have the right to postpone
the time of purchase for a period not exceeding five business
days in order that any necessary changes in the Registration
Statement and Prospectus and other documents may be effected.
<PAGE>
The term Underwriter as used in this agreement shall
refer to and include any Underwriter substituted under this
Section 8 with like effect as if such substituted Underwriter
had originally been named in Schedule A.
9. Indemnity by the Company and the Underwriters.
(a) The Company agrees to indemnify, defend and hold
harmless each Underwriter, any person who controls any
Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, and their respective agents,
representatives, employees, officers, partners and directors
(collectively, the "Underwriter indemnified parties"), from and
against any loss, expense, damage, judgment, liability or claim
(including the costs of investigating, defending or settling
such matters and fees and expenses of counsel in connection
therewith) as they are incurred (and regardless of whether the
Underwriter indemnified party is a party to the litigation, if
any) which, jointly or severally, any such Underwriter
indemnified party may incur under the Act, the Exchange Act or
otherwise insofar as such loss, expense, damage, judgment,
liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact
contained in the Registration Statement (or in the Registration
Statement as amended by any post-effective amendment thereof by
the Company) or in a Prospectus (the term Prospectus for the
purpose of this Section 9 being deemed to include any
Preliminary Prospectus, the Prospectus and the Prospectus as
amended or supplemented by the Company), or arises out of or is
based upon any omission or alleged omission to state a material
fact required to be stated in either such Registration
Statement or Prospectus or necessary to make the statements
made therein not misleading, except insofar as any such loss,
expense, damage, judgment, liability or claim arises out of or
is based upon any untrue statement or alleged untrue statement
of a material fact contained in and in conformity with
information furnished in writing by any Underwriter through you
to the Company expressly for use with reference to such
Underwriter in such Registration Statement or such Prospectus
or arises out of or is based upon any omission or alleged
omission to state a material fact in connection with such
information required to be stated in either such Registration
Statement or Prospectus or necessary to make such information
not misleading; provided, however, that the indemnity agreement
contained in this subsection (a) with respect to any
Preliminary Prospectus or amended Preliminary Prospectus shall
not inure to the benefit of any Underwriter (or to the benefit
of any person controlling such Underwriter) from whom the
person asserting any such loss, expense, liability or claim
purchased the Shares which is the subject thereof to the extent
the Prospectus corrected any such alleged untrue statement or
omission and if such Underwriter failed to send or give a copy
of the Prospectus to such person at or prior to the written
confirmation of the sale of such Shares to such person.
<PAGE>
If any action or proceeding (including any
governmental or regulatory investigation or proceeding) is
brought or asserted against any Underwriter indemnified party
in respect of which indemnity may be sought against the Company
pursuant to the foregoing paragraph, such Underwriter
indemnified party shall promptly notify the Company in writing
of the institution of such action or proceeding and the Company
shall assume the defense of such action or proceeding,
including the employment of counsel satisfactory to the
Underwriter indemnified party and payment of all fees and
expenses; provided that the omission to so notify the Company
shall not in any way relieve the Company from any liability it
may have to an Underwriter indemnified party. An Underwriter
indemnified party shall have the right to employ separate
counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Underwriter indemnified
party unless the employment of such counsel shall have been
authorized in writing by the Company in connection with the
defense of such action or the Company shall not have employed
counsel to have charge of the defense of such action within a
reasonable period of time or such Underwriter indemnified party
or parties shall have reasonably concluded that there may be
one or more defenses available to it or them which are
different from or additional to those available to the Company
(in which case the Company shall not have the right to direct
the defense of such action on behalf of the Underwriter
indemnified party or parties), in any of which events such fees
and expenses shall be borne by the Company and paid as incurred
(it being understood, however, that the Company shall not be
liable for the expenses of more than one separate counsel (in
addition to local counsel), which counsel shall be designated
by Dillon, Read & Co. Inc., in any one action or series of
related actions in the same jurisdiction representing the
Underwriter indemnified parties who are parties to such
action). Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its
written consent (which consent shall not be unreasonably
withheld or delayed) unless the Company shall be in breach of
its obligations to pay fees and expenses pursuant to this
Agreement, but if settled with the written consent of the
Company, or if there is a final judgment with respect thereto,
the Company agrees to indemnify and hold harmless each
Underwriter indemnified party from and against any loss or
liability by reason of such settlement or judgment.
(b) Each Underwriter severally agrees to indemnify,
defend and hold harmless the Company, its directors and
officers, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange
Act (each, a "Company Indemnitee") from and against any loss,
expense, damage, judgment, liability or claim (including the
costs of investigating, defending or settling such matters and
fees and expenses of counsel in connection with therewith) as
<PAGE>
they are incurred (and regardless of whether the Company
Indemnitee is a party to the litigation if any) which, jointly
or severally, such Company Indemnitee may incur under the Act
or otherwise, insofar as such loss, expense, damage, judgment,
liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact
contained in and in conformity with information furnished in
writing by or on behalf of such Underwriter through you to the
Company expressly for use with reference to such Underwriter in
the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof by the Company)
or in a Prospectus, or arises out of or is based upon any
omission or alleged omission to state a material fact in
connection with such information required to be stated either
in such Registration Statement or Prospectus or necessary to
make such information not misleading.
If any action is brought against the Company or any
such person in respect of which indemnity may be sought against
any Underwriter pursuant to the foregoing paragraph, the
Company or such person shall promptly notify such Underwriter
in writing of the institution of such action and such
Underwriter shall assume the defense of such action, including
the employment of counsel and payment of expenses. The Company
or such person shall have the right to employ its own counsel
in any such case, but the fees and expenses of such counsel
shall be at the expense of the Company or such person unless
the employment of such counsel shall have been authorized in
writing by such Underwriter in connection with the defense of
such action or such Underwriter shall not have employed counsel
to have charge of the defense of such action or such
indemnified party or parties shall have reasonably concluded
that there may be defenses available to it or them which are
different from or additional to those available to such
Underwriter (in which case such Underwriter shall not have the
right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees
and expenses shall be borne by such Underwriter and paid as
incurred (it being understood, however, that such Underwriter
shall not be liable for the expenses of more than one separate
counsel in any one action or series of related actions in the
same jurisdiction representing the indemnified parties who are
parties to such action). Anything in this paragraph to the
contrary notwithstanding, no Underwriter shall be liable for
any settlement of any such claim or action effected without the
written consent of such Underwriter.
(c) If the indemnification provided for in this
Section 9 is unavailable to an indemnified party under
subsections (a) and (b) of this Section 9 in respect of any
losses, expenses, damages, judgments, liabilities or claims
referred to therein, then each applicable indemnifying party,
in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified
<PAGE>
party as a result of such losses, expenses, liabilities or
claims (if and only to the extent that indemnification of such
indemnified party would be required under this Section 9 if the
indemnification provided for in this Section 9 were available)
(i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and
the Underwriters on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the
Company on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in
such losses, expenses, damages, judgments, liabilities or
claims, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the
same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting
expenses) received by the Company bear to the total
underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault of the
Company on the one hand and of the Underwriters on the other
shall be determined by reference to, among other things,
whether the untrue statement or alleged untrue statement of a
material fact or omission or alleged omission relates to
information supplied by the Company or by the Underwriters and
the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of
the losses, expenses, damages, judgments, liabilities and
claims referred to above shall be deemed to include any legal
or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any claim or action.
(d) The Company and the Underwriters agree that it
would not be just and equitable if contribution pursuant to
this Section 9 were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose)
or by any other method of allocation that does not take account
of the equitable considerations referred to in subsection (c)
above. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the
Shares underwritten by such Underwriter and distributed to the
public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to
pay by reason of such untrue statement or alleged untrue
statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent
misrepresentation. The Underwriter's obligations to contribute
<PAGE>
pursuant to this Section 9 are several in proportion to their
respective underwriting commitments and not joint.
(e) The indemnity and contribution agreements
contained in this Section 9 and the covenants, warranties and
representations of the Company contained in this Agreement
shall remain in full force and effect regardless of any
investigation made by or on behalf of any Underwriter
indemnified party, or by or on behalf of any Company
indemnified party, and shall survive any termination of this
Agreement or the issuance and delivery of the Shares. The
indemnity and contribution agreements contained in this Section
9 are in addition to any other remedies that the parties hereto
may have in equity or at law. The Company and each Underwriter
agree promptly to notify the others of the commencement of any
litigation or proceeding against it and, in the case of the
Company, against any of the Company's officers and directors in
connection with the issuance and sale of the Shares, or in
connection with the Registration Statement or Prospectus.
10. Notices. Except as otherwise herein provided,
all statements, requests, notices and agreements shall be in
writing or by telegram and, if to the Underwriters, shall be
sufficient in all respects if delivered or sent to Dillon, Read
& Co. Inc., 535 Madison Avenue, New York, N.Y. 10022,
Attention: Syndicate Department and, if to the Company, shall
be sufficient in all respects if delivered or sent to the
Company at the offices of the Company at 1419 Lake Cook Road,
Suite 410, Deerfield, IL 60015, Attention: President and Chief
Executive Officer.
11. CONSTRUCTION. THIS AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE
SECTION HEADINGS IN THIS AGREEMENT HAVE BEEN INSERTED AS A
MATTER OF CONVENIENCE OF REFERENCE AND ARE NOT A PART OF THIS
AGREEMENT.
12. Parties at Interest. The Agreement herein set
forth has been and is made solely for the benefit of the
Underwriters and the Company and the Underwriter indemnified
parties and the Company indemnified parties referred to in
Section 9 hereof, and their respective successors, assigns,
executors and administrators. No other person, partnership,
association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have
any right under or by virtue of this Agreement.
13. Counterparts. This agreement may be signed by
the parties in counterparts which together shall constitute one
and the same agreement among the parties.
<PAGE>
If the foregoing correctly sets forth the
understanding among the Company and the Underwriters, please so
indicate in the space provided below for the purpose, whereupon
this letter and your acceptance shall constitute a binding
agreement among the Company and the Underwriters, severally.
Very truly yours,
STERICYCLE, INC.
By:
Name:
Title:
Accepted and agreed to as of
the date first above written,
on behalf of themselves and
the other several Underwriters
named in Schedule A
DILLON, READ & CO. INC.
SALOMON BROTHERS INC
WILLIAM BLAIR & COMPANY L.L.C.
By: DILLON, READ & CO. INC.
By:__________________________
Name:
Title:
<PAGE>
SCHEDULE A
Number of
Underwriter Firm Shares
DILLON, READ & CO. INC.
SALOMON BROTHERS INC
WILLIAM BLAIR & COMPANY L.L.C.
_________
Total ............................ 3,000,000
_________
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND
MAY NOT BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT PURSUANT
TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE
UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS UNLESS, IN THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO STERICYCLE, INC., AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND STATE SECURITIES LAWS IS
AVAILABLE.
STERICYCLE, INC.
COMMON STOCK PURCHASE WARRANT
VOID AFTER MAY , 2001
Stericycle, Inc., a Delaware corporation (the "Company"), hereby certifies
that, for value received, ("Holder"), or assigns, are entitled,
subject to the terms set forth below, to purchase from the Company at any time
or from time to time before 5:00 p.m. Central time on May , 2001 (the
"Expiration Date"), at the purchase price of $1.50 per share, subject to
adjustment as set forth in Section 6, up to shares of Class A Common
Stock of the Company.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" includes any corporation which shall succeed
to or assume the obligations of the Company hereunder.
(b) The term "Stock" shall mean the Class A Common Stock and any
other securities or property of the Company or of any other person
(corporate or otherwise) which the Holder at any time shall be entitled to
receive on the exercise hereof, in lieu of or in addition to the Class A
Common Stock or which at any time shall be issuable in exchange for or in
replacement of the Class A Common Stock.
1. INITIAL EXERCISE DATE; EXPIRATION. This Warrant may be exercised at
any time or from time to time. It shall expire at 5:00 p.m. central time on May
, 2001.
2. EXERCISE OF WARRANT; PARTIAL EXERCISE.
(a) This Warrant may be exercised in full or in part by the Holder by
<PAGE>
surrender of this Warrant, with the form of subscription attached hereto duly
executed by the Holder, to the Company at its principal office, accompanied by
payment, (a) in cash or by certified or official bank check payable to the order
of the Company, of the purchase price of the shares of Stock to be purchased
hereunder, or (b) the cancellation by the Holder of indebtedness of the Company
to the Holder in an amount equal to such purchase price. For any partial
exercise hereof, the Holder shall designate in the subscription the number of
shares of Stock that he or it wishes to purchase. On any such partial
exercise, the Company at its expense shall forthwith issue and deliver to the
Holder a new warrant of like tenor, in the name of the Holder, which shall be
exercisable for such number of shares of Stock represented by this Warrant which
have not been purchased or surrendered upon such exercise.
(b) At any time at or after the closing of the Company's initial
registered firm commitment underwritten public offering of its common
securities, in lieu of the payment of cash or the cancellation of
indebtedness to the Holder set forth in paragraph 2(a) above, the Holder
shall have the right ("Conversion Right") to convert this Warrant in its
entirety (without payment of any kind) into that number of shares of Stock
equal to the quotient obtained by dividing the Net Value (as defined below)
of the Stock issuable upon exercise of the Warrant by the Fair Market Value
(as defined below) of one share of Stock. As used herein, (A) the Net
Value of the Stock means the aggregate Fair Market Value of all shares of
Stock subject to this Warrant minus the aggregate purchase price of all
such shares of Stock; and (B) the Fair Market Value of one share of Stock
means:
(i) If the exercise is upon the closing of the Company's initial
registered firm commitment underwritten public offering of its common
securities, the Fair Market Value of one share of Stock means the
initial "Price to Public" specified in the final prospectus with
respect to the offering;
(ii) if the exercise occurs at a time during which the Company's
common stock is traded on a national securities exchange or on the
Nasdaq National Market, the Fair Market Value of one share of Stock
means the average last reported or closing sale price for the
Company's common stock on such exchange or market for the three
trading days ending one business day before the exercise of this
Warrant;
(iii) if the exercise is in connection with a merger, sale of
assets or other reorganization transaction, the Fair Market Value of
one share of Stock means the value received by the holders of the
Stock pursuant to such transaction; and
(iv) in all other cases, the Fair Market Value of one share of
Stock shall be determined in good faith by the Company's Board of
Directors.
4. WHEN EXERCISE IS EFFECTIVE. The exercise of this Warrant shall be
deemed to have been effected immediately prior to the close of business on the
business day on which this Warrant is surrendered to the Company as provided in
Section 3, and at such time the person
2
<PAGE>
in whose name any certificate for shares of Stock are to be issued upon such
exercise (as provided in Section 5) shall be deemed to be the record holder of
such Stock for all purposes.
5. DELIVERY ON EXERCISE. As soon as practicable after the exercise of
this Warrant in full or in part, and in any event within five business days
thereafter, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the holder hereof, or as such holder may direct, a certificate or certificates
for the number of fully paid and nonassessable full shares of Stock to which
such holder shall be entitled on such exercise.
6. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The character of
the shares of Stock issuable upon exercise of this Warrant (or any shares of
stock or other securities at the time issuable upon exercise of this Warrant)
and the purchase price therefor, are subject to adjustment upon the occurrence
of the following events:
6.1 ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS, RECAPITALIZATION,
ETC. The exercise price of this Warrant and the number of shares of Stock
issuable upon exercise of this Warrant (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) shall be
appropriately adjusted to reflect any stock dividend, stock split,
combination of shares, reclassification, recapitalization or other similar
event affecting the number of outstanding shares of Stock (or such other
stock or securities). For example, if there should be a 2-for-1 stock
split, the exercise price would be divided by two and such number of shares
would be doubled.
6.2 ADJUSTMENT FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In case the
Company shall make or issue, or shall fix a record date for the
determination of eligible holders entitled to receive, a dividend or other
distribution with respect to the Stock (or any shares of stock or other
securities at the time issuable upon exercise of the Warrant) payable in
(i) securities of the Company (other than shares of Stock) or (ii) assets
(excluding cash dividends paid or payable solely out of retained earnings),
then in each case, the Holder on exercise hereof at any time after the
consummation, effective date or record date of such event shall receive, in
addition to the Stock (or such other stock or securities) issuable on such
exercise prior to such date, the securities or such other assets of the
Company to which the Holder would have been entitled upon such date if the
Holder had exercised this Warrant immediately prior thereto (all subject to
further adjustment as provided in this Warrant).
6.3 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In
case of any consolidation or merger of the Company with or into any other
corporation, entity or person, or any other corporate reorganization, in
which the Company shall not be the continuing or surviving entity of such
consolidation, merger or reorganization, or any transaction in which in
excess of 50% of the Company's voting power is transferred, or any sale of
all or substantially all of the assets of the Company (any such transaction
being hereinafter referred to as a "Reorganization"), then, in each case,
the Holder, on exercise hereof at any time after the consummation or
effective date of such
3
<PAGE>
Reorganization (the "Effective Date"), shall receive, in lieu of the Stock
issuable on such exercise prior to the Effective Date, the stock and other
securities and property (including cash) to which the Holder would have
been entitled upon the Effective Date if the Holder had exercised this
Warrant immediately prior thereto (all subject to further adjustment as
provided in this Warrant).
6.4 ADJUSTMENT UPON SALE OF STOCK If at any time prior to the first
to occur of (i) the Company's initial firm commitment underwritten public
offering of securities or (ii) the expiration or termination of this
Warrant, the Company effects a sale of any of its Stock in exchange for
cash equity for an aggregate purchase price of at least One Million Dollars
($1,000,000) where the per share purchase price of the Stock sold is less
than the exercise price for purchase of Stock pursuant to this Warrant (an
"Equity Raise"), then this Warrant shall, immediately and with no further
action on the part of the holder hereof, become exercisable for the number
of shares of Stock determined by dividing:
(X) the number of shares of Stock issuable upon exercise of this
Warrant multiplied by the exercise price for one share of Stock
pursuant to this Warrant; by
(Y) the issue price per share of the Stock issued pursuant to the
Equity Raise.
In such event, the exercise price per share for the Stock purchasable
pursuant to this Warrant shall be equal to the per share price at which
Stock was issued pursuant to the Equity Raise.
6.5 CERTIFICATE AS TO ADJUSTMENTS. In case of any adjustment or
readjustment in the price or kind of securities issuable on the exercise of
this Warrant pursuant to the provisions of this Section 6, the Company will
promptly give written notice thereof to the Holder in the form of a
certificate, certified and confirmed by the Board of Directors of the
Company, setting forth such adjustment or readjustment and showing in
reasonable detail the facts upon which such adjustment or readjustment is
based.
7. ADDITIONAL OBLIGATIONS. The Company (a) will not increase the par
value of any shares of stock receivable on the exercise of this Warrant above
the amount payable therefor on such exercise, (b) will at all times reserve and
keep available a number of its authorized shares of Stock, free from all
preemptive rights therein, which will be sufficient to permit the exercise of
this Warrant, and (c) shall take all such action as may be necessary or
appropriate in order that all shares of Stock as may be issued pursuant to the
exercise of this Warrant will, upon issuance, be duly and validly issued, fully
paid and non-assessable and free from all taxes, liens and charges with respect
to the issue thereof.
8. NOTICES OF RECORD DATE, ETC. In the event of:
(a) any taking by the Company of a record of the holders of any class
of
4
<PAGE>
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right,
or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company, or any transfer of
all or substantially all the assets of the Company to, or consolidation or
merger of the Company with, or into, any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
then and in each such event the Company will mail to the Holder a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, or (ii) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as of which the holders of record of Stock (or any shares
of stock or other securities at the time issuable upon the exercise of this
Warrant) shall be entitled to exchange their shares for securities or other
property deliverable on such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up. Such
notice shall be mailed at least 20 days prior to the date therein specified.
9. EXCHANGE OF WARRANTS. On surrender for exchange of this Warrant,
properly endorsed, to the Company, the Company at its expense will issue and
deliver to or on the order of the Holder a new Warrant of like tenor, in the
name of the Holder or as the Holder may direct, calling in the aggregate on the
face thereof for the number of shares of Stock called for on the face of the
Warrant so surrendered.
10. REPLACEMENT OF WARRANTS. On receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction of this Warrant, on delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of such Warrant, the Company at
its expense will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
11. TRANSFER. Subject to the transfer conditions referred to in the
legend endorsed hereon, this Warrant and all rights hereunder are transferable,
in whole or in part, without charge to the Holder upon surrender of this Warrant
with a properly executed assignment at the principal office of the Company.
Upon any partial transfer, the Company will at its expense issue and deliver to
the Holder a new Warrant of like tenor, in the name of the Holder, which shall
be exercisable for such number of shares of Stock which were not so transferred.
12. NO RIGHTS OR LIABILITY AS A STOCKHOLDER. This Warrant does not
entitle the
5
<PAGE>
Holder to any voting rights or other rights as a stockholder of the Company. No
provisions hereof, in the absence of affirmative action by the Holder to
purchase Stock, and no enumeration herein of the rights or privileges of the
Holder shall give rise to any liability of the Holder as a stockholder of the
Company.
13. DAMAGES. The Company recognizes and agrees that the Holder will not
have an adequate remedy if the Company fails to comply with the terms of this
Warrant and that damages will not be readily ascertainable, and the Company
expressly agrees that, in the event of such failure, it shall not oppose an
application by the Holder or any other person entitled to the benefits of this
Warrant requiring specific performance of any and all provisions hereof or
enjoining the Company from continuing to commit any such breach of the terms
hereof.
14. NOTICES. All notices referred to in this Warrant shall be in writing
and shall be delivered personally or by certified or registered mail, return
receipt requested, postage prepaid and will be deemed to have been given when so
delivered or mailed (i) to the Company, at its principal executive offices and
(ii) to the Holder, at the Holder's address as it appears in the records of the
Company (unless otherwise indicated by the Holder).
15. PAYMENT OF TAXES. All shares of Stock issued upon the exercise of
this Warrant shall be validly issued, fully paid and non-assessable.
16. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant is being delivered in the State of Illinois and shall
be governed by and construed and enforced in accordance with the internal laws
of the State of Illinois (without reference to any principles of the conflicts
of laws). The headings in this Warrant are for purposes of reference only, and
shall not limit or otherwise affect any of the terms hereof.
---------------------------
6
<PAGE>
FORM OF SUBSCRIPTION
To:
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, shares of Class A Common Stock of
Stericycle, Inc., and herewith makes payment of $1.50 per share therefor, and
requests that the certificates for such shares be issued in the name of, and
delivered to , whose address is
.
---------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
---------------------------------------------
---------------------------------------------
(Address)
Dated:
<PAGE>
SECOND AMENDMENT TO
AMENDED AND RESTATED REGISTRATION AGREEMENT
This Amendment is entered into as of July 1, 1996 by Stericycle, Inc., a
Delaware corporation (the "Company") and Baxter Healthcare Corporation,
Marquette Venture Partners, L.P., State Farm Mutual Automobile Insurance
Company and Jack W. Schuler (the "Investors").
PREAMBLE
A. The Company and the Investors are parties to an Amended and Restated
Registration Agreement dated October 19, 1994, as amended by a First Amendment
to Amended and Restated Registration Agreement, dated September 30, 1995 (as
amended, the "Registration Agreement").
B. The Investors hold more than a majority of the Registrable Shares (as
"Registrable Shares" is defined in Paragraph 8(e) of the Registration Agreement)
and accordingly have the power and authority under Paragraph 9(d) of the
Registration Agreement to consent to an amendment of the agreement.
C. The Company desires to amend the Registration Agreement as follows,
and the Investors are willing to consent to this amendment.
Now, therefore, the Company and the Investors agree as follows:
1. AMENDMENT OF PARAGRAPH 2(a). Paragraph 2(a) of the Registration
Agreement is amended to read as follows:
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register
any of its securities under the Securities Act (other than pursuant to an
initial public offering of its securities or pursuant to a Demand
Registration) and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), the
Company will give prompt written notice to all holders of Registrable
Securities of its intention to effect such a registration and will include
in such registration (subject to the priorities set forth in paragraphs
2(c) and 2(d) below) all Registrable Securities with respect to which the
Company has received written requests for inclusion therein within 20 days
after receipt of the Company's notice.
2. AMENDMENT OF PARAGRAPH 3(a). Paragraph 3(a) of the Registration
Agreement is amended to read as follows:
(a) Each holder of Registrable Securities agrees not to effect any
public sale or distribution of equity securities of the Company, or any
securities convertible into or exchangeable or exercisable for such
securities, during the 180-day period beginning on
<PAGE>
the effective date of any underwritten public offering of equity securities
of the Company (except as part of such underwritten registration), unless
the underwriters managing the registered public offering otherwise agree.
3. MISCELLANEOUS. As amended by this Agreement, the Registration
Agreement shall continue in full force and effect. This Agreement shall be
governed by the laws of the State of Delaware, without regard to choice-of-law
rules. This Amendment may be signed in any number of counterparts, any one of
which need not contain the signature of more than one party, but all of which
taken together shall constitute one and the same instrument.
In witness, the parties have signed this Amendment.
STERICYCLE, INC.
By: /s/ Mark C. Miller
------------------------------------
Mark C. Miller
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
BAXTER HEALTHCARE CORPORATION
By: /s/ John F. Gaither, Jr.
------------------------------------
Name: John F. Gaither, Jr.
---------------------------
Title: Corporate Vice President
---------------------------
MARQUETTE VENTURE PARTNERS, L.P.
By: Marquette Venture Associates, L.P.,
GENERAL PARTNER
By: Marquette Management Partners,
GENERAL PARTNER
By: /s/ Lloyd D. Ruth
------------------------------------
Name: Lloyd D. Ruth
---------------------------
Title: General Partner
---------------------------
[Signatures continue on page 3.]
-2-
<PAGE>
STATE FARM MUTUAL AUTOMOBILE INSURANCE
COMPANY
By: /s/ John S. Concklin
------------------------------------
Name: John S. Concklin
---------------------------
Title: Vice President-Fixed Income
---------------------------
Attest:
/s/ W. Thomas Gardner
--------------------------------
Name: W. Thomas Gardner
---------------------------
Title: Investment Officer
---------------------------
/s/ Jack W. Schuler
---------------------------------------
Jack W. Schuler
-3-
<PAGE>
STERICYCLE, INC.
AMENDED AND RESTATED
INCENTIVE COMPENSATION PLAN
The Stericycle, Inc. Incentive Compensation Plan, as amended, is amended
and restated to read as follows, effective as of the closing of the initial
public offering for which the Company has filed a registration statement on Form
S-1 (Registration No. 333-05665).
ARTICLE 1
PURPOSE
The purpose of this Plan is to permit the Company to grant stock options
and award restricted stock to selected officers, directors and employees of the
Company and its Subsidiaries and to other eligible persons, in order to reward
them for their efforts on the Company's behalf and to provide an additional
incentive to contribute to the Company's attainment of its performance
objectives.
ARTICLE 2
DEFINITIONS
BOARD means the Company's Board of Directors.
COMMON STOCK means the Company's Common Stock, $.01 par value.
CLOSING PRICE means the average of the closing bid and asked prices of a
share of Common Stock on the Nasdaq National Market.
COMPANY means Stericycle, Inc., a Delaware corporation.
DIRECTOR means a director of the Company.
ELIGIBLE PERSON means a person or entity eligible under Article 6 to be
granted an Option or awarded Restricted Stock.
EMPLOYEE means a full-time employee of the Company or any Subsidiary.
EXPIRATION DATE means (i) in the case of an Option which is or may become
exercisable in full at one time, the last day on which the Option may be
exercised, and (ii) in the case of an Installment, the last day on which the
Installment may be exercised.
GRANT DATE means the date on which an Option is granted.
<PAGE>
ISO is defined in Article 4.
INSTALLMENT means an installment of an Option which is or may become
exercisable in installments.
NON-EMPLOYEE DIRECTOR means a Director who (i) is not currently an Officer
or Employee, (ii) does not receive direct or indirect compensation from the
Company or any Subsidiary for services rendered as a consultant, or in any
capacity other than as a Director, in an amount for which disclosure would be
required under Item 404(a) of Regulation S-K of the Securities and Exchange
Commission, (iii) does not possess an interest in any other transaction for
which disclosure would be required under Item 404(a) of Regulation S-K and (iv)
is not engaged in a business relationship for which disclosure would be required
under Item 404(a) of Regulation S-K.
NSO is defined in Article 4.
OFFICER means (i) the Company's President and Chief Executive Officer, (ii)
any Vice President of the Company and (iii) any other person who is considered
an "officer" of the Company for purposes of Rule 16a-1(f) under the Securities
Exchange Act of 1934.
OFFICER OPTIONS COMMITTEE is defined in Paragraph 7.2.
OPTION means an option granted under this Plan to purchase shares of Common
Stock.
OPTION AGREEMENT is defined in Paragraph 8.6.
PLAN means this plan, as amended and restated and as it may be further
amended. The name of the Plan is the "Stericycle, Inc. Incentive Compensation
Plan."
PLAN ADMINISTRATOR means, as the context requires, (i) the Board or the
committee of the Board to which the Board has delegated its authority in
accordance with Paragraph 7.1 (in the context of the administration of this Plan
in respect of Eligible Persons other than Officers) or (ii) the Officer Options
Committee (in the context of the administration of this Plan in respect of
Officers).
OFFICER-EMPLOYEE means an Officer who is also an Employee.
RESTRICTED STOCK means shares of Common Stock awarded under the Plan.
RESTRICTED STOCK AGREEMENT is defined in Article 10.
10% STOCKHOLDER means an Officer or Employee who, at the time that he or
she is granted an ISO, owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company.
SUBSIDIARY means a corporation in which the Company owns stock possessing
at least 50% of the total combined voting power of all classes of stock.
<PAGE>
TERMINATION DATE means the date of termination of an Employee's or Officer-
Employee's employment by the Company or a Subsidiary.
UNDERLYING SHARES means the shares of Common Stock for which an Option or
Installment is or may become exercisable.
ARTICLE 3
EFFECTIVE DATE AND TERM OF PLAN
This Plan became effective on August 1, 1995, subject to approval by the
Company's stockholders, and has term of 10 years expiring on July 31, 2005. No
Option may be granted and no Restricted Stock may be awarded under this Plan
after its expiration.
ARTICLE 4
SHARES AVAILABLE UNDER THE PLAN
4.1 MAXIMUM NUMBER OF SHARES. The maximum combined total number of shares
of Common Stock for which Options may be granted and Restricted Stock may be
awarded under this Plan is 1,500,000 shares (subject to adjustment as provided
in Paragraph 11.1).
4.2 SHARES ADDED BACK. If an Option or Installment expires unexercised or
is surrendered prior to July 31, 2005, the number of Underlying Shares in
respect of the Option or Installment shall be added back to the number of shares
of Common Stock for which Options may be granted and shares of Restricted Stock
may be awarded under this Plan. Similarly, if the Company repurchases any
shares of Restricted Stock pursuant to a Restricted Stock Agreement (or
otherwise), the number of shares repurchased shall be added back to the number
of shares of Common Stock for which Options may be granted and shares of
Restricted Stock may be awarded under this Plan.
ARTICLE 5
TYPES OF OPTIONS
Two types of Options may be granted under this Plan: (i) incentive stock
options intended to satisfy the requirements of Section 422 of the Internal
Revenue Code of 1986 ("ISOs") and (ii) nonstatutory stock options ("NSOs").
ARTICLE 6
ELIGIBILITY
NSOs may be granted, and Restricted Stock may be awarded, to Employees,
Officers and Directors and to consultants to the Company (who also may be
Directors). ISOs may be granted only to Employees and to Officer-Employees.
<PAGE>
ARTICLE 7
ADMINISTRATION
7.1 BOARD. This Plan shall be administered by the Board in respect of all
Eligible Persons other than Officers. The Board may delegate its authority to a
standing committee of the Board or to a committee appointed by the Board for the
purpose consisting of at least two Directors.
7.2 OFFICER OPTIONS COMMITTEE. The Plan shall be administered by a
committee (the "Officer Options Committee") in respect of Officers. The Officer
Options Committee shall be or consist of (i) the Compensation Committee of the
Board, or (ii) if any member of the Compensation Committee is not a Non-Employee
Director, the members of the Compensation Committee who are Non-Employee
Directors, or (iii) if there are not at least two members of the Compensation
Committee who are Non-Employee Directors, the full Board.
7.3 POWERS. The Board shall have sole authority to grant Options and to
award Restricted Stock to Eligible Persons other than Officers, and the Officers
Option Committee shall have sole authority to grant Options and to award
Restricted Stock to Officers. Within the scope of their respective authority
and subject to the express provisions of this Plan, the Board and the Officer
Options Committee may (i) select the Eligible Persons to whom Options are
granted or Restricted Stock is awarded, (ii) designate an Option as an ISO or
NSO, (iii) determine the number of shares of Common Stock for which an Option is
granted or Restricted Stock is awarded and (iv) determine the other terms,
conditions, restrictions and limitations applicable to an Option or an award of
Restricted Stock.
7.4 INTERPRETATION. Within the scope of their respective authority and
subject to the express provisions of this Plan, the Board and the Officer
Options Committee may interpret this Plan, adopt and revise policies and
procedures to administer this Plan, and make all determinations required for
this Plan's administration. The actions of the Board and the Officer Options
Committee on matters within the scope of their respective authority shall be
final and binding.
ARTICLE 8
STOCK OPTIONS
8.1 EXERCISE PRICE. The Plan Administrator shall determine the exercise
price of each Option. The exercise price per share may not be less than the
Closing Price on the Grant Date of the Option (or on the last trading day
preceding the Grant Date if it is not a trading day).
8.2 TERM. The Plan Administrator shall determine (i) whether each Option
shall be exercisable in full at one time or in Installments at different times
and (ii) the time or times at which the Option or Installments shall become and
remain exercisable. No Option or Installment may have an Expiration Date more
than 10 years from the Grant Date. The Plan Administrator may accelerate the
exercisability of any Option or Installment at any time.
8.3 TERMINATION OF EMPLOYMENT. Any Option or Installment held by an
Employee or
<PAGE>
Officer-Employee which is unexercisable as of his or her Termination Date shall
expire on the Termination Date. Any Option or Installment held by an Employee
or Officer-Employee which is exercisable as of his or her Termination Date shall
expire on the Termination Date unless the expiration date is extended by the
Plan Administrator. The Plan Administrator may extend the expiration of an
exercisable NSO (or Installment of a NSO) to any date ending on or before the
applicable Expiration Date. The Plan Administrator may extend the expiration of
an exercisable ISO (or Installment of an ISO) to the earlier of (i) a date no
later than 90 days after the Termination Date or (ii) the applicable Expiration
Date, unless the Employee's or Officer-Employee's termination occurred as a
result of his or her death. In that case, the Plan Administrator may extend the
expiration to the earlier of (i) a date no later than the first anniversary of
the Employee's or Officer-Employee's death or (ii) the applicable Expiration
Date.
8.4 TRANSFERABILITY. No Option or Installment may be transferred,
assigned or pledged (whether by operation of law or otherwise), except as
provided by will or the applicable laws of intestacy, and no Option shall be
subject to execution, attachment or similar process. An Option or Installment
may be exercised only by the person to whom it was granted, except in the case
of his or her death, when it may be exercised by the person or persons to whom
it passes by will or inheritance.
8.5 ISO LIMITATIONS. Notwithstanding anything to the contrary in
Paragraphs 8.1 and 8.2: (i) the exercise price per share of an ISO granted to a
10% Stockholder shall not be less than 110% of the Closing Price on the Grant
Date (or on the last trading day preceding the Grant Date if it is not a trading
day); (ii) no ISO granted to a 10% Stockholder may have an Expiration Date more
than five years from the Grant Date; and (iii) the aggregate fair market value
(determined in respect of each ISO on the basis of the Closing Price on the
Grant Date, or on the last trading day preceding the Grant Date if it was not a
trading day) of the Underlying Shares of all ISOs which become exercisable by an
individual for the first time in any calendar year shall not exceed $100,000.
8.6 OPTION AGREEMENTS. Each Option shall be evidenced by a written
agreement (an "Option Agreement"), in a form approved by the Plan Administrator,
entered into by the Company and the person to whom the Option is granted. Each
Option Agreement shall contain the terms, conditions, restrictions and
limitations applicable to the Option and any other provisions that the Plan
Administrator considers advisable to include.
ARTICLE 9
EXERCISE OF OPTIONS
9.1 MANNER OF EXERCISE. An exercisable Option or Installment may be
exercised in full or in part (but only in respect of a whole number of
Underlying Shares) by (i) written notice to the Plan Administrator (or its
designee) stating the number of Underlying Shares in respect of which the Option
or Installment is being exercised and (ii) full payment of the exercise price of
those shares.
9.2 PAYMENT OF EXERCISE PRICE. Payment of the exercise price of an Option
or Installment
<PAGE>
shall be made by certified or bank cashier's check or, if permitted by the Plan
Administrator (either in the applicable Option Agreement or at the time of
exercise): (i) by delivering shares of Common Stock having a fair market value
on the date of exercise equal to the exercise price; (ii) by directing the
Company to withhold, from the Underlying Shares otherwise issuable upon exercise
of the Option or Installment, Underlying Shares having a fair market value on
the date of exercise equal to the exercise price; (iii) by surrendering
exercisable Options or Installments having a fair market value on the date of
exercise equal to the exercise price (measuring the fair market value of the
Options or Installments surrendered by the excess of the aggregate fair market
value on the date of exercise of the Underlying Shares over the aggregate
exercise price); (iv) by any combination of the preceding methods of payment; or
(v) by any other method of payment authorized by the Plan Administrator. For
purposes of this Paragraph and Paragraph 9.3, "fair market value" shall be
determined by the Closing Price on the Nasdaq National Market on the date in
question (or on the last trading day preceding the date in question if it is not
a trading day).
9.3 WITHHOLDING. Each person exercising a NSO or an Installment of a NSO
shall remit to the Company an amount sufficient to satisfy its federal, state
and local withholding tax obligation in connection with the exercise. Payment
shall be made by certified or bank cashier's check or, if permitted by the Plan
Administrator (either in the applicable Option Agreement or at the time of
exercise): (i) by delivering shares of Common Stock having a fair market value
on the date of exercise equal to the withholding obligation; (ii) by directing
the Company to withhold, from the Underlying Shares otherwise issuable upon
exercise of the Option or Installment, Underlying Shares having a fair market
value on the date of exercise equal to the withholding obligation; (iii) by any
combination of the preceding methods of payment; or (iv) by any other method of
payment authorized by the Plan Administrator.
ARTICLE 10
RESTRICTED STOCK AGREEMENTS
Each Eligible Person to whom Restricted Stock is awarded shall enter into a
written agreement with the Company (a "Restricted Stock Agreement"), in a form
approved by the Plan Administrator. Each Restricted Stock Agreement shall
contain the terms, conditions, restrictions and limitations applicable to the
award of Restricted Stock and any other provisions that the Plan Administrator
considers advisable to include.
ARTICLE 11
MISCELLANEOUS PROVISIONS
11.1 CAPITALIZATION ADJUSTMENTS. The aggregate number of shares of Common
Stock for which Options may be granted and Restricted Stock may be awarded under
this Plan, the aggregate number of Underlying Shares in respect of each
outstanding Option, and the exercise price of each outstanding Option may be
adjusted by the Board as it considers appropriate in the event of changes in the
number of outstanding shares of Common Stock by reason of stock dividends, stock
splits, recapitalizations, reorganizations and the like. Adjustments under this
Paragraph 11.1 shall be made in the Board's discretion, and its decisions shall
be final and
<PAGE>
binding.
11.2 AMENDMENT AND TERMINATION. The Board may amend, suspend or terminate
this Plan at any time. The Company's stockholders shall be required to approve
any amendment which would increase the number of shares of Common Stock for
which Incentive Stock Options may be granted (other than an amendment authorized
under Paragraph 11.1). If this Plan is terminated, the provisions of this Plan
shall continue to apply to Options granted or Restricted Stock awarded prior to
termination, and no amendment, suspension or termination of the Plan shall
adversely affect the rights of the holder of any outstanding Option or any
shares of Restricted Stock without his or her consent.
11.3 NO RIGHT TO EMPLOYMENT. Nothing in this Plan or in any Option
Agreement or Restricted Stock Agreement shall confer on any person the right to
continue in the employ of the Company or any Subsidiary or limit the right of
the Company or Subsidiary to terminate his or her employment.
11.4 NOTICES. Notices required or permitted under this Plan shall be
considered to have been duly given if sent by certified or registered mail
addressed to the Plan Administrator at the Company's principal office or to any
other person at his or her address as it appears on the Company's payroll or
other records.
11.5 SEVERABILITY. If any provision of this Plan is held illegal or
invalid for any reason, the illegality or invalidity shall not affect the
remaining provisions, and the Plan shall be construed and administered as if the
illegal or invalid provision had not been included.
11.6 GOVERNING LAW. This Plan and all Option Agreements and Restricted
Stock Agreements shall be governed in accordance with the laws of the State of
Illinois.
<PAGE>
STERICYCLE, INC.
DIRECTORS STOCK OPTION PLAN
ARTICLE 1
PURPOSE
The purpose of this Plan is to permit the Company to grant stock options to
its outside directors to reward them for their efforts on the Company's behalf
and to provide an additional incentive to contribute to the attainment of the
Company's long-term plans and objectives.
ARTICLE 2
DEFINITIONS
ANNUAL MEETING means the annual meeting of the Company's stockholders.
BOARD means the Company's Board of Directors. If the Board delegates its
authority to administer the Plan to a committee of the Board in accordance with
Article 5, references to the "Board" shall be construed as references to the
committee.
CLOSING PRICE means the average of the closing bid and asked prices of a
share of Common Stock on the Nasdaq National Market.
COMMON STOCK means the Company's Common Stock, $.01 par value.
COMPANY means Stericycle, Inc., a Delaware corporation.
DIRECTOR means a director of the Company.
EFFECTIVE DATE means (i) the date of closing of the initial public offering
for which the Company has filed a registration statement on Form S-1
(Registration No. 333-05665), if this Plan previously has been approved by the
Company's stockholders or (ii) the date that this Plan is approved by the
Company's stockholders, if the closing of the Company's initial public offering
previously has occurred.
EXPIRATION DATE is defined in Paragraph 6.3.
FUNDAMENTAL CHANGE means (i) a sale or transfer of substantially all of the
assets of the Company and its subsidiaries on a consolidated basis or (ii) any
merger or consolidation to which the Company is a party other than a merger in
which there is no change in control of the Company.
GRANT DATE means the date on which an Option is granted.
<PAGE>
OFFICER means (i) the Company's President and Chief Executive Officer, (ii)
any Vice President of the Company and (iii) any other person who is considered
an "officer" of the Company for purposes of Rule 16a-1(f) under the Securities
Exchange Act of 1934.
OPTION means an option granted under this Plan to purchase shares of Common
Stock.
OPTION AGREEMENT is defined in Paragraph 6.6.
OUTSIDE DIRECTOR means a Director who is neither an Officer nor an employee
of the Company or of any corporation in which the Company owns stock possessing
at least 50% of the total combined voting power of all classes of stock.
PLAN means this stock option plan, as it may be amended. The name of this
Plan is the "Stericycle, Inc. Directors Stock Option Plan."
UNDERLYING SHARES means the shares of Common Stock for which an Option is
or may become exercisable.
ARTICLE 3
EFFECTIVE DATE AND TERM OF PLAN
This Plan shall become effective on the Effective Date and shall have a
term of six years expiring on the sixth anniversary of the Effective Date. No
Option may be granted under this Plan after its expiration.
ARTICLE 4
TYPE AND NUMBER OF OPTIONS
4.1 TYPE OF OPTIONS. The type of Options granted under this Plan are
nonstatutory stock options.
4.2 MAXIMUM NUMBER OF OPTIONS. The maximum number of shares of Common
Stock for which Options may be granted is 285,000 shares (subject to adjustment
as provided in Paragraph 8.1). If an Option expires unexercised or is
surrendered prior to the Plan's expiration, the number of Underlying Shares in
respect of the Option shall be added back to the number of shares of Common
Stock for which Options may be granted under the Plan. The Underlying Shares to
be delivered upon the exercise of an Option may be either authorized but
unissued shares or issued shares reacquired by the Company (or any combination
of the two).
ARTICLE 5
ADMINISTRATION
This Plan shall be administered by the Board. Subject to the express
provisions of the
<PAGE>
Plan, the Board may interpret the Plan, adopt and revise policies and procedures
to administer the Plan and make all determinations required for the Plan's
administration. The actions of the Board shall be final and binding. Except
for the Board's authority under Paragraph 6.2 to accelerate vesting in the event
of an anticipated Fundamental Change and the Board's authority under Paragraph
8.1 to make capitalization adjustments, the Board may delegate its authority to
a committee appointed by the Board consisting of at least two Directors.
ARTICLE 6
STOCK OPTIONS
6.1 OPTION GRANTS. The Company shall grant Options to Outside Directors
as follows:
(a) on the Effective Date, the Company shall grant each incumbent Outside
Director an Option for a number of shares of Common Stock determined
by multiplying 7,000 shares by a fraction, the numerator of which is
$12.00 and the denominator of which is the Closing Price on the
Effective Date, subject to a minimum grant of 4,500 shares and a
maximum grant of 9,500 shares;
(b) on the date of the Annual Meeting each year, the Company shall grant
each incumbent Outside Director who is re-elected as a Director at the
Annual Meeting an Option for a number of shares of Common Stock
determined by multiplying 7,000 shares by a fraction, the numerator of
which is $12.00 and the denominator of which is the Closing Price on
the date of the Annual Meeting (or on the last trading day preceding
the Annual Meeting if it is not a trading day), subject to a minimum
grant of 4,500 shares and a maximum grant of 9,500 shares;
(c) on the date of the Annual Meeting each year, the Company shall grant
each new Outside Director who is elected as a Director at the Annual
Meeting an Option for a number of shares of Common Stock determined by
multiplying 21,000 shares by a fraction, the numerator of which is
$12.00 and the denominator of which is the Closing Price on the date
of the Annual Meeting (or on the last trading day preceding the Annual
Meeting if it is not a trading day), subject to a minimum grant of
13,500 shares and a maximum grant of 28,500 shares; and
(d) on the date of election of each new Outside Director who is elected as
a Director other than at an Annual Meeting, the Company shall grant
the new Outside Director an Option for a number of shares equal to
three times the number of shares for which each incumbent Outside
Director was granted an Option on the date of the Annual Meeting
preceding the election of the new Outside Director (or on the
Effective Date, if no Annual Meeting was held after the Effective Date
and prior to the election of the new Outside Director).
The exercise price of each Option shall be the Closing Price on the Grant Date
of the Option (or the last trading day preceding the Grant Date if it is not
trading day)..
6.2 TERM. Each Option shall have a six-year term expiring on the sixth
anniversary of
<PAGE>
the date that it was granted (the "Expiration Date"), subject to early
expiration as provided in Paragraph 6.3, and may be exercised in whole or in
part at any time prior to its Expiration Date to the extent that it is vested.
Each Option shall become vested in 16 equal quarterly installments beginning on
the first day of the first January, April, July or October following the date
that it was granted. An Option shall not continue to vest if the holder of the
Option for any reason ceases to serve as an Outside Director. In the event that
the Board determines that a Fundamental Change is likely to occur, the Board may
accelerate the vesting of all outstanding Options held by incumbent Outside
Directors as the Board considers appropriate in its discretion.
6.3 EARLY EXPIRATION. If the holder of an Option ceases to serve as an
Outside Director for any reason (for example, his or her resignation, death,
disability or removal from office or the expiration of his or her term of office
without re-election), the vested portion, if any, of the Option shall expire 90
days after the date that the holder ceases to serve as an Outside Director (but
in no event later than the Option's Expiration Date), unless the holder ceases
to serve an Outside Director as a result of his or her death or disability. In
either of these cases, the vested portion of the Option shall expire on the
first anniversary of the date that the holder ceases to serve as an Outside
Director (but in no event later than the Option's Expiration Date). The
portion, if any, of the Option which was not vested as of the date that the
holder ceases to serve as an Outsider Director shall expire as of that date.
6.4 TRANSFERABILITY. No Option may be transferred, assigned or pledged
(whether by operation of law or otherwise), except as provided by will or the
applicable intestacy laws, and no Option shall be subject to execution,
attachment or similar process. An Option or Installment may be exercised only
by Outside Director to whom it was granted, except in the case of his or her
death, when it may be exercised by the person or persons to whom it passes by
will or inheritance.
6.5 OPTION AGREEMENTS. Each Option shall be evidenced by a written
agreement (an "Option Agreement"), in a form approved by the Board, entered into
by the Company and the Outside Director to whom the Option is granted.
ARTICLE 7
EXERCISE OF OPTIONS
7.1 MANNER OF EXERCISE. The vested portion of an Option may be exercised
in full or in part (but only in respect of a whole number of shares) by (i)
written notice to the Board (or its designee) stating the number of shares of
Common Stock in respect of which the Option is being exercised and (ii) full
payment of the exercise price of those shares.
7.2 PAYMENT OF EXERCISE PRICE. Payment of the exercise price of the
vested portion of an Option shall be made by certified or bank cashier's check
or, if permitted by the Board (either in the applicable Option Agreement or at
the time of exercise): (i) by delivering shares of Common Stock having a fair
market value on the date of exercise equal to the exercise price; (ii) by
directing the Company to withhold, from the shares of Common Stock otherwise
issuable upon exercise of the Option, shares of Common Stock having a fair
market value on the date of exercise equal to the exercise price; (iii) by
surrendering exercisable Options which have a
<PAGE>
fair market value on the date of exercise equal to the exercise price (measuring
the fair market value of the Options surrendered by the excess of (A) the
aggregate fair market value on the date of exercise of the shares of Common
Stock issuable upon exercise of the Option over (B) the aggregate exercise
price); (iv) by any combination of the preceding methods of payment; or (v) by
any other method of payment authorized by the Board. For purposes of this
Paragraph and Paragraph 7.3), "fair market value" shall be determined by the
closing bid and asked prices of a share of Common Stock on the Nasdaq National
Market on the date in question (or on the last trading day preceding the date in
question if it is not a trading day).
7.3 WITHHOLDING. Each Outside Director exercising the vested portion of
an Option shall remit to the Company an amount sufficient to satisfy the
Company's federal, state and local withholding tax obligation in connection with
the exercise. Payment shall be made by certified or bank cashier's check or, if
permitted by the Board (either in the applicable Option Agreement or at the time
of exercise), by either one or both of the following methods: (i) by delivering
shares of Common Stock having a fair market value on the date of exercise equal
to the Company's withholding obligation; or (ii) by directing the Company to
withhold, from the shares of Common Stock otherwise issuable upon exercise of
the Option, shares of Common Stock having a fair market value on the date of
exercise equal to the Company's withholding obligation.
ARTICLE 8
MISCELLANEOUS PROVISIONS
8.1 CAPITALIZATION ADJUSTMENTS. The aggregate number of shares of Common
Stock for which Options may be granted under the Plan, the aggregate number of
Underlying Shares in respect of each outstanding Option, and the exercise price
of each such Option may be adjusted by the Board as it considers appropriate in
the event of changes in the number of outstanding shares of Common Stock by
reason of stock dividends, stock splits, recapitalizations, reorganizations and
the like. Adjustments under this Paragraph 8.1 shall be made in the Board's
discretion, and its decisions shall be final and binding.
8.2 AMENDMENT AND TERMINATION. The Board may amend, suspend or terminate
the Plan at any time; but except to comply with changes in the Internal Revenue
Code of 1986 and the related regulations, the Board may not amend the Plan more
once every six months to change: (i) the number of shares of Common Stock for
which Options may be granted under the Plan; (ii) the benefits under the Plan;
or (iii) the eligibility requirements of the Plan. The Company's stockholders
shall be required to approve any such amendment (other than an amendment
authorized under Paragraph 8.1) that would materially increase the number of
shares, materially increase the benefits or materially change the eligibility
requirements. If the Plan is terminated, the provisions of the Plan shall
continue to apply to Options granted prior to termination, and no amendment,
suspension or termination of the Plan shall adversely affect the rights of an
Outside Director in respect of any Option held without his or her consent.
8.3 COMPLIANCE WITH SECTION 16(b). The Plan shall be interpreted and
administered in a manner that satisfies the applicable requirements of Rule 16b-
3 under the Securities Exchange Act so that Outside Directors will be entitled
to the benefits of Rule 16b-3.
<PAGE>
8.4 NO RIGHT TO NOMINATION. Nothing in the Plan or in any Option
Agreement shall confer on any Outside Director the right to continue to be
nominated for election as a Director.
8.5 NOTICES. Notices required or permitted under the Plan shall be
considered to have been duly given if sent by certified or registered mail
addressed to the Board at the Company's principal office or to any Outside
Director at his or her address as it appears on the Company's records.
8.6 SEVERABILITY. If any provision of the Plan is held illegal or invalid
for any reason, the illegality or invalidity shall not affect the remaining
provisions, and the Plan shall be construed and administered as if the illegal
or invalid provision had not been included.
8.7 GOVERNING LAW. The Plan and all Option Agreements shall be governed
in accordance with the laws of the State of Illinois.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Exhibit 11 - Statement Re Computation of Per Share Earnings Dec. 31, Dec. 31, Dec. 31, Mar. 31 Mar. 31
1993 1994 1995 1995 1996
Average shares outstanding 369,380 369,756 5,582,385 369,756 5,616,651
Net effect of dilutive stock options and warrants based on
the treasury stock method using the mid point of the offering 1,380,051 1,380,051 1,380,052 1,380,051 1,380,051
Other 98,001 98,001 98,001 98,001 98,001
--------------------------------------------------------------
1,847,432 1,847,808 7,060,438 1,847,808 7,094,703
--------------------------------------------------------------
--------------------------------------------------------------
Net loss applicable to common stock ($9,761) ($10,293) ($4,544) ($3,164) ($347)
--------------------------------------------------------------
--------------------------------------------------------------
Net loss per common share ($5.28) ($5.57) ($0.64) ($1.71) ($0.05)
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 20, 1996, except for the first paragraph of
Note 7, as to which the date is in the Registration Statement on
Form S-1 (No. 333-05665) for the registration of 3,450,000 shares of common
stock.
Chicago, Illinois
July 26, 1996
The foregoing consent is in the form that will be signed when the reverse stock
split, decrease in authorized common stock and redesignation of the Class A and
Class B common stock as a like number of shares of common stock all become
effective prior to completion of an initial public offering as described in the
first paragraph of Note 7 to the financial statements.
ERNST & YOUNG LLP
