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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
COMMISSION FILE NUMBER 0-21229
STERICYCLE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3640402
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1419 LAKE COOK ROAD, SUITE 410, DEERFIELD, ILLINOIS 60015
(Address of principal executive offices)
(847) 945-6550
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
[ x ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
On March 17, 1998, the aggregate market value of the Registrant's voting
stock held by non-affiliates of the Registrant was $123,469,035.
On March 17, 1998, there were 10,481,984 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Items 10, 11, 12 and 13 of Part III of this
Report is incorporated by reference from the Registrant's definitive Proxy
Statement for the 1998 Annual Meeting of Stockholders to be held on April 28,
1998.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Stericycle, Inc. (the "Company") is a multi-regional integrated company
employing its 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.
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 seven geographic service areas: (i)
California and Arizona; (ii) Oregon, Washington, Idaho and British Columbia;
(iii) Illinois, Indiana, Iowa, Minnesota and Wisconsin; (iv) Ohio, Michigan,
Kentucky and Tennessee; (v) Texas; (vi) Connecticut, Massachusetts, Maine,
New Hampshire, Rhode Island and Vermont; and (vii) Delaware, Maryland, New
Jersey, New York, North Carolina, Pennsylvania, South Carolina, Virginia,
West Virginia and the District of Columbia. As of December 31, 1997, the
Company served approximately 40,000 customers, consisting of two principal
types of generators of regulated medical waste. Approximately 50-60% of the
Company's 1997 revenues were derived from hospitals, blood banks and
pharmaceutical manufacturers ("Core" generators), and the balance of its
revenues were derived from long-term and subacute care facilities, outpatient
clinics, medical and dental offices, industrial clinics, dialysis centers,
laboratories, biotechnology and biomedical companies, veterinary offices,
municipal health departments, ambulance, fire and police departments,
correctional facilities, schools, park districts and funeral homes
("Alternate Care" generators).
Regulated medical waste is generally defined as any waste that can cause
an infectious disease or that can reasonably be suspected of harboring human
pathogenic organisms. Regulated medical waste includes single-use disposable
items such as needles, syringes, gloves and laboratory, surgical, emergency
room and other supplies which have been in contact with blood or bodily
fluids; cultures and stocks of infectious agents; and blood and blood
products. An independent study published in 1995 estimated that the size of
the regulated medical waste management market in the United States in 1997
was in excess of $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.
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TRENDS IN THE HEALTH CARE AND MEDICAL WASTE INDUSTRIES
The Company believes that the demand for its services will grow as a
consequence of certain trends in the health care and regulated medical waste
industries.
INCREASED AWARENESS OF REGULATED MEDICAL WASTE. The handling and
disposal of the large quantities of regulated medical waste generated by the
health care industry has attracted increased public awareness and regulatory
attention. The proper management of potentially infectious medical waste
gained national attention in 1988 when disposable syringes and other medical
waste washed ashore on New Jersey and New York coastlines.
These events raised concerns about the potential transmission of
hepatitis B, HIV and other infectious diseases. The Medical Waste Tracking
Act of 1988 ("MWTA") was enacted in response to this problem and established
a multi-year demonstration program for the proper tracking and treatment of
medical waste. Many states have enacted legislation modeled on MWTA's
requirements.
In addition, the Occupational Health and Safety Administration ("OSHA")
has issued regulations concerning employee exposure to bloodborne pathogens
and other potentially infectious material that require, among other things,
special procedures for the handling and disposal of regulated medical waste
and annual training of all personnel who are potentially exposed to blood and
other bodily fluids. The Company believes that the scope of these regulations
will help to expand the market for the Company's services beyond traditional
providers of health care.
As a consequence of these legislative and regulatory initiatives, the
Company believes that health care providers and other generators of regulated
medical waste have become increasingly concerned about the handling,
treatment and disposal of regulated medical waste. These concerns are
reflected by their desire: (i) to reduce on-site handling of regulated
medical waste in order to minimize employee contact; (ii) to assure safe
transportation of regulated medical waste to treatment sites; (iii) to assure
destruction of potentially infectious human pathogens; (iv) to render the
treated regulated medical waste non-recognizable in order to reduce liability
and to increase disposal options; (v) to minimize the impact of the treatment
process on the environment and the volume of solid waste deposited in
landfills; and (vi) to participate in recycling programs where possible and
when cost-effective.
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,
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education on regulated medical waste reduction techniques and assistance with
compliance and recordkeeping. The Company believes that growth in the number
of Alternate Care generators will generate growth in the overall regulated
medical waste market and may provide growth opportunities for the Company.
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 in response to regulations
which the U.S. Environmental Protection Agency ("EPA") adopted in
September 1997 limiting the discharge into the atmosphere of nine pollutants
released by hospital waste incineration. The EPA estimates that of the
approximately 1,100 small, 690 medium and 460 large hospital medical waste
incinerators currently in operation, approximately 93-100% of the small
incinerators, 60-95% of the medium incinerators and as many as 35% of the
large incinerators will be closed as hospitals seek alternative, less
expensive methods of regulated medical waste disposal rather than incur the
cost of installing the necessary air pollution control systems to comply with
EPA regulations. The Company agrees with the thrust of the EPA's estimates
and expects to benefit from this anticipated movement by hospitals to
alternative methods of regulated medical waste disposal.
INDUSTRY CONSOLIDATION. Although the regulated medical waste management
industry remains fragmented, the number of competitors is rapidly decreasing
as a result of industry consolidation. National attention on regulated
medical waste in the late 1980s led to rapid growth in the industry and a
highly-fragmented competitive structure. Entrants into the industry included
several large municipal waste companies and many independent haulers and
incinerator operators. Since 1990, however, government clean air regulations
and public concern about the environment have increased the costs and public
opposition to both on- and off-site regulated medical waste incineration. As
a result, the Company believes that independent haulers and incinerator
operators have encountered increasing difficulty competing with integrated
companies like the Company, which typically have their own low-cost treatment
plants located within the geographic areas that they serve. The Company
believes that many of these independent haulers are withdrawing from the
regulated medical waste industry. As a result of industry consolidation, the
Company believes that it has increasing opportunities to acquire medical
waste management businesses.
GROWTH STRATEGY
The Company is currently the second-largest provider of regulated
medical waste management services in the United States. The Company's goals
are to accelerate its revenue growth through penetration of existing
geographic service areas and expansion into new areas and to increase profits
through additional revenues and the more efficient use of its existing
infrastructure.
INCREASED PENETRATION OF EXISTING SERVICE AREAS. All of the Company's
treatment facilities are currently operating below capacity. Due to the high
fixed costs associated with the collection and treatment of regulated medical
waste, the Company's operating margins increase with incremental volume
gains. Accordingly, the Company is currently implementing a number of
programs to increase customer density, particularly among Alternate Care
generators, andto improve 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, with a predominant
focus on Alternate Care generators. The Company intends to acquire competitors
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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 60% 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
70% 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 investigating expansion into international markets.
In 1996, the Company entered into an agreement with a Brazilian company to
assist in exploring opportunities for the commercialization of the Company's
medical waste management technology in certain territories in South America.
In February, 1998, the Company announced the formation of a Mexican joint
venture company, Medam S.A. de C.V. ("Medam"), to utilize the Company's ETD
technology to treat medical and infectious waste in the Mexico City market.
Medam, which was formed with an established Mexican company and an American
firm of international consulting engineers, has obtained the appropriate
permits to construct a treatment facility with a 100-ton per day capacity.
This facility is the largest permitted for construction to date in Mexico and
is expected to be completed in 1998.
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.
Prior to 1997, the Company completed nine acquisitions: Therm-Tec
Destruction Service of Oregon, Inc. in 1993; Recovery Corporation of Illinois
and Safeway Disposal Systems, Inc. in 1994;, Safetech Health Care, Inc. in
1995; and Bio-Med of Oregon, Inc., WMI Medical Services of New England, Inc.,
Doctors Environmental Control, Inc., Sharps Incinerator of Fort, Inc., and a
majority of the regulated medical waste management business of Waste
Management, Inc. ("WMI"), all in 1996.
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During 1997, the Company completed eight acquisitions. In May, the
Company announced the acquisition of Environmental Control Co., Inc., one of
the leading medical waste companies in the New York City market. In June, the
Company purchased the customer list and certain other assets of WMI's
regulated medical waste business in Wisconsin, and in July, the Company
announced the purchase of the customer lists and certain other assets of
Regional Carting, Inc. and Rumpke Container Service, Inc. in New Jersey and
Ohio, respectively. In August 1997, the Company completed the purchase of the
customer list and certain other assets of Envirotech Enterprises, Inc. in
Tucson, Arizona, and in November, the Company completed the acquisition of
substantially all of the assets of Cal-Va, Inc., which operated in northern
Virginia and Washington, D.C., and selected Alternate Care contracts of
Phoenix Services, Inc., which operated in the Baltimore, Maryland
metropolitan area. In December, the Company bought certain of the assets of
the regulated medical waste business in Arizona of Browning-Ferris
Industries, Inc. ("BFI") and sold BFI certain of the assets of the Company's
regulated medical waste business in Colorado and Utah. The purchase price for
these acquisitions was paid by a combination of cash, promissory notes,
shares of the Company's Common Stock and assumption of liabilities.
The Company's senior management is actively involved in identifying
acquisition candidates and consummating acquisitions. In determining whether
to proceed with a business acquisition, the Company evaluates a number of
factors including: (i) the composition and size of the seller's customer
base; (ii) the efficiencies that may be obtained when the acquisition is
integrated with one or more of the Company's existing operations; (iii) the
potential for enhancing or expanding the Company's geographic service area
and allowing the Company to make other acquisitions in the same service area;
(iv) the seller's historical and projected financial results; (v) the
purchase price negotiated with the seller and the Company's expected internal
rate of return; (vi) the experience, reputation and personality of the
seller's management; (vii) the seller's customer service reputation and
relationships with the communities that it serves; (viii) if the acquisition
involves the assumption of liabilities, the extent and nature of the seller's
liabilities, including environmental liabilities; (viii) whether the
acquisition gives the Company any strategic advantages over its competition;
and (ix) the effect of the proposed acquisition on the Company's earnings per
share.
The Company has established a procedure for efficiently integrating
newly-acquired companies into its business while minimizing disruption of the
continuing operations of both the Company and the acquired business. Once a
medical waste management business is acquired, the Company makes plans to
implement programs designed to improve customer service, sales, marketing,
routing, equipment utilization, employee productivity, operating efficiencies
and overall profitability.
The Company anticipates that its future acquisitions of other regulated
medical waste management businesses will be made by the payment of cash, the
issuance of debt or equity securities or a combination of these methods. The
Company believes that its acquisition strategy will be enhanced by the fact
that the Company's Common Stock is publicly-traded. Historically, the
Company's acquisition strategy has been to acquire selected assets of
regulated medical waste management businesses, consisting principally of
customer lists, customer contracts, vehicles and related supplies and
equipment. Some of the Company's acquisitions have also involved the
Company's assumption of certain liabilities of the seller.
TREATMENT TECHNOLOGIES
The three most common off-site commercial technologies for treating
regulated medical waste are incineration, autoclaving and the Company's
proprietary ETD treatment process. Alternative technologies and methods,
which have not gained wide commercial acceptance, include chemical treatment,
microwaving and certain specialized or experimental technologies, including
the development and marketing of reusable or degradable medical products
designed to reduce the generation of regulated medical waste. The Company
believes that the ETD treatment process has certain advantages over
incineration and autoclaving.
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PRINCIPAL TREATMENT TECHNOLOGIES
INCINERATION. The Company estimates that incineration accounts for
approximately 65-70% 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. The Company estimates that autoclaving accounts for
approximately 20-25% 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 estimates that its patented ETD
treatment process accounts for approximately 8% of permitted off-site
capacity to treat regulated medical waste. ETD also includes a proprietary
system for grinding regulated medical waste. ETD uses an oscillating energy
field of low-frequency radio waves to heat regulated medical waste to
temperatures that destroy pathogens such as viruses, vegetative bacteria,
fungi and yeast without melting the plastic content of the waste. ETD is most
effective on materials with low electrical conductivity that contain polar
molecules, including all human pathogens. Polar molecules are molecules that
have an asymmetric electronic structure and tend to align themselves with an
imposed electric field. When the polarity of the applied field changes
rapidly, the molecules try to keep pace with the alternating field direction,
thus vibrating and in the process dissipating energy as heat. The Company
believes that the electric field created by ETD produces high molecular
agitation and thus rapidly creates high temperatures. All of the molecules
exposed to the field are agitated simultaneously, and accordingly, heat is
produced evenly throughout the waste instead of being imposed from the
surface as in conventional heating. This phenomenon, called volumetric
heating, transfers energy directly to the waste, resulting in uniform heating
throughout the entire waste material and eliminating the inherent
inefficiency of transferring heat first from an external source to the
surface of the waste and then from the surface to the interior of the waste
material. ETD employs low-frequency radio waves because they can penetrate
deeper than high-frequency waves, such as microwaves, which can penetrate
regulated medical waste of a typical density only to a depth of approximately
five inches. ETD uses specific frequencies that match the physical properties
of regulated medical waste generally enabling the ETD treatment process to
kill pathogens while maintaining the temperature of the non-pathogenic waste
at temperatures as low as 90DEG. C. Although ETD is effective in destroying
pathogens present in anatomical waste, the Company does not currently treat
anatomical waste through the ETD process.
ADVANTAGES OF THE COMPANY'S ETD TREATMENT PROCESS
The Company believes that its proprietary ETD treatment process provides
certain advantages over incineration and certain advantages over autoclaving.
PERMITTING. It is difficult and time-consuming to obtain the permits
necessary to construct and operate any regulated medical waste treatment
facility, regardless of the treatment technology to be
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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
Company's process an advantage over autoclave operations that do not include
shredding or grinding.
REUSE AND RECYCLING. The Company believes that its reuse and recycling
capabilities provide a marketing advantage with customers who prefer to use a
regulated medical waste management provider with a commitment to resource
conservation. The Company's customers can participate in a voluntary
recycling program by source-segregating their regulated medical waste. The
source-segregated regulated medical waste is treated by the ETD treatment
process and, in certain geographic service areas, can then be 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 three 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 has worked 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 6% of the
original cubic volume of the regulated medical waste treated by the Company
during 1997 was disposed of in landfills.
COMPANY'S USE OF OTHER TECHNOLOGIES. Under the terms of certain
acquisitions by the Company, the Company is required to use the seller's
incineration or autoclave facilities for a specified period. Accordingly, not
all of the regulated medical waste that the Company collects is treated using
the Company's ETD technology.
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
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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 have been 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 is a 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 in
California; the Kaiser Permanente Medical Care Program in California,
Washington and Oregon; Northwestern Memorial Hospital in Illinois; and VHA
Healthfront in New England. The Company believes that its relationship with
these and other similarly well-known institutions will enhance its ability to
market its services to other Core generators and surrounding Alternate Care
generators.
The Company's marketing and sales efforts directed to Core generators
are supplemented by several strategic marketing alliances. In October 1993,
the Company entered into an alliance agreement with Baxter Healthcare
Corporation ("Baxter"). A key component of this agreement is the expansion of
Baxter's procedure-based delivery system ("PBDS") to include regulated
medical waste disposal by the Company. Under PBDS, Baxter hospital supplies
are custom-packed in containers provided by the Company based on the
requirements of a specific hospital and, in many cases, the requirements of a
specific medical provider. Baxter's agreement to include regulated medical
waste disposal as part of PBDS was intended to assist its
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customers in consolidating the specific costs of a patient procedure. The
alliance agreement enables the Company potentially to benefit from Baxter's
marketing efforts and promotion of PBDS to link the sale of the Company's
regulated medical waste disposal services to Baxter's sale of certain of its
disposable hospital supplies. In connection with the alliance agreement,
Baxter paid $8,000,000 to purchase shares of the Company's preferred stock,
of which the Company was required to spend $1,000,000 for research and
development related to enhancements of the Company's technology to increase
recycling of Baxter's products. In September 1996, Baxter's parent
corporation, Baxter International Inc., spun 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"), and in connection with the spin-off Baxter transferred its
interest in the alliance agreement to Allegiance. In addition to this
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 3% of the Company's 1997 revenues. The Company does
not believe that the loss of any single customer would have a material
adverse effect on its business, financial condition or results of operations.
LOGISTICS
An important element of the Company's business strategy is to maximize
the efficiency with which it collects and transports a large volume of
regulated medical waste and directs the deployment of many collection
vehicles. This aspect of the Company's operations--referred to as
logistics--represents the Company's single largest operating cost.
Accordingly, the Company considers logistics to be a critical component of
its operating plan. The Company's integrated approach to regulated medical
waste management is designed to provide it with numerous logistic advantages
in the process of managing regulated medical waste.
PRE-COLLECTION. Before regulated medical waste is collected, the
Company's integrated waste management approach can "build in" efficiencies
that will yield logistic advantages. For example, the Company's consulting
services can assist its customers in minimizing their regulated medical waste
volume at the point of generation. In addition, the Company provides
customers with the documentation necessary
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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 has introduced two smaller sizes of STERI-TUBS that are
popular in certain areas of hospitals, such as the laboratory, and with many
Alternate Care generators. The Company has also developed a step-on lid
opener and a sliding lid that fit the various sizes of STERI-TUBS and make
STERI-TUBS even safer and more convenient to use. STERI-TUBS are designed to
maximize the loads that will fit within the cargo compartments of standard
trucks and trailers. The Company believes these features to be an improvement
over its competitors' reusable "point-of-generation" containers. The
Company's customers are responsible for packing their regulated medical waste
in a STERI-TUB or approved corrugated container and placing the loaded
containers at a designated collection area on their premises. If a customer
generates a large volume of waste, the Company will place a large temporary
storage container or trailer on the customer's premises. In order to maximize
regulatory compliance and minimize potential liability, the Company will not
accept medical waste unless it is properly packaged by customers in
Company-supplied or Company-approved containers.
COLLECTION AND TRANSPORTATION. Efficiency of collection and
transportation is a critical element of the Company's logistics. The Company
seeks to maximize route density and the number of stops on each route. The
Company also employs a tracking system for its collection vehicles which is
designed to maximize logistic efficiency. The Company deploys dedicated
collection vehicles of different capacities depending upon the amount of
regulated medical waste to be collected at a particular stop or on a
particular route. The Company collects containers of regulated medical waste
from its customers at intervals depending upon customer requirements, terms
of the service agreement and the volume of regulated medical waste produced.
All containers are inspected at the customer's site prior to pickup. The
waste is then transported directly to one of the Company's treatment
facilities or to one of the Company's transfer stations where it is
aggregated with other regulated medical waste and then transported to a
treatment facility. In certain circumstances, the Company transports waste to
other specially-licensed regulated medical waste treatment facilities. The
Company transports small quantities of hazardous substances, such as
photographic fixer, lead foils and amalgam, from certain of its customers to
a metals recycling operation.
TRANSFER STATIONS. The use of transfer stations is another important
component of the Company's logistics. The Company utilizes transfer stations
in a "hub and spoke" configuration which allows the Company to expand its
geographic service area and increase the volume of regulated medical waste
that can be treated at a particular facility. Smaller loads of waste
containers are stored at the transfer stations until they can be consolidated
into full truckloads and transported to a treatment facility.
INSPECTION, TREATMENT AND DISPOSAL. Upon arrival at a treatment facility,
each container of regulated medical waste is scanned to verify that it does not
contain any unacceptable materials such as hazardous substances or radioactive
material. Any container which is discovered to contain hazardous substances or
radioactive material is returned to the customer. In some cases the Company's
operating permits require that unacceptable waste be reported to the appropriate
regulatory authorities. After inspection, the regulated medical waste is loaded
into the processing system and ground, compacted and treated using the Company's
ETD treatment process. Upon completion of this process, the treated medical
waste is transported for resource recovery, recycling or disposal in a
nonhazardous waste landfill. After the STERI-TUBS have been emptied, they are
washed, sanitized and returned to customers for re-use.
As previously noted (see "Treatment Technologies--Advantages of the
Company's ETD Treatment Process--Company's Use of Other Technologies"),
under the terms of certain acquisitions by the Company,
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the Company is required to use the seller's incineration or autoclave
facilities for a specified period. Accordingly, not all of the regulated
medical waste that the Company collects is treated using the Company's ETD
technology.
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.
COMPETITION
The regulated medical waste services industry is highly competitive,
fragmented, and requires substantial labor and capital resources. Intense
competition exists within the industry not only for customers but also for
businesses to acquire. The Company's largest competitor is Browning-Ferris
Industries, Inc. A large number of regional and local companies also compete
in the industry. In addition, the Company faces competition from businesses
and other organizations that are attempting to commercialize alternate
treatment technologies or products designed to reduce or eliminate the
generation of regulated medical waste, such as reusable or degradable medical
products.
The Company competes for service agreements primarily on the basis of
cost effectiveness, quality of service, geographic location and
generator-perceived liability risks. The Company's ability to obtain new
service agreements may be limited by the fact that a potential customer's
current vendor may have an excellent service history or may reduce its prices
to the potential customer.
GOVERNMENTAL REGULATION
The Company operates within the regulated medical waste management
industry, which is subject to extensive and frequently changing federal,
state and local laws and regulations. This statutory and regulatory framework
imposes compliance burdens and risks on the Company, including requirements
to obtain and maintain government permits. These permits grant the Company
the authority, among other things, to construct and operate treatment and
transfer facilities, to transport regulated medical waste within and between
relevant jurisdictions, and to handle particular regulated substances. The
Company's permits must be periodically renewed and are subject to
modification or revocation by the issuing regulatory authority. In addition
to the requirement that it obtain and maintain permits, the Company is
subject to extensive federal, state and local laws and regulations that,
among other things, govern the definition, generation, segregation, handling,
packaging, transportation, treatment, storage and disposal of regulated
medical waste. The Company is also subject to extensive regulation designed
to minimize employee exposure to regulated medical waste. In addition, the
Company is subject to certain foreign laws and regulations.
FEDERAL REGULATION
There are at least four federal agencies that have authority over
medical waste. These agencies are the EPA, OSHA, Department of Transportation
("DOT") and Postal Service. These agencies regulate medical waste under a
variety of statutory and regulatory 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 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
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wastes which were generated in a covered state and which posed environmental
(including aesthetic) problems were delivered to disposal or treatment
facilities with minimum 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 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, 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.
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 ("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
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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 authorizes OSHA to promulgate occupational safety and
health standards. Various standards apply to certain aspects of the Company's
operations. These standards include rules governing exposure to bloodborne
pathogens and other potentially infectious materials, lock out/tag out
procedures, medical surveillance requirements, use of respirators and
personal protective equipment, emergency planning, hazard communication,
noise, ergonomics, and forklift safety, among others. OSHA regulations are
designed to minimize the exposure of employees to hazardous work
environments. The Company is subject to unannounced safety inspections at any
time. Employees are required by Company policy to receive new employee
training, annual refresher training and training in their specific tasks. As
part of the Company's medical surveillance program, employees receive
pre-employment physicals, including drug testing, annually-required medical
surveillance and exit physicals. The Company also subscribes to a drug-free
workplace policy.
UNITED STATES POSTAL SERVICE. The Company was required to obtain a
permit from the U. S. Postal Service to conduct its "mail-back" program,
pursuant to which customers mail appropriately packaged sharps containers
directly to the Company's treatment facilities.
STATE AND LOCAL REGULATION
The Company currently conducts some type of business activity in 32
states. These activities include the collection, transportation, processing,
transferring or recycling of regulated medical waste and, in some cases,
hazardous substances. Each state has its own regulations related to the
handling, treatment and storage of regulated medical waste. Although there
are many differences among the various state laws and regulation, many states
have followed the regulated medical waste model under the MWTA and are
implementing programs under RCRA. Regulations cover the Company's
transportation of regulated medical waste both intrastate and interstate. In
each of the states where the Company operates a treatment facility or
transfer station, it is required to comply with numerous state and local laws
and regulations as well as its site-specific operating plan. Agencies writing
regulations at the state level typically include departments of health and
state environmental protection agencies. In addition, many municipalities
have ordinances, local laws and regulations affecting the Company's
operations, including but not limited to zoning and health measures.
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. The Company believes that
the U.S. Congress may consider bills that could at least partially overturn
these court decisions and immunize particular governmental actions from
Commerce Clause scrutiny.
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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.
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.
States predominantly regulate medical waste as a solid or "special"
waste and not as a hazardous waste under RCRA. State definitions of medical
waste include, but are not limited to: microbiological waste (cultures and
stocks of infectious agents); pathology waste (human body parts from surgical
and autopsy waste); blood and blood products; and sharps.
Most states require segregation of different types of regulated medical
waste at the point of generation. A majority of states require that the
universal biohazard symbol or related label appear on medical waste
containers. Storage regulations may apply to the generator, the treatment
facility, the transport vehicle, or all three. Storage rules center on
identifying and securing the storage area for public safety as well as
setting standards for the manner and length of storage. Many states mandate
employee training for safe environmental clean-up through emergency spill and
decontamination plans. Many states mandate that transporters carry spill
equipment in their vehicles. Those states whose regulatory framework relies
on the MWTA model have tracking document systems in place.
In the State of Washington, the Company is subject to regulation by the
Utilities and Transportation Commission, which regulates all businesses
engaged in transportation in the state. As a regulated business, the Company
must receive approval from the Utilities and Transportation Commission for
the prices that it charges for its services in Washington.
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.
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FOREIGN REGULATION
The Company presently conducts business in 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.
The Company also conducts business in Mexico through its joint venture,
Medam, which plans to collect regulated medical waste and transport it for
treatment to a new facility close to Mexico City. See "Growth Strategy--Other
Growth Opportunities."
If the Company expands its operations into other foreign jurisdictions,
it will be required to comply with the laws and regulations of each such
jurisdiction.
PERMITTING PROCESS
Each state in which the Company operates, and each state in which the
Company may operate in the future, has a specific permitting process. After
the Company has identified a geographic area in which it wishes to locate a
treatment or transfer facility, the Company identifies 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.
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.
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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, insurance
may be vailable only at significantly increased premiums with less extensive
coverage. If the Company is unable to obtain adequate insurance coverage at a
reasonable cost, it may become exposed to potential liability claims. In this
event, a successful claim of sufficient magnitude could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CERCLA and similar state statutes impose strict, joint and several
liability on the present and former owners and operators of facilities from
which releases of hazardous substances have occurred and on the generators
and transporters of the hazardous substances that come to be located at such
facilities. Responsible parties may be liable for waste site investigation,
waste site clean-up costs and natural resource damages, which costs could be
substantial, regardless of whether they exercised due care and complied with
all relevant laws and regulations. There can be no assurance that the Company
will not face claims under CERCLA or similar state laws resulting in
substantial liability for which the Company is uninsured and which could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's pollution liability insurance excludes
liabilities under CERCLA.
PATENTS AND PROPRIETARY RIGHTS
The Company considers the protection of its technology relating to the
processing of regulated medical waste to be material to its business. The
Company's policy is to protect its technology by a variety of means,
including applying for patents in the United States and in appropriate
foreign countries.
The Company holds nine United States patents and an additional patent
application 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 Russia, Hungary, Canada, 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 cross-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 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 January 2015.
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.
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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.
EMPLOYEES
At December 31, 1997, the Company employed 378 full-time employees and
128 part-time employees engaged primarily in sales and marketing.
The Company's production and maintenance employees at its Morton,
Washington facility have voted to affiliate with the International
Brotherhood of Teamsters, AFL-CIO. The Company will be required to negotiate
a collective bargaining agreement covering these employees. None of the
Company's other employees is covered by a collective bargaining agreement.
The Company considers its employee relations generally to be satisfactory.
17
<PAGE>
ITEM 2. FACILITIES
The Company leases office space for its corporate offices in Deerfield,
Illinois. The Company owns and operates ETD treatment facilities in Morton,
Washington and Yorkville, Wisconsin. It leases a treatment facility in
Woonsocket, Rhode Island which the Company has an option to purchase for
$2,000 upon the expiration of the lease in June 2017. The Company also leases
a building in Loma Linda, California which is used as an ETD treatment
facility, and subleases incineration or autoclave facilities from WMI in
Terrell, Texas, Baltimore, Maryland and Henderson, Colorado and may enter
into a sublease from WMI for its facility in Chandler, Arizona if and when
the necessary landlord consents and regulatory approvals have been obtained.
The Company also owns and operates a recycling and research development
facility in West Memphis, Arkansas.
The Company leases two permitted transfer stations in California, one at
San Leandro and the other in Valencia, and one in New York, New York. The
Company also utilizes transfer stations in Columbus and Monroe, Ohio. In
Haverhill, Massachusetts and Vancouver, British Columbia the Company utilizes
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, Anaheim,
California 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. As noted, the Company has an option to purchase the facility for
$2,000 upon the repayment of all of the bonds. The Company's machinery and
equipment at its Yorkville, Wisconsin treatment facility are leased under an
equipment lease expiring in February 1999 and are pledged as collateral to
secure the Company's obligations under the lease. Substantially all of the
Company's property and equipment provide collateral for the Company's
obligations under its revolving credit facility with Silicon Valley Bank. The
Company believes that its existing facilities are generally adequate for its
current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company operates in a highly competitive industry and may be exposed
to regulatory inquiries or investigations from time to time. Investigations
can be initiated for a variety of reasons. The Company has been involved in
several legal and administrative proceedings that have been settled or
otherwise resolved on terms acceptable to the Company, without having a
material adverse effect on the Company's business, financial condition or
results of operations. From time to time the Company may consider it more
cost-effective to settle such proceedings than to involve itself in costly
and time-consuming administrative actions or litigation. The Company is also
a party to various legal proceedings arising in the ordinary course of its
business. The Company believes that the resolution of these other matters
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended December 31, 1997.
18
<PAGE>
SUPPLEMENTAL INFORMATION
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides certain information regarding the seven
officers of the Company:
<TABLE>
<CAPTION>
NAME POSITION WITH COMPANY AGE
<S> <C> <C>
Mark C. Miller . . . . . . President, Chief Executive Officer 42
and a Director
Anthony J. Tomasello . . . Vice President, Operations 51
Linda D. Lee . . . . . . . Vice President, Regulatory Affairs 41
and Quality Assurance
Frank J.M. ten Brink . . . Vice President, Finance 41
and Chief Financial Officer
Richard O. Shea . . . . . Vice President, Western Region 45
Michael J. Bernert . . . . Vice President, Eastern Region 44
Joel Wilson . . . . . . . Vice President, Central Region 38
</TABLE>
MARK C. MILLER has served as President and Chief Executive Officer and a
director since joining the Company in May 1992. From May 1989 until he joined
the Company, Mr. Miller served as Vice President for the Pacific, Asia and
Africa in the International Division of Abbott Laboratories, which he joined
in 1976 and where he held a number of management and marketing positions. He
is a director of Affiliated Research Centers, Inc., which provides clinical
research for pharmaceutical companies and is a director of Lake Forest
Hospital. Mr. Miller received a B.S. degree in computer science from Purdue
University, where he graduated Phi Beta Kappa.
ANTHONY J. TOMASELLO has served as the Company's Vice President,
Operations since August 1990. For five years prior to joining the Company,
Mr. Tomasello was President and Chief Operating Officer of Pi Enterprises and
Orbital Systems, companies providing process and automation services. From
1980 to 1985, he served as Vice President of Operations for Spang and
Company, an operating service firm specializing in resource recovery and
recycling for manufacturing and process industries. Mr. Tomasello received a
B.S. degree in mechanical engineering from the University of Pittsburgh.
LINDA D. LEE has served as the Company's Vice President, Regulatory
Affairs and Quality Assurance since June 1990. She previously served as the
Company's Executive Director for Regulatory Compliance. Prior to joining the
Company in November 1989, she served for six years as Director of
Environmental Health and Safety for Medical Services at the University of
Arkansas. Ms. Lee has served as the chairperson of the American Hospital
Association's Environmental Advocacy Committee and on the American Society
for Hospital Engineers' Safety Committee. She has also served on a number of
government committees, including the Arkansas Governor's Task Force on
Medical Waste, and has written several books and articles on safety and waste
disposal. Ms. Lee received a B.S. degree in environmental health sciences
from Indiana State University and a M.S. degree in operations management from
the University of Arkansas.
FRANK J.M. TEN BRINK has served as the Company's Vice President,
Finance and Chief Financial Officer since June 1997. From 1991 until 1997 he
served as Chief Financial Officer with Hexacomb Corporation and Telular
Corporation. Prior to 1991, he held various financial management positions
with Interlake Corporation and Continental Bank of Illinois. Mr. ten Brink
received a B.B.A. degree in international business and a M.B.A. degree in
finance from the University of Oregon.
19
<PAGE>
RICHARD 0. 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 Bothell,
Washington. He previously held several management positions with the
Diagnostics Division of Abbott Laboratories. Mr. Shea received a B.S. degree
in marketing from Nichols College.
MICHAEL J. BERNERT has served as the Company's Vice President, Eastern
Region, with responsibility for sales and service in New England and portions
of 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.
JOEL P. WILSON has served as the Company's Vice President, Central
Region, with responsibility for sales and service in portions of the Midwest
and Texas, since October 1997. Since joining the company in 1991, Mr. Wilson
has held the positions of Director of Engineering, General Manager of the
Midwest Region, General Manager of Operations and District Manager of
Wisconsin. Prior to joining Stericycle, he held several management positions
with Orbital Systems and Orbital Engineering. Mr. Wilson received a B.S.
degree in civil engineering from Brigham Young University.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "SRCL." On March 17, 1998, there were approximately 185
stockholders of record.
The following table provides the high and low sales prices of the
Company's Common Stock during (i) the period from August 23, 1996, when the
Common Stock was first publicly traded, through September 30, 1996 ("Third
Quarter") and (ii) each subsequent calendar quarter through the fourth
quarter of 1997:
<TABLE>
<CAPTION>
QUARTER HIGH LOW
<S> <C> <C>
Third Quarter 1996. . . . . . . . 11.000 8.750
Fourth Quarter 1996 . . . . . . . 11.750 7.000
First Quarter 1997. . . . . . . . 11.750 8.000
Second Quarter 1997 . . . . . . . 9.375 7.250
Third Quarter 1997. . . . . . . . 10.625 7.625
Fourth Quarter 1997 . . . . . . . 16.000 9.000
</TABLE>
The Company did not pay any dividends during 1997 and has never paid any
dividends on its capital stock. The Company currently expects that it will
retain future earnings for use in the operation and expansion of its business
and does not anticipate paying any cash dividends in the foreseeable future. The
Company is prohibited from paying cash dividends under the terms of its
revolving credit facility with Silicon Valley Bank and is restricted from paying
cash dividends under an agreement in connection with the industrial development
bonds issued to finance the Company's construction of its treatment facility at
Woonsocket, Rhode Island. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA (1)
Revenues . . . . . . . . . . . . . . . . $9,141 $16,141 $21,339 $24,542 $46,166
Income (loss) from operations. . . . . . (5,984) (5,708) (4,276) (2,437) 1,386
Net income (loss). . . . . . . . . . . . (6,028) (5,812) (4,544) (2,389) 1,430
Net income (loss) applicable to
Common Stock . . . . . . . . . . . . . (9,761) (10,293) (4,544) (2,389) 1,430
Diluted net income (loss) per share of
Common Stock (2) . . . . . . . . . . . $(13.64) $(14.38) $(0.81) $(0.32) $0.13
BALANCE SHEET DATA (at December 31) (1)
Cash, cash equivalents and short-term
investments . . . . . . . . . . . . . $ 7,690 $ 1,206 $ 138 $17,749 $7,709
Total assets . . . . . . . . . . . . . . 21,355 27,809 23,491 55,155 61,226
Long-term debt, net of current maturities 2,293 4,838 5,622 4,591 3,475
Convertible redeemable preferred
stock (3) . . . . . . . . . . . . . . 52,708 62,909 -- -- --
Shareholders' equity . . . . . . . . . . $(35,106) $(45,363) $12,574 $40,014 $45,026
</TABLE>
- -------------------
(1) See Note 5 to the Consolidated Financial Statements for information
concerning the Company's acquisitions during the three years ended December
31, 1997. The comparability of information for 1994 and 1995 has been
affected by the Company's acquisition in 1994 of Safe Way Disposal Systems,
Inc. and Recovery Corporation of Illinois.
(2) See Note 2 to the Consolidated Financial Statements for information
concerning the computation of net income (loss) per common share.
(3) See Note 8 to the Consolidated Financial Statements for information
concerning the elimination of the liquidation preference on the Company's
preferred stock, and the reclassification of the preferred stock as Class A
common stock, in connection with a recapitalization during the year ended
December 31, 1995.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES IN ITEM 8 OF THIS REPORT.
BACKGROUND
The Company was incorporated in March 1989. The Company provides
regulated medical waste collection, transportation, treatment, disposal,
reduction, reuse and recycling services to its customers, together with
related training and education programs and consulting services. The Company
also sells ancillary supplies and transports pharmaceuticals, photographic
chemicals, lead foil and amalgam for recycling in selected geographic service
areas. As part of its recycling services, the Company supplies recycled
treated medical waste plastics to a plastics manufacturer and supplies
treated medical waste as a refuse-derived fuel for use in the production of
electricity.
The Company's revenues have increased from $1,563,000 in 1991 to
$46,166,000 in 1997. 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, 1997, the Company had over
41,000 customers.
As part of the Company's marketing strategy, the Company offers
reduction, resource recovery and recycling services to customers.
Accordingly, the Company has invested funds to treat and recover the plastics
from single-use products, and as a part of that strategy, the Company has
entered into an agreement with a plastic products manufacturer to provide
recycled regulated medical waste plastics for use in a line of medical waste
sharps containers. The Company has delivered the recycled plastics as
required under the agreement 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.
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.
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.
23
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased $21,624,000, or 88.1%, to $46,166,000
during the year ended December 31, 1997 from $24,542,000 during the year
ended December 31, 1996 as the Company continued to implement its strategy of
focusing on higher-margin Alternate Care generators while simultaneously
paring certain higher-revenue but lower-margin accounts with Core generators.
This increase also reflects the inclusion of a full year's revenues from the
Waste Management, Inc. ("WMI") acquisition completed in December 1996, eight
months of revenues from the Environmental Control Co, Inc. ("ECCO")
acquisition completed in May 1997, and partial years' revenues from various
other smaller acquisitions. For the year, internal sales growth for Alternate
Care generators was 13%, while sales to Core generators decreased by 4%.
Incremental revenues during 1997 attributable to acquisitions completed in
1997 and late 1996 were $20,975,000. Excluding these incremental revenues
from acquisitions, revenues increased from $24,542,000 in 1996 to $25,191,000
in 1997, or 2.6%.
COST OF REVENUES. Cost of revenues increased $14,686,000, or 75.6%, to
$34,109,000 during the year ended December 31, 1997 from $19,423,000 during
the year ended December 31, 1996. The principal reasons for the increase were
higher transportation, treatment and disposal costs as a result of the higher
volume attributable to the Company's acquisitions and integration expenses
related to the Company's expansion into new geographic service areas. The
gross margin percentage increased to 26.1% during 1997 from 20.9% during
1996, due to the continuing shift to Alternate Care customers and leveraging
of the Company's treatment capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $10,671,000 during the year ended
December 31, 1997 from $7,556,000 during the year ended December 31, 1996.
The increase was largely the result of increases in selling and marketing
expenses as a result of the Company's acquisitions and expansion of the sales
network, and increased administrative costs related the higher volume.
Selling, general and administrative expenses as a percentage of revenues
decreased to 23.1% during 1997 from 30.8% during 1996 due to improved
leverage of the administrative structure versus the sales growth.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to
$428,000 during the year ended December 31, 1997 from $373,000 during the
year ended December 31, 1996. This increase was primarily attributable to
higher indebtedness related to the WMI and ECCO acquisitions. Interest
income increased to $618,000 during 1997 from $421,000 during 1996 due to
interest earned on the invested cash proceeds from the Company's initial
public offering ("IPO") in August 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased $3,203,000, or 15%, to $24,542,000 during
the year ended December 31, 1996 from $21,339,000 during the year ended
December 31, 1995 as the Company continued to implement its strategy of
focusing on higher-margin Alternate Care generators while simultaneously
paring certain higher-revenue but lower-margin accounts with Core generators.
This increase also reflects the inclusion of a full year's revenues from the
Safetech Health Care, Inc. ("Safetech") acquisition, which was completed in
June 1995, eleven months of revenues from the WMI Medical Services of New
England, Inc. ("WMI-NE") acquisition, which was completed in January 1996,
and eight months of revenues from the Doctors Environmental Control, Inc.
("DEC") and Sharps Incinerator of Fort, Inc. ("Sharps") acquisitions, both of
which were completed in May 1996, and the inclusion of revenues for the last
10 days of 1996 resulting from the Company's purchase in December 1996 of a
major portion of WMI's regulated medical waste business . The increase in
revenues was partially offset by a decline in revenues attributable to a lack
of any miscellaneous product sales during 1996 and the sale in April 1995 of
certain unprofitable customer accounts and related assets obtained through
acquisitions. Incremental revenues during 1996 attributable to acquisitions
completed in 1995 and 1996 were $2,332,000. Excluding these incremental
revenues from acquisitions, revenues increased from $21,339,000 in 1995 to
$22,210,000 in 1996, or 4.1%.
24
<PAGE>
COST OF REVENUES. Cost of revenues increased $1,945,000, or 11.1%, to
$19,423,000 during the year ended December 31, 1996 from $17,478,000 during
the year ended December 31, 1995. The principal reasons for the increase were
higher transportation, treatment and disposal costs as a result of the
Safetech, WMI-NE, DEC, Sharps and WMI acquisitions and start-up expenses
related to the Company's expansion into new geographic service areas. The
gross margin percentage increased to 20.9% during 1996 from 18.1% during
1995, due to the continued increase in Alternate Care customers and
leveraging of the treatment capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $7,556,000 during the year ended
December 31, 1996 from $8,137,000 during the year ended December 31, 1995.
This decrease was primarily attributable to a reduction in expenditures to
develop treated medical waste as an alternate fuel for the production of
cement and to savings from the integration into the Company's operations of
the Safe Way Disposal Systems, Inc. ("Safe Way") acquisition in 1994. These
savings resulted from the elimination of redundant employee and staff
positions and the reallocation of resources to Alternate Care generators. In
addition, corporate costs and permitting expenses were at lower levels during
1996 than they were during 1995. Selling, general and administrative expenses
as a percentage of revenues decreased to 30.8% during 1996 from 38.1% during
1995.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to
$373,000 during the year ended December 31, 1996 from $277,000 during the
year ended December 31, 1995. This increase was primarily attributable to
higher indebtedness under the Company's revolving credit facility and
interest expense on notes issued for acquisitions. Interest income increased
to $421,000 during 1996 from $9,000 during 1995 due to interest earned on the
invested cash proceeds from the Company's IPO in August 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been financed principally through the sale of stock to
investors. Prior to the Company's IPO, purchasers of stock invested more than
$50,137,000 in capital which has been used to fund research and development,
acquisitions, capital expenditures, ongoing operating losses and working
capital requirements. The Company's IPO in August 1996 raised $31,050,000,
excluding offering costs, which has been or will be used primarily to fund
acquisitions and for general working capital. The Company has also been able
to secure plant and equipment leasing or financing in connection with some of
its facilities. These debt facilities are secured by security interests in
the financed assets. In addition, during 1995 the Company was able to obtain
a $2,500,000 revolving line of credit secured by accounts receivable and a
secured interest in all other assets of the Company. In March 1998, the
Company increased its revolving line of credit to $7,500,000.
During 1995 the Company's stockholders approved a plan of
recapitalization, pursuant to which all of the Company's outstanding shares
of preferred stock were reclassified as shares of common stock. As a result,
the Company was able to eliminate any liability for accrued but unpaid
dividends on its preferred stock and the preferential rights on liquidation
of holders of preferred stock.
At December 31, 1997, the Company's working capital was $7,214,000
compared to $14,617,000 and $439,000 at December 31, 1996 and 1995,
respectively. The decrease versus 1996 was primarily due to lower balances
of cash, cash equivalents and short-term investments, which decreased by
$10,040,000 to finance acquisitions partially offset by other working capital
needs. The increase in the 1996 working capital compared to 1995 was due to
higher cash balances shortly after the Company's IPO offset by an increase in
debt as a result of the WMI acquisition in December 1996.
The Company's other financial obligations include industrial development
revenue bonds issued on behalf of and guaranteed by the Company to finance
its Woonsocket, Rhode Island treatment facility and equipment. These bonds,
which had an outstanding aggregate balance of $1,358,000 as of December 31,
1997 at fixed interest rates ranging from 6.00% to 7.375%, are due in various
amounts through June 2017. In addition, the Company issued various promissory
notes in connection with acquisitions during 1997, primarily a 10-year note
for $2,300,000 as part of the ECCO acquisition.
25
<PAGE>
Net income (loss) before depreciation and amortization increased to a
surplus of $4,508,000 during the year ended December 31, 1997, compared to a
deficit of $325,000 during the year ended December 31, 1996. Cash used in
operations was $100,000 during the year ended December 31, 1997, compared to
cash provided by operations of $57,000 during the year ended December 31,
1996 and cash used in operations of $871,000 during the year ended December
31, 1995. The change primarily reflects the Company's profitability in 1997
offset by a higher working capital investment in receivables.
Net cash used in investing activities was $3,323,000 during the year
ended December 31, 1997 compared to $13,310,000 during the year ended
December 31, 1996. The decrease in 1997 was the result of a $5,552,000
investment in ECCO and smaller acquisitions and joint ventures, offset by net
proceeds from short-term investments of $3,464,000 in 1997 versus purchases
of $5,799,000 in short-term investments in 1996. Capital expenditures for
the year ended December 31, 1997 were $1,235,000, primarily for improvements
to existing facilities, containers and transportation equipment. Capital
expenditures were $995,000 in 1996 and $726,000 in 1995. The Company did not
open any new treatment facilities during 1997. 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 its
cash, cash equivalents, short-term investments, revolving bank line and cash
from operations will fund its capital requirements through 1998.
Net cash used in financing activities was $3,153,000 during the year
ended December 31, 1997 compared to net cash provided by financing activities
of $25,065,000 during the year ended December 31, 1996. The change was the
result of $28,535,000 of proceeds received in 1996 primarily from the
Company's IPO and repayments in 1997 of $2,905,000 in long-term debt relating
primarily to a note issued in connection with the December 1996 WMI
acquisition.
In 1997, cash and cash equivalents decreased by $6,576,000 primarily due
to investment/acquisition activities of $3,323,000 and repayments of notes
and leases of $3,153,000.
YEAR 2000 ISSUES
The Company has developed a plan to modify its information technology to
be ready for the Year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially
complete by June 1999 at a cost not material to the Company's business. This
cost includes internal costs but excludes the cost to upgrade and replace
data processing systems in the normal course of business. The Company does
not expect this project to have a significant effect on operations. As of
December 31, 1997, there had been no amounts expensed in converting the
Company's data processing systems to be ready for the Year 2000. The Company
will continue to implement systems with strategic value focused on logistics
and further integration of the Company's business functions.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO SUCH THINGS
AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, ACQUISITION
ACTIVITIES AND SIMILAR MATTERS.
A VARIETY OF FACTORS COULD CAUSE THE COMPANY'S ACTUAL RESULTS AND
EXPERIENCE TO DIFFER MATERIALLY FROM ANTICIPATED RESULTS OR OTHER
EXPECTATIONS EXPRESSED IN THE COMPANY'S FORWARD-LOOKING STATEMENTS. THE RISKS
AND UNCERTAINTIES THAT MAY AFFECT THE COMPANY'S BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATION INCLUDE DIFFICULTIES AND DELAYS IN COMPLETING AND
INTEGRATING BUSINESS ACQUISITIONS; DELAYS AND DIVERSION OF ATTENTION RELATING
TO PERMITTING AND OTHER REGULATORY COMPLIANCE; DIFFICULTIES AND DELAYS
RELATING TO MARKETING AND SALES ACTIVITIES; AND GENERAL UNCERTAINTIES
ACCOMPANYING THE COMPANY'S EXPANSION INTO NEW GEOGRAPHIC SERVICE AREAS.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Stericycle, Inc.
We have audited the accompanying consolidated balance sheets of
Stericycle, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. 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, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 6, 1998
27
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 11,950 $ 5,374
Short-term investments . . . . . . . . . . . . . 5,799 2,335
Accounts receivable, less allowance for doubtful
accounts of $178 in 1996 and $361 in 1997 . . 4,756 10,286
Parts and supplies . . . . . . . . . . . . . . . 360 660
Prepaid expense. . . . . . . . . . . . . . . . . 426 440
Other . . . . . . . . . . . . . . . . . . . . . 490 392
--------- --------
Total current assets . . . . . . . . . . . . 23,781 19,487
--------- --------
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . 90 90
Buildings and improvements . . . . . . . . . . . 5,598 5,561
Machinery and equipment. . . . . . . . . . . . . 10,702 11,469
Office equipment and furniture . . . . . . . . . 463 746
Construction in progress . . . . . . . . . . . . 362 614
--------- --------
17,215 18,480
Less accumulated depreciation. . . . . . . . . . (5,208) (7,239)
--------- --------
Property, plant and equipment, net . . . . . . 12,007 11,241
Other assets:
Goodwill, less accumulated amortization of $807
in 1996 and $2,040 in 1997 . . . . . . . . . 18,834 29,458
Other . . . . . . . . . . . . . . . . . . . . . 533 1,040
--------- --------
Total other assets . . . . . . . . . . . . . 19,367 30,498
--------- --------
Total assets . . . . . . . . . . . . . . . $ 55,155 $ 61,226
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt. . . . . . . . $ 3,215 $ 3,052
Accounts payable . . . . . . . . . . . . . . . . 1,510 1,927
Accrued liabilities. . . . . . . . . . . . . . . 3,769 7,039
Deferred revenue . . . . . . . . . . . . . . . . 670 255
--------- --------
Total current liabilities. . . . . . . . . . . 9,164 12,273
--------- --------
Long-term debt:
Industrial development revenue bonds and other . 1,986 1,405
Note payable . . . . . . . . . . . . . . . . . . 2,605 2,070
--------- --------
Total long term debt . . . . . . . . . . . . . 4,591 3,475
--------- --------
Other liabilities. . . . . . . . . . . . . . . . 1,386 452
Shareholders' equity:
Common stock (par value $.01 per share,
30,000,000 shares authorized, 10,000,264 issued
and outstanding in 1996, 10,472,799 issued and
outstanding in 1997) . . . . . . . . . . . . 100 105
Additional paid-in capital . . . . . . . . . . . 79,409 82,986
Notes receivable for common stock purchases. . . (4) (4)
Accumulated deficit. . . . . . . . . . . . . . . (39,491) (38,061)
--------- --------
Total shareholders' equity . . . . . . . . . . 40,014 45,026
--------- --------
Total liabilities and shareholders' equity . . $ 55,155 $ 61,226
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 21,339 $ 24,542 $46,166
Costs and expenses:
Cost of revenues . . . . . . . . . . . . . . . . . . . 17,478 19,423 34,109
Selling, general and administrative expenses . . . . . 8,137 7,556 10,671
-------- -------- --------
Total costs and expenses . . . . . . . . . . . . . . 25,615 26,979 44,780
-------- -------- --------
Income (loss) from operations. . . . . . . . . . . . . (4,276) (2,437) 1,386
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . . 9 421 618
Interest expense . . . . . . . . . . . . . . . . . . . (277) (373) (428)
-------- -------- --------
Total other income (expense) . . . . . . . . . . . . (268) 48 190
-------- -------- --------
Income (loss) before income taxes. . . . . . . . . . . (4,544) $ (2,389) $ 1,576
Income tax expense . . . . . . . . . . . . . . . . . . -- -- 146
-------- -------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . $ (4,544) $ (2,389) $ 1,430
======== ======== ========
Basic earnings per share:
Basic net income (loss) per share . . . . . . . . . $ (0.81) $ (0.32) $ 0.14
======== ======== ========
Diluted earnings per share (restated EPS for FAS 128
and SAB 98) . . . . . . . . . . . . . . . . . . . .
Diluted net income (loss) per share . . . . . . . . $ (0.81) $ (0.32) $ 0.13
======== ======== ========
</TABLE>
29
<PAGE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
STERICYCLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
COMMON STOCK
TOTAL
ACCUMULATED NOTES SHARE-
DIVIDENDS ON RECEIVABLE HOLDERS
CONVERTIBLE FOR EQUITY
ISSUED AND ADDITIONAL REDEEMABLE COMMON ACCUMU- (NET
OUTSTANDING PAID-IN PREFERRED STOCK LATED CAPITAL
SHARES AMOUNT CAPITAL STOCK PURCHASES DEFICIT DEFICIENCY
----------- ------- ---------- ------------ ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock . . . . . . . . . . 350 3 3
Accumulated dividends cancelled. . . . . . . 13,001 13,001
Notes receivable cancelled . . . . . . . . . (181) (2) (629) 619 (12)
Net loss . . . . . . . . . . . . . . . . . . (4,544) (4,544)
------ ------ ------- ------- ------ ------- -------
BALANCES AT DECEMBER 31, 1995. . . . . . . . 5,582 $ 55 $ 49,621 $ -- $ -- $ (37,102) $ 12,574
Initial public offering of common
stock (net of offering costs) . . . . . . 3,450 36 27,586 27,621
Issuance of common stock for
exercise of options and warrants
and employee stock purchases . . . . . . 870 9 717 (64) 662
Note payable exchanged for
common stock. . . . . . . . . . . . . . . 98 1 1,485 1,486
Principal payments under note
receivable . . . . . . . . . . . . . . . 60 60
Net loss . . . . . . . . . . . . . . . . . . (2,389) (2,389)
------ ------ ------- ------- ------ ------- -------
BALANCES AT DECEMBER 31, 1996. . . . . . . . 10,000 $ 100 $ 79,409 $ -- $ (4) $ (39,491) $ 40,014
Issuance of common stock for
exercise of options and warrants
and employee stock purchases . . . . . . . . 70 1 56 57
Common stock issued for
acquisitions . . . . . . . . . . . . . . . . 403 4 3,521 3,525
Net income . . . . . . . . . . . . . . . . . 1,430 1,430
------ ------ ------- ------- ------ ------- -------
BALANCES AT DECEMBER 31, 1997. . . . . . . . 10,473 $ 105 $ 82,986 $ -- $ (4) $ (38,061) $ 45,026
====== ====== ======= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . $ (4,544) $ (2,389) $ 1,430
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization . . . . 1,916 2,064 3,078
Settlement with regulatory agency . . 273 -- --
Other, net . . . . . . . . . . . . . 129 -- --
Changes in operating assets, net of effect
of acquisitions and divestitures:
Accounts receivable . . . . . . . . . 866 (554) (4,123)
Parts and supplies . . . . . . . . . 135 144 (300)
Prepaid expenses . . . . . . . . . . 196 (18) (14)
Other assets . . . . . . . . . . . . 128 (37) 98
Accounts payable . . . . . . . . . . 570 (428) (413)
Accrued liabilities . . . . . . . . . (838) 1,178 559
Deferred revenue and other liabilities 298 97 (415)
------ ------ ------
Net cash (used in) provided by operating
activities. . . . . . . . . . . . . . . (871) 57 (100)
------ ------ ------
INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . (726) (995) (1,235)
Payments for acquisitions,
net of cash acquired. . . . . . . . . (459) (6,516) (5,552)
Proceeds from maturity of
short-term investments . . . . . . . -- -- 5,799
Purchases of short-term investments . . -- (5,799) (2,335)
Proceeds from divestitures . . . . . . 792 -- --
------ ------ ------
Net cash used in investing activities. . . (393) (13,310) (3,323)
------ ------ ------
FINANCING ACTIVITIES:
Net proceeds from (payments of)
note payable to bank . . . . . . . . 858 (858) --
Repayment of long term debt . . . . . . (171) (3,275) (2,905)
Principal payments on capital
lease obligations . . . . . . . . . . (482) (397) (305)
Principal payments on notes receivable
for common stock purchases. . . . . . -- 60 --
Proceeds from long-term debt. . . . . . -- 1,000 --
Proceeds from issuance of
common stock . . . . . . . 18 28,535 57
Other . . . . . . . . . . . . . . . . . . (27) -- --
------ ------ ------
Net cash provided by (used in)
financing activities . . . . . . . . . . 196 25,065 (3,153)
------ ------ ------
Net increase (decrease) in cash and cash
and cash equivalents . . . . . . . . . . (1,068) 11,812 (6,576)
Cash and cash equivalents at beginning
of year . . . . . . . . . . . . . . . . 1,026 138 11,950
------ ------ ------
Cash and cash equivalents at end of year . $ 138 $ 11,950 $ 5,374
====== ====== ======
Non-cash activities:
Issuance of common stock for certain
acquisitions. . . . . . . . . . . . . . $ -- $ -- $ 3,525
Issuance of notes payable for certain
acquisitions . . . . . . . . . . . . . $ -- $ 6,497 $ 1,120
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 regu-lated 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., SWD Acquisition Corporation and
Environmental Control Co., Inc. All significant intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION:
The Company recognizes revenue when the treatment of the regulated
medical waste is completed on-site or the waste is shipped off-site for
processing and disposal. For waste shipped off-site, all associ-ated costs
are recognized at time of shipment.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers all highly liquid instruments with a maturity of
less than three months when purchased to be cash equivalents. Short-term
investments consist of highly liquid investments in corporate debt
obligations which mature in less than one year and are classified as
held-to-maturity since management has the positive intent and ability to hold
the securities to maturity. These obligations are stated at amortized cost,
which approximates fair market value. Interest income is recognized as earned.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation and
amortization, which include the depreciation of assets recorded under capital
leases, are computed using the straight-line method over the estimated useful
lives of the assets as follows:
Buildings and improvements--10 to 30 years
Machinery and equipment--3 to 10 years
Office equipment and furniture--5 to 10 years
GOODWILL:
Goodwill is amortized using the straight-line method over 25 years.
Amortization expense for 1995, 1996 and 1997 related to goodwill was
approximately $320,000, $390,000 and $1,042,000, respectively. The Company
continually evaluates the value and future benefits of its goodwill. The
Company assesses re-
32
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
coverability from future operations using income from operations of the
related acquired business as a measure. Under this approach, the carrying
value of goodwill would be reduced if it becomes probable that the Company's
best estimate for expected undiscounted future cash flows of the related
business would be less than the carrying amount of goodwill over its
remaining amortization period. For the three-year period ended December 31,
1997, there were no adjustments to the carrying amounts of goodwill resulting
from these evaluations.
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.
RESEARCH AND DEVELOPMENT COSTS:
The Company expenses costs associated with research and development as
incurred. Research and development expense for 1995, 1996 and 1997 was
$975,000, $194,000 and $281,000, 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 differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash
equivalents, short-term investments, accounts receivable and payable and
long-term debt. The fair values of these financial instruments were not
materially different from their carrying values. Financial instruments which
potentially subject the Company to concentrations of credit risk consist
principally of accounts receivable. Credit risk on trade receivables is
minimized as a result of the large size of the Company's customer base. No
single customer represents greater than 10% of total accounts receivable. The
Company performs ongoing credit evaluation 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.
33
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER COMMON SHARE:
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Account-ing Standards No. 128, "Earnings per Share"
("FAS 128"). FAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes the dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
net income (loss) per common share amounts for all periods have been
presented, and where appropriate, restated to conform to FAS 128 requirements.
In restating net income (loss) per common share to comply with the requirements
of FAS 128, the Company applied the recently issued Staff Accounting Bulletin
No. 98 ("SAB 98"). As a result of applying the provisions of SAB 98,
the Company has restated the 1995 and 1996 loss per share to exclude the
antidilutive effect of options and warrants granted within one year of
the Company's 1996 initial public offering.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
establishes standards for reporting and display of comprehensive income and
its components in financial statements and is effective for fiscal years
beginning after December 15, 1997. The adoption of FAS 130 will have no
impact on the Company's financial position, results of operations, or cash
flows.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosure
about products and services, geographic areas and major customers. FAS 131 is
effective for financial statements for fiscal years beginning after December
15, 1997. The Company is evaluating the disclosure requirements of FAS 131
and has not determined whether its adoption will have a material impact on
its future disclosure requirements.
NOTE 3--INITIAL PUBLIC OFFERING
On August 28 and August 30, 1996 the Company successfully completed an
initial public offering of 3,450,000 shares of common stock at $9 per
share. The Company received total proceeds from the offering, net of
offering costs, of approximately $27,621,000.
34
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4--INCOME TAXES
The Company's deferred tax liabilities and assets as of December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------------- ------------
<S> <C> <C>
Deferred tax liabilities:
Capital lease obligations . . . . . $ (324,000) $(461,000)
Property, plant and equipment . . . (694,000) (509,000)
Goodwill. . . . . . . . . . . . . . (160,000) (228,000)
-------------- ------------
Total deferred tax liabilities. . . . (1,178,000) (1,198,000)
Deferred tax assets:
Accrued liabilities . . . . . . . . 835,000 857,000
Research and development costs. . . 324,000 324,000
Other . . . . . . . . . . . . . . . 198,000 195,000
Net operating tax loss carryforward $15,102,000 $14,344,000
Alternative minimum tax credit
carry-forward . . . . . . . . . . -- 60,000
-------------- ------------
Total deferred tax assets . . . . . . 16,459,000 15,780,000
-------------- ------------
Net deferred tax assets . . . . . . . 15,281,000 14,582,000
-------------- ------------
Valuation allowance . . . . . . . . . (15,281,000) (14,582,000)
-------------- ------------
Net deferred tax assets . . . . . . $ -- $ --
=========== ==========
</TABLE>
At December 31,1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $36,000,000, which expire
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 are subject to annual limitations, which could
significantly restrict or partially eliminate the utilization of the net
operating losses. Additionally, the Company has an alternative minimum tax
credit carryforward of $60,000 available indefinitely.
Significant components of the Company's income tax expense for the year
ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Current
Federal. . . . . . . . . . . . . . . . . . . . $ 60,000
State . . . . . . . . . . . . . . . . . . . . 86,000
------------
Total provisions . . . . . . . . . . . . . . . . $ 146,000
============
</TABLE>
35
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4--INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision computed at the federal
statutory tax rate to the effective tax rate for the year ended December 31,
1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal statutory income tax rate . . . . . . . . . 34.0%
Effect of:
State taxes, net of federal tax effect. . . . . . 4.4%
Alternative minimum taxes . . . . . . . . . . . . 3.8%
Non-deductible goodwill amortization. . . . . . . 4.5%
Other . . . . . . . . . . . . . . . . . . . . . . 1.7%
Utilization of net operating loss carryforward. . (39.1)%
--------
Effective tax rate. . . . . . . . . . . . . . . . . 9.3%
========
</TABLE>
In 1997, the Company paid income tax of $58,300. No income taxes were
paid in 1996 and 1995. Additionally, the Company did not recognize any income
tax benefit for 1996 and 1995 due to the Company's recurring operating losses
and valuation allowances established for net deferred tax assets.
NOTE 5--ACQUISITIONS AND DIVESTITURES
In November 1997, the Company purchased the customer list and certain
other assets of Cal-Va, Inc. ("Cal-Va"), which operated a regulated medical
waste business in northern Virginia and Washington D.C. The purchase price
was paid by the issuance of shares of the Company's common stock and the
assumption of certain of Cal-Va's liabilities. The purchase price is to be
adjusted in the event that revenues fall below certain levels.
In November 1997, the Company purchased selected customer contracts of
Phoenix Services Inc. ("Phoenix"), which operated a regulated medical waste
business in the Baltimore, Maryland metropolitan area. The purchase price was
paid in cash (in January 1998) and by delivery of a $20,000 note due in
September 1998.
In August 1997, the Company purchased the customer list and certain
other assets of Envirotech Enterprises, Inc. which operated a regulated
medical waste business in Arizona. The purchase price was paid in cash and by
delivery of a $300,000 note due in August 1998. The purchase price is to be
adjusted in the event that acquired revenues fall below certain levels.
In June 1997, the Company purchased the customer list and certain other
assets of the regulated medical waste business of Waste Management, Inc.
("WMI") in Wisconsin ("WMI-WI"). In July 1997, the Company announced the
purchase of the customer lists and certain other assets of the regulated
medical waste businesses of Regional Carting, Inc. and Rumpke Container
Service, Inc. in New Jersey and Ohio, respectively. The purchase price for
these three acquisitions was paid by a combination of cash, assumption of
liabilities and issuance of shares of common stock of the Company and, in one
case, delivery of a
36
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 5--ACQUISITIONS AND DIVESTITURES (CONTINUED)
note which was paid in December 1997. In the event that acquired revenues for
each of these three companies fall below certain levels, the purchase price
will be adjusted accordingly.
In May 1997, the Company announced the acquisition of all of the
outstanding stock of Environmental Control Co., Inc. ("ECCO"), one of the
leading medical waste companies in the New York City market. The Company paid
$4,200,000 in cash; issued 125,000 shares of stock, assumed debt on vehicles
and issued a $2,300,000 10-year promissory note for the balance of the
purchase price. The note bears interest at a rate of 6.86% per annum payable
in 10 equal annual installments of $230,000 starting in May, 1998. The ECCO
purchase price is subject to downward adjustments to reflect uncollectible
acquired accounts receivable, additional outstanding obligations not
reflected in the purchase price at closing, and the extent to which ECCO's
revenues during the one-year period following closing are less than a
specified amount.
In December 1996, the Company purchased the customer lists, vehicles and
certain other assets of the major portion of WMI's medical waste business
(the "WMI Acquisition") for $5,450,000 cash and a note for $5,210,000. During
the quarter ended June 30, 1997, adjustments were made to the value of the
vehicles purchased and to the purchase price. The purchase price was
decreased by $756,000 as specified in the agreement, and the related goodwill
and note payable were adjusted accordingly. The Company finalized its
estimate of the value of the vehicles purchased and reduced the related note
accordingly. In the quarter ended December 31, 1997, the purchase price was
decreased by $163,000 as specified in the agreement, and the related goodwill
was adjusted accordingly. The Company paid $1,796,650 of the adjusted
$3,593,301 balance of the note to WMI in December 1997. The balance plus
accrued interest is due in December 1998.
In May 1996, the Company purchased the customer list and certain other
assets of Doctors Environmental Control, Inc. for $400,000 in cash and notes
payable issued for $600,000, which are payable on May 1, 1998 with an
interest rate of 6% per annum. In addition, the Company assumed vehicle
leases totaling $77,000, which were paid off in May 1996, and delivered
option agreements to shareholders of the seller giving them an option to
purchase up to a total of 53,816 shares of the Company's common stock. The
price for the purchase of the common stock upon exercise of each option was
the surrender and cancellation of the note payable. The options were
exercised in August 1996.
In April 1996, the Company purchased the customer list and certain other
assets of Sharps Incinerator of Fort, Inc. for $757,000 in cash of which
$562,000 was payable at closing and the balance plus interest was paid in
November 1996.
In January 1996, the Company purchased the customer lists and certain
other assets of WMI Medical Services of New England, Inc. for $100,000 in
cash and $492,000 in notes payable issued to the seller. The notes bear
interest at a rate of 7.5% per annum with $150,000 plus interest paid in
1996, $157,000 plus interest paid in 1997 and $185,000 plus interest paid in
January 1998.
In July 1995, the Company sold selected customer lists and related
assets for $248,000. The Company recognized a gain of $50,000 on this
transaction, which is included in selling, general and administrative expense
in the 1995 Consolidated Statement of Operations.
37
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 5--ACQUISITIONS AND DIVESTITURES (CONTINUED)
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 selling, general and administrative expense
in the 1995 Consolidated Statement of Operations.
For financial reporting purposes these acquisition transactions were
accounted for using the purchase method of accounting. The total purchase
price for 1995, 1996 and 1997 of $459,000, $13,013,000 and $10,197,000,
respectively, net of cash acquired, was allocated to assets acquired and
liabilities assumed based on the estimated fair market value at the date of
acquisition. The total purchase price for 1997 acquisitions includes the
value of 403,000 shares of common stock issued to the sellers. The excess of
the purchase price over the fair market value of the net assets acquired is
reflected in the accompanying Consolidated Balance Sheets as goodwill. The
results of operations of these acquired businesses are included in the
Consolidated Statement of Operations from the date of the acquisition. The
effect of these acquisitions would not have a significant effect on the
Company's operations, except for the WMI Acquisition and the ECCO acquisition.
The following unaudited pro forma results of the operations assumes that
the WMI Acquisition occurred as of January 1, 1995 and that the ECCO
acquisition occurred as of January 1, 1996, after giving effect to certain
adjustments including amortization of goodwill, increased interest expense on
debt incurred in connection with the acquisitions and adjustments to record
incremental recurring costs associated with the consolidation of the
operations as the historical results of operations of WMI and ECCO did not
reflect these costs:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma revenues. . . . . . . . . . . . . . . . $36,839 $46,619 $48,181
Pro forma net income (loss) . . . . . . . . . . . (4,270) (1,575) 1,576
Pro forma diluted net income (loss) per share . . $(0.76) $(0.21) $0.15
</TABLE>
The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the transactions taken
place at the beginning of the periods indicated or of future results of
operations.
38
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Industrial development revenue bonds . . . . . $1,492 $1,358
Obligations under capital leases . . . . . . . 517 212
Note payable to bank. . . . . . . . . . . . . . -- --
Notes payable . . . . . . . . . . . . . . . . . 5,797 4,957
------- ------
7,806 6,527
Less: Current portion. . . . . . . . . . . . . . 3,215 3,052
------- ------
Total. . . . . . . . . . . . . . . . . . $4,591 $3,475
======= ======
</TABLE>
In March 1998, the Company entered into a new 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 $7,500,000 or a specific 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 plus
0.50% or LIBOR plus 3.0%, at the Company's option. This agreement has a
maturity date of March 5, 1999. 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 total liabilities to
net worth, quick ratio and profitability. The Company had no borrowings under
its prior $2,500,000 line of credit with the bank as of December 31, 1997.
In connection with the Company's May 1997 purchase of ECCO's stock, a
10-year note for $2,300,000 was issued to the owners of ECCO. The note is
payable in 10 equal annual installments due on May 1 of each year starting in
1998. The note bears interest at the rate of 6.86% per annum.
In connection with the Company's December 1996 purchase of WMI's medical
waste business, a note payable totaling $5,210,000 was issued to WMI. The
note was adjusted to $3,593,301, of which $1,796,650 was repaid in 1997 and
$1,796,651 is due on December 20, 1998. The note bears interest at a rate of
7% per annum.
In 1995, an agreement was reached with the Rhode Island Department of
Environmental Management regarding two notices of violation issued in 1994
and 1995. Although the Company believed that the allegations were meritless,
the agreement was entered into in order to resolve the matter in the best
interest 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 $222,000 at December 31, 1997 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 a selling, general and administrative
39
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6--LONG-TERM DEBT (CONTINUED)
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 Disposal
Systems, Inc. As a result of the Company's initial public offering in August
1996, a portion of the note was converted into 98,001 shares of common stock
and the remainder was paid in cash.
During 1992, the Company entered into an obligation to finance the
development of its Woonsocket, Rhode Island facility. The development and
purchase of substantially all of the property and equipment for the
Woonsocket, Rhode Island facility was financed from the issuance of
industrial development revenue bonds. The bonds are due in various amounts
through 2017 at fixed interest rates ranging from 6.0% to 7.375% and are
collateralized by the property and equipment at the Woonsocket, Rhode Island
facility. The terms of an agreement entered into in connection with the
issuance of the bonds contain, among other provisions, requirements for
maintaining defined levels of working capital and various financial ratios
including debt to net worth.
Payments due on long-term debt, excluding capital lease obligations,
during each of the five years subsequent to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998 . . . . . . . . . . . . . . . . . . $2,840
1999 . . . . . . . . . . . . . . . . . . 430
2000 . . . . . . . . . . . . . . . . . . 445
2001 . . . . . . . . . . . . . . . . . . 545
2002 . . . . . . . . . . . . . . . . . . 410
</TABLE>
The Company paid interest of $262,000, $352,000 and $444,000 for the
fiscal years ended December 31, 1995, 1996 and 1997, respectively.
CAPITAL LEASES:
In February 1994, the Company entered into a sale leaseback transaction
for equipment acquisitions at its Yorkville, Wisconsin facility in the amount
of $882,000. The lease arrangement has a term of 60 months and at the end of
the lease, the Company will have the option to renew the lease, return the
equipment or purchase the equipment at a fair market value not to exceed 11%
of the original purchase price. In January 1996, the Company entered into a
capital lease obligation of $364,000 for equipment. The lease expires in
1998.
40
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6--LONG-TERM DEBT (CONTINUED)
At December 31, property under capital leases included with property,
plant and equipment in the accompanying Consolidated Balance Sheet is as
follows:
<TABLE>
<CAPTION>
1996 1997
(IN THOUSANDS)
--------------------------
<S> <C> <C>
Machinery and equipment . . . . . . . . . . . . . . $1,246 $1,246
Less--accumulated depreciation and amortization . . 293 418
-------- ------
$ 953 $ 828
======== ======
</TABLE>
Minimum future lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998 $ 218
1999 --
--------
Total minimum lease payments 218
Less--Amounts representing interest (6)
--------
Present value of net minimum lease payments 212
Less--Current portion (212)
--------
Long-term obligations under capital leases $--
========
</TABLE>
NOTE 7--LEASE COMMITMENTS
The Company leases various plant equipment, office furniture and
equipment, motor vehicles and office and warehouse space under operating
lease agreements which expire at various dates over the next six years. The
leases for most of the properties contain renewal provisions.
Rent expense for 1995, 1996 and 1997 was $1,739,000, $2,462,000 and
$3,284,000 respectively.
41
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 7--LEASE COMMITMENTS (CONTINUED)
Minimum future rental payments under non-cancelable operating leases
that have initial or remaining terms in excess of one year as of
December 31, 1997 for each of the next five years and in the aggregate
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998 . . . . . . . . . . . . . $4,222
1999 . . . . . . . . . . . . . 3,642
2000 . . . . . . . . . . . . . 2,168
2001 . . . . . . . . . . . . . 954
2002 . . . . . . . . . . . . . 393
Thereafter. . . . . . . . . . . . 105
-------
Total minimum rental payments . . $11,484
=======
</TABLE>
NOTE 8--COMMON AND PREFERRED STOCK
In August 1995, the Board of Directors adopted a plan of
recapitalization which was approved by the Company's stockholders in
September 1995, pursuant to which the Company reclassified its outstanding
convertible redeemable preferred stock as common stock. As part of the plan
of recapitalization, all conversion, redemption and liquidation rights
associated with the convertible redeemable preferred stock were terminated in
exchange for the issuance of shares of common stock.
Shares of the Company's common stock have been reserved for issuance
upon the exercise of options and warrants. Also see Note 10. These shares
have been reserved as follows at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
1993 Plan options . . . . . . . . 4,938
1995 Plan options . . . . . . . . 383,060
1996 Directors Plan options . . . 106,170
1997 Plan options . . . . . . . . 351,693
Warrants. . . . . . . . . . . . . 301,683
---------
Total shares reserved . . . . . . 1,147,544
=========
</TABLE>
42
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 9--NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of net income (loss) per
common share (in thousands, except for share and per share data):
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income (loss) . . . . . . . . $ (4,544) $(2,389) $1,430
Denominator:
Denominator for basic earnings
per share--weighted-
average shares . . . . . . . . 5,582,385 7,471,151 10,239,996
Effect of dilutive securities:
Employee stock options . . . . -- -- 441,586
Warrants. . . . . . . . . . . . -- -- 84,534
-------- --------- ----------
Dilutive potential common shares -- -- 526,120
-------- --------- ----------
Denominator for diluted earnings
per share[cad 228]adjusted weighted[cad 228]
average shares and assumed
conversions . . . . . . . . . . 5,582,385 7,471,151 10,766,116
======== ========= ==========
Basic earnings per common share . . $(0.81) $(0.32) $0.14
======== ========= ==========
Diluted earnings per common share . $(0.81) $(0.32) $0.13
======== ========= ==========
</TABLE>
For additional information regarding outstanding employee stock options
and outstanding warrants, see Note 10.
Options and warrants to purchase 1,170,626 and 838,849 shares of common
stock were outstanding during 1995 and 1996, respectively, at exercise prices
ranging from $.53-$69.02 and $.53-$69.02, respectively, but were not included
in the computation of diluted earnings per common share in these years
because the Company had net losses in 1995 and 1996 and the effect would be
antidilutive.
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.
In 1995, the Company's Board of Directors and shareholders approved an
incentive compensation plan (the "1995 Plan"), which as amended and restated
in 1996, provides for the granting of 1,500,000 shares of common stock in the
form of stock options and restricted stock to employees, officers, directors
and consultants of the Company. The exercise price of options granted under
the 1995 Plan must be at least equal
43
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10--STOCK OPTIONS AND WARRANTS
to the fair market value of the common stock on the date of grant. In 1995, the
Board of Directors authorized the grant to officers and employees of options to
purchase 923,292 shares of the Company's common stock at an exercise price of
$.53 per share. In 1996, the Board of Directors authorized the grant to officers
and employees of options to purchase 229,883 shares of the Company's common
stock at exercise prices ranging from $.53 to $2.12 per share. No options were
granted under the 1995 Plan during 1996 and 1997. All options granted to date
have 10-year terms and vest over periods of up to four years after the date of
grant.
In 1997, the Company's Board of Directors and shareholders approved the
1997 Stock Option Plan (the "1997 Plan"), which provides for the granting of
1,500,000 shares of common stock in the form of stock options to selected
officers, directors and employees of the Company and its subsidiaries. The
exercise price of options granted under the 1997 Plan must be at least equal
to the fair market value of the common stock on the date of grant. In 1997,
the Board of Directors authorized the grant to officers and employees of
options to purchase 376,367 shares of the Company's common stock at exercise
prices ranging from $7.25 to $9.50 per share. All options granted to date
have 10-year terms and vest over periods of up to 5 years after the date of
grant.
In June 1996, the Company's Board of Directors adopted and in July, 1996,
the Company's stockholders approved, the Directors Stock Option Plan. The
plan authorizes stock options for a total of 285,000 shares of common stock
to be granted to eligible directors of the Company, consisting of directors
who are neither officers nor employees of the Company. Each of the six
incumbent eligible directors automatically received an option as of the date
of closing of the Company's initial public offering for 8,195 shares of
common stock with an exercise price of $10.25. As of each annual meeting of
the Company's stockholders, each incumbent eligible director who is
re-elected as a director at the annual meeting automatically receives an
option grant based on a predetermined formula. The exercise price of each
option will be the closing price on the date of grant. In 1997, each of the
six incumbent eligible directors automatically received an option as of the
date of the 1997 annual meeting for 9,500 shares of common stock with an
exercise price of $7.50. The term of each option is six years from the date
of grant, and each option vests 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.
44
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10--STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of stock option information follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year. . . . 109,729 $8.56 933,235 $0.62 537,166 $1.93
Granted. . . . . . . . . . . . . . . 923,292 $0.53 279,053 $3.20 433,367 $7.97
Exercised. . . . . . . . . . . . . . -- $0.00 (660,767) $0.59 (83,006) $0.70
Canceled/Forfeited . . . . . . . . . (99,786) $8.56 (14,355) $3.42 (41,666) $5.38
------- --------- ------- --------- ------- ---------
Outstanding at end of year. . . . . . . 933,235 $0.62 537,166 $1.93 845,861 $4.98
======= ========= ======= ========= ======= =========
Exercisable at end of year. . . . . . . 542,620 $0.60 315,273 $0.81 326,119 $1.53
Available for future grant. . . . . . . 576,708 592,004 1,700,303
</TABLE>
Options outstanding and exercisable as of December 31, 1997 by price range:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------- ------------------------------
WEIGHTED- WEIGHTED WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICE SHARES LIFE IN YEARS EXERCISE PRICE SHARES EXERCISE PRICE
----------------------- ------- ------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$.53-$1.99. . . . . . 383,060 8.09 $ 1.04 298,693 $ 0.79
$7.25-$10.25. . . . . 462,801 9.27 $ 8.23 27,426 $ 9.54
------- -------
845,861 326,119
======= =======
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee stock
options approximates the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
45
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10--STOCK OPTIONS AND WARRANTS (CONTINUED)
Pro forma information regarding net income loss and net loss per share
is required by FAS 123 as if the Company has accounted for its employee stock
options granted subsequent to December 31, 1994 under the fair value method
of that statement. Options granted in 1997 were valued using the
Black-Scholes option pricing model. Options granted in 1996 and 1995, as a
non-public company, were valued using the minimum value method. The following
assumptions were used in 1995, 1996, and 1997: risk-free interest rates
ranging from 5.5% to 5.7% in 1995 and 5.1% to 6.7% in 1996 and 5.9% to 6.8%
in 1997; a dividend yield of 0%; and a weighted-average expected life of the
option of 31 months in 1995 and 1996 and 72 months in 1997. The
weighted-average fair values of options granted during 1995, 1996, and 1997
were $.09 per share, $.79 per share, and $4.48 per share, respectively.
Option value models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing method does not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. The Company's
pro forma information follows (in thousands, except for per share
information):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- -------
<S> <C> <C> <C>
Pro forma net income (loss). . . . . . . . . . . . . . $ (4,559) $ (2,474) $ 1,112
Pro forma diluted net income (loss) per share. . . . . $ (0.82) $ (0.33) $ .10
</TABLE>
The pro forma effect for 1995, 1996, and 1997 is not representative of
the pro forma effect in future years as the pro forma disclosures reflect
only the fair value of stock options granted subsequent to December 31, 1994.
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, 1997, all of these warrants were outstanding. They
expire in March 1998.
The Company, in connection with the issuance of preferred stock, which
was subsequently reclassified as common stock issued warrants to purchase up
to 6,773 shares of common stock at an exercise price of $69.02 per share. At
December 31, 1997, all of these warrants were outstanding. They expire in
march 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 the prime rate plus 3% and was repaid. In addition to the
interest, the lenders received warrants to purchase 220,559 shares of common
stock at $1.59 per share. These warrants expire on July 31, 2000. In 1996,
the lenders exercised warrants to purchase 166,749 shares. At December 31,
1997, warrants to purchase 53,810 shares of common stock remained outstanding.
46
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 11--EMPLOYEE STOCK PURCHASE PLAN
Under a plan for 1997 approved by the Board of Directors, employees of
Stericycle can purchase shares of common stock at a market price. Under the
terms of the plan, employees were allowed to purchase shares throughout the
year and pay for the stock through salary deduction. Employees elected to
purchase a total of 5,235 shares under this plan during 1997.
NOTE 12--REGISTRATION AGREEMENT
The Company is a party to a registration agreement which gives certain
shareholders of the Company registration rights for their shares. The parties
to the registration agreement are the original holders of the Company's prior
Class A, B, C, D, E, F, H and I preferred stock and a holder of a warrant to
purchase up to 15,064 shares of common stock which the Company issued in
conjunction with a lease financing agreement. After the Company's 1995
recapitalization, the registration agreement was amended to provide that the
registration rights applied to the shares of common stock that the parties to
the registration agreement received pursuant to the recapitalization, shares
issuable under certain warrants issued to purchasers of the Company's prior
Class F preferred stock, shares issuable under the warrant issued in
conjunction with the lease financing agreement and the common stock to be
delivered by the Company in payment of a note delivered in connection with
the Safe Way acquisition, for a total of 5,227,608 shares. According to the
registration agreement (i) at any time, the holders of a majority of the
shares which are subject to the registration rights can request registration
of their shares on Form S-1 (a "Long-Form Registration") and the holders of
at least 25% of these shares can request registration of their shares on Form
S-2 or S-3, (ii) at any time, one shareholder who is a party to the
registration agreement may request a Long Form registration, (iii) at any
time, another shareholder who is a party to the registration agreement can
request a Long Form registration, and (iv) the parties to the registration
agreement have the right to include their shares in any registration which is
requested or in any other registration that the Company may otherwise
undertake. If any registration is requested, the Company will use its best
efforts to effect the requested registration at its own expense.
NOTE 13--EMPLOYEE BENEFIT PLAN
The Company has a 401(k) 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 plan by each employee. The Company's contributions for the years ended
December 31, 1995, 1996 and 1997 were approximately $14,000, $14,000 and
$25,000, respectively.
NOTE 14--RELATED PARTIES
In February 1997, the Company announced the formation of an
international joint venture company called Medam S.A. de C.V., ("Medam")
which will utilize Stericycle's proprietary Electro-Thermal Deactivation
(ETD) technology to treat medical and infectious waste in the Mexico City
market. Stericycle's partners in the joint venture are Controladora Ambiental
S.A. de C.V. ("Contam"), headquartered in Mexico City and Pennoni Associates,
Inc., headquartered in Philadelphia, Pennsylvania. The Company owns 24.5% of
the common stock of Medam. During 1997, the Company received partial payments
for machinery to be delivered to Medam in 1998. At the year ended December
31, 1997 the Company has
47
<PAGE>
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 14--RELATED PARTIES (CONTINUED)
made $461,000 in capital contributions. Capital contributions will be
approximately $702,000 in 1998.
In October 1993, the Company entered into an alliance agreement (the
"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 initial term of the
Alliance Agreement ends on October 12, 1998, and will be automatically
renewed for successive one-year terms thereafter, unless either party
notifies the other at least six months prior to the end of any term of its
intent to terminate the Agreement.
Under the Alliance, the investor and the Company have an ongoing
relationship to provide services and products to the healthcare market
place.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL STATEMENT DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors of the Company
is incorporated by reference to the information contained under the caption
"Election of Directors--Nominees for Director" in the Company's definitive
proxy statement for the 1998 Annual Meeting of Stockholders to be held on
April 28, 1998, to be filed pursuant to Regulation 14A.
The information required by this Item regarding executive officers of
the Company is contained under the caption "Executive Officers of the
Registrant" in Part I of this Report.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference to
the information contained under the caption and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive proxy statement
for the 1998 Annual Meeting of Stockholders to be held on April 28, 1998, to
be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the information contained under the caption "Executive Compensation" in the
Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders to be held on April 28, 1998, to be filed pursuant to Regulation
14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the information contained under the caption "Stock Ownership--Stock Ownership
of Directors and Executive Officers" in the Company's definitive proxy
statement for the 1998 Annual Meeting of Stockholders to be held on April 28,
1998, to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the information contained under the caption "Election of Directors--Certain
Transactions" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders to be held on April 28, 1998, to be filed pursuant to
Regulation 14A.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS (Item 14(a)(1) and (2))
The following financial statements and schedules have been filed with
this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors, Ernst & Young LLP. . . . . . . . . . . . . . . 27
Consolidated Financial Statements--Stericycle, Inc. and Subsidiaries
Consolidated Balance Sheets at December 31, 1996 and 1997. . . . . . . . . . . 28
Consolidated Statements of Operation for Each of the Years in the
Three-Year Period Ended December 31, 1997. . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Changes in Shareholders' Equity for
Each of the Years in the Three-Year Period Ended December 31, 1997 . . . . . 30
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended December 31, 1997. . . . . . . . . . . . . . . . . . 31
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 32
</TABLE>
EXHIBITS (Item 14(a)(3))
The following exhibits are filed with this Report:
<TABLE>
<CAPTION>
FILED WITH
EXHIBIT ELECTRONIC
NUMBER. DESCRIPTION SUBMISSION
- ------- ----------- -----------
<S> <C> <C>
3.1* Amended and Restated Certificate of
Incorporation . . . . . . . . . . . . . . . . . .
3.2* Amended and Restated By-Law . . . . . . . . . . .
4.1* Specimen certificate for shares of the
Registrant's Common Stock, par value $.01
per share . . . . . . . . . . . . . . . . . . . .
4.2* Form of Common Stock Purchase Warrant in
connection with July 1995 line of credit. . . . .
4.3* Form of Common Stock Purchase Warrant in
connection with May 1996 short-term loan. . . . .
4.4* Amended and Restated Registration Agreement
dated October 19, 1994 between the Registrant
and certain of its stockholders, and related
First Amendment dated September 30, 1995 and
Second Amendment dated July 1, 1996 . . . . . . .
10.1*+ Amended and Restated Incentive Compensation
Plan. . . . . . . . . . . . . . . . . . . . . . .
10.2*+ Directors Stock Option Plan . . . . . . . . . . .
10.3+ 1997 Stock Option Plan. . . . . . . . . . . . . . X
50
<PAGE>
10.4* 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 . . . . . . . . .
10.5* 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. . . .
10.6* Radio-Frequency Heating Technology Licensing
Agreement dated November 10, 1995 between
the Registrant and IIT Research Institute . . . .
10.7* Alliance Agreement dated October 12, 1993
between the Registrant and Baxter Healthcare
Corporation and related First Amendment dated
August 1, 1996. . . . . . . . . . . . . . . . . .
10.8* Agreement dated May 6, 1994 between the
Registrant and Sage Products, Inc., and related
letter agreement dated November 7, 1995 . . . . .
10.9* 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. . . . . . . . .
10.10* Standard Form Industrial Lease dated October 1,
1991 between the Registrant and General
American Life Insurance Company, relating to
the Registrant's Loma, Linda, California
treatment facility. . . . . . . . . . . . . . . .
10.11* Lease dated June 1, 1992 between the
Registrant and Rhode Island Industrial
Facilities Corporation, relating to the
Registrant's Woonsocket, Rhode Island
treatment facility. . . . . . . . . . . . . . . .
10.12* Lease dated February 25, 1992 between the
Registrant and EML Associates, relating to
the Registrant's San Leandro, California
transfer station. . . . . . . . . . . . . . . . .
10.13* 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. . . . . . . . . . .
10.14* 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. . . . . . . . . . . . . . . . . . . . .
10.15* State of Rhode Island and Providence
Plantations Consent Agreement dated August 22,
1995 between the Registrant and the Rhode
Island Department of Environmental Management . .
10.16* Interim Agreement dated June 28, 1996 between
the Registrant and a Brazilian company. . . . . .
10.17++ Asset Purchase Agreement dated December 20, 1996
between the Registrant and Waste Management,
Inc. and various of its subsidiaries. . . . . . .
51
<PAGE>
10.18++ Stock Purchase Agreement dated May 1, 1997
between Bennett Velocci, Orlando Velocci, Umberto
Velocci and the Estate of Vincent Delbrocolo, Sr.,
relating to the Registrant's purchase of all of
the issued and outstanding stock of Environmental
Control Co., Inc. . . . . . . . . . . . . . . . .
11 Statement re computation of per share earnings . . X
21 Subsidiaries. . . . . . . . . . . . . . . . . . . . X
23 Consent of Ernst & Young LLP. . . . . . . . . . . . X
27.1 Restated financial data schedule for the year
ended December 31, 1995 . . . . . . . . . . . . . . X
27.2 Restated financial data schedule for the year
ended December 31, 1996 . . . . . . . . . . . . . . X
27.3 Financial data schedule for the year ended
December 31, 1997 . . . . . . . . . . . . . . . . . X
</TABLE>
- ---------------
* Incorporated by reference to the exhibit (with the same exhibit number)
to the Registrant's Registration Statement on Form S-1, as declared
effective on August 22, 1996 (Registration No. 333-05665).
+ Management contract or compensatory plan required to be filed pursuant
to Item 601 of Regulation S-K.
++ Incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report (Amended) on Form 8-K/A, dated December 20, 1996, filed on
January 23, 1996.
++ Incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K, dated May 21, 1997, filed on June 5, 1997.
REPORTS ON FORM 8-K (Item 14(b))
During the quarter ended December 31, 1997, the Company did not file any
reports on Form 8-K.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 20, 1997.
STERICYCLE, INC.
By: /s/ MARK C. MILLER
-----------------------------
Mark C. Miller
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ JACK W. SCHULER Chairman of the Board of Directors March 20, 1997
- ------------------------
Jack W. Schuler
/s/ MARK C. MILLER President, Chief Executive Officer March 20, 1997
- ------------------------ and a Director (PRINCIPAL EXECUTIVE
Mark C. Miller OFFICER)
/s/ FRANK J.M. ten BRINK Vice President, Finance and Chief March 20, 1997
- ------------------------ Financial Officer (PRINCIPAL
Frank J.M. ten Brink FINANCIAL AND ACCOUNTING OFFICER)
/s/ ROD DAMMEYER Director March 20, 1997
- ------------------------
Rod Dammeyer
/s/ PATRICK F. GRAHAM Director March 20, 1997
- ------------------------
Patrick F. Graham
/s/ JOHN PATIENCE Director March 20, 1997
- ------------------------
John Patience
/s/ L. JOHN WILKERSON, Ph.D Director March 20, 1997
- ---------------------------
L. John Wilkerson, Ph.D.
/s/ PETER VARDY Director March 20, 1997
- ------------------------
Peter Vardy
</TABLE>
53
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED WITH
EXHIBIT ELECTRONIC
NUMBER. DESCRIPTION SUBMISSION
- ------- ----------- -----------
<S> <C> <C>
3.1* Amended and Restated Certificate of
Incorporation . . . . . . . . . . . . . . . . . .
3.2* Amended and Restated By-Law . . . . . . . . . . .
4.1* Specimen certificate for shares of the
Registrant's Common Stock, par value $.01
per share . . . . . . . . . . . . . . . . . . . .
4.2* Form of Common Stock Purchase Warrant in
connection with July 1995 line of credit. . . . .
4.3* Form of Common Stock Purchase Warrant in
connection with May 1996 short-term loan. . . . .
4.4* Amended and Restated Registration Agreement
dated October 19, 1994 between the Registrant
and certain of its stockholders, and related
First Amendment dated September 30, 1995 and
Second Amendment dated July 1, 1996 . . . . . . .
10.1*+ Amended and Restated Incentive Compensation
Plan. . . . . . . . . . . . . . . . . . . . . . .
10.2*+ Directors Stock Option Plan . . . . . . . . . . .
10.3+ 1997 Stock Option Plan. . . . . . . . . . . . . . X
10.4* 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 . . . . . . . . .
10.5* 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. . . .
10.6* Radio-Frequency Heating Technology Licensing
Agreement dated November 10, 1995 between
the Registrant and IIT Research Institute . . . .
10.7* Alliance Agreement dated October 12, 1993
between the Registrant and Baxter Healthcare
Corporation and related First Amendment dated
August 1, 1996. . . . . . . . . . . . . . . . . .
10.8* Agreement dated May 6, 1994 between the
Registrant and Sage Products, Inc., and related
letter agreement dated November 7, 1995 . . . . .
10.9* 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. . . . . . . . .
10.10* Standard Form Industrial Lease dated October 1,
1991 between the Registrant and General
American Life Insurance Company, relating to
the Registrant's Loma, Linda, California
treatment facility. . . . . . . . . . . . . . . .
54
<PAGE>
10.11* Lease dated June 1, 1992 between the
Registrant and Rhode Island Industrial
Facilities Corporation, relating to the
Registrant's Woonsocket, Rhode Island
treatment facility. . . . . . . . . . . . . . . .
10.12* Lease dated February 25, 1992 between the
Registrant and EML Associates, relating to
the Registrant's San Leandro, California
transfer station. . . . . . . . . . . . . . . . .
10.13* 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. . . . . . . . . . .
10.14* 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. . . . . . . . . . . . . . . . . . . . .
10.15* State of Rhode Island and Providence
Plantations Consent Agreement dated August 22,
1995 between the Registrant and the Rhode
Island Department of Environmental Management . .
10.16* Interim Agreement dated June 28, 1996 between
the Registrant and a Brazilian company. . . . . .
10.17++ Asset Purchase Agreement dated December 20, 1996
between the Registrant and Waste Management,
Inc. and various of its subsidiaries. . . . . . .
10.18++ Stock Purchase Agreement dated May 1, 1997
between Bennett Velocci, Orlando Velocci, Umberto
Velocci and the Estate of Vincent Delbrocolo, Sr.,
relating to the Registrant's purchase of all of
the issued and outstanding stock of Environmental
Control Co., Inc. . . . . . . . . . . . . . . . .
11 Statement re computation of per share earnings . . X
21 Subsidiaries. . . . . . . . . . . . . . . . . . . . X
23 Consent of Ernst & Young LLP. . . . . . . . . . . . X
27.1 Restated financial data schedule for the year
ended December 31, 1995 . . . . . . . . . . . . . . X
27.2 Restated financial data schedule for the year
ended December 31, 1996 . . . . . . . . . . . . . . X
27.3 Financial data schedule for the year ended
December 31, 1997 . . . . . . . . . . . . . . . . . X
</TABLE>
- ---------------
* Incorporated by reference to the exhibit (with the same exhibit number)
to the Registrant's Registration Statement on Form S-1, as declared
effective on August 22, 1996 (Registration No. 333-05665).
+ Management contract or compensatory plan required to be filed pursuant
to Item 601 of Regulation S-K.
++ Incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report (Amended) on Form 8-K/A, dated December 20, 1996, filed on
January 23, 1996.
++ Incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K, dated May 21, 1997, filed on June 5, 1997.
55
<PAGE>
EXHIBIT 10.3
1997 STOCK OPTION PLAN
ARTICLE 1
PURPOSE
The purpose of this Plan is to permit the Company to grant stock options
to selected officers, directors and employees of the Company and its
Subsidiaries, and to selected consultants to the Company, 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, par value $.01 per share.
CLOSING PRICE means the last reported sales price 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.
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.
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 ("Item 404(a)"), (iii) does not possess an interest in
any other transaction for which disclosure would be required under Item
404(a) and (iv) is not engaged in a business relationship for which
disclosure would be required under Item 404(a).
NSO is defined in Article 5.
56
<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.
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 it may be amended. The name of this Plan is the
"Stericycle, Inc. 1997 Stock Option Plan."
PLAN ADMINISTRATOR means, in the context of the administration of this
Plan in respect of Eligible Persons other than Officers, the Board or the
committee of the Board to which the Board has delegated its authority in
accordance with Paragraph 7.1, and in the context of the administration of
this Plan in respect of Officers, the Officer Options Committee.
OFFICER-EMPLOYEE means an Officer who is also an Employee.
10% STOCKHOLDER means an Officer or Employee who, at the time that he or
she is granted an ISO, owns more than 10% of the Company's outstanding Common
Stock.
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.
TERMINATION DATE means the date of termination of employment by the
Company or a Subsidiary of an Employee or Officer-Employee. A transfer of
employment from the Company to a Subsidiary, or from a Subsidiary to the
Company or to another Subsidiary, will not be considered a termination of
employment.
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
3.1 EFFECTIVE DATE. When adopted by the Board, this Plan shall become
effective retroactive to February 1, 1997, but shall be subject to approval
by the Company's stockholders. Options may be granted under this Plan (but
may not be exercised) prior to stockholder approval, but if for any reason
stockholder approval is not obtained on or before December 31, 1997, all such
options shall be cancelled.
3.2 TERM. This Plan shall have a term of 10 years expiring on January
31, 2007. No Option may be granted under this Plan after its expiration.
ARTICLE 4
SHARES AVAILABLE UNDER PLAN
4.1 MAXIMUM NUMBER OF SHARES. The maximum total number of shares of
Common Stock for which Options may be granted under this Plan is 1,500,000
shares (subject to adjustment as provided in Paragraph 10.1).
4.2 SHARES ADDED BACK. If an Option or Installment expires
unexercised or is surrendered prior to
57
<PAGE>
January 31, 2007, 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 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 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.
ARTICLE 7
ADMINISTRATION
7.1 BOARD. This Plan shall be administered by the Board in respect of
all Eligible Persons other than Officers. Except for the Board's authority to
administer the Plan in respect of Directors, the Board may delegate its
authority to administer the Plan 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. This 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 to
Eligible Persons other than Officers, and the Officers Option Committee shall
have sole authority to grant Options 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, (ii) designate an Option as an ISO or NSO, (iii)
determine the number of shares of Common Stock for which an Option is granted
and (iv) determine the other terms, conditions, restrictions and limitations
applicable to an Option.
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 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 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
58
<PAGE>
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 an Option or Installment
at any time.
8.3 TERMINATION OF EMPLOYMENT. Any Option or Installment held by an
Employee or 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 also 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 an
exercisable 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 exercisable 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 termination of the Employee or
Officer-Employee occurred as a result of his or her death. In this case, the
Plan Administrator may extend the expiration to the earlier of (i) a date no
later than the first anniversary of the death of the Employee or
Officer-Employee 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 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) a personal check; (ii) delivery of
shares of Common Stock having a fair market value on the date of exercise
equal to the exercise price; (iii) directing the
59
<PAGE>
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; (iv) 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); (v) any combination of the preceding methods of
payment; or (vi) 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) a personal check; (ii) delivery of shares of
Common Stock having a fair market value on the date of exercise equal to the
withholding obligation; (iii) 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; (iv) any combination of the
preceding methods of payment; or (v) by any other method of payment
authorized by the Plan Administrator.
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 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 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 10.1 shall be made in the Board's discretion, and its decisions
shall be final and binding.
10.2 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 materially increase the number of shares
of Common Stock for which NSOs may be granted or which would increase the
number of shares of Common Stock for which ISOs may be granted (other than an
amendment authorized under Paragraph 10.1). If this Plan is terminated, the
provisions of this 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 the holder of any outstanding Option without
his or her consent.
10.3 NO RIGHT TO EMPLOYMENT. Nothing in this Plan or in any Option
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.
10.4 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.
10.5 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.
10.6 GOVERNING LAW. This Plan and all Option Agreements shall be
governed in accordance with the laws of the State of Illinois.
60
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Weighted average common shares outstanding--
basic earnings per share................................ 5,582,385 7,471,151 10,239,996
Common stock issuable upon assumed conversion of stock
options and warrants.................................... -- -- 526,120
---------- ---------- -----------
Adjusted weighted average common shares outstanding--
diluted earnings per share.............................. 5,582,385 7,471,151 10,766,116
========== ========== -----------
Net income (loss) applicable to common stock............ $ (4,544) $ (2,389) $ 1,430
========== ========== ===========
Basic net income (loss) per common share................ $ (0.81) $ (0.32) $ 0.14
========== ========== ===========
Diluted net income (loss) per common share.............. $ (0.81) $ (0.32) $ 0.13
========== ========== ===========
</TABLE>
61
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Stericycle of Arkansas, Inc., an Arkansas corporation
Stericycle of Washington, Inc., a Washington corporation
SWD Acquisition Corp., a Delaware corporation
Environmental Control Co., Inc., a New York corporation
62
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 333-23695) pertaining to the
Stericycle, Inc. Amended and Restated Incentive Compensation Plan, in the
Registration Statement on Form S-8 (Registration No. 333-24185) pertaining to
the Stericycle, Inc. Directors Stock Option Plan, and in the Registration
Statement on Form S-8 (Registration No. 333-48761) pertaining to the
Stericycle, Inc., 1997 Stock Option Plan, of our report dated March 6, 1998,
with respect to the consolidated financial statements of Stericycle, Inc.,
and Subsidiaries included in its Annual Report on Form 10-K for the year
ended December 31, 1997, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 23, 1998
63
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INCLUDED IN THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 (NO. 333-05665) AND, EXCEPT AS
EARNINGS PER SHARE ARE RESTATED, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 138
<SECURITIES> 0
<RECEIVABLES> 3,731
<ALLOWANCES> 138
<INVENTORY> 0
<CURRENT-ASSETS> 5,192
<PP&E> 10,228
<DEPRECIATION> 3,587
<TOTAL-ASSETS> 23,491
<CURRENT-LIABILITIES> 4,753
<BONDS> 1,633
0
0
<COMMON> 55
<OTHER-SE> 12,519
<TOTAL-LIABILITY-AND-EQUITY> 23,491
<SALES> 21,339
<TOTAL-REVENUES> 21,339
<CGS> 17,478
<TOTAL-COSTS> 17,478
<OTHER-EXPENSES> 8,405
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 277
<INCOME-PRETAX> (4,544)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,544)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,544)
<EPS-PRIMARY> (0.81)<F1>
<EPS-DILUTED> (0.81)<F2>
<FN>
<F1>RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128
AND STAFF ACCOUNTING BULLETIN NO. 98.
<F2>RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128
AND STAFF ACCOUNTING BULLETIN NO. 98.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INCLUDED IN THE
REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND, EXCEPT AS
EARNINGS PER SHARE ARE RESTATED, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,950
<SECURITIES> 5,799
<RECEIVABLES> 4,934
<ALLOWANCES> 178
<INVENTORY> 0
<CURRENT-ASSETS> 23,781
<PP&E> 17,215
<DEPRECIATION> 5,208
<TOTAL-ASSETS> 55,155
<CURRENT-LIABILITIES> 9,164
<BONDS> 4,591
0
0
<COMMON> 100
<OTHER-SE> 39,914
<TOTAL-LIABILITY-AND-EQUITY> 55,155
<SALES> 0
<TOTAL-REVENUES> 24,542
<CGS> 0
<TOTAL-COSTS> 26,979
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 42
<INTEREST-EXPENSE> 373
<INCOME-PRETAX> (2,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,389)
<EPS-PRIMARY> (.32)<F1>
<EPS-DILUTED> (.32)<F2>
<FN>
<F1>RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128
AND STAFF ACCOUNTING BULLETIN NO. 98.
<F2>RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128
AND STAFF ACCOUNTING BULLETIN NO. 98.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS IN THE THREE-YEAR
PERIOD ENDED DECEMBER 31, 1997 ON PAGES 28 AND 29 OF THIS REPORT, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,374
<SECURITIES> 2,335
<RECEIVABLES> 10,647
<ALLOWANCES> 361
<INVENTORY> 0
<CURRENT-ASSETS> 19,487
<PP&E> 18,480
<DEPRECIATION> 7,239
<TOTAL-ASSETS> 61,226
<CURRENT-LIABILITIES> 12,273
<BONDS> 3,475
0
0
<COMMON> 105
<OTHER-SE> 44,921
<TOTAL-LIABILITY-AND-EQUITY> 61,226
<SALES> 0
<TOTAL-REVENUES> 46,166
<CGS> 0
<TOTAL-COSTS> 44,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 428
<INCOME-PRETAX> 1,576
<INCOME-TAX> 146
<INCOME-CONTINUING> 1,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,430
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
