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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, 1998
[ ] 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)
28161 NORTH KEITH DRIVE, LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices)
(847) 367-5910
(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 30, 1999, the aggregate market value of the Registrant's voting
stock held by non-affiliates of the Registrant was $198,493,735.
On March 30, 1999, there were 14,500,101 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 1999 Annual Meeting of Stockholders to be held on May 18, 1999.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Stericycle is the second largest provider of regulated medical waste
management services in the United States, providing regulated medical waste
collection, transportation, treatment and disposal services to over 78,000
customers in 40 states, the District of Columbia and four Canadian provinces.
Combining proprietary treatment technology with a health care orientation in
both the scope of its services and the experience of its management, the Company
believes that it is in a unique position 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. Since 1991, the
Company has completed 35 acquisitions, of which 27 were completed since the
Company's initial public offering in August 1996. These acquisitions, combined
with growth from its existing operations, have increased the Company's revenues
from $1.6 million in 1991 to $66.7 million in 1998. In February 1999, the
Company completed a second public offering.
The Company's integrated services include regulated medical waste
collection, transportation, treatment, disposal, reduction, re-use and recycling
services, together with related training and education programs, consulting
services and product sales. The Company has historically operated in seven
geographic service areas: (i) California, Nevada and Arizona; (ii) Oregon,
Washington, Idaho and British Columbia; (iii) Illinois, Indiana, Minnesota and
Wisconsin; (iv) Ohio, Michigan, Kentucky and Tennessee; (v) Texas and New
Mexico; (vi) Connecticut, Massachusetts, Maine, New Hampshire, Rhode Island and
Vermont; and (vii) Alabama, Delaware, Georgia, Maryland, New Jersey, New York,
North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia and the
District of Columbia. The Company's subsidiary, Med-Tech Environmental Limited
("Med-Tech"), operates in the Canadian provinces of Quebec, Ontario, Alberta and
British Columbia, as well as the northeast United States. The Company's
majority-owned subsidiary, 3CI Complete Compliance Corporation ("3CI"), operates
in Alabama, Arkansas, Georgia, Florida, Missouri, Kansas, Louisiana,
Mississippi, Oklahoma, Tennessee and Texas. The Company markets its services to
two principal types of customers: (i) outpatient clinics, medical and dental
offices,long-term and sub-acute care facilities, biomedical companies, municipal
entities and other smaller-quantity generators of regulated medical waste
("Alternate Care" generators); and (ii) hospitals, blood banks, pharmaceutical
manufacturers and other larger-quantity generators of regulated medical waste
("Large Quantity" generators). The Company's revenues for 1998 were slightly
higher for Alternate Care generators than for Large Quantity generators. The
Company anticipates that a greater proportion of its future revenues will
continue to be derived from Alternate Care generators as the Company continues
to focus its marketing efforts on the rapidly growing, higher-margin Alternate
Care market.
Regulated medical waste is generally described 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 and
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 1997 estimated that the size of the
regulated medical waste management market in the United States in 1999 would be
more than $1.3 billion.
The Company believes that its regulated medical waste management system
using its proprietary Electro-Thermal-Deactivation ("ETD") treatment process is
the only commercially-proven system that: (i) kills human pathogens in regulated
medical waste without generating liquid effluents or regulated air emissions;
(ii) affords certain operating cost advantages over the principal competing
treatment methods; (iii) reduces the volume of regulated medical waste by up to
85%; (iv) renders regulated medical waste
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unrecognizable; (v) permits the recovery and recycling of usable plastics from
regulated medical waste; and (vi) enables the remaining regulated medical waste
to be safely landfilled or used as an alternative fuel in energy production.
TRENDS IN THE HEALTH CARE AND MEDICAL WASTE INDUSTRIES
The Company believes that its business has grown and will continue to 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 Safety and Health 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 continue to be concerned about the handling, treatment and disposal of
regulated medical waste. These concerns are reflected by their desire to: (i)
reduce on-site handling of regulated medical waste in order to minimize employee
contact; (ii) assure safe transportation of regulated medical waste to treatment
sites; (iii) assure destruction of potentially infectious human pathogens; (iv)
render the treated regulated medical waste nonrecognizable in order to reduce
liability and to increase disposal options; and (v) minimize the impact of the
treatment process on the environment and the volume of solid waste deposited in
landfills.
Growing Importance of Alternate Care Generators
The Company believes that in response to managed care and other health care
cost-containment pressures, patient care continues increasingly to shift from
higher-cost acute-care settings to less expensive off-site treatment
alternatives. Many common diseases and conditions are now being treated in
alternate-site settings. According to a report published by the U.S. Health Care
Financing Administration, total alternate-site health care expenditures in the
United States increased from approximately $6 billion in 1985 to approximately
$28 billion in 1996. The Company believes that alternate-site health care
expenditures will continue to grow in response to governmental and private
cost-containment initiatives.
Alternate Care generators are an increasingly important source of revenues in
the regulated medical waste industry. An independent report estimated that in
1990 (the most recent year for which the Company has information from published
sources) approximately 23% (by weight) of regulated medical waste was produced
by Alternate Care generators. The Company believes on the basis of its
experience 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
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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. The Company believes
that Alternate Care generators are accordingly extremely service-sensitive,
relying on their regulated medical waste management provider for timely waste
removal, creative solutions for safer regulated medical waste handling,
establishment of regulated medical waste management protocols, education on
regulated medical waste reduction techniques and assistance with compliance and
recordkeeping. The Company believes that growth in the number of Alternate Care
generators will generate growth in the overall regulated medical waste
management market and will continue to provide growth opportunities for the
Company.
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 pollutants released by medical
waste incineration. The EPA estimates that of the approximately 1,100 small, 690
medium and 460 large medical waste incinerators in operation in May 1996,
approximately 93-100% of the small incinerators, 60-95% of the medium
incinerators and up to 35% of the large incinerators will be closed. The Company
believes that these closures will occur over a period of several years and
expects to benefit from this anticipated movement by hospitals to outsource
regulated medical waste disposal rather than incur the cost of installing the
air pollution control systems necessary to comply with the EPA's regulations.
Industry Consolidation
Although the regulated medical waste management industry remains highly
fragmented, the number of competitors is 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 some 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. The Company
believes that some 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.
Health Care Cost and Liability Containment Initiatives
The health care industry continues to be under pressure to reduce costs and
improve efficiency. In part, this has been accomplished through the outsourcing
of certain services, including regulated medical waste management. The Company
believes that its regulated medical waste management services facilitate cost
containment by health care providers by reducing their 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.
GROWTH STRATEGY
The Company plans to increase its revenue and profitability through improved
penetration
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of existing geographic service areas, expansion into new areas and selected
acquisitions.
Increase Customer Density In Existing Service Areas
The Company continues to implement a number of programs to increase
customer density, including targeted telemarketing and direct sales efforts and
alliances with entities that provide access to new customers within existing
geographic service areas. Due to the high fixed costs associated with the
collection and treatment of regulated medical waste, significant economies of
scale result from increased customer density in existing service areas, and
accordingly, the Company's telemarketing and direct sales efforts target
securing new customer agreements within its existing service areas. The Company
markets to both Large Quantity and Alternate Care generators, focusing on
Alternate Care generators. The Company also reviews potential marketing
alliances with various hospitals, health maintenance organizations, medical
suppliers and others as a way to access primarily Alternate Care customers.
Expand Geographically
The Company estimates that its existing transportation and treatment system
enables it to serve effectively an area encompassing approximately 80% of the
U.S. population. 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 plans to continue to expand its "hub and spoke" transportation
strategy by acquiring or developing additional transfer stations. Channeling
waste through additional transfer stations allows the Company to maximize the
utilization of existing treatment facilities. Selective development of transfer
stations would enable the Company to serve effectively an area encompassing
approximately 80% of the U.S. population. The Company believes that expanded
telemarketing and direct sales efforts will help develop new geographic service
areas. As soon as contracts for managing a critical mass of regulated medical
waste are obtained, the Company reviews whether the construction of additional
treatment or transfer facilities is economically justified.
The Company is also expanding beyond the United States and Canada. 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. This relationship
was expanded in July 1998, when the Company entered into an agreement for an
exclusive license to use the Company's ETD technology in Brazil and for the sale
to the Brazilian company, Companhia Auxiliar de Viacao e Obras -- CAVO, of a
fully-integrated ETD system for use in treating medical waste in the Sao Paulo,
Brazil metropolitan market. 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
primarily 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 and operate a treatment facility.
This facility, which is the largest medical waste treatment facility permitted
to date in Mexico, became operational in 1998. In addition, Medam has acquired a
transportation service company in Mexico. There can be no assurance, however,
that the Company will be successful in expanding profitably into foreign
markets.
Pursue Selected Acquisitions
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, and leadership position in, the
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regulated medical waste industry, its successful expansion strategy and its
customer-service focus make it an attractive buyer to sellers who are interested
in participating in the growth potential inherent in an industry consolidation.
Since the Company's initial public offering in August 1996, the Company has
completed 27 acquisitions of other regulated medical waste management
businesses. The Company's acquisitions have typically involved the purchase of
selected assets consisting principally of customer lists and contracts, vehicles
and related equipment and supplies.
The Company's two most significant acquisitions during 1998 were of
Med-Tech and Waste Systems, Inc. ("WSI"), the controlling shareholder of 3CI. In
December 1998 and January 1999, the Company acquired all of Med-Tech's
outstanding stock and warrants. Med-Tech, which is located in Toronto, Canada,
provides medical waste management services in Canada and the northeastern United
States. The Company paid a total of approximately $3,059,000 in cash for the
Med-Tech shares and warrants that it acquired. In October 1998, the Company had
purchased Med-Tech's junior secured indebtedness of approximately $3,576,000,
paying the face value of the acquired debt, in the form of $2,920,000 in cash
and 36,940 shares of Common Stock.
In October 1998, the Company acquired all of WSI's outstanding stock. The
purchase price was (i) $10,000,000 in cash and (ii) the grant of certain
exclusive negotiation and first refusal rights to the sellers in connection with
the purchase, for installation and operation in the Federal Republic of Germany,
of medical waste treatment units incorporating the Company's proprietary ETD
technology. WSI owns approximately 52.2% of the common stock and all of the
preferred stock of 3CI, which provides regulated medical waste management
services in the southeastern United States. 3CI's common stock is traded on the
Nasdaq SmallCap Market under the symbol "TCCC." WSI also owns a secured
promissory note from 3CI which, as amended in December 1998, is payable to WSI
in the principal amount of approximately $6,237,000 on or before September 30,
1999.
The purchase price for the Company's 33 other acquisitions to date
(including the eight acquisitions completed in the three years prior to the
Company's initial public offering and the six acquisitions completed in the
first quarter of 1999) has been paid by a combination of cash, promissory notes,
shares of the Company's Common Stock and assumption of liabilities (or, in one
case, the forgiveness of indebtedness). 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
is enhanced by the fact that the Company's Common Stock is publicly traded.
The Company believes that its management team has substantial experience in
evaluating potential acquisition candidates and determining whether a particular
medical waste management business can be successfully integrated into the
Company. In determining whether to proceed with a business acquisition, the
Company evaluates a number of factors including: (i) the effect of the proposed
acquisition on the Company's earnings per share; (ii) the composition and size
of the seller's customer base; (iii) the efficiencies that may be obtained when
the acquisition is integrated with one or more of the Company's existing
operations; (iv) 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; (v) the seller's historical and projected financial
results; (vi) the purchase price negotiated with the seller and the Company's
expected internal rate of return; (vii) the experience, reputation and
personality of the seller's management; (viii) the seller's customer service
reputation and relationships with the communities that it serves; (ix) if the
acquisition involves the assumption of liabilities, the extent and nature of the
seller's liabilities, including environmental liabilities; and (x) whether the
acquisition gives the Company any strategic advantages over its competition.
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
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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.
Expand Range of Products and Services
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. For example, the Company 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.
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. See "--Patents and Proprietary Rights."
Additional alternative technologies and methods, which have not gained wide
commercial acceptance, include chemical treatment, chemclaving (a combination of
chemical treatment and autoclaving), 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.
Historically, the Company treated all of the regulated medical waste that
it collected using its proprietary ETD treatment process. As a result of recent
acquisitions, however, the Company and its subsidiaries now operate, in addition
to four ETD treatment facilities, seven facilities that use either incineration
or autoclaving to treat regulated medical waste, as well as one chemclave and
one microwave unit. The Company estimates that during 1998, the Company used
incineration or autoclaving at its own facilities or those of third parties for
approximately 43% of the regulated medical waste that it treated. This
percentage is likely to increase as a result of recent and future acquisitions.
The Company varies its treatment of regulated medical waste among available
treatment technologies based on capacity and pricing considerations in each
service area in order to minimize operating costs and capital investments.
Principal Treatment Technologies
Incineration. The Company estimates that incineration accounts for
approximately 65-70% of United States 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 federal, 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 ash byproduct of incineration may also constitute a
hazardous substance. As a result, there is a significant cost to construct new
incineration facilities, and there may be a substantial additional expense to
improve existing facilities, in order to insure that their operation is in
compliance with regulatory standards.
Autoclaving. The Company estimates that autoclaving accounts for
approximately 20-25% of United States 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
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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 nonrecognizable. 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 United States permitted
off-site capacity to treat regulated medical waste. ETD also includes a system
for grinding regulated medical waste. After grinding, 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, among other possible explanations for the efficacy of the ETD treatment
process, the electric field created by ETD produces high molecular agitation and
as a result rapidly generates high temperatures, and that all of the molecules
exposed to the field are agitated simultaneously, producing heat throughout the
waste instead of being imposed from the surface as in conventional heating. The
Company believes that this phenomenon, called volumetric heating, transfers
energy directly to the waste, resulting in 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. 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 at temperatures as low as 90(degree)C. Although ETD is
effective in destroying pathogens present in anatomical waste, the Company does
not currently treat anatomical waste using the ETD process.
Advantages of the Company's ETD Treatment Process
The Company believes that its proprietary ETD treatment process provides
certain advantages over both incineration and autoclaving.
Permitting. It is difficult and time-consuming to obtain the permits
necessary to construct and operate any regulated medical waste treatment
facility, regardless of the treatment technology to be employed at the proposed
facility. Local residents, citizen groups and elected officials frequently
object to the construction and operation of proposed regulated medical waste
treatment facilities solely because regulated medical waste will be transported
to and stored and handled at the facility. The Company believes, however, that
the fact that the ETD treatment process does not generate liquid effluents or
regulated air emissions may enable the Company to locate treatment facilities
near dense population centers, where greater numbers of potential customers are
found, with less difficulty than would be encountered by a competitor attempting
to locate an incinerator in the same area.
Cost. The Company believes that it is less expensive to construct and
operate an ETD treatment facility than to construct and operate either a
like-capacity incinerator or a like-capacity autoclave with shredding
capability, which may enable the Company to price its treatment services
competitively. The Company believes that the comparative advantage that it
possesses in its ability to locate treatment facilities near dense population
centers may also provide transportation and operating efficiencies.
Volume Reduction and Unrecognizability. The Company's regulated medical
waste management program reduces the overall volume of regulated medical waste
in several ways. The Company's patented reusable container, used under the
trademark Steri-Tub(R), replaces the use of corrugated containers for many Large
Quantity and Alternate Care generators of large amounts of regulated medical
waste, thus
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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 size reduction feature is
a component of the ETD treatment process. As a result of grinding, re-use and
recycling, the cubic volume of treated regulated medical waste disposed of by
the Company in landfills during 1998 was only approximately 8% of the original
cubic volume of the waste received by the Company for treatment. 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 ETD an
advantage over autoclave operations that do not include shredding or grinding.
Re-use and Recycling. The Company is presently in the process of relocating
its recycling facility. Pending regulatory approval and necessary permitting,
the Company intends to reopen its recycling facility in late 1999. When the
Company reopens its recycling facility, the Company's customers will be able to
participate in a voluntary recycling program by source-segregating their
regulated medical waste. The source-segregated regulated medical waste can be
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 may be 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, but this process has not been implemented by the
Company on a commercial scale.
The Company believes that its re-use 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.
Company's Use of Other Technologies
While the Company continues to believe that ETD offers considerable
advantages over other methods of treating regulated medical waste, the Company
expects for various reasons to continue to operate facilities that use either
incineration, autoclaving, microwaving or chemclaving. For example, as part of
the terms of an acquisition, the Company may be required to continue to use the
seller's existing treatment facilities for a specified period of time. In
addition, after making an acquisition, it may not be cost-effective for the
Company to replace the current treatment method with ETD, especially if the
customers acquired are located outside of the service area of one of the
Company's ETD treatment facilities. The Company anticipates that its
newly-acquired subsidiaries, Med-Tech and 3CI, will continue to use treatment
technologies other than ETD for the foreseeable future. Finally, other treatment
methods may provide the Company with additional flexibility to treat certain
types of regulated medical waste, e.g., anatomical waste, for which incineration
is required in certain jurisdictions. Other treatment methods can also be more
cost-effective in treating small bulk regulated medical waste in less populated
areas.
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. The
Company recognizes that its potential
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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 also advises
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.
Alternate Care Generators
The Company has specifically targeted higher-margin Alternate Care generators as
a growth area. Typical Alternate Care customers are individual or small groups
of doctors, dentists and other health care providers who are widely dispersed
and generate only a small amount of regulated medical waste. A significant
concern of these customers is having the regulated medical waste picked up and
disposed of in compliance with applicable state and federal regulations. The
Company has telemarketers who use the Company's proprietary database to identify
and qualify these Alternate Care generators and arrange appointments for the
Company's trained field sales representatives. The Company believes that its
telemarketing program is a cost-effective means to reach the numerous but
diffuse Alternate Care generators.
The Company has a "mail-back" service through which the Company can reach
Alternate Care customers located in outlying areas that would be inefficient to
serve using the Company's regular route structure. In addition, the Company has
introduced a regulated medical waste management and compliance program
specifically targeted to Alternate Care customers who are required to comply
with the OSHA bloodborne pathogens regulations but who lack the internal
personnel and systems to assure compliance.
Large Quantity Generators
The Company believes that it has been successful in servicing its Large
Quantity generator customers and plans to continue to service its current
account base as long as satisfactory levels of profitability can be maintained.
The Company's marketing and sales efforts to Large Quantity generators are
conducted by account executives whose responsibilities include identifying and
attracting new customers and servicing the existing account base of
approximately 1,200 Large Quantity customers. In addition to securing new
contracts, the Company's marketing and sales personnel provide consulting
services to its health care customers assisting them in reducing the amount of
regulated medical waste 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 several strategic alliances to
supplement its marketing and sales efforts to Large Quantity generators.
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Service Agreements
The Company negotiates individual service agreements with each Large
Quantity 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 and, in some
jurisdictions, requirements imposed by statute or regulation. 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, in most service areas, 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 regulated medical
waste service customer accounting for more than 2% of the Company's 1998 medical
waste revenues. The Company does not believe that the loss of any single
customer would have a material adverse effect on its business, financial
condition or results of operations.
LOGISTICS
An important element of the Company's business strategy is to maximize the
efficiency with which it collects and transports a large volume of regulated
medical waste and directs the deployment of many collection vehicles. This
aspect of the Company's operations -- referred to as logistics -- represents the
Company's single largest operating cost. Accordingly, the Company considers
logistics to be a critical component of its operating plan. The Company's
integrated approach to regulated medical waste management is designed to provide
it with numerous logistic advantages in the process of managing regulated
medical waste.
Pre-Collection
Before regulated medical waste is collected, the Company's integrated waste
management approach can "build in" efficiencies that will yield logistic
advantages. For example, the Company's consulting services can assist its
customers in minimizing their regulated medical waste volume at the point of
generation. In addition, the Company provides customers with the documentation
necessary for regulatory compliance which, if properly completed, will minimize
interruptions in the regulated medical waste treatment cycle for verification of
regulatory compliance.
Containers
A key element of the Company's pre-collection measures is the use of
specially designed containers by most of the Company's Large Quantity and
Alternate Care generators of large volumes of regulated medical waste. The
Company has developed and patented a reusable leak- and puncture-resistant
container, made from recycled plastic and used under the registered trademark
Steri-Tub(R). The plastic container 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 plastic containers 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. 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
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waste unless it is properly packaged by customers in Company-supplied or
- -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 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 or corrugated boxes 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. The containers or boxes 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, containers or boxes of regulated
medical waste are scanned to verify that they do not contain any unacceptable
substances such as radioactive material. Any container or box which is
discovered to contain unacceptable waste 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 either loaded into the processing system and ground,
compacted and treated using the Company's ETD treatment process or incinerated
or autoclaved at facilities operated by the Company or third parties. Upon
completion of the particular process, the treated medical waste or incinerator
ash is transported for resource recovery, recycling or disposal in a
nonhazardous waste landfill. After the Steri-Tub(R) plastic containers have been
emptied, they are washed, sanitized and returned to customers for re-use.
Documentation
The Company provides complete documentation to its customers for all
regulated medical waste that it collects, including the name of the generator,
date of pick-up and date of delivery to a treatment facility. The Company
believes that its 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 ("DOT"), 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,
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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, and from on-site
treatment of regulated medical waste by certain Large Quantity generators.
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 a long-term service contract 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, 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
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.
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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.
Clean Air Act Regulations. In September 1997, the EPA adopted regulations
under the Clean Air Act Amendments of 1990 that, among other things, limit the
discharge into the atmosphere of pollutants released by medical waste
incineration. These regulations require that by September 1998, every state must
submit to the EPA for approval a comprehensive plan to meet certain minimum
emission standards for these pollutants. In addition, each state compliance plan
will impose training and recordkeeping requirements on incinerator operators,
mandate the development of a site-specific waste management plan and require
regular monitoring and testing of emissions. See "-- State and Local
Regulations." The EPA estimates that of the approximately 1,100 small, 690
medium and 460 large medical waste incinerators in operation in May 1996,
approximately 93-100% of the small incinerators, 60-95% of the medium
incinerators and up to 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 the EPA's regulations. The Company currently operates two
incinerators and believes that it will be successful in obtaining all necessary
federal and state permits to continue operation of these incinerators without
material expenditure on emissions control systems. The Natural Resources Defense
Council, an environmental organization, has sued the EPA challenging the
validity of its regulations on the grounds that the minimum emissions standards
are too lenient. If successful, this lawsuit could result in the EPA's adoption
of stricter air emissions standards for medical waste incinerators. Stricter
emissions standards could benefit the Company to the extent that the rate of
outsourcing of regulated medical waste management by hospitals is accelerated.
Stricter emissions standards could also have an adverse effect on the Company to
the extent that the Company incurs increased costs to bring its leased
incinerators into compliance with the more stringent standards or faces a
significant price increase in the charges for treatment of regulated medical
waste that the Company delivers to third parties for incineration.
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.
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.
The Company utilizes landfills for the disposal of treated regulated medical
waste from two of its ETD facilities and for the disposal of incinerator ash and
autoclaved waste from its facilities using incineration or autoclaving. Waste is
not regulated as hazardous under RCRA unless it contains hazardous
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substances exceeding certain quantities or concentration levels or exhibits
certain hazardous characteristics. Following treatment, waste from the Company's
ETD and autoclave facilities is disposed of as nonhazardous waste. At the
Company's incineration facilities, the Company tests ash from the incineration
process to determine whether it must be disposed of as hazardous waste and
disposes of it accordingly.
The Company employs quality control measures to check incoming regulated
medical waste for certain types of 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
wastes.
DOT 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 notification in the United States and Canada, and has entered
into agreements with several emergency response organizations to provide spill
cleanup services in certain 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 its use.
The Company expects that the DOT will issue a proposed rule in 1999
regulating the transportation of infectious substances. While the Company does
not expect that the rule will impose significant costs on the Company, the
precise terms of the rule, and hence the associated costs, if any, cannot be
determined at this time.
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 cleanup of facilities from which there has been an actual
or threatened release of hazardous substances into the environment. CERCLA and
similar state laws impose strict, joint and several liability on the current and
former owners and operators of facilities from which releases of hazardous
substances have occurred and on the generators and transporters of the hazardous
substances that come to be located at such facilities. Responsible parties may
be liable for substantial site investigation and cleanup 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 site investigation and cleanup, 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 cleanup costs.
United States Postal Service. The Company has obtained a permit from the
U.S. Postal Service to conduct its "mail-back" program, pursuant to which
customers mail appropriately packaged sharps
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containers directly to the Company's treatment facilities.
State and Local Regulation
The Company currently conducts some type of business activity in 40
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 local governments 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 U.S. Congress has considered, and could in the
future consider, legislation that would at least partially overturn these court
decisions and immunize particular state and local flow control requirements from
Commerce Clause scrutiny.
Similarly, the U.S. Supreme Court has consistently held that state and
local measures that seek to restrict the importation of extraterritorial waste
or tax imported waste at a higher rate are unconstitutional. To date,
congressional efforts to enable states, under certain circumstances, to impose
differential taxes on out-of-state waste or restrict waste importation have been
unsuccessful.
In the absence of federal legislation, certain local laws that direct
waste flows to designated facilities may be unenforceable, and discriminatory
taxes and waste importation restrictions should continue to be subject to
judicial invalidation. If the U.S. Congress adopts legislation allowing for
certain types of flow control or restricting the importation of waste, or if
legislation affecting interstate transportation of waste is adopted at the
federal or state level, such legislation could adversely affect the Company's
medical waste collection, transport, treatment and disposal operations and hence
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance that
municipalities will not attempt to pass ordinances which effectively block or
discourage the Company from locating a treatment or transfer facility within
their limits, although the Company ultimately may prevail in challenging the
legality of such ordinances.
States predominantly regulate medical waste as a solid or "special" waste
and not as a hazardous waste under RCRA. State definitions of medical waste
include, but are not limited to: microbiological waste (cultures and stocks of
infectious agents); pathology waste (human body parts from surgical and autopsy
waste); blood and blood products; and sharps.
Most states require segregation of different types of regulated medical
waste at the point of generation. A majority of states require that the
universal biohazard symbol or related label appear on medical waste containers.
Storage regulations may apply to the generator, the treatment facility, the
transport vehicle, or all three. Storage rules center on identifying and
securing the storage area for public safety as well as setting standards for the
manner and length of storage. Many states mandate employee training for safe
environmental cleanup 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.
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In the State of Washington, the Company is subject to regulation by the
Washington Utilities and Transportation Commission. 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, and various business operator's
licenses. The Company believes that it is currently in compliance in all
material respects with its permits and applicable laws and regulations.
The Company has submitted an application to the New York State Department
of Environmental Conservation for a consent order that would provide the
Company's subsidiary, Environmental Control Co., Inc., with temporary authority
to operate its Bronx, New York, transfer station in place of the facility's
former owner. The Company has also submitted an application to the New York
State Department of Environmental Conservation for a consent order to construct
and operate a medical waste transfer station at its Bronx, New York location.
While the Company believes that it will receive this temporary authority
followed by an operating permit, there can be no assurance that the Company will
in fact receive temporary authority to operate or an operating permit for the
transfer station. Denial of authority to operate or an operating permit for the
transfer station could result in significant additional costs to the Company.
Pursuant to medical waste incinerator regulations adopted by the EPA in
1997, every state was required by September 1998 to adopt a plan to comply with
federal guidelines which, among other things, limit the release of specified
airborne pollutants from medical waste incinerators to levels prescribed by the
EPA. Each state's implementation plan must be at least as restrictive as the
federal emissions standards. If a state in which the Company operates an
incinerator adopts more stringent limits than the federal emissions standards,
the Company could incur significant costs to bring its incinerator into
compliance with the state's requirements. See "--Governmental
Regulation--Federal Regulation--Clean Air Act Regulations."
Subsequent to the issuance of the Company's original license for its
Woonsocket, Rhode Island treatment facility, the State of Rhode Island enacted
legislation that required the Company to obtain an additional license for its
regulated medical waste management operations. The Company has applied for but
has not yet received this additional license. Until regulatory action is taken
in respect of this additional license, the Company is permitted to continue to
operate under its current license. Denial of this additional license could
result in the Company being required to cease operations in Rhode Island and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's ETD 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 received permits or been granted legislative approval to operate its
ETD treatment technology in 15 states, with additional applications pending.
There can be no assurance, however, that the Company's treatment technology will
be approved for the treatment of regulated medical waste in each state or other
jurisdiction where the Company may seek regulatory approval in the future to
construct and operate a treatment facility. The Company's inability to obtain
any such regulatory approval could have a material adverse effect on the
Company's business, financial condition and results of operations.
Foreign Regulation
The Company presently conducts business in British Columbia, Canada,
where it collects regulated medical waste in the Vancouver area and transports
it to the Company's Morton, Washington, treatment
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facility. The Company's activities in British Columbia are governed at the
federal level by the Canadian Transportation of Dangerous Goods Act, 1992, and
the Canadian Environmental Protection Act and at the provincial level by the
British Columbia Waste Management Act. The Canadian Environmental Protection Act
regulates, among other things, the transborder movement of medical waste and
deals primarily with notification requirements. 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, among other things, the
release of any 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 cleanup costs associated with remediation of contaminated sites. The Company
believes that it has obtained all permits required by these acts.
The Company's subsidiary, Med-Tech, operates in the Canadian provinces of
Quebec, Ontario, Alberta and British Columbia, and is subject to the same
federal Canadian regulation and to the same or comparable provincial regulation.
The Company believes that Med-Tech has obtained all necessary permits required
by relevant federal and provincial legislation.
There can be no assurance, however, that the Company or its subsidiary
will not be required in the future to pay for waste cleanup costs incurred under
Canadian environmental laws or will not incur additional operating or capital
costs required by changes to laws, regulations or permits.
The Company also conducts business in Mexico through its joint venture,
Medam, collects regulated medical waste and transports it for treatment to a new
facility close to Mexico City. Medical waste is regulated in Mexico as a
category of waste distinct from solid or "municipal" waste. Mexican regulations
have established collection schedules that are specific to the type and size of
generator. The Secretariat of the Environment, Natural Resources and Fisheries
is responsible for the enforcement of Mexico's regulated medical waste law. The
Company believes that its joint venture operations in Mexico are in compliance
with all applicable laws, rules and regulations affecting regulated medical
waste collection, transport, treatment and disposal. See "--Growth
Strategy--Expand Geographically."
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 currently 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. Permitting for transportation
operations frequently involves registration of vehicles, inspection of equipment
and background investigations on the Company's officers and directors.
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,
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have met with significant community opposition. In some of these cases, the
Company has withdrawn from the permitting process.
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 cleanup 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 or penalties in connection with violations of regulatory
requirements.
The Company carries $7,000,000 of liability insurance (including umbrella
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 available 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.
The Company's pollution liability insurance excludes liabilities under
CERCLA. There can be no assurance that the Company will not face claims under
CERCLA or similar state laws resulting in substantial liability for which the
Company is uninsured and which could have a material adverse effect on the
Company's business, financial condition and results of operations.
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 relating to the ETD
treatment process and other aspects of processing regulated medical waste. The
Company has filed or has been assigned 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, which is used under the registered trademark Steri-Tub(R).
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, portions of Europe
(including all 15 member countries of the European Union), 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 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 United States patent grants to the owner the right to exclude
others from making, using, offering to sell or selling within the United States
or importing into the United States the inventions claimed in the patent. In the
United States, a patent filed before June 8, 1995 is enforceable for 17 years
18
<PAGE> 20
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 have a term which ends 20 years from the effective date of filing. The term
of the first-to-end of the Company's existing United States patents relating to
its ETD treatment process will end in October 2009 at the earliest or in
September 2010 at the latest, and the term of the last-to-end of such patents
will end in January 2015.
In addition, the Company has additional proprietary technology relating
to the processing of regulated medical waste and other health care waste that
the Company believes is patentable. The Company is evaluating the technology to
determine whether to file for patent protection for this technology in the
future.
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 third parties. There can be no
assurance that patents belonging to third parties 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(R),
Steri-Plastic(R), Steri-Tub(R) and Steri-Cement(R), the service mark
Stericycle(R) and a service mark consisting of a graphic that the Company uses
in association with its name and services in the United States. There can be no
assurance that the registered or unregistered trademarks or service marks of the
Company will not infringe upon the rights of third parties. The requirement to
change any trademark, service mark or trade name of the Company could 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.
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<PAGE> 21
EMPLOYEES
At December 31, 1998, the Company employed 461 full-time employees and,
in addition, 94 part-time employees engaged primarily in sales and marketing. At
December 31, 1998, 3CI and Med-Tech employed 214 and 65 full-time employees,
respectively.
Drivers and transportation helpers at the Company's New York City
facilities and drivers at Med-Tech's Montreal, Quebec facility are covered by
collective bargaining agreements between the Company and Med-Tech, respectively,
and the International Brotherhood of Teamsters. The Company's production and
maintenance employees at its Morton, Washington facility were previously
represented by the International Brotherhood of Teamsters, AFL-CIO, but voted in
April 1998 to decertify the union. None of the Company's other employees is
covered by a collective bargaining agreement. The Company considers its employee
relations generally to be satisfactory.
ITEM 2. FACILITIES
The Company leases office space for its corporate offices in Lake Forest,
Illinois. The Company owns and operates ETD treatment facilities in Morton,
Washington and Yorkville, Wisconsin. It leases sites in Woonsocket, Rhode Island
and Loma Linda, California which it operates as ETD treatment facilities, and
leases or subleases treatment facilities using other technologies in Chandler,
Arizona, Baltimore, Maryland, Albuquerque, New Mexico and Terrell, Texas.
The Company leases transfer stations in: Anaheim, Los Angeles, San
Leandro and Valencia, California; Stickney, Illinois; Valparaiso, Indiana;
Albuquerque, New Mexico; New York, New York; Columbus and Middletown, Ohio; and
El Paso, Texas. In Prestonburg, Kentucky, Haverhill, Massachusetts and
Vancouver, British Columbia. 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: Middletown, Connecticut; Salem,
New Hampshire; Garden City, New York; Charlotte, North Carolina; and Renton,
Washington. The Company also utilizes several truck domiciles in Pennsylvania
and Washington.
The Company's lease of its treatment facility at Woonsocket, Rhode Island
expires in June 2017 upon the maturity of the last to mature of the industrial
development revenue bonds which were issued to finance the acquisition and
equipping of the facility. The Company's leasehold interest in the facility and
the Company's machinery and equipment at the facility are pledged as collateral
to secure the Company's obligations in connection with these bonds. The Company
has an option to purchase the facility for $2,000 upon the repayment of all of
the bonds.
The Company's subsidiary, Med-Tech, leases a treatment facility and sales
office in Brampton, Ontario; transfer stations and sales offices in Montreal,
Quebec and Haverhill, Massachusetts; and a truck domicile in Calgary, Alberta.
The Company's majority-owned subsidiary, 3CI, leases sales offices and
truck domiciles in Shreveport and Kenner, Louisiana; Carthage, Grand Prairie and
San Marcos, Texas; Birmingham, Alabama; and Bismark, Arkansas. 3CI owns sales
offices and truck domiciles in Springhill, Louisiana, Fresno, Texas and Jackson,
Mississippi, the latter two of which also serve as transfer stations. It owns
treatment facilities in Springhill, Louisiana and Birmingham, Alabama.
Substantially all of the Company's property and equipment provide
collateral for the Company's obligations under its revolving credit facility
with LaSalle National Bank. The Company believes that its existing facilities
are generally adequate for its current needs.
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<PAGE> 22
ITEM 3. LEGAL PROCEEDINGS
The Company operates in a highly regulated industry and is 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.
In April 1997, a worker at the Company's Morton, Washington treatment
facility was diagnosed with active tuberculosis. Testing revealed two additional
cases of active tuberculosis and 15 additional workers who tested positive for
exposure to tuberculosis. Officials of the Washington Departments of Health and
of Labor and Industries have concluded that the Company's workers were probably
exposed to tuberculosis bacteria through regulated medical waste being processed
at the Company's treatment facility. The Company believes that other sources of
exposure are possible and that the actual source of exposure has yet to be
conclusively determined. However, the Company has implemented the
recommendations of all federal, state and local regulatory authorities regarding
outfitting its workers with personal protective equipment and has implemented or
is implementing additional recommendations regarding the modification of
equipment at the Morton facility. The measures taken at the Morton facility have
been extended to the Company's other treatment facilities. The safety measures
being taken include certain measures recommended by the National Institute for
Occupational Safety and Health ("NIOSH") in a report issued in December 1998.
While future claims are possible, to date the Company has not been subject to
any civil proceedings by the affected employees as a result of this incident,
which the Washington Department of Labor and Industries has determined is
covered by the state workers' compensation program. This or a similar incident
in the future at one of the Company's facilities could result in adverse
publicity and could cause governmental authorities to require the Company to
adopt additional safety measures, impose fines or other penalties, initiate
permit modification or revocation proceedings or deny future permit
applications, or could result in litigation by the affected employees. The cost
of complying with any additional measures, the payment of a significant fine or
penalty, the modification or revocation of an operating permit, adverse
publicity, or the expense of defending or settling employee litigation or paying
an adverse judgment, could have a material adverse effect on the Company's
business, financial condition and results of operations.
As a result of the incident in Morton, Washington, the State of
California in 1998 requested NIOSH's assistance in conducting an assessment
of health and safety at the Company's Loma Linda treatment facility. While the
Company believes that it is currently in compliance with applicable health and
safety requirements, there can be no assurance that this assessment will not
result in the imposition of additional safety precautions requiring associated
expenditures.
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, 1998.
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<PAGE> 23
SUPPLEMENTAL INFORMATION
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides certain information regarding the six officers of
the Company:
<TABLE>
<CAPTION>
NAME POSITION WITH COMPANY AGE
---- --------------------- ---
<S> <C> <C>
Mark C. Miller.................................. President, Chief Executive Officer 43
and a Director
Richard T. Kogler............................... Chief Operating Officer 39
Anthony J. Tomasello............................ Executive Vice President, and Chief 52
Technical Officer
Frank J.M. ten Brink............................ Vice President, Finance 42
and Chief Financial Officer
Michael J. Bernert.............................. Vice President, Sales and Marketing 45
Joel P. Wilson................................. Vice President, Operations 39
</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.
Richard T. Kogler joined the Company as Chief Operating Officer in
December 1998. From May 1995 through October 1998, Mr. Kogler was Vice President
and Chief Operating Officer of American Disposal Services, Inc., a solid waste
management company. From October 1984 through May 1995, Mr. Kogler served in a
variety of management positions with Waste Management, Inc. Mr. Kogler received
a B.A. degree in chemistry from St. Louis University.
Anthony J. Tomasello has served as the Company's Executive Vice President
and Chief Technical Officer since January 1999 and previously had served as Vice
President, Operations since joining the Company in August 1990. For eight 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 1982, 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.
Frank J.M. ten Brink has served as the Company's Vice President, Finance
and Chief Financial Officer since June 1997. From 1991 until 1996 he served as
Chief Financial Officer of Hexacomb Corporation, and from 1996 until joining the
Company, he served as Chief Financial Officer of 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.
Michael J. Bernert has served as the Company's Vice President, Sales &
Marketing, with
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<PAGE> 24
responsibility for sales and marketing throughout North America since January
1999. Since joining the Company in 1992, Mr. Bernert has held the position of
Vice President, Eastern Region. 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 a M.B.A. degree from the
University of Dallas.
Joel P. Wilson has served as the Company's Vice President, Operations,
with responsibility for operations throughout North America since January 1999.
Since joining the company in 1991, Mr. Wilson has held the positions of Vice
President, Midwest Region, 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.
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<PAGE> 25
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 30, 1999, there were approximately 2,764
stockholders of record.
The following table provides the high and low sales prices of the Company's
Common Stock for each calendar quarter during the Company's two most recent
fiscal years:
<TABLE>
<CAPTION>
QUARTER HIGH LOW
------- ---- ---
<S> <C> <C>
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
First Quarter 1998....................... 16.500 12.250
Second Quarter 1998...................... 17.250 11.125
Third Quarter 1998....................... 19.750 13.500
Fourth Quarter 1998...................... 21.000 13.625
</TABLE>
The Company did not pay any dividends during 1998 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 LaSalle National 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."
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<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996 1997 1998
STATEMENTS OF OPERATIONS DATA (1)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 16,141 $ 21,339 $ 24,542 $ 46,166 $66,681
Income (loss) from operations............... (5,708) (4,276) (2,437) 1,386 6,424
Net income (loss)........................... (5,812) (4,544) (2,389) 1,430 5,713
Net income (loss) applicable to
Common Stock............................. (10,293) (4,544) (2,389) 1,430 5,713
Diluted net income (loss) per share of
Common Stock (2)......................... $ (14.38) $ (0.81) $ (0.32) $ 0.13 $ 0.51
BALANCE SHEET DATA (at December 31) (1)
Cash, cash equivalents and short-term
investments.............................. $ 1,206 $ 138 $ 17,749 $ 7,709 $ 1,819
Total assets................................ 27,809 23,491 55,155 61,226 97,755
Long-term debt, net of current maturities... 4,838 5,622 4,591 3,475 23,460
Convertible redeemable preferred
stock (3)................................ 62,909 -- -- -- --
Shareholders' equity (net capital
deficiency).............................. $(35,106) $ 12,574 $ 40,014 $ 45,026 $53,651
</TABLE>
(1)See Note 5 to the Consolidated Financial Statements for information
concerning the Company's acquisitions during the three years ended December 31,
1998.
(2)See Note 8 to the Consolidated Financial Statements for information
concerning the computation of net income (loss) per common share.
(3)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.
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<PAGE> 27
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, re-use 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. The Company
is also expanding into international markets through joint ventures or by
licensing its proprietary technology and selling associated equipment.
The Company's revenues have increased from $1,563,000 in 1991 to
$66,681,000 in 1998. The Company derives its revenues from services to two
principal types of customers: (i) outpatient clinics, medical and dental
offices, long-term and sub-acute care facilities, biomedical companies,
municipal entities and other smaller-quantity generators of regulated medical
waste ("Alternate Care" generators); and (ii) hospitals, blood banks,
pharmaceutical manufacturers and other larger-quantity generators of regulated
medical waste ("Large Quantity" 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
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. Contracts with hospitals and other Large Quantity
generators, which may run for more than one year, typically include price
escalator provisions which allow for price increases generally tied to an
inflation index or set at a fixed percentage. As of December 31, 1998, the
Company served over 78,000 customers.
The Company currently expenses as incurred all permitting, design and
start-up costs associated with its facilities. The Company elects to expense
rather than to capitalize the costs of obtaining permits and approvals for each
proposed facility regardless of whether the Company is ultimately successful in
obtaining the desired permits and approvals and developing the facility. The
Company currently recognizes as a current expense all legal fees and other costs
related to obtaining and maintaining permits and approvals. In addition, the
Company currently expenses all costs related to research and development as
incurred.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased $20,515,000, or 44.4%, to $66,681,000 during
the year ended December 31, 1998 from $46,166,000 during the year ended December
31, 1997 as the Company continued to focus on sales to higher-margin Alternate
Care generators while simultaneously paring certain lower-margin accounts with
Large Quantity generators. The increase also reflects $5,952,000 in revenues
from the sale of equipment to a Brazilian company, Companhia Auxiliar de Viacao
e Obras ("CAVO"), and to a Mexican joint venture, Medam S.A. de C.V. ("Medam"),
that the Company and others formed for the collection, treatment and disposal of
regulated medical waste in the Mexico City metropolitan market utilizing the
Company's ETD treatment technology. During 1998, acquisitions contributed
approximately $13,103,000 to the increase in revenues from 1997. For the year,
internal revenue growth for Alternate Care generators increased 14.8% while
revenues from Large Quantity generators decreased by 7.2%.
Cost of revenues. Cost of revenues increased $11,219,000, or 32.9%, to
$45,328,000 during the year ended December 31, 1998, from $34,109,000 during the
year ended December 31, 1997. The increase was primarily due to the substantial
increase in revenues during 1998 compared to 1997 and to the cost of
26
<PAGE> 28
equipment supplied to CAVO and Medam. The gross margin percentage increased to
32.0% during 1998 from 26.1% during 1997 as a result of the sale of equipment
internationally, the further integration of new acquisitions into the Company's
existing infrastructure, lower costs relating to the changing mix of Alternate
Care and Large Quantity generators and increased utilization of existing
treatment capacity.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $14,929,000 during the year ended December
31, 1998 from $10,671,000 during the year ended December 31, 1997 due to the
Company's continued progress in strengthening its sales and administrative
organizations and due to the increase in the amortization of goodwill and other
incremental costs associated with acquisitions. Selling, general and
administrative expenses as a percentage of revenues decreased to 22.4% during
1998 from 23.1% during 1997. Amortization of goodwill increased to $1,505,000
during 1998 from $1,047,000 in 1997.
Interest expense and interest income. Interest expense increased to
$777,000 during the year ended December 31, 1998, from $428,000 during the year
ended December 31, 1997, primarily due to borrowings on the Company's revolving
line of credit partially offset by the repayment of certain debt issued in
connection with one of the Company's acquisitions. Interest income also
increased to $714,000 during 1998 from $618,000 during 1997, primarily due to
interest income on the Med Tech subordinated debt acquired in October 1998
partially offset by lower interest income on invested cash balances.
Income tax expense. The estimated effective tax rate of approximately
10.2% for the year ended December 31, 1998 reflects the utilization of the
Company's net operating losses for income tax purposes, offset by alternative
minimum tax and state income taxes in states where the Company has no offsetting
net operating losses.
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 Large Quantity generators. This
increase also reflects the inclusion of a full year's revenues from the
acquisition of a major portion of the regulated medical waste business of Waste
Management, Inc. ("WMI"), which was 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. 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%. For the year, internal revenue growth for
Alternate Care generators was 13.0%, while revenues from Large Quantity
generators decreased by 4.0%.
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 increased utilization 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 to 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.
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<PAGE> 29
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.
Income Tax Expense. The effective tax rate of 9.3% for the year ended
December 31, 1997 reflects the utilization of the Company's net operating losses
for income tax purposes, offset by alternative minimum tax and state income
taxes in states where the Company has no offsetting net operating losses. The
Company did not pay any income taxes during the year ended December 31, 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 was used to fund research and development,
acquisitions, capital expenditures, operating losses and working capital
requirements. The Company's IPO in August 1996 raised $27,621,000, net of
offering costs, which has been 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, as of December 31, 1998, the Company had available a $25,000,000
revolving line of credit secured by the Company's accounts receivable and all of
its other assets, and at December 31, 1998, the Company had borrowed $16,386,000
under this line of credit. In February 1999, the Company successfully completed
a second offering of common stock and raised $47,250,000 net of offering costs.
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 $1,295,000 as of December 31, 1998 at
fixed interest rates ranging from 6.30% to 7.375%, are due in various amounts
through June 2017. In addition, the Company has issued various promissory notes
in connection with acquisitions during 1997 and 1998, consisting primarily of a
10-year note issued as part of the ECCO acquisition, which had an outstanding
balance of $2,070,000 at December 31, 1998.
At December 31, 1998, the Company had working capital of $1,166,000
compared to $4,879,000 and $14,617,000 at December 31, 1997 and 1996,
respectively. The decrease in working capital at December 31, 1998 compared to
December 31, 1997 was primarily due to lower cash balances and higher current
liabilities as a result of the debt and liabilities assumed in connection with
certain acquisitions partially offset by higher receivables and other current
assets. The decrease at December 31, 1997 compared to 1996 was primarily due to
lower balances of cash, cash equivalents and short-term investments, which
decreased by $12,375,000 to finance acquisitions partially offset by other
working capital growth.
Net cash provided by (used in) operating activities was $4,862,000 during
the year ended December 31, 1998 compared to ($100,000) for the year ended
December 31, 1997. This increase primarily reflects an increase in the Company's
profitability and an increase in accounts payable offset by an increase in
accounts receivable and a decrease in accrued liabilities. 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.
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 for the year ended December 31,
1998 was $23,753,000 compared to $3,323,000 for the year ended December 31,
1997. This increase primarily reflects an increase in cash used for acquisitions
and capital expenditures and to the maturity in 1997 of temporary investments of
the net proceeds of the Company's IPO. Capital expenditures for 1998 were
$4,342,000 compared to capital
28
<PAGE> 30
expenditures of $1,235,000 for 1997. The increase in capital spending is a
result of continued improvements to the Company's existing treatment facilities,
development of a new billing system (targeted for implementation in 1999) and
improvements to transportation and treatment facilities. Payments for
acquisitions accounted for $19,775,000 of the cash used in investing activities
in 1998. 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 payment for the
acquisition of ECCO as well as several 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 1997 were $1,235,000, primarily for improvements to existing facilities,
containers and transportation equipment. Capital expenditures for 1996 were
$995,000. The Company may decide to build additional treatment facilities as
volumes increase in the Company's current geographic service areas or as the
Company enters new areas. The Company also may elect to increase the capacity of
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, bank credit
facility, cash from operations and the proceeds from the offering completed in
February 1999 will fund its capital requirements through 1999.
Net cash provided by financing activities was $14,729,000 during the year
ended December 31, 1998 compared to net cash used in financing activities of
$3,153,000 during the year ended December 31, 1997. The difference between the
two years results primarily from additional borrowings to finance acquisitions
offset by repayments of debt in 1998 related to acquisitions made in previous
years. 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 of long-term debt relating primarily to a note
issued in connection with the December 1996 WMI acquisition.
YEAR 2000 ISSUES
The Company has developed a plan to modify its information systems in
anticipation of the year 2000. The Company currently expects that this plan will
be substantially implemented by June 1999 at a cost not to exceed $100,000. In
light of the Company's progress to date and the fact that the Company's business
is not significantly affected by the software employed by its vendors and
customers, the Company does not anticipate that the year 2000 will present any
material problems in respect of the Company's key products and services.
The Company's plan for the year 2000 comprises both remediating the
Company's existing hardware and software and upgrading the Company's business
information systems generally. The Company initiated the upgrading process in
1998 in order to respond to the growth in size of the Company's business and the
inefficiencies caused by disparate hardware and software. Undertaken for reasons
unrelated to year 2000 issues, the Company's upgrading of its business
information systems has the benefit of enabling the Company to become year 2000
compliant in the course of the upgrade.
The Company has conducted an extensive review of potential year 2000
issues. The Company's assessment of its treatment facilities and equipment
concluded that there was no risk that the Company would be unable to treat
regulated medical waste as a result of year 2000 issues. The new software that
the Company adopted in 1998 for accounting and related purposes is already year
2000 compliant. The Company's other software and computer hardware are currently
being tested, and upgrades or appropriate adjustments have been or will be made
in accordance with the Company's upgrade plans or as required. The Company is
also in the process of reviewing the year 2000 compliance status of its
significant vendors.
The Company believes that it has an effective plan in place to resolve year 2000
issues in a timely
29
<PAGE> 31
manner. As of March 1999, and in the event that the Company were unable to
complete the remaining phases of its year 2000 plan, the Company believes that,
as a result of year 2000 issues solely affecting the Company, the principal
effect on the Company would be an inability to invoice a portion of its
customers for the Company's services.
The Company is also developing contingency plans to take into account any
inability of the Company itself and others to become fully year 2000 compliant
in time. These plans involve, among other actions, implementing manual systems,
increasing inventories of parts and supplies and adjusting staffing strategies.
ITEM 7A. QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk includes the possibility of rising
interest rates in connection with the Company's credit facility at LaSalle
National Bank, thereby increasing debt service obligations, which could
adversely affect the Company's cash flows. In February 1999, upon receipt of
the proceeds from the Company's public offering of common stock, all borrowings
under the credit facility were repaid. As of March 1999 the Company has no
borrowings outstanding under the credit facility. See "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources"
30
<PAGE> 32
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, 1997 and 1998, 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,
1998. 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, 1997 and 1998, and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 16, 1999
31
<PAGE> 33
================================================================================
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 5,374 $ 1,283
Short-term investments ................................... -- 536
Accounts receivable, less allowance for doubtful
accounts of $361 in 1997 and $901 in 1998 ............ 10,286 16,582
Parts and supplies ....................................... 660 1,291
Prepaid expense .......................................... 440 1,283
Other .................................................... 392 835
-------- --------
Total current assets ................................ 17,152 21,810
-------- --------
Property, plant and equipment:
Land ..................................................... 90 680
Buildings and improvements ............................... 5,561 5,987
Machinery and equipment .................................. 11,469 23,794
Office equipment and furniture ........................... 746 1,082
Construction in progress ................................. 614 1,007
-------- --------
18,480 32,550
Less accumulated depreciation .............................. (7,239) (9,450)
-------- --------
Property, plant and equipment, net .................. 11,241 23,100
-------- --------
Other assets:
Goodwill, less accumulated amortization
of $2,040 in 1997 and $3,551 in 1998 ................ 29,458 49,112
Other .................................................... 3,375 3,733
-------- --------
Total other assets .................................. 32,833 52,845
-------- --------
Total assets .................................. $ 61,266 $ 97,755
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt ........................ $ 3,052 $ 5,499
Accounts payable ......................................... 1,927 6,502
Accrued liabilities ...................................... 7,039 6,465
Deferred revenue ......................................... 255 2,178
-------- --------
Total current liabilities ........................... 12,273 20,644
-------- --------
Long term debt, net of current portion...................... 3,475 23,460
Other liabilities .......................................... 452 --
Shareholders' equity:
Common stock (par value $.01 per share,
30,000,000 shares authorized, 10,472,799
issued and outstanding in 1997,
10,865,862 issued and outstanding in 1998) .......... 105 109
Additional paid-in capital ............................... 82,986 85,894
Notes receivable for common stock purchases .............. (4) --
Accumulated deficit ...................................... (38,061) (32,352)
-------- --------
Total shareholders' equity .......................... 45,026 53,651
-------- --------
Total liabilities and shareholders' equity ...... $ 61,226 $ 97,755
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 34
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues ......................................... $ 24,542 $ 46,166 $ 66,681
Costs and expenses:
Cost of revenues ............................... 19,423 34,109 45,328
Selling, general and administrative expenses ... 7,556 10,671 14,929
-------- -------- --------
Total costs and expenses .................... 26,979 44,780 60,257
-------- -------- --------
Income (loss) from operations .................... (2,437) 1,386 6,424
Other income (expense):
Interest income ................................ 421 618 714
Interest expense ............................... (373) (428) (777)
-------- -------- --------
Total other income (expense) ................ 48 190 (63)
-------- -------- --------
Income (loss) before income taxes ................ $ (2,389) $ 1,576 $ 6,361
Income tax expense ............................... -- 146 648
-------- -------- --------
Net income (loss) ................................ $ (2,389) $ 1,430 $ 5,713
======== ======== ========
Basic earnings per share:
Basic net income (loss) per share ........... $ (0.32) $ 0.14 $ 0.54
======== ======== ========
Diluted earnings per share:
Diluted net income (loss) per share ......... $ (0.32) $ 0.13 $ 0.51
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 35
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................. $ (2,389) $ 1,430 $ 5,713
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................. 2,064 3,078 4,064
Changes in operating assets, net of effect of acquisitions
Accounts receivable ........................................... (554) (4,123) (1,884)
Parts and supplies ............................................ 144 (300) (420)
Prepaid expenses .............................................. (18) (14) 58
Other assets .................................................. (37) 98 302
Accounts payable .............................................. (428) (413) 1,781
Accrued liabilities ........................................... 1,178 559 (6,223)
Deferred revenue and other liabilities ........................ 97 (415) 1,471
-------- -------- --------
Net cash provided by (used in) operating activities ................ 57 (100) 4,862
-------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures .......................................... (995) (1,235) (4,342)
Payments for acquisitions, net of cash acquired ............... (6,516) (5,552) (19,775)
Proceeds from maturity of short-term investments .............. -- 5,799 --
Purchases of short-term investments ........................... (5,799) (2,335) (41)
Proceeds from sale of property ................................ -- -- 405
-------- -------- --------
Net cash used in investing activities .............................. (13,310) (3,323) (23,753)
-------- -------- --------
FINANCING ACTIVITIES:
Net proceeds from bank lines of credit ........................ (858) -- 16,386
Repayment of long term debt ................................... (3,275) (2,905) (3,189)
Principal payments on capital lease obligations ............... (397) (305) (1,273)
Principal payments on notes receivable for common stock
purchases ................................................... 60 -- --
Proceeds from long-term debt .................................. 1,000 -- --
Proceeds from subordinated notes .............................. -- -- 2,750
Payment of deferred financing costs ........................... -- -- (218)
Proceeds from issuance of common stock ........................ 28,535 57 344
-------- -------- --------
Net cash provided by (used in) financing activities ................ 25,065 (3,153) 14,800
-------- -------- --------
Net (decrease) increase in cash and cash and cash equivalents ..... 11,812 (6,576) (4,091)
Cash and cash equivalents at beginning of year ..................... 138 11,950 5,374
-------- -------- --------
Cash and cash equivalents at end of year ........................... $ 11,950 $ 5,374 $ 1,283
======== ======== ========
Non-cash activities:
Issuance of common stock for certain acquisitions ............. $ -- $ 3,525 $ 2,568
Issuance of notes payable for certain acquisitions ............ $ 6,497 $ 1,120 $ 195
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 36
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
ISSUED AND ADDITIONAL FOR COMMOM TOTAL
OUTSTANDING PAID-IN STOCK ACCUMULATED SHAREHOLDERS'
SHARES PAR VALUE CAPITAL PURCHASES DEFICIT EQUITY
----------- --------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995 ..................... 5,582 $ 55 $ 49,621 $ - $ (37,102) $ 12,574
Initial public offering of common stock (net of
offering costs) ................................. 3,450 35 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
Issuance of common stock for exercise of options
and warrants and employee stock purchases ....... 226 $ 2 342 344
Common stock issued for acquisitions .............. 167 2 2,566 2,568
Principal payments under note receivable .......... 4 (4) 0
Net income ........................................ 5,713 5,713
------ ----- --------- ------- --------- --------
BALANCES AT DECEMBER 31, 1998 ..................... 10,866 $ 109 $ 85,894 $ - $ (32,352) $ 53,651
====== ===== ========= ======= ========== ========
</TABLE>
<PAGE> 37
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- DESCRIPTION OF BUSINESS
Stericycle, Inc. and Subsidiaries (the "Company") provides medical waste
collection, transportation, treatment, disposal, reduction, re-use, and
recycling services to hospitals, health care providers, and other small quantity
generators in the United States and Canada. The Company is also expanding into
international markets through joint ventures and by licensing its proprietary
technology and selling associated equipment.
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 Corp., Environmental
Control Co., Inc, ("ECCO") Waste Systems, Inc. ("WSI") (majority shareholder of
3CI Complete Compliance Corporation ("3CI")), Mid-America Environmental, Inc.,
507375 N.B. Ltd., and Med-Tech Environmental Limited ("Med-Tech"). 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 associated costs are
recognized at time of shipment. Revenue and costs on contracts to supply the
Company's proprietary treatment equipment are accounted for by the percentage of
completion method, whereby income is recognized based on the estimated stage of
completion of the individual contract.
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
and certificates of deposit which mature in less than one year and are
classified as held-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 improvement --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 1996, 1997 and 1998 related to goodwill was approximately $390,000,
$1,042,000 and $1,505,000, respectively.
32
<PAGE> 38
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The Company continually evaluates the value and future benefits of its goodwill.
The Company assesses recoverability 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,
1998, 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 operation 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 1996, 1997 and 1998 was $194,000,
$281,000 and $15,000, 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.
Segment Reporting
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures 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
33
<PAGE> 39
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related enterprise-wide
disclosures about products and services, geographic areas, and major customers.
The adoption of FAS 131 did not affect the Company's results of operations or
financial position, but did affect its disclosures. The Company's operating
segments, (Stericycle, Inc., WSI, and Med-Tech) have similar economic
characteristics and are similar in the nature of their products and services,
treatment processes, types of customers, methods of distribution of services,
and nature of their regulatory environments. Based on this conclusion, the
Company has not presented segment disclosure information. The Company has
provided its enterprise-wide disclosures in Note 15.
NOTE 3 -- PUBLIC OFFERINGS
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.
On February 5, 1999, the Company successfully completed a public offering
of 3,500,000 shares of common stock at $14.50 per share. The Company received
total proceeds from the offering, net of offering costs, of approximately
$47,250,000.
NOTE 4 -- INCOME TAXES
The Company's deferred tax liabilities and assets as of December 31, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
Capital lease obligations............................... $ (461,000) $ (561,000)
Property, plant and equipment........................... (509,000) (357,000)
Goodwill................................................ (228,000) (465,000)
Other................................................... -- (265,000)
----------- -----------
Total deferred tax liabilities........................... (1,198,000) (1,648,000)
Deferred tax assets:
Accrued liabilities..................................... 857,000 659,000
Research and development costs.......................... 324,000 324,000
Other................................................... 195,000 149,000
Net operating tax loss carryforward..................... 14,344,000 10,927,000
Alternative minimum tax credit carry-
forward................................................. 60,000 140,000
----------- -----------
Total deferred tax assets................................ 15,780,000 12,199,000
----------- -----------
Net deferred tax assets................................. 14,582,000 10,551,000
Valuation allowance..................................... (14,582,000) (10,551,000)
----------- -----------
Net deferred tax assets.............................. $ -- $ --
============ ============
</TABLE>
34
<PAGE> 40
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
At December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximated $27,000,000, 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
$140,000 available indefinitely.
<TABLE>
<CAPTION>
Significant components of the Company's income tax expense for the year
ended December 31, 1997 and 1998 are as follows:
1997 1998
------ ------
<S> <C> <C>
Current
Federal......................................................... $ 60,000 $ 243,000
State........................................................... $ 86,000 405,000
--------- ---------
Total provisions ............................................... $ 146,000 $ 648,000
========= =========
</TABLE>
A reconciliation of the income tax provision computed at the federal
statutory rate to the effective tax rate for the years ended December 31, 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Federal statutory income tax rate........................................ 34.0% 34.0%
Effect of:
State taxes, net of federal tax effect............................... 4.4% 4.0%
Alternative minimum taxes............................................ 3.8% 3.8%
Nondeductible goodwill amortization.................................. 4.5% 1.8%
Other................................................................ 1.7% --
Utilization of net operating loss carryforward....................... (39.1)% (33.4)%
----- -----
Effective tax rate ..................................................... 9.3% 10.2%
===== =====
</TABLE>
The Company paid income taxes of $1,030,000 and $58,300 in 1998 and
1997. Additionally, the Company did not recognize any income tax benefit for
1996 due to the Company's historical operating losses and valuation allowances
established for net deferred tax assets.
NOTE 5 -- ACQUISITIONS
In late December 1998 the Company gained control of a significant
majority of the outstanding common stock and warrants of Med-Tech Environmental
Limited ("Med-Tech") and in January 1999 the Company acquired all of the
remaining outstanding common stock and warrants of Med-Tech. Med-Tech, which is
located in Toronto, Canada, provides medical waste management services in Canada
and the northeastern United States. The Company paid a total of approximately
$3,059,000 in cash for the Med-Tech shares and warrants that it acquired. In
October 1998, the Company purchased Med-Tech's junior secured indebtedness of
approximately $3,576,000, paying the face value of the acquired debt, in the
form of $2,920,000 in cash and 36,940 shares of the Company's common stock, and
replacing a letter of credit of approximately $1,641,000 (which was cancelled in
January 1999).
In October 1998, the Company acquired all of the outstanding capital
stock of Waste Systems, Inc. ("WSI"). The purchase price was (i) $10,000,000 in
cash and (ii) the grant of certain exclusive negotiation and first refusal
rights to the sellers in connection with the purchase, for installation and
operation in the
35
<PAGE> 41
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Federal Republic of Germany, of medical waste treatment units incorporating the
Company's proprietary ETD technology. WSI owns approximately 52.2% of the common
stock and all of the preferred stock of 3CI, which provides regulated medical
waste management services in the southeastern United States. 3CI's common stock
is traded on the Nasdaq SmallCap Market under the symbol "TCCC." WSI also owns a
secured promissory note from 3CI which, as amended in December 1998, is payable
to WSI in the principal amount of approximately $6,237,000 on or before
September 30, 1999.
In August 1998, the Company acquired the customer contracts, vehicles, and
certain other assets of the regulated medical waste management business of
Medical Compliance Services, Inc. (MCS) for $5,850,000 in cash. The Company
also agreed to purchase from MCS and a related party, MCS's Albuquerque, New
Mexico treatment facility and equipment for $1,250,000 in cash. The purchase of
the treatment facility and equipment closed in March 1999.
In May 1997, the Company acquired all of the outstanding stock of
Environmental Control Co., Inc. ("ECCO"), a regulated medical waste business
operating 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 the rate of 6.86% per annum payable in 10 equal installments of
$230,000, which started in May 1998.
In December 1996, the Company purchased the customer lists, vehicles, and
certain other assets of the major portion of the medical waste business of Waste
Management, Inc. ("WMI") for $5,450,000 in 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 the adjusted balance of the note plus accrued
interest in 1997 and 1998.
In addition to the above acquisitions, in 1996, 1997 and 1998, the Company
acquired the customer contracts and certain other assets of nineteen other
regulated medical waste businesses. The purchase prices for these acquisitions
were paid by a combination of cash, notes payable, and shares of common stock of
the Company.
For financial reporting purposes these acquisition transactions were
accounted for using the purchase method of accounting. The total aggregate
purchase price for 1996, 1997 and 1998 of $13,013,000, $10,197,000 and
$22,538,000, respectively, net of cash acquired, was allocated to the assets
acquired and liabilities assumed based on their estimated fair market values at
the dates of acquisition. The total aggregate purchase price of 1997 and 1998
acquisitions includes the value of 403,000 and 167,000 shares of common stock,
respectively, issued to the sellers. The excess of the purchase prices over the
fair market values 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 respective dates of acquisition. The effect of these acquisitions would
not have a significant effect on the Company's
36
<PAGE> 42
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
operations, except for the Med-Tech, WSI, MCS and ECCO acquisitions.
The following unaudited pro forma results of operations assumes that the
Med-Tech, WSI, MCS and ECCO acquisitions occurred as of January 1, 1997, 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 Med
Tech, WSI, MCS and ECCO did not reflect these costs:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998
---- ----
(in thousands, except per share data)
<S> <C> <C>
Pro forma revenues ................................................. $ 79,213 $ 91,726
Pro forma net income (loss).......................................... (3,031) 4,245
Pro forma diluted net income (loss) per share........................ (0.29) 0.38
</TABLE>
The unaudited pro forma financial information does not purport to be
indicative of the results of operations that would have occurred had the
transactions taken place at the beginning of the periods indicated or of future
results of operations.
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---- ----
(in thousands)
<S> <C> <C>
Industrial development revenue bonds................................. $ 1,358 $ 1,093
Obligations under capital leases..................................... 212 847
Notes payable to banks............................................... -- 19,412
Subordinated debt ................................................. -- 2,750
Notes payable ................................................. 4,957 4,857
------ -----
6,527 28,959
Less: Current portion............................................... 3,052 5,499
----- -----
Total............................................................ $ 3,475 $ 23,460
======== =========
</TABLE>
In December 1998, the Company entered into a subordinated loan agreement
with a group of lenders consisting of six of the Company's seven directors
pursuant to which the lenders agreed to provide the Company with up to
$5,500,000 of short-term financing upon the Company's request. At December 31,
1998 the Company had borrowed $2,750,000. Each loan bore interest at 6.0% per
annum and was due on the earlier of 10 days after completion of the Company's
February 5, 1999 public offering pending when the loan was made or January 5,
2000. Under the terms of the subordinated loan agreement, the lenders were
granted five-year warrants to purchase shares of the Company's common stock
exercisable at any time after the first anniversary of the grant date. Upon
entering into the loan agreement, each lender was granted a warrant for a number
of shares of common stock equal to the amount of the lender's loan commitment
multiplied by 0.05 and then divided by the closing price of a share of common
stock on the trading day immediately prior to the date of the lender's execution
37
<PAGE> 43
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
of the loan agreement. This closing price is also the exercise price of the
warrant. In addition, at the time of each loan, each lender was granted a
warrant for a number of shares of common stock equal to the amount of the loan
multiplied by 0.30 and then divided by the closing price of a share of common
stock on the trading day immediately prior to date of disbursement of the
lender's loan. This closing price is also the exercise price of the warrant. In
January 1999, the Company borrowed the remaining balance of $2,750,000 available
under the loan agreement. In connection with their loans, the lenders were
granted warrants to purchase, in the aggregate, 18,970 shares of common stock at
$14.50 per share, 43,551 shares of common stock at $15.50 per share and 59,092
shares of Common Stock at $16.50 per share. All of the loans were repaid in
March 1999.
In connection with the Company's acquisition of Med-Tech, in December
1998, the Company assumed bank notes payable having an aggregate balance of
$3,023,000 at December 31, 1998, with the National Bank of Canada. The notes
were paid in full in January 1999.
In connection with the Company's acquisition of WSI, in October 1998,
the Company acquired a number of notes payable having an aggregate balance of
$1,838,000 at December 31, 1998. These notes are collateralized by vehicles and
equipment and are due in monthly installments, including interest at rates
ranging from 7% to 16.75% through 2002.
In October 1998, the Company established a new $25,000,000 credit
facility at LaSalle National Bank in Chicago, Illinois under a credit agreement
entered into by the Company, its subsidiaries, and LaSalle National Bank, for
itself and as agent for other lenders who may participate in the credit
agreement. This new credit facility replaced the credit facility previously in
place with Silicon Valley Bank. The new credit facility provides for a five-year
$5,000,000 revolving line of credit for working capital purposes and a one-year
$20,000,000 revolving line of credit for acquisition purposes. Upon the maturity
of this latter line of credit, the outstanding balance, if any, will convert
into a four-year term loan repayable in 16 equal quarterly payments of
principal. If the principal amount of the term loan upon conversion is less than
$15,000,000, however, a further one-year line of credit in the amount of the
difference will be available for acquisition purposes, and upon the maturity of
this further line of credit, the outstanding balance, if any, will convert into
a three-year term loan repayable in 12 equal quarterly payments of principal.
The Company's borrowings under its LaSalle Bank credit facility bear
interest at either the Bank's prime rate plus .25% (8.00% at December 31, 1998),
or an adjusted LIBOR rate (7.05% at December 31, 1998) as the Company elects at
the time of each borrowing. The Company also pays a commitment fee of 0.25% per
annum on the unborrowed portion of the credit facility. Interest is payable
quarterly (or at the end of the interest period, if the Company selects an
interest period of less than three months in the case of a borrowing bearing
interest at the adjusted LIBOR rate). As security for the Company's borrowings,
the Company granted the bank a security interest in all of the Company's
tangible and intangible assets and pledged all of the capital stock of its
subsidiaries. In addition, the Company is required to maintain a minimum level
of net worth and comply with certain restrictive financial covenants, and is
restricted from paying dividends on its capital stock. At December 31, 1998, the
Company had borrowed $16,386,000 under the credit facility. In February 1999,
upon receipt of the proceeds from the Company's public offering of common stock,
all borrowings under the credit facility were repaid.
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 amount
of the note was subsequently adjusted to $3,593,301 and was repaid during 1997
and 1998.
38
<PAGE> 44
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 6.3% 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 during each of the five years subsequent
to December 31, 1998, including capital lease obligations and excluding
borrowings under the Company's LaSalle National Bank credit facility and under
the subordinated loan agreement with certain of its directors, which amounts
were repaid in February 1999, are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999........................................... $ 5,499
2000........................................... 1,262
2001........................................... 788
2002........................................... 445
2003........................................... 230
</TABLE>
The Company paid interest of $352,000, $444,000 and $670,000 for the
fiscal years ended December 31, 1996, 1997 and 1998, respectively.
39
<PAGE> 45
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 eight years. The leases
for most of the properties contain renewal provisions.
Rent expense for 1996, 1997 and 1998 was $2,462,000, $3,284,000 and
$3,508,000 respectively.
Minimum future rental payments under non-cancelable operating leases that
have initial or remaining terms in excess of one year as of December 31, 1998
for each of the next five years and in the aggregate are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999......................................................... $ 3,916
2000......................................................... 3,052
2001......................................................... 2,584
2002......................................................... 1,915
2003......................................................... 1,078
Thereafter................................................... 895
------
Total minimum rental payments................................ $ 13,440
======
</TABLE>
40
<PAGE> 46
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 8 -- NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
net income (loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ----------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Numerator:
Net income (loss) ................................ $ (2,389) $ 1,430 $ 5,713
Denominator:
Denominator for basic earnings per share --
weighted-average shares .......................... 7,471,151 10,239,996 10,647,083
Effect of dilutive securities:
Employee stock options ....................... -- 441,586 473,723
Warrants ..................................... -- 84,534 142,722
----------- ----------- -----------
Dilutive potential common shares.................. -- 526,120 616,445
----------- ----------- -----------
Denominator for diluted earnings per share --
adjusted weighted average shares and
assumed conversions .............................. 7,451,151 10,766,116 11,263,528
=========== =========== ===========
Basic net income (loss) per share ................... $ (0.32) $ 0.14 $ 0.54
=========== =========== ===========
Diluted net income (loss) per share ................. $ (0.32) $ 0.13 $ 0.51
=========== =========== ===========
</TABLE>
For additional information regarding outstanding employee stock options
and outstanding warrants, see Note 9.
Options to purchase 838,849 shares of common stock were outstanding
during 1996 at exercise prices ranging from $.53-$69.02, but were not included
in the computation of diluted earnings per share because the Company had a net
loss in 1996 and the effect would be antidilutive. In 1997 and 1998, options and
warrants to purchase 75,945 shares and 67,615 shares, respectively, at exercise
prices of $10.25 - $69.02 and $15.50 - $69.02, respectively, were not included
in the computation of diluted earnings per share because the effect would be
antidilutive. In 1999, the Company issued 3,500,000 shares of common stock upon
completion of its February 5, 1999 public offering and 59,157 shares of common
stock in payment for certain acquisitions.
NOTE 9 -- STOCK OPTIONS AND WARRANTS
Shares of the Company's common stock have been reserved for issuance upon
the exercise of options and warrants. These shares have been reserved as follows
at December 31, 1998:
<TABLE>
<S> <C>
1995 Plan options............................................ 242,763
1996 Directors Plan options.................................. 152,345
1997 Plan options............................................ 550,862
Warrants..................................................... 268,481
---------
Total shares reserved........................................ 1,214,451
=========
</TABLE>
Stock Options
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 to the fair market value of the common stock on the
date of grant. 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. 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 shareholders 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. As of each annual meeting of the
Company's shareholders, 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. 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.
A summary of stock option information follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ ------------------------- ----------------------
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 933,235 $ 0.62 537,166 $ 1.93 845,861 $ 4.98
Granted 279,053 $ 3.20 433,367 $ 7.97 360,238 $ 13.92
Exercised (660,767) $ 0.59 (83,006) $ 0.70 (155,979) $ 2.21
Canceled/Forfeited (14,355) $ 3.42 (41,666) $ 5.38 (104,150) $ 8.89
-------- ------ ---------- ------ --------- ---------
Outstanding at end of year 537,166 $ 1.93 845,861 $ 4.98 945,970 $ 8.37
======== ====== ========== ====== ========== =========
Exercisable at end of year 315,273 $ 0.81 326,119 $ 1.53 393,084 $ 5.37
Available for future grant 592,004 1,700,303 1,434,821
</TABLE>
Options outstanding and exercisable as of December 31, 1998 by price range:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------------- - ---------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Shares Life in Yrs Price Shares Price
- ------------------------ ------ ----------- ----- ------ -----
<C> <C> <C> <C> <C> <C>
$.53--$1.99 238,314 7.08 $ 1.14 201,578 $ 0.98
$5.84--$10.25 384,292 7.29 $ 8.18 135,438 $ 8.29
$11.125--$18.125 323,364 8.51 $13.94 56,068 $14.11
--------- ---------
945,970 393,084
========= ========
</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 the 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.
41
<PAGE> 47
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Pro forma information regarding net income (loss) and net income (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 and 1998 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 1996, 1997 and 1998: expected volatility of zero in
1996, 0.50 in 1997 and 0.61 in 1998; risk-free interest rates ranging from 5.1%
to 6.7% in 1996, 5.9% to 6.8% in 1997 and 4.5% to 4.8% in 1998; a dividend yield
of 0%; and a weighted-average expected life of the option of 31 months in 1996,
72 months in 1997 and 1998. The weighted-average fair values of options granted
during 1996, 1997 and 1998 were $0.79 per share, $4.48 per share and $6.52 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>
YEAR ENDED DECEMBER 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net income (loss) ............ $ (2,474) $ 1,112 $ 4,485
Pro forma net income (loss) per share .. $ (0.33) $ 0.10 $ 0.40
</TABLE>
The pro forma effect in 1996, 1997 and 1998 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 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, 1998, 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. In 1998, all of the remaining warrants to purchase
53,810 shares were exercised.
In May 1996, the Company obtained a $1,000,000 bridge loan from certain
shareholders, directors and officers to provide working capital and to finance
acquisitions. The bridge loan was repaid in August 1996. In connection with
this loan, the Company issued warrants to members of the lending group to
purchase an aggregate of 226,036 shares of common stock at $7.96 per share. The
warrants expire in May 2001. In 1998, warrants to purchase 35,940 shares were
exercised. At December 31, 1998, warrants to purchase 190,096 shares remained
outstanding.
In December 1998, the Company entered into a subordinated loan agreement
with a group of lenders consisting of six of the Company's seven directors
pursuant to which the lenders agreed to provide the Company with up to
$5,500,000 of short-term financing upon the Company's request. Under the terms
of the subordinated loan agreement, the
42
<PAGE> 48
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
lenders have been granted five-year warrants to purchase shares of the Company's
Common Stock exercisable at any time after the first anniversary of the grant
date. The closing price of the Company's common stock on the dates of grant is
also the exercise price of the warrant. In December 1998 and January, 1999,
lenders were granted warrants to purchase, in the aggregate, 18,970 shares of
common stock at $14.50 per share, 43,551 shares of common stock at $15.50 per
share and 59,092 shares of common stock at $16.50 per share.
NOTE 10 -- 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 2,905 shares under this plan in 1998.
NOTE 11 -- 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,
1996, 1997 and 1998 were approximately $14,000, $25,000 and $10,000,
respectively.
NOTE 12 -- RELATED PARTIES
In February 1998, the Company announced the formation of an international
joint venture company called Medam S.A. de C.V., ("Medam") which utilizes
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. At December 31, 1998, the Company had made $1,164,000 in
capital contributions. In 1998 the Company sold to Medam $1,202,000 of
proprietary equipment and earned technology license fees of $1,060,000. The
Company's investment in Medam is accounted for under the equity method and is
included in other non-current assets in the Consolidated Balance Sheets. The
Company's share of the results of operations of Medam in 1998 was not material.
NOTE 13 -- LEGAL PROCEEDINGS
The Company operates in a highly regulated industry and is 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.
NOTE 14 -- SUBSEQUENT EVENTS
In the first quarter of 1999, the Company completed six acquisitions. In
January 1999, the Company purchased the customer lists and selected other assets
of Environmental Transloading Services, Inc., in Los Angeles, California, and
Medical Resources Corporation, in Farmington, New Mexico. In February 1999, the
Company purchased the customer lists and selected other assets of Medical
Resource Recycling Systems, Inc., in Spokane, Washington, Southwest Medecol,
L.C., in Amarillo, Texas, and Medical Express & General Courier Service, Inc.,
in Pittsburgh, Pennsylvania. In March 1999, the Company purchased the customer
list and selected other assets of Enviro-Tech Disposal, a division of Lancaster
General Service Business Trust, in Lancaster, Pennsylvania.
43
<PAGE> 49
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The aggregate purchase price for these six acquisitions was approximately
$3,825,000 (exclusive of liabilities assumed in two cases), of which
approximately $2,550,000 was paid in cash, approximately $1,200,000 was paid (or
will be paid) by the issuance of 59,157 unregistered shares of the Company's
common stock, and $75,000 was paid by a seven-month interest-free note. In
addition, the Company assumed certain liabilities of two of the sellers in the
aggregate amount of approximately $130,000. In the case of three of the
acquisitions, the purchase price is subject to a downwards adjustment if
revenues from the customer contracts acquired do not reach certain specified
levels.
NOTE 15 -- PRODUCTS AND SERVICES AND GEOGRAPHIC INFORMATION
Summary revenue information for the Company's products and services is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Medical waste management services $ 24,542 $ 46,166 $ 59,669
Proprietary equipment sales -- -- 5,952
Technology license -- -- 1,060
-------- --------- ---------
Total $ 24,542 $ 46,166 $ 66,681
======== ========= =========
</TABLE>
Summary financial information by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
(in thousands)
1996 1997 1998
<S> <C>
Revenues:
United States $ 24,542 $ 46,166 $ 59,206
Canada -- -- 463
Other foreign countries -- -- 7,012
-------- -------- ---------
Total $ 24,542 $ 46,166 $ 66,681
======== ======== =========
Long-lived assets:
United States $ 44,074 $ 66,853
Canada -- 9,092
Other foreign countries -- --
-------- ----------
Total $ 44,074 $ 75,945
======== ==========
</TABLE>
Revenues are attributed to countries based on the location of customers.
In 1998, the Company provided medical waste management services to customers in
Canada and licensed and sold proprietary equipment to a Brazilian company and to
a joint venture in Mexico. Additionally, no individual customer represents more
than 10% of the Company's revenues.
44
<PAGE> 50
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 1999 Annual Meeting of Stockholders to be held on May 18,
1999, to be filed pursuant to Regulation 14A.
The information required by this Item regarding executive officers of the
Company is contained under the caption "Executive Officers of the Registrant" in
Part I of this Report.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the
information contained under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders to be held on May 18, 1999, 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 1999 Annual Meeting of Stockholders
to be held on May 18, 1999, 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 1999 Annual Meeting of Stockholders to be held on May 18, 1999, 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 1999 Annual
Meeting of Stockholders to be held on May 18, 1999, to be filed pursuant to
Regulation 14A.
45
<PAGE> 51
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............................................
Consolidated Financial Statements--Stericycle, Inc. and Subsidiaries
Consolidated Balance Sheets at December 31, 1997 and 1998....................................
Consolidated Statements of Operation for Each of the Years in the
Three-Year Period Ended December 31, 1998..................................................
Consolidated Statements of Changes in Shareholders' Equity
for Each of the Years in the Three-Year Period Ended December 31, 1998.....................
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended December 31, 1998..................................................
Notes to Consolidated Financial Statements...................................................
</TABLE>
EXHIBITS (Item 14(a)(3))
The following exhibits are filed with this Report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION FILED WITH
NUMBER. ELECTRONIC
- ------- SUBMISSION
----------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's 1996 Form S-1).......................................
3.2 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to the
Company's 1996 Form S-1)..........................................................
4.1 Specimen certificate for shares of the Company's Common Stock, par
value $.01 per share (incorporated by reference to Exhibit 4.1 to the Company's
1996 Form S-1)....................................................................
4.2 Form of Common Stock Purchase Warrant in connection with July
1995 line of credit (incorporated by reference to Exhibit 4.2 to
the Company's 1996 Form S-1)......................................................
4.3 Form of Common Stock Purchase Warrant in connection with May 1996
short-term loan (incorporated by reference to Exhibit 4.3 to the Company's 1996
Form S-1).........................................................................
4.4 Form of Common Stock Purchase Warrant in connection with December 1998 subordinated
loan (incorporated by reference to Exhibit 4.1 to the Company's 1999 Form S-3)....
</TABLE>
46
<PAGE> 52
<TABLE>
<CAPTION>
<S> <C>
4.5 Amended and Restated Registration Agreement dated October 19, 1994
between the Company and certain of its stockholders, and related First Amendment
dated September 30, 1995 and Second Amendment dated July 1, 1996 (incorporated by
reference to Exhibit 4.4 to the Company's 1996 Form S-1)..........................
10.1+ Amended and Restated Incentive Compensation Plan (incorporated by reference to
Exhibit 10.1 to the Company's 1996 Form S-1)......................................
10.2+ First Amendment to Amended and Restated Incentive Compensation
Plan (incorporated by reference to Exhibit 10.7 to the Company's
1999 Form S-3)....................................................................
10.3+ Directors Stock Option Plan (incorporated by reference to Exhibit 10.2 to the
Company's 1996 Form S-1)..........................................................
10.4+ First and Second Amendments to Directors Stock Option Plan (incorporated by
reference to Exhibit 10.8 to the Company's 1999 Form S-3).........................
10.5+ 1997 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for 1997)..............................................
10.6+ First Amendment to 1997 Stock Option Plan (incorporated by reference to Exhibit
10.9 to the Company's 1999 Form S-3)..............................................
10.7 Credit Agreement dated as of September 30, 1998 among LaSalle National Bank, as
agent, LaSalle National Bank, as lender, the Company and certain of the Company's
subsidiaries, and related Master First Amendment Agreement dated as of October 30,
1998 (incorporated by reference to Exhibit 10.1 to the Company's 1999 Form S-3)...
10.8 Guaranty Agreement dated June 1, 1992 among the Company, Fleet
National Bank, as Trustee, and Rhode Island Industrial-Recreational Building
Authority, and related Regulatory Agreement dated June 1, 1992 between the Company
and the Rhode Island Industrial-Recreational Building Authority (incorporated by
reference to Exhibit 10.5 to the Company's 1996 Form S-1).........................
10.9 Subordinated Loan Agreement dated December 22, 1998 between the
Company and certain lenders (all of whom are directors of the
Company) (incorporated by reference to Exhibit 10.10 to the
Company's 1999 Form S-3)..........................................................
10.10 Industrial Building Lease dated July 28, 1998 between Curto Reynolds Oelerich, Inc.
and the Company, relating to the Company's lease of office and warehouse space in
Lake Forest, Illinois (incorporated by reference to Exhibit 10.3 to the Company's
1999 Form S-3)....................................................................
10.11 Standard Form Industrial Lease dated October 1, 1991 between the
Company and General American Life Insurance Company, relating to the Company's
Loma, Linda, California treatment facility (incorporated by reference to Exhibit
10.10 to the Company's 1996 Form S-1).............................................
10.12 Lease dated June 1, 1992 between the Company and Rhode Island
Industrial Facilities Corporation, relating to the Company's Woonsocket, Rhode
Island treatment facility (incorporated by reference to Exhibit 10.11 to the
Company's 1996 Form S-1)..........................................................
</TABLE>
47
<PAGE> 53
<TABLE>
<S> <C>
10.13 Agreement for Sublease dated April 1, 1997 between Waste Management of Texas, Inc.
and the Company, relating to the Company's sublease of a treatment facility in
Terrell, Texas (incorporated by reference to Exhibit 10.4 to the Company's 1999
Form S-3).........................................................................
10.14 Agreement for Sublease dated May 1, 1997 between Waste Management of Maryland, Inc.
and the Company, relating to the Company's sublease of a treatment facility in
Baltimore, Maryland (incorporated by reference to Exhibit 10.5 to the Company's
1999 Form S-3)....................................................................
10.15 Agreement for Sublease dated July 30, 1997 between WMI Medical Services of Arizona,
Inc. and the Company, relating to the Company's sublease of a treatment facility in
Chandler, Arizona (incorporated by reference to Exhibit 10.6 to the Company's 1999
Form S-3).........................................................................
10.16 Joint Venture Agreement dated May 16, 1997 among the Company, Pennoni Associates,
Inc., Conopam, S.A. de C.V. and Controladora Ambiental, S.A. de C.V., relating to
the organization of Medam, S.A. de C.V. (incorporated by reference to Exhibit 10.2
to the Company's 1999 Form S-3)...................................................
11 Statement re computation of per share earnings ................................... x
21 Subsidiaries...................................................................... x
23 Consent of Ernst & Young LLP...................................................... x
27 Financial data schedule for the year ended December 31, 1997...................... x
</TABLE>
- ---------------------
+ Management contract or compensatory plan required to be filed pursuant to
Item 601 of Regulation S-K.
References to the Company's "1996 Form S-1" are to the Company's
Registration Statement on Form S-1 as declared effective on August 22, 1996
(Registration No. 333-05665); references to the Company's "1999 Form S-3"
are to the Company's Registration Statement on Form S-3 as declared
effective on February 4, 1999 (Registration No. 333-60591).
REPORTS ON FORM 8-K (Item 14(b))
During the quarter ended December 31, 1998, the Company filed the
following reports on Form 8-K:
(a) a Current Report on Form 8-K, dated and filed October 15, 1998, to
report the Company's acquisition as of October 1, 1998 of all of the
issued and outstanding capital stock of Waste Systems, Inc., which
owns approximately 52.2% of the outstanding common stock and all of
the outstanding preferred stock of 3CI Complete Compliance
Corporation;
(b) a related Current Report (Amended) on Form 8-K/A, dated and filed
December 14, 1998;
(c) a Current Report on Form 8-K, dated and filed November 4, 1998, to
report the Company's purchase of certain of the issued and
outstanding capital stock and junior secured indebtedness of Med-Tech
Environmental Limited (in connection with which the Company
subsequently filed Current Reports (Amended) on Form 8-K/A Reports
(Amended) on Form 8-K/A on January 4 and January 7, 1999).
48
<PAGE> 54
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 31, 1999.
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 31, 1999
-------------------------------
Jack W. Schuler
/s/ MARK C. MILLER President, Chief Executive Officer and March 31, 1999
------------------------------- Director (Principal Executive
Mark C. Miller Officer)
/s/ FRANK J.M. ten BRINK Vice President, Finance and Chief March 31, 1999
-------------------------------- Financial Officer (Principal
Frank J.M. ten Brink Financial and Accounting Officer)
/s/ ROD DAMMEYER Director March 31, 1999
--------------------------------
Rod Dammeyer
/s/ PATRICK F. GRAHAM Director March 31, 1999
--------------------------------
Patrick F. Graham
/s/ JOHN PATIENCE Director March 31, 1999
--------------------------------
John Patience
/s/ L. JOHN WILKERSON, Ph.D Director March 31, 1999
--------------------------------
L. John Wilkerson, Ph.D.
/s/ PETER VARD Director March 31, 1999
--------------------------------
Peter Vardy
</TABLE>
49
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT DESCRIPTION FILED
NUMBER. WITH
ELECTRONIC
SUBMISSION
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's 1996 Form S-1).......................................
3.2 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to the
Company's 1996 Form S-1)..........................................................
4.1 Specimen certificate for shares of the Company's Common Stock, par
value $.01 per share (incorporated by reference to Exhibit 4.1 to the Company's
1996 Form S-1)....................................................................
4.2 Form of Common Stock Purchase Warrant in connection with July
1995 line of credit (incorporated by reference to Exhibit 4.2 to
the Company's 1996 Form S-1)
4.3 Form of Common Stock Purchase Warrant in connection with May 1996
short-term loan (incorporated by reference to Exhibit 4.3 to the Company's 1996
Form S-1).........................................................................
4.4 Form of Common Stock Purchase Warrant in connection with December 1998 subordinated
loan (incorporated by reference to Exhibit 4.1 to the Company's 1999 Form S-3)....
4.5 Amended and Restated Registration Agreement dated October 19, 1994
between the Company and certain of its stockholders, and related First Amendment
dated September 30, 1995 and Second Amendment dated July 1, 1996 (incorporated by
reference to Exhibit 4.4 to the Company's 1996 Form S-1)..........................
10.1+ Amended and Restated Incentive Compensation Plan (incorporated by reference to
Exhibit 10.1 to the Company's 1996 Form S-1)......................................
10.2+ First Amendment to Amended and Restated Incentive Compensation
Plan (incorporated by reference to Exhibit 10.7 to the Company's
1999 Form S-3)
10.3+ Directors Stock Option Plan (incorporated by reference to Exhibit 10.2 to the
Company's 1996 Form S-1)..........................................................
10.4+ First and Second Amendments to Directors Stock Option Plan (incorporated by
reference to Exhibit 10.8 to the Company's 1999 Form S-3).........................
10.5+ 1997 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for 1997)..............................................
10.6+ First Amendment to 1997 Stock Option Plan (incorporated by reference to Exhibit
10.9 to the Company's 1999 Form S-3).............................................
10.7 Credit Agreement dated as of September 30, 1998 among LaSalle National Bank, as
agent, LaSalle National Bank, as lender, the Company and certain of the Company's
subsidiaries, and related Master First Amendment Agreement dated as of October 30,
1998 (incorporated by reference to Exhibit 10.1 to the Company's 1999 Form S-3)...
</TABLE>
50
<PAGE> 56
<TABLE>
<CAPTION>
<S> <C>
10.8 Guaranty Agreement dated June 1, 1992 among the Company, Fleet
National Bank, as Trustee, and Rhode Island Industrial-Recreational Building
Authority, and related Regulatory Agreement dated June 1, 1992 between the Company
and the Rhode Island Industrial-Recreational Building Authority (incorporated by
reference to Exhibit 10.5 to the Company's 1996 Form S-1).........................
10.9 Subordinated Loan Agreement dated December 22, 1998 between the
Company and certain lenders (all of whom are directors of the
Company) (incorporated by reference to Exhibit 10.10 to the
Company's 1999 Form S-3)
10.10 Industrial Building Lease dated July 28, 1998 between Curto Reynolds Oelerich, Inc.
and the Company, relating to the Company's lease of office and warehouse space in
Lake Forest, Illinois (incorporated by reference to Exhibit 10.3 to the Company's
1999 Form S-3)....................................................................
10.11 Standard Form Industrial Lease dated October 1, 1991 between the
Company and General American Life Insurance Company, relating to the Company's
Loma, Linda, California treatment facility (incorporated by reference to Exhibit
10.10 to the Company's 1996 Form S-1).............................................
10.12 Lease dated June 1, 1992 between the Company and Rhode Island
Industrial Facilities Corporation, relating to the Company's Woonsocket, Rhode
Island treatment facility (incorporated by reference to Exhibit 10.11 to the
Company's 1996 Form S-1)..........................................................
10.13 Agreement for Sublease dated April 1, 1997 between Waste Management of Texas, Inc.
and the Company, relating to the Company's sublease of a treatment facility in
Terrell, Texas (incorporated by reference to Exhibit 10.4 to the Company's 1999
Form S-3).........................................................................
10.14 Agreement for Sublease dated May 1, 1997 between Waste Management of Maryland, Inc.
and the Company, relating to the Company's sublease of a treatment facility in
Baltimore, Maryland (incorporated by reference to Exhibit 10.5 to the Company's
1999 Form S-3)....................................................................
10.15 Agreement for Sublease dated July 30, 1997 between WMI Medical Services of Arizona,
Inc. and the Company, relating to the Company's sublease of a treatment facility in
Chandler, Arizona (incorporated by reference to Exhibit 10.6 to the Company's 1999
Form S-3).........................................................................
10.16 Joint Venture Agreement dated May 16, 1997 among the Company, Pennoni Associates,
Inc., Conopam, S.A. de C.V. and Controladora Ambiental, S.A. de C.V., relating to
the organization of Medam, S.A. de C.V. (incorporated by reference to Exhibit 10.2
to the Company's 1999 Form S-3)...................................................
11 Statement re computation of per share earnings ................................... x
21 Subsidiaries...................................................................... x
23 Consent of Ernst & Young LLP...................................................... x
27 Financial data schedule for the year ended December 31, 1997...................... x
</TABLE>
+ Management contract or compensatory plan required to be filed pursuant to
Item 601 of Regulation S-K.
References to the Company's "1996 Form S-1" are to the Company's
Registration Statement on Form S-1
<PAGE> 57
as declared effective on August 22, 1996 (Registration No. 333-05665);
references to the Company's "1999 Form S-3" are to the Company's Registration
Statement on Form S-3 as declared effective on February 4, 1999 (Registration
No.333-60591).
<PAGE> 1
EXHIBIT 11
STERICYCLE, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Weighted average common shares outstanding - basic
earnings per share.................................................... 7,471,151 10,239,996 10,647,083
Common stock issuable upon assumed conversion
of stock options and warrants......................................... -- 526,120 616,445
---------- ----------- -----------
Adjusted weighted average common shares outstanding -
diluted earnings per share............................................ 7,471,151 10,766,116 11,263,528
========== =========== ===========
Net Income (loss) applicable to common stock........................... ($2,389,000) $1,430,000 $5,713,000
========== =========== ===========
Basic net income (loss) per common share............................... ($0.32) $ 0.14 $ 0.54
========== =========== ===========
Diluted net income (loss) per common share............................. ($0.32) $ 0.13 $ 0.51
========== =========== ===========
</TABLE>
<PAGE> 1
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
Waste Systems, Inc., a Delaware corporation
3CI Complete Compliance Corporation, a Delaware corporation
Med-Tech Environmental Limited, an Ontario (Canada) corporation
Med-Tech Environmental (CDA), Ltd., a federal Canadian corporation
Bio-Med Waste Disposal Systems, Ltd., an Ontario (Canada) corporation
Med-Tech Environmental, Inc., a Delaware corporation
Med-Tech Environmental (MA), Inc., a Delaware corporation
507375 N.B. Ltd., a New Brunswick (Canada) corporation
<PAGE> 1
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 Amended and Restated
Incentive Compensation Plan of Stericycle, Inc., in the Registration Statement
on Form S-8 (Registration No. 333-24185) pertaining to the Directors Stock
Option Plan of Stericycle, Inc., and in the Registration Statement on Form S-8
(Registration No. 333-48761) pertaining to the 1997 Stock Option Plan of
Stericycle, Inc. of our report dated March 16, 1999, with respect to the
consolidated financial statements of Stericycle, Inc. and Subsidiaries included
in the Annual Report on Form 10-K for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Chicago, Illinois
March 31, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000861978
<NAME> STERICYCLE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,283
<SECURITIES> 0
<RECEIVABLES> 17,483
<ALLOWANCES> 901
<INVENTORY> 1,291
<CURRENT-ASSETS> 21,810
<PP&E> 32,550
<DEPRECIATION> 9,450
<TOTAL-ASSETS> 97,755
<CURRENT-LIABILITIES> 20,644
<BONDS> 23,460
<COMMON> 109
0
0
<OTHER-SE> 53,542
<TOTAL-LIABILITY-AND-EQUITY> 97,755
<SALES> 0
<TOTAL-REVENUES> 66,681
<CGS> 0
<TOTAL-COSTS> 60,257
<OTHER-EXPENSES> 63
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 777
<INCOME-PRETAX> 6,361
<INCOME-TAX> 648
<INCOME-CONTINUING> 5,713
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,713
<EPS-PRIMARY> .54
<EPS-DILUTED> .51
</TABLE>
