1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ STERICYCLE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-3640402 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 1419 LAKE COOK ROAD, SUITE 410 DEERFIELD, ILLINOIS 60015 (847) 945-6550 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) MARK C. MILLER PRESIDENT AND CHIEF EXECUTIVE OFFICER STERICYCLE, INC. 1419 LAKE COOK ROAD, SUITE 410 DEERFIELD, ILLINOIS 60015 (847) 945-6550 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: CRAIG P. COLMAR, ESQ. GEOFFREY E. LIEBMANN, ESQ. MICHAEL BONN, ESQ. CAHILL GORDON & REINDEL JOHNSON AND COLMAR 80 PINE STREET 300 SOUTH WACKER DRIVE NEW YORK, NEW YORK 10005 CHICAGO, ILLINOIS 60606 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [ ] If any of the securities being offered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, other than securities offered only in connection dividend or interest reinvestment plans, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) AGGREGATE OFFERING PRICE REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share......................... 3,450,000 shares...... $16.91 $58,339,500 $17,678.64 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- (1) Includes 450,000 shares that the Underwriters have the option to purchase from the Registrant to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee based on the average of the high and low prices of the Registrant's Common Stock reported on the Nasdaq National Market on July 31, 1998, in accordance with Rule 457(c) under the Securities Act of 1933. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------

2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS Subject To Completion, Dated August 4, 1998 - -------------------------------------------------------------------------------- 3,000,000 Shares Stericycle Common Stock - -------------------------------------------------------------------------------- Of the 3,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), offered hereby (the "Offering"), 2,000,000 shares are being offered by Stericycle, Inc. ("Stericycle" or the "Company") and 1,000,000 are being offered by certain stockholders of the Company (the "Selling Stockholders"). See "Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. The Common Stock is quoted on the Nasdaq National Market under the symbol "SRCL." On August 3, 1998, the last reported sale price of the Common Stock was $17.75 per share. See "Price Range of Common Stock." FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 7-14. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Price to Underwriting Discounts Proceeds to Proceeds to Public and Commissions(1) Company(2) Selling Stockholders - ---------------------------------------------------------------------------------------------------------------- Per Share............. $ $ $ $ - ---------------------------------------------------------------------------------------------------------------- Total(3).............. $ $ $ $ - ---------------------------------------------------------------------------------------------------------------- (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of this Offering payable by the Company estimated at $ . (3) The Company and other stockholders have granted the Underwriters a 30-day option to purchase up to 450,000 shares of Common Stock on the same terms per share solely to cover over-allotments, if any. If such option is exercised in full, the total purchase price to the public will be $ , the total underwriting discounts and commissions will be $ , the total proceeds to the Company will be $ and the total proceeds to the Selling Stockholders will be $ . See "Underwriting." The Common Stock is being offered by the Underwriters as set forth under "Underwriting" herein. It is expected that the delivery of the certificates therefor will be made at the offices of Warburg Dillon Read LLC, New York, New York, on or about , 1998. The Underwriters include: WARBURG DILLON READ LLC CREDIT SUISSE FIRST BOSTON WILLIAM BLAIR & COMPANY SUTRO & CO. INCORPORATED

3 STERICYCLE [MAP TO COME ELECTRONICALLY] Founded in 1989, Stericycle is the second largest provider of regulated medical waste management services in the United States. Operating in 31 states and the District of Columbia, Stericycle serves over 45,000 customers in markets that encompass approximately half of the United States population. The regulated medical waste management market in the United States is estimated to be more than $1.2 billion. Stericycle's current operations include seven treatment centers, four of which utilize Stericycle's proprietary Electro-Thermal-Deactivation treatment technology, 13 transfer stations and seven customer service centers. Steri-Cement(R), Steri-Fuel(R), Steri-Plastic(R) and Steri-Tub(R) are registered trademarks and Stericycle(R) is a registered service mark of the Company. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE COMMON STOCK AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE UNDERWRITING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2

4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements, Condensed Financial Statements and related Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. See "Underwriting." Unless the context requires otherwise, references to "Stericycle" or the "Company" refer to Stericycle, Inc. and its subsidiaries. Prospective investors should carefully consider the information under "Risk Factors" in evaluating an investment in the Common Stock offered by this Prospectus. 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 45,000 customers in 31 states and the District of Columbia. Combining proprietary treatment technology with a health care orientation, 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 25 acquisitions, of which 17 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 $46.2 million in 1997. 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 markets its services to two principal types of customers: (i) long-term and sub-acute care facilities, outpatient clinics, medical and dental offices, 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 1997 were divided approximately equally between Alternate Care and Large Quantity generators, but the Company anticipates that a greater proportion of its future revenues will be derived from Alternate Care generators as the Company continues to focus its marketing efforts on the more rapidly growing, higher-margin Alternate Care market. The Company's current operations are comprised of seven treatment centers, one recycling center, 13 transfer stations and seven customer service centers. 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 its penetration of its current markets and to expand its operations geographically. The Company believes that it is an attractive buyer to many potential acquisition candidates because of its exclusive focus on the regulated medical waste management industry, its customer-service orientation and its expansion strategy. The Company's senior management is actively involved in identifying acquisition candidates and consummating acquisitions, and the Company has proven procedures for efficiently integrating newly-acquired companies into its business. 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 1998 would be more than $1.2 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 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. 3

5 The Company believes that its business has grown and will continue to grow as a consequence of the following trends in the health care and regulated medical waste industries: - The handling and disposal of the large quantities of regulated medical waste generated by the health care industry has attracted significant public awareness and regulatory attention. The Occupational Safety and Health Administration ("OSHA") has issued regulations concerning employee exposure to bloodborne pathogens and other potentially infectious materials that require, among other things, special procedures for handling regulated medical waste. - Alternate Care generators have become an increasing source of revenues in the regulated medical waste industry. Alternate Care generators, however, 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. - Governmental clean air regulations and public opposition are combining to increase the cost and difficulty of obtaining permits to build and operate incinerators. This trend is expected to accelerate in response to regulations which the U.S. Environmental Protection Agency ("EPA") adopted in September 1997. The EPA expects that these regulations will result in the closing of many of the hospital medical waste incinerators currently in operation as hospitals seek alternative, less expensive methods of regulated medical waste disposal. The Company expects to benefit from this anticipated movement by hospitals to outsource regulated medical waste disposal. - The regulated medical waste management industry is rapidly consolidating. The Company has demonstrated the ability to identify and acquire companies that add revenues and profits to its business. - The health care industry continues to be under pressure to reduce costs and improve efficiency, which the Company believes that it can help to achieve for its clients in the management of regulated medical waste. The Company believes that it has many opportunities to grow and to increase its profitability by improving its penetration of existing geographic service areas, expanding into new product and service areas, acquiring selected businesses, focusing its marketing efforts on higher-margin Alternate Care generators and maximizing operating efficiencies. By improving its penetration of existing geographic service areas and expanding into new areas, the Company expects to increase both its customer density and market share. By acquiring selected regulated medical waste management businesses, the Company expects to augment both growth and operating efficiencies through "tuck-in" acquisitions that can be integrated into the Company's existing operations and acquisitions in new service areas that can be assembled in a "hub and spoke" configuration of treatment facilities and transfer stations. By focusing its marketing efforts on Alternate Care generators, the Company expects to benefit from the higher margins generally available from this large and growing class of customers. By continuing to refine its logistics through the optimization of route structures and greater exploitation of the Company's existing infrastructure, the Company expects to improve its operating efficiencies. The Company also seeks to expand internationally by entering into joint ventures with foreign regulated waste management companies and by licensing its proprietary technology to foreign companies who may also purchase ETD processing equipment. The Company recently announced the formation of a joint venture in Mexico for the collection, treatment and disposal of regulated medical waste in the Mexico City market, and it also recently announced a supply and license agreement with a Brazilian company for ETD technology and equipment to use in the treatment of regulated medical waste in the Sao Paulo, Brazil metropolitan area. Through a strategy combining market penetration, expansion, acquisitions, focused marketing and logistical efficiencies, the Company believes that it is in a unique position to grow and to lead the consolidation of the fragmented regulated medical waste management industry. Stericycle, Inc. is a Delaware corporation with its principal executive offices located at 1419 Lake Cook Road, Suite 410, Deerfield, Illinois 60015. Its telephone number is (847) 945-6550. 4

6 THE OFFERING Common Stock offered by the Company..... 2,000,000 shares Common Stock offered by the Selling Stockholders............................ 1,000,000 shares Total Common Stock offered......... 3,000,000 shares Common Stock to be outstanding after the Offering................................ 12,615,399 shares (1) Use of proceeds to the Company.......... For future acquisitions and general corporate purposes, including working capital, capital expenditures and possible repayment of acquisition-related debt. See "Use of Proceeds." Nasdaq National Market symbol........... SRCL - ------------------------- (1) Based on the number of shares outstanding as of June 30, 1998. This figure excludes 397,332 shares issuable upon the exercise of outstanding stock options exercisable as of or within 60 days after June 30, 1998, at a weighted average exercise price of $4.86 per share, and 286,619 shares issuable upon the exercise of outstanding warrants all of which were exercisable as of June 30, 1998 at a weighted average exercise price of $8.21 per share. This figure also excludes 605,663 shares issuable upon the exercise of outstanding stock options, at a weighted average exercise price of $9.88 per share, which were not exercisable within 60 days after June 30, 1998. 5

7 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------ 1993 1994 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- ---- ---- STATEMENTS OF OPERATIONS DATA (1): Revenues...................... $ 9,141 $ 16,141 $21,339 $24,542 $46,166 $20,816 $28,018 Cost of revenues.............. 9,137 13,922 17,478 19,423 34,109 16,106 19,629 Selling, general and administrative expenses..... 5,988 7,927 8,137 7,556 10,671 4,603 6,358 ------- -------- ------- ------- ------- ------- ------- Income (loss) from operations.................. (5,984) (5,708) (4,276) (2,437) 1,386 107 2,031 Interest income (expense), net......................... (44) (104) (268) 48 190 182 115 ------- -------- ------- ------- ------- ------- ------- Income (loss) before income taxes....................... (6,028) (5,812) (4,544) (2,389) 1,576 289 2,146 Income tax expense............ -- -- -- -- 146 7 278 ------- -------- ------- ------- ------- ------- ------- Net income (loss)............. (6,028) (5,812) (4,544) (2,389) 1,430 282 1,868 Less cumulative preferred dividends (2)............... (3,733) (4,481) -- -- -- -- -- ------- -------- ------- ------- ------- ------- ------- Net income (loss) applicable to common stock............. $(9,761) $(10,293) $(4,544) $(2,389) $ 1,430 $ 282 $ 1,868 ======= ======== ======= ======= ======= ======= ======= Diluted net income (loss) per common share (3)............ $(13.64) $ (14.38) $ (0.81) $ (0.32) $ 0.13 $ 0.03 $ 0.17 ======= ======== ======= ======= ======= ======= ======= Weighted average number of common shares and common stock equivalent shares outstanding................. 716 716 5,582 7,471 10,766 10,554 11,167 JUNE 30, 1998 ---------------------------------- ACTUAL AS ADJUSTED (4) ------ --------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 5,693 Total assets................................................ 62,538 Long-term debt, net of current maturities................... 3,401 Shareholders' equity........................................ $47,673 - ------------------------- (1) See "Business -- Growth Strategy -- Pursue Selected Acquisitions" and Note 5 to the Consolidated Financial Statements for information concerning the Company's acquisitions during the five years and the three years ended December 31, 1997. The comparability of the information for the periods presented has been affected by these acquisitions. (2) In August 1995 and in conjunction with a recapitalization of the Company, the liquidation preference on the Company's preferred stock was eliminated and the Company's preferred stock was reclassified as common stock. See Note 8 to the Consolidated Financial Statements. (3) The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), during the fourth quarter of 1997. FAS 128 replaced the calculation of primary and fully diluted net income (loss) per common share with basic and diluted net income (loss) per common share. Net income (loss) per common share amounts have been restated where appropriate. See Note 2 to the Consolidated Financial Statements. (4) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $17.75 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company). See "Use of Proceeds." 6

8 RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should carefully consider the following factors in evaluating an investment in the Common Stock offered by this Prospectus. Prospective investors are cautioned that the statements in this Prospectus that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. The Company's actual results and the timing of events could differ materially from those contemplated by such forward-looking statements due to a number of factors. These factors include, but are not limited to, those discussed below and elsewhere in this Prospectus. GROWTH STRATEGY DEPENDENT UPON ACQUISITIONS The Company's growth strategy depends significantly upon its ability to acquire other regulated medical waste management businesses. There can be no assurance that the Company will be able to identify suitable businesses to acquire, successfully negotiate their acquisition, improve the productivity of their operations or integrate their operations into the Company's business. The trend toward consolidation in the regulated medical waste management industry may increase competition for the acquisition of existing businesses and result in fewer acquisition opportunities and higher purchase prices. Some of the Company's competitors for acquisitions continue to have greater financial resources than the Company and may be willing to pay higher prices than the Company is willing to pay to complete acquisitions or may be more capable of completing larger transactions. If the Company is successful both in identifying suitable regulated medical waste management businesses to acquire and in negotiating terms of acquisition acceptable to the Company, the size of the Company's acquisitions may nevertheless vary widely and the timing of their completion may be irregular. The Company's completion of acquisitions on an irregular basis, either because of protracted negotiations, delays in obtaining necessary regulatory approvals or other factors, could have an adverse effect on the Company's profits on a quarter-to-quarter basis and result in lower than expected earnings. There can be no assurance that any debt or equity financing which may be necessary to complete the Company's acquisitions will be able to be obtained on terms satisfactory to the Company. Any additional equity financing and the issuance of equity securities as purchase consideration may be dilutive to the Company's existing stockholders. Debt financing, if available, and the issuance of debt as purchase consideration, may significantly increase the Company's debt and involve restrictive covenants which limit the Company's operations. In addition, future acquisitions by the Company may result in large one-time write-offs and the creation of goodwill or other intangible assets that could result in significant amortization expense. The Company's failure to implement its growth strategy successfully could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds" and "Business -- Growth Strategy." If the Company is successful in acquiring additional regulated medical waste management businesses, the Company may continue to experience a period of rapid growth which could place substantial additional demands on the Company's management, resources and management information systems. The Company's failure to manage any such further rapid growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. IMPACT OF GOVERNMENT REGULATION The regulated medical waste management industry is subject to extensive federal, state, local and applicable foreign laws and regulations. The collection, transportation, treatment and disposal of regulated medical waste require applicable government permits, authorizations and approvals ("permits"), the nature of which may vary from jurisdiction to jurisdiction, and continuing compliance with required packaging, labeling, handling, treatment, disposal and documentation procedures and notice and reporting obligations. In certain states, the Company is required to obtain government approval of its pricing and to obtain and operate in compliance with a certificate of public convenience and necessity. The Company believes that it is currently in compliance in all material respects with its permits and with all applicable laws and regulations. State and local laws and regulations change with some frequency, however, and the amendment of existing laws or regulations, the adoption of new laws or regulations, or the imposition of new requirements under existing laws or regulations, could require the Company to obtain new government permits or to modify its current 7

9 methods of operation in order to comply with these changes. There can be no assurance that the Company would be able to obtain any such new permits or that the cost of compliance with any such changes would not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Governmental Regulation." The Company's failure to operate in compliance with the requirements and limitations of any permit, or with the laws and regulations pursuant to which the permit was issued, could jeopardize the permit. Routine compliance inspections by the issuing regulatory agency, as well as complaints filed or anonymously sponsored by the Company's competitors or others alleging that the Company is not operating in compliance with a particular permit, could result in administrative proceedings to modify, suspend or revoke the permit. Any such modification, suspension or revocation could have a material adverse effect on the Company's business, financial condition and results of operations. Some permits have to be renewed periodically, and there can be no assurance that any existing or future permit which must be renewed will be renewed by the issuing regulatory agency. The failure to obtain any such renewal could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Governmental Regulation." The permits that the Company requires, and in particular the permits that it requires to build and operate treatment and transfer facilities and transport regulated medical waste, are difficult and time-consuming to obtain and, if and when issued, may be subject to conditions or restrictions which limit the Company's ability to operate efficiently in the applicable jurisdiction. There can be no assurance that the Company will be successful in obtaining the permits necessary to expand the scope of the geographic service areas in which it operates or the products and services that it offers, or that any such permits will be obtained when contemplated by the Company's expansion plans or under conditions or with restrictions acceptable to the Company. The Company's inability to expand the scope of the geographic service areas in which it operates, or the products and services that it offers, either because it is unable to obtain the necessary permits or because they are issued under conditions or with restrictions that are not acceptable to the Company, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's applications for treatment and transfer facility permits are frequently subject to opposition by elected officials, local residents or citizen groups, and public opposition could force the Company to delay or withdraw its application and abandon its plans to expand into a particular geographic service area or to locate a treatment or transfer facility at a particular site. Even after a permit is issued, opponents may initiate administrative proceedings or litigation to compel the applicable regulatory agency to modify the conditions under which the permit was granted or to revoke the issuance of the permit. The Company's withdrawal of a permit application, after incurring substantial costs in the preparation and prosecution of the application and underlying market studies, site selection, facility design and pre-marketing activities, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's principal treatment technology, Electro-Thermal-Deactivation ("ETD"), 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 legislative approval to operate its 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. Like any technology, the Company's treatment process may be subject to certain technological limitations. Although the Company has never been denied regulatory approval because of any technological limitation on its treatment process, there can be no assurance that specific limitations will not be identified by a regulatory agency as a sufficient reason to withhold a necessary permit in a particular jurisdiction or used by competitors to encourage customers or potential customers to engage their services rather than those of the Company. There can be no assurance that any such actions would not have a material adverse effect on the Company's business, financial condition and results of operations. 8

10 The Company currently employs both autoclaving and incineration in addition to its proprietary ETD treatment process. Incineration is subject to more stringent regulation than the ETD treatment process and may expose the Company to greater risk of the adverse effect of government regulation. See "Business -- Treatment Technologies" and "-- Governmental Regulation." As the Company expands its international operations, it will become subject in the countries where it operates to regulation by foreign governments, including the possibility of pricing tariffs, controls over the location and operation of treatment facilities and various permit requirements similar to those imposed by United States federal, state and local authorities. See "Business -- Governmental Regulation" and "-- Growth Strategy." GOVERNMENTAL ENFORCEMENT PROCEEDINGS The Company has been and may continue to be subject from time to time to governmental enforcement proceedings and has been and may be required to pay fines and penalties or undertake remedial work at its facilities. The amount of any such fines and penalties and the cost of any such remedial work could be substantial and could have a material adverse effect on the Company's business, financial condition and results of operations. Governmental enforcement actions also may be initiated against the Company for the purpose of revoking or modifying one of the Company's permits. The cost of defense and the costs incurred as a result of the revocation or modification of a permit could be substantial and could have a material adverse effect on the Company's business, financial condition and 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 13 additional workers who tested positive for exposure to tuberculosis. While studies are ongoing, officials of the Washington Departments of Health and of Labor and Industries have claimed that the Company's workers were 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 are in the process of being 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 preliminary report issued in March 1998. The Company expects that NIOSH will issue a final report regarding this matter, and the Company may be required as a result to adopt further safety measures. 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 cause governmental authorities to require the Company to adopt additional safety measures, to impose fines or other penalties or to initiate permit modification or revocation proceedings, or 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, or the expense of defending or settling employee litigation or paying an adverse judgement, could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be successful in its defense of any future government enforcement proceeding or in obtaining a settlement on terms acceptable to the Company of any fines or penalties sought to be imposed. The expense and time involved in defending against any such enforcement proceeding, the cost of any fines or penalties imposed or paid in settlement, the cost of any changes in operations that may be necessary because of the modification, suspension or revocation of a permit, and the adverse publicity, loss of customers and additional investigations or inquiries associated with any proceeding, 9

11 could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Legal and Other Proceedings" and "-- Governmental Regulation." COMPETITION WITHIN INDUSTRY The Company operates within the highly competitive regulated medical waste management industry. Historically, competition in the industry resulted in substantial price reductions to Large Quantity generators in virtually all geographic areas. While prices have stabilized in most areas, there can be no assurance that competitive pressures within the regulated medical waste management industry will not result in further price reductions. Substantial further price reductions would have a material adverse effect on the Company's business, financial condition and results of operations. The Company faces competition from one national waste management company and many regional and local businesses in its present locations, and will be confronted with such competition in each location where it seeks to expand in the future. Some of the Company's competitors have greater capital resources, regulatory experience, sales and marketing capabilities and broader product and service offerings than the Company and are well established in their respective markets. The Company's primary competitor is Browning-Ferris Industries, Inc. ("BFI"). BFI and other competitors could engage in a variety of actions that have the effect of delaying or preventing implementation of the Company's growth strategy, including lobbying or support of legislative or regulatory initiatives designed to impede the Company's ability to obtain or maintain necessary permits and approvals and financial support of citizens' groups that oppose the Company's plans to locate a treatment or transfer facility at a particular site. There can be no assurance that the Company's competitors will not substantially increase their commitment of resources devoted to competing aggressively with the Company or that the Company will be able to compete profitably with BFI or other competitors. To the extent that the Company's competitors are able to secure significant numbers of long-term customer agreements with penalties for early termination in geographic service areas that the Company targets for growth, the Company may be unable to meet its growth objectives. See "Business - -- Competition." BROAD DISCRETION IN USE OF PROCEEDS The Company intends to use the net proceeds of this Offering received by the Company for future acquisitions of other regulated medical waste management businesses and for general corporate purposes, including working capital, capital expenditures and possible repayment of all or a portion of outstanding indebtedness incurred in connection with past acquisitions. With the exception of two agreements in principle, the Company has no pending agreements, commitments or understandings as of the date of this Prospectus to acquire other regulated medical waste management businesses. The Company's management will have broad discretion in determining the amount and timing of expenditures and in allocating the net proceeds of this Offering received by the Company. See "Use of Proceeds." UNCERTAINTY OF CONTINUED PROFITABILITY Until 1997, the Company incurred substantial losses each year since it began operations in 1989, and as of December 31, 1997, had an accumulated deficit of approximately $38,061,000. While the Company had net income of $1,430,000 for the year ended December 31, 1997 and net income of $1,868,000 for the six months ended June 30, 1998, there can be no assurance that the Company will be able to continue to operate profitably in the future. The Company is subject to the risks and uncertainties inherent in the growth of a developing business in the regulated medical waste management industry, and prospective investors have only a limited history of profitability to review. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." IMPORTANCE OF GOVERNMENTAL ENFORCEMENT OF ENVIRONMENTAL REGULATIONS The Company believes that its business prospects are enhanced by the enforcement of stringent statutory and regulatory requirements relating to the collection, transportation, treatment and disposal of regulated medical waste. These laws and regulations are, and will continue to be, a principal factor affecting demand for 10

12 the Company's regulated medical waste management services. In addition, the Company views as generally advantageous to its business prospects laws and regulations that make it more difficult or expensive to use regulated medical waste treatment technologies that compete with the ETD treatment process, such as incineration and autoclaving. These advantages have diminished, however, to the extent that the Company itself has recently begun to use incineration and autoclaving. The Company estimates that during 1997, 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. See "Business - -- Treatment Technologies." The Company believes that legislative initiatives offering financial incentives for or otherwise encouraging the recycling of treated medical waste similarly enhance the Company's business prospects. Changes in the law or regulations that relax the requirements governing regulated medical waste, including changes that reduce incentives to landfill diversion and resource recovery or that remove obstacles to the use of incineration and autoclaving for the treatment of regulated medical waste, could have a material adverse effect on the Company's business, financial condition and results of operations. The level of future enforcement of existing and new laws and regulations, the scope of future laws and regulations and the impact of technological changes on existing or future laws and regulations cannot be predicted. The level of enforcement in each jurisdiction is subject to changing political and budgetary pressures. A significant reduction in government enforcement in one or more jurisdictions could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON PATENTS AND PROPRIETARY INFORMATION The Company holds seven United States patents and two additional pending patent applications 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 five of them. The Company also holds one United States patent for its reusable container, which is used under the trademark Steri-Tub(R). The Company believes that its patents are important to its prospects for success. There can be no assurance, however, that the Company's patent applications will issue as patents or that any issued patents will provide competitive advantages to the Company or will not be successfully challenged or circumvented by competitors or other third parties. In addition, there can be no assurance that the Company's regulated medical waste treatment processes do not infringe the patent or other proprietary rights of third parties. Litigation may be required to enforce the Company's patents, to defend the Company against claims of infringement by third parties, and to determine the enforceability, validity and scope of third parties' proprietary rights. Any such litigation could involve a substantial expense to the Company and require significant time and attention of the Company's management. The Company also could be required to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions, which also could involve a substantial expense. A determination adverse to the Company in any such litigation or interference proceedings could result in a substantial liability to the Company or prevent the Company from continuing to use its regulated medical waste treatment processes. In the former event, the liability could have a material adverse effect on the Company's business, financial condition and results of operations. In the latter event, the Company could seek a license from the third party or attempt to redesign its regulated medical waste treatment processes to avoid infringement. The Company's failure to obtain such a license on terms acceptable to the Company, or its failure to redesign its processes to avoid infringement, similarly could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Patents and Proprietary Rights." In addition to patent protection, the Company seeks to protect its proprietary information through confidentiality agreements with its employees, consultants and collaborators. There can be no assurance that such agreements will not be breached, that the Company will have adequate remedies for any such breach or that the Company's proprietary information will not otherwise become known to or be independently developed by the Company's competitors. See "Business -- Patents and Proprietary Rights." The Company holds federal registrations of the trademarks Steri-Fuel(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 11

13 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, could entail significant expense and could have a material adverse effect on the Company's business, financial condition and results of operation. See "Business - -- Patents and Proprietary Rights." POTENTIAL RISK OF LIABILITY AND POTENTIAL UNAVAILABILITY OF INSURANCE The regulated medical waste management industry involves potentially significant risks of statutory, contractual, tort and common law liability. The Company's failure to comply with applicable laws and regulations or to manage regulated medical waste or its byproducts in an environmentally safe manner could result in environmental contamination, personal injury and property damage. The Company maintains pollution liability, general liability and workers' compensation insurance which the Company considers adequate to protect its business and employees. An uninsured or partially insured claim against the Company, however, could have a material adverse effect on the Company's business, financial condition and results of operations. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and similar state laws, impose strict, joint and several liability on current and former owners and operators of facilities from which releases of hazardous substances have occurred and on generators and transporters of the hazardous substances that come to be located at such facilities. Responsible parties may be liable for substantial site investigation and clean-up costs and natural resource damages, regardless of whether they exercised due care or 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 the site investigation and clean-up, even though other parties also may be liable. The Company's ability to obtain contribution from other responsible parties may be limited by the Company's inability to identify those parties and by their financial inability to contribute to investigation and clean-up costs. There can be no assurance that the Company will not face claims under CERCLA or similar state laws, or under other laws, resulting in a substantial liability for which the Company is unable to obtain contribution from other responsible parties and for which the Company is uninsured or only partially insured. The Company's pollution liability insurance excludes liabilities under CERCLA. The Company may experience difficulty in the future in obtaining adequate insurance coverage on acceptable terms. A successful claim against the Company for which it is uninsured or only partially insured, and for which it is unable to obtain contribution from other responsible parties, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Potential Liability and Insurance." ALTERNATIVE TECHNOLOGIES; TECHNOLOGICAL OBSOLESCENCE The regulated medical waste management industry presents continuing opportunities for the development of alternative treatment and disposal technologies. These alternative technologies may emphasize operating cost efficiencies, reductions in the volume of regulated medical waste generated or other environmental factors. The development and commercialization of alternative treatment or disposal technologies that are more cost-effective than the Company's technologies or that reduce the volume of regulated medical waste generated or afford other environmental benefits could place the Company at a competitive disadvantage. DEPENDENCE ON KEY PERSONNEL The Company is dependent upon a limited number of key management, technical and sales personnel. The Company's future success will depend, in part, upon its ability to attract and retain highly qualified personnel. The Company faces competition for such personnel from other companies and organizations, and there can be no assurance that the Company will be successful in hiring or retaining qualified personnel. The Company does not have written employment agreements with its officers providing for specific terms of employment, and officers and other key personnel could leave the Company's employ with little or no prior notice. The Company's loss of key personnel, especially if the loss is without advance notice, or the Company's 12

14 inability to hire or retain key personnel, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not carry any key man life insurance. INTERNATIONAL OPERATIONS The Company plans to grow both domestically and internationally and has begun penetrating regulated medical waste management markets in foreign countries. The Company's international activities may include the export of ETD technology, associated know-how and ETD equipment. A number of risks are inherent in international operations. International operations may be limited or disrupted by the imposition of government controls, export license requirements, political or economic instability, trade restrictions, changes in tariffs, restrictions on repatriating profits, taxation, or difficulties in staffing and managing international operations. Foreign regulatory agencies often establish permit and compliance standards different from those in the United States, and an inability to obtain foreign regulatory approvals on a timely basis could have an adverse effect on the Company's international business and its financial condition and results of operations. In addition, the Company's business, financial condition and results of operations may be adversely affected by fluctuations in currency exchange rates as well as increases in duty rates for ETD equipment. There can be no assurance that the Company will be able to successfully operate in any foreign market. See "Business -- Growth Strategy" and "-- Marketing and Sales." VOLATILITY OF STOCK PRICE The market price of the Common Stock could be adversely affected by fluctuations in the Company's operating results or the operating results of the Company's competitors, the failure of the Company's operating results to meet the expectations of research analysts and investors, delays in consummating acquisitions, changes in regulated medical waste management laws and regulations, actions by regulatory authorities, developments in respect of patents or proprietary rights, changes in research analysts' recommendations regarding the Company or the regulated medical waste management industry generally, general market conditions, or other events and factors. See "Price Range of Common Stock." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial numbers of shares of Common Stock in the public market following this Offering could adversely affect the market price of the Common Stock. Upon completion of this Offering, the Company will have 12,615,399 shares of Common Stock outstanding (based upon shares outstanding as of June 30, 1998). Of these shares, approximately 9,992,759 shares, including the 3,000,000 shares offered hereby (or approximately 10,442,759 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act. The remaining 2,622,640 shares may be sold in the public market only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144. Approximately 2,511,430 of these shares will be eligible for sale under Rule 144 on the date of this Offering. The Company's executive officers and directors and the Selling Stockholders, who together will hold 2,208,735 shares of Common Stock upon completion of this Offering (all of which are eligible for sale under Rule 144 on the date of this Offering), have entered into lock-up agreements with the Managing Underwriters pursuant to which the holders have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, directly or indirectly, any of their shares of Common Stock, or any shares that they may acquire through the exercise of stock options or warrants, or to exercise any of their registration rights in respect of their shares of Common Stock, for a period of 90 days beginning on the date of this Offering without the prior written consent of Warburg Dillon Read LLC on behalf of the Managing Underwriters. See "Shares Eligible for Future Sale" and "Underwriting." As of June 30, 1998, options to purchase a total of 1,002,995 shares of Common Stock were outstanding under the Company's stock option plans, of which options for a total of 366,536 shares were then exercisable. Of the total options exercisable, options for 253,635 shares were held by executive officers and directors subject to the lock-up agreements described above. 13

15 As of June 30, 1998, there were outstanding warrants to purchase 286,619 shares of Common Stock, all of which were then exercisable. Holders of warrants to purchase 178,794 shares of Common Stock are subject to the lock-up agreements described above. After completion of this Offering, the Company may issue unregistered shares of Common Stock as full or partial consideration for future business acquisitions and may grant registration rights to the holders of such shares. See "Business -- Growth Strategy -- Pursue Selected Acquisitions." ABSENCE OF DIVIDENDS The Company has never paid any cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." 14

16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby are estimated to be approximately $ ($ if the Underwriters' over-allotment option is exercised in full), assuming a public offering price of $17.75 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. The Company intends to use the net proceeds of the Offering received by the Company for potential future acquisitions of other regulated medical waste management businesses and for general corporate purposes, including working capital, capital expenditures and possible repayment of all or a portion of outstanding indebtedness incurred in connection with past acquisitions. The amount and specific acquisition indebtedness to be repaid, if any, has not been determined. The Company is continuously evaluating possible acquisition candidates as part of its growth strategy. The Company has reached agreements in principle with two companies for the acquisition of their regulated medical waste management businesses and is in various stages of discussion with other companies. With the exception of these two agreements in principle, the Company presently has no binding agreements or commitments to effect any mergers or acquisitions. Pending these uses, the Company intends to invest the net proceeds of the Offering received by the Company in short-term, interest-bearing, investment-grade securities. PRICE RANGE OF COMMON STOCK Since August 23, 1996, the Company's Common Stock has traded on the Nasdaq National Market under the symbol "SRCL." The following table sets forth, for the periods indicated, the high and low bid prices of the Common Stock as reported on the Nasdaq National Market: PRICE RANGE OF COMMON STOCK ------------------ HIGH LOW ---- --- 1996: Third Quarter (1)............................. $10.63 $ 8.50 Fourth Quarter................................ 11.25 7.00 1997: First Quarter................................. 11.38 8.00 Second Quarter................................ 9.00 7.00 Third Quarter................................. 10.25 7.63 Fourth Quarter................................ 15.75 9.00 1998: First Quarter................................. 16.88 11.00 Second Quarter................................ 17.25 10.75 Third Quarter (2)............................. 18.75 13.50 - ------------------------- (1) From August 23 through September 30, 1996. (2) From July 1 through August 3, 1998. On August 3, 1998, the last reported sale price of the Common Stock on the Nasdaq National Market was $17.75 per share. 15

17 CAPITALIZATION The following table sets forth, as of June 30, 1998, the capitalization of the Company and the capitalization of the Company as adjusted to give effect to the receipt and application by the Company of the estimated net proceeds from the sale of the 2,000,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $17.75 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company). JUNE 30, 1998 ------------------------- ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) Short-term debt: Current portion of long-term debt......................... $ 2,476 $ Long-term debt: Industrial development revenue bonds and other............ 1,366 Notes payable............................................. 2,035 ------- -------- Total long-term debt................................... 3,401 Shareholders' equity: Common Stock, $.01 par value; 30,000,000 shares authorized; 10,615,399 shares issued and outstanding, 12,615,399 shares issued and outstanding, as adjusted............................................... 106 Additional paid-in capital................................ 83,764 Notes receivable for common stock purchases............... (4) Accumulated deficit....................................... (36,193) ------- -------- Total shareholders' equity............................. 47,673 ------- -------- Total capitalization................................. $53,550 $ ======= ======== DIVIDEND POLICY The Company has never paid cash dividends on its capital stock. The Company currently expects that it will retain future earnings for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. The Company is prohibited from paying cash dividends under the terms of its revolving credit facility with Silicon Valley Bank and is restricted from paying cash dividends under an agreement in connection with the industrial development revenue bonds issued to finance the Company's construction of its treatment facility at Woonsocket, Rhode Island. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 16

18 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company. The statements of operations data for the years ended December 31, 1995, 1996 and 1997 and the balance sheet data at December 31, 1996 and 1997 have been derived from the consolidated financial statements of the Company (the "Consolidated Financial Statements"), which are included elsewhere in this Prospectus and which have been audited by Ernst & Young LLP, independent auditors. The statements of operations data for the years ended December 31, 1993 and 1994 and the balance sheet data at December 31, 1993, 1994 and 1995 have been derived from the audited consolidated financial statements of the Company which are not included in this Prospectus. The statements of operations data for the six months ended June 30, 1997 and 1998 and the balance sheet data at June 30, 1998 are derived from the unaudited condensed consolidated financial statements of the Company (the "Condensed Consolidated Financial Statements") included elsewhere in this Prospectus. The Condensed Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and results of operations for that period. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1998. SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------------------------- ------------------ 1993 1994 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA (1): Revenues........................................ $ 9,141 $ 16,141 $21,339 $24,542 $46,166 $20,816 $28,018 Cost of revenues................................ 9,137 13,922 17,478 19,423 34,109 16,106 19,629 Selling, general and administrative expenses.... 5,988 7,927 8,137 7,556 10,671 4,603 6,358 ------- -------- ------- ------- ------- ------- ------- Income (loss) from operations................... (5,984) (5,708) (4,276) (2,437) 1,386 107 2,031 Interest income (expense), net.................. (44) (104) (268) 48 190 182 115 ------- -------- ------- ------- ------- ------- ------- Income (loss) before income taxes............... (6,028) (5,812) (4,544) (2,389) 1,576 289 2,146 Income tax expense.............................. -- -- -- -- 146 7 278 ------- -------- ------- ------- ------- ------- ------- Net income (loss)............................... (6,028) (5,812) (4,544) (2,389) 1,430 282 1,868 Less cumulative preferred dividends (2)......... (3,733) (4,481) -- -- -- -- -- ------- -------- ------- ------- ------- ------- ------- Net income (loss) applicable to common stock.... $(9,761) $(10,293) $(4,544) $(2,389) $ 1,430 $ 282 $ 1,868 ======= ======== ======= ======= ======= ======= ======= Diluted net income (loss) per common share (3)........................................... $(13.64) $ (14.38) $ (0.81) $ (0.32) $ 0.13 $ 0.03 $ 0.17 ======= ======== ======= ======= ======= ======= ======= Weighted average number of common shares and common stock equivalent shares outstanding.... 716 716 5,582 7,471 10,766 10,554 11,167 DECEMBER 31, ----------------------------------------------------- JUNE 30, 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.................................. $ 7,690 $ 1,206 $ 138 $17,749 $ 7,709 $ 5,693 Total assets................................... 21,355 27,809 23,491 55,155 61,226 62,538 Long-term debt, net of current maturities...... 2,293 4,838 5,622 4,591 3,475 3,401 Convertible, redeemable preferred stock (2).... 52,078 62,909 -- -- -- -- Shareholders' equity (net capital deficiency).................................. $(35,106) $(45,363) $12,574 $40,014 $45,026 $47,673 - ------------------------- (1) See "Business -- Growth Strategy -- Pursue Selected Acquisitions" and Note 5 to the Consolidated Financial Statements for information concerning the Company's acquisitions during the five years and the three years ended December 31, 1997. The comparability of the information for the periods presented has been affected by these acquisitions. (2) In August 1995 and in conjunction with a recapitalization of the Company, the liquidation preference on the Company's preferred stock was eliminated and the Company's preferred stock was reclassified as common stock. See Note 8 to the Consolidated Financial Statements. (3) The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), during the fourth quarter of 1997. FAS 128 replaced the calculation of primary and fully diluted net income (loss) per common share with basic and diluted net income (loss) per common share. Net income (loss) per common share amounts have been restated where appropriate. See Note 2 to the Consolidated Financial Statements. 17

19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Company's Consolidated Financial Statements, Condensed Consolidated Financial Statements and the related Notes included elsewhere in this Prospectus. 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 $46,166,000 in 1997. The Company derives its revenues from services to two principal types of customers: (i) long-term and sub-acute care facilities, outpatient clinics, medical and dental offices, 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 June 30, 1998, the Company served over 45,000 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. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 Revenues. Revenues increased $7,202,000, or 34.6%, to $28,018,000 during the six months ended June 30, 1998 from $20,816,000 during the comparable period in 1997 as the Company continued to implement its strategy of acquiring selected businesses and focusing on sales to higher-margin Alternate Care generators while simultaneously paring certain higher-revenue but lower-margin accounts with Large Quantity generators. The increase in revenues also reflects $1,202,000 from the sale of equipment to a Mexican joint venture company, Medam S.A. de C.V. ("Medam"), that the Company and others formed for the collection, treatment and disposal of regulated medical waste in Mexico City utilizing the Company's ETD technology. During the six months ended June 30, 1998, acquisitions contributed approximately $5,071,000 to the increase in revenues as compared to the prior year. Cost of Revenues. Cost of revenues increased $3,523,000, or 21.9%, to $19,629,000 during the six months ended June 30, 1998 from $16,106,000 during the comparable period in 1997. This increase was primarily due to the substantial increase in revenues during 1998 compared to 1997. The gross margin percentage increased to 29.9% during the six months ended June 30, 1998 from 22.6% during the comparable period in 1997 due to further integration of new acquisitions into the existing infrastructure, lower costs relating to the mix of Alternate Care versus Large Quantity customers, increased utilization of treatment capacity and general productivity improvements. 18

20 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $6,358,000 for the six months ended June 30, 1998 from $4,603,000 for the comparable period in 1997, due to the continued progress in strengthening the Company's sales and administrative organizations. Moreover, during the six months ended June 30, 1997 some services related to the December 1996 acquisition of the major portion of the regulated medical waste business of Waste Management, Inc. ("WMI") were performed by WMI as part of the transition arrangements, which resulted in lower relative costs in the first six months of 1997. Selling, general and administrative expenses as a percentage of revenues increased to 22.7% during the six months ended June 30, 1998 from 22.1% during the comparable period in 1997. Interest Expense and Interest Income. Interest expense decreased to $124,000 during the six months ended June 30, 1998, from $216,000 during the comparable period in 1997, primarily due to the repayment of debt issued in the WMI acquisition. Interest income also decreased to $239,000 during the six months ended June 30, 1998, from $398,000 during the comparable period in 1997, primarily due to lower cash balances as a result of acquisitions and repayment of debt. Income Tax Expense. The estimated effective tax rate of approximately 13.0% for the six months ended June 30, 1998 reflects federal taxable income expected in excess of Internal Revenue Code Section 382 limitations on the annual utilization of the Company's net operating loss carryforward 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 WMI acquisition completed in December 1996, eight months of revenues from the Environmental Control Co., Inc. ("ECCO") acquisition completed in May 1997, and partial years' revenues from various other smaller acquisitions. For the year, internal sales growth for Alternate Care generators was 13.0%, while sales to Large Quantity generators decreased by 4.0%. Incremental revenues during 1997 attributable to acquisitions completed in 1997 and late 1996 were $20,975,000. Excluding these incremental revenues from acquisitions, revenues increased from $24,542,000 in 1996 to $25,191,000 in 1997, or 2.6%. Cost of revenues. Cost of revenues increased $14,686,000, or 75.6%, to $34,109,000 during the year ended December 31, 1997 from $19,423,000 during the year ended December 31, 1996. The principal reasons for the increase were higher transportation, treatment and disposal costs as a result of the higher volume attributable to the Company's acquisitions and integration expenses related to the Company's expansion into new geographic service areas. The gross margin percentage increased to 26.1% during 1997 from 20.9% during 1996, due to the continuing shift to Alternate Care customers and 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. 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. 19

21 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. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues. Revenues increased $3,203,000, or 15.0%, to $24,542,000 during the year ended December 31, 1996 from $21,339,000 during the year ended December 31, 1995 as the Company continued to implement its strategy of focusing on higher-margin Alternate Care generators while simultaneously paring certain higher-revenue but lower-margin accounts with Large Quantity generators. This increase also reflects the inclusion of a full year's revenues from the Safetech Health Care, Inc. ("Safetech") acquisition, which was completed in June 1995, eleven months of revenues from the WMI Medical Services of New England, Inc. ("WMI-NE") acquisition, which was completed in January 1996, and eight months of revenues from the Doctors Environmental Control, Inc. ("DEC") and Sharps Incinerator of Fort, Inc. ("Sharps") acquisitions, both of which were completed in May 1996, and the inclusion of revenues for the last 10 days of 1996 resulting from the Company's purchase in December 1996 of a major portion of WMI's regulated medical waste business. The increase in revenues was partially offset by a decline in revenues attributable to a lack of any miscellaneous product sales during 1996 and the sale in April 1995 of certain unprofitable customer accounts and related assets obtained through acquisitions. Incremental revenues during 1996 attributable to acquisitions completed in 1995 and 1996 were $2,332,000. Excluding these incremental revenues from acquisitions, revenues increased from $21,339,000 in 1995 to $22,210,000 in 1996, or 4.1%. Cost of revenues. Cost of revenues increased $1,945,000, or 11.1%, to $19,423,000 during the year ended December 31, 1996 from $17,478,000 during the year ended December 31, 1995. The principal reasons for the increase were higher transportation, treatment and disposal costs as a result of the Safetech, WMI-NE, DEC, Sharps and WMI acquisitions and start-up expenses related to the Company's expansion into new geographic service areas. The gross margin percentage increased to 20.9% during 1996 from 18.1% during 1995, due to the continued increase in Alternate Care customers and increased utilization of the Company's treatment capacity. Selling, general and administrative expenses. Selling, general and administrative expenses decreased to $7,556,000 during the year ended December 31, 1996 from $8,137,000 during the year ended December 31, 1995. This decrease was primarily attributable to a reduction in expenditures to develop treated medical waste as an alternate fuel for the production of cement and to savings from the integration into the Company's operations of the Safe Way Disposal Systems, Inc. ("Safe Way") acquisition in 1994. These savings resulted from the elimination of redundant employee and staff positions and the reallocation of resources to Alternate Care generators. In addition, corporate costs and permitting expenses were at lower levels during 1996 than they were during 1995. Selling, general and administrative expenses as a percentage of revenues decreased to 30.8% during 1996 from 38.1% during 1995. Interest expense and interest income. Interest expense increased to $373,000 during the year ended December 31, 1996 from $277,000 during the year ended December 31, 1995. This increase was primarily attributable to higher indebtedness under the Company's revolving credit facility and interest expense on notes issued for acquisitions. Interest income increased to $421,000 during 1996 from $9,000 during 1995 due to interest earned on the invested cash proceeds from the Company's IPO in August 1996. LIQUIDITY AND CAPITAL RESOURCES The Company has been financed principally through the sale of stock to investors. Prior to the Company's IPO, purchasers of stock invested more than $50,137,000 in capital which has been used to fund research and development, acquisitions, capital expenditures, operating losses and working capital requirements. The Company's IPO in August 1996 raised $31,050,000, excluding offering costs, which has been or will be used primarily to fund acquisitions and for general working capital. The Company has also been able to secure plant and equipment leasing or financing in connection with some of its facilities. These debt facilities are secured 20

22 by security interests in the financed assets. In addition, in October 1995, the Company obtained a $2,500,000 revolving line of credit secured by a security interest in the Company's accounts receivable and other assets, and in March 1998, the Company increased this line of credit to $7,500,000. The Company has no outstanding borrowings under its line of credit. 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 $1,161,000 as of June 30, 1998 at fixed interest rates ranging from 6.000% 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 1996, 1997 and 1998, consisting primarily of a 10-year note for $2,300,000 as part of the ECCO acquisition and a $1,797,000 note due in December 1998 as part of the WMI acquisition. At June 30, 1998, the Company's working capital was $7,963,000. At December 31, 1997, the Company's working capital was $7,214,000 compared to $14,617,000 and $439,000 at December 31, 1996 and 1995, respectively. The increase in working capital at June 30, 1998 compared to December 31, 1997 was primarily due to a decrease in current liabilities as a result of the repayment of debt issued in connection with certain acquisitions and the decrease of accrued liabilities. 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 $10,040,000 to finance acquisitions partially offset by other working capital growth. The increase in working capital in 1996 compared to 1995 was due to higher cash balances shortly after the Company's IPO offset by an increase in debt as a result of the WMI acquisition in December 1996. Net cash provided by operating activities was $893,000 during the six months ended June 30, 1998 compared to net cash used in operating activities of $380,000 for the comparable period in 1997. This change from cash used in operating activities to cash provided by operating activities primarily reflects an increase in the Company's profitability offset by other working capital changes. Cash used in operations was $100,000 during the year ended December 31, 1997, compared to cash provided by operations of $57,000 during the year ended December 31, 1996 and cash used in operations of $871,000 during the year ended December 31, 1995. The change primarily reflects the Company's profitability in 1997 offset by a higher working capital investment in receivables. Net cash used in investing activities for the six months ended June 30, 1998 was $2,147,000 compared to $1,821,000 for the comparable period in 1997. The change is primarily attributable to the net maturity of temporary investments in 1997 and an increase in capital expenditures offset by a reduction in cash used for acquisitions. Capital expenditures were $984,000 for the six months ended June 30, 1998 compared to $702,000 for the comparable period in 1997. The increase in capital spending is a result of improvements made to existing treatment facilities. Payments for acquisitions accounted for $1,163,000 of the cash used in investing activities in the first six months of 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 the year ended December 31, 1997 were $1,235,000, primarily for improvements to existing facilities, containers and transportation equipment. Capital expenditures were $995,000 in 1996 and $726,000 in 1995. The Company 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 capacity in its existing treatment facilities, which would require additional capital expenditures. In addition, capital requirements for transportation equipment will continue to increase as the Company grows. The amount and level of these expenditures cannot be determined currently as they will depend upon the nature and extent of the Company's growth and acquisition opportunities. The Company believes that its cash, cash equivalents, short-term investments, revolving bank line, cash from operations and proceeds from this Offering will fund its capital requirements through 1998. 21

23 Net cash used in financing activities was $762,000 during the six months ended June 30, 1998 compared to $964,000 for the comparable period in 1997. The difference between the two periods results primarily from the decreased repayment of long-term debt and decreased payments on capital leases during the first six months of 1998. Net cash used in financing activities was $3,153,000 during the year ended December 31, 1997 compared to net cash provided by financing activities of $25,065,000 during the year ended December 31, 1996. The change was the result of $28,535,000 of proceeds received in 1996 primarily from the Company's IPO and repayments in 1997 of $2,905,000 of long-term debt relating primarily to a note issued in connection with the December 1996 WMI acquisition. In 1997, cash and cash equivalents decreased by $6,576,000 primarily due to investment and acquisition activities of $3,323,000 and repayments of notes and leases of $3,153,000. YEAR 2000 ISSUES The Company has developed a plan to modify its information technology for the Year 2000 and has begun converting critical data processing systems. The Company currently expects the project to be substantially completed by June 1999 at a cost not material to the Company's business, financial condition or results of operations. As of June 30, 1998, there had been no amounts expensed in converting the Company's data processing systems for the Year 2000. 22

24 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 45,000 customers in 31 states and the District of Columbia. 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 25 acquisitions, of which 17 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 $46.2 million in 1997. 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, in seven geographic service areas: (i) California and Arizona; (ii) Oregon, Washington, Idaho and British Columbia; (iii) Illinois, Indiana, Iowa, Minnesota and Wisconsin; (iv) Ohio, Michigan, Kentucky and Tennessee; (v) Texas; (vi) Connecticut, Massachusetts, Maine, New Hampshire, Rhode Island and Vermont; and (vii) Delaware, Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia and the District of Columbia. The Company markets its services to two principal types of customers: (i) long-term and sub-acute care facilities, outpatient clinics, medical and dental offices, 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 1997 were divided approximately equally between Alternate Care and Large Quantity generators, but the Company anticipates that a greater proportion of its future revenues will 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 1998 would be more than $1.2 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 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. 23

25 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 non-recognizable 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 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 24

26 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 fragmented, the number of competitors is rapidly decreasing as a result of industry consolidation. National attention on regulated medical waste in the late 1980s led to rapid growth in the industry and a highly-fragmented competitive structure. Entrants into the industry included several large municipal waste companies and many independent haulers and incinerator operators. Since 1990, however, government clean air regulations and public concern about the environment have increased the costs and public opposition to both on- and off-site regulated medical waste incineration. As a result, the Company believes that independent haulers and incinerator operators have encountered increasing difficulty competing with integrated companies like the Company, which typically have their own low-cost treatment plants located within the geographic areas that they serve. The Company believes that many of these independent haulers are withdrawing from the regulated medical waste industry. As a result of industry consolidation, the Company believes that it has increasing opportunities to acquire medical waste management businesses. 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 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 half 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. 25

27 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 60-70% 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 into international markets. In 1996, the Company entered into an agreement with a Brazilian company to assist in exploring opportunities for the commercialization of the Company's medical waste management technology in certain territories in South America. 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 two fully-integrated ETD processing lines 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 with a 150-ton per day capacity. This facility, which is the largest medical waste treatment facility permitted to date in Mexico, became operational in June 1998. There can be no assurance, however, that the Company will be successful in expanding profitably into foreign markets. See "Risk Factors -- International Operations." 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 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 17 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. ACQUISITIONS SINCE IPO IN AUGUST 1996 SELLER DATE MARKETS SERVED ------ ---- -------------- Regional Recycling, Inc. July 1998 New Jersey Allegro Carting and Recycling, Inc. July 1998 New York City Mediwaste Disposal Services LLC June 1998 Texas Superior of Wisconsin, Inc. June 1998 Wisconsin Controlled Medical Disposal, Inc. June 1998 New Jersey Arizona Hazardous Waste Disposal June 1998 Arizona Medisin, Inc. April 1998 Kentucky and Ohio Bridgeview, Inc. February 1998 Pennsylvania Browning-Ferris Industries, Inc. December 1997 Arizona Phoenix Services, Inc. November 1997 Maryland 26

28 SELLER DATE MARKETS SERVED ------ ---- -------------- Cal-Va, Inc............................ November 1997 Virginia and Washington, D.C. Envirotech Enterprises, Inc............ August 1997 Arizona Rumpke Container Service, Inc.......... July 1997 Ohio Regional Carting, Inc.................. July 1997 New Jersey Waste Management, Inc.................. July 1997 Wisconsin Environmental Control Co., Inc......... May 1997 New York City, Connecticut and New Jersey Waste Management, Inc.................. December 1996 Arizona, Colorado, Indiana, Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Utah, Washington and Washington, D.C. The purchase price for the Company's 25 acquisitions to date (including the eight acquisitions completed in the three years prior to its initial public offering) 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 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. 27

29 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, 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 now operates three facilities that use either incineration or autoclaving to treat regulated medical waste. The Company estimates that during 1997, approximately 57% of its regulated medical waste was treated using ETD and the balance was treated using incineration or autoclaving at the Company's own facilities or those of third parties. 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. 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 appearance of waste, and recognizable regulated medical waste may not be accepted by landfill operators. To compensate for this disadvantage, autoclaving may be combined with a shredding or grinding process to render the regulated medical waste non- recognizable. The high temperatures generated in the autoclaving process occasionally change the physical properties of plastic waste, prohibiting its recycling. ETD Treatment Process. The Company estimates that its patented ETD treatment process accounts for approximately 8% of United States permitted off-site capacity to treat regulated medical waste. ETD also includes a system for grinding regulated medical waste. ETD uses an oscillating energy field of low-frequency radio waves to heat regulated medical waste to temperatures that destroy pathogens such as viruses, vegetative bacteria, fungi and yeast without melting the plastic content of the waste. ETD is most effective on materials with low electrical conductivity that contain polar molecules, including all human pathogens. Polar molecules are molecules that have an asymmetric electronic structure and tend to align themselves with an imposed electric field. When the polarity of the applied field changes rapidly, the molecules try to keep pace with the alternating field direction, thus vibrating and in the process dissipating energy as heat. The Company believes that, 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 evenly throughout the waste instead of being imposed from the surface as in conventional heating. The Company believes that 28

30 this phenomenon, called volumetric heating, transfers energy directly to the waste, resulting in uniform heating throughout the entire waste material and eliminating the inherent inefficiency of transferring heat first from an external source to the surface of the waste and then from the surface to the interior of the waste. 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 degreesC. 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 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. The Company believes that the ability of its ETD treatment process both to reduce the volume of regulated medical waste and to render it unrecognizable gives the Company's process an advantage over autoclave operations that do not include shredding or grinding. Re-use and Recycling. 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. The Company's customers can participate in a voluntary recycling program by source-segregating their regulated medical waste. The source-segregated regulated medical waste is treated by the ETD treatment process and, in certain geographic service areas, can then be processed through the Company's proprietary systems for the automatic recovery of polypropylene plastics. The recovered polypropylene plastics are used by a third party to manufacture a line of "sharps" containers which are used by health care providers to dispose of sharp objects such as needles and blades. In addition, in three of the Company's geographic service areas, the Company's treated regulated medical waste is transported to resource recovery facilities owned by third parties where it is used as refuse-derived fuel in "waste-to-energy" 29

31 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. 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 1997 was only approximately 8% of the original cubic volume of the waste received by the Company for treatment. 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 or autoclaving. 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. 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 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 30

32 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 recently introduced 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 750 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. 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 customer accounting for more than 3% of the Company's 1997 revenues. The Company does not believe that the loss of any single customer would have a material adverse effect on its business, financial condition or results of operations. LOGISTICS An important element of the Company's business strategy is to maximize the efficiency with which it collects and transports a large volume of regulated medical waste and directs the deployment of many collection vehicles. This aspect of the Company's operations -- referred to as logistics -- represents the Company's single largest operating cost. Accordingly, the Company considers logistics to be a critical component of its operating plan. The Company's integrated approach to regulated medical waste management is designed to provide it with numerous logistic advantages in the process of managing regulated medical waste. Pre-Collection Before regulated medical waste is collected, the Company's integrated waste management approach can "build in" efficiencies that will yield logistic advantages. For example, the Company's consulting services can 31

33 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 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 32

34 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, 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. See "Risk Factors -- Impact of Government Regulation." Federal Regulation There are at least four federal agencies that have authority over medical waste. These agencies are the EPA, OSHA, 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 33

35 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. 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. 34

36 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 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. Comprehensive Environmental Response, Compensation and Liability Act of 1980. The Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") established a regulatory and remedial program to provide for the investigation and clean-up of facilities from which there has been an actual or threatened release of hazardous substances into the environment. CERCLA and similar state laws impose strict, joint and several liability on the current and former owners and operators of 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 clean-up costs and natural resource damages, regardless of whether they exercised due care and complied with applicable laws and regulations. If the Company were found to be a responsible party for a particular site, it could be required to pay the entire cost of site investigation and clean-up, even though other parties also may be liable. The Company's ability to obtain contribution from other responsible parties may be limited by the Company's inability to identify those parties and by their financial inability to contribute to investigation and clean-up costs. 35

37 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 containers directly to the Company's treatment facilities. State and Local Regulation The Company currently conducts some type of business activity in 32 states. These activities include the collection, transportation, processing, transferring or recycling of regulated medical waste and, in some cases, hazardous substances. Each state has its own regulations related to the handling, treatment and storage of regulated medical waste. Although there are many differences among the various state laws and regulation, many states have followed the regulated medical waste model under the MWTA and are implementing programs under RCRA. Regulations cover the Company's transportation of regulated medical waste both intrastate and interstate. In each of the states where the Company operates a treatment facility or transfer station, it is required to comply with numerous state and local laws and regulations as well as its site-specific operating plan. Agencies writing regulations at the state level typically include departments of health and state environmental protection agencies. In addition, many 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 is currently considering several bills introduced in 1997 that could 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 re quire that the universal biohazard symbol or related label appear on medical waste containers. Storage regulations may apply to the generator, the treatment facility, the transport vehicle, or all three. Storage rules center on identifying and securing the storage area for public safety as well as setting standards for the manner and length of storage. Many states mandate employee training for safe environmental clean-up through emergency spill and decontamination plans. Many states mandate that transporters carry spill equipment in their vehicles. Those states whose regulatory framework relies on the MWTA model have tracking document systems in place. 36

38 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, a bulk pool irradiator operator's license for the Company's currently inactive irradiator at its West Memphis, Arkansas facility, and various business operator's licenses. The Company believes that it is currently in substantial compliance with all applicable state and local 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. 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 is 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 facility. The Company's activities in British Columbia are governed at the federal level by the Canadian Transportation of Dangerous Goods Act, 1992, and at the provincial level by the British Columbia Waste Management Act. The federal Transportation of Dangerous Goods Act, 1992, regulates the movement of dangerous goods, including infectious substances and other "specified dangerous goods," by all modes of transportation, and imposes joint and several liability on all persons who are responsible for, or who caused or 37

39 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 clean-up costs associated with remediation of contaminated sites. The Company believes that it has obtained all permits required by these two acts. There can be no assurance, however, that the Company will not be required in the future to pay for waste clean-up costs incurred under either act. 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, 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 clean-up costs, personal injury or damage to the environment, claims of employees, customers or third parties for personal injury or property damages occurring in the course of the Company's operations, or claims alleging negligence or professional errors or omissions in the planning or performance of work. The Company could also be subject to fines 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 38

40 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. See "Risk Factors -- Potential Risk of Liability and Potential Unavailability of Insurance." PATENTS AND PROPRIETARY RIGHTS The Company considers the protection of its technology relating to the processing of regulated medical waste to be material to its business. The Company's policy is to protect its technology by a variety of means, including applying for patents in the United States and in appropriate foreign countries. The Company holds seven United States patents and two additional pending patent applications 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 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 39

41 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. EMPLOYEES At June 30, 1998, the Company employed 468 full-time employees and 96 part-time employees engaged primarily in sales and marketing. Drivers and transportation helpers at the Company's New York City facilities are covered by a collective bargaining agreement between the Company and the International Brotherhood of Teamsters, AFL-CIO. 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. FACILITIES The Company currently leases office space for its corporate offices in Deerfield, Illinois, and has entered into a lease for new space in Lake Forest, Illinois, where it plans to relocate its corporate offices during the fourth quarter of 1998. 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 subleases incineration or autoclave facilities from WMI in Chandler, Arizona, Baltimore, Maryland and Terrell, Texas. The Company also owns a recycling and research and development facility in West Memphis, Arkansas. 40

42 The Company leases eight permitted transfer stations in: Anaheim, San Leandro and Valencia, California; Stickney, Illinois; Valparaiso, Indiana; New York, New York; and Columbus and Middletown, Ohio. In Prestonburg, Kentucky, Haverhill, Massachusetts and Vancouver, British Columbia, the Company utilizes facilities owned by third parties licensed to operate transfer stations. In addition, all of the Company's treatment facilities are authorized to transfer regulated medical waste. The Company also leases seven sales and customer service centers in: Middletown, Connecticut; Deerfield and Lombard, Illinois; Salem, New Hampshire; Garden City, New York; Charlotte, North Carolina; and Kirkland, 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 machinery and equipment at its Yorkville, Wisconsin treatment facility are leased under an equipment lease expiring in February 1999 and are pledged as collateral to secure the Company's obligations under the lease. Substantially all of the Company's property and equipment provide collateral for the Company's obligations under its revolving credit facility with Silicon Valley Bank. The Company believes that its existing facilities are generally adequate for its current needs. LEGAL AND OTHER 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 13 additional workers who tested positive for exposure to tuberculosis. While studies are ongoing, officials of the Washington Departments of Health and of Labor and Industries have claimed that the Company's workers were 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 are in the process of being 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 preliminary report issued in March 1998. The Company expects that NIOSH will issue a final report regarding this matter, and the Company may be required as a result to adopt further safety measures. 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 cause governmental authorities to require the Company to adopt additional safety measures, to impose fines or other penalties or to initiate permit modification or revocation proceedings, or 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, or 41

43 the expense of defending or settling employee litigation or paying an adverse judgement, 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 has recently 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. In August 1995, the Company entered into a voluntary settlement with the Rhode Island Department of Environmental Management ("RIDEM") pursuant to which, without admitting liability, the Company agreed to pay $400,000 over a seven-year period and to perform community services and conduct informational seminars over a five-year period. The settlement arose from certain notices of violation that RIDEM issued in September 1994 and April 1995 pursuant to which RIDEM sought penalties of $3,356,000, claiming that the Company had violated state medical waste and solid waste regulations by, among other things, mishandling and improperly treating medical waste and endangering its employees' health by failing to provide proper training and protective clothing. The Company believes that it is currently in compliance with RIDEM's requirements. 42

44 MANAGEMENT THE EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY ARE AS FOLLOWS: NAME AGE POSITION ---- --- -------- Mark C. Miller............................... 42 President, Chief Executive Officer and a Director Anthony J. Tomasello......................... 51 Vice President, Operations Linda D. Lee................................. 41 Vice President, Regulatory Affairs and Quality Assurance Frank J.M. ten Brink......................... 41 Vice President, Finance and Chief Financial Officer Michael J. Bernert........................... 44 Vice President, Eastern Region Joel P. Wilson............................... 38 Vice President, Central Region Jack W. Schuler.............................. 57 Chairman of the Board of Directors Rod F. Dammeyer.............................. 57 Director Patrick F. Graham............................ 58 Director John Patience................................ 50 Director Peter Vardy.................................. 68 Director L. John Wilkerson, Ph.D. .................... 54 Director Mark C. Miller has served as President and Chief Executive Officer and a director since joining the Company in May 1992. From May 1989 until he joined the Company, Mr. Miller served as Vice President for the Pacific, Asia and Africa in the International Division of Abbott Laboratories, which he joined in 1976 and where he held a number of management and marketing positions. He is a director of Affiliated Research Centers, Inc., which provides clinical research for pharmaceutical companies and is a director of Lake Forest Hospital. Mr. Miller received a B.S. degree in computer science from Purdue University, where he graduated Phi Beta Kappa. Anthony J. Tomasello has served as the Company's Vice President, Operations since August 1990. For 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. Linda D. Lee has served as the Company's Vice President, Regulatory Affairs and Quality Assurance since June 1990. She previously served as the Company's Executive Director for Regulatory Compliance. Prior to joining the Company in November 1989, she served for six years as Director of Environmental Health and Safety for Medical Services at the University of Arkansas. Ms. Lee has served as the chairperson of the American Hospital Association's Environmental Advocacy Committee and on the American Society for Hospital Engineers' Safety Committee. She has also served on a number of government committees, including the Arkansas Governor's Task Force on Medical Waste, and has written several books and articles on safety and waste disposal. Ms. Lee received a B.S. degree in environmental health sciences from Indiana State University and a M.S. degree in operations management from the University of Arkansas. Frank J.M. ten Brink has served as the Company's Vice President, Finance and Chief Financial Officer since June 1997. From 1991 until 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, Eastern Region, with responsibility for sales and service in New England and portions of the Midwest, since February 1992. Prior to joining the Company in 1992, he held a series of management positions with Abbott Laboratories. Mr. Bernert received a B.A. degree in economics from Brown University and a M.B.A. degree from the University of Dallas. 43

45 Joel P. Wilson has served as the Company's Vice President, Central Region, with responsibility for sales and service in portions of the Midwest and Texas, since October 1997. Since joining the company in 1991, Mr. Wilson has held the positions of Director of Engineering, General Manager of the Midwest Region, General Manager of Operations and District Manager of Wisconsin. Prior to joining Stericycle, he held several management positions with Orbital Systems and Orbital Engineering. Mr. Wilson received a B.S. degree in civil engineering from Brigham Young University. Jack W. Schuler has served as Chairman of the Board of Directors of the Company since January 1990. From January 1987 to August 1989, Mr. Schuler served as President and Chief Operating Officer of Abbott Laboratories, a diversified health care company, where he served as a director from April 1985 to August 1989. Mr. Schuler serves as a director of Chiron Corporation, Medtronic, Inc. and Ventana Medical Systems, Inc. He is a co-founder of Crabtree Partners LLC, a private investment firm in Deerfield, Illinois, which was formed in June 1995. Mr. Schuler received a B.S. degree in mechanical engineering from Tufts University and a M.B.A. degree from the Stanford University Graduate School of Business Administration. Rod F. Dammeyer has served as a director of the Company since January 1998. He is the Managing Partner of Equity Group Corporate Investments and Vice Chairman and a director of Anixter International, Inc., where he has been employed since 1985. Mr. Dammeyer is a director of Antec Corporation, CNA Surety Corporation, Grupo Azucarero Mexico, IMC Global, Inc., Jacor Communications, Inc., Metal Management, Inc., TeleTech Holdings, Inc. and Transmedia Network, Inc., and a trustee of Van Kampen American Capital, Inc. closed-end funds. He received a B.S. degree from Kent State University and serves as a trustee of the Kent State University Foundation. Patrick F. Graham has served as a director of the Company since May 1991. Mr. Graham is President and Chief Executive Officer and a director of World Corporation and a director of Intelidata Technologies, Inc. He was a co-founder of Bain & Company, Inc., a management consulting firm in Boston, Massachusetts, where he served in a number of positions from 1973 to 1997. He received a B.A. degree in economics from Knox College and a M.B.A. degree from the Stanford University Graduate School of Business Administration. John Patience has served as a director of the Company since its incorporation in March 1989. He is a co-founder and partner of Crabtree Partners LLC, a private investment firm in Deerfield, Illinois, which was formed in June 1995. From January 1988 to March 1995, Mr. Patience was an indirect general partner of Marquette Venture Partners, L.P., a venture capital fund which he co-founded and which participated in the Company's initial capitalization. Mr. Patience is a director of TRO Learning, Inc. and Ventana Medical Systems, Inc. He received B.A. and B.L degrees from the University of Sydney in Sydney, Australia, and a M.B.A. degree from the Wharton School of Business of the University of Pennsylvania. Peter Vardy has served as a director of the Company since July 1990. He is the Managing Director of Peter Vardy & Associates, an international environmental consulting firm in Chicago, Illinois, which he founded in June 1990. From April 1973 to May 1990, Mr. Vardy served at Waste Management, Inc., a waste management services company, where he was Vice President, Environmental Management. He is a director of EMCON, which he co-founded in 1971. Mr. Vardy received a B.S. degree in geological engineering from the University of Nevada. L. John Wilkerson, Ph.D., has served as a director of the Company since July 1992. He is Chief Executive Officer and a consultant to The Wilkerson Group, a health care products consulting firm in New York, New York. Dr. Wilkerson has served with The Wilkerson Group since 1980 and prior to its acquisition by IBM Corporation was its Chairman. Dr. Wilkerson also serves as a general partner of Galen Partners, L.P. and Galen Partners International, L.P., affiliated health care venture capital funds. He is a director of British Biotech Plc. and several privately held health care companies. Dr. Wilkerson received a B.S. degree in biological sciences from Utah State University and a Ph.D. degree in managerial economics and marketing research from Cornell University. 44

46 SELLING STOCKHOLDERS The following table sets forth certain information regarding each Selling Stockholder's beneficial ownership of the Company's Common Stock as of June 30, 1998, and as adjusted to reflect the sale by the Company and the Selling Stockholders of the shares of the Company's Common Stock offered hereby: SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO THE NUMBER OF OWNED AFTER THE OFFERING (1)(2) SHARES OFFERING (4) ----------------------- BEING ----------------------- NAME OF SELLING STOCKHOLDER NUMBER PERCENTAGE OFFERED (3) NUMBER PERCENTAGE --------------------------- ------ ---------- ----------- ------ ---------- - ------------------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting and investment power in respect of securities. Unless otherwise indicated in the footnotes to this table, and subject to applicable community property laws, the Selling Stockholders have sole voting and investment power in respect of all shares of Common Stock shown as beneficially owned by them. Shares of Common Stock subject to options or warrants that are exercisable as or within 60 days after June 30, 1998 are considered outstanding for purposes of computing the percentage ownership of the Selling Stockholder holding the option or warrant but are not considered for purposes of computing the percentage ownership of any other Selling Stockholder. (2) The applicable percentage of ownership is based on 10,615,399 shares of Common Stock outstanding as of June 30, 1998. (3) The shares shown do not include 450,000 shares of Common Stock to be sold in the Offering if the Underwriters' over-allotment option is exercised in full, of which shares would be sold by the Company and shares would be sold by the following selling stockholders (the "Other Selling Stockholders"): (4) The number of shares and ownership percentages assume no exercise of the Underwriters' over-allotment option. See "Underwriting." The applicable ownership percentage is based on 10,615,399 shares of Common Stock outstanding as of June 30, 1998, as adjusted to reflect the 2,000,000 shares of Common Stock offered by the Company hereby. 45

47 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 30,000,000 shares of Common Stock, par value $.01 per share. COMMON STOCK As of June 30, 1998, there were 10,615,399 shares of Common Stock outstanding, which were held of record by approximately 188 stockholders. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders but do not have cumulative voting rights in respect of the election of directors. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Company's Board of Directors out of legally available funds. In the event of the liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all of the assets of the Company remaining after payment or provision for payment of the Company's liabilities. Holders of Common Stock have no preemptive or other subscription rights to purchase any securities of the Company, and there are no conversion rights or redemption or sinking fund provisions in respect the Common Stock. All shares of Common Stock to be outstanding upon completion of this Offering will be fully paid and nonassessable. WARRANTS As of June 30, 1998, there were outstanding warrants to purchase 286,619 shares of Common Stock, all of which were then exercisable at a weighted average exercise price of $8.21 per share. Of these outstanding warrants, warrants for 6,773 shares of Common Stock, at an exercise price of $69.02 per share, expire in March 1999; warrants for 53,810 shares of Common Stock, at an exercise price of $1.59 per share, expire in July 2000, and warrants for 226,036 shares of Common Stock, at an exercise price of $7.96 per share, expire in May 2001. Holders of warrants to purchase 178,794 shares of Common Stock are subject to 90-day lock-up agreements with the Managing Underwriters. See "Underwriting." OPTIONS As of June 30, 1998, options to purchase a total of 1,002,995 shares of Common Stock were outstanding under the Company's stock option plans, of which options for a total of 366,536 shares were then exercisable at a weighted average exercise price of $4.55. Of the total options exercisable, options for 253,635 shares were held by executive officers and directors subject to 90-day lock-up agreements with the Managing Underwriters. See "Underwriting." REGISTRATION RIGHTS OF CERTAIN HOLDERS Holders of certain shares of Common Stock (the "Registrable Shares") are entitled to certain rights in respect of the registration of the Registrable Shares under the Securities Act of 1933, as amended (the "Securities Act"). All of the Registrable Shares are already freely tradeable without restriction except for 1,055,302 Registrable Shares held by the Company's executive officers and directors, which may be sold subject to the volume limitation and other conditions of Rule 144. The Company is unable to determine the number of Registrable Shares that are currently issued and outstanding because it is unable to identify the beneficial owners of shares of Common Stock held in the names of brokers and other nominees. The Company estimates that in addition to the Registrable Shares being sold by the Selling Stockholders in this Offering and the Registrable Shares held by the Company's executive officers and directors, there may be as many as a further 1,600,000 Registrable Shares issued and outstanding. Under the agreement by which registration rights were granted in respect of the Registrable Shares, no registration rights may be exercised for a period of 180 days after the date of this Offering without the prior written consent of Warburg Dillon Read LLC on behalf of the Managing Underwriters. See "Underwriting." 46

48 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Harris Trust and Savings Bank. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 12,615,399 shares of Common Stock outstanding (based upon shares outstanding as of June 30, 1998). Of these shares, approximately 9,992,759 shares, including the 3,000,000 shares offered hereby (or approximately 10,442,759 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act. The remaining 2,622,640 shares may be sold in the public market only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144. Approximately 2,511,430 of these shares will be eligible for sale under Rule 144 on the date of this Offering. The Company's executive officers and directors and the Selling Stockholders, who together will hold shares of Common Stock upon completion of this Offering (all of which are eligible for sale under Rule 144 on the date of this Offering), have entered into lock-up agreements with the Managing Underwriters pursuant to which the holders have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, directly or indirectly, any of their shares of Common Stock, or any shares that they may acquire through the exercise of stock options or warrants, or to exercise any of their registration rights in respect of their shares of Common Stock, for a period of 90 days beginning on the date of this Offering without the prior written consent of Warburg Dillon Read LLC on behalf of the Managing Underwriters. See "Underwriting." In addition, certain holders of Common Stock have registration rights in respect of their shares. Under the registration agreement by which these registration rights were granted, no registration rights may be exercised for a period of 180 days after the date of this Offering without the prior written consent of Warburg Dillon Read LLC on behalf of the Managing Underwriters. See "Description of Capital Stock -- Registration Rights of Certain Holders." 47

49 UNDERWRITING The names of the Underwriters of the shares of Common Stock offered hereby and the aggregate number of shares of Common Stock which each has severally agreed to purchase from the Company and the Selling Stockholders, subject to the terms and conditions specified in the Underwriting Agreement, are as follows: UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Warburg Dillon Read LLC .................................... Credit Suisse First Boston Corporation...................... William Blair & Company, L.L.C. ............................ Sutro & Co. Incorporated.................................... --------- Total.................................................. 3,000,000 ========= The Managing Underwriters are Warburg Dillon Read LLC, Credit Suisse First Boston Corporation, William Blair & Company, L.L.C. and Sutro & Co. Incorporated. If any shares of Common Stock offered hereby are purchased by the Underwriters, all such shares will be so purchased. The Underwriting Agreement contains certain provisions whereby, if any Underwriter defaults in its obligation to purchase such shares, and the aggregate obligations of the Underwriters so defaulting do not exceed 10% of the shares offered hereby, the remaining Underwriters, or some of them, must assume such obligations. The Underwriters propose to offer the shares of Common Stock to the public initially at the offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not to exceed $ per share. The Underwriters may allow, and such dealers may reallow, a concession not to exceed $ per share on sales to certain other dealers. The offering of the shares of Common Stock is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and withdrawal, cancellation or modification of the offer without notice. The Underwriters reserve the right to reject any order for the purchase of the shares. After the shares are released for sale to the public, the public offering price, the concession and the reallowance may be changed by the Managing Underwriters. The Company and the Other Selling Stockholders have granted to the Underwriters an option to purchase up to an additional 450,000 shares of Common Stock at the offering price less the underwriting discount set forth on the cover page of this Prospectus. Such option is exercisable during the 30 days beginning on the date of the Underwriting Agreement. The Underwriters may exercise such option only to cover over-allotments made of the shares in connection with the Offering. To the extent the Underwriters exercise this option, each of the Underwriters will be obligated, subject to certain conditions, to purchase the number of additional shares proportionate to such Underwriter's initial commitment. The Company and the Selling Stockholders have agreed in the Underwriting Agreement to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company, each of its officers and directors and the Selling Stockholders have agreed prior to this Offering not to offer, sell, contract to sell, grant any option to sell, or otherwise dispose of, directly or indirectly, any shares of Common Stock, or securities convertible into or exercisable or exchangeable for, any shares of Common Stock or warrants or other rights to purchase shares of Common Stock, or permit the registration of any shares of Common Stock for a period of 90 days after the date of this Prospectus, without the prior consent of Warburg Dillon Read LLC acting on behalf of the Managing Underwriters (with the exception 48

50 that, without such consent, the Company and the Selling Stockholders may sell the shares of Common Stock offered hereby). The Managing Underwriters, on behalf of the Underwriters, may engage in over-allotment, stabilizing transactions, syndicate cover transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate sales in excess of the Offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the Common Stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Managing Underwriters to reclaim a selling concession from a syndicate member when the Common Stock originally sold by the syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the Common Stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Managing Underwriters, on behalf of the Underwriters, may engage in passive market making on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Exchange Act during the one-day period before the commencement of offers or sales of Common Stock. The passive market making transactions must comply with applicable volume and price limits and be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered before the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Passive market making may stabilize the market price of the Common Stock above independent market levels and, if commenced, may be discontinued at any time. The Underwriters do not expect to confirm sales to accounts over which they exercise discretionary authority. LEGAL MATTERS Certain legal matters in connection with the Common Stock offered hereby are being passed upon for the Company by Johnson and Colmar, Chicago, Illinois and for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The consolidated financial statements of Stericycle, Inc. and Subsidiaries at December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, appearing in this Prospectus and in the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act , and in accordance with such requirements files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The Company's filings can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of this material can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W, Washington, D.C. 20549 at prescribed rates. In addition, the Commission maintains a site on the World 49

51 Wide Web at http://www.sec.gov, and copies of the reports, proxy statements and other information that the Company has filed electronically may be accessed at this Web site. This Prospectus forms part of a Registration Statement on Form S-3 (the "Registration Statement") which the Company has filed with the Commission under the Securities Act. In accordance with the Commission's rules and regulations, this Prospectus omits certain of the information in the Registration Statement and all of its exhibits, and reference is made to the Registration Statement and its exhibits for further information relating to the Company and the Common Stock offered hereby. Copies of the Registration Statement and its exhibits may be obtained from the Commission upon payment of the prescribed fee or may be inspected without charge at the Commission's public reference facilities described above. Statements in this Prospectus concerning the provisions of any document are not necessarily complete, and each such statement is qualified in its entirety by reference to the copy of the relevant document filed as an exhibit to the Registration Statement. DOCUMENTS INCORPORATED BY REFERENCE The following documents that the Company has filed with the Commission are incorporated in this Prospectus by reference: (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-21229); (ii) the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31 and June 30, 1998; and (iii) the description of the Company's Common Stock contained in the Registration Statement on Form 8-A which the Company filed on August 21, 1996. All documents that the Company files with the Commission pursuant to sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus but prior to the termination of the Offering to which this Prospectus relates shall be deemed to be incorporated in this Prospectus by reference from their respective dates of filing. Any statement in a document incorporated or deemed to be incorporated in this Prospectus by reference shall be deemed to be modified or superseded for purposes of this Prospectus and the Registration Statement to the extent that a statement in this Prospectus or the Registration Statement, or in any document filed after the date of this Prospectus which is deemed to be incorporated in this Prospectus by reference, modifies or supersedes such statement. Any statement so modified or superseded shall be incorporated or deemed to be incorporated in this Prospectus only as so modified or superseded. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, at his or her written or oral request, copies of all or any of the documents that have been or may be incorporated in this Prospectus by reference (excluding the exhibits to any such documents, however, unless the exhibits are specifically incorporated in this Prospectus). Requests for copies should be directed to Investor Relations, Stericycle, Inc., at the Company's offices at 1419 Lake Cook Road, Deerfield, Illinois 60015 (telephone number: (847) 945-6550). 50

52 STERICYCLE, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Auditors, Ernst & Young LLP........... F-2 Consolidated Balance Sheets at December 31, 1996 and 1997... F-3 Consolidated Statements of Operations for Each of the Years in the Three-Year Period Ended December 31, 1997.......... F-4 Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 1997.......... F-5 Consolidated Statements of Changes in Shareholders' Equity for Each of the Years in the Three-Year Period Ended December 31, 1997......................................... F-6 Notes to Consolidated Financial Statements.................. F-7 Condensed Consolidated Balance Sheets at December 31, 1997 and June 30, 1998 (Unaudited)............................. F-20 Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1997 and 1998 (Unaudited)........... F-21 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1998 (Unaudited)........... F-22 Notes to Condensed Consolidated Financial Statements (Unaudited)............................................... F-23 F-1

53 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Stericycle, Inc. We have audited the accompanying consolidated balance sheets of Stericycle, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stericycle, Inc. and Subsidiaries at December 31, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois March 6, 1998 F-2

54 STERICYCLE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) DECEMBER 31, -------------------- 1996 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents................................. $ 11,950 $ 5,374 Short-term investments.................................... 5,799 2,335 Accounts receivable, less allowance for doubtful accounts of $178 in 1996 and $361 in 1997....................... 4,756 10,286 Parts and supplies........................................ 360 660 Prepaid expense........................................... 426 440 Other..................................................... 490 392 -------- -------- Total current assets................................. 23,781 19,487 -------- -------- Property, plant and equipment: Land...................................................... 90 90 Buildings and improvements................................ 5,598 5,561 Machinery and equipment................................... 10,702 11,469 Office equipment and furniture............................ 463 746 Construction in progress.................................. 362 614 -------- -------- 17,215 18,480 Less accumulated depreciation............................... (5,208) (7,239) -------- -------- Property, plant and equipment, net................... 12,007 11,241 -------- -------- Other assets: Goodwill, less accumulated amortization of $807 in 1996 and $2,040 in 1997..................................... 18,834 29,458 Other..................................................... 533 1,040 -------- -------- Total other assets................................... 19,367 30,498 -------- -------- Total assets......................................... $ 55,155 $ 61,226 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 3,215 $ 3,052 Accounts payable.......................................... 1,510 1,927 Accrued liabilities....................................... 3,769 7,039 Deferred revenue.......................................... 670 255 -------- -------- Total current liabilities............................ 9,164 12,273 -------- -------- Long-term debt: Industrial development revenue bonds and other............ 1,986 1,405 Notes payable............................................. 2,605 2,070 -------- -------- Total long-term debt................................. 4,591 3,475 -------- -------- Other liabilities........................................... 1,386 452 Shareholders' equity: Common stock (par value $.01 per share, 30,000,000 shares authorized, 10,000,264 issued and outstanding in 1996, 10,472,799 issued and outstanding in 1997)............. 100 105 Additional paid-in capital................................ 79,409 82,986 Notes receivable for common stock purchases............... (4) (4) Accumulated deficit....................................... (39,491) (38,061) -------- -------- Total shareholders' equity........................... 40,014 45,026 -------- -------- Total liabilities and shareholders' equity........... $ 55,155 $ 61,226 ======== ======== The accompanying notes are an integral part of these financial statements. F-3

55 STERICYCLE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) YEAR ENDED DECEMBER 31, --------------------------- 1995 1996 1997 ---- ---- ---- Revenues.................................................... $21,339 $24,542 $46,166 Costs and expenses: Cost of revenues.......................................... 17,478 19,423 34,109 Selling, general and administrative expenses.............. 8,137 7,556 10,671 ------- ------- ------- Total costs and expenses............................... 25,615 26,979 44,780 ------- ------- ------- Income (loss) from operations............................... (4,276) (2,437) 1,386 Other income (expense): Interest income........................................... 9 421 618 Interest expense.......................................... (277) (373) (428) ------- ------- ------- Total other income (expense)........................... (268) 48 190 ------- ------- ------- Income (loss) before income taxes........................... $(4,544) $(2,389) $ 1,576 Income tax expense.......................................... -- -- 146 ------- ------- ------- Net income (loss)........................................... $(4,544) $(2,389) $ 1,430 ======= ======= ======= Basic earnings per share: Basic net income (loss) per share......................... $ (0.81) $ (0.32) $ 0.14 ======= ======= ======= Diluted earnings per share (restated EPS for FAS 128 and SAB 98) Diluted net income (loss) per share....................... $ (0.81) $ (0.32) $ 0.13 ======= ======= ======= The accompanying notes are an integral part of these financial statements. F-4

56 STERICYCLE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, --------------------------- 1995 1996 1997 ---- ---- ---- OPERATING ACTIVITIES: Net income (loss)........................................... $(4,544) $(2,389) $ 1,430 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization.......................... 1,916 2,064 3,078 Settlement with regulatory agency...................... 273 -- -- Other, net............................................. 129 -- -- Changes in operating assets, net of effect of acquisitions and divestitures: Accounts receivable.................................... 866 (554) (4,123) Parts and supplies..................................... 135 144 (300) Prepaid expenses....................................... 196 (18) (14) Other assets........................................... 128 (37) 98 Accounts payable....................................... 570 (428) (413) Accrued liabilities.................................... (838) 1,178 559 Deferred revenue and other liabilities................. 298 97 (415) ------- ------- ------- Net cash (used in) provided by operating activities......... (871) 57 (100) ------- ------- ------- INVESTING ACTIVITIES: Capital expenditures................................... (726) (995) (1,235) Payments for acquisitions, net of cash acquired........ (459) (6,516) (5,552) Proceeds from maturity of short-term investments....... -- -- 5,799 Purchases of short-term investments.................... -- (5,799) (2,335) Proceeds from divestitures............................. 792 -- -- ------- ------- ------- Net cash used in investing activities....................... (393) (13,310) (3,323) ------- ------- ------- FINANCING ACTIVITIES: Net proceeds from (payments of) note payable to bank... 858 (858) -- Repayment of long-term debt............................ (171) (3,275) (2,905) Principal payments on capital lease obligations........ (482) (397) (305) Principal payments on notes receivable for common stock purchases............................................ -- 60 -- Proceeds from long-term debt........................... -- 1,000 -- Proceeds from issuance of common stock................. 18 28,535 57 Other.................................................. (27) -- -- ------- ------- ------- Net cash provided by (used in) financing activities......... 196 25,065 (3,153) ------- ------- ------- Net increase (decrease) in cash and cash and cash equivalents............................................... (1,068) 11,812 (6,576) Cash and cash equivalents at beginning of year.............. 1,026 138 11,950 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 138 $11,950 $ 5,374 ======= ======= ======= Non-cash activities: Issuance of common stock for certain acquisitions...... $ -- $ -- $ 3,525 Issuance of notes payable for certain acquisitions..... $ -- $ 6,497 $ 1,120 The accompanying notes are an integral part of these financial statements. F-5

57 STERICYCLE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS) COMMON STOCK ACCUMULATED DIVIDENDS ON TOTAL CONVERTIBLE NOTES SHAREHOLDERS ISSUED AND ADDITIONAL REDEEMABLE RECEIVABLE FOR EQUITY OUTSTANDING PAID-IN PREFERRED COMMON STOCK ACCUMULATED (NET CAPITAL SHARES AMOUNT CAPITAL STOCK PURCHASES DEFICIT DEFICIENCY ----------- ------ ---------- ------------ -------------- ----------- ------------ BALANCES AT DECEMBER 31, 1994........... 370 $ 4 $ 811 $(13,001) $ (619) $(32,558) $(45,363) Common stock issued in exchange for preferred stock.... 5,043 50 49,439 49,489 Issuance of common stock.............. 350 3 3 Accumulated dividends cancelled.......... 13,001 13,001 Notes receivable cancelled.......... (181) (2) (629) 619 (12) Net loss............. (4,544) (4,544) ------ ---- ------- -------- ------ -------- -------- BALANCES AT DECEMBER 31, 1995........... 5,582 $ 55 $49,621 $ -- $ -- $(37,102) $ 12,574 Initial public offering of common stock (net of offering costs).... 3,450 36 27,586 27,621 Issuance of common stock for exercise of options and warrants and employee stock purchases.......... 870 9 717 (64) 662 Note payable exchanged for common stock....... 98 1 1,485 1,486 Principal payments under note receivable......... 60 60 Net loss............. (2,389) (2,389) ------ ---- ------- -------- ------ -------- -------- BALANCES AT DECEMBER 31, 1996........... 10,000 $100 $79,409 $ -- $ (4) $(39,491) $ 40,014 Issuance of common stock for exercise of options and warrants and employee stock purchases.......... 70 1 56 57 Common stock issued for acquisitions... 403 4 3,521 3,525 Net income........... 1,430 1,430 ------ ---- ------- -------- ------ -------- -------- BALANCES AT DECEMBER 31, 1997........... 10,473 $105 $82,986 $ -- $ (4) $(38,061) $ 45,026 ====== ==== ======= ======== ====== ======== ======== The accompanying notes are an integral part of these financial statements. F-6

58 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1 -- DESCRIPTION OF BUSINESS Stericycle, Inc. (the "Company") was incorporated in Delaware in March 1989 for the purpose of providing collection, transportation, treatment, disposal, reduction, re-use and recycling services for regulated medical waste to hospitals and other health care providers in the United States and Canada. NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Stericycle, Inc. and its wholly-owned subsidiaries, Stericycle of Arkansas, Inc., Stericycle of Washington, Inc., SWD Acquisition Corporation and Environmental Control Co., Inc. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition: The Company recognizes revenue when the treatment of the regulated medical waste is completed on-site or the waste is shipped off-site for processing and disposal. For waste shipped off-site, all associated costs are recognized at time of shipment. Cash Equivalents and Short-Term Investments: The Company considers all highly liquid instruments with a maturity of less than three months when purchased to be cash equivalents. Short-term investments consist of highly liquid investments in corporate debt obligations which mature in less than one year and are classified as held-to-maturity since management has the positive intent and ability to hold the securities to maturity. These obligations are stated at amortized cost, which approximates fair market value. Interest income is recognized as earned. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation and amortization, which include the depreciation of assets recorded under capital leases, are computed using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements -- 10 to 30 years Machinery and equipment -- 3 to 10 years Office equipment and furniture -- 5 to 10 years Goodwill: Goodwill is amortized using the straight-line method over 25 years. Amortization expense for 1995, 1996 and 1997 related to goodwill was approximately $320,000, $390,000 and $1,042,000, respectively. The Company continually evaluates the value and future benefits of its goodwill. The Company assesses recoverability from future operations using income from operations of the related acquired business as a measure. Under this approach, the carrying value of good-will would be reduced if it becomes probable that the Company's best estimate for expected undiscounted future cash flows of the related business would be less than the carrying amount of goodwill over its remaining amortization period. For the three-year period ended December 31, 1997, there were no adjustments to the carrying amounts of goodwill resulting from these evaluations. F-7

59 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED) New Plant Development and Permitting Costs: The Company expenses costs associated with the operations of new plants prior to the commencement of services to customers and all initial and on-going costs related to permitting. Research and Development Costs: The Company expenses costs associated with research and development as incurred. Research and development expense for 1995, 1996 and 1997 was $975,000, $194,000 and $281,000, respectively. Income Taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax liabilities and assets are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Financial Instruments: The Company's financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable and payable and long-term debt. The fair values of these financial instruments were not materially different from their carrying values. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. Credit risk on trade receivables is minimized as a result of the large size of the Company's customer base. No single customer represents greater than 10% of total accounts receivable. The Company performs ongoing credit evaluation of its customers and maintains allowances for potential credit losses. These losses, when incurred, have been within the range of management's expectations. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Net Income (Loss) Per Common Share: In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes the dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All net income (loss) per common share amounts for all periods have been presented, and where appropriate, restated to conform to FAS 128 requirements. In restating net income (loss) per common share to comply with the requirements of FAS 128, the Company applied the recently issued Staff Accounting Bulletin No. 98 ("SAB 98"). As a result of applying the provisions of SAB 98, the Company has restated the 1995 and 1996 loss per share to exclude the antidilutive effect of options and warrants ranted within one year of the Company's 1996 initial public offering. F-8

60 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Impact of Recently Issued Accounting Standards: In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements and is effective for fiscal years beginning after December 15, 1997. The adoption of FAS 130 will have no impact on the Company's financial position, results of operations, or cash flows. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosure about products and services, geographic areas and major customers. FAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company is evaluating the disclosure requirements of FAS 131 and has not determined whether its adoption will have a material impact on its future disclosure requirements. NOTE 3 -- INITIAL PUBLIC OFFERING On August 28 and August 30, 1996 the Company successfully completed an initial public offering of 3,450,000 shares of common stock at $9 per share. The Company received total proceeds from the offering, net of offering costs, of approximately $27,621,000. NOTE 4 -- INCOME TAXES The Company's deferred tax liabilities and assets as of December 31, 1996 and 1997 are as follows: 1996 1997 ---- ---- Deferred tax liabilities: Capital lease obligations....................... $ (324,000) $ (461,000) Property, plant and equipment................... (694,000) (509,000) Goodwill........................................ (160,000) (228,000) ------------ ------------ Total deferred tax liabilities.................... (1,178,000) (1,198,000) Deferred tax assets: Accrued liabilities............................. 835,000 857,000 Research and development costs.................. 324,000 324,000 Other........................................... 198,000 195,000 Net operating tax loss carryforward............. 15,102,000 14,344,000 Alternative minimum tax credit carryforward..... -- 60,000 ------------ ------------ Total deferred tax assets......................... 16,459,000 15,780,000 ------------ ------------ Net deferred tax assets........................... 15,281,000 14,582,000 Valuation allowance............................... (15,281,000) (14,582,000) ------------ ------------ Net deferred tax assets........................... $ -- $ -- ============ ============ At December 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $36,000,000, which expire beginning in 2004. Based on the Internal Revenue Code of 1986, as amended, and changes in the ownership of the Company, utilization of the net operating loss carryforwards are subject to annual limitations, which could significantly restrict or partially eliminate the F-9

61 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- INCOME TAXES (CONTINUED) utilization of the net operating losses. Additionally, the Company has an alternative minimum tax credit carryforward of $60,000 available indefinitely. Significant components of the Company's income tax expense for the year ended December 31, 1997 are as follows: Current Federal................................................... $ 60,000 State..................................................... 86,000 -------- Total provisions............................................ $146,000 ======== A reconciliation of the income tax provision computed at the federal statutory tax rate to the effective tax rate for the year ended December 31, 1997 is as follows: Federal statutory income tax rate........................... 34.0% Effect of: State taxes, net of federal tax effect.................... 4.4 Alternative minimum taxes................................. 3.8 Non-deductible goodwill amortization...................... 4.5 Other..................................................... 1.7 Utilization of net operating loss carryforward............ (39.1) ----- Effective tax rate.......................................... 9.3% ===== In 1997, the Company paid income tax of $58,300. No income taxes were paid in 1996 and 1995. Additionally, the Company did not recognize any income tax benefit for 1996 and 1995 due to the Company's recurring operating losses and valuation allowances established for net deferred tax assets. NOTE 5 -- ACQUISITIONS AND DIVESTITURES In November 1997, the Company purchased the customer list and certain other assets of Cal-Va, Inc. ("Cal-Va"), which operated a regulated medical waste business in northern Virginia and Washington D.C. The purchase price was paid by the issuance of shares of the Company's common stock and the assumption of certain of Cal-Va's liabilities. The purchase price is to be adjusted in the event that revenues fall below certain levels. In November 1997, the Company purchased selected customer contracts of Phoenix Services Inc. ("Phoenix"), which operated a regulated medical waste business in the Baltimore, Maryland metropolitan area. The purchase price was paid in cash (in January 1998) and by delivery of a $20,000 note due in September 1998. In August 1997, the Company purchased the customer list and certain other assets of Envirotech Enterprises, Inc. which operated a regulated medical waste business in Arizona. The purchase price was paid in cash and by delivery of a $300,000 note due in August 1998. The purchase price is to be adjusted in the event that acquired revenues fall below certain levels. In June 1997, the Company purchased the customer list and certain other assets of the regulated medical waste business of Waste Management, Inc. ("WMI") in Wisconsin ("WMI-WI"). In July 1997, the Company announced the purchase of the customer lists and certain other assets of the regulated medical waste businesses of Regional Carting, Inc. and Rumpke Container Service, Inc. in New Jersey and Ohio, respectively. The purchase price for these three acquisitions was paid by a combination of cash, assumption of F-10

62 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- ACQUISITIONS AND DIVESTITURES (CONTINUED) liabilities and issuance of shares of common stock of the Company and, in one case, delivery of a note which was paid in December 1997. In the event that acquired revenues for each of these three companies fall below certain levels, the purchase price will be adjusted accordingly. In May 1997, the Company announced the acquisition of all of the outstanding stock of Environmental Control Co., Inc. ("ECCO"), one of the leading medical waste companies in the New York City market. The Company paid $4,200,000 in cash; issued 125,000 shares of stock, assumed debt on vehicles and issued a $2,300,000 10-year promissory note for the balance of the purchase price. The note bears interest at a rate of 6.86% per annum payable in 10 equal annual installments of $230,000 starting in May, 1998. The ECCO purchase price is subject to downward adjustments to reflect uncollectible acquired accounts receivable, additional outstanding obligations not reflected in the purchase price at closing, and the extent to which ECCO's revenues during the one-year period following closing are less than a specified amount. In December 1996, the Company purchased the customer lists, vehicles and certain other assets of the major portion of WMI's medical waste business (the "WMI Acquisition") for $5,450,000 cash and a note for $5,210,000. During the quarter ended June 30, 1997, adjustments were made to the value of the vehicles purchased and to the purchase price. The purchase price was decreased by $756,000 as specified in the agreement, and the related goodwill and note payable were adjusted accordingly. The Company finalized its estimate of the value of the vehicles purchased and reduced the related note accordingly. In the quarter ended December 31, 1997, the purchase price was decreased by $163,000 as specified in the agreement, and the related goodwill was adjusted accordingly. The Company paid $1,796,650 of the adjusted $3,593,301 balance of the note to WMI in December 1997. The balance plus accrued interest is due in December 1998. In May 1996, the Company purchased the customer list and certain other assets of Doctors Environmental Control, Inc. for $400,000 in cash and notes payable issued for $600,000, which are payable on May 1, 1998 with an interest rate of 6% per annum. In addition, the Company assumed vehicle leases totaling $77,000, which were paid off in May 1996, and delivered option agreements to shareholders of the seller giving them an option to purchase up to a total of 53,816 shares of the Company's common stock. The price for the purchase of the common stock upon exercise of each option was the surrender and cancellation of the note payable. The options were exercised in August 1996. In April 1996, the Company purchased the customer list and certain other assets of Sharps Incinerator of Fort, Inc. for $757,000 in cash of which $562,000 was payable at closing and the balance plus interest was paid in November 1996. In January 1996, the Company purchased the customer lists and certain other assets of WMI Medical Services of New England, Inc. for $100,000 in cash and $492,000 in notes payable issued to the seller. The notes bear interest at a rate of 7.5% per annum with $150,000 plus interest paid in 1996, $157,000 plus interest paid in 1997 and $185,000 plus interest paid in January 1998. In July 1995, the Company sold selected customer lists and related assets for $248,000. The Company recognized a gain of $50,000 on this transaction, which is included in selling, general and administrative expense in the 1995 Consolidated Statement of Operations. In June 1995 the Company purchased the customer list and transportation equipment and assumed certain contract obligations of Safetech Health Care for $160,000. In April 1995, the Company sold the St. Louis portion of its business to a competitor. The Company received $544,000 as payment for the customer list and concurrently agreed to resolve an antitrust lawsuit brought against this competitor by the Company. The Company recognized a gain on this transaction of $408,000, which is included in selling, general and administrative expense in the 1995 Consolidated Statement of Operations. F-11

63 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- ACQUISITIONS AND DIVESTITURES (CONTINUED) For financial reporting purposes these acquisition transactions were accounted for using the purchase method of accounting. The total purchase price for 1995, 1996 and 1997 of $459,000, $13,013,000 and $10,197,000, respectively, net of cash acquired, was allocated to assets acquired and liabilities assumed based on their estimated fair market value at the date of acquisition. The total purchase price for 1997 acquisitions includes the value of 403,000 shares of common stock issued to the sellers. The excess of the purchase price over the fair market value of the net assets acquired is reflected in the accompanying Consolidated Balance Sheets as goodwill. The results of operations of these acquired businesses are included in the Consolidated Statement of Operations from the date of the acquisition. The effect of these acquisitions would not have a significant effect on the Company's operations, except for the WMI Acquisition and the ECCO acquisition. The following unaudited pro forma results of operations assumes that the WMI Acquisition occurred as of January 1, 1995 and that the ECCO acquisition occurred as of January 1, 1996, after giving effect to certain adjustments including amortization of goodwill, increased interest expense on debt incurred in connection with the acquisitions and adjustments to record incremental recurring costs associated with the consolidation of the operations as the historical results of operations of WMI and ECCO did not reflect these costs: YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma revenues.............................. $36,839 $46,619 $48,181 Pro forma net income (loss)..................... (4,270) (1,575) 1,576 Pro forma diluted net income (loss) per share... $ (0.76) $ (0.21) $ 0.15 The pro forma financial information does not purport to be indicative of the results of operations that would have occurred had the transactions taken place at the beginning of the periods indicated or of future results of operations. NOTE 6 -- LONG-TERM DEBT Long-term debt consists of the following at December 31: 1996 1997 ---- ---- (IN THOUSANDS) Industrial development revenue bonds........................ $1,492 $1,358 Obligations under capital leases............................ 517 212 Note payable to bank........................................ -- -- Notes payable............................................... 5,797 4,957 ------ ------ 7,806 6,527 Less: Current portion....................................... 3,215 3,052 ------ ------ Total.................................................. $4,591 $3,475 ====== ====== In March 1998, the Company entered into a new revolving line of credit with Silicon Valley Bank. To secure this line of credit, the Company granted the bank a lien on all of the Company's assets. Borrowings under the line of credit are limited to the lesser of $7,500,000 or a specific percentage of the Company's eligible receivables, as defined in the loan and security agreement. Outstanding borrowings bear interest at the bank's prime rate plus 0.50% or LIBOR plus 3.0%, at the Company's option. This agreement has a maturity date of March 5, 1999. Under the terms of the loan and security agreement, the Company is among other things, restricted from paying dividends and is required to maintain minimum levels of total liabilities to net F-12

64 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- LONG-TERM DEBT (CONTINUED) worth, quick ratio and profitability. The Company had no borrowings under its prior $2,500,000 line of credit with the bank as of December 31, 1997. In connection with the Company's May 1997 purchase of ECCO's stock, a 10-year note for $2,300,000 was issued to the owners of ECCO. The note is payable in 10 equal annual installments due on May 1 of each year starting in 1998. The note bears interest at the rate of 6.86% per annum. In connection with the Company's December 1996 purchase of WMI's medical waste business, a note payable totaling $5,210,000 was issued to WMI. The note was adjusted to $3,593,301, of which $1,796,650 was repaid in 1997 and $1,796,651 is due on December 20, 1998. The note bears interest at a rate of 7% per annum. In 1995, an agreement was reached with the Rhode Island Department of Environmental Management regarding two notices of violation issued in 1994 and 1995. Although the Company believed that the allegations were meritless, the agreement was entered into in order to resolve the matter in the best interest of the Company and its customers in a timely manner. The Company agreed to pay $35,000 each year from 1995 to 1998, $50,000 in 1999, $60,000 in 2000 and $150,000 in 2001 to the Rhode Island Air and Water Protection Fund. In addition, the Company agreed to perform community services and conduct seminars over a five-year period. The Company recorded this obligation based on the discounted cash flows expected to be paid over the term of agreement, using a discount rate of 11.75%. The recorded obligation of $222,000 at December 31, 1997 has been included in notes payable. An expense of $458,000 is included in the 1995 Consolidated Statement of Operations as a selling, general and administrative expense. This amount reflects the recorded obligation and legal fees incurred in the settlement. In 1994, a non-interest bearing note in the amount of $2,480,000 was issued as part of the purchase of the net assets of Safe Way Disposal Systems, Inc. As a result of the Company's initial public offering in August 1996, a portion of the note was converted into 98,001 shares of common stock and the remainder was paid in cash. During 1992, the Company entered into an obligation to finance the development of its Woonsocket, Rhode Island facility. The development and purchase of substantially all of the property and equipment for the Woonsocket, Rhode Island facility was financed from the issuance of industrial development revenue bonds. The bonds are due in various amounts through 2017 at fixed interest rates ranging from 6.0% to 7.375% and are collateralized by the property and equipment at the Woonsocket, Rhode Island facility. The terms of an agreement entered into in connection with the issuance of the bonds contain, among other provisions, requirements for maintaining defined levels of working capital and various financial ratios including debt to net worth. Payments due on long-term debt, excluding capital lease obligations, during each of the five years subsequent to December 31, 1997 are as follows: (IN THOUSANDS) 1998........................................................ $2,840 1999........................................................ 430 2000........................................................ 445 2001........................................................ 545 2002........................................................ 410 The Company paid interest of $262,000, $352,000 and $444,000 for the fiscal years ended December 31, 1995, 1996 and 1997, respectively. F-13

65 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- LONG-TERM DEBT (CONTINUED) Capital Leases: In February 1994, the Company entered into a sale leaseback transaction for equipment acquisitions at its Yorkville, Wisconsin facility in the amount of $882,000. The lease arrangement has a term of 60 months and at the end of the lease, the Company will have the option to renew the lease, return the equipment or purchase the equipment at a fair market value not to exceed 11% of the original purchase price. In January 1996, the Company entered into a capital lease obligation of $364,000 for equipment. The lease expires in 1998. At December 31, property under capital leases included with property, plant and equipment in the accompanying Consolidated Balance Sheet is as follows: 1996 1997 ---- ---- (IN THOUSANDS) Machinery and equipment..................................... $1,246 $1,246 Less -- accumulated depreciation and amortization........... 293 418 ------ ------ $ 953 $ 828 ====== ====== Minimum future lease payments under capital leases are as follows: (IN THOUSANDS) 1998........................................................ $ 218 1999........................................................ -- ----- Total minimum lease payments................................ 218 Less -- Amounts representing interest....................... (6) ----- Present value of net minimum lease payments................. 212 Less--Current portion....................................... (212) ----- Long-term obligations under capital leases.................. $ -- ===== NOTE 7 -- LEASE COMMITMENTS The Company leases various plant equipment, office furniture and equipment, motor vehicles and office and warehouse space under operating lease agreements which expire at various dates over the next six years. The leases for most of the properties contain renewal provisions. Rent expense for 1995, 1996 and 1997 was $1,739,000, $2,462,000 and $3,284,000 respectively. Minimum future rental payments under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 1997 for each of the next five years and in the aggregate are as follows: (IN THOUSANDS) 1998........................................................ $ 4,222 1999........................................................ 3,642 2000........................................................ 2,168 2001........................................................ 954 2002........................................................ 393 Thereafter.................................................. 105 ------- Total minimum rental payments............................... $11,484 ======= F-14

66 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- COMMON AND PREFERRED STOCK In August 1995, the Board of Directors adopted a plan of recapitalization which was approved by the Company's stockholders in September 1995, pursuant to which the Company reclassified its outstanding convertible redeemable preferred stock as common stock. As part of the plan of recapitalization, all conversion, redemption and liquidation rights associated with the convertible redeemable preferred stock were terminated in exchange for the issuance of shares of common stock. Shares of the Company's common stock have been reserved for issuance upon the exercise of options and warrants. Also see Note 10. These shares have been reserved as follows at December 31, 1997: 1993 Plan options........................................... 4,938 1995 Plan options........................................... 383,060 1996 Directors Plan options................................. 106,170 1997 Plan options........................................... 351,693 Warrants.................................................... 301,683 --------- Total shares reserved....................................... 1,147,544 ========= NOTE 9 -- NET INCOME (LOSS) PER COMMON SHARE The following table sets forth the computation of net income (loss) per common share (in thousands, except for share and per share data): 1995 1996 1997 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income (loss)........................................ $ (4,544) $ (2,389) $ 1,430 Denominator: Denominator for basic earnings per share -- weighted-average shares...................... 5,582,385 7,471,151 10,239,996 Effect of dilutive securities: Employee stock options................................... -- -- 441,586 Warrants................................................. -- -- 84,534 --------- --------- ---------- Dilutive potential common shares......................... -- -- 526,120 --------- --------- ---------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions.......... 5,582,385 7,471,151 10,766,116 ========= ========= ========== Basic earnings per common share............................ $ (0.81) $ (0.32) $ 0.14 ========= ========= ========== Diluted earnings per common share.......................... $ (0.81) $ (0.32) $ 0.13 ========= ========= ========== For additional information regarding outstanding employee stock options and outstanding warrants, see Note 10. Options and warrants to purchase 1,170,626 and 838,849 shares of common stock were outstanding during 1995 and 1996, respectively, at exercise prices ranging from $.53-$69.02 and $.53-$69.02, respectively, but were not included in the computation of diluted earnings per common share in these years because the Company had net losses in 1995 and 1996 and the effect would be antidilutive. F-15

67 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- STOCK OPTIONS AND WARRANTS Stock Options: In September 1993, the Company's shareholders approved an amended and restated stock option plan (the "1993 Plan"), which provided for the granting of options to purchase up to 113,018 shares of common stock. In November 1995, the outstanding options of all current employees were canceled in conjunction with the Company's recapitalization. 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. In 1995, the Board of Directors authorized the grant to officers and employees of options to purchase 923,292 shares of the Company's common stock at an exercise price of $.53 per share. In 1996, the Board of Directors authorized the grant to officers and employees of options to purchase 229,883 shares of the Company's common stock at exercise prices ranging from $.53 to $2.12 per share. All options granted to date have 10-year terms and vest over periods of up to four years after the date of grant. In 1997, the Company's Board of Directors and shareholders approved the 1997 Stock Option Plan (the "1997 Plan"), which provides for the granting of 1,500,000 shares of common stock in the form of stock options to selected officers, directors and employees of the Company and its subsidiaries. The exercise price of options granted under the 1997 Plan must be at least equal to the fair market value of the common stock on the date of grant. In 1997, the Board of Directors authorized the grant to officers and employees of options to purchase 376,367 shares of the Company's common stock at exercise prices ranging from $7.25 to $9.50 per share. All options granted to date have 10-year terms and vest over periods of up to 5 years after the date of grant. In June 1996, the Company's Board of Directors adopted and in July, 1996, the Company's stockholders approved, the Directors Stock Option Plan. The plan authorizes stock options for a total of 285,000 shares of common stock to be granted to eligible directors of the Company, consisting of directors who are neither officers nor employees of the Company. Each of the six incumbent eligible directors automatically received an option as of the date of closing of the Company's initial public offering for 8,195 shares of common stock with an exercise price of $10.25. As of each annual meeting of the Company's stockholders, each incumbent eligible director who is re-elected as a director at the annual meeting automatically receives an option grant based on a predetermined formula. The exercise price of each option will be the closing price on the date of grant. In 1997, each of the six incumbent eligible directors automatically received an option as of the date of the 1997 annual meeting for 9,500 shares of common stock with an exercise price of $7.50. The term of each option is six years from the date of grant, and each option vests in 16 equal quarterly installments and may be exercised only when it is vested and only while the holder of the option remains a director of the Company or during the 90-day period following the date that he or she ceases to serve as a director. F-16

68 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- STOCK OPTIONS AND WARRANTS (CONTINUED) A summary of stock option information follows: 1995 1996 1997 -------------------- --------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ --------- ------ --------- ------ --------- Outstanding at beginning of year............................ 109,729 $8.56 933,235 $0.62 537,166 $1.93 Granted......................... 923,292 $0.53 279,053 $3.20 433,367 $7.97 Exercised....................... -- $0.00 (660,767) $0.59 (83,006) $0.70 Canceled/Forfeited.............. (99,786) $8.56 (14,355) $3.42 (41,666) $5.38 ------- ----- -------- ----- --------- ----- Outstanding at end of year........ 933,235 $0.62 537,166 $1.93 845,861 $4.98 ======= ===== ======== ===== ========= ===== Exercisable at end of year........ 542,620 $0.60 315,273 $0.81 326,119 $1.53 Available for future grant........ 576,708 592,004 1,700,303 Options outstanding and exercisable as of December 31, 1997 by price range: OUTSTANDING EXERCISABLE ------------------------------------- -------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE REMAINING EXERCISE EXERCISE RANGE OF EXERCISE PRICE SHARES LIFE IN YEARS PRICE SHARES PRICE ----------------------- ------ ------------- --------- ------ --------- $.53-$1.99................................. 383,060 8.09 $1.04 298,693 $0.79 $7.25-$10.25............................... 462,801 9.27 $8.23 27,426 $9.54 ------- ------- 845,861 326,119 ======= ======= The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options approximates the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net 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 were valued using the Black- Scholes option pricing model. Options granted in 1996 and 1995, as a non-public company, were valued using the minimum value method. The following assumptions were used in 1995, 1996, and 1997: risk-free interest rates ranging from 5.5% to 5.7% in 1995, 5.1% to 6.7% in 1996 and 5.9% to 6.8% in 1997; a dividend yield of 0%; and a weighted-average expected life of the option of 31 months in 1995 and 1996 and 72 months in 1997. The weighted-average fair values of options granted during 1995, 1996 and 1997 were $.09 per share, $.79 per share and $4.48 per share, respectively. Option value models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing method does not necessarily provide a reliable single measure of the fair value of its employee stock options. F-17

69 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- STOCK OPTIONS AND WARRANTS (CONTINUED) 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): 1995 1996 1997 ---- ---- ---- Pro forma net income (loss)................................. $(4,559) $(2,474) $1,112 Pro forma diluted net income (loss) per share............... $ (0.82) $ (0.33) $ 0.10 The pro forma effect for 1995, 1996, and 1997 is not representative of the pro forma effect in future years as the pro forma disclosures reflect only the fair value of stock options granted subsequent to December 31, 1994. Warrants: The Company, in conjunction with a lease financing agreement, issued the lessor warrants to purchase up to 15,064 shares of common stock at $18.58 per share. At December 31, 1997, all of these warrants were outstanding. They expire in March 1998. The Company, in connection with the issuance of preferred stock, which was subsequently reclassified as common stock, issued warrants to purchase up to 6,773 shares of common stock at an exercise price of $69.02 per share. At December 31, 1997, all of these warrants were outstanding. They expire in March 1999. During 1995, several of the Company's shareholders and directors provided a bridge loan to the Company. The loan totaled $830,000 with interest at the prime rate plus 3% and was repaid. In addition to the interest, the lenders received warrants to purchase 220,559 shares of common stock at $1.59 per share. These warrants expire on July 31, 2000. In 1996, the lenders exercised warrants to purchase 166,749 shares. At December 31, 1997, warrants to purchase 53,810 shares of common stock remained outstanding. 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. At December 31, 1997, all of these warrants were outstanding. NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN Under a plan for 1997 approved by the Board of Directors, employees of Stericycle can purchase shares of common stock at a market price. Under the terms of the plan, employees were allowed to purchase shares throughout the year and pay for the stock through salary deduction. Employees elected to purchase a total of 5,235 shares under this plan during 1997. NOTE 12 -- REGISTRATION AGREEMENT The Company is a party to a registration agreement which gives certain shareholders of the Company registration rights for their shares. The parties to the registration agreement are the original holders of the Company's prior Class A, B, C, D, E, F, H and I preferred stock and a holder of a warrant to purchase up to 15,064 shares of common stock which the Company issued in conjunction with a lease financing agreement. After the Company's 1995 recapitalization, the registration agreement was amended to provide that the registration rights applied to the shares of common stock that the parties to the registration agreement received pursuant to the recapitalization, shares issuable under certain warrants issued to purchasers of the Company's prior Class F preferred stock, shares issuable under the warrant issued in conjunction with the F-18

70 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 -- REGISTRATION AGREEMENT (CONTINUED) lease financing agreement and the common stock to be delivered by the Company in payment of a note delivered in connection with the Safe Way acquisition, for a total of 5,227,608 shares. According to the registration agreement (i) at any time, the holders of a majority of the shares which are subject to the registration rights can request registration of their shares on Form S-1 (a "Long-Form Registration") and the holders of at least 25% of these shares can request registration of their shares on Form S-2 or S-3, (ii) at any time, one shareholder who is a party to the registration agreement may request a Long Form registration, (iii) at any time, another shareholder who is a party to the registration agreement can request a Long Form registration, and (iv) the parties to the registration agreement have the right to include their shares in any registration which is requested or in any other registration that the Company may otherwise undertake. If any registration is requested, the Company will use its best efforts to effect the requested registration at its own expense. NOTE 13 -- EMPLOYEE BENEFIT PLAN The Company has a 401(k) defined contribution retirement savings plan covering substantially all employees of the Company. Each participant may elect to defer a portion of his or her compensation subject to certain limitations. The Company may match up to 30% of the first $1,000 contributed to the plan by each employee. The Company's contributions for the years ended December 31, 1995, 1996 and 1997 were approximately $14,000, $14,000 and $25,000, respectively. NOTE 14 -- RELATED PARTIES In February 1998, the Company announced the formation of an international joint venture company called Medam S.A. de C.V. ("Medam"), which will utilize Stericycle's proprietary Electro-Thermal Deactivation (ETD) technology to treat medical and infectious waste in the Mexico City market. Stericycle's partners in the joint venture are Controladora Ambiental S.A. de C.V., headquartered in Mexico City, and Pennoni Associates, Inc., headquartered in Philadelphia, Pennsylvania. The Company owns 24.5% of the common stock of Medam. During 1997, the Company received partial payments for machinery to be delivered to Medam in 1998. At December 31, 1997 the Company has made $461,000 in capital contributions. Capital contributions will be approximately $702,000 in 1998. In October 1993, the Company entered into an alliance agreement (the "Alliance") with an investor in the Company. The purpose of the Alliance was to develop new technologies and procedures for recycling regulated medical waste. The Company devoted resources to the Alliance research and development program during the first 18 months of the Alliance. The investor has rights with respect to the development of any Alliance technology as part of the research and development program. During the initial 18 months of the Alliance, the Company provided for $1 million of research and development costs under this agreement. A license agreement is effective upon the non-renewal of the Alliance and grants the investor a license to use the Alliance technology subject to certain conditions. The initial term of the Alliance Agreement ends on October 12, 1998, and will be automatically renewed for successive one-year terms thereafter, unless either party notifies the other at least six months prior to the end of any term of its intent to terminate the Agreement. Under the Alliance, the investor and the Company have an ongoing relationship to provide services and products to the health care market place. F-19

71 STERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) DECEMBER 31, JUNE 30, 1997 1998 ------------ -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 5,374 $ 3,358 Short-term investments.................................... 2,335 2,335 Accounts receivable, less allowance for doubtful accounts of $347 in 1998 and $361 in 1997........................ 10,286 11,513 Parts and supplies........................................ 660 802 Prepaid expenses.......................................... 440 485 Other..................................................... 392 507 ------- ------- Total current assets.................................. 19,487 19,000 ------- ------- Property, plant and equipment: Land...................................................... 90 90 Buildings and improvements................................ 5,561 5,699 Machinery and equipment................................... 11,469 12,025 Office equipment and furniture............................ 746 854 Construction in progress.................................. 614 821 ------- ------- 18,480 19,489 Less accumulated depreciation............................... (7,239) (8,268) ------- ------- Property, plant and equipment, net.................... 11,241 11,221 ------- ------- Other assets: Goodwill, less accumulated amortization of $2,692 in 1998 and $2,040 in 1997...................................... 29,458 30,574 Other..................................................... 1,040 1,743 ------- ------- Total other assets.................................... 30,498 32,317 ------- ------- Total assets....................................... $61,226 $62,538 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 3,052 $ 2,476 Accounts payable.......................................... 1,927 2,125 Accrued liabilities....................................... 7,039 6,186 Deferred revenue.......................................... 255 250 ------- ------- Total current liabilities............................. 12,273 11,037 ------- ------- Long-term debt: Industrial development revenue bonds and other............ 1,405 1,366 Notes payable............................................. 2,070 2,035 ------- ------- Total long-term debt.................................. 3,475 3,401 ------- ------- Other liabilities........................................... 452 427 Shareholders' equity: Common stock (par value $.01 per share, 30,000,000 shares authorized, 10,615,399 issued and outstanding in 1998, 10,472,799 issued and outstanding in 1997).............. 105 106 Additional paid-in capital................................ 82,986 83,764 Notes receivable for common stock purchases............... (4) (4) Accumulated deficit....................................... (38,061) (36,193) ------- ------- Total shareholders' equity............................ 45,026 47,673 ------- ------- Total liabilities and shareholders' equity......... $61,226 $62,538 ======= ======= The accompanying notes are an integral part of these financial statements. F-20

72 STERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, ------------------------ 1997 1998 ---- ---- Revenues.................................................... $ 20,816 $ 28,018 Costs and expenses: Cost of revenues.......................................... 16,106 19,629 Selling, general and administrative expenses.............. 4,603 6,358 ---------- ---------- Total costs and expenses............................... 20,709 25,987 ---------- ---------- Income from operations...................................... 107 2,031 Other income (expense): Interest income........................................... 398 239 Interest expense.......................................... (216) (124) ---------- ---------- Total other income (expense)........................... 182 115 ---------- ---------- Income before income taxes.................................. 289 2,146 Income tax expense.......................................... 7 278 ---------- ---------- Net income.................................................. $ 282 $ 1,868 ========== ========== Earnings per share: Basic..................................................... $ 0.03 $ 0.18 ========== ========== Diluted................................................... $ 0.03 $ 0.17 ========== ========== Weighted average number of common shares outstanding: Basic..................................................... 10,071,610 10,511,297 ========== ========== Diluted................................................... 10,554,140 11,167,492 ========== ========== The accompanying notes are an integral part of these financial statements. F-21

73 STERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, --------------------- 1997 1998 ---- ---- OPERATING ACTIVITIES: Net income.................................................. $ 282 $ 1,868 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization............................. 1,426 1,733 Changes in operating assets: Accounts receivable, net of effect of acquisitions........ (4,293) (1,152) Parts and supplies........................................ 126 (135) Prepaid expenses.......................................... 98 (45) Other assets.............................................. 35 (115) Accounts payable.......................................... -- 198 Accrued liabilities....................................... 2,092 (1,429) Deferred revenue.......................................... (146) (30) ------- ------- Net cash provided by (used in) operating activities......... (380) 893 ------- ------- INVESTING ACTIVITIES: Payments for acquisitions, net of cash acquired........... (4,583) (1,163) Proceeds from maturity of short-term investments.......... 5,799 -- Purchases of short-term investments....................... (2,335) -- Capital expenditures...................................... (702) (984) ------- ------- Net cash used in investing activities....................... (1,821) (2,147) ------- ------- FINANCING ACTIVITIES: Repayment of long term debt............................... (838) (788) Principal payments on capital lease obligations........... (150) (57) Principal payments on notes receivable for common stock purchases.............................................. 4 -- Proceeds from issuance of common stock.................... 20 83 ------- ------- Net cash used in financing activities....................... (964) (762) ------- ------- Net decrease in cash and cash equivalents................... (3,165) (2,016) Cash and cash equivalents at beginning of period............ 11,950 5,374 ------- ------- Cash and cash equivalents at end of period.................. $ 8,785 $ 3,358 ======= ======= Non-cash activities: Issuance of common stock for certain acquisitions......... $ 2,363 $ 697 Issuance of notes payable for certain acquisitions........ $ 1,380 $ 195 The accompanying notes are an integral part of these financial statements. F-22

74 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 NOTE 1 -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; but the Company believes the disclosures in the accompanying condensed consolidated financial statements are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto for the three years ended December 31, 1997. The results of operations for the six-month period ended June 30, 1998 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 1998. NOTE 2 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes the dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All net income per common share amounts for all periods have been presented, and where appropriate, restated to conform to FAS 128 requirements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements and was effective for the Company beginning January 1, 1998. The adoption of FAS 130 has had no impact on the Company's financial position, results of operations, or cash flows. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information' ("FAS 131"). FAS 131 establishes standards for reporting information about operating segments in annual financial statements and requires reporting selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosure about products and services, geographic areas and major customers. FAS 131 is effective for the Company's annual financial statements for the year ended December 31, 1998. The Company is evaluating the disclosure requirements of FAS 131 and has not determined whether its adoption will have a material impact on its future disclosure requirements. NOTE 3 -- ACQUISITIONS In February 1998, the Company acquired selected small quantity generator contracts of Bridgeview, Inc., located in Pennsylvania, and in April 1998, the Company acquired the customer contracts and selected other assets of Medisin Inc., located in eastern Kentucky. In June 1998, the Company acquired the customer contracts and selected other assets of Mediwaste Disposal Services LLC., Controlled Medical Disposal, Inc., and Arizona Hazardous Waste Disposal, located in Texas, New Jersey and Arizona, respectively, and selected customer contracts and other assets of Superior of Wisconsin, Inc., located in Wisconsin. The combined purchase price of approximately $2,055,000 for these six acquisitions was paid by a combination of cash, promissory notes, the issuance of common stock (and, in one case, the forgiveness of indebtedness). F-23

75 STERICYCLE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1998 NOTE 4 -- SALE OF EQUIPMENT TO JOINT VENTURE During the six months ended June 30, 1998, the Company sold equipment utilizing the Company's Electro-Thermal-Deactivation ("ETD") technology to a Mexican joint venture company, Medam S.A. de C.V. The Company holds a 24.5% interest in the joint venture. Revenues of $1,202,000 have been recognized in the condensed consolidated statement of operations for the six months ended June 30, 1998. NOTE 5 -- STOCK OPTIONS During the six months ended June 30, 1998, options to purchase common stock totaling 248,668 shares were granted to key employees. These options will vest ratably over a five-year period and have an average exercise price of approximately $13.675 per share. The grant of options was made under the Company's 1997 Stock Option Plan, which authorized the grant of options for a total of 1,500,000 shares of the Company's common stock. The 1997 Stock Option Plan was approved by the Company's stockholders in April 1997. During the six months ended June 30, 1998, options to purchase common stock totaling 63,870 shares were granted to the Company's directors. These options will vest ratably over a one-year period and have an exercise price of $14.14 per share. The grant of options was made under the Company's Directors Stock Option Plan, which authorized the grant of options for a total of 285,000 shares of the Company's common stock. The Directors Stock Option Plan was approved by the Company's stockholders in April 1996. NOTE 6 -- STOCK ISSUANCES During the six months ended June 30, 1998, options to purchase 98,098 shares of common stock were exercised at prices ranging from $0.53-$8.00 per share. The Company also issued 48,621 shares of common stock in connection with certain acquisitions. NOTE 7 -- INCOME TAXES Prior to 1997, the Company had generated net operating losses for income tax purposes. Any benefit resulting from these net operating losses has been offset by a valuation allowance. Annual utilization of the Company's net operating loss carryforward is limited by Internal Revenue Code Section 382. The Company's 1998 income tax expense reflects federal taxable income expected in excess of the Section 382 limitation and income taxes in states where the Company has no offsetting net operating losses. The Company's 1997 income tax expense reflects the federal alternative minimum tax and income taxes in states where the Company has no offsetting net operating losses. For the six month periods ended June 30, 1998 and 1997, utilization of the Company's net operating loss carryforward reduced the Company's income tax expense by $595,000 and $113,000, respectively. NOTE 8 -- COMMITMENT In July 1998, the Company entered into an agreement to supply and license its ETD technology to Companhia Auxiliar de Viacao e Obras -- CAVO of Sao Paulo, Brazil. Under the agreement, the Company will supply the ETD equipment and license technology and will provide engineering, installation, training, and start up services. F-24

76 [LOGO] Through on-site training and education programs, Stericycle helps customers establish regulated medical waste management systems. Stericycle helps health care providers protect patients and employees from the potential hazards of regulated medical waste with puncture-resistant, leak-proof Steri-Tub(R) collection containers. Regulated medical waste is readied for treatment at the beginning of the process. The empty Steri-Tub(R) continues on to the wash station where it is sanitized and prepared for re-use. A processing vessel containing the regulated medical waste automatically enters the dielectric oven, where it is treated using Stericycle's patented Electro-Thermal-Deactivation (ETD) treatment process. The regulated medical waste has now been rendered noninfectious. The treated waste can now be recycled, used as a fuel to provide energy, or safely landfilled.

77 No dealer, salesperson or other person has been authorized to give any information or to make any representation other than those contained in this Prospectus in connection with the offer contained herein, and if given or made, such information or representation must not be relied upon as having been authorized by the Company, the Selling Stockholders or any Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, shares of Common Stock in any jurisdiction to any person to whom it is not lawful to make any such offer or solicitation in such jurisdiction or in which the person making such offer or solicitation is not qualified to do so. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company since the date hereof. TABLE OF CONTENTS Prospectus Summary.................... 3 Risk Factors.......................... 7 Use of Proceeds....................... 15 Price Range of Common Stock........... 15 Capitalization........................ 16 Dividend Policy....................... 16 Selected Consolidated Financial Data................................ 17 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 18 Business.............................. 23 Management............................ 43 Selling Stockholders.................. 45 Description of Capital Stock.......... 46 Shares Eligible for Future Sale....... 47 Underwriting.......................... 48 Legal Matters......................... 49 Experts............................... 49 Available Information................. 49 Documents Incorporated by Reference... 50 Index to Consolidated Financial Statements.......................... F-1 PROSPECTUS , 1998 3,000,000 Shares STERICYCLE Common Stock WARBURG DILLON READ LLC CREDIT SUISSE FIRST BOSTON WILLIAM BLAIR & COMPANY SUTRO & CO. INCORPORATED

78 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered (other than underwriting discounts and commissions). All amounts shown are estimates except the Securities and Exchange Commission registration fee and the Nasdaq National Market listing fees. All of these expenses will be paid by the Registrant. SEC registration fee........................................ $17,678.64 Nasdaq National Market listing fees......................... NASD registration fee....................................... 6,333.26 Legal fees and expenses..................................... Accounting fees and expenses................................ Printing expenses........................................... Blue sky fees and expenses.................................. Transfer agent fees......................................... Miscellaneous............................................... ---------- Total................................................ $ ========== ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides generally that a person sued as a director, officer, employee or agent of a corporation may be indemnified by the corporation in non-derivative suits for expenses (including attorneys' fees), judgments, fines and amounts paid in settlement if such person acted in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the corporation. In the case of criminal actions and proceedings, the person must also not have had reasonable cause to believe that his or her conduct was unlawful. Indemnification of expenses is also authorized in stockholder derivative actions if the person acted in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the corporation and if he or she has not been found liable to the corporation. Even in this latter instance, the court may determine that in view of all the circumstances such person is entitled to indemnification for such expenses as the court deems proper. A person sued as a director, officer, employee or agent of a corporation who has been successful in defense of the action must be indemnified by the corporation against expenses. Article Fifth of the Registrant's By-Laws requires the Company to indemnify its directors, officers, employees and agents to the maximum extent permitted by Delaware law. Article Fifth also requires the Registrant to advance litigation expenses of a director or officer on receipt of his or her written undertaking to repay all amounts advanced if it s ultimately determined that he or she is not entitled to indemnification. Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to include a provision in its certificate of incorporation eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for a breach of the director's fiduciary duty of care. Such a provision may not eliminate or limit the liability of a director for breaching his or her duty of loyalty, failing to act in good faith, engaging in intentional misconduct or knowingly violating a law, declaring an illegal dividend or approving an illegal stock repurchase, or obtaining an improper personal benefit. Article Ninth of the Registrant's Certificate of Incorporation eliminates the personal liability of the Registrant's directors to the fullest extent permitted by Section 102(b)(7). By reason of directors' and officers' liability insurance which the Registrant maintains, the Registrant's directors officers are insured against actual liabilities, including liabilities under the federal securities laws, for acts or omissions related to the conduct of their duties. See the Underwriting Agreement, Exhibit 1.1, for certain indemnification provisions relating to this Offering. II-1

79 ITEM 16. EXHIBITS EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant as currently in effect. (Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-05665), declared effective on August 22, 1996.) 5.1* Opinion of Johnson and Colmar. 10.1 Loan and Security Agreement dated March 4, 1998 between Silicon Valley Bank and the Registrant. 10.2 Joint Venture Agreement dated May 16, 1997 among the Registrant, 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. 10.3 Industrial Building Lease dated July 28, 1998 between Curto Reynolds Oelerich, Inc. and the Registrant, relating to the Registrant's lease of office and warehouse space in Lake Forest, Illinois. 10.4+ Agreement for Sublease dated April 1, 1997 between Waste Management of Texas, Inc. and the Registrant, relating to the Registrant's sublease of a treatment facility in Terrell, Texas. 10.5+ Agreement for Sublease dated May 1, 1997 between Waste Management of Maryland, Inc. and the Registrant, relating to the Registrant's sublease of a treatment facility in Baltimore, Maryland. 10.6+ Agreement for Sublease dated July 30, 1997 between WMI Medical Services of Arizona, Inc. and the Registrant, relating to the Registrant's sublease of a treatment facility in Chandler, Arizona. 10.7 First Amendment to Amended and Restated Incentive Compensation Plan. 10.8 First and Second Amendments to Directors Stock Option Plan. 10.9 First Amendment to 1997 Stock Option Plan. 23.1 Consent of Ernst & Young, LLP. 23.2* Consent of Johnson and Colmar (filed as part of Exhibit 5.1). 24.1 Power of attorney (included under the caption "Power of Attorney" in Part II of this Registration Statement). - ------------------------- * To be filed by amendment + Confidential treatment requested; material omitted and filed separately with the Commission ITEM 17. UNDERTAKINGS The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (2) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time that it was declared effective. II-2

80 (3) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 15, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3

81 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Village of Deerfield, State of Illinois, on August 4, 1998. Stericycle, Inc. By /s/ MARK C. MILLER ------------------------------------ Mark C. Miller President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below who is then an officer or director of the Registrant authorizes Mark C. Miller and Frank J.M. ten Brink, or either of them, with full power of substitution and resubstitution, to sign in his name and to file any amendments to this Registration Statement (including post-effective amendments) and all related documents necessary or advisable to enable the Registrant to comply with the Securities Act of 1933, as amended, in connection with the registration of the securities which are the subject of this Registration Statement, which amendments may make such changes in this Registration Statement (as it may be so amended) as Mark C. Miller or Frank J.M. ten Brink, or either of them, may deem appropriate, and to do and perform all other related acts and things necessary to be done. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. NAME TITLE DATE ---- ----- ---- /s/ JACK W. SCHULER Chairman of the Board of Directors August 4, 1998 - ------------------------------------------------ Jack W. Schuler /s/ MARK C. MILLER President, Chief Executive Officer August 4, 1998 - ------------------------------------------------ and a Director (Principal Executive Mark C. Miller Officer) /s/ FRANK J.M. TEN BRINK Vice President, Finance and Chief August 4, 1998 - ------------------------------------------------ Financial Officer (Principal Frank J.M. Ten Brink Financial and Accounting Officer) /s/ ROD F. DAMMEYER Director August 4, 1998 - ------------------------------------------------ Rod F. Dammeyer /s/ PATRICK F. GRAHAM Director August 4, 1998 - ------------------------------------------------ Patrick F. Graham /s/ JOHN PATIENCE Director August 4, 1998 - ------------------------------------------------ John Patience /s/ PETER VARDY Director August 4, 1998 - ------------------------------------------------ Peter Vardy /s/ L. JOHN WILKERSON, PH.D. Director August 4, 1998 - ------------------------------------------------ L. John Wilkerson, Ph.D. II-4

82 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant as currently in effect. (Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-05665), declared effective on August 22, 1996.) 5.1* Opinion of Johnson and Colmar. 10.1 Loan and Security Agreement dated March 4, 1998 between Silicon Valley Bank and the Registrant. 10.2 Joint Venture Agreement dated May 16, 1997 among the Registrant, 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. 10.3 Industrial Building Lease dated July 28, 1998 between Curto Reynolds Oelerich, Inc. and the Registrant, relating to the Registrant's lease of office and warehouse space in Lake Forest, Illinois. 10.4+ Agreement for Sublease dated April 1, 1997 between Waste Management of Texas, Inc. and the Registrant, relating to the Registrant's sublease of a treatment facility in Terrell, Texas. 10.5+ Agreement for Sublease dated May 1, 1997 between Waste Management of Maryland, Inc. and the Registrant, relating to the Registrant's sublease of a treatment facility in Baltimore, Maryland. 10.6+ Agreement for Sublease dated July 30, 1997 between WMI Medical Services of Arizona, Inc. and the Registrant, relating to the Registrant's sublease of a treatment facility in Chandler, Arizona. 10.7 First Amendment to Amended and Restated Incentive Compensation Plan. 10.8 First and Second Amendments to Directors Stock Option Plan. 10.9 First Amendment to 1997 Stock Option Plan. 23.1 Consent of Ernst & Young, LLP. 23.2* Consent of Johnson and Colmar (filed as part of Exhibit 5.1). 24.1 Power of attorney (included under the caption "Power of Attorney" in Part II of this Registration Statement). - ------------------------- * To be filed by amendment + Confidential treatment requested; material omitted and filed separately with the Commission II-5

1 LOAN AND SECURITY AGREEMENT Exhibit 10.1 This Loan and Security Agreement is entered into as of March 4 , 1998, by and between Silicon Valley Bank, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, Massachusetts 02181, doing business under the name "Silicon Valley East" ("Bank") and Stericycle, Inc., a Delaware corporation with its principal place of business at 1419 Lake Cook Road, Suite 4 10, Deerfield, Illinois 60015 ("Borrower"). Recitals Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. Agreement The parties agree as follows: 1. Definitions and Construction 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a loan advance under the Committed Revolving Line. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, such Persons, managers and members. "Agreement" means this Loan and Security Agreement. "Bank Expenses" means all reasonable costs or expenses (including reasonable attorneys' fees and enforcement of the expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, (including fees and expenses of appeal or review, or those incurred in any Insolvency Proceeding) whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including, without limitation: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" means an amount equal to (i) Seventy-Five percent (75.0 %) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. 1

2 "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the Commonwealth of Massachusetts are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the Massachusetts Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. "Committed Revolving Line" means a credit extension of up to Seven Million Five Hundred Thousand Dollars ($7,500,000.00). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "Credit Extension" means each Advance, Letter of Credit or any other extension of credit by Bank for the benefit of Borrower hereunder. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Credit Extensions made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination, but excluding Subordinated Debt. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4. Unless otherwise agreed to by Bank in writing, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to an account debtor, including Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank; 2

3 (d) Accounts with respect to which the account debtor does not have its principal place of business in the United States; (e) Accounts with respect to which the account debtor is a federal, state, or local governmental entity or any department, agency, or instrumentality thereof to the extent Accounts of such account debtors in the aggregate exceed Two Hundred Fifty Thousand Dollars ($250,000.00), except for those Accounts of the United States or any department, agency or instrumentality thereof as to which the payee has assigned its rights to payment thereof to Bank and the assignment has been acknowledged, pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. 3727); (f) Accounts with respect to which Borrower is liable to the account debtor, but only to the extent of any amounts owing to the account debtor (sometimes referred to as "contra" accounts, e.g. accounts payable, customer deposits, credit accounts etc.); (g) Accounts generated by demonstration or promotional equipment, or with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (h) Accounts with respect to which the account debtor is an Affiliate, officer, employee, or agent of Borrower; and (i) Accounts with respect to which the account debtor disputes liability (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect in the United States from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Intellectual Property Collateral " means (a) Copyrights, Trademarks, Patents, and Mask Works; (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; 3

4 (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (e) All licenses or other rights to use any of the Copyrights, Patents, Trademarks, or Mask Works, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks, Patents, or Mask Works; and (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Letter of Credit" means a letter of credit or similar undertaking issued by Bank pursuant to Section 2.1.2. "Letter of Credit Reserve" has the meaning set forth in Section 2.1.2. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other present or future agreement entered into between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated from time to time. "Mask Works" means all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; "Material Adverse Effect" means a material adverse effect on the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Maturity Date" means the date which is one day prior to one year from the Closing Date. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper. 4

5 "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Patents" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "Payment Date" means the first calendar day of each month commencing on the first such date after the Closing Date and ending on the Maturity Date. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and as to which adequate reserves are maintained on Borrower's Books in accordance with GAAP, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (d) Purchase money security interests which are properly perfected under state law, up to a maximum aggregate amount of $1,000,000.00; 5

6 (e) Security Interests in any assets other than Accounts which assets are purchased by Borrower in connection with a transaction which complies with Section 7.3 hereof and which security interests secure obligations of Borrower to the seller of such assets, provided that the indebtedness secured thereby is expressly subordinated to the Obligations, in form and substance satisfactory to Bank; (f) Leases or subleases and licenses or sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and its Subsidiaries taken as a whole, and any interest or title of a lessor, licensor or under any lease or license provided that such leases, subleases, licenses and sublicenses do not prohibit the grant of the security interest granted hereunder; and (g) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (e) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank as its "prime rate, "whether or not such announced rate is the lowest rate available from Bank. "Quick Assets" means, as of any applicable date, the consolidated cash, cash equivalents, accounts receivable and investments with maturities of fewer than 90 days of Borrower determined in accordance with GAAP. "Responsible Officer" means each of the Chief Executive Officer, the President or the Chief Financial Officer of Borrower. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means with respect to any Person, a corporation, partnership, company association, joint venture, or any other business entity of which more than fifty percent (50%) of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person. "Total Liabilities" means as of any applicable date, any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness, but specifically excluding Subordinated Debt. "Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Assignor connected with and symbolized by such trademarks. 1.2 Accounting and Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations and determinations made hereunder shall be made in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. The terms "including"/ "includes" shall always be read as meaning "including (or includes) without limitation" when used herein or in any other Loan Document. 6

7 2. Loan and Terms of Payment 2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. 2.1.1 (a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding amount not to exceed (i) the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit). Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time during the term of this Agreement. (b) Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled o rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2. 1 to Borrower's deposit account. (c) The Committed Revolving Line shall terminate on the Maturity Date, at which time all Advances under this Section 2.1 and other amounts due under this Agreement (except as otherwise expressly specified herein) shall be immediately due and payable. 2.1.2 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Bank agrees to issue or cause to be issued Letters of Credit for the account of Borrower in an aggregate outstanding face amount not to exceed (i) the lesser of the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the then outstanding principal balance of the Advances; provided that the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) shall not in any case exceed Three Million Dollars ($3,000,000.00). Each Letter of Credit shall have an expiry date no later than one hundred eighty (180) days after the Maturity Date provided that Borrower's Letter of Credit reimbursement obligation shall be secured by cash on terms acceptable to Bank at any time after the Maturity Date if the term of this Agreement is not extended by Bank. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of standard Application and Letter of Credit Agreement. (b) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit, except to the extent that a final court of competent jurisdiction finds that such loss occurred as a result of the Bank's gross negligence or willful misconduct. 7

8 (c) Borrower may request that Bank issue a Letter of Credit payable in a currency other than United States Dollars. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the equivalent of the amount thereof (plus cable charges) in United States currency at the then prevailing rate of exchange in San Francisco, California, for sales of that other currency for cable transfer to the country of which it is the currency. (d) Upon the issuance of any letter of credit payable in a currency other than United States Dollars, Bank shall create a reserve under the Committed Revolving Line for letters of credit against fluctuations in currency exchange rates, in an amount equal to ten percent (10%) of the face amount of such letter of credit. The amount of such reserve may be amended by Bank from time to time to account for fluctuations in the exchange rate. The availability of funds under the Committed Revolving Line shall be reduced by the amount of such reserve for so long as such letter of credit remains outstanding. 2.2 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Sections 2. 1. 1 and 2.1.2 of this Agreement is greater than the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3 Interest Rates, Payments, and Calculations. (a) Interest Rate. Except as set forth in Section 2.3(b), any Advances shall bear interest in accordance with the LIBOR Supplement to Agreement attached hereto as Exhibit E. (b) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to three (3) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest hereunder shall be due and payable on each Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank, including, without limitation, Account Number ________ for payments of principal and interest due on the Obligations and any other amounts owing by Borrower to Bank. Bank will notify Borrower of all debits which Bank has made against Borrower's accounts. Any such debits against Borrower's accounts in no way shall be deemed a set-off. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment whether directed to Borrower's deposit account with Bank or to the Obligations or otherwise, shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment in respect of the Obligations unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise 8

9 be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 Fees. Borrower shall pay to Bank the following: (a) Facility Fee. A Facility Fee equal to Twenty Thousand Dollars ($20,000.00), which fee shall be due on the Closing Date and shall be fully earned and non-refundable; (b) Letter of Credit Fee. A Letter of Credit Fee equal to: (i) one percent (1.0%) for any Standby Letter of Credit in an amount no greater than Two Million Dollars ($2,000,000.00), individually, and (ii) one half of one percent (0.5 %) of any Standby Letter of Credit greater than Two Million Dollars ($2,000,000.00), individually. The fees for all other Letters of Credit shall be based upon the Bank's standard fee schedule. The Letter of Credit Fee shall be due and fully earned upon Borrower's request for such Letters of Credit. (c) Financial Examination and Appraisal Fees. Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents; (d) Bank Expenses. Upon demand from Bank, including, without limitation, upon the date hereof, all Bank Expenses incurred through the date hereof, including reasonable attorneys' fees and expenses and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6 Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement,and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.7 Term. Except as otherwise set forth herein, this Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination of this Agreement, Bank's lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 9

10 3. Conditions of Loans 3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) an audit of Borrower's Accounts; (b) this Agreement; (c) a certificate of the Secretary of Borrower with respect to articles, bylaws, incumbency and resolutions authorizing the execution and delivery of this Agreement; (d) an intellectual property security agreement; (e) subordination agreements by certain Persons; (f) an opinion of Borrower's counsel; (g) financing statements (Forms UCC-1); (h) insurance certificate; (i) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; (j) Certificate of Foreign Qualification (if applicable); and (k) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2. 1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension. The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(b). 4. Creation of Security Interest 4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt payment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. Borrower acknowledges that Bank may place a "hold" on any Deposit Account pledged as Collateral to secure the Obligations. Notwithstanding termination of this Agreement, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 10

11 4.2 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral (with respect to Equipment, only after the occurrence of an Event of Default) in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. Representations and Warranties Borrower represents and warrants as follows: 5.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the failure to so qualify would have a Material Adverse Effect. 5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles/Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The service or property giving rise to such Eligible Accounts has been performed or delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. 5.5 Merchantable Inventory. All Inventory is in all material respects of good and marketable quality,free from all material defects. 5.6 Intellectual Property. Borrower is the sole owner of the Intellectual Property Collateral, except for non- exclusive licenses granted by Borrower to its customers in the ordinary course of business. Each of the Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property Collateral violates the rights of any third party. Except for and upon the filing with the United States Patent and Trademark Office with respect to the Patents and Trademarks and the Register of Copyrights with respect to the Copyrights and Mask Works necessary to perfect the security interests created hereunder, and except as has been already made or obtained, no authorization, approval or other action by, and no notice to or filing with, any United States governmental authority or United States regulatory body is required either (i) for the grant by Borrower of the security interest granted hereby or for the execution, delivery or performance of Loan Documents by Borrower in the United States or (ii) for the perfection in the United States or the exercise by Bank of its rights and remedies hereunder. 11

12 5.7 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business and will not without at least thirty (30) days prior written notice to Bank do business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.8 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending, or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could be reasonably projected to have a Material Adverse Effect or reasonably projected to a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 5.9 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. Except as set forth in the Schedule relative to certain recent acquisitions made by Borrower, there has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank on or about the Closing Date. 5.10 Solvency. Borrower is able to pay its debts (including trade debts) as they mature. 5.11 Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 5.12 Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the release, or other disposition of hazardous waste or hazardous substances into the environment. 5.13 Taxes. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed on a timely basis, and has paid, or has made adequate provision for the payment of, all taxes reflected therein, except those being contested in good faith by proper proceedings with adequate reserves under GAAP. 5.14 Subsidiaries. Except as provided in the Schedule, Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.15 Government Consents. Borrower and each Subsidiary has obtained all material consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted. 12

13 5.16 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. Affirmative Covenants Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1 Good.Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within forty-five (45) days after the end of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, in a form and certified by an officer of Borrower reasonably acceptable to Bank; (b) as soon as available, but in any event within ninety days after the end of Borrower's fiscal year, audited consolidated financing statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) within five (5) days of filing, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Two Hundred Thousand Dollars ($200,000) or more; (e) prompt notice of any material change in the composition of the Intellectual Property Collateral, including, but not limited to, any subsequent ownership right of the Borrower in or to any Copyright, Patent or Trademark not specified in any intellectual property security agreement between Borrower and Bank or knowledge of an event that materially adversely effects the value of the Intellectual Property Collateral; and (f) such annual budgets, or other financial information as Bank may reasonably request from time to time. Within fifteen (15) days after the last day of any month in which any Credit Extension is outstanding hereunder, and/or for the most recent month for which information is available with respect to any Advance requested hereunder, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable. Within thirty (30) days after the last day of each quarter, Borrower shall deliver to Bank a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. 13

14 Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every twelve (12) months unless an Event of Default has occurred and is continuing. 6.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000). 6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning, F. I.C.A., F. U. T. A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if (i) the amount or validity of such payment is contested in good faith by appropriate proceedings, (ii) Borrower or Subsidiary, as the case may be, has established proper reserves (to the extent required by GAAP) and (iii) no lien other than a Permitted Lien results. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as are reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. At Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Principal Depository. Borrower shall maintain its principal depository and operating accounts with Bank. Notwithstanding the foregoing, Borrower may maintain an account at another bank for Borrower's payroll and local vendor/petty cash purposes. 6.8 Quick Ratio; Operating Profit. Borrower shall maintain, as of the last day of each fiscal quarter, at least one of the following: (i) a ratio of Quick Assets to Current Liabilities of at least 1. 10 to 1.0 for such fiscal quarter, or (ii) a minimum operating profit (earnings before interest, taxes, and extraordinary income or expense) of One Million Two Hundred Thousand Dollars ($1,200,000.00) for such fiscal quarter. 6.9 Total Liabilities -Shareholders' Equity. Borrower shall maintain, as of the last day of each fiscal quarter, a ratio of Total Liabilities less Subordinated Debt to shareholders' equity of not more than 0.75 to 1.0. 6.10 Minimum Net Income. Borrower shall have minimum net income of Two Hundred Fifty Thousand Dollars ($250,000.00) for each fiscal quarter. 14

15 6.11 Registration of Intellectual Property Rights. (a) Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those intellectual property rights listed on Exhibits A, B and C to the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement within thirty (30) days of the date of this Agreement. Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright office, as applicable, those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party, including without limitation revisions or additions to the intellectual property rights listed on such Exhibits A, B and C. (b) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank's security interest in the Intellectual Property Collateral. (c) Borrower shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents, Copyrights, and Mask Works, (ii) use its best efforts to detect infringements of the Trademarks, Patents, Copyrights and Mask Works and promptly advise Bank in writing of material infringements detected and (iii) not allow any Trademarks, Patents, Copyrights, or Mask Works to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld, unless Bank determines that reasonable business practices suggest that abandonment is appropriate. (d) Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section 6.11 to take but which Borrower fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6. 11. 6.12 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. Negative Covenants Borrower covenants and agrees that, so long as any Credit Extension hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, Borrower will not do any of the following, without the Bank's prior written consent: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers: (i) of inventory in the ordinary course of business, (ii) of licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; (iii) that constitute payment of normal and usual operating expenses in the ordinary course of business; (iv) of worn-out or obsolete Equipment; or (v) Equipment sold at or above the book value for such Equipment, up to the maximum aggregate amount of $500,000.00. 7.2 Changes in Business Ownership, or Management, Business Locations. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's management. Borrower will not, without at least thirty (30) days prior written notification to Bank, relocate its chief executive office or add any new offices or business locations. 15

16 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person unless: (i) there is no Event of Default hereunder, and (ii) that such merger, consolidation or acquisition will not result, on a prospective basis, in the breach of any of the covenants, terms and conditions hereunder, and (iii) that such merger, consolidation or acquisition is in the same or similar line of business as the Borrower, and (iv) the purchase price for each transaction will be a maximum amount of $5,000,000.00 (inclusive of any indebtedness of the acquired company assumed by the Borrower in connection with the transaction) for each transaction, or $22,000,000.00 in the aggregate for all such transactions, and (v) the Borrower is the surviving legal entity, and (vi) no indebtedness (either direct or contingent) is assumed by the Borrower in connection with such transaction with the exception of indebtedness (A) in such amounts which when added to the purchase price shall not exceed the limits set forth in clause (iv) of this Section 7.3 and (B) which consists only of either trade payables of the acquired company or promissory notes payable to Persons who have sold assets to Borrower in connection with the transaction which notes, if any, shall be subordinated in form and substance acceptable to Bank. 7.4 Indebtedness. Except for Indebtedness incurred or assumed which complies with the conditions provided in Section 7.3 hereinabove, create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property,including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 Distributions. Pay any dividends or make any other distribution or payment an account of or in redemption, retirement or purchase of any capital stock. 7.7 Investments. Except as specifically provided in Section 7.3 hereinabove, directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 7.9 Intellectual Property Agreements. Borrower shall not permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in Borrower's rights and interests in any property included within the definition of the Intellectual Property Collateral acquired under such contracts, except to the extent that such provisions are necessary in Borrower's exercise of its reasonable business judgement. 7.10 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 7.11 Inventory. Except for Inventory sold in the ordinary course of business or otherwise permitted, and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 16

17 7.12 Compliance. Become an "investment company" or a company controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose; fail to meet the minimum funding requirements of ERISA; permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral; or permit any of its Subsidiaries to do any of the foregoing. 8. Events of Default Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 Payment Default. If Borrower fails to pay, when due, any of the Obligations. 8.2 Covenant Default. (a) If Borrower falls to perform any obligation under Sections 6.3, 6.6, 6.7, 6.8, 6.9, 6. 10 or 6. 11 or violates any of the covenants contained in Article 7 of this Agreement; or (b) If Borrower fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); 8.3 Material Adverse Change. If there (i) occurs a material adverse change in the business, operations, or condition (financial or otherwise) of the Borrower, or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations or (iii) is a material impairment of the priority of Bank's security interests in the Collateral; 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within thirty (30) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within thirty (30) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within 30 days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); 17

18 8.6 Other Agreement. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000) or that could have a Material Adverse Effect; 8.7 Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Two Hundred Fifty Thousand Dollars ($250,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.9 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate or writing delivered to Bank by Borrower or any Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. Bank's Rights and Remedies 9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit; (d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (e) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's premises, Borrower hereby grants Bank a license to enter such premises and to occupy the same, without charge; (f) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; 18

19 (g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right, solely pursuant to the provisions of this Section 9. 1, to use, without charge, Borrower's labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9. 1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (h) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply the proceeds thereof to the Obligations in whatever manner or order it deems appropriate; (i) Bank may credit bid and purchase at any public sale, or at any private sale as permitted bylaw; and (j) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. (k) Bank shall have a non-exclusive, royalty-free license to use the Intellectual Property Collateral to the extent reasonably necessary to permit Bank to exercise its rights and remedies upon the occurrence of an Event of Default. 9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (f) modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower's approval of or signature to such modification by amending Exhibit A, Exhibit B, Exhibit C, and Exhibit D, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents, Trademarks, Mask Works acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents, Trademarks, or Mask Works in which Borrower no longer has or claims any right, title or interest; (g) file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; and (h) transfer the Intellectual Property Collateral into the name of Bank or a third party to the extent permitted under the Massachusetts Uniform Commercial Code provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3 Accounts Collection. Upon the occurrence and during the continuance of an Event of Default, Bark may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and if requested or required by Bank, immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 19

20 9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Committed Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not expressly set forth herein as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. Notices Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower Stericycle, Inc. 1419 Lake Cook Road, Suite 410 Deerfield, Illinois 60015 Attn: Chief Financial Officer FAX: (847) 945-6583 If to Bank Silicon Valley Bank 40 William Street - Suite 350 Wellesley, Massachusetts 02181 Attn: Mr. David R. Dailey, Assistant Vice President FAX: (781) 431-9906 with a copy to: Riemer & Braunstein Three Center Plaza Boston, Massachusetts 02108 Attn: David A. Ephraim, Esquire FAX: (617) 723-6831 20

21 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. Choice of Law and Venue; Jury Waiver The laws of the Commonwealth of Massachusetts shall apply to this Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY,THE NON- EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. General Provisions 12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 Indemnification. Borrower shall indemnify, defend, protect and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under the Loan Documents, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 Amendments in Writing; Integration. This Agreement cannot be amended or terminated except by a writing signed by Borrower and Bank. All prior agreements, understandings, representations, warranties, 21

22 and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run; provided that so long as the obligations referred to in the first sentence of this Section 12.7 have been satisfied, and Bank has no commitment to make any Credit Extensions or to make any other loans to Borrower, Bank shall release all security interests granted hereunder and redeliver all Collateral held by it in accordance with applicable law. 12.8 Confidentiality. In handling any confidential information Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank, and (v) as Bank may deem appropriate in connection with the exercise of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. 12.9 Countersignature. This Agreement shall become effective only when it shall have been executed by Borrower and Bank (provided, however, in no event shall this Agreement become effective until signed by an officer of Bank in California). IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. STERICYCLE, INC. By: /s/ Frank J.M. ten Brink ------------------------------------------------ Name: Frank J.M. ten Brink Title: Vice President and Chief Financial Officer SILICON VALLEY BANK, d/b/a SILICON VALLEY EAST By: /s/ Dave Rodriguez ------------------------------------------------ Name: Dave Rodriguez Title: Assistant Vice President 22

23 SILICON VALLEY BANK By: /s/ Michelle Giannini ------------------------------ Name: Michelle Giannini Title: Assistant Vice President 23

1 JOINT VENTURE AGREEMENT Exhibit 10.2 Agreement entered into as of May 16, 1997 between Stericycle, Inc., ("STERICYCLE") a corporation organized and existing under the laws of Delaware represented by Mr. Anthony J. Tomasello, Pennoni Associates, Inc. ("PENNONI"), a corporation organized and existing under the laws of Pennsylvania represented by Mr. C.R. Pennoni, Conopam, S.A. de C.V. ("CONOPAM"), a corporation organized and existing under the laws of Mexico represented by Mr. Mauricio Gomez Baez, and Controladora Ambiental, S.A. de C.V., for the purposes of guarantying CONOPAM's obligations hereunder, also represented by Mr.Mauricio Gomez Baez, pursuant to the following recitals and articles: RECITALS First. The Parties hereto recite that they desire to incorporate a Mexican corporation under the name of Medam, S.A. de C.V. or such other name as they may mutually agree upon (herein called the "Company") for the initial purpose of undertaking in Mexico the business of sales, marketing, on-site service, collection transportation, treatment disposal and recycling/reuse of medical waste materials (biological and infectious residue and dangerous waste). Second. The Parties hereto recite that except as otherwise expressly stated in this Agreement, they have agreed to cooperate in the incorporation, financing, development and operations of the Company by supplying equity and debt capital. Third. The Parties hereto recite that in view of the foregoing recitals they have agreed to enter into this Agreement in accordance with the following articles. ARTICLES I. Acquisition of Stock in Company A. Each of the Parties hereto agrees and undertakes to subscribe and pay in cash or in kind for the shares of capital stock of the Company set forth opposite its respective name below (herein called the "Stock") at a price of Ps. $ 1.00 (one peso, Mexican Currency), per share, which Stock shall be common and fully voting. Name of Party Percentage Number of Shares Series Initial Investment ------------- ---------- ---------------- ------ ------------------ Conopam 51.0% 765,000 "A" $ 765,000.00 pesos Pennoni 24.5% 367,500 "B" $ 367,500.00 pesos Stericycle 24.5% 367,500 "C" $ 367,500.00 pesos B. Each of the Parties hereto agrees and undertakes on the Closing Date to subscribe, and to pay at least the percentage and amount set forth opposite its respective name above of the price of the shares to be subscribed by them in accordance with the provisions of paragraph A of this Article I, and further agrees and undertakes to make any other funding required to pay the shares in full and therefore complete the project pursuant to the funding schedule described in Exhibit "A" attached hereto [omitted]. For these purposes, upon incorporation of the Company, the parties shall execute a shareholders meeting of the Company to be held in order to adopt resolutions on a capital increase for the amount 1

2 provided in Exhibit "A". At such shareholders meeting, the parties shall subscribe all of the shares issued due to the capital increase in the proportions described in paragraph A above. Such shares will be fully subscribed and assessable. C. The Parties hereto agree to cause the Company on the Closing Date to deliver to each Party hereto, certificates representing the shares of the Stock to be subscribed for on that date by each of the Parties hereto, such shares to be paid in accordance with paragraph A and B above. Such certificates, if temporary, shall be replaced by permanent certificates within a period of not more than six (6) months following the Closing Date. The parties also agree to grant the initial shareholders of the Company (founders) a bonus in terms of articles 107 to 1 10 of the Commercial Companies Law during the term and for the amounts described in Exhibit "B"attached hereto [omitted]. II. Closing Date The consummation of the subscription and initial payment for shares in Company provided for in this Agreement (the "Closing") shall be effective upon the execution before a Mexican Notary Public selected by and satisfactory to the Parties hereto of the public instrument containing the charter by-laws of the Company, at the offices of Sanirent, S.A. de C.V., on such date, as such charter by-laws are ready for execution, which date shall not be later than May 1 6, 1 997 (the "Closing Date"). III. Conditions of Closing The respective obligations of each of the Parties hereto to subscribe to the Stock on the Closing Date shall be subject to the following conditions: A. The obligations of the Parties hereto to enter into certain agreements referred to in paragraph A of Article IV of this agreement. B. The charter by-laws of the company shall have been prepared and transcribed in the public instrument to be executed by the Parties hereto, in the form set out in Exhibit "C" attached hereto [omitted] and made a part hereof. C. All instruments executed and proceedings taken on or prior to the Closing Date and in connection with or relating to the execution, delivery and performance of this Agreement and the issuance and subscription of and payment for the Stock shall be in form and substance satisfactory to each of the Parties hereto and to their counsel, and each of said Parties hereto and said counsel shall have received copies of all documents or other evidence requested by them, such documents where appropriate to be certified by appropriate corporate or governmental authorities. D. To hold the shareholders meeting referred to in Article l.B above, to adopt resolutions on a capital increase for the amount established in Exhibit "A" and to fully subscribe the shares as provided thereat. IV. Additional Obligations A. The Parties agree to enter into the agreements set forth below in the form of the Exhibits attached hereto [omitted] and set forth below, and the Parties hereto agree to cause Company to enter into this agreement and the agreements set forth below in the form of the Exhibits attached hereto and set forth below: Exhibit Agreement ------- --------- "D" Trademark and patent license and technical assistance agreement between STERICYCLE and the Company. "E" Medical Waste Treatment Equipment Agreement between STERICYCLE and the Company. 2

3 The parties must request prior approval of the others in the event that the agreements mentioned above are executed by a subsidiary. This approval will not be unreasonably withheld. B. The Parties also agree to comply with the terms provided in the schedules of responsibilities attached as Exhibits "F" and "G" attached hereto [omitted], in the understanding that pursuant to such schedules, they will execute the following agreements in the near future: (i) Schedule of responsibilities attached as Exhibit "F" [omitted]: Operation and services agreement between PENNONI and the Company. (ii) Schedule of responsibilities attached as Exhibit "G" [omitted]: Recollection, transportation and services agreement between CONOPAM and the Company. C. The Parties hereto agree and undertake on the Closing Date, to cause the election to the board of directors of the Company of eight (8) directors and their alternates, of which each Party hereto shall nominate the number of directors and alternates therefor set forth opposite its respective name below: Party Number of Directors ----- ------------------- STERICYCLE 2 PENNONI 2 CONOPAM 4 The Parties further agree and undertake to appoint at the time of incorporation of the Company, an operating committee consisting of three (3) individuals (one designated by each party). D. The Company reserves the right to renegotiate agreements associated with Exhibits "D", "F" and "G", in the event of negative market influences, subject to agreement of both parties. V. Prior Negotiations Each Party hereto acknowledges that it has not negotiated with parties other than the Parties hereto relating to a proposed venture similar in intent and purpose to the proposals described herein and that will present to the other Parties hereto an opinion of counsel, which opinion shall be satisfactory to them and their counsel, stating that no claim, suit or action based upon or arising from or in connection with any such document can be successfully asserted against the other Parties hereto or any of them, and the delivery of such an opinion shall be a condition to the obligations of the other Parties hereto except Company under this agreement. VI. Expenses Each Party will, in the event the transactions contemplated hereby or by the agreements referred to in paragraph A of Article IV of this agreement are not consummated, pay its own costs and expenses, and agrees to hold the other Parties hereto and each of them harmless from and against any and all liabilities with respect to said costs and expenses. 3

4 The Parties hereto agree that in the event the Company is incorporated as provided herein, the Company shall assume any and all of the costs and expenses related to its incorporation. VII. Non-Competition The Parties acknowledge that the non-competition commitment is an essential issue of this agreement. Therefore, the parties hereto agree that they will not, during the life of this agreement, in Mexico, directly or indirectly, sell, offer or deal in, services which are the same as, or competitive with, the services carried out by the Company, except through Company or some other corporation, firm or entity in which the parties hereto directly or indirectly own the same proportion of stock as they do in the Company unless the prior written consent of all the parties hereto is first obtained. The Parties hereto further agree that the above provision shall apply to any shareholder who withdraws from the Company in accordance with this agreement for a period of two (2) years from the date of such withdrawal. The Parties will not undertake directly or indirectly to render the above-mentioned services nor own, manage, operate, control, own an interest (whether as principal, agent, beneficiary, shareholder, consultant, partner, nominee, trustee, financier, or otherwise) or participate in the ownership, management, operation or control of, or become associated in any capacity with, or have any financial interest in or lend their name to any person, enterprise, firm or corporation engaged in a business that is competitive with the business of the Company in Mexico, which business consists in the sale, marketing, on-site service, collection, transportation, treatment, disposal and recycling/reuse of medical waste materials (biological and infectious residue and dangerous waste). If any Party develops a business opportunity in Mexico that is competitive with the business of the Company, the Company will have the first opportunity to engage in that business. If the Company is unwilling to or unable, the Party who developed the business opportunity will have the right to exploit it alone or with third parties. New technologies covering the field of the Company are also subject to the requirement to offer them first to the Company. Nothing in this Article shall restrict or prevent the Parties from owning less than 3% of the stock or securities of any person whose securities are trading on a recognized stock exchange; If pursuant to an arbitration award, there is a breach by one of the Parties of its obligations under this non- competition clause, the other Parties (jointly) will be entitled to liquidated damages for an amount of US $5,000,000.00 (five million dollars) without limiting any other remedies they may have. Such liquidated damages are not a penalty, but are a reasonable estimate of the other Parties' damages in the event of a breach by a Party of its obligations under this clause. VIII. Confidentiality The Parties acknowledge that they will have access to and be entrusted with confidential and proprietary information and trade secrets belonging to each of the parties (this last term to be used as defined in article 82 of the Mexican Industrial Property Law "MIPL"), which are confidential (hereinafter referred to as the "INFORMATION"). Each Party acknowledges that the INFORMATION: (i) is a valuable asset of the Party which developed the same, (ii) is information of commercial and/or industrial application, (iii) provides competitive or economic advantages to the Party which developed the same, and (iv) is not obvious to an expert; further, each Party acknowledges that each Party has adopted systems to protect the INFORMATION. Each of the Parties acknowledge that unauthorized disclosure of the INFORMATION shall automatically cause either a damage to the Party which developed the same or a benefit to the disclosing Party or to any third party which has access to the INFORMATION. 4

5 Therefore, the Parties hereby agree to the following terms: 1. To keep strictly secret and confidential and not to disclose to any individual or legal entity, except to those who have agreed in writing to maintain the confidentiality of the INFORMATION in the terms hereto, specially in terms of articles 84 to 86 of the MIPL. 2. Not to make any use whatsoever of the INFORMATION obtained or learned as a consequence of receiving the INFORMATION, except in connection with the subject matter of this Agreement. 3. To cooperate with the Party involved in causing all written material related or contained in the INFORMATION obtained from it or arising out of said INFORMATION, to be marked to indicate its confidential nature, and to prevent unauthorized use or reproduction thereof in any manner whatsoever. 4. To take all reasonable steps to control the use of the INFORMATION at all times and to prevent it from being divulged to or acquired by or becoming known to any individual or entity other than those expressly authorized by the involved Party in writing. The Parties also agree to cause any directors, officers, employees, agents, representatives and consultants to whom some or all INFORMATION may be disclosed to maintain its secrecy, and that such INFORMATION will be disclosed in a need to know basis only. 5. The foregoing will not be applicable to (I) information already known to the Parties, (ii) information developed independently by any of the Parties without reference to the INFORMATION and (iii) information which becomes a matter of public knowledge, other than by a breach of a Party's obligations under this clause. IX. Termination The respective commitments made in this agreement by certain of the Parties hereto to subscribe to shares of Stock are made in contemplation of the acquisition by each of the other Parties obligated to subscribe to shares of Stock under this agreement. In the event that any one or more of such Parties shall fail to complete such subscription on the Closing Date, or pursuant to the corresponding Exhibit, or shall default any of its obligations under this agreement, the following shall apply: a) The ancillary agreements described in Article IV A. which have been executed between the defaulting party and the Company shall be immediately terminated. b) The other Parties shall have the right to purchase the shares owned by the defaulting Party (on a pro rata basis) at a price equal to the book value of the shares, as shown on the last financial statements approved by the share holders meeting of the Company. If the shares of the defaulting Party have not been paid in full, the price shall be reduced in an amount equal to the payments pending to be made. c) The Joint Venture Agreement shall be terminated only with regard to the defaulting Party. However, any such termination shall not be a bar to any other rights or causes of action, for damages or otherwise, which such other Parties may have as a result of any such failure or default against the defaulting Party. Furthermore, the non-compete and confidentiality obligations of the defaulting Party shall survive the termination of this Joint Venture Agreement. X. Miscellaneous a) Each of the Parties hereto represents that there are no claims for brokerage commissions or finder's fees in connection with the transactions contemplated by this agreement. 5

6 b) Any notice or request hereunder shall be given in writing. Any such notice shall be considered as having been given when received by the Party to whom it was intended, if the notice is to STERICYCLE: Stericycle, Inc. 1419 Lake Cook Road Deerfield, Illinois 60015, U.S.A. with a copy to: Creel, Garcia Cuellar y Muggenburg Bosque de Ciruelos No.304 piso 2 Bosques de las Lomas 1 1 700, Mexico,D.F. if the notice is to PENNONI: C.R. Pennoni, P.E. Pennoni Associates, Inc. One Drexel Plaza 3001 Market Street, Second Floor Philadelphia, PA 19104-2897, U.S.A. and to: Richard D. Loretta Pennoni International de Mexico, S.A. de C.V. Calle Camargo No.32 Col. Hipodromo Condesa 06170, Mexico, D.F. with a copy to: Sanchez-DeVanny & Associates, S.C. Carr. Pichacho-Ajusco No.130-404 Col. Jardines en la Montana , 14210 Mexico, D.F. and if the notice is to CONOPAM: Conopam, S.A. de C.V. Norte 79A No.235 E Col. Claveria, Mexico, D.F. with a copy to: Dominguez y Perez Villanueva, Abogados, S.C. Lic. Eduardo Dominguez Gavaldon Avenida de las Palmas 765-701 Lomas de Chapultepec, Mexico, D.F. In the event that any Party hereto shall desire to have all notices and requests given to the other Parties at any other address, notice to this effect shall be given to each of the other Parties, and such change of address notice shall be effective upon delivery to the Party to which it is directed. c) Except as otherwise expressly provided in this Agreement if any of the Parties to this agreement is temporarily or otherwise unable to perform its obligations under this agreement because of fire, flood, inclement weather or other circumstances caused by the elements, government restrictions or regulations, war (declared or undeclared), invasion, riots, insurrections, negligent or intentional acts or omissions of any of the other Parties hereto or third parties, reasonable unforeseeable accident, acts of force majeure or acts of God, or other causes beyond its reasonable control, no liability shall exist to any of the other parties for failure of performance during such period, nor shall any such temporary occurrence constitute cause for terminating this agreement, except if such temporary occurrence lasts more than 30 days, in which event any Party affected may terminate this agreement with a prior 30 day written notice to the others. 6

7 d) No delay on the part of any Party in exercising any rights hereunder or failure to exercise the same shall operate as a waiver of such rights; no notice to or demand on any Party shall be deemed to be a waiver of the obligation of such Party or of the right of such party to take further action without notice or demand; no right, power or remedy conferred in this agreement or otherwise shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. A tacit or implicit waiver by a party of a right or remedy in any particular instance shall not operate as a wavier of such right or remedy in any other instance. e) Each of the Parties hereto agrees and accepts that they execute this agreement of their own free will and that they have not been subject to duress, coercion, mistake or error, and that they have not suffered injury (lesion) by its execution and that, therefore, they hereby waive any right for rescission derived from any of said causes, the term to exercise said actions, and consequently, the provisions of Articles 2228, 2229 and 2230 of the Civil Code for the Federal District and Territories of Mexico (and the corresponding Articles of the Civil Code for the States of the Mexican United States.) f) This instrument, together with any and all Schedules and Exhibits annexed hereto, and any document that may be delivered at any Closing required or provided for hereunder, contains to the subject matters hereof and supersedes and cancels all previous agreements, negotiations, commitments and writings in respect of such subject matter and may not be released, discharged, abandoned, changed or modified in any manner except by an instrument in writing signed by a duly authorized officer or other representative of each of the Parties hereto. g) This agreement may not be assigned by any Party hereto without the prior written consent of all the other Parties. h) This agreement shall inure to the benefit of and be binding upon each of the Parties hereto and their respective heirs, executors, administrators, legal representatives, successors and assigns. i) This agreement shall be governed by and construed, and any claims or controversy arising with respect thereto shall be resolved by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect, and judgement upon any award rendered by the arbitrators may be entered and a confirmation order sought in any court having jurisdiction thereof, provided, however, that the arbitrators shall not amend, supplement, or reform in any regard any of the rights or obligations of any party hereunder, or the enforceability of any of the terms hereof. Any arbitration shall be conducted in Houston, Texas, before a panel of three arbitrators, and the substantive laws of Mexico shall apply. j) The headings of the this agreement are inserted for convenience only and shall not be deemed to constitute a part thereof. 7

8 IN WITNESS WHEREOF, the parties have caused this Joint Venture Agreement to be duly executed as of the day and year first above written. STERICYCLE, INC. PENNONI ASSOCIATES INC. /s/ Anthony J. Tomasello /s/ C.R. Pennoni - ----------------------------------- ---------------------------------- Anthony J. Tomasello C.R. Pennoni CONOPAM, SA DE C.V. CONTROLADORA AMBIENTAL, SA DE C.V. /s/ Mauricio Gomez Baez /s/ Mauricio Gomez Baez - ----------------------------------- ---------------------------------- By: Mauricio Gomez Baez By: Mauricio Gomez Baez 8

1 Exhibit 10.3 Property Address: 28161-7 North Keith Drive Lake Forest, Illinois 60045 INDUSTRIAL BUILDING LEASE THIS LEASE is made as of this 28th day of July 1998 between CURTO REYNOLDS OELERICH, INC., a Delaware corporation ("Landlord"), and STERICYCLE, INC., a Delaware corporation ("Tenant"). ARTICLE I LEASE TERMS SECTION 1.1. DEFINITIONS. In addition to the other terms, which are elsewhere defined in this Lease, the following terms and phrases, whenever used in this Lease shall have the meanings set forth in this Subsection, and only such meanings, unless such meanings are expressly contradicted, limited or expanded elsewhere herein. A. BASE RENT SCHEDULE: Period Annual Monthly (by lease month) Base Rent Base Rent August 1, 1998 - September 30, 1998 NA $0.00 October 1, 1998 - January 31, 1999 NA $ 4,207.00 February 1, 1999 - December 31, 2001 $188,572.86 $15,714.41 January 1, 2002 - December 31, 2003 $206,830.26 $17,235.86 January 1, 2004 - December 31, 2005 $221,175.36 $18,431.28 B. SECURITY DEPOSIT: None C. INITIAL DEPOSIT: $2,051.43 (i) Initial Tax Deposit: $1,964.49 (ii) Initial Insurance Deposit: $86.94 D. INITIAL TERM: The initial term of seven (7)-years and five (5) months, commencing as of the Commencement Date; provided that the initial two (2) months of the term shall pertain to the South Section (as hereinafter defined) in accordance with Section 2.1 hereof. E. COMMENCEMENT DATE: August 1, 1998 F. TERMINATION DATE: December 31, 2005. G. TERM: The Initial Term as same may be extended or sooner terminated pursuant to the provisions of this Lease. H. USE: General office, corporate headquarters, warehousing and light manufacturing. 1

2 I. OPTION TO RENEW: See Article XXXIV. J. LANDLORD'S MAILING ADDRESS: 1400 East Touhy Avenue, Suite 230 Des Plaines, Illinois 60018 K. TENANT'S MAILING ADDRESS: 1419 Lake Cook Road, Suite 410 Deerfield, Illinois 60015 L. LANDLORD'S BROKER: Curto Reynolds Oelerich, Inc. M. TENANT'S BROKER: Insignia/ESG SECTION 1.2. SIGNIFICANCE OF DEFINITIONS. Each reference in this Lease to any of the Definitions contained in Section 1.1 of this Article shall be deemed and construed to incorporate all of the terms provided under each such Definition. SECTION 1.3. ENUMERATION OF EXHIBITS. The exhibits in this Section and attached to this Lease are incorporated in this Lease by this reference and are to be construed as a part of this Lease. EXHIBIT "A" -- Legal Description EXHIBIT "B" -- Form of Estoppel Certificate ARTICLE II PREMISES SECTION 2.1. LEASE. Landlord, for and in consideration of the rents herein reserved and of the covenants and agreements herein contained on the part of Tenant to be kept, observed and performed, does by these presents, lease to Tenant, and Tenant hereby leases from Landlord, the real estate located at 28161-7 North Keith Drive, Lake Forest, Illinois, and legally described on EXHIBIT "A" attached hereto and by this reference incorporated herein ("Land"), together with all improvements now located or hereafter constructed thereon, including a one-story industrial warehouse building containing approximately 26,082 rentable square feet consisting of a south (office) section containing approximately 12,232 rentable square feet ("South Section"), and a north (warehouse) section containing approximately 13,850 rentable square feet ("North Section") (collectively, the "Improvements") (the Land and the Improvements are sometimes collectively referred to as the "Premises"), subject to covenants, conditions, agreements, easements, encumbrances and restrictions affecting the Land and the Improvements thereon ("Restrictions"); provided, however, that the Premises shall consist solely of the South Section (as hereinafter defined) from August 1, 1998 until October 1, 1998. ARTICLE III TERM SECTION 3.1. TERM. The Initial Term of this Lease shall commence on the Commencement Date and shall end on the Termination Date, unless sooner terminated as hereinafter set forth. The parties hereto acknowledge and agree that, in accordance with Section 2.1 hereof, Landlord shall give Tenant possession of the South Section of the Premises on August 1, 1998, and shall give Tenant possession of the North Section of the Premises on October 1, 1998. (i) Late Delivery of the South Section. 2

3 (a) Adjustment of Abatement Period. In the event that Landlord gives Tenant possession of the South Section after August 1, 1998: i) no Rent shall be due prior to such possession date; ii) all of Tenant's obligations which arise or accrue during the Term of the Lease (including, without limitation, any and all obligations under Article VIII of the Lease) shall be suspended until such possession is given; and iii) the Abatement Period for Rent (as defined in Section 5.3 hereof) shall begin on the date that Landlord gives possession of the South Section to Tenant. For example, if Landlord gives possession of the South Section to Tenant on August 15, 1998, the Abatement Period will be adjusted to begin August 15, 1998 and end October 14, 1998, and Tenant will be obligated to pay Rent for the partial month of October 1998, beginning October 15, 1998, calculated pro rata on a daily basis. (b) Tenant Right of Termination. In the event that Landlord gives Tenant possession of the South Section after October 1, 1998, Tenant may terminate this Lease upon the giving of written notice by Tenant to Landlord on or before October 15, 1998; provided, however, that such notice of termination shall be without force and effect in the event Landlord gives Tenant such possession of the South Section after October 1, 1998 and before Landlord's receipt of such notice. Upon receipt of such notice, this Lease shall terminate on the date of delivery of such notice to Landlord as though the date of delivery was the Termination Date set forth herein. (ii) Late Delivery of the North Section. In the event that Landlord gives Tenant possession of the North Section after October 1, 1998, Rent allocable to the North Section shall abate until possession of the North Section is given to Tenant; provided, further that, in the event that Landlord gives Tenant possession of the North Section after October 31, 1998, the portion of the Base Rent allocable to the North Section shall abate at a rate equal to double the daily Base Rent for the North Section applicable to February 1999 for each day after October 31, 1998 until possession of the North Section is given to Tenant. For example, if possession of the North Section is given to Tenant on November 6, 1998, Tenant shall be entitled to a Base Rent abatement equal to $5,562.90 [($556.29 x 2) x 5]. Any such rent abatement will be credited by Landlord to Tenant against Base Rent due and payable hereunder. Except as otherwise provided in this Section 3.1, no failure to give possession of the Premises as agreed herein shall subject Landlord to any liability, nor shall same affect the validity of this Lease or the obligations of Tenant hereunder, nor shall the same be construed to extend the Term. At the option of Landlord to be exercised within thirty (30) days of the delayed delivery of possession to Tenant, the Lease shall be amended so that the Term shall be extended by the period of time possession is delayed. ARTICLE IV CONDITION OF DEMISED PREMISES SECTION 4.1. CONDITION OF PREMISES. Tenant agrees to accept the Premises in an absolutely "as-is" condition, and Tenant acknowledges that Landlord, its agents, attorneys, representatives and employees have not and do not make any representations or warranties, express or implied, to Tenant regarding the Premises, including, but not limited to: (i) the zoning of the Premises; (ii) the condition of any underground, above ground or surface improvements; (iii) the size, area, use or type of the Premises or the fitness of the Premises for any intended or particular use; (iv) the nature of the soil on and underlying the Premises or its suitability for development or any other use thereof; (v) any financial information pertaining to the operation of the Premises; (vi) the status of any requirements or obligations imposed, implied or to be undertaken by the owner or developer of the Premises pursuant to any zoning, subdivision, development laws or agreements with any governmental entities; or (vii) the presence or absence of any rights of any governmental authority, or of owners of property in the vicinity of the Premises, to obtain reimbursement, recapture or special assessments from any owner of the Premises for all or a portion of the cost of any utilities, roads or other improvements heretofore or hereafter located on or in the vicinity of the Premises, any and all such representations and warranties, express or implied, being hereby expressly waived by Tenant and disclaimed by Landlord. Tenant waives any claim that may exist for patent defects. No promise of Landlord 3

4 to alter, remodel, decorate, clean or improve the Premises or any portion thereof and no representation respecting the condition of the Premises or any portion thereof have been made by Landlord to Tenant. Notwithstanding the foregoing, Landlord shall (i) cause the HVAC, mechanical, plumbing, fire protection, and electrical systems to be in working order on the Commencement Date; (ii) cooperate with Tenant to make claims under all warranties or guaranties, if any, relating to the construction, renovation, operating systems or any other portion of the Premises which Tenant is obligated to maintain; and (iii) deliver the Premises to Tenant on the Commencement Date free of debris and in compliance with the applicable local building codes; Tenant acknowledges and agrees that such building codes shall not be deemed to include the federal Americans with Disabilities Act, and any rules and regulations promulgated thereunder. The parties hereto acknowledge and agree that Landlord has repaved the parking areas at the Premises at a cost of $22,055.00. Upon execution of this Lease, Tenant shall pay Landlord the sum of $11,027.00 to reimburse Landlord for one-half (1/2) of the cost of such repaving. ARTICLE V RENT SECTION 5.1. BASE RENT. In consideration of the leasing aforesaid, Tenant agrees to pay Landlord, without offset or deduction, base rent for the Initial Term ("Base Rent"), payable monthly in advance in the amount of the Monthly Base Rent set forth in the Base Rent Schedule commencing on the Commencement Date and continuing on the first (1st) day of each month thereafter for the balance of the Term of this Lease, and in addition thereto, shall pay such charges as are herein described as "Additional Rent". The term "Rent" when used in this Lease shall include all Base Rent payable under this Section 5.1., as well as the charges herein described as Additional Rent. All Rent payable hereunder shall be payable to Landlord and Landlord's Mailing Address, or as Landlord may otherwise from time to time designate in writing. SECTION 5.2. INTEREST AND LATE CHARGES ON LATE PAYMENTS. Tenant acknowledges that its late payment of any Rent will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amount of which is extremely difficult or impracticable to fix. Such costs and expenses will include, without limitation, loss of use of money, administrative and collection costs and processing and accounting expenses. Therefore, if any due and unpaid installment of monthly Base Rent or any other sum due and unpaid hereunder is not paid within five (5) business days after written notice from Landlord to Tenant, Tenant shall immediately pay to Landlord a late charge equal to three percent (3%) of the unpaid amount. Notwithstanding the foregoing, once Landlord delivers three (3) such notices to Tenant within any twelve (12) consecutive calendar months, Landlord shall not be obligated to deliver any further notices to Tenant and the late charge shall be paid by Tenant to Landlord if any installment of Base Rent or other sum due hereunder is not paid within five (5) business days of the date when due. Such late charge is in addition to any interest due as set forth below. Landlord and Tenant agree that this late charge represents a reasonable estimate of costs and expenses incurred by Landlord from, and is fair compensation to Landlord for, its loss suffered, by such non- payment by Tenant. In addition to the foregoing, Rent not paid within thirty (30) days of the date when due shall bear interest from the date when the same is payable under the terms of this Lease until the same shall be paid at an annual rate of interest equal to the rate of interest announced from time to time by the Bank One ("Bank One") as its Corporate Base Rate, plus three percent (3%), unless a lesser rate shall then be the maximum rate permissible by law, in which event said lesser rate shall be charged ("Lease Interest Rate"). The term "Corporate Base Rate" means that rate of interest announced by Bank One from time to time as its "Corporate Base Rate" of interest, changing automatically and simultaneously with each change in the Corporate Base Rate made by Bank One from time to time. Any publication issued or published by Bank One from time to time or a certificate signed by an officer of Bank One stating its Corporate Base Rate as of a date shall be conclusive evidence of the Corporate Base Rate on that date. Acceptance of the late charge shall not constitute a waiver of Tenant's default with respect to such non-payment by Tenant or prevent Landlord from exercising any other rights and remedies available to Landlord under this Lease. Failure to pay the late charge shall constitute a default under this Lease. 4

5 SECTION 5.3. RENT ABATEMENT. Notwithstanding anything to the contrary contained in this Article V, so long as Tenant is not in default under the terms and conditions of this Lease as of the date any monthly installment of Base Rent and Rent Adjustments would otherwise be due and owing during the Abatement Period (as hereinafter defined), Tenant shall be entitled to an abatement of Base Rent and Additional Rent for the first two (2) months of the Initial Term (hereinafter referred to as the "Abatement Period"). ARTICLE VI TAXES AND IMPOSITIONS SECTION 6.1. TAXES. Subject to Section 6.3 hereof, Tenant further agrees to pay before any fine, penalty, interest or cost may be added thereto for the nonpayment thereof, as Additional Rent for the Premises, all Taxes (as hereinafter defined) due and payable upon the Premises or any part thereof during the Term of this Lease; provided, however, that such Taxes levied against the Premises shall be prorated between Landlord and Tenant for the first year of the Initial Term hereof as of the Commencement Date, and as of the date of expiration of the Term of this Lease for the last year of said Term. Tenant shall be responsible for all increases in Taxes based upon Tenant's occupancy of the Premises. Benefit may be taken by Tenant of the provisions of any statute or ordinance permitting any special assessment to be paid over a period of years; provided, however, that Tenant shall pay all installments of special assessments due during the Term hereof. Tenant shall, in addition to the foregoing, pay any new Tax of a nature not presently in effect but which may hereafter be levied, assessed or imposed upon Landlord or upon the Premises, if such Tax shall be based upon or arise out of the ownership, use or operation of the Premises; provided, however, that for the purpose of computing Tenant's liability for such new type of Tax, the Premises shall be deemed the only property of Landlord. As used herein, the term "Taxes" shall mean real estate taxes, assessments, sewer rents, rates and charges, permit and license fees, transit taxes, taxes based upon the receipt of rent, and any other federal, state or local governmental charge, general, special, ordinary or extraordinary, which may now or hereafter be assessed against the Premises or any portion thereof in any year during the Term hereof, and shall also include any personal property taxes (attributable to the year in which paid) imposed upon the furniture, fixtures, machinery, equipment, apparatus, systems and appurtenances used in connection with the operation of the Premises. It is the intention of the parties hereto that this Section 6.1 shall be interpreted as requiring Tenant to be responsible for the Taxes due and payable during the Term of the Lease, regardless of the assessment or tax billing attributable to that period of time. Nothing contained herein shall be construed to require Tenant to pay any franchise, inheritance, estate, succession or transfer tax of Landlord or any income or excess profits tax assessed upon or in respect of all income of Landlord or chargeable to or required to be paid by Landlord unless such tax shall be specifically levied against the rental income of Landlord derived hereunder (as opposed to a general income tax), which tax shall be paid by Tenant as part of Taxes hereunder provided said rental income shall be considered as the sole income of Landlord. SECTION 6.2. UTILITIES. Tenant shall pay, directly to the appropriate supplier, all costs of natural gas, electricity, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Premises. Landlord shall, at Landlord's sole cost and expense, separately meter the Premises. Landlord shall not in any way be liable or responsible to Tenant for any cost or damage or expense which Tenant may sustain or incur if either the quality or character of such service is changed or is no longer available or suitable for Tenant's requirements. SECTION 6.3. DEPOSITS. As security for the obligations contained in Sections 6.1. and 10.3. hereof, Tenant shall deposit monthly with Landlord, or such other entity as Landlord may designate, on the first (1st) day of each and every month of the Term, a sum equal to one twelfth (1/12) of Landlord's estimate of the current amount of Taxes levied with respect to the Premises and Insurance Premiums (as hereinafter defined). All monthly deposits need not be kept separate and apart by Landlord and shall be held by Landlord 5

6 in such account or accounts as may be authorized by the then current state or federal banking laws, rules or regulations. Provided that no default of Tenant exists hereunder, Landlord shall use the monthly deposits as a fund to be applied, to the extent thereof, to the payment of Taxes and Insurance Premiums (as hereinafter defined) as the same become due and payable. The existence of said fund shall not limit or alter Tenant's obligation to pay the Taxes and Insurance Premiums (as hereinafter defined) for which the fund was created. Tenant shall not be entitled to interest on said fund. Tenant shall pay Landlord as its monthly deposit, for the period commencing on the Commencement Date and terminating on the December 31st immediately thereafter, the Initial Deposit. On or prior to each December 31st occurring within the Term, Landlord shall advise Tenant as to Landlord's estimate of the monthly deposits that will be required for the next Lease Year (as hereinafter defined) and, upon receipt of a notice of increase in assessment, Landlord may require an immediate adjustment in the amount of the deposits for Taxes. Deposits for Taxes due and payable by Tenant under this Section 6.3 during 1998 shall be applied to Tenant's obligation for Taxes due and payable during 1998, as prorated as of October 1, 1998. Deposits for Taxes due and payable by Tenant during 1999 shall be applied to Tenant's obligation for Taxes due and payable in 1999, and so on, with respect to the remaining years of the Lease Term. SECTION 6.4. ADJUSTMENT STATEMENT. As soon as reasonably feasible after the expiration of each calendar year contained within the Term ("Lease Year"), Landlord will furnish Tenant a statement ("Adjustment Statement") showing the following: (i) Actual Taxes and Insurance Premiums (as hereinafter defined) for the Lease Year last ended and the amount of Taxes and Insurance Premiums (as hereinafter defined) payable by Tenant for such Lease Year; (ii) The amount of Additional Rent due Landlord for the Lease Year last ended, less credits for monthly deposits paid, if any; and (iii) The monthly deposits due in the current Lease Year. SECTION 6.5. PAYMENTS. Within thirty (30) days after Tenant's receipt of each Adjustment Statement, Tenant shall pay to Landlord: (i) The amount of Additional Rent shown on said Adjustment Statement to be due Landlord for the Lease Year last ended; plus (ii) The amount, which when added to the monthly deposits theretofore paid in the current Lease Year would provide that Landlord has then received such portion of the monthly deposits as would have theretofore been paid to Landlord had Tenant paid one twelfth (1/12) of the monthly deposits, for the current Lease Year, to Landlord monthly on the first day of each month of such Lease Year. During the last Lease Year, Landlord may include in the monthly deposits its estimate of the Additional Rent which may not be finally determined until after the expiration of the Term. Tenant's obligation to pay such Additional Rent shall survive the Term. SECTION 6.6. PAYMENT ADJUSTMENTS. Tenant's payment of the monthly deposits for each Lease Year shall be credited against the Additional Rent for such Lease Year. If the monthly deposits paid by Tenant for any Lease Year exceed the Additional Rent due for such Lease Year, then Landlord shall give a credit to Tenant in an amount equal to such excess against the Additional Rent due for the next succeeding Lease Year, except that if any such excess relates to the last Lease Year of the Term, then, provided that no default of Tenant exists hereunder, Landlord shall refund such excess to Tenant. SECTION 6.7. RIGHT TO PAY. Landlord shall, at its option, have the right, without notice to Tenant, at all times during the Term to pay any such Taxes not timely paid by Tenant, and the amounts so paid, 6

7 including reasonable expenses, shall be so much Additional Rent due at the next rent day after any such payments, with interest at the Lease Interest Rate from the date of payment thereof. SECTION 6.8. LANDLORD'S CONTEST OF TAXES. To the extent Landlord desires, in Landlord's reasonable business judgment, to contest the imposition of any Taxes against the Land and Improvements, Landlord shall proceed with such protest in accordance with applicable law. Tenant agrees Taxes shall include all of Landlord's reasonable costs and expenses, including reasonable legal fees and court costs, in pursuing any such contest whether or not Landlord is successful in such contest. If Landlord elects not to so contest Taxes, Tenant may do so in Landlord's name and Landlord shall provide reasonable cooperation in connection with such contest. There shall be deducted from Taxes the amount of any Taxes refunded in any Lease Year, provided said refund relates to an assessment year included within the Term of the Lease. ARTICLE VII USE SECTION 7.1. USE. The Premises shall be used for the Use only, and for no other purpose. SECTION 7.2. PROHIBITED USES. Tenant shall not permit the Premises, or any portion thereof, to be used in such manner which impairs Landlord's right, title or interest in the Premises or any portion thereof, or in such manner which gives rise to a claim or claims of adverse possession or of a dedication of the Premises, or any portion thereof, for public use. Tenant shall not use or occupy the Premises or permit the Premises to be used or occupied contrary to any statute, rule, order, ordinance, requirement, regulation or restrictive covenant applicable thereto or in any manner which would violate any certificate of occupancy affecting the same or which would render the insurance thereon void or the insurance risk more hazardous, or which would cause structural injury to the Improvements or cause the value or usefulness of the Premises or any part thereof to diminish or which would constitute a public or private nuisance or waste, and Tenant agrees that it will, promptly upon discovery of any such use, immediately notify Landlord and take all necessary steps to compel the discontinuance of such use. ARTICLE VIII MAINTENANCE, REPAIR AND REPLACEMENTS OF PREMISES SECTION 8.1. MAINTENANCE OBLIGATIONS. A. TENANT'S MAINTENANCE. Tenant agrees, at Tenant's sole cost and expense, to take good care of the Premises, including the Improvements, and keep same and all parts thereof, together with any and all alterations and additions thereto, in good order, condition and repair, suffering no waste or injury. Subject to Subsections 8.1(B) and 8.1(C), Tenant shall, at its sole cost and expense, promptly make all necessary repairs and replacements, foreseen as well as unforeseen, in and to any Improvements or equipment now or hereafter located upon the Land, including, without limitation, the entire interior and exterior of the Improvements, sidewalks, parking areas, railroad tracks (if any), water, sewer, gas and electricity connections, pipes, mains and all other fixtures, machinery, apparatus, equipment and appurtenances now or hereafter belonging to, connected with or used in conjunction with the Premises. All such repairs and replacements shall be of first-class quality and sufficient for the proper maintenance and operation of the Premises. Tenant shall keep and maintain the Premises, including the Improvements and all sidewalks, vault space, parking areas and areas adjacent thereto, safe, secure and clean, specifically including, but not by way of limitation, snow and ice clearance, landscaping and removal of waste and refuse matter. Tenant shall not permit anything to be done upon the Premises (and shall perform all maintenance and repairs thereto so as not) to invalidate, in whole or in part, or prevent the procurement of any insurance policies which may, at any time, be required under the provisions of this Lease. Tenant shall not obstruct or permit the obstruction of any parking area, adjoining street or sidewalk. 7

8 B. STRUCTURAL COMPONENTS. Subject to the provisions of Articles X and XIII hereof, Landlord shall make, or cause to be made, all repairs and necessary replacements to the "structural components" (as hereinafter defined) of the Premises. For purposes of this Lease, the phrase "structural components" shall mean the exterior roof, exterior face of the exterior walls (excluding windows, window frames, doors and door frames) and foundation of the Premises. The cost of such structural repairs and replacements shall be the sole responsibility of Landlord except to the extent such costs arise as a result of any act or omission of Tenant or any person, firm or entity claiming by, through or under any of them, in which event, except as otherwise expressly provided in this Lease, the cost therefor shall be paid by Tenant as Additional Rent within five (5) days after Landlord bills Tenant therefor from time to time. C. HVAC SYSTEM REPAIRS AND REPLACEMENTS. Notwithstanding anything hereof to the contrary, Tenant shall, at Tenant's sole cost and expense, maintain and make, or cause to be made, all necessary repairs to the HVAC system serving the Premises (the "HVAC System"), and Landlord shall make, or cause to be made, at Landlord's cost and expense, all necessary replacements (as opposed to maintenance and repairs) to the HVAC System; provided, however, that (i) Landlord shall be responsible for all replacements of the HVAC System for the period beginning with the Commencement Date and ending on the first (1st) anniversary date of the delivery of the South Section of the Premises to Tenant, and (ii) with respect to any replacements necessitated thereafter, Tenant shall reimburse Landlord for the cost of any such replacements to the HVAC System (the "HVAC Cost") at the time such replacement is made by paying to Landlord the HVAC Cost multiplied by a fraction, the numerator of which is the number of years remaining in the Initial Term rounded to the nearest tenth (10th) of a year (e.g., 2.4 years), and the denominator of which is fifteen (15), which the parties conclusively presume to be the useful life (in years) of any such replacements or replacement part; provided that, if Tenant exercises any option to renew or extend the Lease, or if the Lease is extended past its Termination Date by other agreement, Tenant shall make an additional reimbursing payment to Landlord upon the earlier to occur of Tenant's exercise of such option to renew or the commencement of the renewed or extended Term, which payment shall be calculated by multiplying the HVAC Cost by a fraction, the numerator of which is the duration of the extended Lease Term, (i.e., five (5) years if the extension takes place pursuant to Section 34.1), and the denominator of which is fifteen (15); it being the intention of the parties hereto that Tenant shall reimburse Landlord for such replacements only to the extent of the benefit received by Tenant relative to the replacements' useful life. SECTION 8.2. GOVERNMENTAL REQUIREMENTS. Tenant, at its own cost and expense, shall promptly comply with any and all governmental requirement to or affecting the Premises or any part thereof, irrespective of the nature of the work required to be done, extraordinary as well as ordinary, whether or not the same involve or require any structural changes or additions in or to the Improvements provided that such changes or additions be required in relation to Tenant's use, occupancy or alteration of the Premises. Included in the obligations set forth above, but not in limitation thereof, Tenant, at its own cost and expense shall promptly comply with OSHA regulations relating to overhead cranes, CFR 1910-179(j)(2) and 184(d), CFR 1910-179(j)(3), CFR 1910-179(e)(1) through (4) and CFR 1910-179(b)(5). SECTION 8.3. TENANT'S RESPONSIBILITIES. Landlord shall not be required to furnish any services or facilities whatsoever to the Premises. Tenant hereby assumes full and sole responsibility for condition, operation, repair, alteration, improvement, replacement, maintenance and management of the Premises. Landlord shall not be responsible for any loss or damage to the person or property of Tenant, any guests or invitees, any persons using or working on the Premises, or any persons claiming by, through or under, or any agents, employees, heirs, legal representatives, successors or assigns of, any of the foregoing, other than loss or damage caused by Landlord's negligence or willful misconduct. SECTION 8.4. MAINTENANCE CONTRACT. At Landlord's option, Tenant shall enter into a maintenance contract, in form and substance and with a firm reasonably satisfactory to Landlord, for the maintenance of the Improvements or portions thereof as designated by Landlord. 8

9 ARTICLE 9 TENANT'S INSURANCE SECTION 9.1. COVERAGE REQUIRED. Tenant shall procure and maintain, or cause to be maintained, at all times during the term of this Lease, at Tenant's sole cost and expense, and until each and every obligation of Tenant contained in the Lease has been fully performed, the types of insurance specified below, with insurance companies authorized to do business in the State of Illinois covering all operations under this Lease, whether performed by Tenant or by Contractors. For purposes of this Article IX, "Contractors" shall mean Tenant and contractors and subcontractors and materialmen or any tier providing services, material, labor, operation or maintenance on, about or adjacent to the Premises, whether or not in privity with Tenant. A. IN GENERAL. Upon execution of the Lease, Tenant shall procure and maintain the following kinds and amounts of insurance: (i) WORKER'S COMPENSATION AND OCCUPATIONAL DISEASE INSURANCE. Worker's Compensation and Occupational Disease Insurance, in statutory amounts, covering all employees who provide a service under this Lease. Employer's liability coverage with limits of not less than $100,000 each accident or illness shall be included. (ii) COMMERCIAL LIABILITY INSURANCE (PRIMARY AND UMBRELLA). Commercial Liability Insurance or equivalent with limits of not less than $5,000,000 per occurrence, combined single limit, for bodily injury, personal injury, and property damage liability. Products/completed operation, independent contractors, broad form property damage and contractual liability (with no limitation) coverages are to be included. Landlord is to be named as additional insureds, on a primary, non-contributory basis for any liability, arising directly or indirectly from this Lease. (iii) CONTENTS INSURANCE. Insurance against fire, sprinkler leakage, vandalism, and the extended coverage perils for the full insurable value of all contents of Tenant within the Premises, and of all office furniture, trade fixtures, office equipment, merchandise and all other items of Tenant's property on the Premises and business interruption insurance. B. CONSTRUCTION. During any construction (other than with respect to the construction of the Initial Improvements by Landlord, but including improvements, betterments or repairs), Tenant shall procure and maintain, or cause to be maintained, the following kinds and amounts of insurance: (i) WORKER'S COMPENSATION AND OCCUPATIONAL DISEASE INSURANCE. Worker's Compensation and Occupational Disease Insurance, in statutory amounts, covering all employees who are to provide a service under this construction. Employer's liability coverage with limits of not less than $500,000 for each accident or illness shall be included. (ii) COMMERCIAL LIABILITY INSURANCE (PRIMARY AND UMBRELLA). Commercial Liability Insurance or equivalent with limits of not less than $5,000,000 per occurrence, combined single limit, for bodily injury, personal injury, and property liability. Products/completed operations, explosion, collapse, underground, independent contractors, broad form property damage and contractual liability coverages are to be included. Landlord is to be named as additional insureds on a primary non-contributory basis for any liability arising directly or indirectly from the Lease. (iii) ALL RISK BUILDERS RISK INSURANCE. Tenant or Contractor shall provide All Risk Blanket Builder's Risk Insurance to cover the materials, supplies, equipment, machinery and fixtures that are or will be part of the Premises. Coverage extensions shall include the following: right to partial occupancy, material stored off-site and in-transit, boiler and machinery, earthquake, flood (including surface water backup), collapse, water damage, debris removal, faulty workmanship or materials, testing, mechanical-electrical breakdown and failure, deletion of freezing and temperature exclusions, business interruption, extra expense, loss of revenue, loss of rents and loss of use of property, as applicable, Landlord shall be named as loss payee. 9

10 (iv) PROFESSIONAL LIABILITY. When any architects, engineers, or consulting firms perform work in connection with this Lease, Professional Liability Insurance shall be maintained with limits of $1,000,000. The policy shall have an extended reporting period of two (2) years. When policies are renewed or replaced, the policy retroactive date must coincide with, or precede, start of work. Tenant shall deliver to Landlord, at least fifteen (15) days prior to the earlier of (1) the Commencement Date of this Lease or (2) the date Tenant takes possession of the Premises, duplicate copies of policies (or certificates evidencing such policies) of the insurance required by this Section 9.1; provided, however, that certificates shall not be acceptable with respect to the insurance required under Sections 9.1.A.(iii) and 9.1.B.(vi). Such policies of insurance shall be renewed and duplicate copies of the new policies (or new certificates) shall be deposited with Landlord at least forty-five (45) days prior to the expiration of the old policies. SECTION 9.2. POLICIES. All insurance policies shall be written with insurance companies and shall be in form satisfactory to Landlord. All insurance policies shall name Landlord as an additional insured and loss payee as their respective interests may appear and shall provide that they may not be terminated or modified without sixty (60) days' advance written notice to Landlord. All policies shall also contain an endorsement that Landlord, although named as additional insured, shall nevertheless be entitled to recover for damages caused by the negligence of Tenant. The minimum limits of insurance specified in this Section shall in no way limit or diminish Tenant's liability under this Lease. Tenant shall furnish to Landlord, prior to the date such insurance is first required to be carried by Tenant, and thereafter prior to the expiration of each such policy, true and correct photocopies of all insurance policies required under this Section, together with any amendments and endorsements to such policies, certificates of insurance, and such other evidence of coverages as Landlord may reasonably request, and evidence of payment of all premiums and other expenses owed in connection therewith. Upon Tenant's default in obtaining or delivering the policy for any such insurance or Tenant's failure to pay the charges therefor, Landlord may, at its option, on or after the tenth (10th) day after written notice thereof is given to Tenant, procure or pay the charges for any such policy or policies and the total cost and expense (including attorneys' fees) thereof shall be immediately paid by Tenant to Landlord as Additional Rent upon receipt of a bill therefor. Within thirty (30) days after demand by Landlord that the minimum amount of any coverage be so increased, Tenant shall furnish Landlord with evidence of Tenant's compliance with such demand. SECTION 9.3. SUBROGATION. Landlord and Tenant agree to have all fire and extended coverage and material damage insurance which may be carried by either of them endorsed with a clause providing that any release from liability of or waiver of claim for recovery from the other party or any of the parties named in Section 9.2 above entered into in writing by the insured thereunder prior to any loss or damage shall not affect the validity of said policy or the right of the insured to recover thereunder, and providing further that the insurer waives all rights of subrogation which such insurer might have against the other party or any of the parties named in Section 9.2 above. Without limiting any release or waiver of liability or recovery contained in any other Section of this Lease but rather in confirmation and furtherance thereof, Landlord and any beneficiaries of Landlord waive all claims for recovery from Tenant, and Tenant waives all claims for recovery from Landlord, any beneficiaries of Landlord and the managing agent for the Premises and their respective agents, partners and employees, for any loss or damage to any of its property insured under valid and collectible insurance policies to the extent of any recovery collectible under such insurance policies. Notwithstanding the foregoing or anything contained in this Lease to the contrary, any release or any waiver of claims shall not be operative, nor shall the foregoing endorsements be required, in any case where the effect of such release or waiver is to invalidate insurance coverage or invalidate the right of the insured to recover thereunder or increase the cost thereof (provided that in the case of increased cost the other party shall have the right, within ten (10) days following written notice, to pay such increased cost, thereby keeping such release or waiver in full force and effect). 10

11 SECTION 9.4. MISCELLANEOUS INSURANCE PROVISIONS. Landlord and Tenant further agree as follows: A. Tenant and Contractors expressly understand and agree that any insurance coverages and limits furnished by the Tenant and Contractors shall in no way limit the Tenant's and Contractor's liabilities and responsibilities specified under the Lease, or contracts executed relating to the Premises, or by law. B. The failure of Landlord to obtain such evidence from Tenant or Contractors before permitting Tenant or Contractors to commence work shall not be deemed to be a waiver by Landlord, and Tenant or contractors shall remain under continuing obligation to maintain the insurance coverage. C. Any and all deductibles on referenced insurance coverages shall be borne by Tenant and Contractors. D. Tenant expressly understands and agrees that any insurance maintained by Landlord shall apply in excess of and not contribute with insurance provided by the Tenant or Contractor under the Lease. E. If Tenant or any Contractors desire additional coverage, higher limits of liability, or other modifications for their own protection, Tenant and such Contractors shall be responsible for the acquisition and cost of such additional protection. F. Tenant agrees, and shall cause each Contractor in connection with the Premises to agree, that all insurers shall waive their rights of subrogation against Landlord. G. Tenant and Contractors shall not violate or permit to be violated any of the conditions or provisions of any of the insurance policies, and Tenant and Contractors shall so perform and satisfy or cause to be performed and satisfied the requirements of the companies writing such policies so that at all times companies of good standing, satisfactory to Landlord shall be willing to write and continue such!insurance. H. Landlord shall not be limited in the proof of any damages which Landlord may claim against Tenant and Contractors arising out of or by reason of Tenant's and Contractor's failure to provide and keep in force insurance, as aforesaid, to the amount of the insurance premium or premiums not paid or incurred by Tenant and Contractors and which would have been payable under such insurance, but Landlord shall also be entitled to recover as damages for such breach the uninsured amount of any loss, to the extent of any deficiency in the insurance required by the provisions of this Lease, and damages, costs and expenses of suit suffered or incurred by reason of damage to, or destruction of, the Premises occurring during any period when Tenant or Contractors shall have failed or neglected to provide insurance as aforesaid. I. The insurance required by this Lease, at the option of Tenant or Contractors, may be effected by blanket or umbrella policies issued to Tenant or Contractors covering the Premises and other properties owned or leased by Tenant or Contractors, provided that the policies otherwise comply with the provisions of this Lease and allocate to the Premises the specified coverage, without possibility of reduction or coinsurance by reason of, or damage to, any other premises covered therein. J. All insurance companies shall have a Best rating of not less than A/VII, or an equivalent rating in the event Best ceases to exist or provide a rating. K. Tenant and Contractors shall provide and keep in force such other insurance in such amounts as may from time to time be reasonably required by Landlord or a holder of a Mortgage (defined in Section 23.1 hereof) against such other insurable hazards as at the time are commonly insured against in the case of prudent owners of properties similar to the Premises, and in that connection Landlord may require changes in the forms, types and amounts of insurance required pursuant to this Section or add to, modify or delete other requirements; and in any event, if under applicable law, rule, regulation or ordinance of any governmental authority, state or federal, having jurisdiction in the Premises, liability may be imposed upon Landlord on account of the use or operation of the Premises or other improvements, 11

12 insurance within limits reasonably satisfactory to Landlord shall be maintained by Tenant and Contractors against any such liability. L. The required insurance to be carried shall not be limited by any limitations expressed in the indemnification language herein or any limitation placed on the indemnity therein given as a matter of law. ARTICLE X PROPERTY INSURANCE SECTION 10.1. KINDS AND AMOUNTS. Landlord shall at all times during the Term of this Lease keep in effect insurance on all Improvements against loss by fire and lightning, the risks covered by what is commonly known as extended coverage, malicious mischief and vandalism, and all other risks of direct physical loss in an amount equal to the full replacement value on the replacement form basis, of such Improvements. The policy or policies evidencing such insurance shall be written by a company or companies reasonably satisfactory to Landlord and to Landlord's mortgagee, if any, and authorized to do business in the state where the Premises are located, shall name Landlord as insured thereunder, and shall provide that losses shall be paid to Landlord or its mortgagee, if applicable. At the request of Landlord, a mortgage clause may be included in said policies covering Landlord's mortgagee, if any. Tenant further agrees that if and when obtainable, Landlord will procure and maintain so-called war risk and war damage insurance, earthquake and flood insurance on the Improvements for not less than one hundred percent (100%) of the full insurance value above foundation. Such insurance shall provide for payment of loss thereunder to Landlord and shall, at Landlord's request, contain a mortgage clause in favor of Landlord's mortgagee, if any. Landlord shall also obtain (i) boiler and machinery insurance in an amount equal to the full replacement value of the Improvements, (ii) insurance against loss of Rents due to the occurrence of any casualty or hazard in the amount of all Base Rent payments, taxes, assessments and insurance premiums required hereunder for a twelve (12)-month period, (iii) liability insurance, (iv) insurance against breakage of all plate glass in the Improvements and (v) such other insurance reasonably required by Landlord, all in amounts and under terms customarily carried by Landlord for similar buildings owned by it. The cost of the insurance contemplated by this Article X shall be commercially reasonable. SECTION 10.2. INSURANCE APPRAISALS. From time to time during the Term hereof upon the request of Landlord, or Landlord's mortgagee, if any, Tenant shall furnish to Landlord, at Tenant's expense, insurance appraisals, satisfactory to Landlord, as such are regularly and ordinarily made by or for the benefit of insurance companies, in order to determine the then replacement value of the Improvements. Such insurance appraisals shall not be required more frequently than once in each Lease Year during the Term hereof. SECTION 10.3. TENANT PAYMENTS. All such insurance described in this Article X shall be kept in full force through out the Term of this Lease, and any amounts paid therefor by Landlord (hereinafter referred to as, the "Insurance Premiums") shall be payable by Tenant as Additional Rent in accordance with Sections 6.4. and 6.6. hereof. SECTION 10.4. WAIVER OF RECOVERY. Landlord and Tenant hereby waive all claims for recovery from the other party for any loss or damage (whether or not such loss or damage is caused by negligence of the other party and, notwithstanding any provision or provisions obtained in the Lease to the contrary) to any person or property insured under valid and collectible property insurance policies to the extent of any recovery collectible under such insurance. 12

13 ARTICLE XI DAMAGE OR DESTRUCTION SECTION 11.1. DAMAGE OR DESTRUCTION BY FIRE OR CASUALTY. In the event the Premises are damaged by fire, explosion or other casualty, Landlord shall diligently proceed with respect to the proposed restoration promptly after receipt of the insurance proceeds. Landlord shall commence the repair, restoration or rebuilding thereof and shall complete such restoration, repair or rebuilding within twelve (12) months after the receipt of such proceeds, subject to extension due to delay because of changes, deletions, or additions in construction requested by Tenant, acts of Tenant, strikes, lockouts, casualties, acts of God, war, fuel or energy shortages, material or labor shortages, governmental regulation or control, severe weather conditions or other causes beyond the control of Landlord ("Extension Events"). In the event of any such casualty all insurance proceeds shall be payable to Landlord. In no event shall Landlord be required to repair or replace any alterations or improvements made by Tenant which are not related to the Improvements, Tenant's Equipment or any other fixtures, furnishing and personal property of Tenant. Tenant agrees that Tenant shall deposit with Landlord prior to the commencement of such restoration any sums in the amount of the deductible amounts carried by Landlord under its insurance policies. Landlord's obligation to repair, restore or rebuild the Premises shall be limited to restoring the Premises to substantially the condition in which the same existed prior to the casualty. Rent and all other charges payable by Tenant hereunder shall abate during the period of such repair, restoration or rebuilding to the extent that the Improvements are not tenantable because of any damage or destruction. In the event the casualty causes fifty percent (50%) or more of the Premises to be untenantable during the last twelve (12) months of the Term, either party may terminate this Lease as of the date of such casualty by providing notice to the other within thirty (30) days after occurrence of the fire or other casualty causing the damage, in which event, all insurance proceeds shall be paid to the Landlord and in addition Tenant shall pay to Landlord the amount of any deductible carried by Tenant under its insurance policies. Notwithstanding anything contained herein to the contrary, if Landlord fails to complete such repair, restoration or rebuilding within such twelve-month time period (subject to Extension Events), Tenant may, at its option, terminate this Lease upon written notice to Landlord given within ten (10) days after the expiration of such twelve-month time period (subject to Extension Events). ARTICLE XII LIENS SECTION 12.1. LIEN CLAIMS. Tenant shall not do any act which shall in any way encumber the title of Landlord in and to the Premises, nor shall any interest or estate of Landlord in the Premises be in any way subject to any claim by way of lien or encumbrance, whether by operation of law or by virtue of any express or implied contract by Tenant, and any claim to or lien upon the Premises arising from any act or omission of Tenant shall accrue only against the leasehold estate of Tenant and shall in all respects be subject and subordinate to the paramount title and rights of Landlord in and to the Premises. Tenant will not permit the Premises to become subject to any mechanics', laborers' or materialmen's lien on account of labor or material furnished to Tenant or claimed to have been furnished to Tenant in connection with work of any character performed or claimed to have been performed on the Premises by or at the direction of sufferance of Tenant; provided, however that Tenant shall have the right to contest in good faith and with reasonable diligence the validity of any such lien or claimed lien if Tenant shall provide to Landlord a bond or other security or assurances reasonably satisfactory to Landlord against the possibility of sale, foreclosure or forfeiture of the Premises. On any final determination of the lien or claim for lien, Tenant will immediately pay any judgment rendered, with all proper costs and charges, and will, at its own expense, have the lien released and any judgment satisfied. Should Tenant fail to diligently contest and pursue such lien contest, Landlord may, at its option, use the sums so deposited to discharge any such lien and upon the satisfaction of such lien or encumbrance Landlord shall pay all such sums remaining on deposit to Tenant. SECTION 12.2. LANDLORD'S RIGHT TO CURE. If Tenant shall fail to contest the validity of any lien or claimed lien or fail to give security to Landlord to insure payment thereof, or shall fail to prosecute such contest with diligence, or shall fail to have the same released and satisfy any judgment rendered thereon, then Landlord may, at its election (but shall not be so required) remove or discharge such lien or claim for lien (with the right, in its discretion, to settle or compromise the same), and any amounts advanced by Landlord, including reasonable attorneys' fees, for such purposes shall be so much additional rent due from Tenant to Landlord at the next rent date after any such payment, with interest thereon at the Lease Interest Rate from the date so advanced. 13

14 ARTICLE XIII ALTERATIONS AND IMPROVEMENTS SECTION 13.1. ALTERATIONS. Tenant shall not at any time during the Term of this Lease make any openings in the roof or exterior walls of the Building or make any Tenant alteration, addition or improvement to the Premises or any portion thereof (collectively, "Alterations") without in each instance, the prior written consent of Landlord; provided, however, upon notice to, but without the consent of Landlord, Tenant shall have the right to make any Alterations where same are non-structural, do not require openings on the roof or exterior walls of the Improvements, do not affect any Building system, and do not exceed FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00) in the aggregate in any twelve (12)-month period. No Alteration to the Premises for which Landlord's consent is required shall be commenced by Tenant until Tenant has furnished Landlord with a satisfactory certificate or certificates from an insurance company acceptable to Landlord, evidencing workmen's compensation coverage, and insurance coverage in amounts satisfactory to Landlord and protecting Landlord against public liability and property damage to any person or property, on or off the Premises, arising out of and during the making of such alterations, additions or improvements. Any Alteration by Tenant hereunder shall be done in a good and workmanlike manner in compliance with any applicable governmental law, statute, ordinance or regulation. Upon completion of any Alteration by Tenant hereunder, Tenant shall furnish Landlord with a copy of the "as built" plans covering such construction. Tenant, at its sole cost and expense, will make all Alterations on the Premises which may be necessary by the act or neglect of any other person or corporation (public or private), except Landlord, its agents, employees or contractors. Before commencing any Alterations, involving an estimated cost of more than FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00): (a) plans and specifications therefor, prepared by a licensed architect, shall be submitted to and approved by Landlord (such approval shall not be unreasonably withheld or delayed); (b) Tenant shall furnish to Landlord an estimate of the cost of the proposed work, certified by the architect who prepared such plans and specifications; (c) all contracts for any proposed work shall be submitted to and approved by Landlord; and (d) Tenant shall either furnish to Landlord a bond in form and substance satisfactory to Landlord, or such other security reasonably satisfactory to Landlord to insure payment for the completion of all work free and clear of liens. Tenant further agrees that all contractors engaging in any construction activity by and for the benefit of Tenant for which Landlord's consent shall be required shall obtain comprehensive/commercial general liability, worker's compensation and such other liability insurance in such amounts as may be reasonably required by Landlord naming the Landlord as an additional insured and providing liability coverage during all phases of construction including, without limitation: (a) contractor's and owners protection; (b) blanket contractual liability coverage; (c) broad form property damage insurance; (d) statutory worker's compensation coverage and employer's liability coverage; (e) coverage under the structural work act of the State of Illinois; and (f) environmental liability, if applicable. Before commencing any Alteration, Tenant shall provide Landlord with a written certification that the Alteration does not have any environmental impact on the Premises. Prior to the commencement of any construction activity for which Landlord's consent shall be required, certificates of such insurance coverages (and original policies with respect to environmental liability insurance) shall be provided to Landlord. SECTION 13.2. OWNERSHIP OF ALTERATIONS. All Alterations (except Tenant's Equipment, as defined in Section 21.2 hereof), put in at the expense of Tenant shall become the property of Landlord and shall, unless the Landlord requests their removal, remain upon and be surrendered with the Premises as a part thereof at the termination of this Lease, without compensation or allowance to Tenant. Landlord may, at its sole option, request that Tenant, at Tenant's sole cost, remove any such Alterations and if Tenant shall fail to do so, Landlord may remove the same and Tenant shall pay the cost of such removal to Landlord upon demand. Notwithstanding the foregoing, upon Tenant's request prior to such time as Tenant intends to make any Alteration, Landlord shall indicate to Tenant at the time of such request whether or not such Alterations must be removed upon surrender of the Premises. 14

15 SECTION 13.3. SIGNS. Tenant shall not place any signs on any part of the Premises without the prior written consent of Landlord. Notwithstanding any of the immediately foregoing provisions of this Section 13.3, upon notice and with the consent of Landlord, which consent shall not be unreasonably withheld, Tenant may place a monument sign adjacent to the Premises, provided that: (i) the installation and dimensions of said sign is in strict accordance with applicable law, ordinances and restrictions; (ii) Tenant continually maintains said sign in a first-class manner; and (iii) Tenant, at Tenant's sole cost and expense, removes said sign at the expiration of the Term and restores the area in which said sign is placed to its condition prior to the installation of said sign. SECTION 13.4. TENANT INDEMNITY. Tenant hereby agrees to indemnify, defend and hold the Landlord, its beneficiaries, shareholders, partners or members and their respective agents and employees harmless from any and all liabilities of every kind and description which may arise out of or be connected in any way with said Alterations. Any mechanic's lien filed against the Premises for work claimed to have been furnished to Tenant shall be discharged of record by Tenant within ten (10) days thereafter, at Tenant's expense. Upon completing any Alterations, Tenant shall furnish Landlord with contractors' affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used. All Alterations shall comply with all insurance requirements and with all ordinances and regulations of any pertinent governmental authority. All alterations and additions shall be constructed in a good and workmanlike manner and only good grades of materials shall be used. SECTION 13.5. ENVIRONMENTAL IMPACT. Notwithstanding any other term, covenant or condition contained in this Lease, in the event that any Alteration has any environmental impact on the Premises, Landlord may deny the Tenant the right to proceed in Landlord's sole and absolute discretion. SECTION 13.6. TENANT'S SPACE PLANNING CREDIT. Provided that: (i) the term of this Lease has commenced; (ii) Tenant has begun paying Rent due hereunder; (iii) Tenant is not in default hereunder: and (iv) the Tenant has taken possession of the Premises, Landlord will pay to Tenant the sum of THIRTEEN THOUSAND FORTY-ONE AND NO/100 DOLLARS ($13,041.00) (the "Space Planning Credit") for fees and expenses incurred by Tenant in relation to space improvement plans, construction documents and related services provided!to Tenant by Tenant's architect. The Space Planning Credit will be paid upon execution of this Lease. ARTICLE XIV CONDEMNATION SECTION 14.1. TAKING: LEASE TO TERMINATE. In the event the whole of the Premises shall be taken as a result of the exercise of the power of eminent domain or condemned for a public or quasi-public use or purpose by any competent authority or sold to the condemning authority under threat of condemnation, or in the event a portion of the Premises shall be taken or sold as a result of such event, and as a result thereof the balance of the Premises cannot be used for the same purpose as before such taking, sale or condemnation, then and in either of such events, the Term of this Lease shall terminate as of the date of vesting of title pursuant to such proceeding or sale. The total award, compensation or damages received from such proceeding or sale (collectively, the "Award"), shall be paid to and be the property of Landlord, whether the Award shall be made as compensation for diminution of the value of the leasehold or the fee of the Premises or otherwise, and Tenant hereby assigns to Landlord, all of Tenant's right, title and interest in and to the Award. Tenant shall execute, immediately upon demand of Landlord, such documents as may be necessary to facilitate collection by Landlord of any such Award. SECTION 14.2. TAKING: LEASE TO CONTINUE. In the event only a part of the Premises shall be taken as a result of the exercise of the power of eminent domain or condemned for a public or quasi-public use or purpose by any competent authority or sold to the condemning authority under threat of condemnation, and as a result thereof the balance of the Premises can be used for the same purpose as before such taking, sale or condemnation, this Lease shall not terminate and Landlord, at its sole cost and expense, shall, to the 15

16 extent practical, promptly repair and restore the Premises, subject to any Extension Events. To the extent of the taking of any Improvements the Base Rent shall be equitably adjusted. Any Award paid as a consequence of such taking, sale, or condemnation, shall be paid to Landlord. Any sums not so disbursed shall be retained by Landlord. In the event of a taking of land only, this Lease shall not terminate and Landlord shall not be obligated to repair or restore the Premises. SECTION 14.3 TENANT'S CLAIM. To the extent permitted by law and subject to the rights of any lender with respect to the Premises, Tenant shall be allowed to pursue a claim against the condemning authority (hereinafter referred to as the "Tenant's Claim") that shall be independent of and wholly separate from any action, suit or proceeding relating to the Award (hereinafter referred to as the "Landlord's Proceeding") for reimbursement of relocation expenses or for the loss of any Tenant's Equipment; provided, however: (i) Tenant's Claim shall in no event limit, affect, alter or diminish in any kind or way whatsoever the Award to Landlord as a result of such taking, sale or condemnation; (ii) Tenant's Claim shall in no event include any claim for any interest in real property, it being expressly understood and agreed that the entire Award and other sums paid with respect to the real property interests taken, sold or condemned shall be the sole property of Landlord pursuant to this Article XIII; and (iii) Tenant's Claim shall in no event be joined with Landlord's Proceeding or argued or heard concurrently therewith and if the tribunal hearing Tenant's Claim orders such joinder, Tenant agrees to voluntarily dismiss Tenant's Claim without prejudice until such time as Landlord has received the Award for such taking, sale or condemnation. ARTICLE XV RENT ABSOLUTE SECTION 15.1. RENT ABSOLUTE. This Lease shall be deemed and construed to be a "net lease" and, subject to Section 8.1 hereof, Tenant agrees to pay all costs and expenses of every kind and nature whatsoever, ordinary and extraordinary, arising out of or in connection with the ownership, maintenance, repair, replacement, use and occupancy of the Premises during the Term of this Lease, which, except for the execution and delivery hereof, would otherwise have been payable by Landlord. ARTICLE XVI ASSIGNMENT -- SUBLETTING BY TENANT SECTION 16.1. NO ASSIGNMENT, SUBLETTING OR OTHER TRANSFER. Tenant shall not assign this Lease or any interest hereunder, nor shall Tenant sublet or permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant, without the express prior written consent of Landlord. No assignment or subletting shall relieve Tenant of its obligations hereunder, and Tenant shall continue to be liable as a principal and not as a guarantor or surety, to the same extent as though no assignment or sublease had been made, unless specifically provided to the contrary in Landlord's consent. Consent by Landlord pursuant to this Article shall not be deemed, construed or held to be consent to any additional assignment or subletting, but each successive act shall require similar consent of Landlord. Landlord shall be reimbursed by Tenant for any costs or expenses incurred pursuant to any request by Tenant for consent to any such assignment or subletting. In the consideration of the granting or denying of consent, Landlord may, at its option, take into consideration: (i) the business reputation and credit worthiness of the proposed subtenant or assignee; (ii) any required alteration of the Premises; (iii) the intended use of the Premises by the proposed subtenant or assignee; and (iv) any other factors which Landlord shall deem relevant. Notwithstanding the foregoing, Tenant may assign this Lease or sublet the Premises to any subsidiary or affiliated corporation, provided that Tenant gives Landlord at least thirty (30) days' prior written notice of such assignment or subletting, and further provided that Tenant shall continue to be liable as a principal under the Lease and not as a guarantor or surety, to the same extent as though no assignment or sublease had been made. Further, notwithstanding the foregoing, Landlord hereby approves a sublease of a portion of the Premises to PTS Labs, L.L.C., an Illinois limited liability company ("PTS"), provided that Tenant shall continue to be liable as principal under the Lease and not as a guarantor or surety, to the same extent as if such Sublease had not been made and Tenant provides Landlord with a copy of the sublease agreement promptly after execution. 16

17 SECTION 16.2. OPERATION OF LAW. Tenant shall not allow or permit any transfer of this Lease, or any interest hereunder, by operation of law, or convey, mortgage, pledge or encumber this Lease or any interest hereunder. SECTION 16.3. EXCESS RENTAL. If Tenant shall, with Landlord's prior consent as herein required, sublet the Premises, an amount equal to fifty percent (50%) of the rental in excess of the base rent and any additional rent herein provided to be paid shall be for benefit of Landlord and shall be paid to Landlord promptly when due under any such subletting as additional rent due hereunder. SECTION 16.4. MERGER OR CONSOLIDATION. If Tenant is a corporation whose stock is not publicly traded, any trans action or series of transactions (including, without limitation, any dissolution, merger, consolidation or other reorganization of Tenant, or any issuance, sale, gift, transfer or redemption of any capital stock of Tenant, whether voluntary, involuntary or by operation of law, or any combination of any of the foregoing transactions) resulting in the transfer of control of Tenant, other than by reason of death, shall be deemed to be a voluntary assignment of this Lease by Tenant subject to the provisions of this Section 16. If Tenant is a partnership, any transaction or series of transactions (including without limitation any withdrawal or admittance of a partner or a change in any partner's interest in Tenant, whether voluntary, involuntary or by operation of law, or any combination of any of the foregoing transactions) resulting in the transfer of control of Tenant, other than by reason of death, shall be deemed to be a voluntary assignment of this Lease by Tenant subject to the provisions of this assignment of this Lease by Tenant subject to the provisions of this Section 16. If Tenant is a corporation whose stock is publicly traded, a change or series of changes in ownership of stock which would result in direct or indirect change in ownership by the stockholders or an affiliated group of stockholders of less than fifty percent (50%) of the outstanding stock as of the date of the execution and delivery of this Lease shall not be considered a change of control. Tenant may, upon notice to, but without Landlord's consent, assign this Lease to any corporation resulting from a merger or consolidation of Tenant, provided that: (i) the total assets of such assignee after such consolidation or merger shall be in excess of the total assets of Tenant immediately prior to such consolidation or merger, and (ii) the total net worth of such assignee after such consolidation or merger shall be at least $22,500,000.00, determined by generally accepted accounting principles, and provided that Tenant is not at such time in default hereunder, and provided further that such successor shall execute an instrument in writing, acceptable to Landlord in its reasonable discretion, fully assuming all of the obligations and liabilities imposed upon Tenant hereunder and deliver the same to Landlord. Tenant shall provide in its notice to Landlord such information as may be reasonably required by Landlord to determine that the requirements of this Section 16.4 have been satisfied. As used in this Section 16.4, the term "control" means possession of the power to vote not less than a majority interest of any class of voting securities and partnership or limited liability company interests or to direct or cause the direction (directly or indirectly) of the management or policies of a corporation, or partnership or limited liability company through the ownership of voting securities, partnership interests or limited liability company interests, respectively. SECTION 16.5. UNPERMITTED TRANSACTION. Any assignment, subletting, use, occupancy, transfer or encumbrance of this Lease or the Premises without Landlord's prior written consent shall be of no effect and shall, at the option of Landlord, constitute a default under this Lease, subject to the exceptions set forth in this Article XVI. ARTICLE XVII ANNUAL STATEMENTS SECTION 17.1. ANNUAL STATEMENTS. Tenant agrees to furnish Landlord annually, within ninety (90) days of the end of such fiscal year, or as soon thereafter as they are reasonably available, a copy of its annual audited statements, together with applicable footnotes and any other financial information reasonably requested by Landlord (hereinafter collectively referred to as, the "Financial Information") and agrees 17

18 that Landlord may deliver such Financial Information to any mortgagee, prospective mortgagee or prospective purchaser of the Premises. ARTICLE XVIII INDEMNITY FOR LITIGATION SECTION 18.1. INDEMNITY FOR LITIGATION. Tenant agrees to pay, and to indemnify and defend Landlord against, all costs and expenses (including reasonable attorneys' fees) incurred by or imposed upon Landlord by or in connection with any litigation to which Landlord becomes or is made a party without fault on its part, whether commenced by or against Tenant, or any other person or entity or that may be incurred by Landlord in enforcing any of the covenants and agreements of this Lease with or without the institution of any action or proceeding relating to the Premises or this Lease, or in obtaining possession of the Premises after an Event of Default hereunder or upon expiration or earlier termination of this Lease. The foregoing notwithstanding, Tenant's responsibility under this Section 18.1 to pay Landlord's costs and expenses (including reasonable attorneys' fees) shall not extend to such costs and expenses incurred in defending an action brought by Tenant to enforce the terms of this Lease in which there is a court determination that Landlord failed to perform its obligations under this Lease. The provisions of this Section 18.1 shall survive the expiration or earlier termination of this Lease. ARTICLE XIX ESTOPPEL CERTIFICATES SECTION 19.1. ESTOPPEL CERTIFICATE. Tenant agrees that on the Commencement Date and at any time and from time to time thereafter, upon not less than ten (10) days' prior written request by Landlord, it will execute, acknowledge and deliver to Landlord, or Landlord's mortgagee to the extent factually accurate, a statement in writing in the form of EXHIBIT "B" attached hereto and by this reference incorporated herein; provided, however, Tenant agrees to certify to any prospective purchaser or mortgagee any other reasonable information specifically requested by such prospective purchaser or mortgagee. ARTICLE XX INSPECTION OF PREMISES SECTION 20.1. INSPECTIONS. Tenant agrees to permit Landlord and any authorized representatives of Landlord, to enter the Premises at all reasonable times on reasonable advance notice, except in the case of emergency, for the purpose of inspecting the same. Any such inspections shall be solely for Landlord's purposes and may not be relied upon by Tenant or any other person. SECTION 20.2. SIGNS. Tenant agrees to permit Landlord and!any authorized representative of Landlord to enter the Premises at all reasonable times during business hours on reasonable advance notice to exhibit the same for the purpose of sale, mortgage or lease, and during the final year of the Term hereof or any extension thereof, Landlord may display on the Premises customary "For Sale" or "For Rent" signs. ARTICLE XXI FIXTURES SECTION 21.1. BUILDING FIXTURES. All improvements and all plumbing, heating, lighting, electrical and air-conditioning fixtures and equipment, and other articles of personal property used in the operation of the Premises (as distinguished from operations incident to the business of Tenant), whether or not attached or affixed to the Premises ("Building Fixtures"), shall be and remain a part of the Premises and shall constitute the property of Landlord. 18

19 SECTION 21.2. TENANT'S EQUIPMENT. All of Tenant's trade fixtures and all personal property, fixtures, apparatus, machinery and equipment now or hereafter located upon the Premises, other than Building Fixtures, as shall be and remain the personal property of Tenant, and the same are herein referred to as "Tenant's Equipment." SECTION 21.3. REMOVAL OF TENANT'S EQUIPMENT. Tenant's Equipment may be removed from time to time by Tenant; provided, however, that if such removal shall injure or damage the Premises, Tenant shall repair the damage and place the Premises in the same condition as it would have been if such Tenant's Equipment had not been installed. ARTICLE XXII DEFAULT SECTION 22.1. EVENTS OF DEFAULT. Tenant agrees that any one or more of the following events shall be considered "Events of Default" as said term is used herein: (a) If an order, judgment or decree shall be entered by any court adjudicating Tenant a bankrupt or insolvent, or approving a petition seeking reorganization of Tenant or appointing a receiver, trustee or liquidator of Tenant, or of all or a substantial part!of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of sixty (60) days; or (b) Tenant shall file an answer admitting the material allegations of a petition filed against Tenant in any bankruptcy, reorganization or insolvency proceeding or under any laws relating to the relief of debtors, readjustment or indebtedness, reorganization, arrangements, composition or extension; or (c) Tenant shall make any assignment for the benefit of creditors or shall apply for or consent to the appointment of a receiver, trustee or liquidator of Tenant, or any of the assets of Tenant; or (d) Tenant shall file a voluntary petition in bankruptcy, or shall admit in writing its inability to pay its debts as they come due, or shall file a petition or an answer seeking reorganization or arrangement with creditors or take advantage of any insolvency law; or (e) A decree or order appointing a receiver of the property of Tenant shall be made and such decree or order shall not have been vacated within sixty (60) days from the date of entry or granting thereof; or (f) Tenant shall abandon the Premises during the Term hereof; or (g) Tenant shall default in making any payment of Rent or other payment required to be made by Tenant hereunder and such default shall continue for a period of ten (10) days after written notice from Landlord to Tenant; (h) Tenant shall repeatedly default in the timely payment of Rent in accordance with Section 5.1 hereof or any other charges required to be paid hereunder. For purposes of the foregoing, the occurrence of similar defaults three (3) times within any twelve (12) consecutive calendar months shall constitute a repeated default; or (i) Tenant shall be in default in the performance of or compliance with any of the agreements, terms, covenants or conditions in this Lease other than those referred to in the foregoing subparagraphs (a) through (h) of this Section for a period of twenty (20) days after notice from Landlord to Tenant specifying the items in default, or in the case of a default which cannot, with due diligence, be cured within said twenty (20)-day period, Tenant fails to proceed within said twenty (20)-day period to cure the same and thereafter to prosecute the curing of such default with due diligence (it being 19

20 intended in connection with a default not susceptible of being cured with due diligence within said twenty (20)-day period that the time of Tenant within which to cure the same shall be extended for such period as may be necessary to complete the same with all due diligence). Upon the occurrence of any one or more of such Events of Default, Landlord may at its election terminate this Lease or terminate Tenant's right to possession only, without terminating this Lease. Upon termination of this Lease or of Tenant's right to possession, Tenant shall immediately surrender possession and vacate the Premises, and deliver possession thereof to Landlord, and Landlord or Landlord's agents may immediately or any time thereafter without notice, re-enter the Premises and remove all persons and all or any property therefrom, either by any suitable action or proceeding at law or equity or by force or otherwise, without being liable in indictment, prosecution or damages, therefor, and repossess and enjoy the Premises, together with the right to receive all income of, and from, the Premises. Upon termination of this Lease, Landlord shall be entitled to recover as liquidated damages, because the parties hereto recognize that as of the date hereof actual damages are not ascertainable and are of imprecise calculation and not as a penalty, all Rent and other sums due and payable by Tenant through the date of termination plus (i) an amount equal to the present value of the Rent and other sums provided herein to be paid by Tenant for the residue of the Term using a discount rate equal to five percent (5%) per annum, (ii) the costs of repairing or restoring the Premises as Landlord deems necessary or desirable, and (iii) the costs of performing any other covenants to be performed by Tenant. If Landlord elects to terminate Tenant's right to possession only, without terminating this Lease, Landlord may, at Landlord's option, enter into the Premises, remove Tenant's signs and other evidences of tenancy, and take and hold possession thereof as hereinabove provided, without such entry and possession terminating this Lease or releasing Tenant, in whole or in part, from Tenant's obligations to pay the Rent hereunder for the full Term or from any other obligations of Tenant under this Lease. Landlord shall use commercially reasonably efforts to relet all or any part of!the Premises for such rent and upon terms as are commercially reasonable (including the right to relet the Premises for a term greater or lesser than that remaining of the Term of premises and the right to relet the Premises as a part of a larger area, the right to change the character or use made of the Premises and the right to grant concessions of free rent). For the purpose of such reletting, Landlord may decorate or make any repairs, changes, alterations, or additions in or to the Premises that may be necessary or desirable. If Landlord is unable to relet the Premises after using such commercially reasonably efforts to do so, Landlord shall have the right to terminate this Lease, in which event, Tenant shall pay to Landlord liquidated damages (because the parties hereto recognize that as of the date hereof actual damages are not ascertainable and are of imprecise calculation and not as a penalty) equal to the present value of the Rent and other sums provided herein to be paid by Tenant for the remainder of the Term. If the Premises are relet and sufficient sums shall not be realized from such reletting after payment of all expenses of such decorations, repairs, changes, alterations, additions and the expenses of repossession and such reletting, and the collection of the Rent herein provided and other payments required to be made by Tenant under the provisions of this Lease for the remainder of the Term of this Lease then, in such event, Tenant shall pay to Landlord on demand any such deficiency and Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Section from time to time, and all costs and expenses of Landlord, including attorneys' fees, incurred in connection with any such suit shall be paid by Tenant. SECTION 22.2. WAIVERS. Tenant, for and on behalf of itself and all persons claiming through or under Tenant, waives any and all rights of redemption or re-entry or repossession in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge or in case of re-entry or repossession by Landlord or in case of any expiration or termination of this Lease. The terms "enter," "re-enter," "entry" or "re-entry" as used in this Lease are not restricted to their technical legal meanings. SECTION 22.3. BANKRUPTCY. If Landlord shall not be permitted to terminate this Lease, as provided in this Article XXII because of the provisions of the United States Code relating to Bankruptcy, as amended (the "Bankruptcy Code"), then Tenant as a debtor-in-possession or any trustee for Tenant agrees promptly, 20

21 within no more than sixty (60) days after the filing of the bankruptcy petition, to assume or reject this Lease. In such event, Tenant or any trustee for Tenant may only assume this Lease if: (a) it cures or provides adequate assurances that the trustee will!promptly cure any default hereunder; (b) compensates or provides adequate assurance that Tenant will promptly compensate Landlord of any actual pecuniary loss to Landlord resulting from Tenant's default; and (c) provides adequate assurance of performance during the fully stated term hereof of all of the terms, covenants, and provisions of this Lease to be performed by Tenant. In no event after the assumption of this Lease shall any then-existing default remain uncured for a period in excess of the earlier of ten (10) days or the time period set forth herein. Adequate assurance of performance of this Lease, as set forth hereinabove, shall include, without limitation, adequate assurance: (i) of the source of rent reserved hereunder; and (ii) that the assumption of this Lease will not breach any provision hereunder. If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment, setting forth: (i) the name and address of such person; (ii) all of the terms and conditions of such offer, and (iii) the adequate assurance to be provided Landlord to assure such person's future performance under the Lease, including, without limitation, the assurance referred to in Section 365(b)(3) of the Bankruptcy Code, shall be given to Landlord by the Tenant no later than twenty (20) days after receipt by the Tenant but in any event no later than ten (10) days prior to the date that the Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to the Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code any and all monies or other considerations payable or otherwise to be delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of the Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting the Landlord's property under the preceding sentence not paid or delivered to the Landlord shall be held in trust for the benefit of Landlord and shall be promptly paid to the Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be conclusively deemed without further act or deed to have!assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. Any such assignee shall be permitted to use the Leased Premises only for the Use. Nothing contained in this Section shall, in any way, constitute a waiver of the provisions of Article XVI of this Lease relating to alienation. Tenant shall not, by virtue of this section, have any further rights relating to assignment other than those granted in the Bankruptcy Code. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as rent, shall constitute rent for the purpose of Section 501(b)(6) or any successive section of the Bankruptcy Code. SECTION 22.4. LANDLORD'S DEFAULT. If Landlord shall be in default in the performance of or compliance with any of the agreements, terms, covenants or conditions in this Lease for a period of thirty (30) days after notice from Tenant to Landlord specifying the items in default, or in the case of a default which cannot, with due diligence, be cured within said thirty (30)-day period, Landlord fails to proceed within said thirty (30)-day period to cure the same and thereafter to prosecute the curing of such default with due diligence (it being intended in connection with a default not susceptible of being cured with due diligence within said thirty (30)-day period that the time of Landlord within which to cure the same shall be 21

22 extended for such period as may be necessary to complete the same with all due diligence), then Tenant may, at its option )but shall not be required to) do the same or cause the same to be done, the amounts paid and expenses incurred by tenant in connection therewith shall be due and payable by Landlord to Tenant within thirty (30) days after demand therefor from Tenant. ARTICLE XXIII LANDLORD'S PERFORMANCE OF TENANT'S COVENANTS SECTION 23.1. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS. In the event Tenant shall fail to maintain any insurance required to be paid by it under the terms hereof, or in an Emergency Situation or upon occurrence of an Event of Default, Landlord may (but shall not be obligated so to do), and without waiving or releasing Tenant from any obligation of Tenant hereunder, make any payment or perform any other act which Tenant is obligated to make or perform under this Lease in such manner and to such extent as Landlord may deem desirable; and in so doing Landlord shall also have the right to enter upon the Premises for any purpose reasonably necessary in connection therewith and to pay or incur any other necessary and incidental costs and expenses, including reasonable attorneys' fees. !All sums so paid and all liabilities so incurred by Landlord, together with interest thereon at the rate per annum which is the lesser of (i) the Lease Interest Rate or (ii) the highest rate permitted by law shall be deemed Additional Rent hereunder and shall be payable to Landlord upon demand as Additional Rent. Landlord shall use reasonable efforts to give prior notice (which may be oral) of its performance, if reasonably feasible under the circumstances. The performance!of any such obligation by Landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Inaction of Landlord shall never be considered as a waiver of any right accruing to it pursuant to this Lease. Landlord, in making any payment hereby authorized: (a) relating to Taxes, may do so according to any bill, statement or estimate, without inquiry into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof; (b) for the discharge, compromise or settlement of any lien, may do so without inquiry as to the validity or amount of any claim for lien which may be asserted; or (c) in connection with the completion of construction of improvements to the Premises or the repair, maintenance or the payment of operating costs thereof, may do so in such amounts and to such persons as Landlord reasonably may deem appropriate. Nothing contained herein shall be construed to require Landlord to advance monies for any purpose. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business or other damage of Tenant or any other occupant of the Premises or any part thereof, by reason of making repairs or the performance of any work on the Premises or on account of bringing materials, supplies and equipment into or through the Premises during the course thereof and the obligations of Tenant under this Lease shall not thereby be affected in any manner. In doing so, however, Landlord shall use reasonable efforts not to interfere with the normal operation of the Premises. The term "EMERGENCY SITUATION" shall mean a situation which has caused or is likely to cause bodily injury to persons, contamination of or physical damage to the Premises or adjoining property or economic liability or criminal jeopardy to Landlord. ARTICLE XXIV EXERCISE OF REMEDIES SECTION 24.1. CUMULATIVE REMEDIES. No remedy contained herein or otherwise conferred upon or reserved to Landlord, shall be considered exclusive of any other remedy, but the same shall be cumulative and shall be in addition to every other remedy given herein, now or hereafter existing at law or in equity or by statute, and every power and remedy given by this Lease to Landlord may be exercised from time to time and as often as occasion may arise or as may be deemed expedient. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein. SECTION 24.2. NO WAIVER. No waiver of any breach of any of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach, or a waiver, acquiescence in or consent to any further 22

23 or succeeding breach of the same covenant. The acceptance by Landlord of any payment of Rent or other sums payable hereunder after the termination by Landlord of this Lease or of Tenant's right to possession hereunder shall not, in the absence of agreement in writing to the contrary by Landlord, be deemed to restore this Lease or Tenant's right to possession hereunder, as the case may be, but shall be construed as a payment on account and not in satisfaction of damages due from Tenant to Landlord. Receipt of Rent by Landlord, with knowledge of any breach of this Lease by Tenant or of any default by Tenant in the observance or performance of any of the conditions or covenants of this Lease, shall not be deemed to be a waiver of any provision of this Lease. SECTION 24.3. EQUITABLE RELIEF. In the event of any breach or threatened breach by Tenant of any of the agreements, terms, covenants or conditions contained in this Lease, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise as though re-entry, summary proceedings, and other remedies were not provided for in this Lease. ARTICLE XXV SUBORDINATION TO MORTGAGES SECTION 25.1. SUBORDINATION. Landlord may execute and deliver a mortgage or trust deed in the nature of a mortgage (both sometimes hereinafter referred to as "Mortgage") against the Premises or any portion thereof. This Lease and the rights of Tenant hereunder, shall automatically, and without the requirement of the execution of any further documents, be and are hereby made expressly subject and subordinate at all times to the lien of any Mortgage now or hereafter encumbering any portion of the Improvements, and to all advances made or hereafter to be made upon the security thereof; provided, however, the holder of said Mortgage agrees in writing not to disturb the rights of Tenant under this Lease so long as Tenant is not in default hereunder. Notwithstanding the foregoing, Tenant agrees to execute and deliver such instruments subordinating this Lease to the lien of any such Mortgage as may be requested in writing by Landlord from time to time. Notwithstanding anything to the contrary contained herein, any mortgagee under a Mortgage may, by notice in writing to the Tenant, subordinate its Mortgage to this Lease. SECTION 25.2. MORTGAGE PROTECTION. Tenant agrees to give the holder of any Mortgage, by registered or certified mail, a copy of any notice of default served upon the Landlord by Tenant, provided that prior to such notice Tenant has received notice (by way of service on Tenant of a copy of an assignment of rents and leases, or otherwise) of the address of such mortgagee and containing a request therefor. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then said mortgagee shall have an additional thirty (30) days after receipt of notice thereof within which to cure such default or, if such default cannot be cured within that time, then such additional time as may be necessary, if, within such thirty (30) days, any mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure). Such period of time shall be extended by any period within which such mortgagee is prevented from commencing or pursuing such foreclosure proceedings by reason of Landlord's bankruptcy. Until the time allowed as aforesaid for said mortgagee to cure such defaults has expired without cure, Tenant shall have no right to, and shall not, terminate this Lease on account of default. This Lease may not be modified or amended so as to reduce the Rent or shorten the Term, or so as to adversely affect in any other respect to any material extent the rights of the Landlord, nor shall this Lease be cancelled or surrendered, without the prior written consent, in each instance, of the mortgagee. ARTICLE XXVI INDEMNITY AND WAIVER SECTION 26.1. INDEMNITY. Tenant shall not do or permit any act or thing to be done or omit to do any act or thing upon the Premises which may subject Landlord to any liability or responsibility for injury, damage 23

24 to persons or property, or to any liability by reason of any violation of applicable laws and shall exercise such control over the Premises so as to fully protect Landlord against any such liability. Tenant shall defend, indemnify and save Landlord, and any official, agent, beneficiary, contractor, director, employee, lessor, mortgagee, officer, parent, partner, shareholder and trustee of Landlord (each an "INDEMNIFIED PARTY") representatives, successors and assigns harmless from and against any and all liabilities, suits, judgments, settlements, obligations, fines, damages, penalties, claims, costs, charges and expenses, including, without limitation, engineers', architects' and attorneys' fees, court costs and disbursements, which may be imposed upon or incurred by or asserted against any Indemnified Party by reason of any of the following occurring during or after (but attributable to a period of time falling within) the Term: A. any demolition or razing or construction of any improvements or any other work or thing done in, on or about the Premises or any part thereof by Tenant or any member of the Tenant Group (defined below), including any claim that such work constitutes "public works"; B. any use, nonuse, possession, occupation, alteration, repair, condition, operation, maintenance or management of the Premises or any part thereof or of any tunnel, creek, ditch, detention area, sidewalk, curb or vault adjacent thereto by Tenant or any member of the Tenant Group; C. any act or failure to act on the part of Tenant or any member of the Tenant Group; D. any accident, injury (including death) or damage to any person or property occurring in, on or about the Premises or any part thereof or in, on or about any tunnel, creek, ditch, detention area, sidewalk, curb or vault adjacent thereto as a result of the act or neglect of Tenant or any member of the Tenant Group; E. any failure to perform or comply with any of the covenants, agreements, terms or conditions in this Lease on Tenant's part to be performed or complied with (other than the payment of money); F. any lien or claim which may be alleged to have arisen against or on the Premises, or any lien or claim which may be alleged to have arisen out of this Lease and created or permitted to be created by Tenant or any member of the Tenant Group against any assets of Landlord, or any liability which may be asserted against Landlord with respect thereto; G. any failure on the part of Tenant to keep, observe and perform any of the terms, covenants, agreements, provisions, conditions or limitations contained in the contracts and agreements affecting the Premises on Tenant's part to be kept, observed or performed; and H. any contest permitted pursuant to the provisions of this Lease. No agreement or covenant of Tenant in this Section 26.1 shall be deemed to exempt Landlord from, and Tenant's obligations under this Section 26.1 shall not include liability or damages for injury to persons or damage to property caused by or resulting from the negligence of Landlord, its agents or employees, in the operation or maintenance of the Premises. The obligations of Tenant under this Section 26.1 shall not be affected in any way by the absence in any case of covering insurance or by the failure or refusal of any insurance carrier to perform any obligation on its part underinsurance policies affecting the Premises or any part thereof. SECTION 26.2. WAIVER OF CLAIMS. Tenant waives all claims it may have against Landlord and Landlord's agents for damage or injury to person or property sustained by Tenant or any persons claiming through Tenant or by any occupant of the Premises, or by any other person, resulting from any part of the Premises becoming out of repair, or resulting from any accident on or about the Premises or resulting directly or indirectly from any act or neglect of any person. This Section 26.2. shall include, but not by way of limitation, damage caused by water, snow, frost, steam, excessive heat or cold, sewage, gas, odors, or noise, or caused 24

25 by bursting or leaking pipes or plumbing fixtures, and shall apply equally whether any such damage results from the act or neglect of Tenant or of any other person, and whether such damage be caused or result from anything or circumstance above mentioned or referred to, or to any other thing or circumstance whether of a like nature or of a wholly different nature. All Tenant's Equipment and other personal property belonging to Tenant or any occupant of the Premises that is in or on any part of the Premises shall be there at the risk of Tenant or of such other person only, and Landlord shall not be liable for any damage thereto or for the theft or misappropriation thereof. Notwithstanding the foregoing, nothing in this Section shall be construed as a waiver by Tenant of any claims arising out of Landlord's negligence. SECTION 26.3. LANDLORD'S INDEMNITY. Landlord will protect, indemnify and save Tenant, its partners, shareholders, employees, officers, directors, agents and their respective successors and assigns harmless from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including without limitation, reasonable attorneys' fees and expenses) imposed upon, incurred by or asserted against Tenant by reason of any accident, injury to or death of persons or loss of or damage to property occurring on or about the Premises or any part thereof or the adjoining properties, sidewalks, curbs, streets or ways resulting from the negligent act or omission of Landlord or anyone claiming by, through or under Landlord. ARTICLE XXVII SURRENDER SECTION 27.1. CONDITION. Upon the termination of this Lease whether by forfeiture, lapse of time or otherwise, or upon the termination of Tenant's right to possession of the Premises, Tenant will at once surrender and deliver up the Premises to Landlord, broom clean, in good order, condition and repair, reasonable wear and tear excepted. "Broom clean" means free from all debris, dirt, rubbish, personal property of Tenant, oil, grease, tire tracks or other substances, inside and outside of the Improvements and on the grounds comprising the Premises. Any damage caused by removal of Tenant from the Premises, including any damages caused by removal of Tenant's Equipment as!defined above, shall be repaired and paid for by Tenant prior to the expiration of the Term. SECTION 27.2. REMOVAL OF TENANT'S EQUIPMENT. Upon the termination of this Lease by lapse of time, or otherwise, Tenant may remove Tenant's Equipment provided, however, that Tenant shall repair any injury or damage to the Premises which may result from such removal. If Tenant does not remove Tenant's Equipment from the Premises prior to the end of the Term, however ended, Landlord may, at its option, remove the same and deliver the same to any other place of business of Tenant or warehouse the same, and Tenant shall pay the cost of such removal (including the repair of any injury or damage to the Premises resulting from such removal), delivery and warehousing to Landlord on demand, or Landlord may treat tenant's equipment as having been conveyed to Landlord with this Lease as a Bill of Sale, without further payment or credit by Landlord to Tenant. SECTION 27.3. HOLDOVER. If Tenant retains possession of the Premises or any part thereof after the termination of the Term, by lapse of time and otherwise, then Tenant shall pay to Landlord monthly rent, at one hundred fifty percent (150%) of the rate payable for the month immediately preceding said holding over (including increases for additional rent which Landlord may reasonably estimate), computed on a per-month basis, for each month or part thereof (without reduction for any such partial month) that Tenant thus remains in possession, and in addition thereto, Tenant shall pay Landlord all damages, consequential as well as direct, sustained by reason of Tenant's retention of possession. The provisions of this paragraph do not exclude the Landlord's rights of re-entry or any other right hereunder. Any such extension or renewal shall be subject to all other terms and conditions herein contained. 25

26 ARTICLE XXVIII COVENANT OF QUIET ENJOYMENT SECTION 28.1. COVENANT OF QUIET ENJOYMENT. Landlord covenants that Tenant, on paying the Rent and all other charges payable by Tenant hereunder, and on keeping, observing and performing all the other terms,covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, all of which obligations of Tenant are independent of Landlord's obligations hereunder, shall, during the Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreement hereof free from hindrance by Landlord or any person claiming by, through or under Landlord. ARTICLE XXIX NO RECORDING SECTION 29.1. SHORT FORM OF LEASE. This Lease shall not be recorded. ARTICLE XXX NOTICES SECTION 30.1. NOTICES. All notices, consents, approvals to or demands upon or by Landlord or Tenant desired or required to be given under the provisions hereof, shall be in writing. Any notices or demands from Landlord to Tenant shall be deemed to have been duly and sufficiently given if a copy thereof has been personally served, forwarded by expedited messenger or recognized overnight courier service with evidence of delivery or mailed by United States registered or certified mail in an envelope properly stamped and addressed to Tenant at Tenant's Mailing Address, with a copy to Craig P. Colmar, Esq., Johnson & Colmar, 300 South Wacker Drive, Suite 1000, Chicago, Illinois 60606, or at such other address as Tenant may theretofore have furnished by written notice to Landlord. Any notices or demands from Tenant to Landlord shall be deemed to have been duly and sufficiently given if forwarded by expedited messenger or recognized overnight courier service with evidence of delivery or mailed by United States registered or certified mail in an envelope properly stamped and addressed to Landlord at Landlord's Mailing Address, with a copy to Harry S. Wolin, Esq., Cohon, Raizes & Regal, 208 South LaSalle Street, Suite 1860, Chicago, Illinois 60604-1160, or at such other address as Landlord may theretofore have furnished by written notice to Tenant. The effective date of such notice shall be the date of actual delivery, except that if delivery is refused, the effective date of notice shall be the date delivery is refused. ARTICLE XXXI COVENANTS RUN WITH LAND SECTION 31.1. COVENANTS. All of the covenants, agreements, conditions and undertakings in this Lease contained shall extend and inure to and be binding upon the heirs, executors, administrators, successors and assigns of the respective parties hereto, the same as if they were in every case specifically named, and shall be construed as covenants running with the Land, and wherever in this Lease reference is made to either of the parties hereto, it shall be held to include and apply to, wherever applicable, the heirs, executors, administrators, successors and assigns of such party. Nothing herein contained shall be construed to grant or confer upon any person or persons, firm, corporation or governmental authority, other than the parties hereto, their heirs, executors, administrators, successors and assigns, any right, claim or privilege by virtue of any covenant, agreement, condition or undertaking in this Lease contained. SECTION 31.2. RELEASE OF LANDLORD. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of title to the Premises, and in the event of any transfer or transfers of the title, Landlord herein named (and in the case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all personal liability as respects the performance of any covenants or obligations on the part of Landlord 26

27 contained in this Lease thereafter to be performed; provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee. ARTICLE XXXII ENVIRONMENTAL MATTERS SECTION 32.1. DEFINED TERMS. A. The term "HAZARDOUS MATERIALS", when used herein, shall include, but shall not be limited to, any substances, materials or wastes that are regulated by any local governmental authority, the state where the Premises is located, or the United States of America because of toxic, flammable, explosive, corrosive, reactive, radioactive or other properties that may be hazardous to human health or the environment, including without limitation, above or underground storage tanks, flammables, explosives, radioactive materials, radon, petroleum and petroleum products, petroleum products (other than petroleum products that are normally contained in motor vehicles to the extent such products are not released), urea formaldehyde foam insulation, methane, lead-based paint, polychlorinated biphenyl compounds, hydrocarbons or like substances and their additives or constituents, pesticides and any other special, toxic or hazardous materials, wastes, substances or materials of any kind, including without limitation, those now or hereafter defined, determined or identified as "hazardous substances," "hazardous materials," "toxic substances" or "hazardous wastes" in any Environmental Law. B. "ENVIRONMENTAL LAW" shall mean any Federal, state or local law, statute, ordinance, code, rule, regulation, policy, common law, license, authorization, decision, order, injunction, which pertains to health, safety, any Hazardous Material, or the environment (including but not limited to ground or air or water or noise pollution or contamination, and underground or above-ground tanks) and shall include, without limitation, the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 et seq., as amended by the Hazardous and Solid Waste Amendments of 1984; the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq. ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"); the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq.; the Clean Air Act, 42 U.S.C. Section 7401 et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; the Illinois Environmental Protective Act, 415 ILCS 4/1 et seq.; the Municipal Code of the City of Chicago; the Clean Air Act (42 U.S.C. Section 7401 et seq., "CAA"); the Rivers and Harbors Act, (33 U.S.C. Section 401 et seq., "RHA"); the Emergency Planning and Community Right-to-Know Act of 1986 (41 U.S.C. 11001 et seq., "EPCRA"), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. 136 to 136y); the Oil Pollution Act of 1990 (33 U.S.C. 2701 et seq., "OPA"); and the Occupational Safety and Health Act (29 U.S.C. 651 et seq., "OSHA"); and any other local, state or federal environmental statutes, and all rules, regulations, orders and decrees now or hereafter promulgated under any of the foregoing, as any of the foregoing now exist or may be changed or amended or come into effect in the future. C. "ENVIRONMENTAL CLAIM" shall mean and include any demand, notice of violation, inquiry, cause of action, proceeding or suit for damages (including reasonable attorneys' and experts' fees), losses, injuries to person or property, damages to natural resources, fines, penalties, interest, cost recovery, compensation, or contribution resulting from or in any way arising in connection with any Hazardous Material or any Environmental Law. D. "PRE-EXISTING CONDITION" shall mean the presence of any Hazardous Material on the Premises, to the extent such Hazardous Material was not introduced onto the Premises after the Commencement Date. E. "ENVIRONMENTAL CONDITION" shall mean the existence of any Hazardous Material on the Premises other than a Pre- Existing Condition, (i) in violation of, or requiring cleanup under, any Environmental Law 27

28 or the provisions of this Article XXX; or (ii) which subjects Landlord to liability for any Environmental Claim or which must be remediated to prevent Landlord from incurring liability as a result of such Environmental Claim. F. "ENVIRONMENTAL REMEDIATION" shall mean any investigative, cleanup, removal, containment, remedial or other action relating to an Environmental Condition (i) required pursuant to any Environmental Law, or (ii) necessary to prevent Landlord from incurring, or relieve Landlord from, liability as a result of an Environmental Claim. G. "REMEDIATING PARTY" shall mean that party which has elected (or is deemed to have elected) to perform any Environmental Remediation. H. "TENANT GROUP" shall mean any of all of Tenant's agents, employees, representatives, contractors, workmen, mechanics, suppliers, customers, guests, licensees, invitees, sublessees, assignees and all of their respective successors and assigns or any party claiming by, through or under any of them. SECTION 32.2. TENANT'S COVENANTS WITH RESPECT TO ENVIRONMENTAL MATTERS. During the Term, Tenant, at its sole cost and expense, shall: A. comply with all Environmental Laws relating to the use and operation of the Premises; B. keep the Premises free of Hazardous Materials; C. not exacerbate a Pre-Existing Condition; D. in the case of an Environmental Condition: (1) promptly, but not later than three (3) business days after the discovery of an Environmental Condition, notify Landlord of the Environmental Condition; (2) furnish a letter of credit, personal guaranty, escrow of funds or other security reasonably acceptable to Landlord to secure performance of Environmental Remediation and to assure Landlord that all necessary funds are readily available to Landlord to pay the costs and expenses of Environmental Remediation; (3) submit to Landlord for review and approval prior to commencement of any Environmental Remediation, a proposed scope of work and timetable therefor, and provide Landlord with a cost estimate for same; (4) diligently perform Environmental Remediation, as approved by Landlord; (5) submit to Landlord in a timely manner for review and comment the documentation and information required by Sections 30.5 and 30.6 relating to each phase of the Environmental Remediation; and (6) comply with applicable release reporting requirements and provide Landlord with any information necessary to comply; E. not install or operate any above or below ground tank, sump, pit, pond, lagoon or other storage or treatment vessel or device on the Premises without first obtaining Landlord's prior written consent; F. not handle, use, generate, treat, dispose of or permit the use, handling, generation, treatment, storage or disposal of any Hazardous Materials in, on, under, around or above the Premises at any time during the Term. 28

29 SECTION 32.3. CONDUCT OF TENANT. If Tenant, with the prior written authorization of Landlord, which authorization may be granted or denied by Landlord in its sole and absolute discretion generates, uses, transports, stores, treats or disposes of any Hazardous Materials: A. Tenant shall, at its own cost and expense, comply with all Environmental Laws relating to Hazardous Materials; B. Tenant shall (i) not dispose of any Hazardous Materials in dumpsters or trash containers or at any other location at the Premises; (ii) not discharge any Hazardous Materials into drains or sewers; (iii) not cause or allow the release, discharge, emission or run-off of any Hazardous Materials to air, to surface waters, to the land, to ground water, whether directly or indirectly; (iv) at Tenant's own cost and expense, arrange for the lawful transportation and off-site disposal of all Hazardous Materials generated by Tenant; (v) provide secondary containment around all Hazardous Materials storage containers, storage facilities and above ground storage tanks; (vi) conduct all necessary environmental inspections, such as, but not limited to, asbestos inspections prior to any renovation or demolition, as required by 40 CFR Part 61 and provide copies of all such reports to the Landlord; (vii) comply with all reporting requirements under any local, state or federal ordinance, statute or regulation, such as, but not limited to, toxics inventory reporting under the Emergency Planning and Community Right-to-Know Act, the provisions under 40 CFR Part 61, or various regulations controlling the emissions into the atmosphere of volatile organic compounds and provide copies of all such reports and notifications to Landlord; and (viii) use only highly skilled people to address all environmental issues associated with the leasehold, that such people and all employees of the Tenant shall receive all required training or certification under any local, state or federal law specifically mentioned or alluded to in Section 32.1 of this Lease; C. Tenant shall promptly provide Landlord with copies of all communications, permits or agreements with any governmental authority or agency (federal, state or local) or any private entity relating in any way to the violation or alleged violation of any Environmental Laws or to any violation of Tenant's obligations under subparagraph (B) above; D. Landlord and Landlord's agents and employees shall have the right to enter the Premises and/or conduct appropriate tests for the purpose of ascertaining that Tenant complies with all applicable laws, rules or permits relating in any way to the presence of Hazardous Materials on the Premises; and E. Upon the written request of Landlord no more frequently than once every year, or on any other occasion in the event that Landlord has reason to believe an environmental problem exists at the Premises, Tenant shall provide Landlord the results of appropriate tests of air, water and soil to demonstrate (i) that Tenant is in compliance with all applicable laws, rules or permits relating in any way to the presence of any Hazardous Materials on the Premises and (ii) the lack of any releases, discharges or emissions. If the presence, release, threat of release, placement on or in the Premises occurs or is caused in whole or in part during the Term of this Lease, or the generation, transportation, storage, treatment, or disposal at the Premises or is caused in whole or in part during the Term of this Lease of any Hazardous Materials gives rise to liability (including, but not limited to, a response action, remedial action, or removal action) under any Environmental Laws or common law theory, including, but not limited to nuisance, strict liability, negligence and trespass, Tenant shall promptly take any and all remedial and removal action necessary to clean up the Premises containing such Hazardous Materials and mitigate exposure to liability arising from the Hazardous Materials, whether or not required by law. 29

30 SECTION 32.4. EXACERBATION. If Tenant exacerbates a Pre-Existing Condition (including as a result of Tenant's investigative or remediation activities) during the Lease term, that the provisions of this Article XXXII shall apply to such exacerbation of the Pre-Existing Condition, and Tenant shall perform Environmental Remediation as to such exacerbation. Tenant shall be responsible for all fines and penalties caused by Tenant or to the extent exacerbated by Tenant (including Tenant's environmental investigation or remediation activities) at any time during the Lease Term. SECTION 32.5. RIGHTS OF INSPECTION. Landlord and their respective agents and representatives shall have a right of entry and access to the Premises at any time in Landlord's discretion for the purposes of (i) inspection of the documentation relating to Hazardous Materials or environmental matters maintained by Tenant or occupant of the Premises; (ii) ascertaining the nature of the activities being conducted on the Premises and investigating whether Tenant is in compliance with its obligations under Article XXXII of this Lease; and (iii) determining the type, kind and quantity of all products, materials and substances brought onto the Premises, or made or produced thereon. Landlord and its agents and representatives shall have the right to take samples in quantities sufficient for analysis of all products, materials and substances present on the Premises including, but not limited to, samples, products, materials or substances brought onto or made or produced on the Premises by Tenant or occupant of the Premises or their respective agents, employees, contractors or invitees and shall also have the right to conduct other tests and studies as may be reasonably determined by Landlord to be appropriate in order to investigate whether Tenant is in compliance with its obligations under Article XXXII. SECTION 32.6. COPIES OF NOTICES. During the term of this Lease, Tenant and Landlord shall each provide the other promptly with copies of all summons, citations, directives, information inquiries or requests, notices of potential responsibility, notices of violation or deficiency, orders or decrees, Environmental Claims, complaints, investigations, judgments, letters, notices of environmental liens or response actions in progress, and other communications, written or oral, actual or threatened, received in the case of Tenant, by Tenant or occupant of the Premises, or in the case of Landlord, by Landlord, from the United States Environmental Protection Agency, Occupational Safety and Health Administration, Illinois Environmental Protection Agency, or other federal, state or local agency or authority, or any other entity or individual (including both governmental and non-governmental entities and individuals), concerning (a) any actual or alleged release of a Hazardous Material on, to or from the Premises; (b) the imposition of any lien on the Premises relating to any Hazardous Material; (c) any actual or alleged violation of or responsibility under Environmental Laws; or (d) any actual or alleged liability under any theory of common law tort or toxic tort, including without limitation, negligence, trespass, nuisance, strict liability or ultrahazardous activity. SECTION 32.7. TESTS AND REPORTS. A. Upon written request by Landlord, Tenant shall provide Landlord, at Tenant's expense, with (i) copies of all environmental reports and tests prepared or obtained by or for Tenant or occupant of the Premises; (ii) copies of transportation and disposal contracts (and related manifests, schedules, reports and other information) entered into or obtained by Tenant with respect to any Hazardous Materials; (iii) copies of any permits issued to Tenant under Environmental Laws with respect to the Premises; (iv) prior to filing, copies of any and all reports, notifications and other filings to be made by Tenant or occupant of the Premises to any federal, state or local environmental authorities or agencies and after filing, copies of such filings; and (v) any other applicable documents and information with respect to environmental matters relating to the Premises. Tenant shall be obligated to provide such documentation only to the extent within Tenant's possession or control. B. In addition, if Landlord shall ever reasonably believe that there exists any breach by Tenant of the terms of this Article XXXII, or if any Environmental Claim is made or threatened, or if a default shall have occurred under the Lease, or at Landlord's discretion, one (1) time per calendar year, Landlord shall have the right, but not the duty, to enter upon the Premises and conduct an environmental assessment of the 30

31 Premises, including but not limited to a visual site inspection, review of records pertaining to the site and interviews of Tenant's representatives or others concerning the site use and history and other matters. The investigation may also include reasonable subsurface or other invasive investigation of the Premises including but not limited to soil borings and sampling of site soil and ground or surface water for laboratory analysis, as may be recommended by the consultant as part of its inspection of the Premises or based upon such other reasonable evidence of Environmental Conditions warranting such subsurface or other invasive investigation. Landlord shall have the right, but not the duty, to retain any independent professional consultant to conduct any such environmental assessment; provided, however, that Landlord agrees to limit, in the absence of an Environmental Claim or default under this Article XXXII, the number of such environmental assessments to one (1) per calendar year for the Lease Term. Tenant will cooperate with the Landlord's consultant and will supply to the consultant, promptly upon request, any information reasonably requested by Landlord to facilitate the completion of the environmental assessment. Landlord and its designees are hereby granted access to the Premises at any time or times, upon reasonable notice (which may be written or oral) to perform such environmental assessment. In exercising its right, Landlord shall use its reasonable efforts to minimize disruption of operations at the Premises. Any costs associated with performance of the environmental assessment, including but not limited to the consultant fees and restoration of any property damaged by such environmental assessment, shall be paid by Landlord, unless such investigation discloses an Environmental Condition, in which case Tenant shall pay such costs. C. Tenant shall pay Tenant's Proportion of all costs incurred by Landlord for consultant fees to review and comment on all reports, and other documentation and information required by Sections 32.5 and 32.6 concerning the work, and to monitor the performance of any Environmental Remediation performed by Tenant. SECTION 32.8. INDEMNIFICATION. Tenant shall reimburse, defend, indemnify and hold Landlord and any other Indemnified Party free and harmless from and against any and all Environmental Claims, response costs, losses, liabilities, damages, costs and expenses, including, without limitation, loss of rental income, loss due to business interruption, and reasonable attorneys' fees and costs, arising out of or in any way connected with any or all of the following: A. any Hazardous Materials (other than a Pre-Existing Condition) which, at any time during the Term, are or were actually or allegedly generated, stored, treated, released, disposed of or otherwise located on or at the Premises as a result of the act or omission of Tenant or any other member of the Tenant Group (regardless of the location at which such Hazardous Materials are now or may in the future be located or disposed of), including, but not limited to any and all (i) liabilities under any common law theory of tort, nuisance, strict liability, ultrahazardous activity, negligence or otherwise based upon, resulting from or in connection with any Hazardous Material; (ii) obligations to take response, cleanup or corrective action pursuant to any Environmental Laws; and (iii) the costs and expenses of investigation or remediation in connection with the decontamination, removal, transportation, incineration or disposal of any of the foregoing; and B. any actual or alleged illness, disability, injury or death of any person, in any manner arising out of or allegedly arising out of exposure to Hazardous Materials or other substances or conditions present at the Premises as a result of the act or omission of any member of the Tenant Group (including, but not limited to, ownership, operation and disposal of any equipment which generates, creates or uses electromagnetic files, x-rays, other forms of radiation and radioactive materials), regardless of when any such illness, disability, injury or death shall have occurred or been incurred or manifested itself; and C. any actual or alleged failure of Tenant or any member of the Tenant Group at any time and from time to time to comply with all applicable Environmental Laws; D. any failure by Tenant to comply with its obligations under this Article XXXIII relating to an Environmental Condition for which Tenant is Remediating Party; 31

32 E. Tenant's failure to provide all information, make all submissions, and take all steps required by all applicable governmental authorities; F. the imposition of any lien for damages caused by, or the recovery of any costs for, the remediation cleanup of Hazardous Material as a result of events that took place during the Term of this Lease as a result of the act or omission of Tenant or any member of the Tenant Group; G. costs of removal of any and all Hazardous Material from all or any portion of the Premises, which Hazardous Material were placed on the Premises during the Term of this Lease as a result of the act or omission of Tenant or any member of the Tenant Group; H. costs incurred to comply, in connection with all or any portion of the Premises, with all governmental regulations with respect to Hazardous Materials on, in, under or affecting the Premises, which Hazardous Materials were placed on the Premises during the Term of this Lease as a result of the act or omission of Tenant or any member of the Tenant Group; I. any spills, discharges, leaks, escapes, releases, dumping, transportation, storage, treatment or disposal of any Hazardous Materials which occur during the Term of this Lease, but only to the extent that such Hazardous Materials originated from or were or are located on the Premises. In the event Environmental Claims or other assertion of liability shall be made against any Indemnified Party for which the Indemnified Party is entitled to indemnity hereunder, the procedure set forth in Section 26.1 shall apply. The obligations of Tenant under this Section 32.8 shall survive any termination or expiration of this Lease. SECTION 32.9. TENANT REPRESENTATIONS WITH RESPECT TO ENVIRONMENTAL MATTERS. Tenant acknowledges that the Premises are being leased in their present "as is" condition. Tenant further acknowledges that Landlord has made no representation whatsoever regarding Hazardous Materials on or about the Premises. SECTION 32.10. LIABILITY OF LANDLORD. Landlord shall reimburse, defend, indemnify and hold Tenant harmless from and against any and all Environmental Claims, response costs, losses, liabilities, damages, costs and expenses, including, without limitation, reasonable attorneys' fees and costs, arising out of or in any way connected with any Hazardous Materials which, at any time during the Term, are or were actually or allegedly generated, stored, treated, released, disposed of or otherwise located on or at the Premises as a result of the act or omission of Landlord. Subject to Tenant's obligations under this Article XXXII, Landlord agrees that it shall be liable to remediate any Pre-Existing Condition, to the extent required by Environmental Laws. ARTICLE XXXIII MISCELLANEOUS SECTION 33.1. CAPTIONS. The captions of this Lease are for convenience only and are not to be construed as part of this Lease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. SECTION 33.2. SEVERABILITY. If any covenant, agreement or condition of this Lease or the application thereof to any person, firm or corporation or to any circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such covenant, agreement or condition to persons, firms or corporations or to circumstances other than those as to which it is invalid or unenforceable, 32

33 shall not be affected thereby. Each covenant, agreement or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. SECTION 33.3. APPLICABLE LAW. This Lease shall be construed and enforced in accordance with the laws of the state where the Premises are located. SECTION 33.4. AMENDMENTS IN WRITING. None of the covenants, terms or conditions of this Lease, to be kept and performed by either party, shall in any manner be altered, waived, modified, changed or abandoned, except by a written instrument, duly signed, acknowledged and delivered by the other party. SECTION 33.5. RELATIONSHIP OF PARTIES. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. SECTION 33.6. BROKERAGE. Tenant warrants that it has no dealings with any real estate broker or agent in connection with this lease other than Landlord's Broker and Tenant's Broker, and Tenant covenants to pay, hold harmless and indemnify Landlord from and against any and all cost, expense or liability for any compensation, commissions and charges claimed by any other broker or other agent with respect to this Lease or the negotiation thereof arising out of any acts of Tenant. SECTION 33.7. NO ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated and additional rent shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. SECTION 33.8. JOINT EFFORT. The preparation of this Lease has been a joint effort of the parties hereto and the resulting documents shall not, solely as a matter of judicial construction, be construed more severely against one of the parties than the other. SECTION 33.9. TIME. Time is of the essence of this Lease, and all provisions herein relating thereto shall be strictly construed. SECTION 33.10. LANDLORD'S CONSENT. Landlord's granting of any consent under this Lease, or Landlord's failure to object to any action taken by Tenant without Landlord's consent required under this Lease, shall not be deemed a waiver by Landlord of its rights to require such consent for any further similar act by Tenant. No waiver by Landlord of any other breach of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach or to be a waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. None of the Tenant's covenants under this Lease, and no breach thereof, shall be waived, altered or modified except by a written instrument executed by Landlord. SECTION 33.11. NO PARTNERSHIP. Landlord is not, and shall not be deemed to be, in any way or for any purpose, the partner, employer, principal, master or agent of or with Tenant. SECTION 33.12. LANDLORD'S LIABILITY. Notwithstanding anything to the contrary herein contained, there shall be absolutely no personal liability asserted or enforceable against Landlord or on any persons, firms or entities who constitute Landlord with respect to any of the terms, covenants, conditions and provisions of this Lease, and Tenant shall, subject to the rights of any mortgagee, look solely to the interest of Landlord, its successors and assigns in the Premises for the satisfaction of each and every remedy of Tenant in the event of default by Landlord hereunder; such exculpation of personal liability is absolute and 33

34 without any exception whatsoever. If the entity constituting Landlord is a partnership, Tenant agrees that the deficit capital account of any such partner shall not be deemed an asset or property of said partnership. Notwithstanding anything in this Lease to the contrary, with respect to any provision of this Lease which requires Landlord's consent or approval, Tenant shall not be entitled to make, nor shall Tenant make, any claim for (and Tenant hereby waives any claim for) money damages as a result of any claim by Tenant that Landlord has unreasonably withheld or unreasonably delayed any consent or approval, but Tenant's sole remedy shall be an action or proceeding to enforce such provision, or for specific performance, injunction or declaratory judgment. SECTION 33.13. LANDLORD RIGHTS. This Lease does not grant any rights to light or air over or about the Premises. Landlord specifically excepts and reserves to itself the use of any roofs, the exterior and structural components of the Building, all rights to the land and improvements below the improved floor level of the Building, to the improvements and air rights above the Building and to the improvements and air rights located outside the demising walls of the building and to such areas within the Building required for installation of utility lines and other installations and to such portions of the Premises necessary to access, maintain and repair same, and no rights with respect thereto are conferred upon Tenant. SECTION 33.14. ENTIRE AGREEMENT. It is understood and agreed that all understandings and agreements heretofore had between the parties hereto are merged in this Lease, the exhibits annexed hereto and the instruments and documents referred to herein, which alone fully and completely express their agreements, and that no party hereto is relying upon any statement or representation, not embodied in this Agreement, made by the other. Each party expressly acknowledges that, except as expressly provided in this Agreement, the other party and the agents and representatives of the other party have not made, and the other party is not liable for or bound in any manner by, any express or implied warranties, guaranties, promises, statements, inducements, representations or information pertaining to the transactions contemplated hereby. ARTICLE XXXIV RENEWAL OPTIONS SECTION 34.1. RENEWAL OPTION. Tenant shall have the option ("Renewal Option") to renew the Initial Term for all of the Premises as of the expiration date of the Initial Term, for one (1) additional period of five (5) years ("Renewal Term") upon the following terms and conditions: A. Tenant gives Landlord written notice of its exercise of the Renewal Option prior to April 30, 2005. B. Tenant is not in default under this Lease either on the date Tenant delivers the notice required under subparagraph 34.1A. above or at any time thereafter prior to the commencement of the Renewal Term so exercised. C. Landlord shall be provided with evidence satisfactory to it of Tenant's compliance with the terms and conditions of Article XXXII hereof. D. All of the terms and provisions of this Lease (except this Article XXXIV) shall be applicable to the Renewal Term, except that Base Rent for the Renewal Term shall be determined as follows. Upon receipt of a notice from Tenant exercising the Renewal Option Landlord shall promptly advise Tenant of Landlord's determination of the Fair Value (as hereinafter defined). Landlord and Tenant shall thereafter attempt in good faith to agree upon the amount of Base Rent to be paid by Tenant for each year during the Renewal Term. In the event that Landlord and Tenant are unable to agree upon the amount of Base Rent to be paid by Tenant for each year during the Renewal Term, either Landlord or Tenant may, upon notice to the other at any time after June 30, 2005, discontinue discussions with the 34

35 other party in which event the exercise of the Renewal Option shall be deemed revoked and the term of the Lease shall expire on December 31, 2005. For purposes of this Lease, "Fair Value" shall mean Landlord determination, utilizing its reasonable judgment, of an annual amount per rentable square foot for a term equivalent to the period for which Fair Value is being determined beginning with the first (1st) day of the subject period that a willing, creditworthy, new non-equity tenant leasing comparable space to Tenant's would pay and a willing, comparable landlord of an industrial building comparable to the Building in the Chicago metropolitan area ("Market") would accept at arm's length, giving appropriate consideration to annual rental rate per rentable square foot, rental escalations, length of lease term, size and location of the premises being leased, and other generally applicable terms and conditions prevailing for comparable space in comparable buildings located in the Market. Upon Tenant's written request, Landlord shall provide Tenant with the information Landlord relied upon to determine Fair Value. SECTION 34.2. "AS IS" CONDITION. Tenant agrees to accept the Premises to be covered by this Lease during the Renewal Term in an "as is" physical condition and Tenant shall not be entitled to receive any allowance, credit, concession or payment from Landlord for the improvement thereof. SECTION 34.3. AMENDMENT. In the event that Tenant exercises the Renewal Option, then Landlord and Tenant shall mutually execute and deliver an amendment to this Lease reflecting the renewal of the Term on the terms herein provided, which amendment shall be executed and delivered promptly after the determination of Rent to be applicable to the Renewal Term as hereinabove provided. SECTION 34.4. TERMINATION. The Renewal Options herein granted shall automatically terminate upon the earliest to occur of (i) the expiration or termination of this Lease, (ii) the termination of Tenant's right to possession of the Premises, (iii) any assignment or subletting by Tenant, except as to assignments or subleases to which Landlord has consented pursuant to Section 16.1 hereof, or (iv) the failure of Tenant to timely or properly exercise the Renewal Option. SECTION 34.5. NO COMMISSIONS. Landlord and Tenant acknowledge and agree that no real estate brokerage commission or finder's fee shall be payable by Landlord in connection with any exercise by Tenant of the Renewal Option herein contained. IN WITNESS WHEREOF, the parties have executed this Lease as of the date set forth above. LANDLORD: CURTO REYNOLDS OELERICH, INC., a Delaware corporation By: /s/ John Oelerich ------------------------------------------ Its: President TENANT: STERICYCLE, INC., a Delaware corporation By: /s/ Mark C. Miller ------------------------------------------ Its: President and Chief Executive Officer 35

36 EXHIBIT "A" LEGAL DESCRIPTION [Omitted] 36

37 EXHIBIT "B" TENANT ESTOPPEL CERTIFICATE [Omitted] 37

1 Terrell, Texas AGREEMENT FOR SUBLEASE Exhibit 10.4 THIS SUBLEASE (the "Sublease") is entered into effective as of April 1, 1997 by and between Waste Management of Texas, Inc., a Texas corporation ("Lessor"), and Stericycle, Inc., a Delaware corporation ("Lessee"), WITNESSETH: ARTICLE 1 PREMISES AND TERM Lessor, for and in consideration of the rents herein reserved and the covenants and agreements herein contained on the part of the Lessee to be kept observed and performed, has demised and leased, and does by these presents demise and lease to the Lessee a certain parcel (or parcels) of real estate located at the address contained in and the legal description described on Exhibit A attached hereto and made a part hereof. TO HAVE AND TO HOLD the above described real estate, together with the buildings and improvements situated thereon and the rights, privileges and appurtenances thereunto belonging or appertaining (the "Premises"), unto the Lessee for and during the term of three (3) years, commencing on April 1, 1997 and ending on March 31, 2000, unless said term shall be sooner terminated as herein provided. Lessor hereby also leases to Lessee the equipment, furniture, fixtures and other tangible personal property located on the Premises, which personal property is listed on the attached Exhibit B (the "Personal Property"). The Lessee may terminate this Sublease, effective as of the last day of any calendar month, upon six months' prior written notice to the Lessor given at any time during the term of this Sublease. ARTICLE 2 RENT SECTION 2.1 In consideration of the leasing aforesaid, Lessee hereby covenants and agrees to pay Lessor, at the office of Lessor at WMI of Dallas, 12160 Garland Road, Dallas, Texas 75218 (Attention: Controller), or at such other place as the Lessor may from time to time designate in writing, aggregate rental of [Omitted; filed separately with the Securities and Exchange Commission] for the term of this Sublease (sometimes herein referred to as the "rent") payable monthly in installments of [Omitted; filed separately with the Securities and Exchange Commission] each on the first day of each and every month of the term hereof beginning April 1, 1997. However, if the term of this Sublease shall commence on a date other than the first day of a calendar month or end on a day other than the last day of a calendar month, the first and last month's rent shall be prorated based upon the ratio that the number of days in the term within such month bears to the total number of days in such month. In the event that Lessor makes any capital improvements to the Premises which are required in connection with the continued operation at the Premises of an incinerator or autoclave for the treatment of medical waste (or which are required to be made by Lessor under Section 4.2 of this Sublease) and as a result the "net book value" of the Premises is increased, the monthly rent payable under this Sublease shall be increased to reflect the resulting increases in the monthly capital charge (at [omitted; filed separately with the Securities and Exchange Commission] % per annum) and monthly depreciation in respect of the Premises. This increase in the monthly rent shall be determined in a manner consistent with the determination of the initial monthly rent as shown by the "Monthly Total" on Schedule 4 to the Asset Purchase Agreement dated December 20, 1996 (the "Asset Purchase Agreement") entered into by Lessee, Waste Management, Inc. ("WMI") and certain subsidiaries of WMI. 1

2 SECTION 2.2 Lessee agrees to pay in addition to the rent herein reserved, all sums which may become due by reason of the failure of Lessee to comply with all the covenants of this Sublease and any and all damages, costs, expenses and impositions which Lessor may suffer or incur by reason of any default of the Lessee or failure on its part to comply with all the covenants of this Sublease, and each of them. SECTION 2.3 Upon the signing of this Sublease, Lessee shall pay to Lessor the first month's rent and as a security deposit the sum of [Omitted; filed separately with the Securities and Exchange Commission] which shall secure the various covenants of Lessee under this Sublease, including payment of rent. Lessor shall keep such security deposit and shall return the same to Lessee within thirty (30) days of the termination of Lessee's tenancy hereunder, without interest. In the event that Lessee shall breach any provision of this Sublease which may be cured through the payment of money, or the hiring of services, Lessor shall be entitled to so cure, using the Lessee's security deposit, and upon written notice to Lessee, Lessee shall within twenty-one (21) days replenish the security deposit to the sum set forth above. ARTICLE 3 NET LEASE SECTION 3.1 It is the purpose and intent of Lessor and Lessee that the rental provided in Article 2 during the term of this Sublease shall be net to Lessor, except for the items noted in Sections 4.2 and 4.4 of this Sublease, and that, except for such items, all costs, expenses, real estate taxes and obligations of every kind and nature whatsoever relating to the Premises which may arise during the term of this Sublease shall be paid by Lessee, and Lessor shall be indemnified and saved harmless by Lessee against the same. SECTION 3.2 Lessee shall pay all charges for natural gas, water, electricity and telephone services used on the Premises during the term of this Sublease. ARTICLE 4 USE, MAINTENANCE, REPAIRS AND ACCESS SECTION 4.1 Lessee and all persons claiming by, through or under Lessee may use and occupy the Premises for the treatment of medical waste and office purposes solely in compliance with all federal, state and local laws and regulations. SECTION 4.2 Throughout the term of this Sublease, Lessee shall, at its cost and expense properly, maintain and repair all structures and improvements, including heating, plumbing, ventilating and air conditioning systems, and all fixtures, equipment and furnishings; provided however, that Lessor shall be obligated to make promptly and at its own expense all structural repairs which are required on the Premises to the extent that the aggregate cost of such repairs exceed $25,000 in any calendar year; and provided further, however, that neither Lessor nor Lessee shall repair or replace any capital structures or improvements without first having obtained the prior written consent of the other party. Lessee may, in its discretion and at its expense, make any alterations and changes it deems necessary to the Premises for the purpose of best serving its business, provided that it first obtains the written consent of the City of Terrell. SECTION 4.3 Lessor and Lessee agree that any and all fixed improvements made to the Premises by Lessee shall become the sole property of Lessor upon termination of this Sublease as long as said improvements do not detract from the fair market value of the Premises, in which case, Lessee agrees to remove all of said improvements and return the Premises to Lessor in the same condition in which the Premises were received on the commencement date of this Sublease, normal wear and tear excepted. In any case, Lessee shall be allowed to remove all personal property owned by Lessee from the Premises. SECTION 4.4 Lessee shall not be responsible for any costs of Lessor under Lessor's covenants of quiet enjoyment and peaceable possession or Lessor's taxes due on Lessor's income, gross receipts or other similar items that are not reasonably considered to be in the nature of real estate taxes. 2

3 SECTION 4.5 Lessee may, with the prior consent of the City of Terrell, make any alterations and changes it deems necessary to the Premises for the purpose of best serving its business. If Lessee shall alter or change the Premises during the term of this Sublease, Lessee shall make such alterations in compliance with the Americans with Disabilities Act of 1990 ("ADA") and all statutes, ordinances, laws, orders, rules, regulations and requirements of all applicable federal state, county and other agencies or authorities now in effect with respect to the use, occupation or alteration of the Premises ("Laws") and, upon request of Lessor, shall deliver evidence thereof reasonably satisfactory to Lessor. Lessor hereby represents that the Premises are currently in compliance with the ADA and all other Laws and agrees to indemnify Lessee for any damages or expenses (including attorneys' fees) incurred by Lessee as a result of Lessor's breach of the foregoing representation. SECTION 4.6 During the term of this Sublease, Lessee shall keep, afford and allow access to Lessor to the Premises at all reasonable times. Except in an emergency, Lessor shall give at least twenty four (24) hours' advance notice, written or oral of its intent to gain access to the Premises. SECTION 4.7 Lessee shall vacate and deliver up the Premises upon the expiration of the term of this Sublease, or any renewal thereof or sooner termination of the term of this Sublease, in the same condition that the Premises were in as of the date hereof, reasonable wear and tear excepted. ARTICLE 5 INDEMNIFICATION SECTION 5.1 Lessee agrees to defend, indemnify and save Lessor harmless from and against any and all liability, loss, damage, and Environmental Damages, as defined herein, and expense (including reasonable attorneys' fees) and from and against any and all suits, claims and demands of every kind and nature made by or on behalf of any and all persons, firms or corporations, provided that any of the foregoing (i) are due to Lessee's negligence, willful misconduct or breach hereof, (ii) arise out of or are based upon any accident, injury or damage, however occurring, which happens in, or about the Premises or entrances thereto during the term of this Sublease, (iii) arise out of or are based upon Lessee's use, occupation or operation of the Premises or facilities during the term hereof or (iv) with respect to Environmental Damages, arise out of any Hazardous Substance located on the Premises during the term of this Sublease or any event or condition which occurs or exists on the Premises during the term of this Sublease. Nothing in this Section shall relieve Lessor from, or obligate Lessee to indemnify Lessor for, liability resulting from Lessors's own negligence, wilful misconduct or breach of its obligations under this Sublease. SECTION 5.2 Lessor agrees to defend, indemnify and save Lessee harmless from and against any and all liability, loss, damage, and Environmental Damages, as defined herein, and expense (including reasonable attorneys' fees) and from and against any and all suits, claims and demands of every kind and nature made by or on behalf of any and all persons, firms or corporations, provided that any of the foregoing (i) are due to Lessor's negligence, wilful misconduct or breach hereof, (ii) arise out of or are based upon any accident, injury or damage, however occurring, which happened in or about the Premises or entrances thereto at any time prior to the term of this Sublease or (iii) with respect to Environmental Damages, arise out of any Hazardous Substance located on or adjacent to the Premises prior to the term of this Sublease or any event or condition which occurred or existed prior to the term of this Sublease. Nothing in this Section shall relieve Lessee from, or obligate Lessor to indemnify Lessee for, liability resulting from Lessee's own negligence, wilful misconduct or breach of its obligations under this Sublease. SECTION 5.3 Lessor agrees to give Lessee prompt written notice of any claims or demands against the Lessor arising out of or based upon any of the liabilities, losses or expenses against which Lessee is bound to defend, indemnify and save harmless the Lessor. Lessee shall have full control over any such claim or litigation, and Lessor shall reasonably cooperate with Lessee in such efforts. Lessee agrees to give Lessor 3

4 prompt written notice of any claims or demands against the Lessee arising out of or based upon any of the liabilities, losses or expenses against which Lessor is bound to defend, indemnify and save harmless the Lessee. Lessor shall have full control over any such claim or litigation, and Lessee shall reasonably cooperate with Lessor in such efforts. SECTION 5.4 Lessee shall indemnify and save harmless Lessor from and against all mechanic's liens and notices thereof and all claims thereof on account of any materials furnished or labor performed in, about or in connection with the Premises or the sidewalks and curbs adjacent thereto except those arising from work undertaken by Lessor. Should any such lien be filed, Lessee shall promptly bond or otherwise discharge the same. ARTICLE 6 ENVIRONMENTAL REPRESENTATIONS SECTION 6.1 As used herein, "Hazardous Substance" means any substance that is toxic, ignitable, reactive, corrosive or radioactive and that is regulated by any local government, the state in which the Premises are located or the United States government. "Hazardous Substance" includes any and all materials or substances that are now or hereafter defined as "hazardous waste," "extremely hazardous waste," "toxic substance," or a "hazardous substance" pursuant to state, federal or local governmental law, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Sections 9601 et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.). "Hazardous Substance" includes but is not restricted to friable asbestos, polychlorinated biphenyls ("PCB's"), and petroleum products. "Environmental Damages" means all claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability), encumbrances, liens, costs and expenses of whatever kind or nature, contingent or otherwise matured or otherwise matured, foreseeable or unforeseeable, including, without limitation, reasonable attorneys' and consultants' fees, incurred at any time as a result of the existence of Hazardous Substance upon, about, or beneath the Premises or migrating or threatening to migrate to or from the Premises, or the existence of a violation of any governmental requirement pertaining to the environment, health or safety arising from the Premises, or the existence of a violation of any governmental requirement pertaining to the environment, health or safety arising from or relating to the Property. The representations and warranties contained in this Article shall survive the expiration or termination of this Sublease and any transfer of title to the Premises (whether by sale or otherwise) and shall not be affected by any investigation by or on behalf of Lessee or by any information which Lessee may have or obtain with respect thereto. SECTION 6.2 Except in compliance with all governmental requirements pertaining to health, safety and the environment, Lessee shall not knowingly cause or permit any Hazardous Substance to be used, stored, generated, or disposed of on in or about the Premises by Lessee, Lessee's agents, employees, contractors, or invitees. If Lessee causes any contamination of the Premises by a release of such Hazardous Substances for which Lessee is legally liable, in addition to its obligations contained in Section 5. 1, Lessee shall, upon request of Lessor, at Lessee's sole expense, take any and all necessary actions to return the Premises to the condition existing prior to the release of any such Hazardous Substances on the Premises, including, but not limited to, any and all clean-up and remedial actions. ARTICLE 7 CASUALTY In case of damage to or destruction of all or part of the Premises or all or part of the fixtures or improvements thereon by fire or other casualty, Lessee shall promptly at its own expense repair, restore or 4

5 rebuild the same to no less than the condition existing immediately prior to the occurrence of such fire or other casualty and promptly clear away the remaining debris to return the Premises to a safe condition. ARTICLE 8 INSURANCE SECTION 8.1 Lessee covenants and agrees that it will at all times, at its sole cost and expense, keep the building or buildings and improvements on the Premises occupied by Lessee insured under a fire insurance policy with extended coverage endorsements for not less than its full or their full insurance value above foundations, and will keep all such insurance in full force and effect during the entire term of this Sublease. Lessee shall cause Lessor to be named as an additional insured under such fire insurance policy. It is covenanted and agreed between the parties hereto that in the event of loss under any such policy or policies, Lessee shall proceed with the repair and restoration of the damaged or destroyed improvements occupied by Lessee in accordance with Article 7 hereof and that the insurance proceeds shall be paid to and held by Lessee to be paid out for the expense of repairing or rebuilding the buildings or improvements occupied by Lessee which have been damaged or destroyed. SECTION 8.2 Lessor and Lessee release each other and waive any right of recovery against each other for loss or damage to their respective property which occurs in or about the Premises (whether due to negligence of either party, their agents, employees, officers, contractors, licensees, invitees or otherwise) to the extent that such loss or damage is reimbursed by insurance proceeds. Lessor and Lessee agree that all policies of insurance obtained by either of them in connection with the Premises shall contain appropriate waiver of subrogation clauses. SECTION 8.3 Lessee covenants and agrees that it will at all times during the term hereof carry and maintain, for the mutual benefit of Lessor and Lessee, general public liability insurance against claims for personal injury, death or property damage, occurring in, on or about the Premises, such insurance to afford protection to the limit of not less than One Million Dollars ($1,000,000) per occurrence, for bodily injury and property damage. ARTICLE 9 CONDEMNATION SECTION 9.1 If the use, occupancy or title of the entire Premises shall be taken, requisitioned or sold in, by or on account of any actual or threatened eminent domain proceeding or other action by any person having the power of eminent domain (the "Condemnation"), then and in that event the term of this Sublease shall terminate upon Condemnation, and any award, compensation or damages shall be divided between Lessor and Lessee in accordance with their respective interests in and to the Premises. SECTION 9.2 In the event that a portion (but less than all) of the Premises or any interest therein, including but not limited to the right of free access to the Premises, shall be so taken, requisitioned or sold as to render the remaining portion of the Premises, in the sole opinion of Lessee, unsuitable for Lessee's use, then the Lessee may, at its option, terminate this Sublease and the term hereof upon Condemnation, and any award shall be divided between Lessor and Lessee in the same manner and upon the same conditions as set forth in Section 9.1. Such option shall be exercised by Lessee by written notice to Lessor not less than thirty (30) days prior to the date on which possession of such portion of the Premises shall be taken. If Lessee shall not so elect to terminate this Sublease and the term hereof then, upon the payment of any award arising from such Condemnation, the amount received shall be paid to and held by Lessor and used in defraying the cost and expense of making repairs to and alterations of the improvements on the Premises for the purpose of restoring the same to an economic architectural unit to the extent that may have been made necessary by such Condemnation, and the balance, if any, remaining shall be paid to Lessor. 5

6 SECTION 9.3 In case the taking of part of the Premises by Condemnation renders the Premises untenantable in whole or in part, rent shall abate until the Premises are again fully tenantable. If as a result of any such taking, the area of the Premises is permanently reduced, basic rent hereunder shall be reduced in proportion to the reduction in area of the Premises. ARTICLE 10 SUBORDINATION This Sublease and Lessee's leasehold estate and all rights of Lessee hereunder shall be subject and subordinate at all times in all respects to the lien of any and all mortgages which Lessor may make upon any right, title or interest of Lessor in the Premises, and to any and all extensions and renewals and any and all new mortgages made in lieu of or in replacement of any such mortgage, provided that any such mortgage shall provide that so long as Lessee shall not be in default in the performance and observance of the terms, covenants, conditions and limitations in this Sublease contained on the part of the Lessee to be performed and observed, no foreclosure of the lien of said mortgage for default thereof shall impair the right of Lessee to enjoy this Sublease pursuant to its terms. In the event of acquisition of Lessor's interest in this Sublease by any such mortgagee or anyone claiming through or under such mortgagee, Lessee will recognize as its lessor such mortgagee or the person claiming through or under such mortgagee who shall so acquire title to the Lessor's interest in this Sublease. ARTICLE 11 ASSIGNMENT AND SUBLETTING Lessee shall not assign this Sublease or sublease all or any portions of the Premises without first obtaining both Lessor's prior written consent, which consent shall not be unreasonably withheld, and the City of Terrell's prior written consent. ARTICLE 12 FIXTURES SECTION 12.1 Subject to the provisions contained in Section 4.3, all buildings and improvements on the Premises and all plumbing, heating, fighting, electrical and air conditioning fixtures and equipment and other articles of personal property used in the operation of such buildings as such (as distinguished from operations incident to the business of Lessee) attached to the Premises (sometimes herein referred to as "Building Fixtures"), shall be and remain a part of the Premises and shall constitute the property of Lessor. SECTION 12.2 Lessee may at any time and from time to time at its expense install its trade fixtures on the Premises. All of Lessee's trade fixtures and all personal property, fixtures, apparatus, machinery and equipment now or hereafter located upon the Premises (other than Building Fixtures) and owned by the Lessee or any other occupants of the Premises, and whether or not the same are affixed thereto, shall be and remain the personal property of Lessee or such other occupants and the same are herein sometimes referred to as "Lessee's Equipment." Lessee's Equipment may be removed from time to time by Lessee or other occupants of the Premises. Any damage caused by such removal shall be repaired by Lessee at Lessee's expense. ARTICLE 13 NOTICES OR DEMANDS All notices to or demands upon Lessor or Lessee desired or required to be given under any of the provisions hereof shall be deemed to have been duly and sufficiently given if a copy thereof shall have been 6

7 hand-delivered or mailed by United States first class mail in an envelope properly stamped and addressed to Lessee at 1419 Lake Cook Road, Suite 410, Deerfield, Illinois 60015, or at such other address as Lessee may theretofore have furnished by written notice to Lessor; and any notices or demands from Lessee to Lessor shall be deemed to have been duly and sufficiently given if a copy thereof shall have been hand-delivered or mailed by United States first class mail in an envelope properly stamped and addressed to the Lessor c/o Waste Management, Inc. at 3001 Butterfield Road, Oak Brook, Illinois 60521, Attention: General Counsel or at such other address as Lessor may have furnished by written notice to Lessee. ARTICLE 14 DEFAULT AND REMEDIES UPON DEFAULT SECTION 14.1 If Lessee shall default in the payment of the rent or any part thereof when due as herein provided, and such default shall continue for ten (10) days after notice thereof in writing to Lessee, or if default shall be made in any of the other covenants, agreements, conditions or undertakings herein contained to be kept, observed and performed by Lessee, and such default shall continue for thirty (30) days after notice thereof in writing to Lessee, or if Lessee shall abandon the Premises, then and in any such event it shall be lawful for Lessor, at its election to declare the term ended and to take appropriate legal action to re-enter and regain possession of the Premises. If default shall be made in any covenant, agreement, condition or undertaking herein contained to be kept, observed and performed by Lessee, other than the payment of rent as herein provided, which cannot with due diligence be cured within a period of thirty (30) days, and if notice thereof in writing shall have been given to Lessee, and if Lessee prior to the expiration of thirty (30) days from and after the giving of such notice commences to eliminate the cause of such default and proceeds diligently and with reasonable dispatch to take all steps and do all work required to cure such default and does so cure such default, then Lessor shall not have the right to declare the said term ended by reason of such default; provided, however, that the curing of any default in such manner shall not be construed to limit or reduce the right of Lessor to declare said term ended and enforce all of its rights and remedies hereunder for any default not so cured. SECTION 14.2 If a default occurs and is not cured within the time permitted herein, Lessor shall have the rights and remedies hereinafter set forth, which shall be distinct, separate and cumulative with and in addition to any other right or remedy allowed under any law or other provisions of this Sublease: (a) Lessor may terminate this Sublease, repossess the Premises by detainer suit or other lawful means, and recover as damages a sum of money equal to (a) any unpaid rent as of the termination date including interest accruing from the due date thereof at the rate of twelve percent (12%) per annum, (b) any unpaid rent which would have accrued after the termination date through the time of award including interest accruing from the due date thereof at the rate of twelve percent (12%) per annum, (c) any unpaid rent which would have accrued after the time of award during the balance of the term discounted to the present value of such amount, and (d) any other amounts necessary to compensate Lessor for all detriment or damages proximately caused by Lessee's failure to perform its obligations under this Sublease including, without limitation, Lessor's costs of reletting. If applicable law shall require that the amount of unpaid rent recoverable hereunder be modified to reflect the "worth at the time of award," computed by allowing or discounting interest at specified rates, or the "reasonable value" of the rent claimed, or shall require any other specific modification of the foregoing provisions, such law shall govern and control. (b) Lessor shall at all times have the rights and remedies (which shall be cumulative with any other rights of Lessor hereunder or under any law): (i) to seek any declaratory, injunctive or other equitable relief and specifically enforce this Sublease or restrain or enjoin a violation or breach of any provision hereof and (ii) to sue for and collect any unpaid rent. Such rights may be exercised at any time and from time to time. Notwithstanding anything to the contrary contained in this Sublease, to the extent not expressly prohibited by applicable law, in the event of any default by Lessee not cured within any applicable time for cure hereunder, Lessor may terminate this Sublease and accelerate and declare that all rent reserved for the remainder of the term shall be immediately due and payable; provided, Lessor shall, after receiving 7

8 payment of the same from Lessee, be obligated to turn over to Lessee any actual net reletting proceeds thereafter received during the remainder of the term, up to the amount so received from Lessee pursuant to this provision. (c) No re-entry or repossession, repairs, changes, alterations and additional reletting, acceptance of keys from Lessee, or any other action or omission by Lessor shall be construed as an election by Lessor to terminate this Sublease or accept a surrender of the Premises, nor shall the same operate to release the Lessee in whole or in part from any of the Lessee's obligations hereunder, unless express written notice of such intention is sent by Lessor or its agent to Lessee. The times set forth herein for the curing of defaults by Lessee are of the essence of this Sublease. Lessee hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Sublease. ARTICLE 15 SURRENDER OF POSSESSION If Lessee shall hold over beyond the expiration of the term herein provided or any renewal or extension thereof, Lessor may at its election either proceed to evict Lessee by legal proceedings or treat such holdover tenancy only as a month-to- month tenancy for 200% of the monthly rental herein specified. ARTICLE 16 OPTION TO PURCHASE Provided that Lessee is not in default of any term of this Sublease and provided that this Sublease has not terminated prior to the termination date, Lessor grants to Lessee the exclusive right and option to purchase (i) all of Lessee's right, title and interest in the Premises under that certain Agreement for Lease of Incinerator Property, dated October 31, 1988, between the City of Terrell, Texas, a Texas municipal corporation, as lessor, and American Container Service Corporation, Inc., a Delaware corporation, as lessee (the "Lessor Lease"), and (ii) the Personal Property (together, the "Purchased Property"), upon the following terms and conditions: (a) The option may be exercised by Lessee at any time at least 90 days prior to the expiration of the term of this Sublease upon written notice of exercise to Lessor accompanied by a check in the amount of $50,000 as an earnest money deposit. (b) This Article shall be deemed an irrevocable offer by Lessor to sell the Purchased Property to Lessee on the terms and conditions set forth in this Article. Lessee's exercise of the option shall be deemed Lessee's acceptance of such offer. Such offer and acceptance shall constitute a binding contract for the purchase and sale of the Purchased Property, in accordance with terms of this Article and the then generally prevailing customs and practices relating to the sale of real estate in the county in which the Premises are located. (c) The date of closing shall be as specified in Lessee's notice of exercise of the option, which date shall be no earlier than forty-five (45) days and no later than ninety (90) days after the date of such notice. (d) The purchase price of the Purchased Property shall be the "net book value" of the Premises as of the close of the month preceding the month of closing. The "net book value" of the Premises for this purpose shall be determined in a manner consistent with the determination of the "net book value" of the Premises on Schedule 4 to the Asset Purchase Agreement, and shall reflect increases as described in Section 2.1 of this Sublease. (e) Lessee shall be allowed a credit against the purchase price of the Purchased Property in an amount equal to the sum of: 8

9 (1) one-half of the aggregate "capital charge" component of Lessee's monthly rent paid during the term of this Sublease through the close of the month preceding the month of closing (as the "capital charge" component of the monthly rent for the Premises is shown on Schedule 4 to the Asset Purchase Agreement, and as it may be increased in accordance with Section 2.1 of this Sublease); and (2) the aggregate "monthly depreciation" component of Lessee's monthly rent paid during the term of this Sublease through the close of the month preceding the month of closing (as the "monthly depreciation" component of the monthly rent for the Premises is shown on Schedule 4 to the Asset Purchase Agreement, and as it may be increased in accordance with Section 2.1 of this Sublease). (f) The closing shall occur at the Premises or at such other location as mutually agreed by Lessor and Lessee. (g) Lessor shall deliver to Lessee at the closing such of the following as are applicable: (i) an assignment of Lessor's interest under the Lessor Lease, in form and content acceptable to Lessee, which assignment shall be consented to by Lessor's lessor and (ii) a bill of sale, in form and content acceptable to Lessee, conveying to Lessee all of Lessor's right, title and interest in and to the Personal Property. (h) This Sublease shall terminate on the date of closing. Rents and other proratable items shall be prorated as of the date of closing. All prorations shall be final. (i) Possession of the Premises shall be delivered to Lessee as the owner of Lessor's interest under the Lessor Lease at the closing. ARTICLE 17 PERMITS Lessee has obtained the necessary regulatory approvals and permits to operate an incinerator or autoclave at the Premises for the treatment of medical waste. Upon the termination of this Sublease for any purpose, other than pursuant to the exercise of Lessee's option pursuant to Article 16 above, the parties agree to cooperate in good faith with each other so that all of Lessee's regulatory approvals and permits and approvals are transferred to Lessor. Lessee hereby agrees to provide Lessor with access to the Premises and to all records relevant to Lessee's compliance with its regulatory approvals and permits that Lessee maintains in respect of its operation of an incinerator or autoclave at the Premises for the treatment of medical waste. Lessee also agrees to provide copies of any and all correspondence from or to regulatory authorities regarding Lessee's operations at the Premises and to notify Lessor as far in advance as possible of any inspections. Lessee agrees to operate at the Premises in full compliance with all applicable laws, regulations and the conditions set forth in Lessee's regulatory approvals and permitst, copies of which have been previously delivered to Lessor. Lessee agrees to defend, indemnify and hold Lessor and its affiliates harmless from and against all indemnifiable damages of Lessor. For this purpose, "indemnifiable damages" of Lessor means the aggregate of all expenses, losses, costs, deficiencies, liabilities and damages (including attorneys' fees and court costs) incurred or suffered by Lessor, or any of its directors, agents, employees or affiliates or its affiliates directors, agents or employees, as a result of or in connection with Lessee's operations at the Premises. 9

10 ARTICLE 18 BROKER'S COMMISSION Lessor and Lessee warrant, each to the other, that there are no brokers involved in this lease transaction. If any other person shall assert a claim to a fee, commission or other compensation on account of alleged employment as a broker or finder or for performance of services as a broker or finder in connection with this Sublease, the party hereto under whom the broker or finder is claiming shall indemnify and hold harmless the other party against and from any such claim and all costs, expenses and liabilities incurred in connection with such claim or any action or proceeding brought thereon. ARTICLE 19 SUBLEASE PROVISIONS SECTION 19.1 This Sublease is a sublease of Lessor's leasehold interest in the Premises under the Lessor Lease. SECTION 19.2 Lessee shall perform all of Lessor's obligations under the Lessor Lease. SECTION 19.3 Lessor will use reasonable efforts to procure the written consent of the landlord under the Lessor Lease to the sublease of the Premises under this Sublease substantially in the form attached hereto as Exhibit C. ARTICLE 20 PERSONAL PROPERTY Lessor represents and warrants to Lessee that Lessor holds title to the Personal Property free and clear of all liens, claims and encumbrances, including any claims by the landlord under the Lessor Lease. ARTICLE 21 MISCELLANEOUS SECTION 21.1 The captions of this Sublease are for convenience only and are not to be construed as part of this Sublease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. SECTION 21.2 If any term or provision of this Sublease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Sublease shall not be affected thereby, but each term and provision of this Sublease shall be valid and be enforced to the fullest extent permitted by law. SECTION 21.3 This Sublease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. SECTION 21.4 Lessor and Lessee agree that this Sublease is not in consideration for or dependent or contingent in any manner upon any other contract, lease or agreement between them and that the term, rental and other provisions of this Sublease are not intended by said parties to be tied in with any other such contract, lease or agreement; but on the contrary, this Sublease and all of its provisions are entirely and completely independent of any other transactions or relationship between the parties. SECTION 21.5 The failure of Lessor to enforce any term, covenant, condition, or agreement hereof by reason of its breach by Lessee after notice hereunder shall not be deemed to avoid or affect the right of Lessor 10

11 to enforce the same term, covenant, condition or agreement on the occasion of the subsequent default or reach. IN WITNESS WHEREOF, Lessor and Lessee have caused these presents to be executed as of the day and year first herein above written. Lessor: WASTE MANAGEMENT OF TEXAS, INC. a Texas corporation By: /s/ John H. Slocum ----------------------------------------- Name: John H. Slocum Title: Vice President Lessee: STERICYCLE, INC. a Delaware corporation By: /s/ Linda D. Lee ----------------------------------------- Linda D. Lee Vice President, Regulatory Affairs and Quality Assurance 11

12 EXHIBIT A MUNICIPAL SOLID WASTE INCINERATION FACILITY CITY OF TERRELL INCINERATOR PROPERTY DESCRIPTION [Omitted] 12

13 EXHIBIT B PERSONAL PROPERTY [Omitted] 13

14 EXHIBIT C LANDLORD'S CONSENT [Omitted] 14

1 Baltimore, Maryland AGREEMENT FOR SUBLEASE Exhibit 10.5 THIS SUBLEASE (the "Sublease") is made as of this 1st day of May, 1997 by and between Waste Management of Maryland, Inc., a Maryland corporation ("Lessor"), and Stericycle, Inc., a Delaware corporation ("Lessee"), WITNESSETH: ARTICLE 1 PREMISES AND TERM Lessor, for and in consideration of the rents herein reserved and the covenants and agreements herein contained on the part of the Lessee to be kept observed and performed, has demised and leased, and does by these presents demise and lease to the Lessee a certain parcel (or parcels) of real estate located at the address contained in and the legal description described on Exhibit A attached hereto and made a part hereof. TO HAVE AND TO HOLD the above described real estate, together with the buildings and improvements situated thereon and the rights, privileges and appurtenances thereunto belonging or appertaining (the "Premises"), unto the Lessee for and during the term of three (3) years, commencing on the 1st day of May, 1997 and ending on the 30th day of April, 2000, unless said term shall be sooner terminated as herein provided. Lessor hereby also leases to Lessee the equipment, furniture, fixtures and other tangible personal property located on the Premises, which personal property is listed on the attached Exhibit B (the "Personal Property"). The Lessee may terminate this Sublease, effective as of the last day of any calendar month, upon six months' prior written notice to the Lessor given at any time during the term of this Sublease. ARTICLE 2 RENT SECTION 2.1 In consideration of the leasing aforesaid, Lessee hereby covenants and agrees to pay Lessor c/o Waste Management, Inc., 3001 Butterfield Road, Oak Brook, Illinois, or at such other place as the Lessor may from time to time designate in writing, aggregate rental of [Omitted; filed separately with the Securities and Exchange Commission] for the term of this Sublease (sometimes herein referred to as the "rent") payable monthly in installments of [Omitted; filed separately with the Securities and Exchange Commission] each on the first day of each and every month of the term hereof beginning May 1, 1997. However, if the term of this Sublease shall commence on a date other than the first day of a calendar month or end on a day other than the last day of a calendar month, the first and last month's rent shall be prorated based upon the ratio that the number of days in the term within such month bears to the total number of days in such month. In the event that Lessor makes any capital improvements to the Premises which are required in connection with the continued operation at the Premises of an incinerator or autoclave for the treatment of medical waste (or which are required to be made by Lessor under Section 4.2 of this Sublease) and as a result the "net book value" of the Premises is increased, the monthly rent payable under this Sublease shall be increased to reflect the resulting increases in the monthly capital charge (at [omitted; filed separately with the Securities and Exchange Commission] % per annum) and monthly depreciation in respect of the Premises. This increase in the monthly rent shall be determined in a manner consistent with the determination of the initial monthly rent as shown by the "Monthly Total" on Schedule 4 to the Asset Purchase Agreement dated December 20, 1996 (the "Asset Purchase Agreement") entered into by Lessee, Waste Management, Inc. ("WMI") and certain subsidiaries of WMI. 1

2 SECTION 2.2 Lessee agrees to pay in addition to the rent herein reserved, all sums which may become due by reason of the failure of Lessee to comply with all the covenants of this Sublease and any and all damages, costs, expenses and impositions which Lessor may suffer or incur by reason of any default of the Lessee or failure on its part to comply with all the covenants of this Sublease, and each of them. SECTION 2.3 Upon the signing of this Sublease, Lessee shall pay to Lessor the first month's rent and as a security deposit the sum of [Omitted; filed separately with the Securities and Exchange Commission], which shall secure the various covenants of Lessee under this Sublease, including payment of rent. Lessor shall keep such security deposit and shall return the same to Lessee within thirty (30) days of the termination of Lessee's tenancy hereunder, without interest. In the event that Lessee shall breach any provision of this Sublease which may be cured through the payment of money, or the hiring of services, Lessor shall be entitled to so cure, using the Lessee's security deposit, and upon written notice to Lessee, Lessee shall within twenty-one (21) days replenish the security deposit to the sum set forth above. ARTICLE 3 NET LEASE SECTION 3.1 It is the purpose and intent of Lessor and Lessee that the rental provided in Article 2 during the term of this Sublease shall be net to Lessor, except for the items noted in Sections 4.2 and 4.4 of this Sublease, and that, except for such items, all costs, expenses, real estate taxes and obligations of every kind and nature whatsoever relating to the Premises which may arise during the term of this Sublease shall be paid by Lessee, and Lessor shall be indemnified and saved harmless by Lessee against the same. SECTION 3.2 Lessee shall pay all charges for natural gas, water, electricity and telephone services used on the Premises during the term of this Sublease. ARTICLE 4 USE, MAINTENANCE, REPAIRS AND ACCESS SECTION 4.1 Lessee and all persons claiming by, through or under Lessee may use and occupy the Premises for the treatment of medical waste and office purposes solely in compliance with all federal, state and local laws and regulations. SECTION 4.2 Throughout the term of this Sublease, Lessee shall, at its cost and expense properly, maintain and repair all structures and improvements, including heating, plumbing, ventilating and air conditioning systems, and all fixtures, equipment and furnishings; provided however, that Lessor shall be obligated to make promptly and at its own expense all structural repairs which are required on the Premises to the extent that the aggregate cost of such repairs exceed $25,000 in any calendar year; and provided further, however, that neither Lessor nor Lessee shall repair or replace any capital structures or improvements without first having obtained the prior written consent of the other party. Lessee may, in its discretion and at its expense, make any alterations and changes it deems necessary to the Premises for the purpose of best serving its business. SECTION 4.3 Lessor and Lessee agree that any and all fixed improvements made to the Premises by Lessee shall become the sole property of Lessor upon termination of this Sublease as long as said improvements do not detract from the fair market value of the Premises, in which case, Lessee agrees to remove all of said improvements and return the Premises to Lessor in the same condition in which the Premises were received on the commencement date of this Sublease, normal wear and tear excepted. In any case, Lessee shall be allowed to remove all personal property owned by Lessee from the Premises. 2

3 SECTION 4.4 Lessee shall not be responsible for any costs of Lessor under Lessor's covenants of quiet enjoyment and peaceable possession or Lessor's taxes due on Lessor's income, gross receipts or other similar items that are not reasonably considered to be in the nature of real estate taxes. SECTION 4.5 Lessee may, in its discretion, make any alterations and changes it deems necessary to the Premises for the purpose of best serving its business. If Lessee shall alter or change the Premises during the term of this Sublease, Lessee shall make such alterations in compliance with the Americans with Disabilities Act of 1990 ("ADA") and all statutes, ordinances, laws, orders, rules, regulations and requirements of all applicable federal state, county and other agencies or authorities now in effect with respect to the use, occupation or alteration of the Premises ("Laws") and, upon request of Lessor, shall deliver evidence thereof reasonably satisfactory to Lessor. Lessor hereby represents that the Premises are currently in compliance with the ADA and all other Laws and agrees to indemnify Lessee for any damages or expenses (including attorneys' fees) incurred by Lessee as a result of Lessor's breach of the foregoing representation. SECTION 4.6 During the term of this Sublease, Lessee shall keep, afford and allow access to Lessor to the Premises at all reasonable times. Except in an emergency, Lessor shall give at least twenty four (24) hours' advance notice, written or oral of its intent to gain access to the Premises. SECTION 4.7 Lessee shall vacate and deliver up the Premises upon the expiration of the term of this Sublease, or any renewal thereof or sooner termination of the term of this Sublease, in the same condition that the Premises were in as of the date hereof, reasonable wear and tear excepted. ARTICLE 5 INDEMNIFICATION SECTION 5.1 Lessee agrees to defend, indemnify and save Lessor harmless from and against any and all liability, loss, damage, and Environmental Damages, as defined herein, and expense (including reasonable attorneys' fees) and from and against any and all suits, claims and demands of every kind and nature made by or on behalf of any and all persons, firms or corporations, provided that any of the foregoing (i) are due to Lessee's negligence, willful misconduct or breach hereof, (ii) arise out of or are based upon any accident, injury or damage, however occurring, which happens in, or about the Premises or entrances thereto during the term of this Sublease, (iii) arise out of or are based upon Lessee's use, occupation or operation of the Premises or facilities during the term hereof or (iv) with respect to Environmental Damages, arise out of any Hazardous Substance located on the Premises during the term of this Sublease or any event or condition which occurs or exists on the Premises during the term of this Sublease. Nothing in this Section shall relieve Lessor from, or obligate Lessee to indemnify Lessor for, liability resulting from Lessors's own negligence, wilful misconduct or breach of its obligations under this Sublease. SECTION 5.2 Lessor agrees to defend, indemnify and save Lessee harmless from and against any and all liability, loss, damage, and Environmental Damages, as defined herein, and expense (including reasonable attorneys' fees) and from and against any and all suits, claims and demands of every kind and nature made by or on behalf of any and all persons, firms or corporations, provided that any of the foregoing (i) are due to Lessor's negligence, wilful misconduct or breach hereof, (ii) arise out of or are based upon any accident, injury or damage, however occurring, which happened in or about the Premises or entrances thereto at any time prior to the term of this Sublease or (iii) with respect to Environmental Damages, arise out of any Hazardous Substance located on or adjacent to the Premises prior to the term of this Sublease or any event or condition which occurred or existed prior to the term of this Sublease. Nothing in this Section shall relieve Lessee from, or obligate Lessor to indemnify Lessee for, liability resulting from Lessee's own negligence, wilful misconduct or breach of its obligations under this Sublease. SECTION 5.3 Lessor agrees to give Lessee prompt written notice of any claims or demands against the Lessor arising out of or based upon any of the liabilities, losses or expenses against which Lessee is bound to defend, indemnify and save harmless the Lessor. Lessee shall have full control over any such claim or 3

4 litigation, and Lessor shall reasonably cooperate with Lessee in such efforts. Lessee agrees to give Lessor prompt written notice of any claims or demands against the Lessee arising out of or based upon any of the liabilities, losses or expenses against which Lessor is bound to defend, indemnify and save harmless the Lessee. Lessor shall have full control over any such claim or litigation, and Lessee shall reasonably cooperate with Lessor in such efforts. SECTION 5.4 Lessee shall indemnify and save harmless Lessor from and against all mechanic's liens and notices thereof and all claims thereof on account of any materials furnished or labor performed in, about or in connection with the Premises or the sidewalks and curbs adjacent thereto except those arising from work undertaken by Lessor. Should any such lien be filed, Lessee shall promptly bond or otherwise discharge the same. ARTICLE 6 ENVIRONMENTAL REPRESENTATIONS SECTION 6.1 As used herein, "Hazardous Substance" means any substance that is toxic, ignitable, reactive, corrosive or radioactive and that is regulated by any local government, the state in which the Premises are located or the United States government. "Hazardous Substance" includes any and all materials or substances that are now or hereafter defined as "hazardous waste," "extremely hazardous waste," "toxic substance," or a "hazardous substance" pursuant to state, federal or local governmental law, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Sections 9601 et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.). "Hazardous Substance" includes but is not restricted to friable asbestos, polychlorinated biphenyls ("PCB's"), and petroleum products. "Environmental Damages" means all claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability), encumbrances, liens, costs and expenses of whatever kind or nature, contingent or otherwise matured or otherwise matured, foreseeable or unforeseeable, including, without limitation, reasonable attorneys' and consultants' fees, incurred at any time as a result of the existence of Hazardous Substance upon, about, or beneath the Premises or migrating or threatening to migrate to or from the Premises, or the existence of a violation of any governmental requirement pertaining to the environment, health or safety arising from the Premises, or the existence of a violation of any governmental requirement pertaining to the environment, health or safety arising from or relating to the Property. The representations and warranties contained in this Article shall survive the expiration or termination of this Sublease and any transfer of title to the Premises (whether by sale or otherwise) and shall not be affected by any investigation by or on behalf of Lessee or by any information which Lessee may have or obtain with respect thereto. SECTION 6.2 Except in compliance with all governmental requirements pertaining to health, safety and the environment, Lessee shall not knowingly cause or permit any Hazardous Substance to be used, stored, generated, or disposed of on in or about the Premises by Lessee, Lessee's agents, employees, contractors, or invitees. If Lessee causes any contamination of the Premises by a release of such Hazardous Substances for which Lessee is legally liable, in addition to its obligations contained in Section 5. 1, Lessee shall, upon request of Lessor, at Lessee's sole expense, take any and all necessary actions to return the Premises to the condition existing prior to the release of any such Hazardous Substances on the Premises, including, but not limited to, any and all clean-up and remedial actions. ARTICLE 7 CASUALTY In case of damage to or destruction of all or part of the Premises or all or part of the fixtures or improvements 4

5 thereon by fire or other casualty, Lessee shall promptly at its own expense repair, restore or rebuild the same to no less than the condition existing immediately prior to the occurrence of such fire or other casualty and promptly clear away the remaining debris to return the Premises to a safe condition. ARTICLE 8 INSURANCE SECTION 8.1 Lessee covenants and agrees that it will at all times, at its sole cost and expense, keep the building or buildings and improvements on the Premises occupied by Lessee insured under a fire insurance policy with extended coverage endorsements for not less than its full or their full insurance value above foundations, and will keep all such insurance in full force and effect during the entire term of this Sublease. Lessee shall cause Lessor to be named as an additional insured under such fire insurance policy. It is covenanted and agreed between the parties hereto that in the event of loss under any such policy or policies, Lessee shall proceed with the repair and restoration of the damaged or destroyed improvements occupied by Lessee in accordance with Article 7 hereof and that the insurance proceeds shall be paid to and held by Lessee to be paid out for the expense of repairing or rebuilding the buildings or improvements occupied by Lessee which have been damaged or destroyed. SECTION 8.2 Lessor and Lessee release each other and waive any right of recovery against each other for loss or damage to their respective property which occurs in or about the Premises (whether due to negligence of either party, their agents, employees, officers, contractors, licensees, invitees or otherwise) to the extent that such loss or damage is reimbursed by insurance proceeds. Lessor and Lessee agree that all policies of insurance obtained by either of them in connection with the Premises shall contain appropriate waiver of subrogation clauses. SECTION 8.3 Lessee covenants and agrees that it will at all times during the term hereof carry and maintain, for the mutual benefit of Lessor and Lessee, general public liability insurance against claims for personal injury, death or property damage, occurring in, on or about the Premises, such insurance to afford protection to the limit of not less than One Million Dollars ($1,000,000) per occurrence, for bodily injury and property damage. ARTICLE 9 CONDEMNATION SECTION 9.1 If the use, occupancy or title of the entire Premises shall be taken, requisitioned or sold in, by or on account of any actual or threatened eminent domain proceeding or other action by any person having the power of eminent domain (the "Condemnation"), then and in that event the term of this Sublease shall terminate upon Condemnation, and any award, compensation or damages shall be divided between Lessor and Lessee in accordance with their respective interests in and to the Premises. SECTION 9.2 In the event that a portion (but less than all) of the Premises or any interest therein, including but not limited to the right of free access to the Premises, shall be so taken, requisitioned or sold as to render the remaining portion of the Premises, in the sole opinion of Lessee, unsuitable for Lessee's use, then the Lessee may, at its option, terminate this Sublease and the term hereof upon Condemnation, and any award shall be divided between Lessor and Lessee in the same manner and upon the same conditions as set forth in Section 9.1. Such option shall be exercised by Lessee by written notice to Lessor not less than thirty (30) days prior to the date on which possession of such portion of the Premises shall be taken. If Lessee shall not so elect to terminate this Sublease and the term hereof then, upon the payment of any award arising from such Condemnation, the amount received shall be paid to and held by Lessor and used in defraying the cost and expense of making repairs to and alterations of the improvements on the Premises for the purpose of restoring the same to an economic architectural unit to the extent that may have been made necessary by such Condemnation, and the balance, if any, remaining shall be paid to Lessor. 5

6 SECTION 9.3 In case the taking of part of the Premises by Condemnation renders the Premises untenantable in whole or in part, rent shall abate until the Premises are again fully tenantable. If as a result of any such taking, the area of the Premises is permanently reduced, basic rent hereunder shall be reduced in proportion to the reduction in area of the Premises. ARTICLE 10 SUBORDINATION This Sublease and Lessee's leasehold estate and all rights of Lessee hereunder shall be subject and subordinate at all times in all respects to the lien of any and all mortgages which Lessor may make upon any right, title or interest of Lessor in the Premises, and to any and all extensions and renewals and any and all new mortgages made in lieu of or in replacement of any such mortgage, provided that any such mortgage shall provide that so long as Lessee shall not be in default in the performance and observance of the terms, covenants, conditions and limitations in this Sublease contained on the part of the Lessee to be performed and observed, no foreclosure of the lien of said mortgage for default thereof shall impair the right of Lessee to enjoy this Sublease pursuant to its terms. In the event of acquisition of Lessor's interest in this Sublease by any such mortgagee or anyone claiming through or under such mortgagee, Lessee will recognize as its lessor such mortgagee or the person claiming through or under such mortgagee who shall so acquire title to the Lessor's interest in this Sublease. ARTICLE 11 ASSIGNMENT AND SUBLETTING Lessee shall not assign this Sublease or sublease all or any portions of the Premises without first obtaining Lessor's prior written consent, which consent shall not be unreasonably withheld. ARTICLE 12 FIXTURES SECTION 12.1 Subject to the provisions contained in Section 4.3, all buildings and improvements on the Premises and all plumbing, heating, fighting, electrical and air conditioning fixtures and equipment and other articles of personal property used in the operation of such buildings as such (as distinguished from operations incident to the business of Lessee) attached to the Premises (sometimes herein referred to as "Building Fixtures"), shall be and remain a part of the Premises and shall constitute the property of Lessor. SECTION 12.2 Lessee may at any time and from time to time at its expense install its trade fixtures on the Premises. All of Lessee's trade fixtures and all personal property, fixtures, apparatus, machinery and equipment now or hereafter located upon the Premises (other than Building Fixtures) and owned by the Lessee or any other occupants of the Premises, and whether or not the same are affixed thereto, shall be and remain the personal property of Lessee or such other occupants and the same are herein sometimes referred to as "Lessee's Equipment." Lessee's Equipment may be removed from time to time by Lessee or other occupants of the Premises. Any damage caused by such removal shall be repaired by Lessee at Lessee's expense. 6

7 ARTICLE 13 NOTICES OR DEMANDS All notices to or demands upon Lessor or Lessee desired or required to be given under any of the provisions hereof shall be deemed to have been duly and sufficiently given if a copy thereof shall have been hand-delivered or mailed by United States first class mail in an envelope properly stamped and addressed to Lessee at 1419 Lake Cook Road, Suite 410, Deerfield, Illinois 60015, or at such other address as Lessee may theretofore have furnished by written notice to Lessor; and any notices or demands from Lessee to Lessor shall be deemed to have been duly and sufficiently given if a copy thereof shall have been hand-delivered or mailed by United States first class mail in an envelope properly stamped and addressed to the Lessor c/o Waste Management, Inc. at 3001 Butterfield Road, Oak Brook, Illinois 60521, Attention: General Counsel or at such other address as Lessor may have furnished by written notice to Lessee. ARTICLE 14 DEFAULT AND REMEDIES UPON DEFAULT SECTION 14.1 If Lessee shall default in the payment of the rent or any part thereof when due as herein provided, and such default shall continue for ten (10) days after notice thereof in writing to Lessee, or if default shall be made in any of the other covenants, agreements, conditions or undertakings herein contained to be kept, observed and performed by Lessee, and such default shall continue for thirty (30) days after notice thereof in writing to Lessee, or if Lessee shall abandon the Premises, then and in any such event it shall be lawful for Lessor, at its election to declare the term ended and to take appropriate legal action to re-enter and regain possession of the Premises. If default shall be made in any covenant, agreement, condition or undertaking herein contained to be kept, observed and performed by Lessee, other than the payment of rent as herein provided, which cannot with due diligence be cured within a period of thirty (30) days, and if notice thereof in writing shall have been given to Lessee, and if Lessee prior to the expiration of thirty (30) days from and after the giving of such notice commences to eliminate the cause of such default and proceeds diligently and with reasonable dispatch to take all steps and do all work required to cure such default and does so cure such default, then Lessor shall not have the right to declare the said term ended by reason of such default; provided, however, that the curing of any default in such manner shall not be construed to limit or reduce the right of Lessor to declare said term ended and enforce all of its rights and remedies hereunder for any default not so cured. SECTION 14.2 If a default occurs and is not cured within the time permitted herein, Lessor shall have the rights and remedies hereinafter set forth, which shall be distinct, separate and cumulative with and in addition to any other right or remedy allowed under any law or other provisions of this Sublease: (a) Lessor may terminate this Sublease, repossess the Premises by detainer suit or other lawful means, and recover as damages a sum of money equal to (a) any unpaid rent as of the termination date including interest accruing from the due date thereof at the rate of twelve percent (12%) per annum, (b) any unpaid rent which would have accrued after the termination date through the time of award including interest accruing from the due date thereof at the rate of twelve percent (12%) per annum, (c) any unpaid rent which would have accrued after the time of award during the balance of the term discounted to the present value of such amount, and (d) any other amounts necessary to compensate Lessor for all detriment or damages proximately caused by Lessee's failure to perform its obligations under this Sublease including, without limitation, Lessor's costs of reletting. If applicable law shall require that the amount of unpaid rent recoverable hereunder be modified to reflect the "worth at the time of award," computed by allowing or discounting interest at specified rates, or the "reasonable value" of the rent claimed, or shall require any other specific modification of the foregoing provisions, such law shall govern and control. (b) Lessor shall at all times have the rights and remedies (which shall be cumulative with any other rights of Lessor hereunder or under any law): (i) to seek any declaratory, injunctive or other equitable relief 7

8 and specifically enforce this Sublease or restrain or enjoin a violation or breach of any provision hereof and (ii) to sue for and collect any unpaid rent. Such rights may be exercised at any time and from time to time. Notwithstanding anything to the contrary contained in this Sublease, to the extent not expressly prohibited by applicable law, in the event of any default by Lessee not cured within any applicable time for cure hereunder, Lessor may terminate this Sublease and accelerate and declare that all rent reserved for the remainder of the term shall be immediately due and payable; provided, Lessor shall, after receiving payment of the same from Lessee, be obligated to turn over to Lessee any actual net reletting proceeds thereafter received during the remainder of the term, up to the amount so received from Lessee pursuant to this provision. (c) No re-entry or repossession, repairs, changes, alterations and additional reletting, acceptance of keys from Lessee, or any other action or omission by Lessor shall be construed as an election by Lessor to terminate this Sublease or accept a surrender of the Premises, nor shall the same operate to release the Lessee in whole or in part from any of the Lessee's obligations hereunder, unless express written notice of such intention is sent by Lessor or its agent to Lessee. The times set forth herein for the curing of defaults by Lessee are of the essence of this Sublease. Lessee hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Sublease. ARTICLE 15 SURRENDER OF POSSESSION If Lessee shall hold over beyond the expiration of the term herein provided or any renewal or extension thereof, Lessor may at its election either proceed to evict Lessee by legal proceedings or treat such holdover tenancy only as a month-to- month tenancy for 200% of the monthly rental herein specified. If so elected by Lessor, such holdover tenancy may be terminated by either party hereto upon thirty days' prior written notice. ARTICLE 16 OPTION TO PURCHASE Provided that Lessee is not in default of any term of this Sublease and provided that this Sublease has not terminated prior to the termination date, Lessor grants to Lessee the exclusive right and option to purchase (i) all of Lessee's right, title and interest in the Premises under that certain Lease Agreement, dated July 17, 1992, between R & E Hauling Company, Inc., a Maryland corporation, as lessor, and Lessor, as lessee, as amended (the "WM Lease"), and (ii) the Personal Property (together, the "Purchased Property"), upon the following terms and conditions: (a) The option may be exercised by Lessee at any time during the term (or any extended term) of this Sublease upon written notice of exercise to Lessor accompanied by a check in the amount of $50,000 as an earnest money deposit. (b) This Article shall be deemed an irrevocable offer by Lessor to sell the Purchased Property to Lessee on the terms and conditions set forth in this Article. Lessee's exercise of the option shall be deemed Lessee's acceptance of such offer. Such offer and acceptance shall constitute a binding contract for the purchase and sale of the Purchased Property, in accordance with terms of this Article and the then generally prevailing customs and practices relating to the sale of real estate in the county in which the Premises are located. (c) The date of closing shall be as specified in Lessee's notice of exercise of the option, which date shall be no earlier than forty-five (45) days and no later than ninety (90) days after the date of such notice. 8

9 (d) The purchase price of the Purchased Property shall be the "net book value" of the Premises as of the close of the month preceding the month of closing. The "net book value" of the Premises for this purpose shall be determined in a manner consistent with the determination of the "net book value" of the Premises on Schedule 4 to the Asset Purchase Agreement, and shall reflect increases as described in Section 2.1 of this Sublease. (e) Lessee shall be allowed a credit against the purchase price of the Purchased Property in an amount equal to the sum of: (1) one-half of the aggregate "capital charge" component of Lessee's monthly rent paid during the term of this Sublease through the close of the month preceding the month of closing (as the "capital charge" component of the monthly rent for the Premises is shown on Schedule 4 to the Asset Purchase Agreement, and as it may be increased in accordance with Section 2.1 of this Sublease); and (2) the aggregate "monthly depreciation" component of Lessee's monthly rent paid during the term of this Sublease through the close of the month preceding the month of closing (as the "monthly depreciation" component of the monthly rent for the Premises is shown on Schedule 4 to the Asset Purchase Agreement, and as it may be increased in accordance with Section 2.1 of this Sublease). (f) The closing shall occur at the Premises or at such other location as mutually agreed by Lessor and Lessee. (g) Lessor shall deliver to Lessee at the closing such of the following as are applicable: (i) an assignment of Lessor's interest under the WM Lease, in form and content acceptable to Lessee, which assignment shall be consented to by Lessor's lessor and (ii) a bill of sale, in form and content acceptable to Lessee, conveying to Lessee all of Lessor's right, title and interest in and to the Personal Property. (h) This Sublease shall terminate on the date of closing. Rents and other proratable items shall be prorated as of the date of closing. All prorations shall be final. (i) Possession of the Premises shall be delivered to Lessee as the owner of Lessor's interest under the WM Lease at the closing. ARTICLE 17 PERMITS Lessee has obtained the necessary regulatory approvals and permits to operate an incinerator or autoclave at the Premises for the treatment of medical waste. Upon the termination of this Sublease for any purpose, other than pursuant to the exercise of Lessee's option pursuant to Article 16 above, the parties agree to cooperate in good faith with each other so that all of Lessee's regulatory approvals and permits and approvals are transferred to Lessor. Lessee hereby agrees to provide Lessor with access to the Premises and to all records relevant to Lessee's compliance with its regulatory approvals and permits that Lessee maintains in respect of its operation of an incinerator or autoclave at the Premises for the treatment of medical wasteLessee also agrees to provide copies of any and all correspondence from or to regulatory authorities regarding Lessee's operations at the Premises and to notify Lessor as far in advance as possible of any inspections. Lessee agrees to operate at the Premises in full compliance with all applicable laws, regulations and the conditions set forth in Lessee's regulatory approvals and permitst, copies of which have been previously delivered to Lessor. Lessee agrees to defend, indemnify and hold Lessor and its affiliates harmless from and against all indemnifiable damages of Lessor. For this purpose, "indemnifiable damages" of Lessor means the aggregate of all expenses, losses, costs, deficiencies, liabilities and damages (including attorneys' 9

10 fees and court costs) incurred or suffered by Lessor, or any of its directors, agents, employees or affiliates or its affiliates directors, agents or employees, as a result of or in connection with Lessee's operations at the Premises. ARTICLE 18 BROKER'S COMMISSION Lessor and Lessee warrant, each to the other, that there are no brokers involved in this lease transaction. If any other person shall assert a claim to a fee, commission or other compensation on account of alleged employment as a broker or finder or for performance of services as a broker or finder in connection with this Sublease, the party hereto under whom the broker or finder is claiming shall indemnify and hold harmless the other party against and from any such claim and all costs, expenses and liabilities incurred in connection with such claim or any action or proceeding brought thereon. ARTICLE 19 SUBLEASE PROVISIONS SECTION 19.1 This Sublease is a sublease of Lessor's leasehold interest in the Premises under the WM Lease. SECTION 19.2 Lessee shall perform all of Lessor's obligations under the WM Lease as and to the extent provided in this Sublease. Except as the burden passes through to Lessee under this Sublease, Lessor shall perform all of its obligations under the WM Lease. SECTION 19.3 Lessor will use reasonable efforts to procure the written consent of the landlord under the WM Lease to the sublease of the Premises under this Sublease substantially in the form attached hereto as Exhibit C. ARTICLE 20 PERSONAL PROPERTY Lessor represents and warrants to Lessee that Lessor holds title to the Personal Property free and clear of all liens, claims and encumbrances, including any claims by the landlord under the WM Lease. ARTICLE 21 MISCELLANEOUS SECTION 21.1 The captions of this Sublease are for convenience only and are not to be construed as part of this Sublease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. SECTION 21.2 If any term or provision of this Sublease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Sublease shall not be affected thereby, but each term and provision of this Sublease shall be valid and be enforced to the fullest extent permitted by law. SECTION 21.3 This Sublease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. SECTION 21.4 Lessor and Lessee agree that this Sublease is not in consideration for or dependent or contingent in any manner upon any other contract, lease or agreement between them and that the term, rental 10

11 and other provisions of this Sublease are not intended by said parties to be tied in with any other such contract, lease or agreement; but on the contrary, this Sublease and all of its provisions are entirely and completely independent of any other transactions or relationship between the parties. SECTION 21.5 The failure of Lessor to enforce any term, covenant, condition, or agreement hereof by reason of its breach by Lessee after notice hereunder shall not be deemed to avoid or affect the right of Lessor to enforce the same term, covenant, condition or agreement on the occasion of the subsequent default or reach. IN WITNESS WHEREOF, Lessor and Lessee have caused these presents to be executed as of the day and year first herein above written. Lessor: WASTE MANAGEMENT OF MARYLAND, INC. a Maryland corporation By: /s/ Thomas J. Jennings --------------------------------- Name: Thomas J. Jennings Title: Vice President Lessee: STERICYCLE, INC. a Delaware corporation By: ---------------------------------- Name: Linda D. Lee Title: Vice President 11

12 EXHIBIT A LEGAL DESCRIPTION AND ADDRESS [Omitted] Commonly known as: 2510 Erick Street, Baltimore, Maryland 12

13 EXHIBIT B PERSONAL PROPERTY [Omitted] 13

14 EXHIBIT C LANDLORD'S CONSENT [Omitted] 14

1 AGREEMENT FOR SUBLEASE Exhibit 10.6 THIS SUBLEASE (the "Sublease") is made as of this 30th day of July, 1997 by and between WMI Medical Services of Arizona, Inc., an Arizona corporation ("Lessor"), and Stericycle, Inc., a Delaware corporation ("Lessee"), WITNESSETH: ARTICLE 1 PREMISES AND TERM Lessor, for and in consideration of the rents herein reserved and the covenants and agreements herein contained on the part of the Lessee to be kept observed and performed, has demised and leased, and does by these presents demise and lease to the Lessee a certain parcel (or parcels) of real estate located at the address contained in and the legal description described on Exhibit A attached hereto and made a part hereof. TO HAVE AND TO HOLD the above described real estate, together with the buildings and improvements situated thereon and the rights, privileges and appurtenances thereunto belonging or appertaining (the "Premises"), unto the Lessee for and during the term of three (3) years, commencing on the 1st day of September, 1997 and ending on the 31st day of August, 2000, unless said term shall be sooner terminated as herein provided. Lessor hereby also leases to Lessee the equipment, furniture, fixtures and other tangible personal property located on the Premises, which personal property is listed on the attached Exhibit B (the "Personal Property"). The Lessee may terminate this Sublease, effective as of the last day of any calendar month, upon six months' prior written notice to the Lessor given at any time during the term of this Sublease. ARTICLE 2 RENT SECTION 2.1 In consideration of the leasing aforesaid, Lessee hereby covenants and agrees to pay Lessor, in care of Waste Management of Phoenix, 3000 South 19th Avenue, Phoenix, Arizona 85004 (Attention: Vice President-Controller), or at such other place as the Lessor may from time to time designate in writing, aggregate rental [Omitted; filed separately with the Securities and Exchange Commission] per annum for the term of this Sublease (sometimes herein referred to as the "rent") payable monthly in installments of [Omitted; filed separately with the Securities and Exchange Commission] each on the first day of each and every month of the term hereof beginning September 1, 1997. However, if the term of this Sublease shall commence on a date other than the first day of a calendar month or end on a day other than the last day of a calendar month, the first and last month's rent shall be prorated based upon the ratio that the number of days in the term within such month bears to the total number of days in such month. SECTION 2.2 Lessee agrees to pay in addition to the rent herein reserved, all sums which may become due by reason of the failure of Lessee to comply with all the covenants of this Sublease and any and all damages, costs, expenses and impositions which Lessor may suffer or incur by reason of any default of the Lessee or failure on its part to comply with all the covenants of this Sublease, and each of them. SECTION 2.3 Upon the signing of this Sublease, Lessee shall pay to Lessor the first month's rent and as a security deposit the sum of [Omitted; filed separately with the Securities and Exchange Commission] which shall secure the various covenants of Lessee under this Sublease, including payment of rent. Lessor shall keep such security deposit and shall return the same to Les- 1

2 see within thirty (30) days of the termination of Lessee's tenancy hereunder, without interest. In the event that Lessee shall breach any provision of this Sublease which may be cured through the payment of money, or the hiring of services, Lessor shall be entitled to so cure, using the Lessee's security deposit, and upon written notice to Lessee, Lessee shall within twenty-one (21) days replenish the security deposit to the sum set forth above. ARTICLE 3 NET LEASE SECTION 3.1 It is the purpose and intent of Lessor and Lessee that the rental provided in Article 2 during the term of this Sublease shall be net to Lessor, except for the items noted in Sections 4.2 and 4.4 of this Sublease, and that, except for such items, all costs, expenses, real estate taxes and obligations of every kind and nature whatsoever relating to the Premises which may arise during the term of this Sublease shall be paid by Lessee, and Lessor shall be indemnified and saved harmless by Lessee against the same. SECTION 3.2 Lessee shall pay all charges for natural gas, water, electricity and telephone services used on the Premises during the term of this Sublease. ARTICLE 4 USE, MAINTENANCE, REPAIRS AND ACCESS SECTION 4.1 Lessee and all persons claiming by, through or under Lessee may use and occupy the Premises for the treatment of medical waste and office purposes solely in compliance with all federal, state and local laws and regulations. SECTION 4.2 Throughout the term of this Sublease, Lessee shall, at its cost and expense properly, maintain and repair all structures and improvements, including heating, plumbing, ventilating and air conditioning systems, and all fixtures, equipment and furnishings; provided however, that Lessor shall be obligated to make promptly and at its own expense all structural repairs which are required on the Premises to the extent that the aggregate cost of such repairs exceed $25,000 in any calendar year; and provided further, however, that neither Lessor nor Lessee shall repair or replace any capital structures or improvements without first having obtained the prior written consent of the other party. Lessee may, in its discretion and at its expense, make any alterations and changes it deems necessary to the Premises for the purpose of best serving its business. SECTION 4.3 Lessor and Lessee agree that any and all fixed improvements made to the Premises by Lessee shall become the sole property of Lessor upon termination of this Sublease as long as said improvements do not detract from the fair market value of the Premises, in which case, Lessee agrees to remove all of said improvements and return the Premises to Lessor in the same condition in which the Premises were received on the commencement date of this Sublease, normal wear and tear excepted. In any case, Lessee shall be allowed to remove all personal property owned by Lessee from the Premises. SECTION 4.4 Lessee shall not be responsible for any costs of Lessor under Lessor's covenants of quiet enjoyment and peaceable possession or Lessor's taxes due on Lessor's income, gross receipts or other similar items that are not reasonably considered to be in the nature of real estate taxes. SECTION 4.5 Lessee may, in its discretion, make any alterations and changes it deems necessary to the Premises for the purpose of best serving its business. If Lessee shall alter or change the Premises during the term of this Sublease, Lessee shall make such alterations in compliance with the Americans with Disabilities Act of 1990 ("ADA") and all statutes, ordinances, laws, orders, rules, regulations and requirements of all applicable federal state, county and other agencies or authorities now in effect with respect to the use, occupation or alteration of the Premises ("Laws") and, upon request of Lessor, shall deliver evi- 2

3 dence thereof reasonably satisfactory to Lessor. Lessor hereby represents that the Premises are currently in compliance with the ADA and all other Laws and agrees to indemnify Lessee for any damages or expenses (including attorneys' fees) incurred by Lessee as a result of Lessor's breach of the foregoing representation. SECTION 4.6 During the term of this Sublease, Lessee shall keep, afford and allow access to Lessor to the Premises at all reasonable times. Except in an emergency, Lessor shall give at least twenty four (24) hours' advance notice, written or oral of its intent to gain access to the Premises. SECTION 4.7 Lessee shall vacate and deliver up the Premises upon the expiration of the term of this Sublease, or any renewal thereof or sooner termination of the term of this Sublease, in the same condition that the Premises were in as of the date hereof, reasonable wear and tear excepted. ARTICLE 5 INDEMNIFICATION SECTION 5.1 Lessee agrees to defend, indemnify and save Lessor harmless from and against any and all liability, loss, damage, and Environmental Damages, as defined herein, and expense (including reasonable attorneys' fees) and from and against any and all suits, claims and demands of every kind and nature made by or on behalf of any and all persons, firms or corporations, provided that any of the foregoing (i) are due to Lessee's negligence, willful misconduct or breach hereof, (ii) arise out of or are based upon any accident, injury or damage, however occurring, which happens in, or about the Premises or entrances thereto during the term of this Sublease, (iii) arise out of or are based upon Lessee's use, occupation or operation of the Premises or facilities during the term hereof or (iv) with respect to Environmental Damages, arise out of any Hazardous Substance located on the Premises during the term of this Sublease or any event or condition which occurs or exists on the Premises during the term of this Sublease. Nothing in this Section shall relieve Lessor from, or obligate Lessee to indemnify Lessor for, liability resulting from Lessors's own negligence, wilful misconduct or breach of its obligations under this Sublease. Lessee's indemnification obligations under this Section 5.2 shall extend to Lone Buttee Industrial Development Corporation and the Gila River Indian Community and their respective successors and assigns. SECTION 5.2 Lessor agrees to defend, indemnify and save Lessee harmless from and against any and all liability, loss, damage, and Environmental Damages, as defined herein, and expense (including reasonable attorneys' fees) and from and against any and all suits, claims and demands of every kind and nature made by or on behalf of any and all persons, firms or corporations, provided that any of the foregoing (i) are due to Lessor's negligence, wilful misconduct or breach hereof, (ii) arise out of or are based upon any accident, injury or damage, however occurring, which happened in or about the Premises or entrances thereto at any time prior to the term of this Sublease or (iii) with respect to Environmental Damages, arise out of any Hazardous Substance located on or adjacent to the Premises prior to the term of this Sublease or any event or condition which occurred or existed prior to the term of this Sublease. Nothing in this Section shall relieve Lessee from, or obligate Lessor to indemnify Lessee for, liability resulting from Lessee's own negligence, wilful misconduct or breach of its obligations under this Sublease. SECTION 5.3 Lessor agrees to give Lessee prompt written notice of any claims or demands against the Lessor arising out of or based upon any of the liabilities, losses or expenses against which Lessee is bound to defend, indemnify and save harmless the Lessor. Lessee shall have full control over any such claim or litigation, and Lessor shall reasonably cooperate with Lessee in such efforts. Lessee agrees to give Lessor prompt written notice of any claims or demands against the Lessee arising out of or based upon any of the liabilities, losses or expenses against which Lessor is bound to defend, indemnify and save harmless the Lessee. Lessor shall have full control over any such claim or litigation, and Lessee shall reasonably cooperate with Lessor in such efforts. SECTION 5.4 Lessee shall indemnify and save harmless Lessor from and against all mechanic's liens and notices thereof and all claims thereof on account of any materials furnished or labor performed in, about or 3

4 in connection with the Premises or the sidewalks and curbs adjacent thereto except those arising from work undertaken by Lessor. Should any such lien be filed, Lessee shall promptly bond or otherwise discharge the same. ARTICLE 6 ENVIRONMENTAL REPRESENTATIONS SECTION 6.1 As used herein, "Hazardous Substance" means any substance that is toxic, ignitable, reactive, corrosive or radioactive and that is regulated by any local government, the state in which the Premises are located or the United States government. "Hazardous Substance" includes any and all materials or substances that are now or hereafter defined as "hazardous waste," "extremely hazardous waste," "toxic substance," or a "hazardous substance" pursuant to state, federal or local governmental law, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. ss.ss. 9601 et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. ss.ss. 6901 et seq.). "Hazardous Substance" includes but is not restricted to friable asbestos, polychlorinated biphenyls ("PCB's"), and petroleum products. "Environmental Damages" means all claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability), encumbrances, liens, costs and expenses of whatever kind or nature, contingent or otherwise matured or otherwise matured, foreseeable or unforeseeable, including, without limitation, reasonable attorneys' and consultants' fees, incurred at any time as a result of the existence of Hazardous Substance upon, about, or beneath the Premises or migrating or threatening to migrate to or from the Premises, or the existence of a violation of any governmental requirement pertaining to the environment, health or safety arising from the Premises, or the existence of a violation of any governmental requirement pertaining to the environment, health or safety arising from or relating to the Property. The representations and warranties contained in this Article shall survive the expiration or termination of this Sublease and any transfer of title to the Premises (whether by sale or otherwise) and shall not be affected by any investigation by or on behalf of Lessee or by any information which Lessee may have or obtain with respect thereto. SECTION 6.2 Except in compliance with all governmental requirements pertaining to health, safety and the environment, Lessee shall not knowingly cause or permit any Hazardous Substance to be used, stored, generated, or disposed of on in or about the Premises by Lessee, Lessee's agents, employees, contractors, or invitees. If Lessee causes any contamination of the Premises by a release of such Hazardous Substances for which Lessee is legally liable, in addition to its obligations contained in Section 5. 1, Lessee shall, upon request of Lessor, at Lessee's sole expense, take any and all necessary actions to return the Premises to the condition existing prior to the release of any such Hazardous Substances on the Premises, including, but not limited to, any and all clean-up and remedial actions. ARTICLE 7 CASUALTY In case of damage to or destruction of all or part of the Premises or all or part of the fixtures or improvements thereon by fire or other casualty, Lessee shall promptly at its own expense repair, restore or rebuild the same to no less than the condition existing immediately prior to the occurrence of such fire or other casualty and promptly clear away the remaining debris to return the Premises to a safe condition. 4

5 ARTICLE 8 INSURANCE SECTION 8.1 Lessee covenants and agrees that it will at all times, at its sole cost and expense, keep the building or buildings and improvements on the Premises occupied by Lessee insured under a fire insurance policy with extended coverage endorsements for not less than its full or their full insurance value above foundations, and will keep all such insurance in full force and effect during the entire term of this Sublease. Lessee shall cause Lessor to be named as an additional insured under such fire insurance policy. It is covenanted and agreed between the parties hereto that in the event of loss under any such policy or policies, Lessee shall proceed with the repair and restoration of the damaged or destroyed improvements occupied by Lessee in accordance with Article 7 hereof and that the insurance proceeds shall be paid to and held by Lessee to be paid out for the expense of repairing or rebuilding the buildings or improvements occupied by Lessee which have been damaged or destroyed. SECTION 8.2 Lessor and Lessee release each other and waive any right of recovery against each other for loss or damage to their respective property which occurs in or about the Premises (whether due to negligence of either party, their agents, employees, officers, contractors, licensees, invitees or otherwise) to the extent that such loss or damage is reimbursed by insurance proceeds. Lessor and Lessee agree that all policies of insurance obtained by either of them in connection with the Premises shall contain appropriate waiver of subrogation clauses. SECTION 8.3 Lessee covenants and agrees that it will at all times during the term hereof carry and maintain, for the mutual benefit of Lessor and Lessee, general public liability insurance against claims for personal injury, death or property damage, occurring in, on or about the Premises, such insurance to afford protection to the limit of not less than One Million Dollars ($1,000,000) per occurrence, for bodily injury and property damage. Lessee's general public liability insurance shall also be for the benefit of Lone Butte Industrial Development Corporation and the Gila River Indian Community, which shall be named as additional insureds. Lessee shall provide Lone Butte Industrial Development Corporation with a certificate of insurance to this latter effect and, if requested, a copy of the underlying insurance policy. ARTICLE 9 CONDEMNATION SECTION 9.1 If the use, occupancy or title of the entire Premises shall be taken, requisitioned or sold in, by or on account of any actual or threatened eminent domain proceeding or other action by any person having the power of eminent domain (the "Condemnation"), then and in that event the term of this Sublease shall terminate upon Condemnation, and any award, compensation or damages shall be divided between Lessor and Lessee in accordance with their respective interests in and to the Premises. SECTION 9.2 In the event that a portion (but less than all) of the Premises or any interest therein, including but not limited to the right of free access to the Premises, shall be so taken, requisitioned or sold as to render the remaining portion of the Premises, in the sole opinion of Lessee, unsuitable for Lessee's use, then the Lessee may, at its option, terminate this Sublease and the term hereof upon Condemnation, and any award shall be divided between Lessor and Lessee in the same manner and upon the same conditions as set forth in Section 9.1. Such option shall be exercised by Lessee by written notice to Lessor not less than thirty (30) days prior to the date on which possession of such portion of the Premises shall be taken. If Lessee shall not so elect to terminate this Sublease and the term hereof then, upon the payment of any award arising from such Condemnation, the amount received shall be paid to and held by Lessor and used in defraying the cost and expense of making repairs to and alterations of the improvements on the Premises 5

6 for the purpose of restoring the same to an economic architectural unit to the extent that may have been made necessary by such Condemnation, and the balance, if any, remaining shall be paid to Lessor. SECTION 9.3 In case the taking of part of the Premises by Condemnation renders the Premises untenantable in whole or in part, rent shall abate until the Premises are again fully tenantable. If as a result of any such taking, the area of the Premises is permanently reduced, basic rent hereunder shall be reduced in proportion to the reduction in area of the Premises. ARTICLE 10 SUBORDINATION This Sublease and Lessee's leasehold estate and all rights of Lessee hereunder shall be subject and subordinate at all times in all respects to the lien of any and all mortgages which Lessor may make upon any right, title or interest of Lessor in the Premises, and to any and all extensions and renewals and any and all new mortgages made in lieu of or in replacement of any such mortgage, provided that any such mortgage shall provide that so long as Lessee shall not be in default in the performance and observance of the terms, covenants, conditions and limitations in this Sublease contained on the part of the Lessee to be performed and observed, no foreclosure of the lien of said mortgage for default thereof shall impair the right of Lessee to enjoy this Sublease pursuant to its terms. In the event of acquisition of Lessor's interest in this Sublease by any such mortgagee or anyone claiming through or under such mortgagee, Lessee will recognize as its lessor such mortgagee or the person claiming through or under such mortgagee who shall so acquire title to the Lessor's interest in this Sublease. ARTICLE 11 ASSIGNMENT AND SUBLETTING Lessee shall not assign this Sublease or sublease all or any portions of the Premises without first obtaining Lessor's prior written consent, which consent shall not be unreasonably withheld. ARTICLE 12 FIXTURES SECTION 12.1 Subject to the provisions contained in Section 4.3, all buildings and improvements on the Premises and all plumbing, heating, fighting, electrical and air conditioning fixtures and equipment and other articles of personal property used in the operation of such buildings as such (as distinguished from operations incident to the business of Lessee) attached to the Premises (sometimes herein referred to as "Building Fixtures"), shall be and remain a part of the Premises and shall constitute the property of Lessor. SECTION 12.2 Lessee may at any time and from time to time at its expense install its trade fixtures on the Premises. All of Lessee's trade fixtures and all personal property, fixtures, apparatus, machinery and equipment now or hereafter located upon the Premises (other than Building Fixtures) and owned by the Lessee or any other occupants of the Premises, and whether or not the same are affixed thereto, shall be and remain the personal property of Lessee or such other occupants and the same are herein sometimes referred to as "Lessee's Equipment." Lessee's Equipment may be removed from time to time by Lessee or other occupants of the Premises. Any damage caused by such removal shall be repaired by Lessee at Lessee's expense. 6

7 ARTICLE 13 NOTICES OR DEMANDS All notices to or demands upon Lessor or Lessee desired or required to be given under any of the provisions hereof shall be deemed to have been duly and sufficiently given if a copy thereof shall have been hand-delivered or mailed by United States first class mail in an envelope properly stamped and addressed to Lessee at 1419 Lake Cook Road, Suite 410, Deerfield, Illinois 60015, or at such other address as Lessee may theretofore have furnished by written notice to Lessor; and any notices or demands from Lessee to Lessor shall be deemed to have been duly and sufficiently given if a copy thereof shall have been hand-delivered or mailed by United States first class mail in an envelope properly stamped and addressed to the Lessor c/o Waste Management, Inc. at 3001 Butterfield Road, Oak Brook, Illinois 60521, Attention: General Counsel or at such other address as Lessor may have furnished by written notice to Lessee. ARTICLE 14 DEFAULT AND REMEDIES UPON DEFAULT SECTION 14.1 If Lessee shall default in the payment of the rent or any part thereof when due as herein provided, and such default shall continue for ten (10) days after notice thereof in writing to Lessee, or if default shall be made in any of the other covenants, agreements, conditions or undertakings herein contained to be kept, observed and performed by Lessee, and such default shall continue for thirty (30) days after notice thereof in writing to Lessee, or if Lessee shall abandon the Premises, then and in any such event it shall be lawful for Lessor, at its election to declare the term ended and to take appropriate legal action to re-enter and regain possession of the Premises. If default shall be made in any covenant, agreement, condition or undertaking herein contained to be kept, observed and performed by Lessee, other than the payment of rent as herein provided, which cannot with due diligence be cured within a period of thirty (30) days, and if notice thereof in writing shall have been given to Lessee, and if Lessee prior to the expiration of thirty (30) days from and after the giving of such notice commences to eliminate the cause of such default and proceeds diligently and with reasonable dispatch to take all steps and do all work required to cure such default and does so cure such default, then Lessor shall not have the right to declare the said term ended by reason of such default; provided, however, that the curing of any default in such manner shall not be construed to limit or reduce the right of Lessor to declare said term ended and enforce all of its rights and remedies hereunder for any default not so cured. SECTION 14.2 If a default occurs and is not cured within the time permitted herein, Lessor shall have the rights and remedies hereinafter set forth, which shall be distinct, separate and cumulative with and in addition to any other right or remedy allowed under any law or other provisions of this Sublease: (a) Lessor may terminate this Sublease, repossess the Premises by detainer suit or other lawful means, and recover as damages a sum of money equal to (a) any unpaid rent as of the termination date including interest accruing from the due date thereof at the rate of twelve percent (12%) per annum, (b) any unpaid rent which would have accrued after the termination date through the time of award including interest accruing from the due date thereof at the rate of twelve percent (12%) per annum, (c) any unpaid rent which would have accrued after the time of award during the balance of the term discounted to the present value of such amount, and (d) any other amounts necessary to compensate Lessor for all detriment or damages proximately caused by Lessee's failure to perform its obligations under this Sublease including, without limitation, Lessor's costs of reletting. If applicable law shall require that the amount of unpaid rent recoverable hereunder be modified to reflect the "worth at the time of award," computed by allowing or discounting interest at specified rates, or the "reasonable value" of the rent claimed, or shall require any other specific modification of the foregoing provisions, such law shall govern and control. (b) Lessor shall at all times have the rights and remedies (which shall be cumulative with any other rights of Lessor hereunder or under any law): (i) to seek any declaratory, injunctive or other equitable re- 7

8 lief and specifically enforce this Sublease or restrain or enjoin a violation or breach of any provision hereof and (ii) to sue for and collect any unpaid rent. Such rights may be exercised at any time and from time to time. Notwithstanding anything to the contrary contained in this Sublease, to the extent not expressly prohibited by applicable law, in the event of any default by Lessee not cured within any applicable time for cure hereunder, Lessor may terminate this Sublease and accelerate and declare that all rent reserved for the remainder of the term shall be immediately due and payable; provided, Lessor shall, after receiving payment of the same from Lessee, be obligated to turn over to Lessee any actual net reletting proceeds thereafter received during the remainder of the term, up to the amount so received from Lessee pursuant to this provision. (c) No re-entry or repossession, repairs, changes, alterations and additional reletting, acceptance of keys from Lessee, or any other action or omission by Lessor shall be construed as an election by Lessor to terminate this Sublease or accept a surrender of the Premises, nor shall the same operate to release the Lessee in whole or in part from any of the Lessee's obligations hereunder, unless express written notice of such intention is sent by Lessor or its agent to Lessee. The times set forth herein for the curing of defaults by Lessee are of the essence of this Sublease. Lessee hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Sublease. ARTICLE 15 SURRENDER OF POSSESSION If Lessee shall hold over beyond the expiration of the term herein provided or any renewal or extension thereof, Lessor may at its election either proceed to evict Lessee by legal proceedings or treat such holdover tenancy only as a month-to- month tenancy for 200% of the monthly rental herein specified. If so elected by Lessor, such holdover tenancy may be terminated by either party hereto upon thirty days' prior written notice. ARTICLE 16 PERMITS Lessee has obtained the necessary regulatory approvals and permits to operate an incinerator or autoclave at the Premises for the treatment of medical waste. Upon the termination of this Sublease for any purpose, other than pursuant to the exercise of Lessee's option pursuant to Article 16 above, the parties agree to cooperate in good faith with each other so that all of Lessee's regulatory approvals and permits and approvals are transferred to Lessor. Lessee hereby agrees to provide Lessor with access to the Premises and to all records relevant to Lessee's compliance with its regulatory approvals and permits that Lessee maintains in respect of its operation of an incinerator or autoclave at the Premises for the treatment of medical waste. Lessee also agrees to provide copies of any and all correspondence from or to regulatory authorities regarding Lessee's operations at the Premises and to notify Lessor as far in advance as possible of any inspections. Lessee agrees to operate at the Premises in full compliance with all applicable laws, regulations and the conditions set forth in Lessee's regulatory approvals and permitst, copies of which have been previously delivered to Lessor. Lessee agrees to defend, indemnify and hold Lessor and its affiliates harmless from and against all indemnifiable damages of Lessor. For this purpose, "indemnifiable damages" of Lessor means the aggregate of all expenses, losses, costs, deficiencies, liabilities and damages (including attorneys' fees and court costs) incurred or suffered by Lessor, or any of its directors, agents, employees or affiliates or its affiliates directors, agents or employees, as a result of or in connection with Lessee's operations at the Premises. 8

9 ARTICLE 17 BROKER'S COMMISSION Lessor and Lessee warrant, each to the other, that there are no brokers involved in this lease transaction. If any other person shall assert a claim to a fee, commission or other compensation on account of alleged employment as a broker or finder or for performance of services as a broker or finder in connection with this Sublease, the party hereto under whom the broker or finder is claiming shall indemnify and hold harmless the other party against and from any such claim and all costs, expenses and liabilities incurred in connection with such claim or any action or proceeding brought thereon. ARTICLE 18 SUBLEASE PROVISIONS SECTION 18.1 This Sublease is subject and subordinate to the provisions of Lease No. B-GR-61 dated November 28, 1968, as amended, between Lone Butte Industrial Development Corporation ("Lone Butte") and Gila River Indian Community ("GRIC"), as amended (the "Master Lease") and Lease No. B-GR-61-E-1 dated June 10, 1970, between Lone Butte and the Fillmore Partnership, as amended (the "Fillmore Sublease"). In the event of any conflict between the provisions of the Master Lease or the Fillmore Sublease and the provisions of this Sublease, the provisions of the Master Lease or the Fillmore Sublease, as the case may be, shall be controlling. SECTION 18.2 This Sublease is a sublease of Lessor's tenacy in the Premises under the Sublease Agreement to Lease No. B-GR-61-E, dated November 23, 1988, between the Fillmore Partnership, as landlord, and Southwest S.T.A.T., an Arizona corporation, as tenant, as extended in accordance with Resolution EDSC GR-07-92 of the Economic Development Standing Committee of the Gila River Indian Community Council (as extended, the "WMI Lease"). In accordance with Section XIII.E of the WMI Lease, Lessee agrees to perform faithfully and to assume and be bound by all the terms, covenants, conditions, provisions and provisions of the WMI Lease during the term of this Sublease. SECTION 18.3 Lessor will use reasonable efforts to procure the written consent of the landlord under the Lessor Lease to the sublease of the Premises under this Sublease substantially in the form attached hereto as Exhibit C. ARTICLE 19 PERSONAL PROPERTY Lessor represents and warrants to Lessee that Lessor holds title to the Personal Property free and clear of all liens, claims and encumbrances, including any claims by the landlord under the WMI Lease. ARTICLE 20 MISCELLANEOUS SECTION 20.1 During the term of this Sublease, Lessee shall pay to Lone Butte a road maintenance fee of $25.00 per month, plus $1.00 per month for each employee at the Premises, which shall be paid monthly in advance. SECTION 20.2 Lessee understands that Lone Butte will provide security patrol services to inspect the exterior of the improvements on the Premises periodically throughout each 24-hour period. Lessee shall pay Lone Butte $225 per month for these security services, which shall be paid monthly in advance. Lessee acknowledges that neither Lone Butte nor GRIC shall be responsible for, and Lessee hereby waives, any 9

10 claims arising out of any alleged failure by Lone Butte to provide adequate security patrol services, except for claims against Lone Butee arising out of its willful misconduct. Lessee understands that Lone Butte may, upon 30 days' written notice to Lessee, discontinue the security patrol services described in this Section 21.2. In this event, Lessee shall be relieved of any obligation to make any further payments under this Section 21.2 (but shall not be relieved of its obligation to make any delinquent payments). SECTION 20.3 The captions of this Sublease are for convenience only and are not to be construed as part of this Sublease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. SECTION 20.4 If any term or provision of this Sublease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Sublease shall not be affected thereby, but each term and provision of this Sublease shall be valid and be enforced to the fullest extent permitted by law. SECTION 20.5 This Sublease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. SECTION 20.6 Lessor and Lessee agree that this Sublease is not in consideration for or dependent or contingent in any manner upon any other contract, lease or agreement between them and that the term, rental and other provisions of this Sublease are not intended by said parties to be tied in with any other such contract, lease or agreement; but on the contrary, this Sublease and all of its provisions are entirely and completely independent of any other transactions or relationship between the parties. SECTION 20.7 The failure of Lessor to enforce any term, covenant, condition, or agreement hereof by reason of its breach by Lessee after notice hereunder shall not be deemed to avoid or affect the right of Lessor to enforce the same term, covenant, condition or agreement on the occasion of the subsequent default or reach. IN WITNESS WHEREOF, Lessor and Lessee have caused these presents to be executed as of the day and year first herein above written. Lessor: WMI MEDICAL SERVICES OF ARIZONA, INC. an Arizona corporation By: /s/ Howard S. Yamaguchi ----------------------------------------- Name: Howard S. Yamaguchi Title: Assistant Secretary Lessee: STERICYCLE, INC. a Delaware corporation By: /s/ Linda D. Lee ----------------------------------------- Name: Linda D. Lee Title: Vice President 10

11 EXHIBIT A LEGAL DESCRIPTION AND ADDRESS [Omitted] Commonly known as: 1251 South Nelson Drive, Chandler Arizona 11

12 EXHIBIT B PERSONAL PROPERTY [Omitted] 12

13 EXHIBIT C LANDLORD'S CONSENT [Omitted] 13

1 FIRST AMENDMENT TO Exhibit 10.7 STERICYCLE, INC. AMENDED AND RESTATED INCENTIVE COMPENSATION PLAN The Stericycle, Inc. Amended and Restated Compensation Plan (the "Plan") is amended as follows pursuant to the authority of the Board of Directors of Stericycle, Inc. under Paragraph 11.2 of the Plan: 1. ARTICLE 2. The following definition is added to the definitions in Article 2 of the Plan: CHANGE OF CONTROL means an event or the last of a series of related events by which: (1) any Person directly or indirectly acquires or otherwise becomes entitled to vote 51% or more of the Company's Common Stock (or, if in the future the Company has more than one class of stock outstanding, any Person directly or indirectly acquires or otherwise becomes entitled to vote stock having 51% or more of the voting power in elections for Directors); or (2) during any 24-month period a majority of the members of the Board of Directors ceases to consist of Directors who were: (a) Directors at the beginning of the period ("Continuing Directors"); or (b) appointed to office after the start of the period by the Board of Directors with the approval of two-thirds of the incumbent Continuing Directors ("Appointed Directors"); or (c) elected to office after the start of the period by the Company's stockholders following nomination for election by the Board of Directors with the approval of two-thirds of the incumbent Continuing Directors ("Elected Directors"); or (d) appointed to office after the start of the period by the Board of Directors with the approval of two-thirds of the incumbent Continuing, Appointed and Elected Directors; or (e) elected to office after the start of the period by the Company's stockholders following nomination for election by the Board of Directors with the approval of two-thirds of the incumbent Continuing, Appointed and Elected Directors; or (3) the Company merges or consolidates with another corporation, and holders of outstanding shares of the Company's Common Stock immediately prior to the merger or consolidation do not own stock in the survivor of the merger or consolidation having more than 75% of the voting power in elections for directors; or (4) the Company sells all or a substantial portion of the consolidated assets of the Company and its Subsidiaries,and the Company does not own stock in the purchaser having more than 75% of the voting power in elections for directors. As used in this definition, a "Person" means any "person" as that term is used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, together with all of that person's "affiliates" and "associates" as those terms are defined in Rule 12b-2 of the Securities and Exchange Commission. 2. PARAGRAPH 8.2. Paragraph 8.2 of the Plan is amended to read as follows: 8.2 TERM. The Plan Administrator shall determine (i) whether each Option shall be exercisable in full at one time or in Installments at different times and (ii) the time or times at which the Option or Installments shall become and remain exercisable. No Option or Installment may have an Expiration Date more than 10 years from the Grant Date. Notwithstanding any limitation on exercisability in Paragraph 8.5 or anything to the contrary in the underlying Option Agreement, each outstanding Option or Installment shall become exercisable in full upon a Change in Control. In addition, the Plan Administrator, in its discretion, may accelerate the exercisability of any Option or Installment at any time under any related or other circumstances. 3. EFFECTIVE DATE. This Amendment shall become effective as of the date of its approval by the Board of Directors of Stericycle, Inc. -1-

1 FIRST AMENDMENT TO Exhibit 10.8 STERICYCLE, INC. DIRECTORS STOCK OPTION PLAN The Board of Directors of Stericycle, Inc. (the "Company") adopted the Stericycle, Inc. Directors Stock Option Plan (the "Plan") on June 11, 1996. The Plan was approved and adopted by the Company's stockholders as of July 31, 1996. Pursuant to the authority of the Board of Directors under Section 8.2 of the Plan, Section 6.4 of the Plan is amended to read as follows, effective retroactive to August 28, 1996: 6.4 TRANSFERABILITY. An Option may be transferred by the Outside Director to whom it was granted subject to the following conditions and limitations: (a) The Option may be transferred only to one or more of the following persons or entities ("Permissible Transferees"): (1) a member of the Outside Director's immediate family (consisting of his or her spouse, children and grandchildren); (2) a trust for the primary benefit of the Outside Director or any one or more members of his or her immediate family; (3) a corporation, partnership or other entity which, together with its affiliates, owns at the time of transfer at least 2.0% of the issued and outstanding shares of Common Stock and with which the Outside Director has a contractual obligation to pay over or assign his or her "outside" remuneration directly or indirectly received by reason of his or her employment by or affiliation with such corporation, partnership or other entity. (b) A Permissible Transferee to whom an Option is transferred shall be subject to all of the terms and conditions of the Plan and of the Option Agreement evidencing the Option (as "Option Agreement" is defined in Section 6.5). The Permissible Transferee may not transfer, assign or pledge the Option, however, except, solely if the Permissible Transferee is a natural person, by will or applicable intestacy laws. Section 6.3, dealing with the early expiration of Options, shall continue in effect in respect of the Permissible Transferee as if the Outside Director who transferred the Option had not done so, i.e., references in Section 6.3 to the "holder of an Option" or "holder" shall be construed as referring to the Outside Director who transferred the Option and not to the Permissible Transferee. The Company shall not be under any duty to notify the Permissible Transferee that the Outside Director who transferred the Option has ceased to serve as an Outside Director. (c) No transfer of an Option by an Outside Director to a Permissible Transferee shall relieve the Outside Director of his or her withholding obligations under Section 7.3. Except for transfers to Permissible Transferees, an Outside Director may not transfer, assign or pledge an Option (whether by operation of law or otherwise) except as provided by will or applicable intestacy laws; and no Option shall be subject to execution, attachment or similar process. An Option may be exercised only by the Outside Director to whom it was granted (or by the Permissible Transferee to whom the Outside Director transferred the Option), except in the case of the death of the Outside Director (or the death of the Permissible Transferee), when it may be exercised by the person or persons to whom it passes by will or applicable intestacy laws. 1

2 SECOND AMENDMENT TO STERICYCLE, INC. DIRECTORS STOCK OPTION PLAN The Stericycle, Inc. Directors Stock Option Plan, as amended by a First Amendment (as amended, the "Plan") is amended as follows pursuant to the authority of the Board of Directors of Stericycle, Inc. under Paragraph 8.2 of the Plan: 1. ARTICLE 2. The definition of "Fundamental Change" in Article 2 of the Plan is deleted. The following definition is added to the remaining definitions in Article 2: CHANGE OF CONTROL means an event or the last of a series of related events by which: (1) any Person directly or indirectly acquires or otherwise becomes entitled to vote 51% or more of the Company's Common Stock (or, if in the future the Company has more than one class of stock outstanding, any Person directly or indirectly acquires or otherwise becomes entitled to vote stock having 51% or more of the voting power in elections for Directors); or (2) during any 24-month period a majority of the members of the Board of Directors ceases to consist of Directors who were: (a) Directors at the beginning of the period ("Continuing Directors"); or (b) appointed to office after the start of the period by the Board of Directors with the approval of two-thirds of the incumbent Continuing Directors ("Appointed Directors"); or (c) elected to office after the start of the period by the Company's stockholders following nomination for election by the Board of Directors with the approval of two-thirds of the incumbent Continuing Directors ("Elected Directors"); or (d) appointed to office after the start of the period by the Board of Directors with the approval of two-thirds of the incumbent Continuing, Appointed and Elected Directors; or (e) elected to office after the start of the period by the Company's stockholders following nomination for election by the Board of Directors with the approval of two-thirds of the incumbent Continuing, Appointed and Elected Directors; or (3) the Company merges or consolidates with another corporation, and holders of outstanding shares of the Company's Common Stock immediately prior to the merger or consolidation do not own stock in the survivor of the merger or consolidation having more than 75% of the voting power in elections for directors; or (4) the Company sells all or a substantial portion of the consolidated assets of the Company and its Subsidiaries, and the Company does not own stock in the purchaser having more than 75% of the voting power in elections for directors. As used in this definition, a "Person" means any "person" as that term is used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, together with all of that person's "affiliates" and "associates" as those terms are defined in Rule 12b-2 of the Securities and Exchange Commission. 2. PARAGRAPH 6.2. Paragraph 6.2 of the Plan is deleted and the following provision is substituted in its place: 2

3 6.2 TERM. Each Option shall have a six-year term expiring on the sixth anniversary of the date that it was granted (the "Expiration Date"), subject to early expiration as provided in Paragraph 6.3, and may be exercised in whole or in part at any time prior to its Expiration Date to the extent that it is vested. Each Option granted prior to April 1, 1998 shall become vested in 16 consecutive equal quarterly installments beginning on the first day of the first January, April, July or October following the date on which it was granted; and each Option granted after March 31, 1998 shall become vested in 12 consecutive equal monthly installments beginning on the first day of the first month following the month in which it was granted. An Option shall not continue to vest if the holder of the Option for any reason ceases to serve as an Outside Director. Each outstanding Option held by an incumbent Outside Director shall become fully vested upon a Change in Control. In addition, the Board, in its discretion, at any time may accelerate the vesting of all outstanding Options held by incumbent Outside Directors under any related circumstances. 3. EFFECTIVE DATE. This Amendment shall become effective as of the date of its approval by the Board of Directors of Stericycle, Inc. 3

1 FIRST AMENDMENT TO Exhibit 10.9 STERICYCLE, INC. 1997 STOCK OPTION PLAN The Stericycle, Inc. 1997 Stock Option Plan (the "Plan") is amended as follows pursuant to the authority of the Board of Directors of Stericycle, Inc. under Paragraph 10.2 of the Plan: 1. ARTICLE 2. The following definition is added to the definitions in Article 2 of the Plan: CHANGE OF CONTROL means an event or the last of a series of related events by which: (1) any Person directly or indirectly acquires or otherwise becomes entitled to vote 51% or more of the Company's Common Stock (or, if in the future the Company has more than one class of stock outstanding, any Person directly or indirectly acquires or otherwise becomes entitled to vote stock having 51% or more of the voting power in elections for Directors); or (2) during any 24-month period a majority of the members of the Board of Directors ceases to consist of Directors who were: (a) Directors at the beginning of the period ("Continuing Directors"); or (b) appointed to office after the start of the period by the Board of Directors with the approval of two-thirds of the incumbent Continuing Directors ("Appointed Directors"); or (c) elected to office after the start of the period by the Company's stockholders following nomination for election by the Board of Directors with the approval of two-thirds of the incumbent Continuing Directors ("Elected Directors"); or (d) appointed to office after the start of the period by the Board of Directors with the approval of two-thirds of the incumbent Continuing, Appointed and Elected Directors; or (e) elected to office after the start of the period by the Company's stockholders following nomination for election by the Board of Directors with the approval of two-thirds of the incumbent Continuing, Appointed and Elected Directors; or (3) the Company merges or consolidates with another corporation, and holders of outstanding shares of the Company's Common Stock immediately prior to the merger or consolidation do not own stock in the survivor of the merger or consolidation having more than 75% of the voting power in elections for directors; or (4) the Company sells all or a substantial portion of the consolidated assets of the Company and its Subsidiaries, and the Company does not own stock in the purchaser having more than 75% of the voting power in elections for directors. As used in this definition, a "Person" means any "person" as that term is used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, together with all of that person's "affiliates" and "associates" as those terms are defined in Rule 12b-2 of the Securities and Exchange Commission. 2. PARAGRAPH 8.2. Paragraph 8.2 of the Plan is amended to read as follows: 8.2 TERM. The Plan Administrator shall determine (i) whether each Option shall be exercisable 1

2 in full at one time or in Installments at different times and (ii) the time or times at which the Option or Installments shall become and remain exercisable. No Option or Installment may have an Expiration Date more than 10 years from the Grant Date. Notwithstanding any limitation on exercisability in Paragraph 8.5 or anything to the contrary in the underlying Option Agreement, each outstanding Option or Installment shall become exercisable in full upon a Change in Control. In addition, the Plan Administrator, in its discretion, may accelerate the exercisability of any Option or Installment at any time under any related or other circumstances. 3. EFFECTIVE DATE. This Amendment shall become effective as of the date of its approval by the Board of Directors of Stericycle, Inc. 2

1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Consolidated Financial Data" and to the use of our report dated March 6, 1998, in the Registration Statement on Form S-3 (No. 333- _______) and related Prospectus of Stericycle, Inc. for the registration of 3,450,000 shares of its common stock. /S/ Ernst & Young LLP Chicago, Illinois August 4, 1998