<PAGE> 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)
<TABLE>
<S> <C>
DELAWARE 36-3640402
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
1419 LAKE COOK ROAD, SUITE 410
DEERFIELD, ILLINOIS 60015
(847) 945-6550
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARK C. MILLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STERICYCLE, INC.
1419 LAKE COOK ROAD, SUITE 410
DEERFIELD, ILLINOIS 60015
(847) 945-6550
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
CRAIG P. COLMAR, ESQ. GEOFFREY E. LIEBMANN, ESQ.
MICHAEL BONN, ESQ. CAHILL GORDON & REINDEL
JOHNSON AND COLMAR 80 PINE STREET
300 SOUTH WACKER DRIVE NEW YORK, NEW YORK 10005
CHICAGO, ILLINOIS 60606
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement
If 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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share......................... 3,450,000 shares...... $16.91 $58,339,500 $17,678.64
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 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.
<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to Proceeds to
Public and Commissions(1) Company(2) Selling Stockholders
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
- ----------------------------------------------------------------------------------------------------------------
Total(3).............. $ $ $ $
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------
ACTUAL AS ADJUSTED (4)
------ ---------------
<S> <C> <C>
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
</TABLE>
- -------------------------
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
---- ---
<S> <C> <C>
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
</TABLE>
- -------------------------
(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
<PAGE> 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).
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
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 $
======= ========
</TABLE>
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."
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<PAGE> 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.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- -------------------------
(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.
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<PAGE> 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
<PAGE> 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.
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<PAGE> 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
<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
<PAGE> 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.
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<PAGE> 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
<TABLE>
<CAPTION>
SELLER DATE MARKETS SERVED
------ ---- --------------
<S> <C> <C>
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
</TABLE>
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<PAGE> 28
<TABLE>
<CAPTION>
SELLER DATE MARKETS SERVED
------ ---- --------------
<S> <C> <C>
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.
</TABLE>
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.
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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
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<PAGE> 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
<PAGE> 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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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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.
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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.
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In the State of Washington, the Company is subject to regulation by the
Washington Utilities and Transportation Commission. As a regulated business, the
Company must receive approval from the Utilities and Transportation Commission
for the prices that it charges for its services in Washington.
The Company maintains numerous permits and licenses to conduct its business
from various state and local authorities. The Company's permits vary from state
to state based upon the Company's activities within that state and on the
applicable state and local laws and regulations. These permits include transport
permits for solid waste, regulated medical waste and hazardous substances,
permits to construct and operate treatment facilities, permits to construct and
operate transfer stations, permits governing discharge of sanitary water and
registration of equipment under air regulations, specific approval for the use
of ETD to treat regulated medical waste, 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
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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
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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
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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.
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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
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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.
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MANAGEMENT
THE EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY ARE AS FOLLOWS:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
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
</TABLE>
Mark C. Miller has served as President and Chief Executive Officer and a
director since joining the Company in May 1992. From May 1989 until he joined
the Company, Mr. Miller served as Vice President for the Pacific, Asia and
Africa in the International Division of Abbott Laboratories, which he joined in
1976 and where he held a number of management and marketing positions. He is a
director of Affiliated Research Centers, Inc., which provides clinical research
for pharmaceutical companies and is a director of Lake Forest Hospital. Mr.
Miller received a B.S. degree in computer science from Purdue University, where
he graduated Phi Beta Kappa.
Anthony J. Tomasello has served as the Company's Vice President, Operations
since August 1990. For 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.
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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
<PAGE> 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:
<TABLE>
<CAPTION>
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
--------------------------- ------ ---------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
</TABLE>
- -------------------------
* 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Warburg Dillon Read LLC ....................................
Credit Suisse First Boston Corporation......................
William Blair & Company, L.L.C. ............................
Sutro & Co. Incorporated....................................
---------
Total.................................................. 3,000,000
=========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 52
STERICYCLE, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
F-1
<PAGE> 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
<PAGE> 54
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,950 $ 5,374
Short-term investments.................................... 5,799 2,335
Accounts receivable, less allowance for doubtful accounts
of $178 in 1996 and $361 in 1997....................... 4,756 10,286
Parts and supplies........................................ 360 660
Prepaid expense........................................... 426 440
Other..................................................... 490 392
-------- --------
Total current assets................................. 23,781 19,487
-------- --------
Property, plant and equipment:
Land...................................................... 90 90
Buildings and improvements................................ 5,598 5,561
Machinery and equipment................................... 10,702 11,469
Office equipment and furniture............................ 463 746
Construction in progress.................................. 362 614
-------- --------
17,215 18,480
Less accumulated depreciation............................... (5,208) (7,239)
-------- --------
Property, plant and equipment, net................... 12,007 11,241
-------- --------
Other assets:
Goodwill, less accumulated amortization of $807 in 1996
and $2,040 in 1997..................................... 18,834 29,458
Other..................................................... 533 1,040
-------- --------
Total other assets................................... 19,367 30,498
-------- --------
Total assets......................................... $ 55,155 $ 61,226
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,215 $ 3,052
Accounts payable.......................................... 1,510 1,927
Accrued liabilities....................................... 3,769 7,039
Deferred revenue.......................................... 670 255
-------- --------
Total current liabilities............................ 9,164 12,273
-------- --------
Long-term debt:
Industrial development revenue bonds and other............ 1,986 1,405
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
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 55
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................... $21,339 $24,542 $46,166
Costs and expenses:
Cost of revenues.......................................... 17,478 19,423 34,109
Selling, general and administrative expenses.............. 8,137 7,556 10,671
------- ------- -------
Total costs and expenses............................... 25,615 26,979 44,780
------- ------- -------
Income (loss) from operations............................... (4,276) (2,437) 1,386
Other income (expense):
Interest income........................................... 9 421 618
Interest expense.......................................... (277) (373) (428)
------- ------- -------
Total other income (expense)........................... (268) 48 190
------- ------- -------
Income (loss) before income taxes........................... $(4,544) $(2,389) $ 1,576
Income tax expense.......................................... -- -- 146
------- ------- -------
Net income (loss)........................................... $(4,544) $(2,389) $ 1,430
======= ======= =======
Basic earnings per share:
Basic net income (loss) per share......................... $ (0.81) $ (0.32) $ 0.14
======= ======= =======
Diluted earnings per share (restated EPS for FAS 128 and SAB
98)
Diluted net income (loss) per share....................... $ (0.81) $ (0.32) $ 0.13
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 56
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $(4,544) $(2,389) $ 1,430
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization.......................... 1,916 2,064 3,078
Settlement with regulatory agency...................... 273 -- --
Other, net............................................. 129 -- --
Changes in operating assets, net of effect of acquisitions
and divestitures:
Accounts receivable.................................... 866 (554) (4,123)
Parts and supplies..................................... 135 144 (300)
Prepaid expenses....................................... 196 (18) (14)
Other assets........................................... 128 (37) 98
Accounts payable....................................... 570 (428) (413)
Accrued liabilities.................................... (838) 1,178 559
Deferred revenue and other liabilities................. 298 97 (415)
------- ------- -------
Net cash (used in) provided by operating activities......... (871) 57 (100)
------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures................................... (726) (995) (1,235)
Payments for acquisitions, net of cash acquired........ (459) (6,516) (5,552)
Proceeds from maturity of short-term investments....... -- -- 5,799
Purchases of short-term investments.................... -- (5,799) (2,335)
Proceeds from divestitures............................. 792 -- --
------- ------- -------
Net cash used in investing activities....................... (393) (13,310) (3,323)
------- ------- -------
FINANCING ACTIVITIES:
Net proceeds from (payments of) note payable to bank... 858 (858) --
Repayment of long-term debt............................ (171) (3,275) (2,905)
Principal payments on capital lease obligations........ (482) (397) (305)
Principal payments on notes receivable for common stock
purchases............................................ -- 60 --
Proceeds from long-term debt........................... -- 1,000 --
Proceeds from issuance of common stock................. 18 28,535 57
Other.................................................. (27) -- --
------- ------- -------
Net cash provided by (used in) financing activities......... 196 25,065 (3,153)
------- ------- -------
Net increase (decrease) in cash and cash and cash
equivalents............................................... (1,068) 11,812 (6,576)
Cash and cash equivalents at beginning of year.............. 1,026 138 11,950
------- ------- -------
Cash and cash equivalents at end of year.................... $ 138 $11,950 $ 5,374
======= ======= =======
Non-cash activities:
Issuance of common stock for certain acquisitions...... $ -- $ -- $ 3,525
Issuance of notes payable for certain acquisitions..... $ -- $ 6,497 $ 1,120
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 57
STERICYCLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
COMMON STOCK
<TABLE>
<CAPTION>
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
----------- ------ ---------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER
31, 1994........... 370 $ 4 $ 811 $(13,001) $ (619) $(32,558) $(45,363)
Common stock issued
in exchange for
preferred stock.... 5,043 50 49,439 49,489
Issuance of common
stock.............. 350 3 3
Accumulated dividends
cancelled.......... 13,001 13,001
Notes receivable
cancelled.......... (181) (2) (629) 619 (12)
Net loss............. (4,544) (4,544)
------ ---- ------- -------- ------ -------- --------
BALANCES AT DECEMBER
31, 1995........... 5,582 $ 55 $49,621 $ -- $ -- $(37,102) $ 12,574
Initial public
offering of common
stock (net of
offering costs).... 3,450 36 27,586 27,621
Issuance of common
stock for exercise
of options and
warrants and
employee stock
purchases.......... 870 9 717 (64) 662
Note payable
exchanged for
common stock....... 98 1 1,485 1,486
Principal payments
under note
receivable......... 60 60
Net loss............. (2,389) (2,389)
------ ---- ------- -------- ------ -------- --------
BALANCES AT DECEMBER
31, 1996........... 10,000 $100 $79,409 $ -- $ (4) $(39,491) $ 40,014
Issuance of common
stock for exercise
of options and
warrants and
employee stock
purchases.......... 70 1 56 57
Common stock issued
for acquisitions... 403 4 3,521 3,525
Net income........... 1,430 1,430
------ ---- ------- -------- ------ -------- --------
BALANCES AT DECEMBER
31, 1997........... 10,473 $105 $82,986 $ -- $ (4) $(38,061) $ 45,026
====== ==== ======= ======== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Capital lease obligations....................... $ (324,000) $ (461,000)
Property, plant and equipment................... (694,000) (509,000)
Goodwill........................................ (160,000) (228,000)
------------ ------------
Total deferred tax liabilities.................... (1,178,000) (1,198,000)
Deferred tax assets:
Accrued liabilities............................. 835,000 857,000
Research and development costs.................. 324,000 324,000
Other........................................... 198,000 195,000
Net operating tax loss carryforward............. 15,102,000 14,344,000
Alternative minimum tax credit 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........................... $ -- $ --
============ ============
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $36,000,000, which expire beginning
in 2004. Based on the Internal Revenue Code of 1986, as amended, and changes in
the ownership of the Company, utilization of the net operating loss
carryforwards are subject to annual limitations, which could significantly
restrict or partially eliminate the
F-9
<PAGE> 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:
<TABLE>
<S> <C>
Current
Federal................................................... $ 60,000
State..................................................... 86,000
--------
Total provisions............................................ $146,000
========
</TABLE>
A reconciliation of the income tax provision computed at the federal
statutory tax rate to the effective tax rate for the year ended December 31,
1997 is as follows:
<TABLE>
<S> <C>
Federal statutory income tax rate........................... 34.0%
Effect of:
State taxes, net of federal tax effect.................... 4.4
Alternative minimum taxes................................. 3.8
Non-deductible goodwill amortization...................... 4.5
Other..................................................... 1.7
Utilization of net operating loss carryforward............ (39.1)
-----
Effective tax rate.......................................... 9.3%
=====
</TABLE>
In 1997, the Company paid income tax of $58,300. No income taxes were paid
in 1996 and 1995. Additionally, the Company did not recognize any income tax
benefit for 1996 and 1995 due to the Company's recurring operating losses and
valuation allowances established for net deferred tax assets.
NOTE 5 -- ACQUISITIONS AND DIVESTITURES
In November 1997, the Company purchased the customer list and certain other
assets of Cal-Va, Inc. ("Cal-Va"), which operated a regulated medical waste
business in northern Virginia and Washington D.C. The purchase price was paid by
the issuance of shares of the Company's common stock and the assumption of
certain of Cal-Va's liabilities. The purchase price is to be adjusted in the
event that revenues fall below certain levels.
In November 1997, the Company purchased selected customer contracts of
Phoenix Services Inc. ("Phoenix"), which operated a regulated medical waste
business in the Baltimore, Maryland metropolitan area. The purchase price was
paid in cash (in January 1998) and by delivery of a $20,000 note due in
September 1998.
In August 1997, the Company purchased the customer list and certain other
assets of Envirotech Enterprises, Inc. which operated a regulated medical waste
business in Arizona. The purchase price was paid in cash and by delivery of a
$300,000 note due in August 1998. The purchase price is to be adjusted in the
event that acquired revenues fall below certain levels.
In June 1997, the Company purchased the customer list and certain other
assets of the regulated medical waste business of Waste Management, Inc. ("WMI")
in Wisconsin ("WMI-WI"). In July 1997, the Company announced the purchase of the
customer lists and certain other assets of the regulated medical waste
businesses of Regional Carting, Inc. and Rumpke Container Service, Inc. in New
Jersey and Ohio, respectively. The purchase price for these three acquisitions
was paid by a combination of cash, assumption of
F-10
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma revenues.............................. $36,839 $46,619 $48,181
Pro forma net income (loss)..................... (4,270) (1,575) 1,576
Pro forma diluted net income (loss) per share... $ (0.76) $ (0.21) $ 0.15
</TABLE>
The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the transactions taken
place at the beginning of the periods indicated or of future results of
operations.
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Industrial development revenue bonds........................ $1,492 $1,358
Obligations under capital leases............................ 517 212
Note payable to bank........................................ -- --
Notes payable............................................... 5,797 4,957
------ ------
7,806 6,527
Less: Current portion....................................... 3,215 3,052
------ ------
Total.................................................. $4,591 $3,475
====== ======
</TABLE>
In March 1998, the Company entered into a new revolving line of credit with
Silicon Valley Bank. To secure this line of credit, the Company granted the bank
a lien on all of the Company's assets. Borrowings under the line of credit are
limited to the lesser of $7,500,000 or a specific percentage of the Company's
eligible receivables, as defined in the loan and security agreement. Outstanding
borrowings bear interest at the bank's prime rate plus 0.50% or LIBOR plus 3.0%,
at the Company's option. This agreement has a maturity date of March 5, 1999.
Under the terms of the loan and security agreement, the Company is among other
things, restricted from paying dividends and is required to maintain minimum
levels of total liabilities to net
F-12
<PAGE> 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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $2,840
1999........................................................ 430
2000........................................................ 445
2001........................................................ 545
2002........................................................ 410
</TABLE>
The Company paid interest of $262,000, $352,000 and $444,000 for the fiscal
years ended December 31, 1995, 1996 and 1997, respectively.
F-13
<PAGE> 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:
<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $1,246 $1,246
Less -- accumulated depreciation and amortization........... 293 418
------ ------
$ 953 $ 828
====== ======
</TABLE>
Minimum future lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 218
1999........................................................ --
-----
Total minimum lease payments................................ 218
Less -- Amounts representing interest....................... (6)
-----
Present value of net minimum lease payments................. 212
Less--Current portion....................................... (212)
-----
Long-term obligations under capital leases.................. $ --
=====
</TABLE>
NOTE 7 -- LEASE COMMITMENTS
The Company leases various plant equipment, office furniture and equipment,
motor vehicles and office and warehouse space under operating lease agreements
which expire at various dates over the next six years. The leases for most of
the properties contain renewal provisions.
Rent expense for 1995, 1996 and 1997 was $1,739,000, $2,462,000 and
$3,284,000 respectively.
Minimum future rental payments under non-cancelable operating leases that
have initial or remaining terms in excess of one year as of December 31, 1997
for each of the next five years and in the aggregate are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 4,222
1999........................................................ 3,642
2000........................................................ 2,168
2001........................................................ 954
2002........................................................ 393
Thereafter.................................................. 105
-------
Total minimum rental payments............................... $11,484
=======
</TABLE>
F-14
<PAGE> 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:
<TABLE>
<S> <C>
1993 Plan options........................................... 4,938
1995 Plan options........................................... 383,060
1996 Directors Plan options................................. 106,170
1997 Plan options........................................... 351,693
Warrants.................................................... 301,683
---------
Total shares reserved....................................... 1,147,544
=========
</TABLE>
NOTE 9 -- NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of net income (loss) per
common share (in thousands, except for share and per share data):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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
========= ========= ==========
</TABLE>
For additional information regarding outstanding employee stock options and
outstanding warrants, see Note 10.
Options and warrants to purchase 1,170,626 and 838,849 shares of common
stock were outstanding during 1995 and 1996, respectively, at exercise prices
ranging from $.53-$69.02 and $.53-$69.02, respectively, but were not included in
the computation of diluted earnings per common share in these years because the
Company had net losses in 1995 and 1996 and the effect would be antidilutive.
F-15
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 109,729 $8.56 933,235 $0.62 537,166 $1.93
Granted......................... 923,292 $0.53 279,053 $3.20 433,367 $7.97
Exercised....................... -- $0.00 (660,767) $0.59 (83,006) $0.70
Canceled/Forfeited.............. (99,786) $8.56 (14,355) $3.42 (41,666) $5.38
------- ----- -------- ----- --------- -----
Outstanding at end of year........ 933,235 $0.62 537,166 $1.93 845,861 $4.98
======= ===== ======== ===== ========= =====
Exercisable at end of year........ 542,620 $0.60 315,273 $0.81 326,119 $1.53
Available for future grant........ 576,708 592,004 1,700,303
</TABLE>
Options outstanding and exercisable as of December 31, 1997 by price range:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICE SHARES LIFE IN YEARS PRICE SHARES PRICE
----------------------- ------ ------------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$.53-$1.99................................. 383,060 8.09 $1.04 298,693 $0.79
$7.25-$10.25............................... 462,801 9.27 $8.23 27,426 $9.54
------- -------
845,861 326,119
======= =======
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options approximates the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
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
<PAGE> 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):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss)................................. $(4,559) $(2,474) $1,112
Pro forma diluted net income (loss) per share............... $ (0.82) $ (0.33) $ 0.10
</TABLE>
The pro forma effect for 1995, 1996, and 1997 is not representative of the
pro forma effect in future years as the pro forma disclosures reflect only the
fair value of stock options granted subsequent to December 31, 1994.
Warrants:
The Company, in conjunction with a lease financing agreement, issued the
lessor warrants to purchase up to 15,064 shares of common stock at $18.58 per
share. At December 31, 1997, all of these warrants were outstanding. They expire
in March 1998.
The Company, in connection with the issuance of preferred stock, which was
subsequently reclassified as common stock, issued warrants to purchase up to
6,773 shares of common stock at an exercise price of $69.02 per share. At
December 31, 1997, all of these warrants were outstanding. They expire in March
1999.
During 1995, several of the Company's shareholders and directors provided a
bridge loan to the Company. The loan totaled $830,000 with interest at the prime
rate plus 3% and was repaid. In addition to the interest, the lenders received
warrants to purchase 220,559 shares of common stock at $1.59 per share. These
warrants expire on July 31, 2000. In 1996, the lenders exercised warrants to
purchase 166,749 shares. At December 31, 1997, warrants to purchase 53,810
shares of common stock remained outstanding.
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
<PAGE> 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
<PAGE> 71
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
(UNAUDITED)
<S> <C> <C>
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
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 72
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1998
---- ----
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 73
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
JUNE 30,
---------------------
1997 1998
---- ----
<S> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<TABLE>
<S> <C>
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
</TABLE>
PROSPECTUS , 1998
3,000,000 Shares
STERICYCLE
Common Stock
WARBURG DILLON READ LLC
CREDIT SUISSE FIRST BOSTON
WILLIAM BLAIR & COMPANY
SUTRO & CO. INCORPORATED
<PAGE> 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.
<TABLE>
<S> <C>
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................................................ $
==========
</TABLE>
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
<PAGE> 79
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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).
</TABLE>
- -------------------------
* 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/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.
</TABLE>
II-4
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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).
</TABLE>
- -------------------------
* To be filed by amendment
+ Confidential treatment requested; material omitted and filed separately with
the Commission
II-5
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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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.
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(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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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<PAGE> 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);
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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;
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(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.
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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
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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,
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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
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SILICON VALLEY BANK
By: /s/ Michelle Giannini
------------------------------
Name: Michelle Giannini
Title: Assistant Vice President
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<PAGE> 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.
<TABLE>
<CAPTION>
Name of Party Percentage Number of Shares Series Initial Investment
------------- ---------- ---------------- ------ ------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Exhibit Agreement
------- ---------
<S> <C>
"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.
</TABLE>
2
<PAGE> 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:
<TABLE>
<CAPTION>
Party Number of Directors
----- -------------------
<S> <C>
STERICYCLE 2
PENNONI 2
CONOPAM 4
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Period Annual Monthly
(by lease month) Base Rent Base Rent
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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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
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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,
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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.
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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.
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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.
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(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).
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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,
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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.
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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.
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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.
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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
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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.
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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
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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.
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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
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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,
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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
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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
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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
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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
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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.
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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
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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
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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.
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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.
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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
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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;
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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,
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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
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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
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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
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EXHIBIT "A"
LEGAL DESCRIPTION
[Omitted]
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EXHIBIT "B"
TENANT ESTOPPEL CERTIFICATE
[Omitted]
37
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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.
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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.
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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
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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
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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.
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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
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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
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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:
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(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.
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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
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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
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EXHIBIT A
MUNICIPAL SOLID WASTE INCINERATION FACILITY
CITY OF TERRELL INCINERATOR
PROPERTY DESCRIPTION
[Omitted]
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EXHIBIT B
PERSONAL PROPERTY
[Omitted]
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EXHIBIT C
LANDLORD'S CONSENT
[Omitted]
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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.
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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.
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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
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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
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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.
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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.
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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
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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.
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(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'
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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
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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
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EXHIBIT A
LEGAL DESCRIPTION AND ADDRESS
[Omitted]
Commonly known as: 2510 Erick Street, Baltimore, Maryland
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EXHIBIT B
PERSONAL PROPERTY
[Omitted]
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EXHIBIT C
LANDLORD'S CONSENT
[Omitted]
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<PAGE> 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-
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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-
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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
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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.
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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
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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.
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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
<PAGE> 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
<PAGE> 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
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<PAGE> 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
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EXHIBIT A
LEGAL DESCRIPTION AND ADDRESS
[Omitted]
Commonly known as: 1251 South Nelson Drive, Chandler Arizona
11
<PAGE> 12
EXHIBIT B
PERSONAL PROPERTY
[Omitted]
12
<PAGE> 13
EXHIBIT C
LANDLORD'S CONSENT
[Omitted]
13
<PAGE> 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-
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
