UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1997 Commission File Number 000-28876
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CHEM INTERNATIONAL, INC.
(Exact name of small business registrant in its charter)
Delaware 13-3035216
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Route 22, Hillside, New Jersey 07205
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: (973) 926-0816
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $.002 par value per share
Class A Redeemable Common Stock Purchase Warrants
(Title of Each Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes X No
Registrant's revenues for the fiscal year ended June 30, 1997 were $11,126,860.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the trading price of the Registrant's Common Stock on August
29, 1997 was $4,470,000.
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Class Outstanding at August 29, 1997
Common Stock $.002 par value 4,335,000 Shares
Class A Redeemable Common Stock Purchase Warrants 1,265,000 Warrants
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III will be incorporated by reference to
certain portions of a definitive Proxy Statement which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
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CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-KSB ANNUAL REPORT
INDEX
Page
Part I
Item 1. Description of Business 2
Item 2. Description of Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 7
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7. Financial Statements 13
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
Part III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the
Exchange Act 13
Item 10. Executive Compensation 13
Item 11. Security Ownership of Certain Beneficial
Owners and Management 13
Item 12. Certain Relationships and Related Transactions 13
Item 13. Exhibits and Reports on Form 8-K 13
Signatures
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PART I
Disclosure Regarding Forward-Looking Statements
All statements other than statements of historical fact, in this Form 10-KSB,
including without limitation, the statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Description of
Business" are, or may be deemed to be, forward looking statements. These
statements represent the Company's current judgment and are subject to risks and
uncertainties that could cause actual results to differ materially. Such risks
and uncertainties include, without limitation: (i) loss of a major customer,
(ii) competition, and/or (iii) government regulation.
Item 1. Description of Business
Chem International Inc. [the "Company"] a Delaware corporation, is the survivor
of a merger of Chem International, Inc. a Delaware Corporation, with and into
Frog Industries, Ltd. a New York corporation, which was effected on December 27,
1994 with Frog Industries, Ltd. renamed Chem International Inc.after the merger.
The Company was reincorporated in Delaware on February 2, 1996. The Company is
engaged primarily in manufacturing, marketing and sales of vitamins, nutritional
supplements and herbal products, including vitamins sold as single entity
supplements, in multi-vitamin combinations and in varying potency levels and in
different packaging sizes. The Company's subsidiary, Manhattan Drug
Company, Inc. ["Manhattan Drug"], manufacturers the vitamins and nutritional
supplements for sale to distributors, multilevel marketers and specialized
health-care providers. The Company also manufactures such products for
sale under its own private brand, "Vitamin Factory," at its retail store in
Hillside, New Jersey or through mail order.
Distribution Agreement
On February 17, 1997, the Company signed a distribution agreement with Roche
Vitamins, Inc. a subsidiary of Roche Holdings of Switzerland. Under the
agreement, the Company, will service and supply Roche products to a select
segment of Roche's food, nutrition and cosmetic customers.
New Products
In January 1997, the Company signed an exclusive agreement with the
International Nutrition Research Center, Inc. to market and distribute the
Master Amino Acid Pattern ["MAP"]. MAP is a new patented unique food supplement
in the sports nutrition field. MAP represents the first proprietary product
developed for sale by the Company.
Reduction of Significant Revenues from Major Customer - The Company derives a
significant portion of its sales from one customer, Rexall Sundown, Inc.
["Rexall"], for which it manufactures vitamins and nutritional supplements.
Sales to Rexall expressed as a percentage of the Company's total sales, were
approximately 48% and 40%, respectively, for the fiscal years ended June 30,
1997 and 1996. The loss of this customer would have a material affect on the
Company's operations.
Dependence on Key Personnel - The Company is highly dependent on the experience
of its management in the continuing development of its manufacturing and retail
operations. The loss of the services of certain of these individuals,
particularly E. Gerald Kay, Chairman of the Board, President and director of the
Company, would have a material adverse effect on the Company's business. The
Company has entered into employment agreements with each of its five executive
officers, which expire on June 30, 1999. Such agreements may be terminated by
the employees at any time upon 30 days prior written notice without penalty,
subject to a one year non-compete clause. The Company has obtained key-man life
insurance in the amount of $ 1,000,000 on the life of Mr. Kay, with the Company
as the named beneficiary.
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Raw Materials
The principal raw materials used in the manufacturing process are natural and
synthetic vitamins, minerals, herbs, and related nutritional supplements,
gelatin capsules and coating materials and the necessary components for
packaging the finished products. The raw materials are available from numerous
sources within the United States. The gelatin cap sales and coating materials
and packaging materials are similarly widely available. Raw materials are
generally purchased by the Company without long term commitments, on a purchase
order basis. The Company's principal suppliers are Roche Vitamins, Inc., Triarco
Inc., M.W. International Inc. and Basf Corporation.
Employees
As of June 30, 1997, the Company had 77 full time employees, of whom 43 belonged
to a local unit of the Teamsters Union and are covered by a collective
bargaining agreement which expires August 30, 1999.
Seasonality
The Company's results of operations are not significantly affected by seasonal
factors.
Trademarks
The Company owns the registration in the United States Patent and Trademark
offices for "Oxitiva." Oxitiva is the Company's brand of chewable antioxidant
formula.
Government Regulations
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by a number of
federal agencies, including the Food and Drug Administration [the "FDA"], the
Federal Trade Commission [the "FTC"], the United States Postal Service, the
Consumer Product Safety Commission and the United States Department of
Agriculture. The FDA is primarily responsible for the regulation of the
manufacturing, labeling and sale of the Company's products. The Company's
activities are also regulated by various state and local agencies in which the
Company's products are sold. The operation of the Company's vitamin
manufacturing facility is subject to regulation by the FDA as a food
manufacturing facility. In addition, the United States Postal Service and the
FTC regulate advertising claims with respect to the Company's products sold by
solicitation through the mail.
The Dietary Supplement Health and Education Act of 1994 [the "Dietary
Supplement Act"] was enacted on October 25, 1994. The Dietary Supplement Act
amends the Federal Food, Drug and Cosmetic Act by defining dietary supplements,
which include vitamins, minerals, nutritional supplements and herbs, and by
providing a regulatory framework to ensure safe, quality dietary supplements and
the dissemination of accurate information about such products. Dietary
supplements are regulated as foods under the Dietary Supplement Act and the FDA
is generally prohibited from regulating the active ingredients in dietary
supplements as food additives, or as drugs unless product claims trigger drug
status.
The Dietary Supplement Act provides for specific nutritional labeling
requirements for dietary supplements effective January 1, 1997. The Dietary
Supplement Act permits substantiated, truthful and non-misleading statements of
nutritional support to be made in labeling, such as statements describing
general well being from consumption of a dietary ingredient or the role of a
nutrient or dietary ingredient in affecting or maintaining structure or function
of the body. In addition, the Dietary Supplement Act also authorizes the FDA to
promulgate Current Good Manufacturing Practices ["CGMPs"] specific to the
manufacture of dietary supplements, to be modeled after food CGMPS. The Company
currently manufactures its dietary supplement products pursuant to food CGMPS.
The Company believes that it is currently in compliance with all applicable
government regulations.
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The FDA will be proposing and promulgating regulations to implement the Dietary
Supplement Act. The Company cannot determine what effect such regulations, when
promulgated, will have on its business in the future or what cost it will add to
manufacturing the product. Such regulations could, among other things, require
expanded or different labeling, the recall, reformulation or discontinuance of
certain products, additional recordkeeping and expanded documentation of the
properties of certain products and scientific substantiation regarding
ingredients, product claims, safety or efficacy.
Competition
The business of manufacturing, distributing and marketing vitamins and
nutritional supplements is highly competitive. Many of the Company's competitors
are substantially larger and have greater financial resources with which to
manufacture and market their products. In particular, competition is fierce in
the retail segment. Many direct marketers not only focus on selling their own
branded products, but offer national brands at discounts as well. Many
competitors have established brand names recognizable to consumers. In addition,
major pharmaceutical companies offer nationally advertised multivitamin
products. The Company also competes with certain of its customers that also have
their own manufacturing capabilities.
Many of the Company's competitors in the retailing segment have the financial
resources to advertise freely to promote sales and to produce sophisticated
catalogs. In many cases, such competitors are able to offer price incentives for
retail purchasers and offer participation in frequent buyers programs. Some
retail competitors also manufacture their own products whereby they have the
ability and financial incentive to sell their own product.
Product Liability Insurance
The Company intends to compete by stressing the quality of its manufacturing
product, providing prompt service, competitive pricing of products in its direct
marketing segment and by focusing on niche products in the international retail
markets.
The Company, like other manufacturers, wholesalers and distributors of vitamin
and nutritional supplement products, faces an inherent risk of exposure to
product liability claims if, among other things, the use of its products results
in injury. Accordingly, the Company currently maintains product liability
insurance policies which provides a total of $10 million of coverage per
occurrence and $10 million of coverage in the aggregate. Although the Company's
product liability insurance policies do not currently provide coverage for
claims with respect to products containing L-tryptophan manufactured after
September 1992, the Company discontinued manufacturing such products in 1989.
Based upon indemnification arrangements with its supplier of L-tryptophan, the
Company's product liability insurance and the product liability insurance of its
suppliers, the Company believes that its product liability insurance is adequate
to cover any product liability claims. There can be no assurance that the
Company's current level of product liability insurance will continue to be
available or, if available, will be adequate to cover potential liabilities.
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Item 2. Description of Properties
On January 10, 1997, the Company entered into a lease agreement for
approximately 84,000 square feet of factory, warehouse and office facilities in
Hillside, New Jersey. The facilities are leased from Vitamin Realty Associates,
L.L.C., a limited liability company which is owned by the Company's president
and principal stockholder and certain family members and 10% owned by the
Company's chief financial officer. The Lease has a term of five years and
expires on January 10, 2002. The lease provides for a base annual rental of
$346,000 plus increases in real estate taxes and building expenses. At its
option, the Company has the right to renew the lease for an additional five year
period. The space is utilized for the retail mail order business, warehousing
and packaging operations and also houses the Company's corporate offices.
The Company also leases 40,000 of manufacturing facilities in Hillside, New
Jersey from Gerob Realty Partnership, of which E. Gerald Kay, President of the
Company, is a general partner. The lease which expires on December 31, 1997
provides for a minimum annual rental of $60,000 plus payment of all real estate
taxes. The space is utilized for Manhattan Drug's tablet manufacturing
operations.
Item 3. Legal Proceedings
Numerous unrelated manufacturers, distributors, suppliers, importers and
retailers of manufactured L- tryptophan are or were defendants in an estimated
2,000 lawsuits brought in federal and state courts seeking compensation and
punitive damages for alleged personal injury from ingestion of products
containing manufactured L-tryptophan. A number of these suits have been settled
or discontinued. Additional suits may be filed. Prior to a request from the FDA
in November 1989 for a national, industry-wide recall, Manhattan Drug halted
sales and distribution and also ordered a recall of L- tryptophan products.
Subsequently, the FDA indicated that there is a strong epidemiological link
between the ingestion of the allegedly contaminated L-tryptophan and a blood
disorder known as eosinophilia myalgia syndrome ["EMS"]. Investigators at the
United States Centers for Disease Control suspect that a contaminant was
introduced during the manufacture of the product in Japan. While intensive
independent investigations are continuing, there has been no indication that EMS
was caused by any formulation or manufacturing fault of Manhattan Drug or any of
the other firms that manufactured tablets and/or capsules containing
L-tryptophan.
Manhattan Drug and certain companies in the vitamin industry, including
distributors, wholesalers and retailers, have entered into an agreement [the
"Indemnification Agreement"] with Showa Denko America, Inc. ["SDA"], under which
SDA, a U.S. subsidiary of a Japanese corporation, Showa Denko K.K. ["SDK"],
which appears to have been the supplier of all of the alleged contaminated
L-tryptophan products, has assumed the defense of all claims against Manhattan
Drug arising out of the ingestion of L-tryptophan products and has agreed to pay
the legal fees and expenses in that defense, and SDK has agreed to guarantee
SDA's obligation therein. SDA has posted a revolving irrevocable letter of
credit, in the amount of $20,000,000, to be used for the benefit of the Company
and other indemnified parties if SDA is unable or unwilling to satisfy any
claims or judgments. SDA has agreed to indemnify Manhattan Drug against any
judgments and to fund settlements arising out of those actions and claims if it
is determined that a cause of the injuries sustained by the plaintiffs was a
constituent in the bulk material sold by SDA to Manhattan Drug or its suppliers,
except to the extent that Manhattan Drug is found to have any part of the
responsibility for those injuries and except for certain claims relating to
punitive damages. There is no assurance that SDA will have the financial ability
to perform under the Indemnification Agreement.
Manhattan Drug has product liability insurance, which the Company believes
provides coverage for all of its L-tryptophan products subject to these claims,
including legal defense costs. Due to the multitude of defendants, the
probability that some or all of the total liability will be assessed against
other defendants and the fact that discovery in these actions is not complete,
it is impossible to predict the outcome of these actions or to assess the
ultimate financial exposure of the Company. Based upon the aforementioned
indemnification arrangements, the Company's product liability insurance and the
product liability insurance of its suppliers, the Company does not believe the
outcome of these actions will have a material adverse effect on Manhattan Drug,
and, accordingly, no provision has been made in the Company's Consolidated
Financial Statements for any loss that may be incurred by the Company as a
result of these actions.
5
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Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter ended June 30, 1997.
6
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On October 30, 1996, the Company's units [Consisting of two shares of Common
Stock and two Class A Redeemable Warrants], Common Stock and Class A Redeemable
Warrants commenced trading on the National Association of Securities Dealers
Automated Quotation SmallCap Market System "NASDAQ" under the symbols CXILU,
CXIL and CXILW, respectively. In November 1996 the Company unbundled its public
unit. In November 1996, the Company authorized NASDAQ to delist the Unit [CXILU]
and cease trading it. Prior to the Company's initial public offering in October
1996 the Common Stock was traded sporadically in the over-the-counter market on
the NASD's Electronic Bulletin Board during the period commencing December 18,
1995 through May 5, 1996, at which time it was voluntarily withdrawn from
trading.
The following table sets forth the high and low prices for each of the Unit, the
Common Stock and the Class A Redeemable Warrant for the periods indicated as
reported by NASDAQ.
UNITS [CLIXU]
Time Period: HIGH LOW
October 30, 1996 through November 27, 1996 [Trading
ceased on November 29, 1996] 27 8
COMMON STOCK [CXIL]
Time Period:
October 30, 1996 through December 31, 1996 10 5 1/4
January 1, 1997 through March 31, 1997 10 1/4 6 1/4
April 1, 1997 through June 30, 1997 8 3/4 2 1/2
CLASS A REDEEMABLE WARRANTS [CXILW]
Time Period:
October 30, 1996 through December 31, 1996 5 2 1/4
January 1, 1997 through March 31, 1997 5 1/2 2 1/2
April 1, 1997 through June 30, 1997 4 3/4 3/8
As of June 30, 1997 there were approximately 163 holders of record of the
Company's Common Stock.
The Company has not declared or paid a dividend with respect to its Common Stock
nor does the Company anticipate paying dividends in the foreseeable future.
7
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Item 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the historical
financial statements of the Company and notes thereto.
Results of Operations
Year ended June 30, 1997 Compared to the Year ended June 30, 1996
The Company's net [loss] for the year ended June 30, 1997 was $(654,304) as
compared to net income of $42,198 for the year ended June 30, 1996. This
decrease in net income of approximately $700,000 is primarily the result of a
$1,200,000 decrease in operating income resulting from a decrease in gross
profit of approximately $650,000 and an increase in selling and administrative
expenses of approximately $550,000 for the year ended June 30, 1997 as compared
to the year ended June 30, 1996. The decrease in gross profit is due to a higher
percentage of sales to lower margin customers and an increase in raw material
costs.
Cost of sales increased to $9,475,624 in 1997 as compared to $8,343,179 for
1996. Cost of sales increased as a percentage of sales to 85% as compared to 78%
for 1996. The increase in cost of sales is due to an increase in material costs.
The Company has begun to develop new raw material suppliers whereby the Company
can achieve a lower cost of materials.
Selling and administrative expenses for the year ended June 30, 1997 were
$2,546,972 versus $1,990,997 for the same period a year ago. The increase of
$555,975 was primarily attributable to an increase in officers' compensation of
approximately $225,000, an increase in office salaries of approximately $25,000,
a decrease in professional fees of approximately $38,000, a decrease in travel
and entertainment of approximately $21,000, an increase in consulting fees of
approximately $207,000, a decrease in office rent of approximately $22,000, an
increase in advertising and catalog costs of approximately $117,000 and an
increase in payroll tax expense of approximately $9,000.
Other income [expense] was $(4,588) for the year ended June 30, 1997 as compared
to $(127,823) for the same period a year ago. This increase of $123,235 is
attributable to a decrease in sales of fixed assets of $39,000, an increase of
$38,778 from a 50% owned partnership, a decrease in interest expense of $85,600
and an increase in interest and investment income of $37,857.
The Company began in July 1997 a renovation of its blending department.
Management expects the renovation to be completed by October 15, 1997 and
expects to achieve greater manufacturing efficiencies as a result.
Sales for the years ended June 30, 1997 and 1996 were $11,126,860 and
$10,637,797, respectively, an increase of approximately $490,000 or 5%. For the
year ended June 30, 1997, the Company had sales to one customer, who accounted
for 48% of net sales in 1997 and 40% of net sales in 1996. The loss of this
customer would have an adverse affect on the Company's operations.
Retail and mail order sales for the year ended June 30, 1997 totaled $983,749 as
compared to $756,711 for the year ended June 30, 1996, an increase of $227,038
or 30%.
On February 17, 1997, the Company signed a distribution agreement with Roche
Vitamins, Inc. to service and supply Roche products to a select segment of
Roche's food, nutrition and cosmetic accounts. The agreement has an initial
term of two years and shall be renewable for additional terms of one year each.
Sales for the period from February 20, 1997 through June 30, 1997 under the
agreement totaled $308,259.
In 1997, the Company signed an exclusive agreement with International Nutrition
Research Center, Inc. ["INRC"] to market and distribute the Master Amino Acid
Pattern ["MAP"]. MAP is a new patented unique food supplement in the sports
nutrition field and is specifically recommended for professional and weekend
athletes who need to maximize protein synthesis. MAP is being marketed
exclusively by " The Vitamin Factory, Inc. " a subsidiary of the Company through
mail order. MAP represents the first proprietary product developed for sale by
the Company.
On July 7, 1997, the Company was informed by one of its suppliers of a recall of
the supplier's raw material used in the manufacturing of tablets sold containing
the recalled raw material. On July 17, 1997, the Company issued a voluntary
recall to three customers affected by this and accordingly reduced its sales and
accounts receivable at June 30, 1997 by $127,000. The Company believes they have
recourse against the supplier for the full value of the tablets sold containing
the recalled raw material.In September the Company instituted suit to recover
all damages.
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Results of Operations [Continued]
Year ended June 30, 1997 Compared to the Year ended June 30, 1996
[Continued]
Year ended June 30, 1996 ["Fiscal 1996"] Compared to the Year ended June 30,
1995 ["Fiscal 1995"]
Net sales for fiscal 1996 were $10,637,797, a decrease of $6,204,664, or 37%
from $16,842,461 for fiscal 1995. The decrease is directly related to a decrease
in sales to a major customer as well as a decrease in the total number of units
sold. Sales to such customer accounted for approximately 40% and approximately
76% of the Company's total sales in fiscal 1996 and fiscal 1995, respectively.
Retail and mail order sales were $756,711 for fiscal 1996, an increase of
$176,135 or 30% over fiscal 1995.
Cost of sales decreased to $8,343,179 for fiscal 1996 compared to $13,634,757
for fiscal 1995. Cost of sales decreased as a percentage of sales to 78% for
fiscal 1996 from 81% for fiscal 1995. The decrease as a percentage of product
sales was due to an increase in bottling and packaging services which carry a
lower cost percentage than bulk manufacturing. Additionally, retail and mail
order sales carry a lower cost percentage.
Selling and administrative expenses decreased 22% to $1,990,997 in fiscal 1996
as compared to $2,543,354 for fiscal 1995. The decrease of $552,357 is primarily
attributable to the following factors: (i) a decrease in advertising expenses of
$56,424, or 26%, to $159,447 for fiscal 1996 from $215,871 for fiscal 1995, due
to a decrease in magazine advertising; (ii) a decrease in professional fees of
$84,395, or 27%, to $225,916 for fiscal 1996 from $310,311 for fiscal 1995;
(iii) a decrease in officers' salaries of $329,162, or 61%, to $207,838 for
fiscal 1996 from $537,000 for fiscal 1995, as a result of a reduction in the
salary of a corporate officer; and (iv) a decrease in non-union pension and
profit-sharing plan expense of $59,675, or 125%, to a credit of $11,924 for
fiscal 1996 from a charge of $47,751 for fiscal 1995.
Other income/[expense] was $(127,823) for fiscal 1996 as compared to $686 for
fiscal 1996. This decrease of $128,509 is attributable to the following factors
(i) an increase in interest expense of $116,645 due to an $80,000 non-cash
charge for debt issuance costs related to the Bridge Units, a decrease in
imputed interest of $15,265 and an increase in line of credit borrowings; (ii) a
loss of $36,998 in fiscal 1996 from a 50%-owned partnership; (iii) an increase
in sales of fixed assets to $64,000 for fiscal 1996 from $11,452 for fiscal
1995; and (iv) a decrease in interest and investment income of $27,414.
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Liquidity and Capital Resources
At June 30, 1997, the Company's working capital was $4,032,402 and increase
of $ 1,687,544 over working capital at June 30, 1996. Cash and cash equivalents
were $ 1,010,256 at June 30, 1997 an increase of $ 245,191 from June 30, 1996.
The Company utilized $1,776,278 and $450,098 for operations for the
years ended June 30, 1997 and 1996, respectively. The primary reasons for
the increase in cash utilized for operations are (a) an increase in
inventories of approximately $650,000 resulting from the new product, MAP, and
an increased volume in the mail order business and (b) the increase in accounts
receivable of approximately $400,000 resulting from an increase of approximately
$1 million in sales for the quarter ended June 30, 1997 versus the quarter ended
June 30, 1996. The Company utilized $660,004 and $300,874 in investing
activities for the years ended June 30, 1997 and 1996, respectively. The Company
generated $2,681,473 from financing activities for the year ended June 30, 1997,
primarily the net result of net proceeds of approximately $3,400,000 from a
public offering of common stock offset by the payment of notes payable of
approximately $1,200,000 The Company utilized $354,710 from financing activities
for the year ended June 30, 1996.
On February 3, 1997, the Company received a secured promissory note in the
amount of $250,000 with interest at 14% per annum. The note is due and payable
on November 3, 1997. Advance interest of $26,250 was payable out of the proceeds
of the loan and is taken into income over the period of the loan.
On October 29, 1996, the Company successfully completed a public offering
whereby the Company sold 632,500 units at $7.00 per unit, each unit consisting
of two shares of Common Stock and two Class A Redeemable Common Stock Purchase
Warrants. The net proceeds to the Company after deducting underwriting discounts
and commission of $575,575 and other expenses of the offering of $442,310 were
$3,357,170.
The Company has a $500,000 revolving line of credit agreement with a bank which
bears interest at .75% above the bank's prime lending rate and expires on
November 30, 1997. At June 30, 1997, there was no balance due under the line of
credit agreement. The Company has additionally secured a five year equipment
term loan with interest at 1.50% over the bank's prime lending rate. At June 30,
1997, the balance due under the equipment loan was $206,653.
The Company's total annual principal commitments at June 30, 1997 for the next
five years of $1,709,704 consists of obligations under operating leases for
facilities and a lease agreements for the rental of warehouse equipment, office
equipment and automobiles.
Effective July 1, 1996, the Company entered into employment agreements with each
of its five executive officers providing for aggregate compensation in the
amount of $580,000 for the fiscal year ending June 30, 1997. In 1998, the total
annual employment agreements will total $680,000. Such compensation amounts to
an approximate increase of $200,000 as compared to fiscal 1996.
On October 29, 1996 the date of the public offering, the company repaid
bridge lenders the principal amount due of $ 300,000 plus accrued interest.
10
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Liquidity and Capital Resources [Continued]
Management expects to renew the $ 500,000 line of credit which expires on
November 30, 1997. In the event that the Company requires additional working
capital the Company would have to either increase its line of credit or engage
in sales of it's equity securities. There can be no assurance that any line of
credit increases or sales of equity securities can be accomplished on conditions
favorable to the company.
New Authoritative Pronouncements
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively
retroactive application is prohibited.Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB
deferred some provisions of SFAS No. 125, which are not expected to be
relevant to the Company.
The FASB issued Statement of Financial Accounting Standards ["SFAS"] No. 128,
"Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital
Structure" in February 1997. SFAS No. 128 simplifies the earnings per share
["EPS"] calculations required by Accounting Principles Board ["APB"] Opinion No.
15, and related interpretations, by replacing the presentation of primary EPS
with a presentation of basic EPS. SFAS No. 128 requires dual presentation of
basic and diluted EPS by entities with complex capital structures. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in the earnings of an entity, similar to the fully diluted EPS of APB
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. When adopted, SFAS No. 128 will require
restatement of all prior-period EPS data presented; however, the Company has not
sufficiently analyzed SFAS No. 128 to determine what effect SFAS No. 128 will
have on its historically reported EPS amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
11
<PAGE>
New Authoritative Pronouncements [Continued]
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of
financial statements for earlier periods provided for comparative purposes
is required. SFAS No. 130 is not expected to have a material impact on the
Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments
are reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and
comparative information for earlier years is to be restated. SFAS No. 131
need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material
impact on the Company.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
12
<PAGE>
Item 7. Financial Statements
For a list of financial statements filed as part of this report, see index to
financial statements at F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended June 30, 1997.
Item 10. Executive Compensation
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended June 30, 1997.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended June 30, 1997.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended June 30, 1997.
Item 13. Exhibits and Reports on Form 8-K
Exhibits
The following is a list of exhibits filed as part of this Annual Report. Where
so indicated by footnote, the exhibits have either been previously filed and are
hereby incorporated by reference:
Exhibit #
1.1 Form of Amended Underwriting Agreement (1)
1.2 Form of Amended Underwriter's Options (1)
1.3 Form of Amended Consulting Agreement between Registrant and the
Underwriter (1)
2.1 Agreement and Plan of Merger between Chem International, Inc
. and Frog Industries Ltd.,
dated September 9, 1994 (1)
2.2 Certificate of Merger of Chem International, Inc., a Delaware
Corporation, into Frog
Industries Ltd., a New York Corporation, filed December 27, 1994 (1)
3.1 Restated Certificate of Incorporation (1)
3.2 By-Laws (1)
4.1 Form of Amended Warrant Agreement among the Registrant and
Continental Stock Transfer
& Trust Company, as Warrant Agent (1)
4.2 Specimen Common Stock Certificate of Registrant (1)
4.3 Specimen Class A Warrant Certificate of Registrant (1)
5.1 Opinion of Singer Zamansky LLP (1)
13
<PAGE>
10.1 Employment Agreement, effective January 1, 1996, between the
Registrant and Ronald G.
Smalley (1)
10.2 Employment Agreement, effective July 1, 1996, between the Registrant
and E. Gerald Kay (1)
10.3 Employment Agreement, effective July 1, 1996, between the Registrant
and Eric Friedman (1)
10.4 Employment Agreement, effective July 1, 1996, between the Registrant
and Riva L. Kay (1)
10.5 Employment Agreement, effective July 1, 1996, between the Registrant
and Christina M.
Kay (1)
10.6 Lease Agreement, dated January 1, 1996, between the Registrant and
Gerob Realty Partnership (1)
10.7 Stock Option Plan (1)
10.8 Amended Employment Agreement, effective September 20, 1996, between the
Registrant and E. Gerald Kay (1)
10.9 Lease Agreement, dated August 3, 1994, between the Registrant and
Hillside 22 Realty
Associates, L.L.C. (1)
10.10 Exclusive License Agreement between the Registrant and International
Nutrition Research
Center, Inc. and amendments, dated April 29, 1997 and November 27, 1996
(2)
10.11 Lease Agreement between the Registrant and Vitamin Realty Associates,
dated January 10, 1997 (2)
16.1 Letter on Changes in Certifying Accountants (1)
(1) Previously filed.
(2) Filed herewith.
Reports on Form 8-K
None filed during the quarter for which this report is submitted.
14
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
INDEX
- ------------------------------------------------------------------------------
Item 7: Financial Statements
Independent Auditor's Report.................................... F-1....
Consolidated Balance Sheet as of June 30, 1997.................. F-2.... F-3
Consolidated Statements of Operations for the years
ended June 30, 1997 and 1996.................................... F-4....
Consolidated Statement of Stockholders' Equity for the years
ended June 30, 1997 and 1996.................................... F-5....
Consolidated Statements of Cash Flows for years ended
June 30, 1997 and 1996 ......................................... F-6.... F-7
Notes to Consolidated Financial Statements...................... F-8... F-20
. . . . . . . .
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Chem International, Inc.
We have audited the accompanying consolidated balance sheet of Chem
International, Inc. and its subsidiaries as of June 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audit
provides 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 Chem International, Inc. and its subsidiaries as of June 30, 1997,
and the consolidated results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
September 10, 1997
F-1
<PAGE>
Independent Auditors' Report
To the Stockholders of
Chem International, Inc.
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Chem International, Inc. and Subsidiaries
for the year ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations, changes in stockholders' equity and consolidated cash flows of Chem
International, Inc. and Subsidiaries for the year ended June 30, 1996, in
conformity with generally accepted accounting principles.
CORNICK, GARBER & SANDLER, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
September 4, 1996
F-2
<PAGE>
<TABLE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997.
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,010,256
Accounts Receivable - Net 2,464,708
Note Receivable 238,373
Inventories 2,086,366
Prepaid Expenses and Other Current Assets 291,389
Refundable Federal Income Taxes 240,000
-----------
Total Current Assets 6,331,092
Property and Equipment - Net 1,072,049
-----------
Other Assets:
Goodwill 293,872
Prepaid Pension Costs 340,291
Security Deposits and Other Assets 103,344
-----------
Total Other Assets 737,507
Total Assets $ 8,140,648
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-3
</TABLE>
<PAGE>
<TABLE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997.
- ------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ 48,203
Accounts Payable 1,761,962
Federal and State Income Taxes Payable 41,416
Accrued Expenses and Other Current Liabilities 175,109
Accrued Expenses - Related Party 272,000
-----------
Total Current Liabilities 2,298,690
Non-Current Liabilities:
Notes Payable 234,171
Notes Payable - Related Party 276,444
-----------
Total Non-Current Liabilities 510,615
Commitments and Contingencies [14] --
Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares,
$.002 Par Value, No Shares Issued --
Common Stock - Authorized 25,000,000 Shares,
$.002 Par Value, 4,335,000 Shares Issued and Outstanding 8,670
Additional Paid-in Capital 4,196,072
Retained Earnings 1,126,601
Total Stockholders' Equity 5,331,343
Total Liabilities and Stockholders' Equity $ 8,140,648
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-4
</TABLE>
<PAGE>
<TABLE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Years ended
June 30,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Sales $11,126,860 $10,637,797
Cost of Sales 9,475,624 8,343,179
---------- -----------
Gross Profit 1,651,236 2,294,618
Selling and Administrative Expenses 2,546,972 1,990,997
---------- -----------
Operating [Loss] Income (895,736) 303,621
---------- -----------
Other Income [Expense]:
Gain on Sale of Fixed Assets 25,000 64,000
Interest Expense (85,696) (171,296)
Interest Expense - Related Party (14,099) (14,099)
Interest and Investment Income 68,427 30,570
Income [Loss] on Investment in Partnership 1,780 (36,998)
---------- -----------
Other Income [Expense] - Net (4,588) (127,823)
---------- -----------
[Loss] Income Before Income Taxes (900,324) 175,798
Federal and State Income Tax [Benefit] Expense (246,020) 133,600
---------- -----------
Net [Loss] Income $ (654,304) $ 42,198
========== ===========
Net [Loss] Income Per Share $ (.16) $ .01
========== ===========
Average Common Shares Outstanding 4,007,877 3,081,000
========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-5
</TABLE>
<PAGE>
<TABLE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30,
1997 AND 1996.
- ------------------------------------------------------------------------------
Additional Total
Common Stock Preferred Paid-in Retained Stockholders'
Shares Par Value Stock Capital Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1995 1,000,000 $ 2,000 $ 473 $ 593,859 $1,658,707 $2,255,039
Contribution of Stock of
Bioscience Technologies, Inc. -- -- -- 2,977 -- 2,977
Conversion of Class B Preferred
Stock 2,000,000 4,000 (160) 12,160 -- 16,000
Redemption of Class A Preferred
Stock -- -- (313) (156,160) -- (156,473)
Sale of Common Stock in Private
Placement 70,000 140 -- 155,141 -- 155,281
Issuance of Bridge Units 300,000 600 -- 1,199,400 -- 1,200,000
Reversal of Liabilities Assumed on
Reverse Acquisition -- -- -- 61,656 -- 61,656
Imputed Interest on Note Payable -
Related Party -- -- -- 14,099 -- 14,099
Net Income -- -- -- -- 42,198 42,198
-------- -------- -------- --------- -------- --------
Balance - June 30, 1996 3,370,000 6,740 -- 1,883,132 1,700,905 3,590,777
Reversal of Issuance of
Bridge Units (300,000) (600) - (1,199,400) 80,000 (1,120,000)
Imputed Interest on Note
Payable - Related Party -- -- -- 14,099 -- 14,099
Issuance of Stock Options -- -- -- 143,601 -- 143,601
Net Proceeds from Public
Offering 1,265,000 2,530 -- 3,354,640 -- 3,357,170
Net [Loss] -- -- -- -- (654,304) (654,304)
-------- -------- -------- --------- -------- --------
Balance - June 30, 1997 4,335,000 $ 8,670 $ -- $4,196,072 $1,126,601 $5,331,343
========= ======== ======== ========== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
<PAGE>
<TABLE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
June 30,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Operating Activities:
Net [Loss] Income $ (654,304) $ 42,198
---------- -----------
Adjustments to Reconcile Net [Loss] Income to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 310,395 338,838
Lease Termination Items (108,753) --
Noncurrent Rent Charge -- 35,595
Deferred Income Taxes 27,000 (82,955)
Imputed Interest on Note Payable - Related Party 14,099 14,099
[Gain] Loss on Investment in Partnership (1,780) 36,998
Interest Income on Note Receivable (14,623) --
Bad Debt Expense 23,779 13,262
[Gain] on Sale of Property and Equipment (25,000) (64,000)
Consulting Expense - Stock Options 143,601 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (291,987) (838,599)
Inventories (653,134) (505,271)
Prepaid Expenses and Other Current Assets (241,332) (39,557)
Prepaid Pension Costs (45,957) (45,110)
Security Deposits and Other Assets (12,991) --
Increase [Decrease] in:
Accounts Payable (115,228) 536,580
Federal and State Income Taxes Payable (127,549) (24,032)
Accrued Expenses and Other Liabilities (2,514) 131,856
---------- -----------
Total Adjustments (1,121,974) (492,296)
---------- -----------
Net Cash - Operating Activities - Forward (1,776,278) (450,098)
---------- -----------
Investing Activities:
Investment in Partnership (5,000) --
Issuance of Note Receivable (223,750) --
Repayment of Loan from Related Company 16,849 --
Repayment of Note Payable - Stock Retirement (156,473) --
Purchase of Property and Equipment (316,499) (328,920)
Proceeds from Sale of Property and Equipment 25,000 64,000
Loans to Stockholders (92) (54,977)
Repayment of Loans by Stockholders -- 51,019
Repayment of Note Receivable 3,183 --
Repayment of Loan by Affiliated Company -- 12,837
Loan to Related Company (3,222) (16,127)
Investment in Split Dollar Life Insurance -- (28,706)
---------- -----------
Net Cash - Investing Activities - Forward $ (660,004) $ (300,874)
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-7
</TABLE>
<PAGE>
<TABLE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
June 30,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $(1,776,278) $ (450,098)
----------- -----------
Net Cash - Investing Activities - Forwarded (660,004) (300,874)
---------- -----------
Financing Activities:
Proceeds from Public Offering 3,426,344 --
Proceeds from Bridge Note Financing -- 290,994
Proceeds from Notes Payable 412,744 394,156
Repayment of Notes Payable (1,157,615) (1,141,967)
Net Proceeds from Sale of Common Stock in Private
Placement -- 155,281
Deferred Offering Costs -- (69,174)
Proceeds from Conversion of Class B Preferred Stock -- 16,000
---------- -----------
Net Cash - Financing Activities 2,681,473 (354,710)
---------- -----------
Net Increase [Decrease] in Cash and Cash Equivalents 245,191 (1,105,682)
Cash and Cash Equivalents - Beginning of Years 765,065 1,870,747
---------- -----------
Cash and Cash Equivalents - End of Years $1,010,256 $ 765,065
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 59,000 $ 83,000
Income Taxes $ 168,000 $ 242,000
</TABLE>
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
The Company incurred offering costs of $69,174 as of June 30, 1996. These
costs were offset against the net proceeds of the public offering as
reflected in the consolidated statements of stockholders' equity for the year
ended June 30, 1997.
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
F-8
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Business
Chem International, Inc. [the "Company"] is engaged primarily in the
manufacturing, marketing and sales of vitamins, nutritional supplements
and herbal products. Its customers are located primarily throughout
the United States.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries all of which are
wholly-owned. Intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Inventories - The inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Depreciation - The Company follows the general policy of depreciating the cost
of property and equipment over the following estimated useful lives:
Machinery and Equipment 7 Years
Transportation Equipment 5 Years
Leasehold Improvements See Below
Effective July 1, 1995, the Company revised its estimate of the useful lives of
its leasehold improvements from 31 years to 15 years from date of acquisition.
This change in estimate increased depreciation expense by approximately $26,000
and decreased net income by approximately $16,000 for the year ended June 30,
1996.
Machinery and equipment are depreciated using accelerated methods while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense was $298,408 and $326,851 for the years ended June 30, 1997 and 1996,
respectively.
Consulting Agreement - On October 29, 1996, the Company entered into a two year
consulting agreement for $88,550 with the underwriter of the Company's public
offering, which is being taken into expense over the term of the agreement. The
balance recorded at June 30, 1997 is approximately $59,000 and is included in
prepaid expenses and other assets.
Goodwill - Goodwill, representing the excess of cost over the fair value of the
net assets acquired of the Company's principal operating business subsidiary at
its date of its acquisition in 1981, is being amortized over 40 years on the
straight-line method. The Company carries its goodwill at its amortized cost,
subject to periodic review for impairment.
Amortization expense was $11,987 for each of the years ended June 30, 1997 and
1996.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings [Loss] Per Share - Earnings [loss] per common share are computed based
upon the weighted average number of common and common stock equivalents shares
outstanding during the periods presented after giving retroactive effect to the
1-for-4 reverse stock split in July 1996. Common stock equivalents are included
when dilutive.
F-9
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Revenue Recognition - The Company generally recognizes revenue upon shipment of
the product.
Impairment - Certain long-term assets of the Company including goodwill are
reviewed at least annually as to whether their carrying value has become
impaired, pursuant to guidance established in Statement of Financial Accounting
Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." Management considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations [undiscounted and without interest charges]. If impairment is
deemed to exist, the assets will be written down to fair value or projected
discounted cash flows from related operations. Management also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 1997, management
expects these assets to be fully recoverable.
Stock Options Issued to Employees - The Company adopted fair the
value method of SFAS No. 123, "Accounting for Stock-Based Compensation,
" on July 1, 1996 for financial note disclosure purposes and will
continue to apply the intrinsic value method of Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees,
" for financial reporting purposes.
Advertising - Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $235,636 and $159,447 for the
years ended June 30, 1997 and 1996, respectively.
[3] Investment in and Advances to Partnership
The Company was a 50% partner in Swedish Herbal Institute - Chem Associates [the
"Partnership"]. In addition to its $1,000 capital investment, the Company had
advanced approximately $70,000 in exchange for a series of promissory notes. As
of June 30, 1996, the Partnership was insolvent and the Company recorded a loss
on its investment and a charge for approximately 50% of its note receivable for
the year ended June 30, 1996. The balance was assumed by the other 50% partner.
At June 30, 1997, the balance of this note is $32,317 and is included in other
assets.
[4] Investment in Manhattan Health Products, L.L.C.
The Company is a 50% partner in Manhattan Health Products, L.L.C. In June 1997,
the Company's capital investment was recorded at $5,000 and is included in
other assets.
[5] Inventories
Inventories consist of the following at June 30, 1997:
Raw Materials $ 892,022
Work-in-Process 450,970
Finished Goods 743,374
----------
Total $2,086,366
F-10
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[6] Property and Equipment
Property, plant and equipment comprise the following at June 30, 1997:
Leasehold Improvements $ 826,209
Machinery and Equipment 1,861,913
Transportation Equipment 36,652
----------
Total 2,724,774
Less: Accumulated Depreciation and Amortization 1,652,725
Total $1,072,049
[7] Note Receivable
On February 3, 1997, the Company received a secured promissory note in the
amount of $250,000 with interest at 14% per annum. The note is due and payable
on November 3, 1997. Prepaid interest of $26,250 was received and will be
amortized over the period of the loan.
[8] Notes Payable
Notes payable are summarized as follows at June 30, 1997:
Related Party
Notes Payable Note Payable Total
Notes Payable:
Bio Merieux Vitek, Inc. (a) $ 75,721 $ -- $ 75,721
Gerob Realty Partnership [See Note 14](b) -- 276,444 276,444
Summit Bank:
Revolving Line-of-Credit (c) -- -- --
Equipment Term Loan (d) 206,653 -- 206,653
---------- ----------- ----------
Totals 282,374 276,444 558,818
Less: Current Portion 48,203 -- 48,203
---------- ----------- ----------
Noncurrent Portion $ 234,171 $ 276,444 $ 510,615
------------------ ========== =========== ==========
(a)Five year 10% equipment note dated April 1, 1997 providing for monthly
payments of $1,698 for principal and interest. The note is collateralized by
laboratory equipment.
(b)Noninterest bearing note due September 10, 1997. For financial reporting
purposes, interest has been imputed at 8.5% a year with the net of tax effect
being credited to additional paid-in capital. [See Notes 17 and 19A].
(c)Under the terms of a revolving line of credit which expires on November 30,
1997, the Company may borrow up to $500,000 at 3/4% above the bank's prime
rate. The loan is collateralized by accounts receivable, inventory and
machinery and equipment. The loan has been guaranteed by the Company's
president and principal stockholder. At June 30, 1997, there were no
borrowings under the line of credit.
F-11
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[8] Notes Payable [Continued]
(d)Under the terms of an equipment term loan, due November 30, 2001, the Company
may borrow up to $350,000 at 1-1/2% above the bank's prime rate. The term
loan provides for monthly payments of $4,698 for principal and interest. At
June 30, 1997, the interest rate was 9.75%. The loan is collateralized by
machinery and equipment. The loan has been guaranteed by the Company's
president and principal stockholder.
The loan agreement with Summit Bank contains certain financial covenants
relating to the maintenance of specified liquidity, debt to equity and debt
coverage ratios and requires that the Company's president and principal
stockholder maintain a minimum stock ownership percentage of the Company. At
June 30, 1997, the Company was in compliance with all bank covenants.
The following are maturities of long-term debt for each of the next five years:
Related Party
Notes Payable Note Payable Total
June 30,
1998 $ 48,203 $ -- $ 48,203
1999 50,501 -- 50,501
2000 52,028 -- 52,028
2001 53,710 -- 53,710
2002 52,166 -- 52,166
Thereafter 25,766 276,444 302,210
---------- ----------- ----------
Totals $ 282,374 $ 276,444 $ 558,818
------ ========== =========== ==========
[9] Income Taxes
Provision for income taxes consists of the following:
Years Ended
June 30,
1 9 9 7 1 9 9 6
------- -------
Currently Payable:
Federal $ (277,276)$ 162,000
State 4,256 54,555
----------- -----------
(273,020) 216,555
Deferred:
Federal 22,950 (70,112)
State 4,050 (12,843)
----------- -----------
27,000 (82,955)
Totals $ (246,020)$ 133,600
------ =========== ===========
F-12
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[9] Income Taxes [Continued]
Reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
Years Ended
June 30,
1 9 9 7 1 9 9 6
------- -------
U.S. Statutory Rate (34)% 34%
State Taxes on Income - Net of Federal Benefit (6) 6
Nondeductible Items:
Travel and Entertainment 4 11
Amortization of Deferred Bridge Loan Finance Costs -- 18
Amortization of Goodwill 2 3
Other - Net 1 4
Consulting Fees 6 --
------ -----
Effective Income Tax Rate (27)% 76%
------------------------- ====== =====
Deferred income taxes arise from temporary differences resulting from income
and expense reported for financial accounting and tax purposes in different
periods.
The significant components of deferred tax assets and [liabilities] relate to
the following at June 30, 1997:
Inventory Cost $ 24,000
Other 6,000
Nondeductible Expense 109,000
Pension Benefit Obligation (136,000)
Depreciation Expense 14,000
----------
Subtotal 17,000
Valuation Allowance 0
Total Net Deferred Tax Assets $ 17,000
----------------------------- ==========
The Company believes that net deferred tax assets, which are included in other
current assets, are more likely than not to be realized because all deductible
temporary differences will be utilized as charges against reversals of future
taxable temporary differences.
The Company and its subsidiaries file a consolidated federal income tax return.
[10] Pension Plans
The Company sponsors a noncontributory defined benefit pension plan covering all
nonunion employees meeting age and service requirements. Contributions to the
plan, which are made solely by the Company, are determined by an outside
actuarial firm. The Company made no contributions for 1997 or 1996,
respectively.
The defined benefit pension plan calls for benefits to be paid to eligible
employees at retirement based primarily upon years of service with the Company
and the average monthly compensation. Contributions to the plan reflect benefits
attributed to employees' services to date, as well as services expected to be
earned in the future. Plan assets consist primarily of marketable securities.
F-13
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[10] Pension Plans [Continued]
Pension expense includes the following components:
Years Ended
June 30,
1 9 9 7 1 9 9 6
------- -------
Service Cost of the Current Period $ 27,920 $ 25,992
Interest Cost on the Projected Benefit Obligation 36,541 33,706
Actual Gain on Assets Held in the Plan (81,318) (75,708)
Net Amortization of Transition Liability and Net Gain(29,100) (29,100)
Pension Expense [Credit] $ (45,957)$ (45,110)
------------------------ =========== ===========
The following sets forth the funded status of the plan and the amounts shown in
the accompanying balance sheet:
1 9 9 7 1 9 9 6
------- -------
Actuarial Present Value of Benefit Obligations:
Vested Benefits $ (567,601)$ (491,317)
Nonvested Benefits -- (17,172)
---------- ----------
Accumulated Benefit Obligation (567,601) (508,489)
Effect of Anticipated Future Compensation Levels and
Other Events (31,187) (40,398)
Projected Benefit Obligation (598,788) (548,887)
Fair Value of Assets Held in the Plan 1,138,348 1,016,480
---------- ----------
Excess of Plan Assets Over Projected Benefit Obligation 539,560 467,593
Unrecognized Transition Obligation 80,500 92,001
Unrecognized Net Gain from Past Experience Different than
Assumed (279,769) (265,260)
Prepaid Pension Cost Included in the Balance Sheet $ 340,291 $ 294,334
-------------------------------------------------- ========== ==========
The weighted average discount rate used to measure the projected benefit
obligation is 7% for 1997 and 7% for 1996, the rate of increase in future
compensation levels is 2% for 1997 and 2% for 1996 and the expected long-term
rate of return on assets is 7% for 1997 and 7% in 1996. The Company uses the
straight-line method of amortization of unrecognized gains and losses.
Additionally, the Company participates in a union sponsored multi-employer
defined contribution plan covering all union employees. Information relating to
accumulated benefits obligations and plan assets is not available. Under ERISA,
an employer, upon withdrawal from a multi-employer plan, is required to fund its
proportionate share of the plan's unfunded vested benefits at the point of
withdrawal. The Company has no intention of withdrawing from the plan. The
Company is required to fund the plan on the first of each month for the
preceding month's obligation. Total contributions were $48,960 and $46,320 for
the years ended June 30, 1997 and 1996, respectively.
[11] Profit-Sharing Plan
The Company maintains a profit-sharing plan which qualifies under Section 401(k)
of the Internal Revenue Code, covering all nonunion employees meeting age and
service requirements. Contributions are determined by matching a percentage of
employee contributions. The total expense for the years ended June 30, 1997 and
1996 was $32,596 and $33,186, respectively.
F-14
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[12] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Cash - The Company maintains balances at
several financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At June 30, 1997, the
Company's uninsured cash balances totaled approximately $907,000.
The Company does not require collateral in relation to cash credit risk.
[B] Concentrations of Credit Risk - Receivables - The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk. The amount
of the allowance for uncollectible accounts at June 30, 1997 is $15,750.
[13] Major Customer
For the years ended June 30, 1997 and 1996, approximately 48% and 40% of
revenues were derived from one customer. The loss of this customer would have an
adverse affect on the Company's operations. In addition, for the years ended
June 30, 1997 and 1996, an aggregate of approximately 19% and 25%, respectively,
of revenues were derived from two other customers; no other customers accounted
for more than 10% of consolidated sales for the years ended June 30, 1997 and
1996. Accounts receivable from these customers comprised approximately 51% and
58% of total accounts receivable at June 30, 1997 and 1996, respectively.
[14] Commitments and Contingencies
[A] Leases
Related Party Leases - Certain manufacturing and office facilities are leased
from Gerob Realty Partnership ["Gerob"] whose partners are stockholders of the
Company. The lease, which expires on December 31, 1997, provides for a minimum
annual rental of $60,000 plus payment of all real estate taxes. Rent and real
estate tax expense for the years ended June 30, 1997 and 1996 on this lease was
approximately $143,000 and $172,000, respectively. Unpaid rent of $272,000 due
to Gerob at June 30, 1997 has been separately disclosed as accrued expenses on
the consolidated balance sheet.
The Company's original lease agreement with a non-related party for warehouse
and office facilities was terminated on January 10, 1997
when the landlord sold the premises. At the time of sale the rentals
under the lease were recorded for financial accounting purposes on
a straight-line basis. At December 31, 1996, accrued future rentals
of $105,613, which give effect to both future scheduled increases and certain
concessions at the lease inception had been recorded as a non-current liability.
Because of the termination of the lease the balance of accrued future rentals of
$105,613 has been allocated to rent expense in the six month period ended June
30, 1997. The Company subleased a portion of its premises on a month-to-month
basis through January 10, 1997 for approximately $25,000 a month.
Other warehouse and office facilities are leased from Vitamin Realty Associates,
L.L.C., a limited liability company, which is 90% owned by the Company's
president and principal stockholder and certain family members and 10% owned by
the Company's chief financial officer. The lease was effective on January 10,
1997 and provides for minimum annual rental of $346,000 through January 10, 2002
plus increases in real estate taxes and building operating expenses. At its
option, the Company has the right to renew the lease for an additional five year
period.
Other Lease Commitments - The Company leases warehouse equipment for a five year
period providing for an annual rental of $15,847 and office equipment for a five
year period providing for an annual rental of $8,365.
F-15
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[14] Commitments and Contingencies [Continued]
[A] Leases [Continued]
Other Lease Commitments [Continued] - The Company leases automobiles under
non-cancelable operating lease agreements which expire through 2000.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related Party
Lease Lease
Commitment Commitment Total
Year Ending
June 30,
1998 $ 37,077 $ 346,000 $ 383,077
1999 32,384 346,000 378,384
2000 31,703 346,000 377,703
2001 24,212 346,000 370,212
2002 17,719 182,609 200,328
Thereafter -- -- --
---------- ----------- ----------
Total $ 143,095 $ 1,566,609 $1,709,704
----- ========== =========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $285,000 and $526,000 for the years ended June 30, 1997 and 1996,
respectively. Rent expense is stated net of sublease income of approximately
$160,000 and $200,000 for the years ended June 30, 1997 and 1996, respectively.
[B] Employment Agreements - Effective July 1, 1996, the Company entered into
three year employment agreements with its president and four other officers
which provide for aggregate annual salaries of $580,000 for the year ending June
30, 1997 and $680,000 for the year ending June 30, 1998. These agreements are
subject to annual increases equal to at least the increase in the consumer price
index for the Northeastern United States. An agreement with one of the officers
also provided for a $100,000 signing bonus, which was expensed during the year
ended June 30, 1997.
[C] Litigation - Numerous unrelated manufacturers, distributors, suppliers,
importers and retailers of manufactured L-tryptophan are or were defendants in
lawsuits seeking compensation and punitive damages for alleged personal injury
from ingestion of products containing manufactured L-tryptophan. A number of
these suits have been settled or discontinued. Additional suits may be filed.
Prior to a request from the FDA in November 1989 for a national, industry-wide
recall, the Company halted sales and distribution and also ordered a recall of
L-tryptophan products. Subsequently, the FDA indicated that there is a strong
link between the ingestion of the allegedly contaminated L-tryptophan and a
blood disorder. There has been no indication that the blood disorder was caused
by any formulation or manufacturing fault of the Company or any of the other
firms that manufactured tablets and/or capsules containing L-tryptophan.
The Company and certain companies in the vitamin industry, including
distributors, wholesalers and retailers, have entered into an Indemnification
Agreement with Showa Denko America, Inc. ["SDA"], which appears to have been the
supplier of all of the alleged contaminated L-tryptophan products. SDA has
assumed the defense of all claims against the Company arising out of the
ingestion of L-tryptophan products and has agreed to pay the legal fees and
expenses in that defense. SDA's parent company has agreed to guarantee SDA's
obligation therein. SDA has posted a revolving irrevocable letter of credit, in
the amount of $20,000,000, to be used for the benefit of the Company and other
indemnified parties.
F-16
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[14] Commitments and Contingencies [Continued]
[C] Litigation [Continued] - Manhattan Drug has product liability insurance,
which the Company believes provides coverage for all of its L-tryptophan
products subject to these claims, including legal defense costs. Based upon the
aforementioned indemnification arrangements, the Company's product liability
insurance and the product liability insurance of its suppliers, the Company does
not believe the outcome of these actions will have a material adverse effect on
the Company, and, accordingly, no provision has been made for any loss that may
be incurred by the Company as a result of these actions.
[15] Related Party Transactions
During the year ended June 30, 1997, the Company entered into a consulting
agreement with the brother of the Company's president on a month to month basis
for $1,000 per month for the year ended June 30, 1997. The total consulting
expense recorded per this verbal agreement by the Company was $11,000.
[16] Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company uses a variety
of methods and assumptions, which are based on estimates of market conditions
and risks existing at the time. For certain instruments, including cash and cash
equivalents, accounts receivable, notes receivable, accounts payable, and
accrued expenses, it was estimated that the carrying amount approximated fair
value because of the short maturities of these instruments. Short-term debt
and long-term debt including long-term debt to a related party
is based on current rates at which the Company could borrow funds with similar
remaining maturities and approximates fair value.
[17] Equity Transactions
[A] Capital Stock - Effective December 27, 1994, the Company and Frog
Industries, Ltd. ["Frog"], an inactive corporation, executed a plan of Merger
whereby the Company was merged into Frog [the "Merger"]. Each share of the
Company's then outstanding voting common stock was exchanged for 30,357 shares
of Frog's voting common stock. Each issued share of the Company's then
outstanding preferred stock was converted into one share of non-voting Class A
preferred stock and .51127 shares of non-voting Class B convertible preferred
stock of Frog, resulting in 156,473 shares of outstanding Class A preferred
stock and 80,000 shares of outstanding Class B preferred stock, with a par value
of $313 and $160, respectively. Simultaneously with the Merger, Frog changed its
name to Chem International, Inc.
For accounting purposes, the transaction has been treated as an acquisition of
Frog by the Company. As of the date of the Merger, Frog was inactive, had no
assets and had recorded liabilities of $61,656 for possible income and other tax
liabilities and for certain unstated judgments. Since the Company attributed no
value to its shares issued or recorded any "goodwill," in the acquisition,
it recorded the $61,656 excess of liabilities assumed over assets
acquired as a direct charge to additional paid-in capital.
As a result of the Company's subsequent reincorporation in
Delaware in February 1996, it eliminated all delinquent tax filings. Also,
management now believes that the likelihood of any prior
outstanding claims or judgments being asserted against Frog is remote.
Accordingly, the previously recorded liabilities have been reversed and credited
to additional paid-in capital at June 30, 1996.
F-17
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[17] Equity Transactions [Continued]
[A] Capital Stock - The Class A preferred stock was entitled to receive
dividends, as and when declared, up to a total of $1,853,527 [the "Aggregate
Class A Preferred Stock Dividend Preference"] and in no event, so long as any
shares of Class A preferred stock were outstanding, could any dividends be paid
on any shares of common stock or Class B preferred stock be purchased by the
Company unless all dividends were paid on the Class A preferred stock.
In February 1996, the 80,000 shares of Class B preferred stock were converted
into 2,000,000 shares of common stock. The preferred stockholders also paid the
Company $16,000, equal to the then par value of the common shares issued.
In June 1996, the aggregate Class A Preferred Stock Dividend Preference was
waived, when the 156,473 outstanding shares of Class A preferred stock were
redeemed for $1 a share and retired.
In February 1996, the Company [a New York corporation] was merged into its
wholly-owned subsidiary, Chem International, Inc. [a Delaware corporation],
pursuant to Section 253 of the Delaware Corporation Law for the sole purpose of
changing its domicile. As a result thereof and after giving effect to
restatements to the Company's certificate of incorporation subsequent to the
conversions and retirement of the previously outstanding Class A and Class B
preferred stock, the authorized capitalization of the Company is as follows:
Preferred Stock: Authorized 1,000,000 shares $.002 par value
Common Stock: Authorized 25,000,000 shares $.002 par value
The Board of Directors of the Company has the right to determine the
designations, rights, preferences and privileges of the holders of one or more
series of preferred stock which might be issued.
In May 1996, the Company sold, in a private placement, 70,000 shares of common
stock for $175,000. In June 1996, the Company also issued the equivalent of
300,000 Bridge Units [each consisting of one share of common stock and one
warrant to purchase a share of common stock at $5.50 a share for four years
following the offering] in connection with the sale of $300,000 of 7% promissory
notes to four investors. The Bridge Units were valued at $4 each, a total of
$1,200,000, which was being charged to operations over the term of the Bridge
Notes. On October 16, 1996, the Bridge Lenders waived their rights to the bridge
units and agreed to the cancellation of the underlying securities. Accordingly,
the Company has eliminated the amount previously recorded for the bridge units
and the related bridge loan finance costs of $80,000.
In July 1996, the Company affected a 1 for 4 reverse common stock split. The
foregoing amounts for common stock and the attached financial statements give
retroactive effect to the reverse stock split.
On October 29, 1996, the Company received net proceeds of approximately
$3,400,000 from the sale of 632,500 units at $7.00 per unit in a public
offering. Each unit consisted of two shares of Common Stock and two Class A
Redeemable Common Stock Purchase Warrants.
[B] Additional Paid-in Capital - On August 31, 1995, two shareholders, who are
members of the principal shareholder's family, contributed 100% of the issued
and outstanding shares of stock of Bioscience Technologies, Inc. to the Company.
The net book value of Bioscience Technologies, Inc. was credited to additional
paid-in capital. Its operations for the year ended June 30, 1995 and for the two
months ended August 31, 1995 were immaterial in relation to those of the
Company.
At June 30, 1996, previously recorded liabilities of $61,646 were credited to
additional paid-in capital concerning the reverse acquisition of Frog by the
Company [See Note 17A].
F-18
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[17] Equity Transactions [Continued]
[B] Additional Paid-in Capital [Continued] - For financial accounting purposes,
interest of 8.5% a year is being imputed on a related party non-interest bearing
note [See Note 8(b)].
[C] Stock Option Plan - The Company has adopted a stock option plan for the
granting of options to employees, officers, directors and consultants of the
Company to purchase up to 1,000,000 shares of common stock, at the discretion of
the Board of Directors. Stock option grants are limited to a total of 500,000
shares for "incentive stock options" and 500,000 shares for "non-statutory
options" and, may not be priced less than the fair market value of the Company's
common stock at the date of grant. Options granted are generally for ten year
periods, except that options granted to a 10% stockholder [as defined] are
limited to five year terms. On October 16, 1996, options to purchase 573,597
shares at the offering price [$3.50] and 25,974 shares at 110% of the offering
price were granted. Such options become exercisable on October 16, 1997.
Information pertaining to options as of June 30, 1997 and for the year then
ended is as follows:
Remaining
Contractual
Weighted Average Life
Common Exercise Price of Options
Shares Per Share Outstanding
Options Outstanding - July 1, 1995 -- $ --
Options Granted --
Options Exercised -- -- --
Options Canceled -- -- --
-------- ---------- ------------
Options Outstanding - June 30, 1996 -- -- --
Options Granted at Stock Price 573,597 3.50 4.3 Years
Options Granted Above Stock Price 25,974 3.85 8.7 Years
Options Exercised -- -- --
Options Canceled -- -- --
-------- ---------- ------------
Options Outstanding - June 30, 1997 599,571 $ 3.52 4.5 Years
----------------------------------- ======== ========== ============
Options Exercisable - June 30, 1997 -- $ -- --
----------------------------------- ======== ========== ============
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, for stock options
issued to employees in accounting for its stock option plan. Because no
stock options were issued below the stock price at date of grant, no
compensation expense has been recognized for the Company's stock-based
compensation plan.
Had compensation cost for the Company's stock options issued to employees been
determined based upon the fair value at the grant date for stock options issued
under these plans pursuant to the methodology prescribed under the Statement of
Financial Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and loss per share would have been
increased, on a pro forma basis, by approximately $935,000 or approximately $.24
per share for the year ended June 30, 1997.The weighted average fair
value of the stock options granted to employees used in determining the
pro forma amounts is estimated at $1.99 during the year
ended June 30, 1997, respectively, using the Black-Scholes option-pricing model
with the following weighted average assumptions used for
grants in fiscal year 1997: dividend yields of 0%; expected volatility of 64%;
risk-free interest rate of 6.0%; and an expected life of 4.6 years.
F-19
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[17] Equity Transactions [Continued]
[C] Stock Option Plan [Continued] - Net income [loss] and net income [loss] per
share as reported, and on a pro forma basis as if compensation cost had been
determined on the basis of fair value pursuant to SFAS No. 123 is as follows:
Years Ended
June 30,
1 9 9 7
-------
Net Income [Loss] - As Reported $ (654,304)
===========
Pro Forma $(1,589,680)
===========
Income [Loss] Per Share - As Reported $ (.16)
===========
Pro Forma $ (.40)
===========
During the year ended June 30, 1997, the Company issued 75,000 stock options to
consultants at an exercise price equal to the market price [$3.50] on the date
of grant. The fair Value of issuing these stock options to consultants during
the year ended June 30, 1997, is approximately $144,000 which is for consulting
services related to the public offering, and is being charged to paid-in
capital. The fair value of the stock options granted to consultants for the year
ended June 30, 1997 is estimated at $2.08 using the Black-Scholes option pricing
model and using a risk-free interest rate of 6.1%, an expected volatility of
64%, and an expected life of 5 years. No dividends are expected to be paid
during the expected life of the options.
[18] New Authoritative Pronouncements
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed.The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of SFAS No. 125, which are not expected to be relevant to the Company
The FASB issued Statement of Financial Accounting Standards ["SFAS"] No. 128,
"Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital
Structure" in February 1997. SFAS No. 128 simplifies the earnings per share
["EPS"] calculations required by Accounting Principles Board ["APB"] Opinion No.
15, and related interpretations, by replacing the presentation of primary EPS
with a presentation of basic EPS. SFAS No. 128 requires dual presentation of
basic and diluted EPS by entities with complex capital structures. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in the earnings of an entity, similar to the fully diluted EPS of APB
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. When adopted, SFAS No. 128 will require
restatement of all prior-period EPS data presented; however, the Company has not
sufficiently analyzed SFAS No. 128 to determine what effect SFAS No. 128 will
have on its historically reported EPS amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
F-20
<PAGE>
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- ------------------------------------------------------------------------------
[18] New Authoritative Pronouncements [Continued]
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. SFAS No. 130
is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning
after December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim
financial statements in the initial year of its application. SFAS No. 131
is not expected to have a material impact on the Company.
[19] Subsequent Events (Audited)
[A] Related Party Note - On August 15, 1997, the Company and Gerob extended the
terms of the Company's note payable [See Note 8(b)].
[B] Recall of Product - On July 7, 1997, the Company was informed by one of its
suppliers of a recall of the supplier's raw material used in the manufacturing
of tablets sold containing the recalled raw material. On July 17, 1997, the
Company issued a voluntary recall to three customers affected by this and
accordingly reduced its sales and accounts receivable at June 30, 1997 by
$127,000. The Company believes they have recourse against the supplier for the
full value of the tablets sold containing the recalled raw material. The Company
does not believe there will be any significant additional costs relating to this
recall.
(20) Subsequent Event (Unaudited)
In September of 1997 in connection with the product recall [Note 19(b)]
the Company instituted suit to recover all damages.
. . . . . . . . . . . . .
F-21
<PAGE>
AGREEMENT
AGREEMENT, made as of this 29th day of April, 1997, by and between INTERNATIONAL
NUTRITION RESEARCH CENTER, INC. (INRC), a corporation of Florida, having
principal offices at 401 West Linton Boulevard, Delray Beach, FL 33444 (the
"Licensee") and CHEM INTERNATIONAL, INC. a corporation of Delaware with its
principal offices at 225 Long Avenue, Hillside, New Jersey 07205 (the
"Sub-Licensee").
WITNESSETH:
WHEREAS, the Licensee has the right to grant a sub-license to make,
have made, use and sell a patented amino acid nutritional formula;
pursuant to an Agreement with Interamerican Nutritional Research
Laboratories Corp. (Interamerican), P.O. Box 146, Road Town, Tortola,
British Virgin Islands (hereafter "Licensor") and
WHEREAS, the Sub-Licensee desires to engage in the sale of the
patented amino acid nutritional formulas;
NOW THEREFORE, in consideration of the foregoing and of the mutual agreements
set forth herein and other good and valuable consideration, the parties agree as
follows:
1.0 Defined Terms. As used in this Agreement, the following
definitions shall apply:
1.1. Product. The term "Product" shall mean the patented amino
acid nutritional formulas covered by U.S. Patent No.
5,132,113 and any improvements thereof.
1.2. Territory. The term "Exclusive Territory" shall mean the
United States.
1.3. Minimum Royalty Payments. The term "Minimum Royalty Payments" shall
mean the aggregate quantity of Royalties that the Sub-Licensees
shall be obligated to pay during each twelve (12) month period
beginning on the date hereof and on each anniversary date thereafter
during the term of this Agreement. The aggregate quantities of
royalties which
1
<PAGE>
Sub-Licensee is required to pay during each twelve (12) month period are set
forth on Schedule 1.1 hereto.
2.0 Authorization.
2.1. Subject to and upon the terms and conditions of this
Agreement, the Licensee hereby grants to the Sub-Licensee
the exclusive right to make, have made, use and sell the
Product in the Territory for sports nutrition, but not for
weight loss or to sell to hospitals, physicians or
medically related facilities and not for the nutrification
of foodstuffs. No right is granted under this Agreement to
sell the Product for other fields of use.
2.2 The Sub-Licensee may use its own trademarks in the
Territory and may register the trademarks in any
jurisdiction in the Territory. If Sub-Licensee becomes
insolvent or declares bankruptcy, Sub-Licensee will assign
any trademarks used in connection with the Product to the
Licensee. If Sub-Licensee desires to sell its trademarks on
the Product, it will not sell these trademarks to anyone
without first offering to sell them to the Licensee for the
same price that it offers to sell the trademarks to a third
party.
3.0 Sub-Licensee's Obligations.
3.1. The Sub-Licensee shall sell the Product in the Territory so as:
(a) to meet the Minimum Royalty Requirements, as set forth
in Schedule 1.1 hereto;
(b) to assure the best employment of the Product in the
Territory;
(c) to supply fully with reasonable promptness the demand
for the Product in the Territory; and
(d) to develop vigorously and increase the volume of utilization of
the Product in the Territory.
(e) to adopt the labeling requirement for the Product that the
Licensee will require except for the trademark to be used on the
Product. Approval of the labeling will not be unreasonably withheld
by the Licensee. If a further license on the Product is granted, the
Licensee will impose a similar requirement on future sub-licensees.
2
<PAGE>
3.2. Purchase of the Product. The Sub-Licensee shall purchase its
requirements of the Product from any reputable source of supply or
will manufacture the Product using Good Manufacturing Practices.
3.3 Maintenance of Facilities. The Sub-Licensee shall provide and
maintain suitable facilities in the Territory for the proper storage
and handling of the Product.
3.4 Sub-Licensee Personnel. The Sub-Licensee shall maintain an adequate
and suitably qualified staff to the best utilization of the Product
in the Territory and perform in a timely and satisfactory manner the
Sub-Licensee's obligations under this Agreement.
3.5 Consumer Claims. The Sub-Licensee shall process and seek to settle, in
a manner acceptable to the Licensee, all consumer complaints arising from the
use of the Product in the Territory. The Sub-Licensee shall maintain records and
accounts relating to any and all claims for the Product and shall permit
examination of such records by the Licensee's representative.
4.0 Licensee's Obligations.
4.1 By mutual consent of the Licensee and the Sub-Licensee, the Sub-Licensee may
undertake to provide any available brochures, any available scientific
information and any available results of studies.
4.2 By mutual consent of the Licensee and the Sub-Licensee, the Licensee may
provide and pay for the expenses of the scientific promotion of the Product in
seminars and lectures by its own specialists or others.
4.3 By mutual consent of the Licensee and the Sub-Licensee, the Licensee may
participate in the cost of any advertising or promotional activities to assist
in the sale of the Product in the Territory.
4.4 The Licensee will exert its best efforts to provide all requested
information to the Sub-Licensee on a timely basis.
4.5 The Licensee will exert its best efforts to inform Sub- Licensee of any
inquiries or orders for Product that originate in the Territory.
4.6 The Licensee will exert its best efforts to make a knowledgeable scientific
person available as a consultant for 96 hours per year for the first three years
of this contract at times and places to be mutually agreed upon. The
Sub-Licensee will not be obligated to reimburse the Licensee for the
knowledgeable scientific person's travel expenses.
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5.0 Compliance with the Laws.
The Sub-Licensee shall comply in all material respects with any and all laws,
ordinances, rules, regulations and ordinary standards of care now in effect, or
which hereafter may be in effect, which pertains to the conduct of their
business and the utilization of the Product in the Territory, and shall
indemnify and hold the Licensor harmless against any failure to comply
therewith.
6.0 Royalty.
6.1. The Sub-Licensee shall pay to the Licensee a royalty based on all Product
manufactured or purchased by Sub- Licensee. The Sub-Licensee under this
sub-license from the Licensee, will pay an additional royalty directly to the
Licensor as directed by the Licensee. The Licensor and the Licensee shall have
no responsibility for invoicing, collection or credit risks of the
Sub-Licensee's customers.
The royalty is payable to Licensor and Licensee when the Sub-Licensee
manufactures the Product or accepts delivery of manufactured Product which
Sub-Licensee has manufactured under this Agreement. The royalty payable to the
Licensor is the sum of $ 140,000.00 per metric ton. The royalty payable to the
Licensee is $90,000.00 per metric ton.
6.2. Payment of the royalties shall be made by the Sub- Licensee directly to the
Licensor and directly to the Licensee in U.S.Dollars, unless by mutual consent,
payment in another currency is acceptable to the parties.
7.0 Indemnification and Insurance.
7.1 The Sub-Licensee shall indemnify, defend and hold the Licensor and the
Licensee, harmless against and from (a) any and all claims based upon, arising
out of, or in any way related to the transportation, storage, warehousing or use
of the Product by the Sub-Licensee, the conduct of the business of the
Sub-Licensee, any negligent or wrongful act, misfeasance or nonfeasance by the
Sub-Licensee any claim of a third party that the Sub-Licensee misrepresented its
authority or made any contractual commitment not expressly authorized under this
Agreement, or any breach by the Sub-Licensee of any representation, warranty or
covenant contained herein or the failure of the Sub- Licensee to perform its
obligation under this Agreement, and (b) any and all fees, costs, and expenses
including, without limitation attorneys' fees incurred by or on behalf of the
Licensor, or the Licensee in the defense against any and all such claims. The
Licensor shall provide the Licensee and/or its Sub-Licensee with prompt written
notice upon receipt of any such claim and the Licensor or the Licensee shall not
settle any such claim without the prior knowledge and consent of the
Sub-Licensee. The Sub-Licensee
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will maintain a product liability policy which provides at least $5,000,000.00
for each occurrence and an aggregate coverage of at least $5,000,000.00 and will
name the Licensor and Licensee as additional insureds under the policy.
7.2 The Licensee shall indemnify defend and hold Sub- Licensee harmless against
and from (a) any and all claims made against Sub-Licensee based upon any
negligent or wrongful act of Licensee and from any and all reasonable fees,
costs and expenses including reasonable attorneys' fees incurred by or on behalf
of the Sub-Licensee, in the defense against any of such claims. The Sub-Licensee
shall provide the Licensee with prompt written notice upon receipt of any such
claim and the Licensee shall not settle any such claim without the prior
knowledge and consent of the Sub-Licensee.
8.0 Representations and Warranties.
8.1 The Sub-Licensee represents and warrants that it is a corporation duly
organized and authorized to carry on the professional activity contemplated by
this Agreement under the laws of Delaware. The Sub-Licensee has obtained or will
obtain all licenses, permits and authorizations required under the laws or
regulations applicable in the Territory to undertake the use and promotion
activities contemplated herein prior to selling the Product in each jurisdiction
in the Territory.
8.2 The Sub-Licensee further represents and warrants that it has or will provide
the expertise, professional associates, knowledge and financial resources to
manufacture or purchase and sell the Product in the Territory and otherwise to
fulfill its obligations hereunder in an effective and competent manner.
8.3 The Licensee represents and warrants that it is a Corporation duly organized
and authorized to enter into this Agreement; that this Agreement does not
violate the terms of any other Agreement under which the Licensee is bound, and
that the Licensee is authorized to catty on the professional activity
contemplated by this Agreement under the laws of Florida. The Licensee also
represents and warrants that it has no knowledge of any basis under which U.S.
Patent No. 5,132,113 would be held to be invalid or unenforceable.
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9.0 Term and Termination.
9.1. This Agreement shall commence on the effective date of this Agreement as
provided hereinabove and will extend for a term which is coextensive with the
remaining term of U.S.
Patent No. 5,132,113.
9.2. The Licensee may terminate this Agreement on notice to the Sub-Licensee:
9.2.1. If the Sub-Licensee makes an assignment for the benefit of creditors,
has a receiver appointed or enters into liquidation (whether voluntarily or
involuntarily), is unable to pay its debts in the ordinary course of business,
or otherwise becomes insolvent, or terminates its existence or ceases to do
business; or
9.3. Except as otherwise provided herein, in the event that the Sub-Licensee
fails materially to perform any of its obligations under this Agreement, the
Licensee may notify the Sub-Licensee in writing, specifying the nature of such
failure and the section of this Agreement imposing the obligation, whereupon
Sub-Licensee shall have sixty (60) days within which to remedy the failure. If
the Sub- Licensee does not remedy such failure within such sixty (60) day
period, the Licensee may terminate this Agreement by subsequent notice to the
Sub-Licensee. Notwithstanding any provision in the Agreement to the contrary, no
monetary or other damages are to be paid to the Licensee if Sub- Licensee fails
to make it minimum royalty payments.
9.4. The Licensee may terminate this Agreement immediately on notice to the
Sub-Licensee if the Sub-Licensee makes an assignment for the benefit of the
creditors, or has a receiver appointed or enters into liquidation (whether
voluntarily or involuntarily), is unable to pay its debts in the ordinary course
of business; or terminates its existence or ceases to do business; or
9.5 In the event that the Licensee fails materially to perform any of its
obligations under this Agreement, the Sub-Licensee may notify the Licensee in
writing, specifying the nature of such failure and the section of this Agreement
imposing the obligation, whereupon the Licensee shall have sixty (60) days
within which to remedy the failure. If the Licensee does not remedy the failure
within such sixty (60) day period, the Sub-Licensee may terminate this Agreement
by subsequent notice to the Licensee.
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10.0. Assignment.
The Licensee may assign all or part of its rights and delegate all or part of
its duties described in this Agreement to an entity capable of fulfilling such
duties by giving written notice to the Sub-Licensee. The Sub-Licensee may not
assign or transfer this Agreement or its rights or obligations hereunder,
without the prior written consent of the Licensee.
11.0. Relationship of Parties.
Nothing herein contained shall create or be deemed to create any relationship of
agency, partnership or joint venture between the Licensee and/or its
Sub-Licensees. The Sub-Licensee shall have no authority to create or assume any
liability or indebtedness of any kind in the name of or on behalf of the
Licensee or to act for the Licensee in any manner other than as specifically
provided for herein without the prior written approval of the Licensee.
12.0. Remedies.
Neither failure nor delay on the part of the Licensee to exercise any right,
remedy, power or privilege provided for herein or by statute or by law, or in
equity shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, remedy, power or privilege preclude any other or
further exercise thereof or the exercise of any right, remedy, power or
privilege.
13.0. Notices.
Any notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand, or
mailed by first class, overnight mail, postage and registry fees prepaid, or
sent via reputable courier or by telecopy addressed:
If to the Licensee, to:
INTERNATIONAL NUTRITION RESEARCH CENTER, INC.
401 West Linton Boulevard
Delray Beach, FL 33444
If to the Sub-Licensee, to:
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CHEM INTERNATIONAL, INC.
225 Long Avenue
Hillside, NJ 07205
14.0 Impossibility of Performance.
Neither the Sub-Licensee nor the Licensee shall be held liable for delays in
performing or any failure to perform any of the terms of this Agreement caused
by the effects of fire, strike, war, insurrection, government restriction, force
majeure or other causes reasonably beyond its control and without its fault, but
the party failing to perform shall use all reasonable endeavors to resume
performance of this Agreement as quickly as feasible. If either party is
affected by an event described herein, such party shall immediately give notice
to the other and upon receipt of such notice this Agreement shall be suspended
and the parties agree to negotiate in good faith to resolve the difficulty. If
the period of such suspension exceeds sixty (60) days, the party whose ability
to perform has not been so affected may, by giving notice, terminate this
Agreement. This provision shall not relieve the Licensee and/or its Sub-Licensee
of the obligation to pay the Licensee if any Product is delivered hereunder.
15.0. Prior Understanding.
This Agreement expresses fully the understanding between the Licensee and the
Sub-Licensee with regard to the subject matter hereof and supersedes and cancels
all prior agreements and understandings relating to the subject matter hereof.
The terms of this Agreement may not be changed or modified except by an
instrument in writing signed by the Licensee and Sub-Licensee.
16.0. Severability.
If any condition, term or covenant of this Agreement shall at any time be held
to be void, invalid or unenforceable, such condition, covenant or term shall be
construed as severable and shall not in any way affect or render void, invalid
or unenforceable any other condition, covenant or term of this Agreement which
shall remain in full force and effect.
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17.0. Choice of Law.
This Agreement shall be construed, and the obligations of the parties hereto
shall be determined, in accordance with the laws of the State of New York.
18.0. Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed to
be an original and all of which together shall be deemed to be one and the same
instrument.
19.0. Headings.
The headings of this Agreement are for purposes of references only
and shall not limit or otherwise affect the meaning of any provision
hereof.
20.0. Disputes.
In the event that any dispute arises under this agreement, written notice must
be given to the other party and the other party shall have 60 days to correct
any error or omission arising under this agreement.
21.0 Initial Inventory.
The Sub-Licensee will manufacture or have manufactured for inventory the
following quantities of Product to be available according to the following
schedule:
Before June 30, 1997 one metric ton(+/-10%)
Before September 30, 1997 two metric ton(+/-10%)
Before December 30, 1997 two metric ton(+/-10%)
Within 10 days of the signing of this Agreement, Sub-Licensee will guarantee the
payment of the royalties for the Initial Inventory to Licensee and Licensor by
providing clean, unconditional Letters of Credit drawn to the benefit of the
Licensor in the amount of $140,000.00 and the Licensee in the amount of
$90,000.00 to guarantee payment.
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22.0 Accounting.
a) Within twenty-four (24) hours of manufacturing or accepting delivery of the
Product, Sub-Licensee shall telecopy to Licensee a report of which discloses the
weight of the Product manufactured or delivered.
b) During each third month following the execution of this Agreement,
Sub-Licensee shall deliver to Licensee a full and true accounting of all sales
hereunder made by Sub-Licensee during the three (3) month period ending with the
last day of the immediately preceding month.
c) Sub-Licensee hereby agrees to keep full, thorough and accurate records of
accounts containing all particulars which may be necessary for the purpose of
showing the amount payable to the other as royalty and will furnish copies to
the Licensee promptly upon written request. Such records shall be kept at the
principal place of business, and the necessary portions thereof shall be open at
all reasonable times within a period of two (2) years after submission of each
royalty report, for inspection by an independent certified public accountant
retained by one party and acceptable to the other (who may be the accountant who
regularly audits the Licensee's or its subsidiaries books) for the sole purpose
of verifying statements submitted hereunder. The confidential character of
records shall be observed by such accountant who shall report only upon the
accuracy of reports and payments required to be made under this Agreement.
23.0 Third Party Infringement.
a) If in any proceeding in a court of competent jurisdiction, in which the
validity of the licensed claims are in issue, a judgment upon an unappealed or
unappealable decision is entered holding such to be invalid, the right of the
Licensee and the Licensor to royalties hereunder for the utilization of such
claim by the Licensee shall terminate, without, however, affecting any such
right with respect to any and all claims not so held invalid.
b) If at any time the Sub-Licensee shall obtain reliable information that there
is occurring substantial infringement by any unlicensed third party of the
patented invention, through the manufacture, use or sale of the subject matter
licensed hereunder, the Sub- Licensee to the extent that it is utilizing such
claims hereunder, may notify the Licensor and/or the Licensee of such
infringement and furnish proof thereof and request that appropriate steps be
initiated to bring about a discontinuance of such infringement.
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If the Licensor and/or the Licensee fail to bring suit to take appropriate steps
to obtain a discontinuance any such patent infringement within 90 days after
being given notice by Sub-Licensee, the obligation of the Sub- Licensee to pay
royalties will be suspended unless Licensor and/or Licensee bring an action in a
court of competent jurisdiction against any such infringer to abate the
infringement and prosecutes such action to abate the infringement. In the case
of one or more infringements, the pendency of a single action against one
infringer which has not resulted in a final and unappealable decision will
require the Sub-Licensee to continue to pay royalties.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the date first above written.
The Licensee:
INTERNATIONAL NUTRITION RESEARCH CENTER INC.,
By
Title
The Sub-Licensee:
CHEM INTERNATIONAL, INC.
By
Title
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Schedule 1.1
TO
AGREEMENT
DATED:
Minimum Royalties commencing in 1997
and ending on December 31 of each year
thereafter as follows:
Year ending on December 31 U.S. Dollars
INRC Royalty INTERAMERICAN Royalty
1997 450,000.00 700,000.00
1998 720,000.00 1,120,000.00
1999 1,350,000.00 2,100,000.00
2000 1,440,000.00 2,240,000.00
2001 1,620,000.00 2,520,000.00
2002 1,800,000.00 2,800,000.00
2003 1,980,000.00 3,080,000.00
2004 2,160,000.00 3,360,000.00
2005 2,340,000.00 3,640,000.00
2006 2,610,000.00 4,060,000.00
2007 2,880,000.00 4,480,000.00
2008 3,150,000.00 4,900,000.00
2009 3,510,000.00 5,460,000.00
2010 3,870,000.00 6,020,000.00
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AGREEMENT
AGREEMENT, made effective as of the 27th day of November , 1996, by and between
INTERNATIONAL NUTRITION RESEARCH CENTER, INC., a corporation of Florida, having
principal offices at at 401 West Linton Boulevard, Delray Beach, FL 33444 (the
"Company") and CHEM INTERNATIONAL INC., a corporation of Delaware with its
principal offices at 225 Long Avenue, Hillside, New Jersey 07205 "Distributor")
to supercede and replace the Agreement of the 26th day of November, 1996 between
the same parties.
WITNESSETH:
WHEREAS, the Company is engaged in providing a patented amino acid
nutritional formula; and
WHEREAS, the Distributor is engaged or will be engaged in the sale of
amino acid nutritional formulas;
NOW THEREFORE, in consideration of the foregoing and of the mutual agreements
set forth herein and other good and valuable consideration, the parties agree as
follows:
1.0 Defined Terms. As used in this Agreement, the following definitions
shall apply:
1.1. Product. The term "Product" shall mean the patented amino acid
nutritional formulas covered by U.S. Patent No. 5,132,113 and
any improvements thereof.
1.2. Territory. The term "Exclusive Territory" shall mean the United
States; the term "Non-Exclusive Territory" shall mean the rest
of the world outside of the United States except Italy, Spain
and Switzerland. If, in the future, the Company issues a license
to a third party on an exclusive basis for any country in the
"Non-Exclusive Territory" and gives notice to the Distributor
under this Agreement, the "Non-Exclusive Territory" under this
Agreement will be redefined to exclude any such country. At
least 30 days prior to the granting of a license to a third
party in a country in the Non Exclusive Territory, the Company
will give notice to the Distributor of its I ntent to grant a
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license to a third party and the Distributor will have the option to
obtain the Exclusive license in that country under the same terms and
conditions that were offered to the third party by giving notice to the
Distributor within 30 days after receipt of the notice of intent to
license.
1.3. Minimum Purchase Requirements. The term "Minimum Purchase
Requirements" shall mean the aggregate quantity of Product
that the Buyer shall be obligated to buy during each twelve
(12) month period beginning on the date hereof and on each
anniversary date thereafter during the term of this Agreement.
The aggregate quantities of products which Distributor is
required to buy during each twelve (12) month period are set
forth on Schedule 1.3 hereto. Any purchases which are in
excess of the Minimum Purchase Requirements will be credited
against future Minimum Purchase Requirements in order to
reduce the total amount of the future Minimum Purchase
Requirements.
2.0 Authorization.
2.1. Subject to and upon the terms and conditions of this
Agreement, the Company hereby grants to the Distributor the
exclusive right to use and sell the Product in the Exclusive
Territory and in the Non Exclusive Territory in the field of
sports nutrition. No right to sell is granted for Products for
weight loss or to sell Products to hospitals, physicans or
medically related facilities. No right to make or manufacture
the Product is granted under this Agreement and no right to
sell the Product for other fields of use is granted by this
Agreement. The Distributor hereby accepts this grant of
authority upon the terms and conditions hereof.
2.2 The Distributor may use its own trademarks in the Territory and may register
the trademarks in any jurisdiction in the Territory. If Distributor is
liquidated in a bankruptcy proceeding, Distributor will assign any trademarks
used in connection with the Product to the Company. If Distributor desires to
sell its trademarks on the Product, it will not sell these trademarks to anyone
without first offering to sell them to the Company for the same price that it
offers to sell the trademarks to a third party.
3.0 Distributors's Obligations.
3.1. The Distributor shall use the Product in the Territory so as:
(a) to meet the Minimum Purchase Requirements, as set forth in Schedule
1.3 hereto or as set by the Company hereunder;
(b) to assure the best employment of the Product in the Territory;
(c) to supply fully with reasonable promptness the demand for the
Product in the Territory; and
(d) to develop vigorously and increase the volume of utilization of the
Product in the Territory.
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(e) to adopt text for labeling the Product only after obtaining the approval of
the Company. Approval of the labeling will not be unreasonably withheld by the
Company. If a further license on the Product is granted, the Company will impose
a similar requirement on future licensees.
3.2 Purchase of the Product. The Distributor shall purchase its
requirements of the Product solely from the Company or from parties
specified in writing by the Company.
3.3 Maintenance of Facilities. The Distributor shall provide and maintain
suitable facilities in the Territory for the proper storage and handling of the
Product.
3.4 Distributor Personnel. The Distributor shall maintain an adequate and
suitably qualified staff to the best utilization of the Product in the
Territory and perform in a timely and satisfactory manner the
Distributor's obligations under this Agreement.
3.5 Consumer Claims. The Distributor shall process and seek to settle, in a
manner acceptable to the Company, all consumer complaints arising from
the use of the Product.
The Distributor shall maintain records and accounts relating to any and all
claims for the Product and shall permit examination of such records by the
Company's representative.
4.0 Company's Obligations.
4.1 By mutal consent of the Distributor and the Company, the Company may
undertake to provide the Distributor with any available brochures, any available
scientific information and any available results of studies.
4.2 By mutual consent of the Distributor and the Company, the Company may
provide and pay for the expenses of the scientific promotion of the Product in
seminars and lectures by its own specialists or others.
4.3 By mutual consent of the Distributor and the Company, the Company may
participate in the cost of any advertising or promotional activities to assist
in the sale of the Product in the Territory.
4.4 The Company will exert its best efforts to provide all requested information
to the Distributor on a timely basis.
4.5 The Company will exert its best efforts to inform Distributor of any
inquiries or orders for Product that originate in the Territory.
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4.6 The Company will provide product to Distributor which meet the labeled
specifications and will supply all orders on a timely basis.
4.7 The Company will exert its best efforts to make a knowledgeable scientific
person available as a consultant for 96 hours per year for the first three years
of this contract at times and places to be mutually agreed upon. The Distributor
will not be obligated to reimburse the Company for the knowlegeable scientific
person's travel expenses.
5.0 Compliance with the Laws.
The Distributor shall comply in all material respects with any and all laws,
ordinances, rules, regulations and ordinary standards of care now in effect, or
which hereafter may be in effect, which pertains to the conduct of its business
and the utilization of the Product in the Territory, and shall indemnify and
hold the Company harmless against any failure to comply therewith.
6.0 Price and Delivery.
6.1.The Company shall sell to the Distributor and the Distributor shall purchase
from the Company, or from a supplier authorized by the Company, the Product at
the Price in effect as of the date hereof as set forth in Schedule 1.1 hereto.
The Company may adjust the price to reflect increases in the price that it pays
its supplier. All prices are exclusive of any and all present or future value
added taxes, property taxes, use or excise taxes, custom duties, imposts or
assessments upon or measured by the receipts from the sale or by the value of
the Product after delivery to the Distributor, and any such taxes, duties,
impost or assessment shall be the obligation of the Distributor. The Company
shall have no responsibility for invoicing, collection or credit risks of the
Distributor's customers. The price charged to the Distributor will not be higher
than the price which it charges any other distributor in the Exclusive
Territory.
6.2. Payment for the Product shall be made by the Distributor
to the Company in U.S. Dollars.
6.3.The Distributor shall submit all orders for the Product to the Company at
least twelve (12) weeks in advance of delivery or such other period as shall be
provided herein by the Company from time to time. All orders are subject to
acceptance by the Company in its sole discretion, and all accepted orders are
subject to the availability of Product. If an order is not accepted, the minimum
purchase requirements of Schedule 1.3 will be tolled until the order is
accepted.
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6.4.The Distributor shall inspect all Product immediately upon receipt. The
Distributor shall notify the Company in writing of the existence of any defects
or damage to the Product within thirty (30) business days of arrival at the
Distributor's warehouse. Failure to provide notice within such twenty day period
shall be deemed a waiver of any claim for damages hereunder.
6.5.Without prejudice to any other rights or remedies available to the Company,
the Company shall be entitled to withhold further deliveries of the Product
while any amounts due from the Distributor are unpaid.
7.0 Indemnification and Insurance.
7.1. The Distributor shall indemnify, defend and hold the Company, harmless
against and from (a) any and all claims based upon, arising out of, or in any
way related to the transportation, storage, warehousing or use of the Product by
the Distributor, the conduct of the business of the Distributor, any negligent
or wrongful act, misfeasance or nonfeasance by the Distributor, any claim of a
third party that the Distributor misrepresented its authority or made any
contractual commitment not expressly authorized under this Agreement, or any
breach by the Distributor of any representation, warranty or covenant contained
herein or the failure of the Distributor to perform its obligation under this
Agreement, and (b) any and all reasonable fees, costs, and expenses including,
without limitation reasonable attorneys' fees incurred by or on behalf of the
Company, in the defense against any and all such claims. The Company shall
provide the Distributor with prompt written notice upon receipt of any such
claim and the Company shall not settle any such claim without the prior
knowledge and consent of the Distributor. The Distributor will maintain a
product liability policy which provides at least $5,000,000 for each occurance
and an aggregate coverage of at least $5,000,000 and will name the Company as an
additional insured under the policy.
7.2. The Company shall indemnify, defend and hold Distributor, harmless against
and from (a) any and all claims made against Distributor based upon any
negligent or wrongful act of the Company including any and all reasonable fees,
costs and expenses including reasonable attorneys' fees incurred by or on behalf
of the Distributor, in the defense against any of such claims. The Distributor
shall provide the Company with prompt written notice upon receipt of any such
claim and the Distributor shall not settle any such claim without the prior
knowledge and consent of the Company.
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8.0 Representations and Warranties.
8.1.The Company represents that all the Product, when
delivered to Distributor, will not be adulterated,
contaminated or misbranded within the meaning of the U.S. FDA
regulations regarding food products.
8.2.The Distributor represents and warrants that it is a Corporation duly
organized and authorized to carry on the professional activity contemplated by
this Agreement under the laws of New Jersey. The Distributor has obtained or
will obtain all licenses, permits and authorizations required under the laws or
regulations applicable in the Territory to undertake the use and promotion
activities contemplated herein prior to selling Product in each jurisdiction in
the Territory.
8.3 The Distributor further represents and warrants that it has or will provide
the expertise, professional associates, knowledge and financial resources to
purchase and sell the Product in the Territory and otherwise to fulfill its
obligations hereunder in an effective and competent manner.
8.4.The Company represents and warrants that it is a Corporation duly organized
and authorized to enter into this Agreement; that this Agreement does not
violate the terms of any other Agreement under which the Company is bound, and
that the Company is authorized to carry on the professional activity
contemplated by this Agreement under the laws of Florida. The Company also
represewnts and warrants that it has no knowledge of any basis under which U.S.
Patent No. 5,132,113 would be held to be invalid or unenforceable. The Company
will exert its best efforts to maintain the Agreement of October 17, 1995
between the Company and the International Nutritional Research Laboratories, a
British Virgin Islands Corporation.
9.0 Term and Termination.
9.1. This Agreement shall commence on the effective date of this Agreement as
provided hereinabove and will extend for a term which is coextensive with the
remaining term of U.S.
Patent No.5,132,113.
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9.2. The Company may terminate this Agreement on notice to the Distributor if:
9.2.1. The Distributor makes an assignment for the benefit of creditors,
has a receiver appointed or enters into liquidation (whether voluntarily or
involuntarily), is unable to pay its debts in the ordinary course of business,
or otherwise becomes insolvent, or terminates its existence or ceases to do
business;
9.3. Except as otherwise provided herein, in the event that the Distributor
fails materially to perform any of its obligations under this Agreement, the
Company may notify the Distributor in writing, specifying the nature of such
failure and the section of this Agreement imposing the obligation, whereupon
Distributor shall have sixty (60) days within which to remedy the failure. If
the Distributor does not remedy such failure within such sixty (60) day period,
the Company may terminate this Agreement by subsequent notice to the Distributor
except that Distributor shall have the right at any time to extend the time to
reach the minimum purchase requirement of Schedule 1.2 to a two year period by
combining the purchases for the year in which the required sales were not made
with the purchases of the following year and comparing the combined actual
purchases for the two year period with the required minimum purchases stated in
1.2 for that period to determine if the minimum purchases have been made. If
Distributor fails to make the minimum purchases, Distributor shall have the
option to become a non-exclusive distributor of the Company by giving written
notice within one month of the end of the two year period in which Distributor
fails to make the required minimum purchases. If Distributor exercises the
option to become a non-exclusive Distributor, thereafter, Distributor will
retain the exclusive right to sell to all accounts that Distributor has
developed in the Exclusive Territory and the Non Exclusive for the sale of the
Product. Notwithstanding any provision in the Agreement to the contrary, no
monetary or other damages are to be paid to Company if Distributor fails to
purchase its required minimum purchases.
9.4. The Distributor may terminate this Agreement immediately on notice to the
Company if the Company makes an assignment for the benefit of the creditors, or
has a receiver appointed or enters into liquidation (whether voluntarily or
involuntarily), is unable to pay its debts in the ordinary course of business;
or terminates its existence or ceases to do business; or
7
<PAGE>
9.5. In the event that the Company fails materially to perform any of its
obligations under this Agreement, the Distributor may notify the Company in
writing, specifying the nature of such failure and the section of this Agreement
imposing the obligation, whereupon the Company shall have sixty (60) days within
which to remedy the failure. If the Company does not remedy the failure within
such sixty (60) day period, the Distributor may terminate this Agreement by
subsequent notice to the Company.
10.0. Assignment.
The Company may assign all or part of its rights and delegate all or part of its
duties described in this Agreement to an entity capable of fulfilling such
duties by giving written notice to the Distributor. The Distributor may assign
or transfer this Agreement or its rights or obligations hereunder, with the
prior written consent of the Company.
11.0. Relationship of Parties.
Nothing herein contained shall create or be deemed to create any relationship of
agency, partnership or joint venture between the Distributor and the Company.
The Distributor shall have no authority to create or assume any liability or
indebtedness of any kind in the name of or on behalf of the Company or to act
for the Company in any manner other than as specifically provided for herein
without the prior written approval of the Company.
12.0. Remedies.
Neither failure nor delay on the part of the Company or the Distributor to
exercise any right, remedy, power or privilege provided for herein or by statute
or by law, or in equity shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right, remedy, power or privilege preclude any
other or further exercise thereof or the exercise of any right, remedy, power or
privilege.
13.0. Notices.
Any notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand, or
mailed by first class, overnight mail, postage and registry fees prepaid, or
sent via reputable courier or by telecopy addressed:
8
<PAGE>
If to the Company, to:
INTERNATIONAL NUTRITION RESEARCH CENTER, INC.
401 West Linton Boulevard
Delray Beach, FL 33444
If to the Distributor, to:
CHEM INTERNATIONAL, INC.
225 Long Avenue
Hillside, New Jersey 07205 and
Kevin M. Kilcullen
Shanley & Fisher
131 Madison Avenue
Morristown, NJ 07960
14.0 Impossibility of Performance.
Neither the Distributor nor the Company shall be held liable for delays in
performing or any failure to perform any of the terms of this Agreement caused
by the effects of fire, strike, war, insurrection, government restriction, force
majeure or other causes reasonably beyond its control and without its fault, but
the party failing to perform shall use all reasonable endeavors to resume
performance of this Agreement as quickly as feasible. If either party is
affected by an event described herein, such party shall immediately give notice
to the other and upon receipt of such notice this Agreement shall be suspended
and the parties agree to negotiate in good faith to resolve the difficulty. If
the period of such suspension exceeds one hundred twenty (120) days, the party
whose ability to perform has not been so affected may, by giving notice,
terminate this Agreement. This provision shall not relieve the Distributor of
the obligation to pay the Company for all Product delivered hereunder.
15.0. Prior Understanding.
This Agreement expresses fully the understanding between the Distributor and the
Company with regard to the subject matter hereof and supersedes all prior
agreements and understandings relating to the subject matter hereof. The terms
of this Agreement may not be changed or modified except by an instrument in
writing signed by the Company and Distributor.
9
<PAGE>
16.0. Severability.
If any condition, term or covenant of this Agreement shall at any time be held
to be void, invalid or unenforceable, such condition, covenant or term shall be
construed as severable and shall not in any way affect or render void, invalid
or unenforceable any other condition, covenant or term of this Agreement which
shall remain in full force and effect.
17.0. Choice of Law.
This Agreement shall be construed, and the obligations of the parties hereto
shall be determined, in accordance with the laws of the State of New Jersey.
18.0. Counterparts.
This Agreement may be executed in counterparts, each of Awhich shall be deemed
to be an original and all of which together shall be deemed to be one and the
same instrument.
19.0. Headings.
The headings of this Agreement are for purposes of references only
and shall not limit or otherwise affect the meaning of any provision
hereof.
20.0. Disputes.
In the event that any dispute arises under this agreement, written notice must
be given to the other party and the other party shall have 60 days to correct
any error or omission arising under this agreement. After 60 days the parties
agree to confer in good faith to attempt to resolve the dispute and to reach an
amicable settlement within the next 60 day period. Thereafter, either party may
pursue any available legal remedy.
21.0 Initial Shipment
The initial shipment shall be 750.0kg. of Product in the form
of 495 kg of powder and 255kg of tablets. The total price
will be $250,250.00.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the date first above written.
The Company:
INTERNATIONAL NUTRITION RESEARCH CENTER, INC.
By
Title
The Distributor:
CHEM INTERNATIONAL, INC.
By
Title
11
<PAGE>
Schedule 1.1
TO
AGREEMENT
DATED: November 26, 1996
Product Price
Amino Acid Powder or Granulate $350.00/kilo
having the formula covered by
any patent corresponding to
U.S. Patent 5,132,113
12
<PAGE>
Schedule 1.2
TO
AGREEMENT
DATED: November 26, 1996
Initial Purchase $250,250.00
Period Ending:
June 30, 1997 $350,000.00
September 30, 1997 $700,000.00
December 31, 1998 $700,000.00
March 31, 1998 $1,400,000.00
June 30, 1998 $1,400,000.00
Minimum Purchase Requirements commencing July 1, 1998 to the anniversery
date of each year thereafter as follows:
U.S. Dollars
1999 $ 5,280,000.00
2000 $ 5,808,000.00
2001 $ 6,388,000.00
2002 $ 7,027,000.00
2003 $ 7,730,000.00
2004 $ 8,503,000.00
2005 $ 9,383,000.00
2006 $10,320,000.00
2007 $11,353,000.00
2008 $12,488,000.00
2009 $13,737,000.00
2010 $15,110,000.00
2011 $16,621,000.00
13
<PAGE>
LEASE AGREEMENT
BETWEEN
VITAMIN REALTY ASSOCIATES, L.L.C.,
LESSOR,
-AND-
MANHATTAN DRUG COMPANY,
LESSEE.
--------------------------------------
DATED: January , 1997
-------------------------------------
Prepared by:
Stephen A. Urban, Esq.
Shanley & Fisher, P.C.
131 Madison Avenue
Morristown, New Jersey 07962
<PAGE>
<TABLE>
TABLE OF CONTENTS
Page
<S> <C>
PRELIMINARY STATEMENT..............................................................1
ARTICLE 1 DEFINITIONS............................................................1
ARTICLE 2 DEMISE; TERM...........................................................7
ARTICLE 3 BASIC RENT; ADDITIONAL RENT; NET LEASE.................................7
ARTICLE 4 OPERATING EXPENSES.....................................................9
ARTICLE 5 [INTENTIONALLY OMITTED]...............................................11
ARTICLE 6 MAINTENANCE, ALTERATIONS AND ADDITIONS;
REMOVAL OF TRADE FIXTURES.............................................11
ARTICLE 7 USE OF DEMISED PREMISES................................................13
ARTICLE 8 LESSOR'S SERVICES......................................................14
ARTICLE 9 INDEMNIFICATION; LIABILITY OF LESSOR...................................15
ARTICLE 10 COMPLIANCE WITH REQUIREMENTS..........................................16
ARTICLE 11 DISCHARGE OF LIENS....................................................20
ARTICLE 12 PERMITTED CONTESTS....................................................20
ARTICLE 13 INSURANCE.............................................................21
ARTICLE 14 ESTOPPEL CERTIFICATES.................................................23
ARTICLE 15 ASSIGNMENT AND SUBLETTING.............................................24
ARTICLE 16 CASUALTY..............................................................30
ARTICLE 17 CONDEMNATION..........................................................31
ARTICLE 18 EVENTS OF DEFAULT.....................................................32
ARTICLE 19 CONDITIONAL LIMITATIONS; REMEDIES.....................................34
ARTICLE 20 RIGHT OF ENTRY; RESERVATION OF EASEMENTS..............................37
i
</TABLE>
<PAGE>
<TABLE>
TABLE OF CONTENTS
(CONTINUED)
Page
<S> <C>
ARTICLE 21 ACCORD AND SATISFACTION...............................................38
ARTICLE 22 SUBORDINATION.........................................................39
ARTICLE 23 LESSEE'S REMOVAL......................................................40
ARTICLE 24 BROKERS...............................................................41
ARTICLE 25 NOTICES...............................................................42
ARTICLE 26 NATURE OF LESSOR'S OBLIGATIONS........................................42
ARTICLE 27 SECURITY DEPOSIT......................................................42
ARTICLE 28 RULES AND REGULATIONS.................................................43
ARTICLE 29 MISCELLANEOUS.........................................................44
</TABLE>
SCHEDULE A FLOOR PLAN
SCHEDULE B BASIC RENT
ii
<PAGE>
LEASE AGREEMENT
LEASE AGREEMENT (this "Lease"), made as of January __, 1997, between
VITAMIN REALTY ASSOCIATES, L.L.C. (the "LESSOR"), a New Jersey limited liability
company, having an address at 225 Long Avenue, Hillside, New Jersey 07205, and
MANHATTAN DRUG COMPANY (the "LESSEE"), a New Jersey corporation, having an
address at 225 Long Avenue, Hillside, New Jersey 07205.
PRELIMINARY STATEMENT
LESSOR is the owner in fee simple of a certain tract of land
situated in the Township of Hillside, County of Union and State of New Jersey,
which is designated on the official tax map for the Township of Hillside as
Block 1110, Lot 1 (the "Land"). On the Land, there is an office/warehouse
building (the "Building") and other related improvements; the Land and the
Building, including all other im provements now or hereafter constructed on the
Land and all fixtures and appurtenances to the Land and the Building, are
collectively referred to as the "Property". The Property is commonly known as
225 Long Avenue, Hillside, New Jersey.
The roadways, the drainage areas, the landscape areas and the other
common portions of the Property will be maintained for the benefit, use and
enjoyment of all tenants leasing space within the Property.
LESSEE desires to lease from LESSOR approximately 58,521 rentable
square feet of warehouse space on the first floor of the Building, approximately
14,563 rentable square feet of office space on the second floor of the Building,
and approximately 10,800 rentable square feet of space on the third floor of the
Building (collectively the "Demised Premises") in accordance with, and subject
to, the pro visions of this Lease. The location of the Demised Premises is
cross- hatched on the floor plan annexed hereto as Schedule A.
NOW, THEREFORE, LESSOR and LESSEE agree as follows:
ARTICLE 1
DEFINITIONS
1.1. As used in this Lease, the following terms have the following
respective meanings:
(a) Additional Rent: defined in Section 3.2.
(b) Base Operating Expenses: LESSOR'S Operating Expenses
for calendar year 1996.
(c) Basic Rent: defined in Section 3.1 and specified in
Schedule B annexed hereto.
(d) Basic Rent Payment Dates: the first day of each
consecutive calendar month during the Term.
(e) Building: defined in the Preliminary Statement.
<PAGE>
(f) Building Holidays: Saturday, Sunday, New Year's Day,
President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
(g) Business Hours: 8:00 AM to 6:00 PM, Monday through
Friday, except for Building Holidays.
(h) Commencement Date: defined in Section 2.2.
(i) Demised Premises: defined in the Preliminary
Statement.
(j) Environmental Laws: all statutes, regulations, codes and
ordinances of any governmental entity, authority, agency and/or department
relating to (i) air emissions, (ii) water discharges, (iii) noise emissions,
(iv) air, water or ground pollution or (v) any other environmental or health
matter, including, without limitation, ISRA, the New Jersey Spill Compensation
and Control Act, N.J.S.A. 58:10-23.11 et seq. and the regulations promulgated
thereunder, and the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. ss. 9601 et seq. and the regulations promulgated
thereunder.
(k) Events of Default: defined in Article 18.
(l) Excusable Delay: any delay caused by governmental action, or
lack thereof; shortages or unavailability of materials and/or supplies; labor
disputes (including, but not limited to, strikes, slow downs, job actions,
picketing and/or secondary boycotts); fire or other casualty; delays in
transportation; acts of God; directives or requests by any governmental entity,
authority, agency or department; any court or administrative orders or
regulations; adjustments of insurance; acts of declared or undeclared war,
public disorder, riot or civil commotion; or by anything else beyond the
reasonable control of LESSOR, including delays caused directly or indirectly by
an act or a failure to act by LESSEE or LESSEE'S Visitors.
(m) Insurance Requirements: all terms of any insurance policy
maintained by LESSOR with respect to the Property and all requirements of the
National Board of Fire Underwriters (or any other body exercising similar
function) applicable to or affecting all or any part of the Property.
(n) ISRA: The New Jersey Industrial Site Recovery Act,
N.J.S.A. 13:1K-6 et seq. and the regulations promulgated thereunder.
(o) Land: defined in the Preliminary Statement.
(p) Legal Requirements: all statutes, regulations, codes and
ordinances of any governmental entity, authority, agency and/or department,
which now or at any time hereafter may be applicable to the Property or any part
thereof, including, but not limited to, all Environmental Laws.
(q) LESSEE: the party defined as such in the first
paragraph of this Lease.
2
<PAGE>
(r) LESSEE'S Notice: defined in Section 15.2.
(s) LESSEE'S Proportionate Share: for all purposes of this
Lease shall be deemed to be 49%.
(t) LESSEE'S Visitors: LESSEE'S agents, servants, employees,
subtenants, contractors, invitees, licensees and all other persons invited by
LESSEE into the Demised Premises as guests or doing lawful business with LESSEE.
(u) LESSOR: the party defined as such in the first paragraph of this
Lease, including at any time after the date hereof, the then owner of LESSOR'S
interest in the Property.
(v) LESSOR'S Estimated Operating Expenses: defined in
Section 4.2.
(w) LESSOR'S Expense Statement: defined in Section 4.2.
(x) LESSOR'S Operating Expenses: those costs or expenses paid or
incurred by LESSOR in connection with the ownership, operation, management,
maintenance, repair and replacement of the Property, including, but not limited
to, the cost of common area electricity; sewer meter charges; water; window
cleaning; exterminating; insurance of all kinds carried in good faith by LESSOR
and applicable to the Property (including, without limitation, rent insurance);
snow and ice removal; maintenance and cleaning of the parking lots and driveways
(including resurfacing and restripping); regulation of traffic; landscape and
grounds maintenance; service, maintenance, repair and replacement of all
mechanical, electrical, plumbing and other systems and/or equipment (other than
any system or equipment installed by LESSEE in the Demised Premises); general
maintenance and repairs of any kind for which LESSOR is not reimbursed; painting
and/or sealing of the exterior of the Build ing and the common areas; management
fees; maintenance and service agreements; compliance with any Legal or Insurance
Requirements; Taxes; contesting the Taxes and/or the assessed valuation of the
Property (including reasonable attorneys' fees, accounting fees and appraisal
fees); any expenses allocable to the Property and/or to LESSOR which relate to
the common areas of the Property; the cost of obtaining and maintaining any
access and/or utility licenses and easements across any contiguous property
which serve the Property; security services and/or alarm and fire protection
systems and equipment; wages, salaries, fringe benefits and other labor costs of
all persons engaged by LESSOR for the operation, maintenance, repair and
replacement of the Property; payroll taxes and workers' compensation for such
persons; legal and accounting expenses (except legal expenses incurred in
preparing leases or en forcing the terms of leases); licenses, permits and other
governmental charges; depreciation on and rentals of machinery and equipment
used in the operation and maintenance of the Property; and any other expense or
cost, which, in accordance with generally accepted accounting principles and the
standard management practices for buildings comparable to the Building, would be
considered as an expense of operating, managing, maintaining, repairing or
replacing the Property, plus a sum equal to fifteen percent (15%) of the
aggregate of the foregoing for general overhead. Excluded from LESSOR'S
Operating Expenses are costs reim bursed by insurance; the cost of any work or
service performed by LESSOR
3
<PAGE>
for any tenant of the Building pursuant to the terms of said tenant's lease to
the extent such work or service is in excess of the work or service which LESSOR
is obligated to perform under this Lease; costs in connection with preparing
space for a new tenant; advertising expenses; real estate brokers' commissions;
franchise, transfer, inheritance or capital stock taxes or other taxes imposed
upon or measured by the income or profits of LESSOR; and administrative wages
and salaries or any other general and administrative overhead of LESSOR. All
accounting for LESSOR'S Operating Expenses shall be on the accrual basis. In the
event that, at any time during the Term, the Building is not fully leased and
occupied by tenants, LESSOR'S Operating Expenses shall be projected as if the
Building were fully occupied at all times.
(y) Lien: any mortgage, pledge, lien, charge, encumbrance
or security interest of any kind, including any inchoate mechanic's or
materialmen's lien.
(z) Net Award: any insurance proceeds or condemnation
award payable in connection with any damage, destruction or Taking, less
any expenses incurred by LESSOR in recovering such amount.
(aa) Net Rental Proceeds: in the case of a sublease, the amount by
which the aggregate of all rents, additional charges or other consideration
payable under a sublease to LESSEE by the subtenant (including sums paid for the
sale or rental of LESSEE'S fixtures, leasehold improvements, equipment,
furniture or other personal property) exceeds the sum of (i) the Basic Rent plus
all amounts payable by LESSEE pursuant to the provisions hereof during the term
of the sublease in respect of the subleased space, (ii) brokerage commissions at
prevailing rates due and owing to a real estate brokerage firm, (iii) other cus
tomary and reasonable costs incurred by LESSEE in connection with the
subleasing, and (iv) the then net unamortized or undepreciated cost of the
fixtures, leasehold improvements, equipment, furniture or other personal
property included in the subletting; and in the case of an assignment, the
amount by which all sums and other considerations paid to LESSEE by the assignee
of this Lease for or by reason of such assign ment (including sums paid for the
sale of LESSEE'S fixtures, leasehold improvements, equipment, furniture or other
personal property) exceeds the sum of (i) brokerage commissions at prevailing
rates due and owing to a real estate brokerage firm, (ii) other customary and
reasonable costs incurred by LESSEE in connection with the assignment, and (iii)
the then net unamortized or undepreciated cost of the fixtures, leasehold
improvements, equipment, furniture or other personal property sold to the
assignee.
(ab) Prime Rate: the prime commercial lending rate publicly
announced from time to time by the Wall Street Journal.
(ac) Property: defined in the Preliminary Statement.
(ad) Recapture Notice: defined in Section 15.5.
(ae) Recapture Space: defined in Section 15.5.
(af) Restoration: the restoration, replacement or
rebuilding of the Building or any portion thereof as nearly as
4
<PAGE>
practicable to its value, condition and character immediately prior to
any damage, destruction or Taking.
(ag) Rules and Regulations: defined in Article 28.
(ah) Taking: a taking of all or any part of the Property, or any
interest therein or right accruing thereto, as the result of, or in lieu of, or
in anticipation of, the exercise of the right of condemnation or eminent domain
pursuant to any law, general or special, or by reason of the temporary
requisition of the use or occupancy of the Property or any part thereof, by any
governmental authority, civil or military.
(ai) Taxes: all real estate taxes and assessments or substitutes
therefor or supplements thereto, upon, applicable, attributable or assessed
against the Property or any part thereof, or any improvement thereon owned by
LESSOR and used in connection with the operation of the Building. If and to the
extent that due to a change in the method of taxation or assessment any
franchise, capital stock, capi tal, rent, income, profit or other tax or charge
shall be substituted by the applicable taxing authority for the Taxes now or
hereafter imposed upon the Property, such franchise, capital stock, capital,
rent, income, profit or other tax or charge shall be deemed included in the term
"Taxes", provided, however, that the amount of such tax, assessment, levy,
imposition, charge or fee deemed to be included in the term "Taxes" shall be
determined as if the Property were the only asset of LESSOR and as if the rent
received therefrom were the only income of LESSOR. In the event the Building is
not fully leased and occupied by tenants, the Taxes shall be projected as if the
Building was fully occupied at all times.
(aj) Term: defined in Section 2.2.
(ak) Termination Date: the day preceding the tenth (10th)
anniversary of the Commencement Date, or such earlier date upon which
the Term may expire or be terminated pursuant to any of the conditions
of this Lease or pursuant to law.
(al) Underlying Encumbrances: defined in Section 22.1.
(am) Work: defined in Section 6.5.
5
<PAGE>
ARTICLE 2
DEMISE; TERM
2.1. LESSOR, for and in consideration of the covenants hereinafter
contained and made on the part of the LESSEE, does hereby demise and lease to
LESSEE, and LESSEE does hereby hire from LESSOR, the Demised Premises, together
with the exclusive right to use two reserved automobile parking spaces at the
front of the Building, and two rows of parking spaces in the general parking
area on the Land, each in a location to be designated by LESSOR, and the
non-exclusive right to use such other portions of the Property as are intended
for common use, subject, however, to the terms and conditions of this Lease.
2.2. The term (the "Term") of this Lease shall commence on the
earlier of (a) the execution and delivery hereof by LESSOR and LESSEE, or (b)
the date that LESSOR acquires title to the Property (the "Commencement Date"),
and shall end on the Termination Date.
2.3. LESSEE agrees that the Demised Premises are being leased
hereunder in their "AS IS" condition, and by entering into occupancy of any part
of the Demised Premises, LESSEE shall be conclusively deemed to have agreed that
the Demised Premises were in satisfactory condition as of the date of such
occupancy. LESSEE shall make all alterations and improvements to the Demised
Premises that are required by LESSEE in connection with its occupancy of the
Demised Premises, in accordance with Section 6.4 hereof.
2.4. When the Commencement Date occurs, LESSOR and LESSEE shall
enter into an agreement memorializing the Commencement and Termination Dates of
this Lease.
ARTICLE 3
BASIC RENT; ADDITIONAL RENT; NET LEASE
3.1. LESSEE shall pay rent ("Basic Rent") to LESSOR during the Term
in the amounts and at the times provided in Schedule B in lawful money of the
United States of America; provided, however, LESSEE shall pay the first
installment of Basic Rent upon the execution of this Lease. In the event the
Commencement Date shall be other than a Basic Rent Payment Date, the Basic Rent
and Additional Rent payable hereunder shall be prorated for the initial and
terminal fractional months of the Term.
3.2. In addition to the Basic Rent, LESSEE shall pay to LESSOR
during the Term all other amounts, liabilities and obligations which LESSEE
herein agrees to pay to LESSOR as and when the same become due (hereinafter
collectively referred to as "Additional Rent"); and LESSEE agrees that each such
amount, liability and obligation, together with any interest, penalty and/or
cost thereon, shall be deemed Additional Rent regardless of whether it is
specifically referred to as Additional Rent in this Lease. LESSOR shall have all
the rights, powers and remedies provided for in this Lease or at law or in
equity or otherwise for failure to pay Additional Rent as are available for non
payment of Basic Rent.
6
<PAGE>
3.3. If any installment of Basic Rent or Additional Rent is not paid
when due, LESSEE shall pay to LESSOR on demand, as Additional Rent, a late
charge equal to four percent (4%) of the amount unpaid. In addition, any
installment or installments of Basic Rent or Additional Rent accruing hereunder
which are not paid within ten (10) days after the date when due, shall bear
interest at the Prime Rate plus four percent (4%) per annum from the due date
thereof until the date of payment, which interest shall be deemed Additional
Rent hereunder and shall be payable upon demand by LESSOR.
3.4. LESSEE will contract for and pay all charges for communications
and other services or utilities at any time rendered or used on or about the
Demised Premises and not provided by LESSOR pursuant to Article 8 to the company
providing the same before any interest or penalty may be added thereto and will
furnish to LESSOR, upon request, satisfactory proof evidencing such payment.
3.5. Except as herein provided, LESSEE hereby covenants and agrees
to pay to LESSOR during the Term, at LESSOR'S address for notices hereunder, or
such other place as LESSOR may from time to time designate, without any offset,
set-off, counterclaim, deduction, defense, abatement, suspension, deferment or
diminution of any kind (i) the Basic Rent, without notice or demand, (ii)
Additional Rent and (iii) all other sums payable by LESSEE hereunder. Except as
otherwise expressly provided herein, this Lease shall not terminate, nor shall
LESSEE have any right to terminate or avoid this Lease or be entitled to the
abatement of any Basic Rent, Additional Rent or other sums payable hereunder or
any reduction thereof, nor shall the obligations and lia bilities of LESSEE
hereunder be in any way affected for any reason. The obligations of LESSEE
hereunder shall be separate and independent covenants and agreements.
ARTICLE 4
OPERATING EXPENSES
4.1. LESSEE shall pay to LESSOR, as Additional Rent, LESSEE'S
Proportionate Share of the amount by which LESSOR'S Operating Expenses for any
calendar year during the Term exceeds the Base Operating Expenses. LESSEE'S
Proportionate Share of such excess for less than a year shall be prorated and
apportioned.
4.2. On or about the Commencement Date, and thereafter within ninety
(90) days following the first day of each succeeding calendar year within the
Term, LESSOR shall determine or estimate the amount by which LESSOR'S Operating
Expenses for such calendar year will exceed the Base Operating Expenses
("LESSOR'S Estimated Operating Expenses") and shall submit such information to
LESSEE in a written statement ("LESSOR'S Expense Statement").
4.3. Commencing on the first Basic Rent Payment Date following the
submission of any LESSOR'S Expense Statement and continuing thereafter until
LESSOR renders the next LESSOR'S Expense Statement, LESSEE shall pay to LESSOR
on account of its obligation under Section 4.1 of this Lease, a sum (the
"Monthly Expense Payment") equal to one-twelfth (1/12) of LESSEE'S Proportionate
Share of LESSOR'S
7
<PAGE>
Estimated Operating Expenses for such calendar year. LESSEE'S first Monthly
Expense Payment after receipt of LESSOR'S Expense Statement shall be accompanied
by the payment of an amount equal to the product of the number of full months,
if any, within the calendar year which shall have elapsed prior to such first
Monthly Expense Payment, times the Monthly Expense Payment; minus any Additional
Rent already paid by LESSEE on account of its obligation under Section 4.1 of
this Lease for such calendar year.
4.4. Each LESSOR'S Expense Statement shall reconcile the payments
made by LESSEE pursuant to the preceding LESSOR'S Expense Statement with
LESSEE'S Proportionate Share of LESSOR'S Operating Expenses for the period
covered thereby. Any balance due to LESSOR shall be paid by LESSEE within thirty
(30) days after LESSEE'S receipt of LESSOR'S Expense Statement; any surplus due
to LESSEE shall be applied by LESSOR against the next accruing monthly
installment(s) of Additional Rent due under this Article. If the Term has
expired or has been terminated, LESSEE shall pay the balance due to LESSOR or,
alternatively, LESSOR shall refund the surplus to LESSEE, whichever the case may
be, within thirty (30) days after LESSEE'S receipt of LESSOR'S Expense
Statement; provided, however, if the Term shall have been terminated as a result
of a default by LESSEE, then LESSOR shall have the right to retain such surplus
to the extent LESSEE owes LESSOR any Basic Rent or Additional Rent.
4.5. LESSEE or its representative shall have the right to examine
LESSOR'S books and records with respect to the reconciliation of LESSOR'S
Operating Expenses for the prior calendar year set forth in LESSOR'S Expense
Statement during normal business hours at any time within five (5) days
following the delivery by LESSOR to LESSEE of such LESSOR'S Expense Statement.
Unless LESSEE shall give LESSOR a notice objecting to said reconciliation and
specifying the respects in which said reconciliation is claimed to be incorrect
within ten (10) days after the date of said examination, said reconciliation
shall be considered as final and accepted by LESSEE. Notwithstanding anything to
the contrary contained in this Article, LESSEE shall not be permitted to examine
LESSOR'S books and records or to dispute said reconciliation unless LESSEE has
paid to LESSOR the amount due as shown thereon; said payment is a condition
precedent to said examination and/or dispute.
4.6. (a) If LESSOR shall receive any refund of Taxes in respect of a
calendar year and if LESSEE shall have paid Additional Rent pursuant to this
Article 4 for said calendar year, LESSOR shall credit to LESSEE LESSEE'S
Proportionate Share of such refund (based upon the portion of said Taxes
actually paid by LESSEE and not on any portion of said Taxes that are included
in Base Operating Expenses) against the next accruing monthly installment(s) of
Additional Rent due under this Article, or if the Term shall have expired,
LESSEE'S Proportionate Share of such refund shall be refunded to LESSEE within
thirty (30) days after receipt thereof by LESSOR; provided, however, if the Term
shall have expired as a result of a default by LESSEE, then LESSOR shall have
the right to retain LESSEE'S Proportionate Share of the refund to the extent
LESSEE owes LESSOR any moneys hereunder.
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(b) While proceedings for the reduction in assessed
valuation for any year are pending, the computation of the Taxes shall be based
upon the original assessments for such year.
(c) Notwithstanding anything to the contrary contained
in this Lease, LESSEE shall not have the right to contest or appeal the validity
of any Taxes or the amount of the assessed valuation of the Property without the
prior written consent of LESSOR.
4.7. In no event shall any adjustment in LESSEE'S obligation to pay
Additional Rent under this Article 4 result in a decrease in the Basic Rent
payable hereunder. LESSEE'S obligation to pay Additional Rent, and LESSOR'S
obligation to credit and/or refund to LESSEE any amount, pursuant to the
provisions of this Article 4, shall survive the Termination Date.
4.8. LESSEE shall also pay to LESSOR, as Additional Rent, upon
demand, the amount of any increase in LESSOR'S Operating Expenses which is
attributable to LESSEE'S use or manner of use of the Demised Premises, to
activities conducted on or about the Demised Premises by LESSEE or on behalf of
LESSEE or to any additions, improvements or alterations to the Demised Premises
made by or on behalf of LESSEE.
4.9. The provisions of Section 29.3 shall apply to LESSOR'S Expense
Statement.
ARTICLE 5
[Intentionally Omitted]
ARTICLE 6
MAINTENANCE, ALTERATIONS AND
ADDITIONS; REMOVAL OF TRADE FIXTURES
6.1. LESSEE agrees to keep the Demised Premises (including, but not
limited to, all systems located within the Demised Premises and servicing only
the Demised Premises) in good order and condition (except for ordinary wear and
tear) and will make all non-structural repairs, alterations, renewals and
replacements, ordinary and extraordinary, foreseen or unforeseen, and shall take
such other action as may be necessary or appropriate to keep and maintain the
Demised Premises in good order and condition. Except as expressly provided in
this Lease, LESSOR shall not be obligated in any way to maintain, alter or
repair the Demised Premises. Notice is hereby given that, except with respect to
repairs or restoration undertaken by LESSOR, LESSOR will not be lia ble for any
labor, services or materials furnished or to be furnished to LESSEE, or to
anyone holding the Demised Premises or any part thereof through or under LESSEE,
and that no mechanics' or other liens for any such labor or materials shall
attach to or affect the interest of LESSOR in and to the Demised Premises.
6.2. If LESSOR is required to make any repairs and replacements to
the Property as a result of or arising out of the intentional acts or negligence
of LESSEE or LESSEE'S Visitors, then
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LESSEE shall reimburse LESSOR, upon demand, for the reasonable cost thereof.
6.3. All maintenance and repair, and each addition, improvement or
alteration (a) must not, individually or in the ag gregate, adversely affect the
usefulness of the Demised Premises for use as office space, (b) shall be
completed expeditiously in a good and workmanlike manner, and in compliance with
all applicable Legal and Insurance Requirements, (c) shall be completed free and
clear of all Liens and (d) shall be performed by contractors approved by LESSOR
to the extent such work involves any work to any electrical, mechanical,
plumbing or other system of the Building, any work to the outside of the
Building, any work to the roof of the Building or any work to any structural
element of the Building.
6.4. LESSEE shall not make any addition, improvement or alteration
of the Demised Premises (any such work being hereinafter referred to as "Work"),
unless LESSEE submits to LESSOR detailed plans and specifications therefor and
LESSOR approves such plans and specifications in writing (which such approval
shall be at LESSOR'S sole discretion).
6.5. (a) All additions, improvements and alterations to the Demised
Premises shall, upon installation, become the property of LESSOR and shall be
deemed part of, and shall be surrendered with, the Demised Premises, unless
LESSOR, by notice given to LESSEE at least thirty (30) days prior to the
Termination Date, elects to relinquish LESSOR'S right thereto. If LESSOR elects
to relinquish LESSOR'S right to any such addition, improvement or alteration,
LESSEE shall remove said addition, improvement or alteration, shall promptly
repair any damage to the Demised Premises caused by said removal and shall
restore the Demised Premises to the condition existing prior to the installation
of said addition, improvement or alteration; all such work shall be done prior
to the Termination Date.
(b) LESSEE may install or place or reinstall or re
place and remove from the Demised Premises any trade equipment, machinery and
personal property belonging to LESSEE, provided, that (i) LESSEE shall repair
all damage caused by such removal and (ii) LESSEE shall not install any
equipment, machinery or other items upon the roof of the Building or make any
openings on or about such roof. Such trade equipment, machinery and personal
property shall not become the property of LESSOR.
ARTICLE 7
USE OF DEMISED PREMISES
7.1. LESSEE shall not, except with the prior consent of LESSOR, use
or suffer or permit the use of the Demised Premises or any part thereof for any
purposes other than general and administrative offices and warehousing;
provided, however, anything in this Lease to the contrary notwithstanding, that
(a) the portions of the Demised Premises which are identified as toilets or
utility areas shall be used by LESSEE only for the purposes for which they are
designed and (b) LESSEE complies with the requirements of Section 7.2 hereof.
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7.2. LESSEE shall not use, or suffer or permit the use of, the
Demised Premises or any part thereof in any manner or for any purpose or do,
bring or keep anything, or suffer or permit anything to be done, brought or
kept, therein (including, but not limited to, the installation or operation of
any electrical, electronic or other equipment) (a) which would violate any
covenant, agreement, term, pro vision or condition of this Lease or is unlawful
or in contravention of the certificate of occupancy for the Building or the
Demised Premises or is in contravention of any Legal or Insurance Requirement to
which the Building or the Demised Premises is subject, or (b) which would
overload or could cause an overload of the electrical or mechanical systems of
the Building or the Demised Premises or which would exceed the floor load per
square foot which the floor was designed to carry and which is allowed by law,
or (c) which in the reasonable judgment of the LESSOR may in any way impair or
interfere with the proper and economic heating, air conditioning of the Building
or (d) suffer or permit the Building or any component thereof to be used in any
manner or anything to be done therein or anything to be brought into or kept
thereon which, in the reasonable judgment of LESSOR, would in any way impair or
tend to impair or exceed the design criteria, the structural integrity,
character or appearance of the Building, or result in the use of the Building or
any component thereof in a manner or for a purpose not intended; nor shall the
LESSEE use, or suffer or permit the use of, the Demised Premises or any part
thereof in any manner, or do, or suffer or permit the doing of, anything therein
or in connection with the LESSEE'S business or adver tising which, in the
reasonable judgment of the LESSOR, may be prejudicial to the business of LESSOR.
7.3. LESSEE shall obtain, at its sole cost and expense, all permits,
licenses or authorizations of any nature required in connection with the
operation of LESSEE'S business at the Demised Premises.
ARTICLE 8
LESSOR'S SERVICES
8.1. LESSOR shall furnish to LESSEE only the services set forth in
this Lease.
8.2. Throughout the Term, LESSOR shall supply the following items,
which shall be included in LESSOR'S Operating Expenses (a) janitorial services
for the Demised Premises at times reasonably determined by LESSOR (other than
during Building Holidays); and (b) snow and ice removal from the parking areas,
driveways and sidewalks each day (other than Building Holidays) within a
reasonable time after accumula tion thereof.
8.3. (a) LESSOR shall provide to the Demised Premises HVAC,
electricity, hot and cold water and sewer services. The Demised Premises are not
metered separately from the rest of the Building, and LESSEE shall pay to LESSOR
as Additional Rent, LESSEE'S Proportionate Share of the cost of such services,
which payment shall be due within ten (10) days after receipt of a statement
therefor from LESSOR. Notwithstanding anything to the contrary contained in this
Lease, LESSEE hereby expressly agrees and acknowledges that (i) LESSOR shall not
be liable in any way to LESSEE (A) for any loss, damage, failure, defect or
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change in the quantity or character of any utility furnished to the Demised
Premises, (B) or if such quantity or character of any utility furnished to the
Demised Premises is no longer available or suitable for LESSEE'S requirements,
or (C) for any cessation, diminution or inter ruption of the supply thereof.
(b) LESSEE shall be responsible for replacing all
light bulbs, fluorescent lamps, non-Building standard lamps and bulbs, and all
ballasts used by LESSEE in the Demised Premises.
(c) LESSEE shall make no alteration to the existing
electrical equipment or connect any fixtures, appliances or equipment thereto
(other than electric typewriters, personal computers, calculators, desk lights,
photocopy machines and other small, ordinary office equipment) without the prior
written consent of LESSOR in each instance. Should LESSOR grant such consent,
all additional risers or other equipment required therefor shall be provided by
LESSOR and the cost thereof shall be paid by LESSEE as Additional Rent upon
LESSOR'S demand.
8.4. LESSOR shall not be liable to LESSEE for any costs, expenses or
damages incurred by LESSEE as a result of any failure to furnish any service
hereunder, or any interruption of any utility service to the Demised Premises,
and such failure or interruption (i) shall not be construed as a constructive
eviction or eviction of LESSEE, (ii) shall not excuse LESSEE from failing to
perform any of its obligations hereunder and (iii) shall not entitle LESSEE to
any abatement or offset against Basic Rent or Additional Rent. LESSEE agrees
that any service to be provided by LESSOR may be stopped and/or interrupted in
connection with any inspection, repair, replacement or emergency.
8.5. The parties hereto shall comply with all mandatory and
voluntary energy conservation controls and requirements imposed or instituted by
the Federal, State or local governments and applicable to office and/or
warehouse buildings, as applicable to the Demised Premises, including, without
limitation, controls on the permitted range of temperature settings, and
requirements necessitating curtailment of the volume of energy consumption or
the hours of operation of the Building. Any terms or conditions of this Lease
that conflict or interfere with such controls or requirements shall be suspended
for the duration of such controls or requirements. Compliance with such controls
or requirements shall not be considered an eviction, actual or constructive, of
LESSEE from the Demised Premises and shall not entitle LESSEE to terminate this
Lease or to an abatement of any Basic Rent or Additional Rent.
ARTICLE 9
INDEMNIFICATION; LIABILITY OF LESSOR
9.1. LESSEE hereby indemnifies, and shall pay, protect and hold
LESSOR harmless from and against all liabilities, losses, claims, demands,
costs, expenses (including attorneys' fees and expenses) and judgments of any
nature, (except to the extent LESSOR is compensated by insurance maintained by
LESSEE hereunder and except for such of the
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foregoing as arise from the recklessness or willful misconduct of LESSOR, its
agents, servants or employees), arising, or alleged to arise, from or in
connection with, (a) any injury to, or the death of, any person or loss or
damage to property on or about the Demised Premises, (b) any violation of this
Lease or of any Legal or Insurance Requirement, or (c) performance of any labor
or services or the furnishing of any materials or other property in respect of
the Demised Premises or any part thereof. LESSEE will resist and defend any
action, suit or proceeding brought against LESSOR by reason of any such occur
rence by independent counsel selected by LESSEE, which is reasonably acceptable
to LESSOR. The obligations of LESSEE under this Section 9.1 shall survive any
termination of this Lease.
9.2. LESSEE agrees to make no claim against LESSOR for any injury or
damage to LESSEE or to any other person or for any damage to, or loss (by theft
or otherwise) of, or loss of use of, any property of LESSEE or of any other
person, unless caused by the recklessness or willful misconduct of LESSOR, its
agents, servants and employees, it being understood that LESSEE assumes all risk
in connection therewith.
ARTICLE 10
COMPLIANCE WITH REQUIREMENTS
10.1. At its sole cost and expense, LESSEE will (a) comply with all
Legal and Insurance Requirements applicable to the Demised Premises and the use
thereof and (b) maintain and comply with all permits, licenses and other
authorizations required by any governmental authority for its use of the Demised
Premises and for the proper opera tion, maintenance and repair of the Demised
Premises or any part thereof. LESSOR will join in the application for any permit
or authorization with respect to Legal Requirements if such joinder is
necessary.
10.2. LESSEE shall not do, or permit to be done, anything in or to
the Demised Premises, or bring or keep anything therein which will, in any way,
increase the cost of fire or public liability insurance on the Property, or
invalidate or conflict with the fire insurance or public liability insurance
policies covering the Property or any personal property kept therein by LESSOR,
or obstruct or interfere with the rights of LESSOR or of other tenants, or in
any other way injure LESSOR or other tenants, or subject LESSOR to any liability
for injury to persons or damage to property, or interfere with good order of the
Building, or conflict with the Legal Requirements. Any in crease in fire
insurance premiums on the Property or the contents within the Building, or any
increase in the premiums of any other insurance carried by LESSOR in connection
with the Building or the Demised Premises, caused by the use or occupancy of the
Demised Premises by LESSEE and any expense or cost incurred in consequence of
the negligence, carelessness or willful action of LESSEE, shall be Additional
Rent and paid by LESSEE to LESSOR within ten (10) days of demand therefor made
by LESSOR to LESSEE.
10.3. LESSEE shall deliver promptly to LESSOR a true and complete
photocopy of any correspondence, notice, report, sampling, test, finding,
declaration, submission, order, complaint, citation or
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any other instrument, document, agreement and/or information submitted to, or
received from, any governmental entity, department or agency in connection with
any Environmental Law relating to or affecting LESSEE, LESSEE'S employees,
LESSEE'S use and occupancy of the Demised Premises and/or the Demised Premises.
10.4. LESSEE shall not cause or permit any "hazardous substance" or
"hazardous waste" (as such terms are defined under ISRA or any other
Environmental Law) to be brought, kept or stored on or about the Demised
Premises, and LESSEE shall not engage in, or permit any other person or entity
to engage in, any activity, operation or business on or about the Demised
Premises which involves the generation, manufacture, refining, transportation,
treatment, storage, handling or disposal of hazardous substances and/or
hazardous wastes.
10.5. (a) If a spill or discharge of a hazardous substance or a
hazardous waste occurs on the Property, LESSEE shall give LESSOR immediate oral
and written notice of such spill and/ or discharge, setting forth in reasonable
detail all relevant facts. In the event such spill or discharge arose out of or
in connection with LESSEE'S use and occupancy of the Demised Premises, or in the
event such spill or discharge was caused by the act, negligence or omission of
LESSEE or LESSEE'S Visitors, then LESSEE shall pay all costs and expenses
relating to compliance with the applicable Environmental Law (including, without
limitation, the costs and expenses of the site investigations and of the removal
and remediation of such hazardous substance or hazardous waste).
(b) Without relieving LESSEE of its obligations under
this Lease and without waiving any default by LESSEE under this Lease, LESSOR
shall have the right, but not the obligation, to take such action as LESSOR
deems necessary or advisable to cleanup, remove, resolve or minimize the impact
of or otherwise deal with any spill or discharge of any hazardous substance or
hazardous waste. In the event such spill or discharge arose out of or in
connection with LESSEE'S use and occupancy of the Demised Premises, or in the
event such spill or discharge was caused by the act, negligence or omission of
LESSEE or LESSEE'S Visitors, then LESSEE shall pay to LESSOR on demand, as
Additional Rent, all costs and expenses incurred by LESSOR in connection with
any action taken by LESSOR.
10.6. (a) If LESSEE'S operations at the Demised Premises now or
hereafter constitute an "Industrial Establishment" (as defined under ISRA) or
are subject to the provisions of any other Environmental Law, then LESSEE agrees
to comply, at its sole cost and expense, with all requirements of ISRA or such
other applicable Environmental Law to the satisfaction of LESSOR and the
governmental entity, department or agency having jurisdiction over such matters
(including, but not limited to, performing site investigations and performing
any removal and reme diation required in connection therewith), in connection
with (i) the occurrence of the Termination Date, (ii) any termination of this
Lease prior to the Termination Date, (iii) any closure, transfer or
consolidation of LESSEE'S operations at the Demised Premises, (iv) any change in
the ownership or control of LESSEE, (iv) any permitted assignment of this Lease
or permitted sublease of all or part of the Demised Premises or (v) any other
action by LESSEE which triggers ISRA or such other Environmental Law.
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(b) In connection with subsection (a) above, if LESSEE
has failed (i) with respect to ISRA, to obtain a no further action letter,
complete an approved remediation agreement or otherwise comply with the
requirements of ISRA, or (ii) with respect to any other applicable Environmental
Law, to fully comply with the applicable provisions of such Environmental Law,
prior to the Termination Date, LESSEE shall be deemed to be a holdover tenant,
shall pay rent at the rate set forth in Section 23.3 and shall continue to
diligently pursue compliance with ISRA and/or such Environmental Law. Upon
LESSEE'S full compliance with the provisions of ISRA and/or such Environmental
Law, LESSEE shall deliver possession of the Demised Premises to LESSOR in
accordance with the provisions of this Lease and such holdover rent shall be
adjusted as of said date.
10.7. (a) In connection with (i) any sale or other disposition of
all or part of LESSOR'S interest in the Property, (ii) any change in the
ownership or control of LESSOR, (iii) any condemnation, (iv) any foreclosure or
(v) any other action by LESSOR which triggers ISRA or any other applicable
Environmental Law, LESSOR shall comply, at its sole cost and expense, with all
requirements of ISRA or such applicable Environmental Law; provided, however, if
any site investigation is required as a result of LESSEE'S use and occupancy of
the Demised Premises or a spill or discharge of a hazardous substance or
hazardous waste caused by the act, negligence or omission of LESSEE or LESSEE'S
Visitors, then LESSEE shall pay all costs associated with said site
investigation; in addition, if any removal and remediation is required as a
result of a spill or discharge of a hazardous substance or hazardous waste
caused by the act, negligence or omission of LESSEE or LESSEE'S Visitors, then
LESSEE shall pay all costs associated with said removal and remediation.
(b) If, in connection with such compliance, LESSOR
requires any affidavits, certifications or other information from LESSEE, LESSEE
agrees to cooperate with LESSOR and to execute and deliver to LESSOR without
charge all such documents within five (5) business days after LESSEE'S receipt
of said request.
10.8. (a) LESSOR shall have the right, but not the obligation, to
enter onto the Demised Premises from time to time during the Term for the
purpose of conducting such tests and investigations as LESSOR deems reasonably
necessary to determine whether LESSEE is complying with the provisions of this
Article 10 and all applicable Environmental Laws. In the event LESSOR determines
that LESSEE is not in compliance with this Article 10 or any Environmental Law,
LESSOR shall notify LESSEE of such fact, setting forth in such notice the basis
for LESSOR'S determination. Within ten (10) business days after receipt of
LESSOR'S notice of noncompliance, LESSEE shall notify LESSOR whether it disputes
LESSOR'S determination. If LESSEE so notifies LESSOR within said ten (10)
business day period, then LESSOR and LESSEE, and their respective consultants,
shall meet to resolve the dispute; if LESSEE fails to notify LESSOR of any
objection within said ten (10) business day period, then LESSEE shall be deemed
to have accepted LESSOR'S determination and LESSEE shall promptly remedy the
noncompliance.
(b) In the event LESSEE is not in compliance with the
provisions of this Article 10 or any applicable Environmental Law,
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LESSEE shall pay to LESSOR, as Additional Rent, upon demand, an amount equal to
all costs and expenses incurred by LESSOR in connection with the tests and
investigations conducted by or on behalf of LESSOR.
(c) LESSOR shall use reasonable efforts to minimize
any interference with or disruptions to LESSEE'S operations at the Demised
Premises caused by such tests and investigations, to do all such tests and
investigations in a good and workmanlike manner, to proceed with such tests and
investigations with reasonable dispatch and to repair promptly all damage to the
Demised Premises arising out of or in connection with such tests and
investigations.
10.9. LESSEE hereby agrees to defend, indemnify and hold LESSOR
harmless from and against any and all claims, losses, liability, damages and
expenses (including, without limitation, site investigation costs, removal and
remediation costs and attorneys' fees and disbursements) arising out of or in
connection with (i) LESSEE'S use and occupancy of the Demised Premises, (ii) any
spill or discharge of a hazardous substance or hazardous waste by LESSEE or
LESSEE'S Visitors and/or (iii) LESSEE'S failure to comply with the provisions of
this Article 10.
10.10. If LESSOR has given to LESSEE the name and address of any
holder of an Underlying Encumbrance, LESSEE agrees to send to said holder a
photocopy of those items given to LESSOR pursuant to the provisions of Section
10.3.
10.11. LESSEE'S obligations under this Article 10 shall survive the
expiration or earlier termination of this Lease.
10.12 LESSEE hereby represents and warrants to LESSOR that LESSEE'S
operations at the Demised Premises have the following Standard Industrial
Classification numbers as set forth in the most recent Standard Industrial
Classification published by the Federal Executive Office of the President,
Office of Management and Budget: 5169.
ARTICLE 11
DISCHARGE OF LIENS
LESSEE will discharge within fifteen (15) days after receipt of
notice thereof any Lien on the Demised Premises or the Basic Rent, Additional
Rent or any other sums payable under this Lease, caused by or arising out of
LESSEE'S acts or LESSEE'S failure to perform any obliga tion hereunder.
ARTICLE 12
PERMITTED CONTESTS
LESSEE may contest by appropriate proceedings, the amount, validity
or application of any Legal Requirement which LESSEE is obligated to comply with
or any Lien which LESSEE is obligated to discharge, provided that (a) such
proceedings shall suspend the collection of any amount due as a result thereof,
(b) no part of the Demised Premises or of any Basic Rent or Additional Rent or
other sum
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payable hereunder would be subject to loss, sale or forfeiture during such
proceedings, (c) LESSOR would not be subject to any civil or criminal liability
for failure to pay or perform, as the case may be, (d) LESSEE shall have
furnished such security as may be required in the proceedings or reasonably
requested by LESSOR, (e) such proceedings shall not affect the payment of Basic
Rent, Additional Rent or any other sum payable to LESSOR hereunder or prevent
LESSEE from using the Demised Premises for its permitted use hereunder, and (f)
LESSEE shall notify LESSOR of any such proceedings not less than ten (10) days
prior to the commencement thereof, and shall describe such proceedings in
reasonable detail. LESSEE will conduct all such contests in good faith and with
due diligence and will, promptly after the determination of such contest, pay
and discharge all amounts which shall be determined to be payable therein.
ARTICLE 13
INSURANCE
13.1. LESSEE will maintain with insurers authorized to do business
in the State of New Jersey and which are rated A-Plus in Best's Key Rating
Guide:
(a) comprehensive general liability insurance (including, during any
period when LESSEE is making alterations or improvements to the Demised
Premises, coverage for any construction on or about the Demised Premises),
against claims for bodily injury, personal injury, death or property damage
occurring on, in or about the Demised Premises in a combined single limit of not
less than $3,000,000.00;
(b) workers' compensation insurance coverage for the full
statutory liability of LESSEE;
(c) such other insurance with respect to the Demised Premises in
such amounts and against such insurable exposures as may reasonably and
customarily be required by any mortgagee holding a first lien upon the Building.
13.2. The policies of insurance required to be maintained by LESSEE
pursuant to Section 13.1 shall name as the insured parties (except for workers'
compensation insurance) LESSOR and LESSEE, as their respective interests may
appear, and shall be reasonably satisfactory to LESSOR. In addition, said
policies of insurance (except for worker's compensation insurance) shall (i)
provide that thirty (30) days' prior written notice of suspension, cancellation,
termination, modification, non-renewal or lapse or material change of coverage
shall be given and that such insurance shall not be invalidated by any act or
neglect of LESSOR or LESSEE or any owner of the Demised Premises, nor by any
change in the title or ownership of the Demised Premises, nor by occupation of
the Demised Premises for purposes more hazardous than are permitted by such
policy, and (ii) not contain a provision relieving the insurer thereunder of
liability for any loss by reason of the existence of other policies of insurance
covering the Demised Premises against the peril involved, whether collectible or
not; and the policies of insurance required to be maintained by LESSEE pursuant
to subsection 13.1(a) shall
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also include a contractual liability endorsement evidencing coverage of LESSEE'S
obligation to indemnify LESSOR pursuant to Section 9.1 hereof.
13.3. On the Commencement Date, LESSEE shall deliver to LESSOR
original or duplicate policies or certificates of the insurers evidencing all
the insurance which is required to be maintained hereunder by LESSEE, and,
within ten (10) days prior to the expiration of any such insurance, other
original or duplicate policies or certificates evidencing the renewal of such
insurance.
13.4. LESSEE shall not obtain or carry separate insurance concurrent
in form or contributing in the event of loss with that required by Section 13.1
unless LESSOR and LESSEE are named as insureds therein.
13.5. (a) LESSOR hereby waives and releases LESSEE, and LESSEE
hereby waives and releases LESSOR, from any and all liabilities, claims and
losses for which the released party is or may be held liable to the extent of
any insurance proceeds received by said injured party.
(b) Each party hereto agrees to have included in each
of its insurance policies (insuring the Building in the case of LESSOR, and
insuring LESSEE'S personal property, trade fixtures, equipment and improvements
in the case of LESSEE, against loss, damage or destruction by fire or other
casualty) a waiver of the insurer's right of subrogation against the other party
to this Lease. If there is any extra charge for such waiver, the party
requesting the waiver shall pay the extra charge therefor. If such waiver is not
enforceable or is unattainable, then such insurance policy shall contain either
(i) an express agreement that such policy shall not be invalidated if LESSOR or
LESSEE, whichever the case may be, waives the right of recovery against the
other party to this Lease or (ii) any other form for the release of LESSOR or
LESSEE, whichever the case may be. If such waiver, agreement or release shall
not be, or shall cease to be, obtainable from LESSOR'S insurance company or from
LESSEE'S insurance company, whichever the case may be, then LESSOR or LESSEE
shall notify the other party of such fact and shall use its best efforts to
obtain such waiver, agreement or release from another insurance company
satisfying the requirements of this Lease.
ARTICLE 14
ESTOPPEL CERTIFICATES
14.1. At any time and from time to time, upon not less than ten (10)
days' prior notice by LESSOR, LESSEE shall execute, acknowledge and deliver to
LESSOR a statement (or, if LESSEE is a corporation, an authorized officer of
LESSEE shall execute, acknowledge and deliver to LESSOR a statement) certifying
the following: (i) the Commencement Date, (ii) the Termination Date, (iii) the
date(s) of any amendment(s) and/or modification(s) to this Lease, (iv) that this
Lease was properly executed and is in full force and effect without amendment or
modification, or, alternatively, that this Lease and all amendments and/or
modifications thereto have been properly executed and are in full force and
effect, (v) the current annual Basic Rent, the current monthly installments of
Basic Rent and the date on which LESSEE'S obligation to
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pay Basic Rent commenced, (vi) the current monthly installment of Additional
Rent for Taxes and LESSOR'S Operating Expenses, (vii) the date to which Basic
Rent and Additional Rent have been paid, (viii) the amount of the security
deposit, if any, (ix) that all work to be done to the Demised Premises by LESSOR
has been completed in accordance with this Lease and have been accepted by
LESSEE, except as specifically provided in the estoppel certificate, (x) that no
installment of Basic Rent or Additional Rent has been paid more than thirty (30)
days in ad vance, (xi) that LESSEE is not in arrears in the payment of any Basic
Rent or Additional Rent, (xii) that, to the best of LESSEE'S knowledge, neither
party to this Lease is in default in the keeping, observance or performance of
any covenant, agreement, provision or condition contained in this Lease and no
event has occurred which, with the giving of notice or the passage of time, or
both, would result in a default by either party, except as specifically provided
in the estoppel certificate, (xiii) that LESSEE has no existing defenses,
offsets, liens, claims or credits against the Basic Rent or Additional Rent or
against enforcement of this Lease by LESSOR, (xiv) that LESSEE has not been
granted any options or rights of first refusal to extend the Term, to lease
additional space, to terminate this Lease before the Termination Date or to
purchase the Property, except as specifically provided in this Lease, (xv) that
LESSEE has not received any notice of violation of Legal Requirements or
Insurance Requirements relating to the Demised Premises or to the Property,
(xvi) that LESSEE has not assigned this Lease or sublet all or any portion of
the Demised Premises, (xvii) that no "hazardous substances" or "hazardous
wastes" have been generated, manu factured, refined, transported, treated,
stored, handled, disposed or spilled on or about the Demised Premises and
(xviii) such other reasonable matters as the person or entity requesting the
Certificate may request. LESSEE hereby acknowledges and agrees that such
statement may be relied upon by any mortgagee, or any prospective purchaser,
lessee, sublessee, mortgagee or assignee of any mortgage, of the Demised
Premises or any part thereof.
14.2. If LESSEE shall fail or otherwise refuse to execute an
estoppel certificate in accordance with Section 14.1, then and upon such event,
LESSEE shall be deemed to have appointed LESSOR and LESSOR shall thereupon be
regarded as the irrevocable attorney-in-fact of LESSEE duly authorized to
execute and deliver the required certificate for and on behalf of LESSEE, but
the exercise of such power shall not be deemed a waiver of LESSEE'S default.
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ARTICLE 15
ASSIGNMENT AND SUBLETTING
15.1. Except as otherwise expressly provided in this Article 15,
LESSEE shall not sell, assign, transfer, hypothecate, mortgage, encumber, grant
concessions or licenses, sublet, or otherwise dispose of any interest in this
Lease or the Demised Premises, by operation of law or otherwise, without the
prior written consent of LESSOR. Any consent granted by LESSOR in any instance
shall not be construed to constitute a consent with respect to any other
instance or request. If the Demised Premises or any part thereof should be
sublet, used, or occupied by anyone other than LESSEE, or if this Lease should
be assigned by LESSEE, LESSOR shall have the right to collect rent from the
assignee, subtenant, user or occupant, but no such assignment, subletting, use,
occupancy or collection shall be deemed a waiver of any of LESSOR'S rights under
the provisions of this Section 15.1, a waiver of any of LESSEE'S covenants
contained in this Article 15, the acceptance of the assignee, subtenant, user or
occupant as tenant, or a release of LESSEE from further performance by LESSEE of
LESSEE'S obligations under the Lease.
15.2. If LESSEE shall desire to sublet the Demised Premises or to
assign this Lease, it shall first submit to LESSOR a written notice ("LESSEE'S
Notice") setting forth in reasonable detail:
(a) the name and address of the proposed sublessee or
assignee;
(b) the terms and conditions of the proposed subletting or
assignment (including the proposed commencement date of the sublease or the
effective date of the assignment, which shall be at least thirty (30) days after
LESSEE'S Notice is given);
(c) the nature and character of the business of the
proposed sublessee or assignee;
(d) banking, financial, and other credit information relating to the
proposed sublessee or assignee, in reasonably sufficient detail, to enable
LESSOR to determine the proposed sublessee's or assignee's financial
responsibility; and
(e) in the case of a subletting, complete plans and specifications
for any and all work to be done in the Demised Premises to be sublet.
15.3. Within thirty (30) days after LESSOR'S receipt of LESSEE'S
Notice, LESSOR agrees that it shall notify LESSEE whether LESSOR (i) consents to
the proposed sublet or assignment, (ii) does not consent to the proposed sublet
or assignment, or (iii) elects to exercise its recapture right, as described in
Section 15.5. If LESSOR fails to so notify LESSEE within said thirty (30) day
period, LESSOR shall be deemed to have not consented to the proposed sublet or
assignment. Notwithstanding the submission of LESSEE'S Notice and the
satisfaction of the requirements of Section 15.4, LESSOR, at its sole
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discretion, may withhold its consent to the proposed sublet or
assignment.
15.4. In addition to the foregoing requirements,
(a) no assignment or sublease shall be permitted if, at the
effective date of such assignment or sublease, LESSEE is in default under this
Lease; and
(b) no assignment or sublease shall be permitted unless LESSEE
agrees, at the time of the proposed assignment or sublease and in LESSEE'S
Notice, to pay to LESSOR, immediately upon receipt thereof, 50% of all Net
Rental Proceeds, of whatever nature, payable by the prospective assignee or
sublessee to LESSEE pursuant to such assignment or sublease.
15.5. (a) LESSOR shall have the right, to be exercised by giving
written notice (the "Recapture Notice") to LESSEE within thirty (30) days after
receipt of LESSEE'S Notice, to recapture the space described in LESSEE'S Notice
(the "Recapture Space"). The Recapture Notice shall cancel and terminate this
Lease with respect to the Recapture Space as of the date stated in LESSEE'S
Notice for the commencement of the proposed assignment or sublease as fully and
completely as if that date had been herein definitively fixed as the Termination
Date, and LESSEE shall surrender possession of the Recapture Space as of such
date. Thereafter, the Basic Rent and Additional Rent shall be equitably adjusted
based upon the square footage of the Demised Premises then remaining, after
deducting the square footage attributable to the Recapture Space.
(b) In the event LESSOR elects to exercise its recap
ture right and the Recaptured Space is less than the entire Demised Premises,
then LESSOR, at its sole expense, shall have the right to make any alterations
to the Demised Premises required, in LESSOR'S reasonable judgment, to make such
Recaptured Space a self-contained rental unit. LESSOR agrees to perform all such
work, if any, with as little inconvenience to LESSEE'S business as is reasonably
possible; provided, however, LESSOR shall not be required to perform such work
after LESSEE'S business hours or on weekends; and provided further, LESSOR shall
not be deemed guilty of an eviction, partial eviction, construc tive eviction or
disturbance of LESSEE'S use or possession of the Demised Premises, and shall not
be liable to LESSEE for same.
(c) LESSOR's right of recapture set forth in this
Section 15.5 shall not be applicable to the portions of the Demised Premises
located on the first floor of the Building.
15.6. In addition to the foregoing requirements, any sublease must
contain the following provisions:
(a) the sublease shall be subject and subordinate to all of
the terms and conditions of this Lease;
(b) at LESSOR'S option, in the event of cancellation or termination
of this Lease for any reason or the surrender of this Lease, whether
voluntarily, involuntarily, or by operation of law, prior to the
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expiration of such sublease, including extensions and renewals of such sublease,
the subtenant shall make full and complete attornment to LESSOR for the balance
of the term of the sublease. The attornment shall be evidenced by an agreement
in form and substance satisfactory to LESSOR which the subtenant shall execute
and deliver at any time within five (5) days after request by LESSOR or its
successors and assigns;
(c) the term of the sublease shall not extend beyond a date
which is one day prior to the Termination Date;
(d) no subtenant shall be permitted to further sublet all or any
portion of the subleased space or to assign its sublease without LESSOR'S prior
written consent; and
(e) the subtenant shall waive the provisions of any law now or
subsequently in effect which may give the subtenant any right of election to
terminate the sublease or to surrender possession of the space subleased in the
event that any proceeding is brought by LESSOR to terminate this Lease.
15.7. Each of the following events shall be deemed to constitute an
assignment of this Lease and each shall require the prior written consent of
LESSOR:
(a) any assignment or transfer of this Lease by operation
of law; or
(b) any hypothecation, pledge, or collateral assignment of
this Lease; or
(c) any involuntary assignment or transfer of this Lease in
connection with bankruptcy, insolvency, receivership, or similar
proceeding; or
(d) any assignment, transfer, disposition, sale or acquisition of a
controlling interest in LESSEE to or by any person, entity, or group of related
persons or affiliated entities, whether in a single transaction or in a series
of related or unrelated transactions; or
(e) any issuance of an interest or interests in LESSEE (whether
stock, partnership interests, or otherwise) to any person, entity, or group of
related persons or affiliated entities, whether in a single transaction or in a
series of related or unrelated transactions, which results in such person,
entity, or group holding a controlling interest in LESSEE. For purposes of the
immediately fore going, a "controlling interest" of LESSEE shall mean 50% or
more of the aggregate issued and outstanding equitable interests (whether stock,
partnership interests, or otherwise) of LESSEE.
15.8. It is a further condition to the effectiveness of any
assignment otherwise complying with this Article 15 that the assignee execute,
acknowledge, and deliver to LESSOR an agreement in form and substance
satisfactory to LESSOR whereby the assignee assumes all of the obligations of
LESSEE under this Lease and agrees that the provisions of
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this Article 15 shall continue to be binding upon it with respect to all future
assignments and deemed assignments of this Lease.
15.9. No assignment of this Lease nor any sublease of all or any
portion of the Demised Premises shall release or discharge LESSEE from any
liability, whether past, present, or future, under this Lease and LESSEE shall
continue to remain primarily liable under this Lease.
15.10. LESSEE shall be responsible for obtaining all permits and
approvals required by any governmental or quasi-governmental agency in
connection with any assignment of this Lease or any subletting of the Demised
Premises, and LESSEE shall deliver copies of these documents to LESSOR prior to
the commencement of any work, if work is to be done. LESSEE is also responsible
for and is required to reimburse LESSOR for all fees, costs and expenses,
including, but not limited to, reasonable attorneys' fees and disbursements,
which LESSOR incurs in reviewing any proposed assignment of this Lease, any
proposed sublease of the Demised Premises, and any permits, approvals, and
applications for construction within the Demised Premises.
15.11. If LESSOR consents to any proposed assignment or sublease and
LESSEE fails to consummate the assignment or sublease to which LESSOR consented
within ninety (90) days after the giving of such consent, LESSEE shall be
required again to comply with all of the provisions and conditions of this
Article 15 before assigning this Lease or subletting the Demised Premises. If
LESSEE consummates the assignment or sublease to which LESSOR consented within
said ninety (90) day period, LESSEE agrees that it shall deliver to LESSOR a
fully executed, duplicate original counterpart of the assignment or sublease
agreement within ten (10) days of the date of execution of such item.
15.12. LESSEE agrees that under no circumstances shall LESSOR be
liable in damages or subject to liability by reason of LESSOR'S failure or
refusal to grant its consent to any proposed assignment of this Lease or
subletting of the Demised Premises.
15.13. If LESSOR withholds its consent of any proposed assignment or
sublease, LESSEE shall defend, indemnify, and hold LESSOR harmless from and
reimburse LESSOR for all liability, damages, costs, fees, expenses, penalties,
and charges (including, but not limited to, reasonable attorneys' fees and
disbursements) arising out of any claims that may be made against LESSOR by any
brokers or other persons claiming a commission or similar compensation in
connection with the proposed assignment or sublease.
15.14. (a) Notwithstanding anything to the contrary contained in
this Lease, in the event that this Lease is assigned to any person or entity
pursuant to the provisions of the Bankruptcy Code, any and all monies or other
consideration payable or otherwise to be delivered in connection with such
assignment shall be paid or delivered to LESSOR, shall be and remain the
exclusive property of LESSOR and shall not constitute property of LESSEE or of
the estate of LESSEE within the meaning of the Bankruptcy Code. Any and all
monies or other consideration constituting LESSOR'S property under the preceding
sentence not paid or delivered to LESSOR shall be held in trust for the benefit
of LESSOR and be promptly paid to or turned over to LESSOR.
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(b) If LESSEE proposes to assign this Lease 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 LESSEE, then notice of such proposed assignment setting forth (i) the name
and address of such person or entity, (ii) all of the terms and conditions of
such offer and (iii) the adequate assurance to be provided by LESSEE to assure
such person's or entity's future performance under this Lease, including,
without limitation, the assurance referred to in Section 365(b)(3) of the
Bankruptcy Code, or any such successor or substitute legislation or rule
thereto, shall be given to LESSOR by LESSEE no later than twenty (20) days after
receipt by LESSEE, but in any event no later than ten (10) days prior to the
date that LESSEE shall make application to a court of competent jurisdiction for
authority and approval to enter into such assignment and assumption. LESSOR
shall thereupon have the prior right and option, to be exercised by notice to
LESSEE 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 for the assignment of this Lease. Any person or entity to which
this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall
be deemed without further act or deed to have assumed all of the obliga tions
arising under this Lease on or after the date of such assignment. Any such
assignee shall, upon demand, execute and deliver to LESSOR an instrument
confirming such assumption.
ARTICLE 16
CASUALTY
16.1. If there is any damage to or destruction of the Demised
Premises, LESSEE shall promptly give notice thereof to LESSOR, describing the
nature and extent thereof.
16.2. If the Demised Premises are damaged, but are not thereby
rendered partially or wholly untenantable, and this Lease is not terminated
pursuant to Section 16.4, 16.5 or 16.6 hereof, LESSOR shall, at its own expense,
cause Restoration to be completed as soon as reason ably practicable but in no
event later than ninety (90) days from the occurrence, subject to any Excusable
Delays, and the Basic Rent and Additional Rent shall not abate.
16.3. If the Demised Premises are damaged or destroyed and are
rendered partially or wholly untenantable, and this Lease is not terminated
pursuant to Section 16.4, 16.5 or 16.6 hereof, LESSOR shall, at its own expense,
cause Restoration to be completed as soon as reasonably practicable but in no
event later than one hundred eighty (180) days from the occurrence, subject to
any Excusable Delays, and the Basic Rent and Additional Rent shall be equitably
abated.
16.4. If, in the sole opinion of LESSOR, the Building is damaged or
destroyed and the total cost of Restoration shall amount to twenty percent (20%)
or more of the full insurable value of the Building, LESSOR, in lieu of
Restoration, may elect to terminate this Lease, provided that notice of such
termination shall be sent to LESSEE within sixty (60) days after the occurrence
of such casualty. If LESSOR
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exercises its right to terminate this Lease, this Lease shall cease, terminate
and expire, and all Basic Rent and Additional Rent shall be prorated, as of the
date of such damage or destruction.
16.5. If the Building is damaged or destroyed and, in the sole
opinion of LESSOR, more than one hundred eighty (180) days are necessary to
complete Restoration, or if during the final year of the Term the Demised
Premises are damaged or destroyed and rendered partially or wholly untenantable,
then in either case LESSOR may elect to terminate this Lease provided notice of
such termination shall be sent to LESSEE within sixty (60) days after the
occurrence of such casualty. If LESSOR exercises its right to terminate this
Lease, this Lease shall cease, terminate and expire, and all Basic Rent and
Additional Rent shall be prorated, as of the date of such damage or destruction.
16.6. LESSOR shall not be required to expend for Restoration an
amount in excess of the Net Award received by it. In the event the Net Award is
not adequate or the holder of an Underlying Encumbrance elects to retain the Net
Award, LESSOR shall have the right to terminate this Lease provided notice of
such termination shall be sent to LESSEE within sixty (60) days after the amount
of such Net Award is ascertained, or after the date on which the holder of the
Underlying Encumbrance notifies LESSOR that it has elected to retain the Net
Award, whichever the case may be. If LESSOR exercises its right to terminate
this Lease, this Lease shall cease, terminate and expire, and all Basic Rent and
Additional Rent shall be prorated, as of the date of such damage or destruction.
ARTICLE 17
CONDEMNATION
17.1. LESSEE hereby irrevocably assigns to LESSOR any award or
payment to which LESSEE becomes entitled by reason of any Taking of all or any
part of the Demised Premises, whether the same shall be paid or payable in
respect of LESSEE'S leasehold interest hereunder or other wise, except that
LESSEE shall be entitled to any award or payment for the Taking of LESSEE'S
trade fixtures or personal property or for loss of business, relocation or
moving expenses provided the amount of the Net Award payable to LESSOR with
respect to the fee interest is not diminished. All amounts payable pursuant to
any agreement with any con demning authority which have been made in settlement
of or under threat of any condemnation or other eminent domain proceeding shall
be deemed to be an award made in such proceeding. LESSEE agrees that this Lease
shall control the rights of LESSOR and LESSEE in any Net Award and any contrary
provision of any present or future law is hereby waived.
17.2. In the event of a Taking of the whole of the Demised Premises,
then the Term shall cease and terminate as of the date when possession is taken
by the condemning authority and all Basic Rent and Additional Rent shall be paid
up to that date.
17.3. In the event of a Taking of thirty (30%) percent or more of
the Demised Premises, then, if LESSEE shall determine in good faith and certify
to LESSOR that because of such Taking, continuance of
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its business at the Demised Premises would be uneconomical, LESSEE may at any
time either prior to or within a period of sixty (60) days after the date when
possession of such premises shall be required by the condemning authority, elect
to terminate this Lease. In the event that LESSEE shall fail to exercise any
such option to terminate this Lease, or in the event of a Taking of the Demised
Premises under circumstances under which LESSEE will have no such option, then,
and in either of such events, LESSOR shall, subject to the provisions of Section
17.4. cause Restoration to be completed as soon as reasonably practicable, but
in no case later than ninety (90) days after the date the condemning authority
takes possession of such portion of the Demised Premises, subject to any
Excusable Delays, and the Basic Rent and Additional Rent thereafter payable
during the Term shall be equitably prorated based upon the square foot area of
the Demised Premises and/or of the Building actually taken.
17.4. If (a) the Net Award is inadequate to complete Restoration of
the Demised Premises, or (b) in the case of a Taking of thirty (30%) percent or
more of the Demised Premises, LESSEE has not elected to terminate this Lease
pursuant to Section 17.3 hereof, then LESSOR may elect either to complete such
Restoration or terminate this Lease by giving notice to LESSEE within sixty (60)
days after (x) the amount of the Net Award is ascertained or (y) the expiration
of the sixty (60) day period within which LESSEE may terminate this Lease (as
described in Section 17.3 hereof), whichever the case may be. In such event, all
Basic Rent and Additional Rent shall be apportioned as of the date the
condemning authority actually takes possession of the Demised Premises.
ARTICLE 18
EVENTS OF DEFAULT
18.1. Any of the following occurrences, conditions or acts shall
constitute an "Event of Default" under this Lease:
(a) If LESSEE shall default in making payment when due of any Basic
Rent, Additional Rent or other amount payable by LESSEE hereunder, and such
default shall continue for five (5) days; or
(b) if LESSEE shall fail to take actual occupancy of the Demised
Premises within thirty (30) days after the Commencement Date or shall thereafter
vacate the Demised Premises for a period in excess of thirty (30) days; or
(c) if the Demised Premises shall be abandoned by LESSEE
for a period of thirty (30) consecutive days; or
(d) if LESSEE shall file a petition in bankruptcy pursuant to the
Bankruptcy Code or under any similar federal or state law, or shall be
adjudicated a bankrupt or become insolvent, or shall commit any act of
bankruptcy as defined in any such law, or shall take any action in furtherance
of any of the foregoing; or
(e) if a petition or answer shall be filed proposing the
adjudication of LESSEE as a bankrupt pursuant to the Bankruptcy Code or
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any similar federal or state law, and (i) LESSEE shall consent to the filing
thereof, or (ii) such petition or answer shall not be discharged or denied
within sixty (60) days after the filing thereof; or
(f) if a receiver, trustee or liquidator (or other similar official)
of LESSEE or of all or substantially all of its business or assets or of the
estate or interest of LESSEE in the Demised Premises shall be appointed and
shall not be discharged within sixty (60) days thereafter or if LESSEE shall
consent to or acquiesce in such appointment; or
(g) if the estate or interest of LESSEE in the Demised Premises
shall be levied upon or attached in any proceeding and such process shall not be
vacated or discharged within sixty (60) days after such levy or attachment; or
(h) if LESSEE shall use or suffer or permit the use of the Demised
Premises or any part thereof for any purpose other than expressly specified in
Section 7.1; or
(i) if LESSEE fails to discharge any Lien within the time
period set forth in Article 11; or
(j) if LESSEE fails to maintain the insurance required pursuant to
Article 13, or LESSEE fails to deliver to LESSOR the insurance certificates
required by Article 13 within the time periods set forth in Section 13.3; or
(k) if LESSEE fails to deliver to LESSOR the estoppel certificate
required by Article 14 within the time period set forth therein; or
(l) if LESSEE assigns this Lease or sublets all or any portion of
the Demised Premises without complying with all the provisions of Article 15; or
(m) if LESSEE fails to deliver to LESSOR the subordination agreement
required by Section 22.1 within the time period set forth therein; or
(n) if LESSEE fails to comply with any Legal or Insurance
Requirement, and such failure continues for a period of ten (10) days after
LESSOR shall have given notice to LESSEE specifying such default and demanding
that the same be cured; or
(o) if LESSEE shall default in the observance or per formance of any
provision of this Lease other than those provisions contemplated by clause (i)
through (n), inclusive, of this Section 18.1, and such default shall continue
for thirty (30) days after LESSOR shall have given notice to LESSEE specifying
such default and demanding that the same be cured (unless such default cannot be
cured by the payment of money and cannot with due diligence be wholly cured
within such period of thirty (30) days, in which case LESSEE shall have such
longer period as shall be necessary to cure the default, so long as LESSEE
proceeds promptly to cure the same within such thirty (30) day period,
prosecutes the cure to completion with due diligence and advises LESSOR from
time
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to time, upon LESSOR'S request, of the actions which LESSEE is taking and the
progress being made).
ARTICLE 19
CONDITIONAL LIMITATIONS; REMEDIES
19.1. This Lease and the Term and estate hereby granted are subject
to the limitation that whenever an Event of Default shall have happened and be
continuing, LESSOR shall have the right, at its election, then or thereafter
while any such Event of Default shall continue and notwithstanding the fact that
LESSOR may have some other remedy hereunder or at law or in equity, to give
LESSEE written notice of LESSOR'S intention to terminate this Lease on a date
specified in such notice, which date shall be not less than five (5) days after
the giving of such notice, and upon the date so specified, this Lease and the
estate hereby granted shall expire and terminate with the same force and effect
as if the date specified in such notice were the date hereinbefore fixed for the
expiration of this Lease, and all right of LESSEE hereunder shall expire and
terminate, and LESSEE shall be liable as hereinafter in this Article 19
provided. If any such notice is given, LESSOR shall have, on such date so
specified, the right of re-entry and possession of the Demised Premises and the
right to remove all persons and property therefrom and to store such property in
a warehouse or elsewhere at the risk and expense, and for the account, of
LESSEE. Should LESSOR elect to re-enter as herein provided or should LESSOR take
possession pursuant to legal proceedings or pursuant to any notice provided for
by law, LESSOR may from time to time re-let the Demised Premises or any part
thereof for such term or terms and at such rental or rentals and upon such terms
and conditions as LESSOR may deem advisable, with the right to make alterations
in and repairs to the Demised Premises.
19.2. In the event of any termination of this Lease as in this
Article 19 provided or as required or permitted by law, LESSEE shall forthwith
quit and surrender the Demised Premises to LESSOR, and LESSOR may, without
further notice, enter upon, re-enter, possess and repossess the same by summary
proceedings, ejectment or otherwise, and again have, repossess and enjoy the
same as if this Lease had not been made, and in any such event LESSEE and no
person claiming through or under LESSEE by virtue of any law or an order of any
court shall be entitled to possession or to remain in possession of the Demised
Premises but shall forthwith quit and surrender the Demised Premises, and LESSOR
at its option shall forthwith, notwithstanding any other provision of this
Lease, be entitled to recover from LESSEE, as and for liquidated damages, the
sum of:
(a) all Basic Rent, Additional Rent and other amounts
payable by LESSEE hereunder then due or accrued and unpaid, and
(b) for loss of the bargain, an amount equal to the aggregate of all
unpaid Basic Rent and Additional Rent which would have been payable if this
Lease had not been terminated prior to the end of the Term then in effect,
discounted to its then present value in accordance with accepted financial
practice using a rate equal to six percent (6%) per annum; and
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(c) all other damages and expenses (including attorneys' fees and
expenses), which LESSOR shall have sustained by reason of the breach of any
provision of this Lease.
19.3. Nothing herein contained shall limit or prejudice the right of
LESSOR, in any bankruptcy or insolvency proceeding, to prove for and obtain as
liquidated damages by reason of such termination an amount equal to the maximum
allowed by any bankruptcy or insolvency proceedings, or to prove for and obtain
as liquidated damages by reason of such termination, an amount equal to the
maximum allowed by any statute or rule of law whether such amount shall be
greater or less than the excess referred to above.
19.4. In the event that LESSEE should abandon the Demised Premises,
LESSOR may, at its option and for so long as LESSOR does not terminate LESSEE'S
right to possession of the Demised Premises, enforce all of its rights and
remedies under this Lease, including the right to recover all Basic Rent,
Additional Rent and other payments as they become due hereunder. Additionally,
LESSOR shall be entitled to recover from LESSEE all costs of maintenance and
preservation of the Demised Premises, and all costs, including attorneys' and
receiver's fees, incurred in connection with the appointment of or performance
by a re ceiver to protect the Demised Premises and LESSOR'S interest under this
Lease.
19.5. Nothing herein shall be deemed to affect the right of LESSOR
to indemnification pursuant to Section 8.1 of this Lease.
19.6. At the request of LESSOR upon the occurrence of an Event of
Default, LESSEE will quit and surrender the Demised Premises to LESSOR or its
agents, and LESSOR may without further notice enter upon, re-enter and repossess
the Demised Premises by summary proceedings, ejectment or otherwise. The words
"enter", "re-enter", and "re-entry" are not restricted to their technical legal
meanings.
19.7. If LESSEE shall be in default in the observance or performance
of any provision of this Lease, and an action shall be brought for the
enforcement thereof in which it shall be determined that LESSEE was in default,
LESSEE shall pay to LESSOR all fees, costs and other expenses which may become
payable as a result thereof or in connection therewith, including attorneys'
fees and expenses.
19.8. If LESSEE shall default in the keeping, observance or
performance of any covenant, agreement, term, provision or condition herein
contained, LESSOR, without thereby waiving such default, may perform the same
for the account and at the expense of LESSEE (a) immediately or at any time
thereafter and without notice in the case of emergency or in case such default
will result in a violation of any Legal or Insurance Requirement, or in the
imposition of any Lien against all or any portion of the Property and (b) in any
other case if such default continues after thirty (30) days from the date of the
giving by LESSOR to LESSEE of notice of LESSOR'S intention so to perform the
same. All costs and expenses incurred by LESSOR in connection with any such
performance by it for the account of LESSEE and also all costs and ex penses,
including attorneys' fees and disbursements incurred by LESSOR in any action or
proceeding (including any summary dispossess
29
<PAGE>
proceeding) brought by LESSOR to enforce any obligation of LESSEE under this
Lease and/or right of LESSOR in or to the Demised Premises, shall be paid by
LESSEE to LESSOR upon demand.
19.9. Except as otherwise provided in this Article 19, no right or
remedy herein conferred upon or reserved to LESSOR is intended to be exclusive
of any other right or remedy, and every right and remedy shall be cumulative and
in addition to any other legal or equitable right or remedy given hereunder, or
now or hereafter existing. No waiver by LESSOR of any provision of this Lease
shall be deemed to have been made unless expressly so made in writing. LESSOR
shall be entitled, to the extent permitted by law, to injunctive relief in case
of the violation, or attempted or threatened violation, of any provision of this
Lease, or to a decree compelling observance or performance of any provision of
this Lease, or to any other legal or equitable remedy.
ARTICLE 20
RIGHT OF ENTRY; RESERVATION OF EASEMENTS
20.1. LESSOR and LESSOR'S agents and representatives shall have the
right to enter into or upon the Demised Premises, or any part thereof, at all
reasonable hours for the following purposes: (1) examining the Demised Premises;
(2) making such repairs or alterations therein as may be necessary in LESSOR'S
sole judgment for the safety and preservation of the Building or the Demised
Premises; (3) erecting, maintaining, repairing or replacing wires, cables,
ducts, pipes, conduits, vents or plumbing equipment running in, to or through
the Demised Premises; (4) showing the Demised Premises to prospective new
tenants during the last twelve (12) months of the Term; or (5) showing the
Demised Premises during the Term to any mortgagees or prospective purchasers of
the Property. LESSOR shall give LESSEE three (3) business days prior written
notice before commencing any non-emergency repair or alteration.
20.2. LESSOR may enter upon the Demised Premises at any time in case
of emergency without prior notice to LESSEE.
20.3. LESSOR, in exercising any of its rights under this Article 20,
shall not be deemed guilty of an eviction, partial eviction, constructive
eviction or disturbance of LESSEE'S use or possession of the Demised Premises
and shall not be liable to LESSEE for same.
20.4. All work performed by or on behalf of LESSOR in or on the
Demised Premises pursuant to this Article 20 shall be performed with as little
inconvenience to LESSEE'S business as is reasonably possible.
20.5. LESSEE shall not change any locks or install any additional
locks on doors entering into the Demised Premises without the consent of LESSOR
and, if any change is made, a copy of any such lock key shall be given to
LESSOR. If in an emergency LESSOR is unable to gain entry to the Demised
Premises by unlocking entry doors thereto, LESSOR may force or otherwise enter
the Demised Premises, without liability to LESSEE for any damage resulting
directly or indirectly therefrom. LESSEE shall be responsible for all damages
created or
30
<PAGE>
caused by its failure to give LESSOR a copy of any key to any lock installed by
LESSEE controlling entry to the Demised Premises.
20.6. LESSOR reserves the right to make changes, alterations,
additions, improvements, repairs or replacements in or to the Property, the
Building (including the Demised Premises) and the fixtures and equipment thereof
from time to time as LESSOR may reasonably deem neces sary or desirable;
provided, however, that there be no unreasonable obstruction of the means of
access to the Demised Premises or unreasonable interference with LESSEE'S use of
the Demised Premises and the usable square foot area of the Demised Premises is
not unreasonably affected thereby. Nothing contained in this Article shall be
deemed to relieve LESSEE of any duty, obligation or liability of LESSEE with
respect to making any repair, replacement or improvement or complying with any
law, order or requirement of any governmental authority.
ARTICLE 21
ACCORD AND SATISFACTION
The receipt by LESSOR of any installment of Basic Rent or of any
Additional Rent with knowledge of a default by LESSEE under the terms and
conditions of this Lease shall not be deemed a waiver of such default. No
payment by LESSEE or receipt by LESSOR of a lesser amount than the rent herein
stipulated shall be deemed to be other than on ac count 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 LESSOR may accept such check or payment without prejudice to
LESSOR'S right to recover the balance of such rent or pursue any other remedy in
this Lease provided.
ARTICLE 22
SUBORDINATION
22.1. This Lease and the term and estate hereby granted are and
shall be subject and subordinate to the lien of each mortgage which may now or
at any time hereafter affect all or any portion of the Property or LESSOR'S
interest therein and to all ground leases which may now or at any time hereafter
affect all or any portion of the Property (any such mortgage or ground lease
being herein called an "Underlying Encumbrance"). The foregoing provisions for
the subordination of this Lease and the term and estate hereby granted to an
Underlying Encumbrance shall be self-operative and no further instrument shall
be required to effect any such subordination; provided, however, at any time and
from time to time, upon not less than ten (10) days' prior notice by LESSOR,
LESSEE shall execute, acknowledge and deliver to LESSOR any and all reasonable
instruments that may be necessary or proper to effect such subordination or to
confirm or evidence the same.
22.2. If all or any portion of LESSOR'S estate in the Property shall
be sold or conveyed to any person, firm or corporation upon the exercise of any
remedy provided for in any mortgage or by law or equity, such person, firm or
corporation and each person, firm or corporation thereafter succeeding to its
interest in the Property (a) shall not be liable for any act or omission of
LESSOR under this Lease
31
<PAGE>
occurring prior to such sale or conveyance, (b) shall not be subject to any
offset, defense or counterclaim accruing prior to such sale or conveyance, (c)
shall not be bound by any payment prior to such sale or conveyance of Basic
Rent, Additional Rent or other payments for more than one month in advance
(except prepayments in the nature of security for the performance by LESSEE of
its obligations hereunder), and (d) shall be liable for the keeping, observance
and performance of the other covenants, agreements, terms, provisions and
conditions to be kept, ob served and performed by LESSOR under this Lease only
during the period such person, firm or corporation shall hold such interest.
22.3. In the event of an act or omission by LESSOR which would give
LESSEE the right to terminate this Lease or to claim a partial or total
eviction, LESSEE will not exercise any such right until it has given written
notice of such act or omission, or, in the case of the Demised Premises or any
part thereof becoming untenantable as the result of damage from fire or other
casualty, written notice of the occurrence of such damage, to the holder of any
Underlying Encumbrance whose name and address shall previously have been
furnished to LESSEE in writing, by delivering such notice of such act, omission
or damage ad dressed to such holder at said address or if such holder hereafter
furnishes another address to LESSEE in writing at the last address of such
holder so furnished to LESSEE, and, unless otherwise provided herein, until a
reasonable period for remedying such act, omission or damage shall have elapsed
following such giving of such notice, provided any such holder, with reasonable
diligence, shall, following the giving of such notice, have commenced and
continued to remedy such act, omission or damage or to cause the same to be
remedied.
22.4. If, in connection with obtaining financing for the Property or
refinancing any mortgage encumbering the Property, the prospective lender
requests reasonable modifications to this Lease as a condition precedent to such
financing or refinancing, then LESSEE hereby covenants and agrees not to
unreasonably withhold, delay or condition its consent to such modifications,
provided such modifications do not increase the Basic Rent or Additional Rent,
do not reduce the length of the Term, do not materially and adversely affect the
leasehold interest created by this Lease and do not materially and adversely
affect the manner in which LESSEE'S operations are conducted at the Demised Prem
ises.
ARTICLE 23
LESSEE'S REMOVAL
23.1. Upon the expiration or earlier termination of this Lease,
LESSEE shall surrender the Demised Premises to LESSOR in the condition same is
required to be maintained under Article 7 of this Lease and broom clean. Any
personal property which shall remain in any part of the Demised Premises after
the expiration or earlier termination of this Lease shall be deemed to have been
abandoned, and either may be retained by LESSOR as its property or may be
disposed of in such manner as LESSOR may see fit; provided, however, that,
notwithstanding the foregoing, LESSEE will, upon request of LESSOR made not
later than thirty (30) days after the expiration or earlier termination of this
32
<PAGE>
Lease, promptly remove from the Demised Premises any such personal property.
23.2. If, at any time during the last three (3) months of the Term,
LESSEE shall not occupy any part of the Demised Premises in connection with the
conduct of its business, LESSOR may elect, at its option, to enter such part of
the Demised Premises to alter and/or redecorate such part of the Demised
Premises, and LESSEE hereby irrevocably grants to LESSOR a license to enter such
part of the Demised Premises in connection with such alterations and/or
redecorations. LESSOR'S exercise of such right shall not relieve LESSEE from any
of its obligation under this Lease.
23.3. If LESSEE holds over possession of the Demised Premises beyond
the Termination Date, such holding over shall not be deemed to extend the Term
or renew this Lease but such holding over shall continue upon the terms,
covenants and conditions of this Lease except that LESSEE agrees that the charge
for use and occupancy of the Demised Premises for each calendar month or portion
thereof that LESSEE holds over (even if such part shall be one day) shall be a
liquidated sum equal to one-twelfth (1/12th) of two (2) times the Basic Rent and
Additional Rent required to be paid by LESSEE during the calendar year preceding
the Termination Date. The parties recognize and agree that the damage to LESSOR
resulting from any failure by LESSEE to timely surrender possession of the
Demised Premises will be extremely substantial, will exceed the amount of the
monthly Basic Rent and Additional Rent payable hereunder and will be impossible
to accurately measure. If the Demised Premises are not surrendered upon the
expir ation of this Lease, LESSEE shall indemnify, defend and hold harmless
LESSOR against any and all losses and liabilities resulting therefrom,
including, without limitation, any claims made by any succeeding tenant founded
upon such delay. Nothing contained in this Lease shall be construed as a consent
by LESSOR to the occupancy or possession by LESSEE of the Demised Premises
beyond the Termination Date, and LESSOR, upon said Termination Date, shall be
entitled to the benefit of all legal remedies that now may be in force or may be
hereafter enacted relating to the immediate repossession of the Demised
Premises. The provisions of this Article shall survive the expiration or sooner
termination of this Lease.
ARTICLE 24
BROKERS
LESSEE represents to LESSOR that no real estate broker or sales
representative participated in this transaction or has any interest herein.
LESSEE agrees to indemnify and hold harmless LESSOR and its directors, officers,
employees and partners, from and against any threatened or asserted claims,
liabilities, losses or judgments (including reasonable attorneys' fees and
disbursements) by any broker or sales representative arising out of or in
connection with this Lease. The provisions of this Article shall survive the
expiration or sooner termination of this Lease.
33
<PAGE>
ARTICLE 25
NOTICES
All notices, demands, requests, consents, approvals, offers,
statements and other instruments or communications required or permitted to be
given hereunder shall be in writing, shall be either hand delivered by
respectable priority overnight delivery service, or mailed by first class
registered or certified mail, postage prepaid, addressed to the address for such
party set forth above, or to such other address as either party shall designate
to the other in writing, and shall be deemed to have been given when delivered,
or three (3) days after being mailed. Notwithstanding the foregoing, any notice
changing the address of a party shall not be deemed given until received by the
party to whom it was addressed.
ARTICLE 26
NATURE OF LESSOR'S OBLIGATIONS
Anything in the Lease to the contrary notwithstanding, no recourse
or relief shall be had under any rule of law, statute or constitution or by any
enforcement of any assessments or penalties, or otherwise or based on or in
respect of this Lease (whether by breach of any obligation, monetary or
non-monetary), against LESSOR, it being ex pressly understood that all
obligations of LESSOR under or relating to this Lease are solely obligations
payable out of the Property and are compensable solely therefrom. It is
expressly understood that all such liability is and is being expressly waived
and released as a condition of and as a condition for the execution of this
Lease, and LESSEE ex pressly waives and releases all such liability as a
condition of, and as a consideration for, the execution of this Lease by LESSOR.
ARTICLE 27
SECURITY DEPOSIT
27.1. (a) Concurrently with the execution of this Lease, LESSEE
shall deposit with LESSOR the sum of $28,833.33, the same to be held by LESSOR
as security for the full and faithful performance by LESSEE of the terms and
conditions by it to be observed and performed hereunder. If any Basic Rent,
Additional Rent or other sum payable by LESSEE to LESSOR becomes overdue and
remains unpaid, or should LESSOR make any payments on behalf of LESSEE, or
should LESSEE fail to perform any of the terms and conditions of this Lease,
then LESSOR, at its option, and without prejudice to any other remedy which
LESSOR may have on account thereof, shall appropriate and apply said deposit, or
so much thereof as may be required to compensate or reimburse LESSOR, as the
case may be, toward the payment of Basic Rent, Additional Rent or other such sum
payable hereunder, or loss or damage sustained by LESSOR due to the breach or
failure to perform on the part of LESSEE, and upon demand, LESSEE shall restore
such security to the original sum deposited.
(b) LESSEE hereby agrees that the security deposit
shall equal one (1) month's Basic Rent at all times during the Term, and LESSEE
agrees to deposit with LESSOR such additional sum as may be
34
<PAGE>
required to satisfy such requirement within thirty (30) days after any increase
in the Basic Rent.
27.2. Conditioned upon the full compliance by LESSEE of all of the
terms of this Lease, and the prompt payment of all sums due hereunder, as and
when they fall due, said deposit shall be returned in full to LESSEE within
fifteen (15) days after the end of the Term.
27.3. In the event of bankruptcy or other debtor-creditor proceeding
against LESSEE, such security deposit shall be deemed to be applied first to the
payment of rent and other charges due LESSOR for all periods prior to filing of
such proceedings.
27.4. In the event of any transfer of title to the Property, or any
assignment of LESSOR'S interest under this Lease, LESSOR shall have the right to
transfer the security deposit to said transferee or assignee, and LESSOR shall
thereupon be released by LESSEE from all liability for the return of such
security deposit. In such event, LESSEE agrees to look to the new lessor for the
return of the security deposit. It is hereby agreed that the provisions of this
Section shall apply to every transfer or assignment made of the security deposit
to a new lessor.
ARTICLE 28
RULES AND REGULATIONS
LESSOR shall have the right to adopt at any time during the Term
such rules and regulations with respect to the Property as it deems reasonably
necessary for the safety, care and cleanliness of the Property, the preservation
of good order therein and the general convenience of all the tenants, and LESSEE
and LESSEE'S Visitors shall comply with such rules and regulations after twenty
(20) days' written notice thereof from LESSOR (such rules and regulations, as
the same may be amended pursuant to this Section, are collectively referred to
as the "Rules and Regulations"). LESSOR may make, at its sole discretion,
reasonable amendments thereto from time to time, and LESSEE and LESSEE'S
Visitors shall comply with such amended Rules and Regulations after twenty (20)
days' written notice thereof from LESSOR. All Rules and Regulations shall apply
to all tenants occupying space within the Building, and will not materially
interfere with the use and enjoyment of the Demised Premises by LESSEE. In the
event there is a conflict be tween the provisions of this Lease and the Rules
and Regulations, the provisions of this Lease shall govern.
ARTICLE 29
MISCELLANEOUS
29.1. This Lease may not be amended, modified or terminated, nor may
any obligation hereunder be waived, orally, and no such amendment, modification,
termination or waiver, shall be effective unless in writing and signed by the
party against whom enforcement thereof is sought. No waiver by LESSOR of any
obligation of LESSEE hereunder shall be deemed to constitute a waiver of the
future performance of such obligation by LESSEE. If any provision of this
35
<PAGE>
Lease or any application thereof shall be invalid or unenforceable, the
remainder of this Lease and any other application of such provision shall not be
affected thereby. This Lease shall be binding upon and inure to the benefit of
and be enforceable by the respective successors and assigns of the parties
hereto, except as provided in Article 15. Upon due performance of the covenants
and agreements to be performed by LESSEE under this Lease, LESSOR covenants that
LESSEE shall and may at all times peaceably and quietly have, hold and enjoy the
Demised Pre mises during the Term. The table of contents and the article
headings are for convenience of reference only and shall not limit or otherwise
affect the meaning hereof. Schedules A and B annexed hereto are incor porated
into this Lease. This Lease will be simultaneously executed in several
counterparts, each of which when so executed and delivered, shall constitute an
original, fully enforceable counterpart for all pur poses. This Lease shall be
governed by and construed in accordance with the laws of the State of New
Jersey.
29.2. No act or thing done by LESSOR or LESSOR'S agents during the
Term shall be deemed an acceptance of a surrender of the Demised Premises, and
no agreement to accept such surrender shall be valid unless in writing and
signed by LESSOR. No employee of LESSOR or LESSOR'S agents shall have any
authority to accept the keys to the Demised Premises prior to the Termination
Date and the delivery of keys to any employee of LESSOR or LESSOR'S agents shall
not operate as an acceptance of a termination of this Lease or an acceptance of
a surrender of the Demised Premises.
29.3. LESSOR'S failure during the Term to prepare and deliver any of
the statements, notices or bills set forth in this Lease shall not in any way
cause LESSOR to forfeit or surrender its rights to collect any amount that may
have become due and owing to it during the Term.
29.4. The submission of this Lease to LESSEE for examination does
not constitute an offer to lease the Demised Premises on the terms set forth
herein, and this Lease shall become effective as a lease agreement only upon the
execution and delivery of this Lease by LESSOR and LESSEE.
29.5. For the convenience of all tenants of the Building, LESSOR
agrees to install and maintain a building directory in the entrance lobby of the
Building. On or about the Commencement Date, LESSOR agrees to place the name of
LESSEE on said directory; the size, color and type of letters used by LESSOR
shall be consistent with the other letters of the building directory.
36
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease as of the
date first above written.
ATTEST: LESSOR:
(SEAL) VITAMIN REALTY ASSOCIATES,
L.L.C.
________________________ By:___________________________
Name:
Title:
ATTEST: LESSEE:
(SEAL) MANHATTAN DRUG COMPANY
________________________ By:___________________________
Secretary Name:
Title:
37
<PAGE>
SCHEDULE B
BASIC RENT
The Basic Rent shall be payable in equal monthly installments,
in advance, on the Basic Rent Payment Dates. The Basic Rent for the
Term shall be as follows:
(a) for the period from the Commencement Date to, but not including,
the fifth anniversary of the Commencement Date, the Basic Rent shall be
$346,000.00 per annum, payable in equal monthly in stallments of $28,833.33; and
(b) for the period from the fifth anniversary of the Commencement
Date to and including the Termination Date, the Basic Rent shall adapted by
multiplying the Basic Rent set forth in subsection (a) above by a fraction, the
numerator of which is the CPI for all wage earners for the month immediately
preceding the fifth anniversary of the Commencement Date, and the denominator of
which is the CPI for all wage earners for the month immediately preceding the
Commencement Date, provided that such fraction shall never be less than one.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
Date: September 26, 1997 By:
E. Gerald Kay,
President and Chief Executive Officer
Date: September 26, 1997 By:
Eric Friedman,
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the condolidated
balance sheet and the consolidated statement of operations and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> jun-30-1997
<PERIOD-END> jun-30-1997
<CASH> 1,010,256
<SECURITIES> 0
<RECEIVABLES> 2,464,708
<ALLOWANCES> 0
<INVENTORY> 2,086,366
<CURRENT-ASSETS> 6,331,092
<PP&E> 1,072,049
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,140,648
<CURRENT-LIABILITIES> 2,298,690
<BONDS> 0
0
0
<COMMON> 8,670
<OTHER-SE> 5,322,673
<TOTAL-LIABILITY-AND-EQUITY> 8,140,648
<SALES> 11,126,860
<TOTAL-REVENUES> 11,126,860
<CGS> 9,475,624
<TOTAL-COSTS> 2,546,972
<OTHER-EXPENSES> (95,207)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,795
<INCOME-PRETAX> (900,324)
<INCOME-TAX> (246,020)
<INCOME-CONTINUING> (654,304)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9654,304)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
