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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to _______________________
Commission file number 000-21615 .
BOSTON BIOMEDICA, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2652826
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
375 WEST STREET,
WEST BRIDGEWATER, MASSACHUSETTS 02379-1040
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(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code (508) 580-1900
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OFTHE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities 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 be reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at March 17, 1998 was $27,754,339. The aggregate market
value was computed by reference to the closing price as of that date on
NASDAQ.
The number of shares outstanding of the Registrant's only class of
common stock as of March 17, 1998 was 4,643,172.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's definitive Proxy Statement for its 1997
annual meeting, are incorporated by reference into Part III of this Report, and
portions of the Registrant's Registration Statement on Form S-1 (Registration
No. 333-10759) are incorporated by reference into Part IV of this Report.
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PART I
ITEM 1. BUSINESS
The Company is a worldwide provider of proprietary quality control
products for use with in vitro diagnostic test kits ("test kits") for the
detection, analysis and monitoring of infectious diseases, including AIDS,
Hepatitis and Lyme Disease. These products are used to develop test kits, to
permit the monitoring of laboratory equipment and personnel, and to help ensure
the accuracy of test results. The Company's products are derived from human
plasma and serum using proprietary manufacturing processes. The Company
believes its Quality Control Panel products are viewed as the current industry
standard for the independent assessment of the performance of HIV and Hepatitis
test kits. The Company also manufactures diagnostic test kit components,
laboratory instruments, and provides specialty laboratory services, including
clinical trials. It also provides contract instrument development and related
repairs at its service center in Garden Grove, CA. The Company's customers
include test kit manufacturers, regulatory agencies and end-users of test kits
such as blood banks, hospital laboratories and clinical reference laboratories.
Currently the Company's products are used in connection with the detection of
more than 15 infectious diseases, and its specialty laboratory services are
used in connection with the detection of over 100 such diseases.
The Company's strategy is to leverage its scientific capabilities in
microbiology, immunology, virology, and molecular biology to (i) capitalize on
the emerging end-user market, (ii) develop new products and services, (iii)
enhance technical leadership, (iv) capitalize on complementary business
operations, and (v) pursue strategic acquisitions and alliances.
Industry Overview
Infectious Disease Test Kits and Testing Methods. Test kits contain in
one compact package all of the materials necessary to run a test for an
infectious disease. These include the disposable diagnostic components,
instructions, and reaction mixing vessels (generally 96-well plates or test
tubes) which are coated with the relevant infectious disease antigens,
antibodies or other materials. To perform the test, either a technician or a
specially designed instrument typically mixes the solutions from the test kit
with human blood specimens in a specific sequence according to the test kit
instructions. The mixture must then "incubate" for up to 18 hours, during which
time a series of biochemical reactions trigger signals (including color, light
and radioactive count) which indicate the presence or absence and amount of
specific markers of the particular disease in the specimen.
Test kits generally employ one of three methods for infectious disease
testing: microbiology, immunology or molecular biology. Traditional
microbiology tests use a growth medium that enables an organism, if present, to
replicate and be detected visually. Immunology tests detect the antigen or
antibody, which is an indicator (marker) of the pathogen (e.g., virus,
bacterium, fungus or parasite). Molecular diagnostic methods, such as the
polymerase chain reaction ("PCR"), test for the presence of nucleic acids (DNA
or RNA) which are specific to a particular pathogen.
Most infectious disease tests currently use microbiological or
immunological methods. However, molecular diagnostic methods are increasingly
being used in research and clinical laboratories worldwide. The Company
believes that the advent of molecular diagnostic methods will complement rather
than diminish the need to test by microbiological and immunological procedures,
because different test methods reveal different information about a disease
state. The Company anticipates that as new test methods become more widespread,
they will account for a larger portion of the Company's business.
Quality Control for In Vitro Diagnostic Test Kits. Customers employ
quality control products in order to develop and use test kits (both infectious
and non-infectious). Quality control products help ensure that test kits detect
the correct analyte (specificity), detect it the same way every time
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(reproducibility or precision), and detect it at the appropriate levels
(sensitivity). The major element of this quality control process is the
continuous evaluation of test kits by the testing of carefully characterized
samples that resemble the donor or patient samples routinely used with the
test. Quality control is used in both the infectious and non-infectious disease
markets, although currently it is not as prevalent among end-users of
infectious disease test kits.
The market for quality control products consists of three main customer
segments: (i) manufacturers of test kits, (ii) regulatory agencies that oversee
the manufacture and use of test kits and (iii) end-users of test kits, such as
hospitals, clinical reference laboratories and blood banks.
Company Products and Services
Overview
The Company offers two broad product classes used in in vitro
diagnostics ("IVD"): "Diagnostic Products" consisting of Quality Control
Panels, Accurun( Run Controls and Diagnostic Components, all used in connection
with infectious disease testing, and new for 1997, "Laboratory Instruments".
Diagnostic Products are used throughout the entire test kit life cycle, from
initial research and development, through the regulatory approval process and
test kit production, to training, troubleshooting and routine use by end-users.
The Company's Quality Control Panels, which combine human blood specimens with
comprehensive quantitative data useful for comparative analysis, help ensure
that test kits detect the correct analyte (specificity), detect it the same way
every time (reproducibility), and detect it at the appropriate levels
(sensitivity). The Company's Accurun( Run Controls enable end-users of test
kits to confirm the validity of results by monitoring test performance, thereby
minimizing false negative test results and improving error detection. In
addition, the Company provides Diagnostic Components, which are custom
processed human plasma and serum products, to test kit manufacturers.
Through its wholly owned subsidiary, BBI Source Scientific, Inc., the
Company designs, manufactures and markets Laboratory Instruments used in
hospitals, clinics, and research, environmental and food testing laboratories.
Utilizing a common hardware technology platform, these instruments are used in
connection with the performance of an IVD test, including reading the test
result.
The Company's specialty clinical laboratory services include both
routine and sophisticated infectious disease testing in microbiology,
immunology and molecular biology. The Company seeks to focus its specialty
laboratory services in advanced areas of infectious disease testing, and
provides contract research and clinical trials for the United States government
and for domestic and foreign test kit manufacturers.
Diagnostic Products
The Company manufactures its Diagnostic Products from human plasma and
serum which are obtained from nonprofit and commercial blood centers, primarily
in the United States. The Company has acquired and developed an inventory of
approximately 50,000 individual blood units and specimens (with volumes ranging
from 1 ml to 800 ml) which provides most of the raw material for its products.
Within the Diagnostic Products class are two groups: Quality Control Products
(Panels and Accurun( Run Controls) and Diagnostic Components.
Quality Control Panels
Quality Control Panels consist of blood products characterized by the
presence or absence of specific disease markers and a Data Sheet containing
comprehensive quantitative data useful for comparative analysis. These Quality
Control Panels are designed for measuring overall test kit
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performance and laboratory proficiency, as well as for training laboratory
professionals. The Company's Data Sheets, containing comprehensive
quantitative data useful for comparative analysis, are an integral part of its
Quality Control Panels. These Data Sheets are created as the result of
extensive testing of proposed panel components in both the Company's
laboratories and at major testing laboratories on behalf of the Company in the
United States and Europe, including national public health laboratories,
research and clinical laboratories and regulatory agencies. These laboratories
are selected based on their expertise in performing the appropriate tests on a
large scale in an actual clinical setting; this testing process provides the
Company's customers with the benefit that the Quality Control Panels they
purchase from the Company have undergone rigorous testing in actual clinical
settings. In addition, the Company provides information on its Data Sheets on
the reactivity of panel components in all FDA licensed test kits and all
leading European test kits for the target pathogen, as well as for all other
appropriate markers of this pathogen. For example, the Company's HIV panel Data
Sheets include anti-HIV by IFA, ELISA and western blot; HIV antigen by ELISA;
and HIV RNA by several molecular diagnostic procedures. The Company's Data
Sheets require significant time and scientific expertise to prepare. The
following table describes the types of Quality Control Panel products currently
offered by the Company.
<TABLE>
<CAPTION>
QUALITY CONTROL PANEL PRODUCTS
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
PRODUCT LINE DESCRIPTION USE CUSTOMERS
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
<S> <C> <C> <C>
Seroconversion Panels Plasma samples collected from a Compare the clinical Test kit
single individual overra specific sensitivity of competing manufacturers and
time period showing conversion manufacturers' test kits, regulators.
from negative to positive for enabling the user to assess the
markers of an infectious sensitivity of a test in
disease.- detecting a developing
antigen/antibody.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
Performance Panels A set of 10 to 50 serum and Determine test kit performance Test kit
plasma samples collected from against all expected levels of manufacturers and
many different individuals and reactivities in the evaluation regulators.
characterized for the presence or of new, modified and improved
absence of a particular disease test methods.
marker.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
Sensitivity Panels Precise dilutions of human plasma Evaluate the low-end analytical Test kit
or serum human plasma or serum sensitivity of a test kit. manufacturers
containing a known amount of an
infectious disease marker as
calibrated against international
standards.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
Qualification Panels Dilutions of human plasma or Demonstrate the consistent Clinical reference
serum manifesting a full range of lot-to-lot performance of test laboratories, blood
reactivities in test kits for a kits, troubleshoot problems, banks, and hospital
specific marker. evaluate proficiency, and train laboratories
laboratory technicians.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
OEM Panels Custom-designed Qualification Train laboratory personnel on Custom designed
Panels for regulators and test new test kits or equipment. with test kit
kit manufacturers for manufacturers and
distribution to customers or for regulators as an
internal use. end-user product or
for internal use.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
</TABLE>
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The Company first introduced Quality Control Panels in 1987. The
Company currently offers a broad range of Quality Control Panels that address a
variety of needs of manufacturers and regulators of test kits as well as blood
banks, hospitals, clinical laboratories and other end-users. Prices for the
Company's quality control seroconversion, performance and sensitivity panels
range from $450 to $2,000 each, and its qualification and OEM panels range from
$100 to $200 per panel.
Seroconversion and Performance Panels are comprised of unique and rare
plasma specimens obtained from individuals during the short period of time when
the markers for a particular disease are converting from negative to positive.
As a result, the quantity of any such panel is limited, so that the Company
must replace these panels as they sell out with another panel comprised of
different specimens equally unique and rare. The Company believes that its
inventory and relationships with blood centers affords it a competitive
advantage in acquiring such plasma for replacement panels and developing new
products to meet market demand. There can be no assurance that the Company will
be able to continue to obtain such specimens.
Quality Control Panels currently span the immunologic markers for AIDS
(i.e., HIV), Hepatitis (A, B and C), Lyme Disease and ToRCH (Toxoplasma,
rubella, cytomegalovirus and herpes simplex virus). New introductions this year
include Performance Panels for HIV, EBV and HCV, Qualification Panels for HIV,
HTLV, CMV and HCV, and additional Seroconversion Panels for HIV and HCV.
Included in the Performance Panel category are the first "Worldwide" panels for
HCV and HIV that include specimens from throughout the world reactive for
variants and subtypes of these deadly viruses.
Accurun(r) Run Controls
End-users of test kits utilize Run Controls to confirm the validity of
results by monitoring test performance, thereby minimizing false negative test
results and improving error detection. Run controls consist of one or more
specimens of known reactivity that are tested together with donor or patient
samples in an assay to determine whether the assay is performing within the
manufacturer's specifications. Clinical laboratories generally process their
patient specimens in a batch processing mode, and typically include 25 to 100
specimens to be tested in each batch (a "run"). Large laboratories may perform
several runs per day, while smaller laboratories may perform only a single run
each day, or sometimes only several runs per week. A clinical laboratory using
a Run Control will place the Run Control product in a testing well or
test-tube, normally used for a specimen, and will test it in the same manner
that it tests the donor or patient specimens. It will then compare the results
generated to an acceptable range, determined by the user, to measure whether
the other specimens are being accurately tested. The Run Control result must be
within the acceptable range to be considered valid. This is often tracked
visually using a Levey-Jennings chart. Depending upon a particular laboratory's
quality control practices, it may use several Run Controls on each run or it
may simply use a Run Control in a single run at the beginning and end of the
day.
In 1997, the Company introduced its AccuChartTM tracking and charting
software. Used as part of a laboratory's quality assurance program, AccuChartTM
runs on a PC and is designed to provide the data tracking capability needed to
document laboratory performance.
The Company's Accurun(r) family of products is targeted at the emerging
market of end-users of infectious disease test kits. The Company believes that
it offers the most comprehensive line of Run Controls in the industry, and that
its Accurun(r) products, in combination with its Quality Control Panel
products, provide an extensive line of products for quality assurance in
infectious disease testing. The Company intends to continue to expand its line
of Accurun(r) products, thereby providing its customers with the convenience
and cost effectiveness of a single supplier for independent run controls.
The Company introduced its first four Accurun(r) Run Control products
in the fourth quarter of 1993 and has since developed and released for sale an
additional 31 Accurun(r) products, for a total of 35
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Run Controls. The majority of these products are available for diagnostic
purposes; the others currently are limited to research use. Current Accurun(r)
Run Control products range in price from $5 to $45 per milliliter and are
described in the following table.
<TABLE>
<CAPTION>
ACCURUN(r) RUN CONTROLS
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
PRODUCT LINE DESCRIPTION CURRENT NUMBER OF PRIMARY CUSTOMERS
PRODUCTS
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
<S> <C> <C> <C>
Accurun(r)1-99 Multi-marker Run Control 6 Blood Banks
for immunological tests
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(r)100-199 Single-marker Run Control 22 Hospitals and clinical
for immunological tests reference laboratories
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(r)200-299 Multi-marker Run Control 1 Research and specialty
for molecular tests laboratories
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(r)300-399 Single-marker Run Control 3 Research and specialty
for immunological tests laboratories
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(r)800-899 Negative Run Control for 3 All laboratories
immunological and molecular
tests
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
</TABLE>
All of the Company's Accurun(r) Run Controls require FDA premarket
clearance (a 510(k)) prior to being marketed for diagnostic use, under current
FDA rules. The FDA Modernization Act of 1997 will likely produce new
regulations exempting some of these products from FDA submission requirements,
but the new rules are not yet in place. As of March 1, 1998, a total of nine
products in the Accurun 1(r) line and 14 single analyte Accurun( controls have
received 510(k) clearance from the FDA. An additional three Accurun(r) single
analyte products have been submitted but have not yet received FDA approval.
Diagnostic Components
Diagnostic Components are the individual materials supplied to
infectious disease test kit manufacturers and combined (often after further
processing by the manufacturer) with other materials to become the various
fluid components of the manufacturer's test kit. The Company supplies
Diagnostic Components in four product lines: Normal Human Plasma, Normal Human
Serum, Basematrix, and Characterized Disease State Serum and Plasma. Normal
Human Plasma and Serum are both the clear liquid portion of blood which
contains proteins, antibodies, hormones and other substances, except that the
Serum product has had the clotting factors removed. Basematrix, the Company's
proprietary processed serum product that has been chemically converted from
plasma, is designed to be a highly-stable, lower cost substitute for most
Normal Human Serum and Plasma applications. Characterized Disease State Serum
and Plasma are collected from specific blood donors pre-selected because of the
presence or absence of a particular disease marker. The Company often
customizes its Diagnostic Components by further processing the raw material to
meet the specifications of the test kit manufacturer. The Company's Diagnostic
Components range in price from $0.25 to $60 per milliliter, with the majority
selling between $0.50 and $5 per milliliter.
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Laboratory Instruments
In 1997, the Company acquired the business and net assets of Source
Scientific, Inc., a laboratory instrument manufacturer in Garden Grove,
California. As a result of this acquisition, the Company through its wholly
owned subsidiary, BBI Source Scientific, Inc. ("BBI Source"), now has expertise
in IVD instruments, adding to its existing capability in IVD quality control
products. This is significant since, in addition to the test kit and a well
trained technician, the third element to an accurate test result is a properly
calibrated instrument to read the test result. See also Note 2 to the Company's
Notes to Consolidated Financial Statements in Item 8 hereunder regarding the
Company's purchase of the business and net assets of Source Scientific, Inc.
BBI Source designs, manufactures and markets Laboratory Instruments
used in hospitals, clinics, and research, environmental and food testing
laboratories. They are generally sold on a private-label or OEM basis for other
companies utilizing a common hardware technology platform. The instruments
manufactured by the Company use advanced optical detection methods
(luminescence, fluorescence, reflectance, photometry), robotics, fluidics, and
unique software, which is desired by customer companies reselling the
state-of-the-art instrumentation systems to clinical distributors and
laboratories worldwide.
The products currently being offered by BBI Source have been
commercialized since 1985. BBI Source expects that its newest products will be
available for production in late 1998. Management believes that products address
important market segments in biomedical and clinical diagnostic testing and
environmental monitoring and food testing research. The BBI Source product line
includes the following:
MicroChem(r) Photometer. A compact, low-cost, photometer designed for
immunoassay and general chemistry applications.
ChemStat(r) Automated Photometer. A high-speed, automated photometer
with a sample capacity of 95 tubes and a read rate of one sample per second.
This product is suited for high-volume processing.
ChemStat(r) Plus Automated Photometer. The ChemStat Plus is a second
generation photometer compatible with the EXEC-WASH Washing System that
features menu-driven software and optional on-board dispensers.
E/LUMINA(r) Luminescence Analyzer. A flexible luminometer for both
"flash" and "glow" luminescence methods, this automated system reads up to 114
samples and reports final results.
E/LUMINA(r) 2E Automated Luminescence Analyzer. This detection system
is designed with the same features as the E/LUMINA Luminescence Analyzer that
can be used to detect faster "flash" luminescence techniques and adapts to
various formats, as well as to liquid phase assays.
EXEC-WASH(r) Washing System. An automated immunoassay washing system
that can be quickly configured by the user to wash different solid-phase assay
formats by a propriety manifold design. The EXEC-WASH is fully compatible with
a variety of other Company products, such as the ChemStat, the ChemStat Plus
and the E/LUMINA Luminescence Analyzer.
PlateMate(r) Reader. The Company expects to have available in 1998 the
PlateMate Reader, a microfluidics well-reading system combining robotics and
fluidics. The current design of the PlateMate Reader performs photometric
assays in the 400 to 700 nm range for 96 samples at a time and prints out
results directly on a built-in printer.
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Protocol Design Software System. A development tool for researchers and
assay manufacturers, the program operates under Microsoft(r) Windows and serves
as the master programing center for EXEC-WASH systems to create fluid handling
protocols.
FOCUS(r). Florescence Polarization System. Fluorescence polarization
("FP") is a technology that has dominated the clinical market for therapeutic
and abuse drug level testing for many years.
FluoroStat(r) Reader. The FluoroStat is a compact fluorometer that is
highly sensitive and provides a broad dynamic range for tube-based fluorometric
assays. The instrument was introduced in September 1995 and is currently
available for OEM manufacture.
Services
The Company seeks to focus its specialty laboratory services in both
the clinical reference laboratory testing and advanced research areas. The
Company concentrates its services in those areas of infectious disease testing
which are complementary to its quality control and diagnostic products
businesses.
Specialty Clinical Laboratory Testing. Through its wholly owned
subsidiary, BBI Clinical Laboratories, Inc. the Company operates an independent
specialty clinical reference laboratory which performs both routine and
sophisticated infectious disease testing in microbiology, immunology and
molecular biology, with special emphasis in AIDS, Viral Hepatitis and Lyme
Disease. The Company's specialty clinical laboratory combines traditional
microbiology, advanced immunology, and current molecular diagnostic techniques,
such as PCR, to detect and identify microorganisms, their antigens and related
antibodies, and their nucleic acids (i.e., DNA and RNA). Customers include
physicians, clinics, hospitals and other clinical/research laboratories.
Contract Research. The Company, through its wholly owned subsidiary,
BBI Biotech Research Laboratories, Inc. ("BBI Biotech"), offers a variety of
contract research services in molecular biology, cell biology and immunology to
governmental agencies, diagnostic test kit manufacturers and biomedical
researchers. Molecular biology services include DNA sequencing, recombinant DNA
support, probe labeling and custom PCR assays. Cell biology and immunology
services include sterility testing, virus infectivity assays, cultivations of
virus or bacteria from clinical specimens, preparation of viral or bacterial
antigens or nucleic acids, and production of antibodies. The Company is
currently providing contract research services under several contracts and
grants. These services primarily related to infectious diseases, and include
the following: assessment of the efficiency of candidate HIV vaccines in a
monkey model system; development of a multiplex RT PCR based test for HIV-1,
HTLV I/II, HCV, and HBV; DNA sequencing of human genes involved in neurological
disorders; plate assays for HIV-1 genotyping; and eliciting neutralizing
antibodies targeting HIV. In addition, since 1983, BBI Biotech, has provided
blood processing and repository services for the National Cancer Institute
("NCI"), also a part of the National Institutes of Health ("NIH"). The
repository stores over 2,000,000 specimens and processes or ships up to several
thousand specimens per week in support of various NIH cancer and virus research
programs. A new one year NCI repository contract was signed in February 1997
which includes four one year renewal options exercisable by NCI. The total
value of the contract in the first year is $916,000, and including all options,
is $4.8 million. The initial renewal option has been approved by the NCI
although there can be no assurance that any subsequent options will be
exercised.
Clinical Trials. The Company conducts clinical trials for domestic and
foreign test kit manufacturers. Test kit manufacturers must conduct such trials
to collect data for submission to the United States FDA and other regulatory
agencies. By providing this service, the Company is able to maintain close
contact with test kit manufacturers and regulators, and is able to evaluate new
technologies in various stages of development. The Company believes that the
reputation of its laboratory and scientific staff, its large number of Quality
Control Panels, and its inventory of
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characterized serum and plasma specimens assist the Company in marketing its
clinical trial services to its customers. The Company has performed clinical
trials for a number of United States and foreign test kit manufacturers seeking
to obtain FDA approval for their infectious disease test kits.
Laboratory Instrumentation Services. BBI Source offers design,
development and manufacturing services to companies seeking to market
biomedical products manufactured under government-approved manufacturing
practices. The OEM services range in complexity from contract manufacturing to
full system development and distribution.
BBI Source also provides after-sales-service. Management believes that
after-sales service is a major marketing advantage in many of the Company's
markets, since many of the Company's customers do not maintain their own full
service departments. Servi-Trak(r), a proprietary software program, is a key
element of this after-sales service. The Company's service department is
located at BBI Source's facility in Garden Grove, California. A fully
functional service center located in Giessen, Germany, is contracted by the
Company to provide European service and support.
On March 9, 1998, the Company announced plans to modify a previously
announced 3-year contract with ABX Hematology, Inc. ("ABX") and its parent
company, ABX Hematologie, SA (France). Under the contract, the Company provided
technical, customer and field services for instruments sold by ABX in the
United States. Under the modified agreement, individual customer service
contracts will be assigned to ABX and ABX will assume responsibility for its
United States instruments. The Company will provide certain consulting services
through March 1999 to assist ABX in establishing a sales, customer service,
technical support, and field service operation in the United States for its
hematology instrument and reagent business. In addition, the Company has agreed
to allow ABX to occupy space at its California facility during the period of
the agreement. The Company's personnel associated with this contract, included
the nationwide field service organization and hotline technical support, will
be offered employment by ABX.
Drug Screening Program. As a subcontractor for an NIH AIDS grant held
by the University of North Carolina at Chapel Hill, the Company has established
an anti-HIV drug screening program to test a large number of natural products
(largely plant derivatives) to determine whether they inhibit HIV replication
in an in vitro assay system. These in vitro assays are also offered as a
service to researchers and pharmaceutical companies who wish to test various
candidate anti-viral agents for anti-HIV activity.
Research and Development
The Company's research and development effort is focused on the
development of (i) new and improved Quality Control Products (Panels and
Accurun(r)) for the emerging end-user market, (ii) new products for existing
customers, (iii) Diagnostic Components for use with test kits for both new test
methodologies and new diseases, (iv) new laboratory instruments and mechanical
and optical detection techniques, and (v) infectious disease testing services
using PCR and other amplification assays for AIDS, Viral Hepatitis, Lyme
Disease and Chlamydia, among others. The Company has approximately 36 full or
part-time employees involved in its research and development effort. For 1997
the Company increased spending on research and development as a percentage of
revenues compared to 1996 and expects to continue to increase such expenditures
as a percentage of revenues for the next several years. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations." The Company's research scientists work closely with
sales, marketing, manufacturing, regulatory and finance personnel to identify
and prioritize the development of new products and services.
The Company's product development activities center on the
identification and characterization of materials for the manufacture of new
Quality Control Products and the replacement of sold-out products. During 1997,
the Company introduced 32 new Seroconversion, Performance, Sensitivity and
Qualification Panel products, as well as 6 new Accurun(r) Run Controls, and 34
OEM Panels. The
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Company is developing new Quality Control Products for use with both
immunological and molecular diagnostic tests for subtypes and variants of HIV,
HCV and HBV, and a variety of controls targeted for leading instrument
platforms. The Company has increased the number of off-the-shelf Quality
Control Products it offers from approximately 20 products in 1990 to
approximately 167 in 1997.
The Company's product development activities related to Laboratory
Instruments are centered on additional configurations for its PlateMate(r)
microtiter plate reader and the development of a "reflectance" reader to
produce qualitative results from rapid IVD tests using dry chemistry (strip)
technology. In addition, the Company continues to work on applications for
existing products to broaden their utilization.
The Company is also developing new and improved infectious disease
tests which offer potential for above average profit for use in its specialty
laboratory business. This includes emphasis on additional applications of PCR
and other amplification technologies to infectious disease diagnostics, beyond
its current assays for the pathogens of AIDS, Viral Hepatitis, Lyme Disease and
Herpes, and for the direct detection of other infectious agents in blood,
tissues and other body fluids.
From time to time in the past, the Company has funded a portion of its
research and development activities from grants provided by various agencies
and departments of the United States government. See also "-Services-Contract
Research."
Strategic Alliances
University of North Carolina at Chapel Hill ("UNC"). The Company is
directly supporting a drug discovery program at UNC, in which a full-time
research scientist is working to develop synthetic derivatives of anti-HIV
compounds that have been discovered pursuant to the Company's joint
collaboration with UNC. This research scientist is also working to introduce
modifications to these derivatives that would make them more soluble, less
toxic, or otherwise enhance their anti-viral properties. UNC has licensed to
the Company exclusive worldwide rights to three series of patent applications
filed by the Company and UNC with respect to three classes of anti-HIV
compounds. Two such compounds have exhibited therapeutic indices in in vitro
test model systems in excess of those recorded for AZT under comparable test
conditions. The Company is expending approximately $150,000 per year for
research and development relating to these compounds. In addition, under this
license, the Company will also have the rights to any new anti-HIV compounds or
derivatives developed in the course of this sponsored research, provided the
Company obtains certain regulatory approvals from the FDA. See also
"-Services-Drug Screening program."
Ajinomoto Co., Inc. The Company entered into an agreement with
Ajinomoto Co., Inc. in October 1995 pursuant to which the Company is performing
research regarding among other things, whether tests for certain amino acids in
plasma can be used to determine a person's immune status, particularly in
chronic fatigue syndrome. This project is funded by Ajinomoto and has a three
year budget of approximately $1,000,000. Discoveries and inventions arising
from the research will be owned by Ajinomoto, but the Company has the right of
first refusal to obtain certain exclusive licenses from Ajinomoto of any
patented technology arising from the research. The Company is entitled to
certain royalties based upon a percentage of sales of products arising out of
the research. This agreement expires in September 1998. The Company does not
know if the contract will be renewed.
BioSeq, Inc. In October 1996, the Company entered into a strategic
alliance with BioSeq, Inc. an early stage biotechnology company that is
developing a technology that may, through the use of pressure, be able to more
precisely control chemical reactions. The Company believes that this technology
may be useful for sample preparation in connection with both molecular and
immunological testing, process purification, sequencing, synthesizing and
characterizing nucleic acids and proteins, which may then allow for the more
precise identification of infectious disease agents. See also Note 5 to the
Company's
-10-
Notes to Consolidated Financial Statements in Item 8 hereunder regarding the
Company's investment in BioSeq, Inc. The Company, in a seperate transaction,
purchased a licensed technology from BioSeq, Inc. on March 20, 1998. See also
Note 14 to the Company's Note to Consolidated Financial Statements and Item 8
hereunder regarding subsequent event.
Sales and Marketing
The Company's sales and marketing efforts are directed by a Senior Vice
President of Sales and Marketing and includes 25 sales people and 9 other
full-time marketing and customer services employees.
The Company's marketing strategy is focused upon addressing the needs
of its customers in the infectious disease testing market throughout the entire
test kit life-cycle, from initial research and development, through the
regulatory approval process and test kit production, to training,
troubleshooting and routine use by end-users such as clinical laboratories,
hospitals and blood banks.
The Company recently has begun to focus its sales and marketing efforts
on the emerging end-user market for quality control products for infectious
disease test kits. To promote this objective, the Company has implemented a
major marketing platform, known as "Total Quality System" ("TQS"). TQS is a
package of Quality Control Products, including the Company's Accurun(r) Run
Controls, which is designed to provide test kit end-users with the products
needed in an overall quality assurance program. These products enable
laboratories to evaluate each of the key elements involved in the testing
process: the test kit, laboratory instrument and laboratory personnel. The
Company believes that TQS effectively addresses the need for end-users to
ensure the accuracy of their test results. The Company intends to continue to
expand its sales and marketing activities with respect to its Accurun(r) line
of run control products.
The Company's products are currently sold through a combination of
telephone, mail, third party distributors and direct sales efforts.
Domestically, Diagnostic Products are sold through a direct sales force
consisting of a sales director, three regional managers and nine sales
representatives. Internationally, the Company distributes its Diagnostic
Products both directly and through 21 independent distributors located in
Japan, Australia, South America, Southeast Asia, Israel and Europe. The
Company's international sales manager oversees the Company's foreign
distributors. The Company's Laboratory Instruments are sold through a direct
domestic and international sales force consisting of two sales managers. Export
sales, including sales to distributors, for the years ended December 31, 1995,
1996, and 1997 were $3.4 million, $4.3 million, and $5.2 million, respectively.
See also Note 6 to the Consolidated Financial Statements.
The Company's Specialty Clinical Laboratory Testing services are
marketed primarily through a direct domestic sales force consisting of seven
sales representatives managed by a sales director. The sales representatives
are located throughout the eastern and mid-western United States. They are
supported internally by a client services representative.
The Company emphasizes high quality products and services, technical
knowledge, and responsiveness to customer needs in its marketing activities for
both products and services. The Company educates its distributors, customers
and prospective customers about its products through a series of detailed
marketing brochures, technical bulletins and pamphlets, press releases and
direct mail pieces. These materials are supplemented by advertising campaigns
in major industry publications, technical presentations, and exhibitions at
local, national and international trade shows and expositions.
-11-
Customers
The Company's customers for Diagnostic Products comprise three major
groups: (i) international diagnostics and pharmaceutical manufacturing
companies, such as Abbott Diagnostics, Behring, Boehringer Mannheim, Chiron,
Fujirebio, Hoffman LaRoche, Ortho Diagnostics (Johnson and Johnson), Sanofi
Diagnostics and Sorin Biomedica; (ii) regulatory agencies such as the United
States FDA, the British Public Health Laboratory Service, the French Institut
National de la Transfusion Sanguine, and the German Paul Ehrlich Institute; and
(iii) end-users of diagnostic test kits, such as hospital and independent
clinical laboratories, including LabCorp, Quest and Smith Klein Beecham, public
health laboratories and blood banks, including the American Red Cross, Swiss
Red Cross, United Blood Services and Kaiser Permanente. The Company's customers
for Laboratory Instruments consist of international diagnostic and
pharmaceutical manufacturing companies and are generally sold on an OEM basis,
for use by hospitals, and clinical and research laboratories. In addition,
Laboratory Instruments are sold directly to environmental and food testing
laboratories, and wineries. Customers include Mast Immuno Systems, ABX
Hematology, Hybritech Inc., Vicam, and Toray Fuji Bionics Inc. The Company's
Specialty Clinical Laboratory Testing services are sold to hospital and
clinical laboratories, physicians, blood banks, researchers and other health
care providers. The Company's Contract Research services are typically offered
under contracts to governmental agencies, diagnostic test kit manufacturers and
biomedical researchers.
The Company does not have long-term contracts with its customers for
Quality Control Products and Diagnostic Components. The Company's products are
sold to its customers pursuant to purchase orders for discrete purchases.
Laboratory Instruments sold on an OEM basis are usually done so under a one
year contract with monthly delivery dates. Although the Company believes that
its relationships with customers are satisfactory, termination of the Company's
relationship with any one of its customers could have a material adverse effect
on the Company.
During the fiscal years 1995, 1996 and 1997, sales to the Company's
three largest customers accounted for an aggregate of approximately 20% of the
Company's net sales, although the customers were not identical in each period.
During the fiscal years 1995, 1996 and 1997, the combined revenues to all
branches of the National Institutes of Health, a United States Government
agency, accounted for approximately 13% of total consolidated revenues of the
Company. While the Company believes that the loss of any one customer would
have an adverse effect on its results, this risk is partially mitigated by the
diversity of its customer base within the IVD industry and the different
diseases and instrument platforms on which they focus.
Manufacturing and Operations
The Company manufactures and assembles Diagnostic Products at its
facility in West Bridgewater, Massachusetts. Raw materials (primarily plasma
and serum) are acquired from a variety of vendors and through a program of
donor recruitment, screening, management, and plasma/serum collection and
characterization. All important materials have multiple sources of supply.
Laboratory Instruments are manufactured and assembled at the Company's facility
in Garden Grove, California. Raw materials and subassemblies are acquired from
a variety of vendors with multiple sources of supply.
The Company also operates a specialty clinical laboratory in New
Britain, Connecticut, and a research and development laboratory in
Gaithersburg, Maryland. See "Item 2 -- PROPERTIES."
Competition
The market for the Company's products and services is highly
competitive. Many of the Company's competitors are larger than the Company and
have greater financial, research, manufacturing, and marketing resources.
Important competitive factors for the Company's products include product
-12-
quality, price, ease of use, customer service and reputation. In a broader
sense, industry competition is based upon scientific and technical capability,
proprietary know-how, access to adequate capital, the ability to develop and
market products and processes, the ability to attract and retain qualified
personnel, and the availability of patent protection. To the extent that the
Company's products and services do not reflect technological advances, the
Company's ability to compete in those products and services could be adversely
affected.
In the area of Quality Control Products, the Company competes in the
United States with NABI (formerly North American Biologicals, Inc.) in run
controls and quality control panel products. with Dade International, Bio-Rad
Laboratories, Inc., and Blackhawk Biosystems Inc. in run controls, and with a
number of smaller, privately held companies in quality control panels. In
Europe, in addition to the above, the Netherlands Red Cross has recently begun
offering several run control and panel products. The Company believes that all
of these competitors currently offer a more limited line of panel and run
control products than the Company, although there can be no assurance these
companies will not expand their product lines.
In the Diagnostic Components area, the Company competes against
integrated plasma collection and processing companies such as Serologicals,
Inc. and NABI, as well as smaller, independent plasma collection centers and
brokers of plasma products. In the Diagnostic Components area, the Company
competes on the basis of quality, breadth of product line, technical expertise
and reputation.
The laboratory instrument manufacturing industry is diverse and highly
competitive. The Company believes its technology base, reputation for
reliability, systems integration and service capabilities provide it with a
competitive advantage over its competitors which include: Dynatech Corp,
Kollsman Manufacturing Company, Inc., Bio-Tek Instruments Inc., Rela Inc. (part
of Colorado Medtech, Inc.), as well as numerous, smaller companies, such as
Awareness Technology Inc.
In the Specialty Clinical Laboratory Testing services portion of the
Company's business, it competes with large national reference laboratories,
such as LabCorp of America, Quest Laboratories and SmithKline Beecham Clinical
Laboratories, as well as several independent regional laboratories, hospital
laboratories, government contract laboratories and large research institutions.
The Company believes that by focusing on the specialty clinical laboratory
market, it is able to offer its customers a higher value-added service on the
more complex diagnostic tests than the larger national reference laboratories.
Intellectual Property
The Company holds as trade secrets current technology used to prepare
Basematrix and other blood-based products. None of the Company's Quality
Control Products or Diagnostic Components has been patented. The Company relies
primarily on a combination of trade secrets and non-disclosure and
confidentiality agreements to establish and protect its proprietary rights in
its technology and products. There can be no assurance that others will not
independently develop or otherwise acquire the same, similar or more advanced
trade secrets and know-how.
BBI Source has also relied on trade secrets and proprietary know-how
for its Laboratory Instruments which it protects in part by entering into
confidentiality agreements with persons or parties deemed appropriate by
management. In addition, the Company currently has five issued United States
patents, and one United States patent application on file, covering significant
aspects of the Company's core instrument technology and techniques, as well as
several electronic and mechanical designs employed in the Company's existing
products.
The Company owns two United States patents related to its contracts and
services work, and, jointly with UNC, has four additional United States patents
relating to compounds, pharmaceutical compositions and therapeutic methods in
connection with the Company's drug discovery program at
-13-
UNC. One additional United States application and foreign applications for all
five of the joint patents are pending.
The Company has no reason to believe that its products and proprietary
methods infringe the proprietary rights of any other party. There can be no
assurance, however, that other parties will not assert infringement claims in
the future.
Government Regulation
The manufacture and distribution of medical devices, including products
manufactured by the Company that are intended for in vitro diagnostic use, are
subject to extensive government regulation in the United States and in other
countries.
In the United States, the Food, Drug, and Cosmetic Act ("FDCA")
prohibits the marketing of most in vitro diagnostic products until they have
been cleared or approved by the FDA, a process that is time-consuming,
expensive, and uncertain. In vitro diagnostic products must be the subject of
either a premarket notification clearance (a "510(k)") or an approved premarket
approval application ("PMA"). With respect to devices reviewed through the
510(k) process, a company may not market a device for diagnostic use until an
order is issued by the FDA finding the product to be substantially equivalent
to a legally marketed device. A 510(k) submission may involve the presentation
of a substantial volume of data, including clinical data, and may require a
substantial period of review. With respect to devices reviewed through the PMA
process, a company may not market a device until FDA has approved a PMA
application, which must be supported by extensive data, including preclinical
and clinical trial data, literature, and manufacturing information to prove the
safety and effectiveness of the device.
The Company's Accurun(r) Run Controls, when marketed for diagnostic
use, have been classified by the FDA as medical devices. The FDA could,
however, require that some products be reviewed through the PMA process, which
generally involves a longer review period and the submission of more
information to FDA. There can be no assurance that the Company will obtain
regulatory approvals on a timely basis, if at all. Failure to obtain regulatory
approvals in a timely fashion or at all could have a material adverse effect on
the Company.
As of March 1, 1998, a total of nine products in the Accurun 1(r) line
and fourteen Accurun(r) single analyte controls have received 510(k) clearance
from the FDA. An additional three Accurun(r) single analyte controls have been
submitted but have not yet received FDA clearance.
Some of the Company's Accurun(r) run controls are currently marketed
"for research use only." Such products do not currently require FDA premarket
clearance or approval. The labeling of these products limits their use to
research. It is possible, however, that some purchasers of these products may
use them for diagnostic purposes despite the Company's intended use. In these
circumstances, the FDA could allege that these products should have been
cleared or approved by the FDA prior to marketing, and initiate enforcement
action against the Company, which could have a material adverse effect on the
Company. The FDA has recently issued a Draft Policy Compliance Guideline,
which, if it takes effect as written, will strictly limit the sale of products
labeled "for research use only." The Company is monitoring this situation, and
will adapt its policies as required.
BBI Source obtains 510(k) approval for all laboratory instrumentation
designed and manufactured in its Garden Grove facility.
The Company's Diagnostic Products and Laboratory Instruments product
groups are both registered as medical device manufacturers with the FDA, and
file listings of their products semi-annually. The Company's facilities in West
Bridgewater, Massachusetts for Diagnostic Products and Garden Grove, California
for Laboratory Instruments are FDA Good Manufacturing Practices
-14-
(FDA/GMP) facilities, and, as such, maintain high standards of quality in
manufacturing, testing and documentation, and implement strict GMP guidelines
governing reagent and instrument manufacturing.
Once cleared or approved, medical devices are subject to pervasive and
continuing regulation by the FDA, including, but not limited to, good
manufacturing practices ("GMP") regulations governing testing, control, and
documentation; and reporting of adverse experiences with the use of the device.
Ongoing compliance with GMP and other applicable regulatory requirements is
monitored through periodic inspections. FDA regulations require agency
clearance or approval for certain changes if they do or could affect the safety
and effectiveness of the device, including, for example, new indications for
use, labeling changes or changes in design or manufacturing methods. In
addition, both before and after clearance or approval, medical devices are
subject to certain export and import requirements under the FDCA. Product
labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. Products may be promoted by
the Company only for their approved use. Failure to comply with these and other
regulatory requirements can result, among other consequences, in failure to
obtain premarket approvals, withdrawal of approvals, total or partial
suspension of product distribution, injunctions, civil penalties, recall or
seizures of products and criminal prosecution.
The Company believes that its Quality Control Panels are not regulated
by the FDA because they are not intended for diagnostic purposes. The Company
believes that its Diagnostic Components, which are components of in vitro
diagnostic products, may be subject to certain regulatory requirements under
the FDCA and other laws administered by the FDA, but do not require that the
Company obtain a premarket approval or clearance. There can be no assurance,
however, that the FDA would agree or that the FDA will not adopt a different
interpretation of the FDCA or other laws it administers, which could have a
material adverse effect on the Company.
The Company's Diagnostic Products and Laboratory Instruments groups are
both ISO9001 certified, with registration by TUV Rheinland. The Laboratory
Instrument group is also certified to EN46001, a set of supplementary
requirements applicable to their products.
Laws and regulations affecting some of the Company's products are in
effect in many of the countries in which the Company markets or intends to
market its products. These requirements vary from country to country. Member
states of the European Economic Area (which is composed of the European Union
members and the European Free Trade Association members) are in the process of
adopting various product and service "Directives" to address essential health,
safety, and environmental requirements associated with the subject products and
services. The "Directives" cover both quality system requirements (ISO Series
9000 Standards and the EN46001 Requirements) and product and marketing related
requirements. In addition, some jurisdictions have requirements related to
marketing of the Company's products. There can be no assurance that the Company
will be able to obtain any regulatory approvals required to market its products
on a timely basis, or at all. Delays in receipt of, or failure to receive such
approvals, or the failure to comply with regulatory requirements in these
countries or states could lead to compliance action, which could have a
material adverse effect on the Company's business, financial condition, or
results of operations.
The Company's service-related business (clinical trials, infectious
disease testing, and contract research) is subject to other national and local
requirements. The Company's facilities are subject to review, inspection,
licensure or accreditation by some states, national professional organizations
(College of American Pathologists), and other national regulatory agencies
(Health Care Financing Administration). Studies to evaluate the safety or
effectiveness of FDA regulated products (primarily human and animal drugs or
biologics) must also be conducted in conformance with relevant FDA
requirements, including Good Laboratory Practice ("GLP") regulations,
investigational new drug or device regulations, Institutional Review Board
("IRB") regulations and informed consent regulations.
-15-
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA")
prohibits laboratories from performing in vitro tests for the purpose of
providing information for the diagnosis, prevention or treatment of any disease
or impairment of, or the assessment of, the health of human beings unless there
is in effect for such laboratories a certificate issued by the US Department of
Health and Human Services ("HHS") applicable to the category of examination or
procedure performed.
The Company currently holds permits issued by HHS (CLIA license),
Centers for Disease Control and Prevention (Importation of Etiological Agents
or Vectors of Human Diseases), the US Department of Agriculture (Importation
and Transportation of Controlled Materials and Organisms and Vectors) and the
US Nuclear Regulatory Commission (in vitro testing with byproduct material
under general license, covering the use of certain radioimmunoassay test
methods).
The Company is also subject to government regulation under the Clean
Water Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act, the Atomic Energy Act, and other national, state and local
restrictions relating to the use and disposal of biohazardous, radioactive and
other hazardous substances and wastes. The Company is an exempt small quantity
generator of hazardous waste and has a US Environmental Protection Agency
identification number. The Company is also registered with the US Nuclear
Regulatory Commission for use of certain radioactive materials. The Company is
also subject to various state regulatory requirements governing the handling of
and disposal of biohazardous, radioactive and hazardous wastes. The Company has
never been a party to any environmental proceeding.
Internationally, some of the Company's products are subject to
additional regulatory requirements, which vary significantly from country to
country. Each country in which the Company's products and services are offered
must be evaluated independently to determine the country's particular
requirements. In foreign countries, the Company's distributors are generally
responsible for obtaining any required government consents.
Employees
As of December 31, 1997 the Company employed 282 persons, all of whom
were located in the United States. Of these, 102 persons were employed by the
West Bridgewater, Massachusetts company, 65 by the New Britain, Connecticut
company, 48 by the Gaithersburg, Maryland company, and 67 by the Garden Grove,
California company. None of the Company's employees is covered by a collective
bargaining agreement. The Company believes that it has a satisfactory
relationship with its employees.
-16-
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the current
executive officers of the Registrant as of December 31, 1997:
Name Age Position
- ---- --- --------
Richard T. Schumacher 47 President; Chief Executive Officer and
Chairman of the Board
Kevin W. Quinlan 47 Senior Vice President, Finance; Chief
Financial Officer; Treasurer and
Director
Patricia E. Garrett, Ph.D. 54 Senior Vice President, Regulatory
Affairs & Strategic Programs
Mark M. Manak, Ph.D. 46 Senior Vice President, Research and
Development
Richard A Sullivan 57 Senior Vice President, Laboratory
Instrumentation
Richard C. Tilton, Ph.D. 61 Senior Vice President, Specialty
Laboratory Services
Barry M. Warren 50 Senior Vice President, Sales &
Marketing
Ronald V. DiPaolo, Ph.D. 53 Vice President, Manufacturing
Richard H. Newhouse, Ph.D. 54 Vice President, Materials Management
Mr. Schumacher, the founder of the Company, has been the President and
a Director since 1986, and Chief Executive Officer and Chairman since 1992. Mr.
Schumacher served as the Director of Infectious Disease Services for Clinical
Science Laboratory, a New England-based medical reference laboratory, from 1986
to 1988. From 1972 to 1985, Mr. Schumacher was employed by the Center for Blood
Research, a nonprofit medical research institute associated with Harvard
Medical School. Mr. Schumacher received a B.S. in zoology from the University
of New Hampshire.
Mr. Quinlan, a Director of the Company since 1986, has been Senior Vice
President, Finance, Chief Financial Officer and Treasurer since January 1993.
From 1990 to December 1992, he was the Chief Financial Officer of ParcTec, Inc.
a New York-based leasing company. Mr. Quinlan served as Vice President and
Assistant Treasurer of American Finance Group, Inc. from 1981 to 1989 and was
employed by Coopers & Lybrand from 1975 to 1980. Mr. Quinlan is a certified
public accountant and received a M.S. in accounting from Northeastern
University and a B.S. in economics from the University of New Hampshire.
Dr. Garrett has been Senior Vice President, Regulatory Affairs &
Strategic Programs since 1988. From 1980 to 1987, Dr. Garrett served as the
Technical Director of the Chemistry Laboratory, Department of Laboratory
Medicine at the Lahey Clinic Medical Center. Dr. Garrett earned her Ph.D. from
the University of Colorado and was a postdoctoral research associate at Harvard
University, Oregon State University, Massachusetts Institute of Technology and
the University of British Columbia.
Dr. Manak has served as Senior Vice President, Research and Development
since 1992. From 1980 to 1992, he served as Senior Research Scientist,
Molecular Biology, of Biotech Research Laboratories. Dr. Manak received his
Ph.D. in biochemistry from the University of Connecticut and completed
postdoctoral research work in biochemistry/virology at Johns Hopkins
University.
Mr. Sullivan has served as Senior Vice President, Laboratory
Instrumentation since the Company's acquisition of the business of Source
Scientific, Inc. ("Source") in July 1997. Prior to that from 1994 to 1997, Mr.
Sullivan was Chairman, President and Chief Executive Officer of Source. He held
the position of Executive Vice President and General Manager of Source from
1993 to 1994, and was Vice President Sales & Marketing for MicroProbe
Corporation from 1989 to 1993. Previously, he was President of LAB2000 in
Florida, a company specialized in import and export of clinical and industrial
products worldwide. Mr. Sullivan holds a BS in Medical Technology from the
University of Buffalo, New York and a MBA from Pace University, New York.
Dr. Tilton has served as Senior Vice President, Specialty Laboratory
Services since the Company's acquisition of BBI Clinical Laboratories, Inc.
("BBICL") in 1993 and was one of the
-17-
founders of BBICL, where he served as President from 1989 to 1993. Dr. Tilton
has 25 years of experience in university hospital clinical microbiology
laboratories and is board certified in medical and public health microbiology.
Dr. Tilton received his Ph.D. in microbiology from the University of
Massachusetts.
Mr. Warren has served as Senior Vice President, Sales & Marketing since
1993. From 1985 to 1993, Mr. Warren served as Group Director of Marketing of
Organon Teknika, a manufacturer of infectious disease reagents. Mr. Warren
received an M.A. in political science from Loyola University of Chicago and a
B.A. from Loyola University.
Dr. DiPaolo has recently been appointed Vice President, Manufacturing.
Prior to that he served as Vice President of Operations since 1993. Prior to
joining the Company, Dr. DiPaolo served as Vice President and General Manager
of the Biomedical Products Division of Collaborative Research, a medical
research products company from 1986 to 1989. From 1975 to 1986 he was employed
by DuPont New England Nuclear, an in vitro test kit manufacturer. Dr. DiPaolo
received his Ph.D. in biochemistry from Massachusetts Institute of Technology
and later completed postdoctoral research at the Eunice Shriver Center in
Waltham, Massachusetts.
Dr. Newhouse has been Vice President of Materials Management since
1997. Prior to joining the Company, Dr. Newhouse served as Vice President of
Laboratory Services for Serologicals Corporation, an Atlanta, Georgia based
biopharmaceutical company from 1989 to 1997. Prior to that he was employed for
20 years in several medical diagnostics companies holding titles such as Vice
President Operations, Laboratory Director, and Director of Manufacturing. Dr.
Newhouse received his Ph.D. in clinical pathology from the University of
Maryland.
Officers are elected by, and serve at the pleasure of, the Board of Directors.
ITEM 2. PROPERTIES.
The Company owns its corporate offices and Diagnostic Products
manufacturing facility located in a two story, 32,000 square foot building in
West Bridgewater, Massachusetts. The Company has been renovating and expanding
this facility during the past year, and believes that upon completion of
renovations in mid 1998, its facility in West Bridgewater will be sufficient to
meet its foreseeable needs.
The Company leases 41,000 square feet of space in Garden Grove,
California where it manufactures Laboratory Instruments. The lease continues
until February 1, 2002 and the Company has an option to renew at market rates.
The Company leases its laboratory facilities in Gaithersburg, Maryland
and New Britain, Connecticut. The Gaithersburg facility contains 36,500 square
feet of custom built laboratory space, and is occupied under a ten-year lease
that is due to expire on October 31, 2007. The New Britain facility has 15,000
square feet, most of which is dedicated to laboratory space. The lease is for
five years and is due to expire on July 30, 2000; the Company has an option to
renew for an additional five years.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company or
its subsidiaries.
-18-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of fiscal 1997 to a
vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
The Company completed an initial public offering of its Common Stock,
$.01 par value, (the "Common Stock") on October 31, 1996. The Common Stock is
listed on the NASDAQ National Market under the symbol "BBII".
The following table sets forth the high and low closing price, by
quarter, since the Company's initial public offering.
Q1 Q2 Q3 Q4
------------- ------------- ------------- -------------
High Low High Low High Low High Low
------ ----- ------ ----- ------ ----- ------ -----
1997 10.250 6.063 11.375 7.750 8.875 6.000 8.000 4.875
1996 --- --- --- --- --- --- 8.500 6.750
As of December 31, 1997, there were 20,000,000 shares of Common Stock
authorized of which 4,622,566 shares were outstanding, held of record by
approximately 1,500 stockholders.
The Company has not declared or paid any dividends on its Common Stock.
In accordance with the terms of the Company's loan agreement with its bank,
payment of dividends on Common Stock requires bank approval. The Company does
not expect to recommend the payment of a dividend as it plans to continue to
reinvest profits to expand its business.
-19-
ITEM 6. SELECTED FINANCIAL DATA
The statement of income data for each of the fiscal years in the five
year period ended December 31, 1997, and the balance sheet data as of December
31, 1993, 1994, 1995, 1996 and 1997, have been derived from the consolidated
financial statements of the Company which have been audited by Coopers &
Lybrand L.L.P., independent accountants. This data should be read in
conjunction with Item 8--"Consolidated Financial Statements and Supplementary
Data", and Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION
Year Ended December 31,
----------------------------------------------------
1997 (1) 1996 1995 1994 1993(2)
--------- --------- --------- --------- --------
Consolidated Statement of Income Data: (In thousands, except per share data)
REVENUE:
<S> <C> <C> <C> <C> <C>
Products $11,711 $ 8,470 $ 6,622 $ 5,982 $3,942
Services 10,588 7,039 5,649 4,741 5,215
--------- --------- --------- --------- --------
Total revenue 22,299 15,509 12,271 10,723 9,157
--------- --------- --------- --------- --------
COSTS AND EXPENSES:
Cost of product sales 5,773 4,252 3,564 3,194 2,088
Cost of services 7,239 4,856 4,168 3,416 3,965
Research and development 1,311 797 375 469 279
Selling and marketing 3,241 2,188 1,340 1,192 894
General and administrative 3,343 2,401 2,316 2,047 1,619
--------- --------- --------- --------- --------
Total operating costs and expenses 20,907 14,494 11,763 10,318 8,845
--------- --------- --------- --------- --------
Income from operations 1,392 1,015 508 405 312
Interest expense, net 283 (213) (336) (244) (179)
--------- --------- --------- --------- --------
Income before income taxes and extraordinary item 1,675 802 172 161 133
Provision for income taxes (670) (321) (69) (64) (41)
--------- --------- --------- --------- --------
Income before extraordinary item 1,005 481 103 97 92
Extraordinary item-gain on elimination of debt, net of income taxes -- -- -- -- 50
--------- --------- --------- --------- --------
Net income $ 1,005 $ 481 $ 103 $ 97 $ 142
--------- --------- --------- --------- --------
Net income per share, basic $ 0.23 $ 0.17 $ 0.04 $ 0.04 $ 0.06
Net income per share, diluted $ 0.21 $ 0.14 $ 0.03 $ 0.03 $ 0.05
Number of shares used to calculate net income per share
Basic 4,438 2,916 2,570 2,552 2,403
Diluted 4,780 3,340 3,040 3,019 2,794
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
Consolidated Balance Sheet Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Working capital(3) $ 9,576 $12,836 $4,688 $4,686 $3,612
Total assets 23,630 19,798 9,928 8,076 6,870
Long term debt, less current maturities(3) 216 41 4,216 3,180 2,381
Total stockholders' equity 18,067 16,290 3,187 3,041 2,762
Dividends -- -- -- -- --
</TABLE>
- ---------------
(1) Effective July 1, 1997, the Company acquired the business and net assets of
Source Scientific, Inc. for $1,994,000 which increased 1997 revenues by
$2,608,000.
(2) On June 30, 1993, the Company exercised its option to pre-pay the
acquisition note in connection with the 1992 purchase of BBI Biotech at a
substantial discount from the balance due, resulting in an extraordinary
gain of $50,000 net taxes of $33,000. The 1993 net income per share before
such extraordinary gain was $0.04.
(3) Due to a modification of its maturity date, the Company's demand line of
credit with an outstanding amount of $1,895,000 as of December 31, 1993,
has been presented as part of long-term debt (and excluded from current
liabilities in calculating working capital) for 1993. This change was made
to be consistent with its reclassification to long-term debt in 1994 and
1995.
-20-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Overview
The Company generates revenue from products and services provided
primarily to the in vitro diagnostic infectious disease industry. There are two
broad product classes: Diagnostic Products and Laboratory Instruments.
Diagnostic Products consist of three groups: Quality Control Panels, Accurun(r)
Run Controls and Diagnostic Components. Services consist of Specialty Clinical
Laboratory Testing, Contract Research, Clinical Trials, Laboratory
Instrumentation Services, and Drug Screening. In the five full years since the
Company's acquisition of BBI Biotech Research Laboratories ("BBI Biotech") and
BBI Clinical Laboratories, Inc. ("BBICL"), the Company has experienced a shift
in revenue mix towards increased product sales, as product revenue as a
percentage of total revenue increased from 43.1% in 1993 to 52.5% in 1997, with
a corresponding decrease in the percentage of total revenue provided by
services.
The Company's gross profit margin increased from 33.9% in 1993 to 41.6%
in 1997 principally as a result of the increased percentage of higher margin
product revenues. Within products, the Company's Quality Control Products
(Accurun(r) Run Controls and Quality Control Panels) have higher margins than
the Company's Laboratory Instruments and Diagnostic Components. Within
services, Contract Research gross margins are lower than other services.
However, such contracts enable the Company to maintain certain scientific staff
and capability that it might otherwise not be able to afford. The Company
intends to continue to concentrate on the growth in sales of its Quality
Control Products.
Historically, the Company's results of operations have been subject to
quarterly fluctuations due to a variety of factors, including customer
purchasing patterns, primarily driven by end-of-year expenditures, and seasonal
demand during the summer months for certain laboratory testing services. In
particular, the Company's sales of its Quality Control Products and Diagnostic
Components typically have been highest in the fourth quarter and lowest in the
first quarter of each fiscal year, whereas Specialty Clinical Laboratory
Testing has generally reached a seasonal peak during the third quarter,
coinciding with the peak incidence of Lyme Disease. Research Contracts are
generally for large dollar amounts spread over a one or two year period, and
upon completion, frequently do not have renewal phases. As a result they can
cause large fluctuations in revenue and net income. In addition to staff
dedicated to internal research and development, certain of the Company's
technical staff work on both Contract Research for customers and Company
sponsored research and development. The allocation of certain technical staff
to such projects depends on the volume of Contract Research. As a result,
research and development expenditures fluctuate due to increases or decreases
in Contract Research.
To develop new Quality Control Products and support increased sales,
the Company hired additional research and development staff in the second half
of 1995 and sales and marketing staff in 1996 and 1997. The Company intends to
continue to add staff to these departments but at a reduced rate. General and
administrative expenses are not expected to increase at the same rate, as the
Company has already incurred significant infrastructure expenses.
The Company does not have any foreign operations. However, the Company
does have significant export sales in Europe, the Pacific Rim countries and
Canada to agents under distribution agreements, as well as directly to test kit
manufacturers. All sales are denominated in US dollars. Export sales for the
years ended December 31, 1995, 1996, and 1997 were $3.4 million, $4.3 million,
and $5.2 million, respectively. The Company expects that export sales will
continue to be a significant source of revenue and operating income.
-21-
Results of Operations
The following table sets forth for the periods indicated the percentage
of total revenue represented by certain items reflected in the Company's
consolidated statements of operations:
Year Ended December 31
----------------------
1997 1996 1995
------ ------ ------
Revenue:
Products 52.5% 54.6% 54.0%
Services 47.5 45.4 46.0
------ ------ ------
Total revenue 100.0 100.0 100.0
Gross profit 41.6 41.3 37.0
Operating expenses:
Research and development 5.9 5.1 3.1
Selling and marketing 14.5 14.1 10.9
General and administrative 15.0 15.5 18.9
------ ------ ------
Total operating expenses 35.4 34.7 32.9
------ ------ ------
Income from operations 6.2 6.5 4.1
Interest income (expense) 1.3 (1.4) (2.7)
------ ------ ------
Income before income taxes 7.5 5.1 1.4
Net income 4.5 3.1 0.8
====== ====== ======
Product gross profit 50.7% 49.8% 46.2%
Services gross profit 31.6% 31.0% 26.2%
Years Ended December 31, 1997 and 1996
The most significant event in 1997 effecting comparability of results
with 1996 was the acquisition of the business of Source Scientific, Inc.
effective July 1, 1997. The acquisition was completed by a wholly owned
subsidiary of the Company, BBI Source Scientific, Inc., ("BBI Source") and was
accounted for as an asset purchase. This effected every line of the income
statement.
Total revenue increased 43.8%, or $6,790,000, to $22,299,000 in 1997
from $15,509,000 in 1996. The increase in revenue was the result of a 38.3%
increase in product revenue of $3,241,000 to $11,711,000 from $8,470,000, and a
50.4% increase in service revenue of $3,549,000 to $10,588,000 from $7,039,000
in 1996. Approximately $1,416,000 of the product increase was attributable to
the inclusion of BBI Source for the first time, and the balance of the increase
was a result of a 34.0% increase in sales of Quality Control Products,
particularly Accurun(r) from a higher volume of both new and existing products,
offset in part by price decreases. Service revenue included $1,192,000 from
inclusion of BBI Source, a 49.1% increase in contract research revenue as a
result of new contracts, and a 32.6% increase in specialty clinical laboratory
testing revenue as the Company's HIV PCR test introduced in September 1996, was
offered for a full year in 1997. Overall for both products and services, prices
declined slightly in 1997 versus 1996. In summary, even after excluding BBI
Source, the Company's total revenue increased 27.0% in 1997 compared to 1996
with a 21.5% increase in product revenue, and a 33.5% increase in service
revenue on strong volume performance by Quality Control Products, contract
research, and specialty clinical laboratory testing.
Gross profit increased 45.1%, or $2,886,000, to $9,287,000 for 1997
from $6,401,000 in 1996. Product gross profit increased 40.8%, or $1,720,000,
to $5,938,000 in 1997 from $4,218,000 in 1996 and product gross profit margin
increased to 50.7% in 1997 from 49.8%. The products gross margin increase was a
result of a favorable shift in product mix towards Accurun sales and overall
volume increase, thereby spreading fixed costs over a larger base, and despite
a lower gross profit margin in BBI Source's instrument sales. Services gross
profit increased 53.5%, or $1,167,000, to $3,350,000 in 1997 from $2,183,000 in
1996 as the testing volume increased at a faster rate than laboratory
headcount, thereby
-22-
causing the services gross profit margin to increase to 31.6% in 1997 from
31.0% in 1996. BBI Source's service gross profit margin was slightly higher
than the Company average, which is expected to continue.
Research and development expenditures increased 64.6%, or $514,000, to
$1,311,000 in 1997 from $797,000 in 1996. The increase resulted primarily from
new Laboratory Instrument development activities at BBI Source, as well as
increased development expenditures for Accurun(r), molecular and immunological
Run Controls, and specialized molecular assays.
Selling and marketing expenses increased 48.1%, or $1,053,000, to
$3,241,000 in 1997 from $2,188,000 in 1996. The increase was attributable
primarily to an eleven person expansion of the TQS sales, marketing, and
technical support staff and related increased trade show and travel expenses.
In addition, the inclusion of BBI Source added $167,000 of expense to this
category.
General and administrative costs increased 39.2%, or $942,000, to
$3,343,000 in 1997 from $2,401,000 in 1996. This increase was attributable
primarily to: the addition of a Director of Human Resources and wide area
network systems analyst; higher expenditures for accounting and legal
professionals and investor relations activities in our first full year as a
public company; increased travel associated with the BBI Source acquisition;
and non-recurring moving costs of $40,000 associated with moving BBI Biotech
Research Laboratories to a new facility in Gaithersburg Maryland. These
increases were partially offset by a lower provision for doubtful accounts as a
result of improved accounts receivable collections from patients at the
Company's clinical reference testing laboratory. In addition, the inclusion of
BBI Source added $442,000 of expense to this category.
Operating income increased 37.1%, or $377,000, to $1,392,000 in 1997
from $1,015,000 in 1996. This increase was primarily a result of continued
strong performance in the Company's Quality Control Products business and
clinic reference testing laboratory, partially offset by a loss at BBI Source
of $189,000.
The Company had net interest income of $283,000 in 1997 versus net
interest expense of ($213,000) in 1996 as substantially all of the Company's
debt was repaid in November 1996 with a portion of the proceeds from its IPO.
The Company had positive cash balances to invest for all of 1997.
Net income increased 108.9%, or $524,000, to $1,005,000 in 1997 from
$481,000 in 1996. Of this increase, 43% was attributable to higher operating
income, and the balance was due to the shift from net interest expense in 1996
to net interest income in 1997. Diluted earnings per share increased 50% to
$0.21 for 1997 versus $0.14 in 1996. This increase was achieved even though
weighted average diluted shares outstanding increased 43%. Basic earnings per
share increased 35% to $0.23 for 1997 versus $0.17 in 1996.
Years Ended December 31, 1996 and 1995
Total revenue increased 26.4%, or $3,239,000, to $15,509,000 in 1996
from $12,271,000 in 1995. The increase in revenue was the result of a 27.9%
increase in product revenue of $1,848,000 to $8,470,000 from $6,622,000, and a
24.6% increase in service revenue of $1,390,000 to $7,039,000 from $5,649,000
in 1995. The increase in product revenue was attributable to an increase in the
volume of sales of Quality Control Products, particularly Accurun. The
increase in service revenue was primarily the result of increased volume of
specialty clinical laboratory testing and a favorable mix shift towards higher
priced molecular testing, and the impact of two new research contracts. This
was partially offset by lower volume of clinical trial services.
Gross profit increased 41.0%, or $1,862,000, to $6,400,599 for 1996
from $4,539,000 in 1995. Products gross profit increased 38.0%, or $1,160,000,
to $4,217,000 in 1996 from $3,057,000 in 1995 and products gross profit margin
increased to 49.8% in 1996 from 46.2%. The products gross margin increase was a
result of a favorable mix shift towards Accurun sales. Services gross profit
increased 47.3%, or $701,000, to $2,183,000 in 1996 from $1,481,000 in 1995 as
the testing volume increased at a
-23-
faster rate than laboratory headcount increased, and thereby caused the
services gross profit margin to increase to 31.0% in 1996 from 26.2% in 1995.
Research and development expenditures increased 112.1%, or $421,000, to
$797,000 in 1996 from $376,000 in 1995. The increase resulted from increased
costs of personnel hired in the second half of 1995 to step-up the rate of new
product introductions, and increased research project expenditures. Development
projects included Accurun(r), molecular and immunological Run Controls,
specialized molecular assays, and expenditures related to the Company's drug
discovery program.
Selling and marketing expenses increased 63.3%, or $848,000, to
$2,188,000 in 1996 from $1,340,000 in 1995. The increase was attributable
primarily to additional sales and marketing staff and overhead; increased
advertising, promotion, trade show and travel expenses due to the commencement
of the Company's "Total Quality System" (TQS) marketing campaign; and costs
associated with participation by the Company's Specialty Clinical Laboratory in
the Roche Diagnostics' Amplicor( Access program in connection with Roche's
launch of their new FDA approved HIV PCR test kit. The Amplicor( kit is
primarily used to monitor the HIV viral load (level) in patients prior to and
during drug therapy.
General and administrative costs increased 3.7%, or $85,000, to
$2,401,000 in 1996 from $2,316,000 in 1995. This increase was attributable
primarily to additional staffing in support of Company growth and higher
reserve provisions for doubtful accounts associated with the increased volume
of revenue related to testing in situations in which payment to the Company
depends on collecting from the patient rather than a healthcare institution.
Operating income increased 100.0%, or $507,000, to $1,015,000 in 1996
from $508,000 in 1995. This increase was primarily a result of a very strong
performance in the Company's Quality Control Products business and clinic
reference testing laboratory.
Net interest expense decreased 36.6%, or $123,000, to $213,000 in 1996
from $336,000 in 1995, as the proceeds from the Company's initial public
offering were used to pay down almost all debt in early November, and the
remaining amount invested in short term, investment grade securities.
Net income increased 367.2%, or $378,000, to $481,000 in 1996 from
$103,000 in 1995. Diluted earnings per share increased 325% to $0.14 for 1996
versus $0.03 in 1995. Weighted average diluted shares outstanding only
increased 10% in 1996 over 1995 as the Company's shares issued in connection
with its IPO were outstanding for only two months in 1996. Basic earnings per
share increased 312% to $0.17 for 1996 versus $0.04 in 1995.
Liquidity and Capital Resources
At December 31, 1997, the Company had cash and cash equivalents of
approximately $2,772,000 and working capital of $9,633,000. Trade accounts
receivable increased $2,143,000 or 62.7%, primarily from the inclusion of BBI
Source in the year end balance sheet for the first time, and significant growth
in fourth quarter revenue in 1997. Inventory increased $1,723,000 or 41.2%,
again primarily due to the inclusion of BBI Source for the first time, and the
addition of 39 new products to inventory.
On October 31, 1996, the Company's Common Stock commenced trading on the
NASDAQ as a result of completing the initial public offering of its common
stock ("IPO"), selling 1,600,000 shares at $8.50 per share. Net proceeds
received after underwriting discounts, commissions and offering costs was
approximately $11,633,000. On November 5, 1996, the Company repaid
substantially all of its outstanding bank debt which totaled approximately $3.9
million.
The Company has financed its operations to date through cash flow from
operations, borrowings from banks and sales of equity. The Company expects its
cash flow and cash position to meet existing operational needs, although its
revolving line of credit will be available as needed for working capital.
-24-
Net cash provided by operations for 1997 was $727,000 as compared to
$1,460,000 in 1996. As discussed above, this decrease in cash flow was
primarily attributable to carrying additional accounts receivable and inventory
as of year end. This was partially offset by an increase in deferred revenue
from a payment of $331,000 under a research contract for future clinical trial
services, and a net increase in accounts payable and accrued expenses of
$696,000. Also benefiting net cash from operations for 1997 was a $290,000
reduction in current federal tax liability as a result of non-qualified stock
option exercises. Cash flow used in operations in 1995 was $29,000 as working
capital needs due to sales growth exceeded cash generated from net income
adjusted by non cash expenses.
Cash used in investing activities for 1997, 1996 and 1995 amounted to
$5,396,000, $1,412,000, and $1,320,000, respectively. In addition to normal
capital expenditures, four items accounted for most of the 1997 investing
activities. First, the Company exercised its option to purchase an additional
165,000 shares of BioSeq, Inc. stock at an aggregate cost of $750,000, thereby
increasing its ownership of BioSeq to 19.9%. Second, in May 1997, the Company's
BBI Biotech subsidiary signed a ten year lease for new laboratory space in
Gaithersburg, Maryland and spent $566,000 on leasehold improvements for new
laboratory space for its contract research and product development activities.
Third, the expansion and renovation of its Diagnostic Products manufacturing
facility in West Bridgewater, Massachusetts commenced construction and
approximately $920,000 was expended as the project is now over two-thirds
complete. Finally, effective on July 1, 1997, the Company completed the
acquisition of the business and net assets of Source Scientific, Inc. at a
purchase price of $1,994,000 including acquisition costs. The Company has
accounted for the acquisition as an asset purchase, and is amortizing goodwill
of approximately $2.2 million over 15 years. See Note 2 to the Company's Notes
to Consolidated Financial Statements in Item 8 hereunder. The cash used in
investing activities in 1996 included the initial investment in BioSeq, Inc. of
$732,500, while 1995 included the purchase of the Company's West Bridgewater
facility for $806,000.
During 1997, net cash generated from financing activities included
$300,000 from the exercise of warrants, and $182,000 from exercising stock
options. Also in 1997, $1,124,000 was used to pay down debt acquired in
connection with the Source acquisition. In 1996, net cash generated from
common stock issued, including the IPO, approximated $12,600,000. This was
used to pay down net debt of $4,577,000. Net cash provided by borrowings for
1995 amounted to $1,240,000, and net proceeds from the sale of Common Stock for
the same period was approximately $176,000. The proceeds of such debt were used
for working capital, to acquire the West Bridgewater property and to purchase
capital equipment.
In 1997, 1996 and 1995 capital expenditures amounted to $2,613,000,
$669,000, and $1,316,000, respectively. The 1997 expenditures included both
the Massachusetts and Maryland facility improvement, and the 1995 expenditures
related to the purchase of the West Bridgewater facility, all as discussed
above.
On April 26, 1996 the Company entered into a new five year distribution
agreement with Kyowa Medex, Co., Ltd., a foreign distributor, extending a six
year old relationship. Simultaneously, Kyowa purchased 117,647 shares of the
Company's Common Stock at a price of $8.50 per share. Under the distribution
agreement, Kyowa has been granted an exclusive right to sell and distribute
the Company's products in Japan and to continue to purchase product from the
Company at a discount. In return, Kyowa is obligated to achieve certain
minimum sales levels, provide market, sales and regulatory information, and has
agreed not to compete with the Company.
On March 9, 1998, the Company announced plans to modify a previously
announced 3-year contract with ABX Hematology, Inc. ("ABX") and its parent
company, ABX Hematologie, SA (France). Under the contract, the Company provided
technical, customer and field services for instruments sold by ABX in the
United States. Under the modified agreement, individual customer service
contracts will be assigned to ABX and ABX will assume responsibility for its
United States instruments. The Company will provide certain consulting services
through March 1999 to assist ABX in establishing a sales, customer service,
technical support, and field service operation in the United States for its
hematology
-25-
instrument and reagent business. In addition, the Company has agreed to allow
ABX to occupy space at its California facility during the period of the
agreement. The Company's personnel associated with this contract, included the
nationwide field service organization and hotline technical support, will be
offered employment by ABX.
The Company is accounting for its investment in BioSeq on the
cost-basis in accordance with the provisions of APB 18 since its cumulative
investment is less than 20% of the equity of BioSeq and the Company does not
exert significant influence or control. BioSeq needs to obtain additional
financing in 1998 to continue operations and there can be no assurances that
any such financing will be available upon acceptable terms. Due to the
uncertainty of technology based development stage enterprises, the Company
performs a periodic analysis of the investment to determine whether the
carrying value of its investment in BioSeq has been other than temporarily
impaired. In performing the analysis of its investment in BioSeq for the
current year, management considered BioSeq's positive factors including its
technology, patent positions, business prospects, and the possibility of
raising capital and achieving financial success; as well as its negative cash
flow and net worth, and limited cash and other resources, and failure to date
to raise significant capital independent of the Company. Management has
concluded that its investment has not been other than temporarily impaired, if
at all. If it is subsequently determined to be impaired, the Company will
adjust the carrying value of its investment by taking a charge to earnings
which could amount to the full value of its $1,482,500 investment as of
December 31, 1997. See also Note 14 relating to the Company's $600,000
purchase of certain technology rights from BioSeq.
The Company anticipates capital expenditures to begin slowing down in
1998 as most of the Maryland and approximately two-thirds of the Massachusetts
projects have been completed. The Company believes that existing cash balances,
the borrowing capacity available under the revolving line of credit, and cash
generated from operations are sufficient to fund operations and anticipated
capital expenditures for the foreseeable future. Except for purchase orders in
connection with the manufacturing expansion, there were no material financial
commitments for capital expenditures as of December 31, 1997.
Year 2000 Computer Systems Compliance
Concerns have been widely expressed regarding the inability of certain
computer programs to process date information beyond year 1999. These concerns
focus on the impact of the Year 2000 problem on business operations and the
potential costs associated with identifying and addressing the problem. The
Company is in the process of evaluating and taking steps to deal with the
potential impact of this problem in areas under its control, including its
products and sources of supply, as well as its operations management,
administration and financial systems.
Based on its review to date, the Company believes that its products are
"Year 2000 compliant." The Company plans to correct or replace its
administrative and business systems in time to avoid material problems. The
Company has confirmed with existing software vendors that Year 2000 compliant
versions either exist or will be available to upgrade or replace its operations
management, administrative and financial systems. Where it believes that a
particular supplier's situation poses unacceptable risks, the Company plans to
identify an alternative source.
Based upon its review, the Company does not believe that the Year 2000
problem will have a material adverse affect on the Company. However, there can
be no assurances that failure to comply with Year 2000 by parties outside its
control will not have a material adverse affect on the Company.
-26-
Recent Accounting Pronouncements
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) is effective for fiscal years beginning after
December 15, 1997. SFAS 130 requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence as
other financial statements. The Company will adopt SFAS 130 in fiscal year
ended December 31, 1998. Adoption of this statement is not expected to have an
impact on the Company's consolidated financial position and results of
operations.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
financial statements for periods beginning after December 15, 1997. This
statement will change the way companies report annual financial statements and
requires them to report selected segment information in their quarterly reports
issued to shareholders. It also requires entity wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. The Company will
adopt SFAS 131 in the fiscal year ended December 31, 1998. Adoption of this
statement is not expected to have an impact on the Company's consolidated
financial position and results of operations.
Forward - Looking Information
The Annual Report on Form 10-K contains forward-looking statements
concerning the Company's financial performance and business operations. The
Company wishes to caution readers of this Annual Report on Form 10-K that
actual results might differ materially from those projected in the
forward-looking statements contained herein.
Factors which might cause actual results to differ materially from
those projected in the forward-looking statements contained herein include the
following: inability of the Company to develop the end user market for quality
control products; inability of the Company to integrate the business of Source
Scientific, Inc. into the Company's business; inability of the Company to grow
the sales of Source Scientific, Inc. to the extent anticipated; failure to
execute a definitive agreement with ABX Hematologie for the transfer to them of
certain service activities in connection with the letter of intent to modify
the existing contract; a material adverse change in the business, financial
condition or prospects of BioSeq, Inc., an early stage biotechnology company in
which the Company has made a significant investment, including inability to
develop its technology to the level of commercial utilization; inability of the
Company to obtain an adequate supply of the unique and rare specimens of plasma
and serum necessary for certain of its products; significant reductions in
purchases by any of the Company's major customers; and the potential
insufficiency of Company resources, including human resources, plant and
equipment and management systems, to accommodate any future growth. Certain of
these and other factors which might cause actual results to differ materially
from those projected are more fully set forth under the caption "Risk Factors"
in the Company's Registration Statement on Form S-1 (SEC File No. 333-10759).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
-27-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------- --------------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $2,772,360 $8,082,642
Accounts receivable, less allowances of $446,517
in 1997 and $352,058 in 1996 5,558,710 3,415,994
Inventories 5,902,821 4,180,334
Prepaid expense and other 288,481 239,950
Deferred income taxes 328,562 283,200
------------- ------------
Total current assets 14,850,934 16,202,120
------------- ------------
Property and equipment, net 4,980,164 2,699,158
OTHER ASSETS:
Long term investment 1,482,500 732,500
Goodwill and other intangibles, net 2,212,220 95,302
Notes receivable and other 124,178 69,234
------------ ------------
3,818,898 897,036
------------ ------------
TOTAL ASSETS $23,649,996 $19,798,314
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long term debt $ 14,878 $ 12,820
Accounts payable 2,218,685 991,839
Accrued compensation 1,103,837 840,666
Accrued income taxes 132,802 427,140
Other accrued expenses 498,247 264,262
Deferred revenue 1,249,024 829,477
------------ -----------
Total current liabilities 5,217,473 3,366,204
------------ -----------
LONG-TERM LIABILITIES:
Deferred rent and other liabilities 215,937 40,948
Deferred income taxes 149,333 101,580
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 20,000,000 shares in
1997 and 1996; issued and outstanding 4,622,566 in 1997 and
4,378,157 in 1996 46,226 43,782
Additional paid-in capital 16,029,049 15,258,656
Retained earnings 1,991,978 987,144
------------ ------------
Total stockholders' equity 18,067,253 16,289,582
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $23,649,996 $19,798,314
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-28-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
REVENUE:
Products $11,711,026 $ 8,469,890 $ 6,621,631
Services 10,588,311 7,039,406 5,649,099
------------- ------------ ------------
Total revenue 22,299,337 15,509,296 12,270,730
COSTS AND EXPENSES:
Cost of product sales 5,773,417 4,252,068 3,564,241
Cost of services 7,238,527 4,856,630 4,167,625
Research and development 1,311,190 796,805 375,712
Selling and marketing 3,241,422 2,188,152 1,339,792
General and administrative 3,342,829 2,400,681 2,315,814
------------- ------------ ------------
Total operating costs and expenses 20,907,385 14,494,336 11,763,184
Income from operations 1,391,952 1,014,960 507,546
Interest income (expense), net 282,771 (212,969) (335,899)
------------- ------------ ------------
Income before income taxes 1,674,723 801,991 171,647
Provision for income taxes (669,889) (320,771) (68,657)
------------- ------------ ------------
Net income $ 1,004,834 $ 481,220 $ 102,990
============= ============ ============
Net income per share, basic $ 0.23 $ 0.17 $ 0.04
Net income per share, diluted $ 0.21 $ 0.14 $ 0.03
Number of shares used to calculate net income per share
Basic 4,437,801 2,915,522 2,569,641
Diluted 4,780,070 3,340,236 3,040,188
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-29-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Total
$.01 Par Paid-In Retained Treasury Stockholders'
Shares Value Capital Earnings Stock Equity
---------- ---------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 2,578,865 25,789 2,612,500 402,934 - 3,041,223
Issuance of common stock 8,535 85 58,160 58,245
Stock options and warrants exercised 47,200 472 117,068 117,540
Conversion of note payable 5,817 58 9,542 9,600
Treasury stock purchased - 80,000 shares (144,000) (144,000
Tax benefit of stock options exercised 1,350 1,350
Net income 102,990 102,990
---------- ---------- ----------- --------- --------- -------------
BALANCE, December 31, 1995 2,640,417 26,404 2,798,620 505,924 (144,000) 3,186,948
Issuance of common stock, net of issuance costs 1,637,647 16,377 12,371,469 144,000 12,531,846
Stock options and warrants exercised 85,760 858 67,210 68,068
Conversion of note payable 14,333 143 21,357 21,500
Net income 481,220 481,220
---------- ---------- ----------- --------- --------- -------------
BALANCE, December 31, 1996 4,378,157 43,782 15,258,656 987,144 - 16,289,582
Stock options and warrants exercised 244,409 2,444 480,032 482,476
Tax benefit of stock options exercised 290,361 290,361
Net income 1,004,834 1,004,834
---------- ---------- ----------- ---------- -------- -------------
BALANCE, December 31, 1997 4,622,566 $ 46,226 $16,029,049 $1,991,978 - $18,067,253
========== ========== =========== ========== ======== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-30-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $1,004,834 $ 481,220 $ 102,990
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 858,434 600,495 441,356
Provision for doubtful accounts 174,925 247,080 181,084
Deferred rent (71,381) (87,152) (45,792)
Deferred income taxes 2,391 (155,495) (61,765)
Tax benefit of stock options exercised 290,361 - 1,350
Changes in operating assets and liabilities:
Accounts receivable (1,907,413) (587,204) (997,112)
Note receivable and other assets (13,930) 14,188 (61,343)
Inventories (640,301) (503,483) (67,335)
Prepaid expenses 2,546 14,249 (98,082)
Accounts payable 797,690 246,623 (42,190)
Accrued compensation and other expenses (102,199) 883,063 94,126
Deferred revenue 330,855 306,076 523,401
----------- ----------- -----------
Net cash provided by (used in) operating activities 726,812 1,459,660 (29,312)
----------- ----------- -----------
CASH FLOWS FOR INVESTING ACTIVITIES:
Payments for additions to property and equipment (2,612,697) (669,154) (1,316,217)
Purchase of intangible assets (39,625) (9,999) (4,000)
Purchase of long term investment (750,000) (732,500) -
Net assets of acquisition, net of cash acquired (1,993,722) - -
----------- ----------- -----------
Net cash used in investing activities (5,396,044) (1,411,653) (1,320,217)
----------- ----------- -----------
CASH FLOWS FOR FINANCING ACTIVITIES:
Proceeds from long term debt - 226,300 1,517,867
Repayments of long-term debt (1,123,526) (4,803,042) (277,789)
Proceeds of common stock issued 482,476 13,581,315 175,785
Offering costs associated with common stock issued - (981,401) -
Purchase of treasury stock - - (144,000)
----------- ----------- -----------
Net cash (used in) provided by financing activities (641,050) 8,023,172 1,271,863
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: (5,310,282) 8,071,179 (77,666)
Cash and cash equivalents, beginning of year 8,082,642 11,463 89,129
----------- ----------- -----------
Cash and cash equivalents, end of year $2,772,360 $8,082,642 $ 11,463
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Conversion of note payable to common stock - $ 21,500 $ 9,600
Noncash exercise of warrants to stockholder - $ 180,650 -
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 662,304 $ 85,460 $ 168,994
Interest paid $ 5,731 $ 300,587 $ 331,495
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-31-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies
Boston Biomedica, Inc. ("BBI") and Subsidiaries (together, the
"Company") provide infectious disease diagnostic products, clinical
instrumentation, contract research and specialty infectious disease testing
services to the in-vitro diagnostic industry, government agencies, blood banks,
hospitals and other health care providers worldwide. The Company is subject to
risks common to companies in the Biotechnology industry, including but not
limited to, development by the Company or its competitors of new technological
innovations, dependence on key personnel, protection of proprietary technology,
and compliance with FDA government regulations.
Significant accounting policies followed in the preparation of these
consolidated financial statements are as follows:
(i) Principles of Consolidation
The consolidated financial statements include the accounts of BBI and
its wholly-owned subsidiaries, BBI Biotech Research Laboratories, Inc. ("BBI
Biotech"), BBI Clinical Laboratories, Inc. ("BBICL"), and BBI Source
Scientific, Inc. ("BBI Source"). All significant intercompany accounts and
transactions have been eliminated in the consolidation. Certain amounts
included in the prior year's financial statements may have been reclassified to
conform to the current presentation.
(ii) Use of Estimates
To prepare the financial statements in conformity with generally
accepted accounting principles, management is required 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. In particular, the Company records reserves for estimates
regarding the collectability of accounts receivable as well as the net
realizable value of its inventory. Actual results could differ from the
estimates and assumptions used by management.
(iii) Revenue Recognition
Product revenues are recognized as sales upon shipment of the products
or, for specific orders at the request of the customer, on a bill and hold
basis after completion of manufacture. All bill and hold transactions meet
specified revenue recognition criteria which include normal billing, credit and
payment terms, and transfer to the customers of all risks and rewards of
ownership. Accounts receivable as of December 31, 1997 and 1996 include bill
and hold receivables of $31,000 and $23,000, respectively.
The Company periodically enters into barter transactions whereby the
Company exchanges inventory for testing services. Revenue on these transactions
are recognized when both the products have been shipped and the testing
services have been completed and are recorded at the estimated fair market
value of the inventory based upon standard Company prices. The revenue
recognized on these transactions for the years ended December 31, 1997, 1996
and 1995 was $261,000, $244,000, and $213,000, respectively.
Services are recognized as revenue upon completion of tests for
specialty laboratory services. Revenue from service contracts and research and
development contracts for the Company's laboratory instrumentation business is
recognized as the service and research and development activities are performed
under the terms of the contracts.
Revenue under long-term contracts, including funded research and
development contracts, is recorded under the percentage of completion method,
wherein costs plus profit is recorded as service revenue and billed monthly as
the work is performed. Certain customers make advance payments that are
deferred until revenue recognition is appropriate. Unbilled amounts for fee
retainage are included in accounts receivable at December 31, 1997 and 1996,
and are immaterial. When the current contract estimates indicate a loss,
provision is made for the total anticipated loss. The Company does not believe
there are any material collectability issues associated with these receivables.
Total revenue related to funded research and development contracts was
approximately $1,737,000, $1,126,000, and $728,000 for the years ended December
31, 1997, 1996 and 1995, respectively. Total contract costs associated with
these agreements were approximately $1,438,000, $975,000 and $575,000 for the
years ended December 1997, 1996 and 1995, respectively.
-32-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies -- (Continued)
(iv) Cash and cash equivalents
The Company's policy is to invest available cash in short-term,
investment grade, interest bearing obligations, including money market funds,
municipal notes, and bank and corporate debt instruments. Securities purchased
with initial maturities of three months or less, are valued at cost plus
accrued interest, which approximates fair market value, and classified as cash
equivalents. At December 31, 1997 the Company's cash equivalents consisted of
$2,702,280 invested in a money market fund. At December 31, 1996 the Company's
cash equivalents consisted of $6,001,259 invested in a money market fund and a
banker's acceptance of $1,991,522.
(v) Research and Development Costs
Research and development costs are expensed as incurred.
(vi) Inventories
Inventories are stated at the lower of average cost or net realizable
value and include material, labor and manufacturing overhead.
(vii) Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is recognized using accelerated and straight-line
methods, allocating the cost of the assets over their estimated useful lives
ranging from five years to ten years for certain manufacturing and laboratory
equipment, from three to five years for management information systems and
office equipment, three years for automobiles and fifteen years for the
building. Upon retirement or sale, the cost and related accumulated
depreciation of the asset are removed from the books. Any resulting gain or
loss is credited or charged to income.
(viii) Goodwill and Intangibles
The Company has classified as goodwill the cost in excess of fair value
of the assets of business acquired. Goodwill is being amortized on a straight
line basis over ten to fifteen years. Other intangibles primarily consist of
patents, licenses, and intellectual property rights and are amortized over four
to ten years.
(ix) Income Taxes
The Company utilizes the liability method of accounting for income
taxes. Under the liability method, deferred taxes arise from temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. A valuation allowance is provided for net
deferred tax assets if, based on the weighted available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. Tax credits are recognized when realized using the flow through
method of accounting.
(x) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally cash and cash equivalents, and
accounts receivable. The Company places its cash in federally chartered banks,
each of which is insured up to $100,000 by the Federal Deposit Insurance
Corporation. The Company limits credit risk in cash equivalents by investing
only in short term, investment grade securities including money market funds
restricted to such securities. Concentration of credit risk with respect to
accounts receivable is limited to certain customers to whom the Company makes
substantial sales (see also Note 6). The Company does not require collateral
from its customers. To reduce risk, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is limited.
(xi) Deferred Revenue
Deferred revenue consists of payments received from customers in
advance of services performed.
-33-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies -- (Continued)
(xii) Recent Accounting Standards
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) is effective for fiscal years beginning after
December 15, 1997. SFAS 130 requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence as
other financial statements. The Company will adopt SFAS 130 in fiscal year
ended December 31, 1998. Adoption of this statement is not expected to have an
impact on the Company's consolidated financial position and results of
operations.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
financial statements for periods beginning after December 15, 1997. This
statement will change the way companies report annual financial statements and
requires them to report selected segment information in their quarterly
reports issued to shareholders. It also requires entity wide disclosures about
the products and services an entity provides, the material countries in which
it holds assets and reports revenues, and its major customers. The Company
will adopt SFAS 131 in the fiscal year ended December 31, 1998. Adoption of
this statement is not expected to have an impact on the Company's consolidated
financial position and results of operations.
(2) Purchase of the Business and Net Assets of Source Scientific, Inc.
In July 1997, the Company, through its wholly owned subsidiary
BBI-Source Scientific, Inc., completed the acquisition of all of the assets,
business, and selected liabilities of Source Scientific, Inc. ("Source"). In
addition to the cash payment of $1,894,000 to Source, the total purchase price
was $1,994,000 including consulting, legal, accounting and other acquisition
costs, net of cash acquired. The acquisition is treated as an asset purchase as
of July 2, 1997 and the results of operations have been included since that
date. The purchase price exceeded the fair market value of net assets acquired
by approximately $2,202,000, which is recognized as goodwill and is being
amortized on a straight line basis over fifteen years.
The following unaudited pro forma information combines the consolidated
results of operations of the Company and Source as if the asset purchase had
occurred at the beginning of 1996, after giving effect to certain adjustments,
including amortization of intangible assets, increased interest expense on the
acquisition debt, and related income tax effects. The unaudited pro forma
information is shown for comparative purposes only and does not reflect the
synergies expected to result from the integration of Source's business into the
Company's business.
Years Ended December 31,
----------------------------
Unaudited 1997 1996
- --------- ------------- -------------
Revenue $24,051,796 $20,489,296
Operating income (loss) 688,808 539,960
Net income (loss) 371,285 239,976
Pro forma earnings per share, basic 0.08 0.08
Pro forma earnings per share, diluted 0.08 0.07
-34-
(3) Inventories
The Company purchases human plasma and serum from various private and
commercial blood banks. Upon receipt, such purchases generally undergo
comprehensive testing, and associated costs are included in the value of raw
materials. Most plasma is manufactured into Basematrix and other diagnostic
components to customer specifications. Plasma and serum with the desired
antibodies or antigens are sold or manufactured into Quality Control Panels,
Accurun(r) Run Controls, and reagents ("Finished Goods"). Panels and reagents
are unique to specific donors and/or collection periods, and require
substantial time to characterize and manufacture due to stringent technical
specifications. Panels play an important role in diagnostic test kit
development, licensure and quality control. Panels are manufactured in
quantities sufficient to meet expected user demand which may exceed one year.
Inventory balances at December 31, 1997 and 1996 consist of the following:
1997 1996
---------- ----------
Raw materials.............................. $2,033,040 $1,359,569
Work-in-process............................ 1,190,567 697,749
Finished goods............................. 2,679,214 2,123,016
---------- ----------
$5,902,821 $4,180,334
========== ==========
(4) Property and Equipment
Property and equipment at December 31, 1997 and 1996 consist of the
following:
1997 1996
------------ ------------
Laboratory and manufacturing equipment........ $2,240,660 $1,751,737
Management information systems................ 1,693,939 1,247,190
Office equipment.............................. 686,608 394,957
Automobiles................................... 189,775 196,663
Leasehold improvements........................ 687,714 122,419
Land, building and improvements............... 2,160,932 956,386
------------ ------------
7,659,628 4,669,352
Less accumulated depreciation................. 2,679,464 1,970,194
------------ ------------
Net book value................................ $4,980,164 $2,699,158
============ ============
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 was approximately $731,000, $585,500, and $425,700 respectively. Included
in 1997 land, building and improvements is approximately $920,000 of
construction in progress.
(5) Long Term Investment
In October 1996, the Company entered into a License Agreement, Purchase
Agreement, Stockholders' Agreement and Warrant Agreement with BioSeq, Inc.
("BioSeq") a privately held, technology based development stage company. The
Company agreed to purchase convertible preferred stock equivalent to
approximately 19% of the capital stock of BioSeq for an aggregate of $1,482,500
in three installments. Of the $1,482,500, $732,500 was invested in 1996.
In April 1997, the Company exercised its option to purchase an
additional 165,000 shares of BioSeq at an aggregate cost of $750,000, thereby
increasing its ownership to 19%. The investment is carried at cost of
$1,482,500 and classified as a long term investment. Under the operative
documents, the Company has price anti-dilution protection, pre-emptive rights
and the right to board representation. In addition, the Company was granted
warrants to acquire additional shares of common stock of BioSeq for additional
consideration under certain conditions, provided that this right is not
exercisable to the extent it would cause the Company's ownership
-35-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Long Term Investment (Continued)
to equal or exceed 20%. The Company is accounting for its investment in BioSeq
on the cost-basis in accordance with the provisions of APB 18 since its
cumulative investment is less than 20% of the equity of BioSeq and the Company
does not exert significant influence or control. BioSeq needs to obtain
additional financing in 1998 to continue operations and there can be no
assurances that any such financing will be available upon acceptable terms. Due
to the uncertainty of technology based development stage enterprises, the
Company performs a periodic analysis of the investment to determine whether the
carrying value of its investment in BioSeq has been other than temporarily
impaired. In performing the analysis of its investment in BioSeq for the
current year, management considered BioSeq's positive factors including its
technology, patent positions, business prospects, and the possibility of
raising capital and achieving financial success; as well as its negative cash
flow and net worth, and limited cash and other resources, and failure to date
to raise significant capital independent of the Company. Management has
concluded that its investment has not been other than temporarily impaired, if
at all. If it is subsequently determined to be impaired, the Company will
adjust the carrying value of its investment by taking a charge to earnings
which could amount to the full value of its $1,482,500 investment as of
December 31, 1997. See also Note 14 relating to the Company's $600,000
purchase of certain technology rights from BioSeq.
In accordance with the agreement, the Company was granted a worldwide
right ("the License") to use the BioSeq technology relating to sequencing and
analysis services. The License will be exclusive until BioSeq commences
selling on a commercial basis the equipment used in the DNA sequencing and
analysis process, at which time the License will become non-exclusive. The
License provides that the Company will pay BioSeq market royalties as a
percentage of net revenues arising out of the services performed by the Company
with the licensed technology. The Company will account for the royalty as a
cost of revenue as the revenues are earned. (See also Note 14.)
(6) Revenue from Significant Customers and Export Sales
The Company performs contract research and certain other services under
contracts, subcontracts and grants from United States Government Agencies,
primarily the National Institutes of Health ("NIH"). Revenue from such
contracts, subcontracts and grants was approximately $2,638,000 in 1997,
$1,920,000 in 1996, and $1,628,000 in 1995.
Export sales by geographic area are approximately as follows:
1997 1996 1995
---------- ---------- ----------
Europe $3,150,000 $2,844,000 $2,257,000
Pacific Rim 1,310,000 948,000 642,000
Others 694,000 534,000 531,000
---------- ---------- ----------
Total $5,154,000 $4,326,000 $3,430,000
(7) Deferred Rent and Other Liabilities
One of the facility leases includes scheduled base rent increases over
the term of the lease. The amount of base rent payments is being charged to
expense on the straight-line method over the term of the lease. As of December
31, 1997 and 1996, the Company has recorded a liability of $189,867 and
$53,900, respectively, to reflect the excess of rent expense over cash payments
since inception of the lease. In addition to base rent, the Company pays a
monthly allocation of the operating expenses and real estate taxes for the
above facility.
The Company's outstanding debt consists of an installment note payable
with an interest rate of 9.75%, due August 2001. The note is collateralized by
office furniture and laboratory equipment. The amount outstanding on December
31, 1997 and 1996 was $40,948 and $53,768, respectively. The current amounts of
such debt at December 31, 1997 and 1996 was $14,878 and $12,820, respectively.
During 1996, convertible debt in the amount of $21,500 was converted
into 14,333 shares of common stock at a price of $1.50 per share.
-36-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Deferred Rent and Other Liabilities (Continued)
Effective March 28, 1997, the Company entered into a $7.5 million
uncollateralized revolving line of credit (the "Line") with its bank. The Line
matures on June 30, 1999; bears interest at the Company's option based on
either base rate, LIBOR plus 1.75%, or overnight money market rate plus 1.75%;
and carries a facility fee of .25% per annum, payable quarterly. The Line
contains covenants regarding the Company's ratio of total
liabilities-to-equity, minimum tangible net worth, and minimum debt service
coverage ratio. The Line further provides for restrictions on the payment of
dividends, and limitations on additional borrowings. The Company did not draw
upon the Line during 1997.
(8) Income Taxes
The Company's effective tax rate does not significantly differ from the
federal and state income tax statutory rates. The components of the provision
for income taxes are as follows:
1997 1996 1995
---------- ---------- ----------
Current expense: federal and state $667,498 $476,206 $130,422
Deferred expense (benefit): federal and state 2,391 (155,495) (61,765)
---------- ---------- ----------
Total $669,889 $320,711 $68,657
========== ========== ==========
Significant items making up deferred tax liabilities and deferred tax
assets are as follows:
1997 1996
---------- ----------
Current deferred taxes:
Inventory $ 72,249 $ 87,158
Accounts receivable allowance 153,469 115,548
Other accruals 102,844 80,494
---------- ----------
Total current deferred tax assets 328,562 283,200
Long term deferred taxes:
Accelerated tax depreciation (217,029) (176,015)
Goodwill and intangibles 15,176 13,551
State net operating loss carryforwards 52,520 60,884
---------- ----------
Total long term deferred tax liabilities, net (149,333) (101,580)
---------- ----------
Total net deferred tax assets $179,229 $181,620
========== ==========
As of December 31, 1997, the state net operating loss carryforwards expire at
various dates beginning in 1999 through 2007.
-37-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Commitments and Contingencies
The Company leases certain office space, laboratory, research and
manufacturing facilities under operating leases with various terms through
October 2007. All of the real estate leases include renewal options at either
market or increasing levels of rent.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$506,300, $365,700, and $477,600, respectively. At December 31, 1996, the
remaining fixed lease commitment was as follows:
Year Ended Amount
-------------------- ------------
1998 $ 938,970
1999 969,715
2000 971,993
2001 915,609
2002 578,326
2003 and thereafter 2,358,410
------------
$6,733,023
Commencing in February 1995, the Company committed under a sponsored
research agreement with a university to fund a research scientist at a cost of
$13,125 per quarter for three years which costs are charged to research and
development expense. In return, the Company has exclusive rights to any
anti-HIV compounds or derivatives developed in the course of this research,
provided the Company obtains certain regulatory approvals from the FDA.
(10) Retirement Plan
In January 1993, the Company adopted a retirement savings plan for its
employees, which has been qualified under Section 401(k) of the Internal
Revenue Code. Eligible employees are permitted to contribute to the plan
through payroll deductions within statutory limitations and subject to any
limitations included in the plan. Company contributions are made at the
discretion of management. To date, no such contributions have been made.
During 1997, the Company recognized administrative expense of approximately
$23,000 in connection with the plan.
(11) Stockholders' Equity
Common Stock
On October 31, 1996, the Company commenced trading on the NASDAQ
National Market as a result of the initial public offering of its common stock
("IPO"), raising net proceeds of $11,633,000 from the sale of 1,600,000 shares
at $8.50 per share.
On April 26, 1996, the Company entered into a Stock Purchase Agreement
and Exclusive Distributor Agreement for five years with a foreign distributor.
Pursuant to the Stock Purchase Agreement, the Company issued 117,647 shares of
redeemable common stock at a price per share of $8.50, for which it received
net proceeds of $898,503. Issuance costs were $101,497. Completion of the IPO
terminated the redemption feature. The distributor was restricted from selling
these securities for a one-year period after completion of the IPO. The Company
issued 80,000 shares of Treasury Stock in connection with this transaction.
On August 8, 1996 the Board of Directors approved a 1-for-2 reverse
stock split and an increase in authorized common shares to 20,000,000, and
authorized 1,000,000 shares of preferred stock (par value $.01), which were
approved by the stockholders on September 10, 1996. The stock split has been
retroactively reflected in the accompanying financial statements and notes for
all periods presented.
-38-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Stockholders' Equity-(Continued)
Options and Warrants
The Company has a nonqualified option plan and an incentive stock
option plan both of which are administered by a committee of the Board of
Directors. In general, the option price shall not be less than the fair market
value at the time the option is granted. Generally, options become exercisable
at the rate of 25% at the end of each of the four years following the
anniversary of the grant. Options issued expire ten years from the date of
grant, or 30 days from the date of termination of affiliation.
At December 31, 1997, 775,806 shares have been reserved for
non-qualified stock options, of which 92,250 are available for future grants.
At December 31, 1997, 778,925 shares have been reserved for incentive stock
options, of which 348,587 are available for future grants.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Pro forma information regarding net income and
earnings per share is required by SFAS 123 and has been determined as if the
Company had accounted for its employee stock options under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1997. The minimum value option pricing model
was used for all grants during 1996 and 1995 as they were granted prior to the
Company's IPO.
1997 1996 1995
-------- -------- --------
Risk-free interest rate 5.72% 6.18% 5.33%
Volatility factor .55 .001 .001
Weighted average expected life 5 years 5 years 5 years
Expected dividend yield 0 0 0
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income and pro forma net income per share is as follows:
1997 1996 1995
---------- -------- --------
Net income-as reported $1,004,834 $481,220 $102,990
Net income-pro forma 851,408 424,921 80,196
Net income per share-as reported, basic .23 .17 .04
Net income per share-as reported, diluted .21 .14 .03
Net income per share-pro forma, basic .19 .14 .03
Net income per share-pro forma, diluted .17 .13 .03
-39-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Stockholders' Equity-(Continued)
Because SFAS 123 provides for pro forma expense for options granted
beginning in 1995, the pro forma expense will likely increase in future years
as new option grants become subject to the pricing model. The average fair
value of options granted during 1997, 1996 and 1995 is estimated as $4.44,
$1.86 and $1.40, respectively.
In 1991 and 1993, the Company issued warrants in connection with
certain debt financings. During 1997 all of those warrants were exercised.
The Company has reserved shares of its authorized but unissued common
stock for the following:
<TABLE>
<CAPTION>
Stock Options Warrants
-------------------------- -----------------------
Weighted Weighted
Average price Average price Total
--------------------------
Shares per share Shares per share Shares Exercisable
---------- --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance outstanding, December 31, 1994 780,950 2.12 301,538 2.73 1,082,488 827,576
Granted 73,187 6.00 - - 73,187
Exercised (6,000) 1.88 (41,200) 2.58 (47,200)
Expired (47,850) 2.64 - - (47,850)
---------- -------- -----------
Balance outstanding, December 31, 1995 800,287 2.45 260,338 2.85 1,060,625 879,038
Granted 140,600 7.27 - - 140,600
Exercised (1,500) 4.50 (84,260) 2.88 (85,760)
Expired (21,500) 6.05 (56,078) 3.54 (77,578)
---------- -------- -----------
Balance outstanding, December 31, 1996 917,887 3.10 120,000 2.50 1,037,887 839,272
Granted 263,050 7.42 - - 263,050
Exercised (124,409) 1.44 (120,000) 2.50 (244,409)
Expired (30,435) 7.36 - - (30,435)
---------- -------- -----------
Balance outstanding, December 31, 1997 1,026,093 4.27 - - 1,026,093 672,231
========== ======== ===========
</TABLE>
The following table summarizes information concerning options outstanding and
exercisable as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Remaining Number of Exercise Number of Exercise
Range of Exercise Prices Life Options Price Options Price
- ------------------------ --------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.25 - $1.50 2.40 188,834 1.0975 188,834 1.0975
$1.65 - $3.00 4.60 342,767 2.3869 342,767 2.3869
$4.50 - $6.63 8.10 259,917 5.9231 104,798 5.0106
$7.00 - $8.50 8.60 234,575 7.7556 35,832 7.3645
------------ ---------
1,026,093 672,231
============ =========
</TABLE>
-40-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Computation of Net Income per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS 128 establishes a different method of computing net income per
share than is currently required under the provisions of Accounting Principles
Board opinion No. 15. The following illustrates the computation of basic and
diluted net income per share.
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Shares, basic 4,437,801 2,915,522 2,569,641
Net effect of dilutive common stock
equivalents-based on treasury stock
method using average market price 342,269 424,714 470,547
----------- ----------- -----------
Shares, diluted 4,780,070 3,340,236 3,040,188
=========== =========== ===========
Net income, basic and diluted $1,004,834 $ 481,220 $102,990
=========== =========== ===========
Net income per share-basic 0.23 0.17 0.04
Net income per share-diluted 0.21 0.14 0.03
=========== =========== ===========
(13) Selected Quarterly Financial Data (Unaudited)
Unaudited (Amounts in thousands, except for per share data)
1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Total revenue $4,209 $4,649 $6,140 $7,301
Gross profit 1,678 1,921 2,541 3,148
Net income 148 176 246 435
Net income per share, basic 0.03 0.04 0.06 0.10
Net income per share, diluted 0.03 0.04 0.05 0.09
1996 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Total revenue $3,084 $3,844 $4,015 $4,566
Gross profit 1,051 1,621 1,752 1,976
Net (loss) income (97) 179 163 236
Net (loss) income per share, basic (0.04) 0.07 0.06 0.06
Net (loss) income per share, diluted (0.04) 0.06 0.05 0.06
(14) Subsequent Event
On March 20, 1998 the Company completed a license agreement with
BioSeq, Inc., a development stage biotech company of which BBI owns 19% (see
also Note 5). The license agreement provides the Company the sole and exclusive
worldwide right to use BioSeq technical information, licensed processes and
improvements to develop, manufacture, market and sell or sublicense products or
services in the field of human in vitro immunodiagnostics. The Company paid an
initial license fee in the amount of $600,000, to be capitalized with
intangible assets. In accordance with the agreement, the Company will pay
BioSeq an annual royalty based on net sales to customers and sublicensees. The
agreement is effective March 20, 1998 and ends on the date that the last patent
expires, which is approximately 16 years.
-41-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
BOSTON BIOMEDICA, INC.:
We have audited the accompanying consolidated balance sheets of Boston
Biomedica, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Boston
Biomedica, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 24, 1998 except as to
the information in Note 14, for
which the date is March 20, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by reference to
the information under Part I, Item 1 - Business under the heading "Executive
Officers of the Registrant" at page 14 of this Report, and to the information
in the Registrant's definitive Proxy Statement which is expected to be filed by
the Registrant within 120 days after the close of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to
the information in the Registrant's definitive Proxy Statement under the
heading "Executive Compensation," which is expected to be filed by the
Registrant within 120 days after the close of its fiscal year.
-42-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference to
the information in the Registrant's definitive Proxy Statement under the
heading "Security Ownership of Directors, Officers and Certain Beneficial
Owners," which is expected to be filed by the Registrant within 120 days after
the close of its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Item 13 is incorporated by reference to
the information in the Registrant's definitive Proxy Statement under the
heading "Certain Relationships and Related Transactions," which is expected to
be filed by the Registrant within 120 days after the close of its fiscal year.
-43-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Index to Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996.........28
Consolidated Statements of Income for the three years
ended December 31, 1997..............................................29
Consolidated Statements of Changes in Stockholders' Equity for the
three years ended December 31, 1997..................................30
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997....................................................31
Notes to Consolidated Financial Statements...........................32
Report of Independent Accountants....................................42
(a) 2. Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts........................49
Report of Independent Accountants....................................50
All supplemental schedules other than as set forth above are omitted as
inapplicable or because the required information is included in the
Consolidated Financial Statements or the Notes to Consolidated Financial
Statements.
(a)3. Exhibits:
Exhibit No.
-----------
3.1 Amended and Restated Articles of Organization of the
Company**
3.2 Amended and Restated Bylaws of the Company**
4.1 Specimen Certificate for Shares of the Company's Common
Stock**
4.2 Description of Capital Stock (contained in the Restated
Articles of Organization of the Company filed as Exhibit
3.1) **
10.1 Agreement, dated January 17, 1994, between Roche
Molecular Systems, Inc. and the Company**
10.2 Exclusive License Agreement, dated December 6, 1994,
between the University of North Carolina at Chapel Hill
and the Company**
10.3 Contract, dated September 30, 1995, between the National
Institutes of Health and the Company (No. 1-AI55273) **
10.4 Contract, dated September 30, 1995, between the National
Institutes of Health and the Company (No. 1-AI-55277) **
10.6 Agreement, dated October 1, 1995, between Ajinomoto Co.,
Inc. and the Company**
10.7 Lease Agreement, dated June 30, 1992, for Rockville,
Maryland Facility between Cambridge Biotech Corporation
and the Company**
10.8 Lease Agreement, dated July 28, 1995, for New Britain,
Connecticut Facility between MB Associates and the
Company**
10.9 Worcester County Institution for Savings Warrant dated
December 1, 1995 (No. 1) **
10.10 Worcester County Institution for Savings Warrant dated
July 26, 1993 (No. 2) **
10.11 Stock Purchase Agreement, dated June 5, 1990, between
G&G Diagnostics Limited Partnership I and the Company,
as amended**
-44-
10.14 Stock Purchase Agreement, dated April 26, 1996, between
Kyowa Medex Co., Ltd. And the Company**
10.15 1987 Non-Qualified Stock Option Plan**++
10.16 Employee Stock Option Plan**++
10.17 Underwriters Warrants, each dated November 4, 1996,
between the Company and each of Oscar Gruss & Son
Incorporated and Kaufman Bros., L.P. **
10.20 Purchase Agreement, dated October 7, 1996, between
BioSeq, Inc. and the Company**
10.21 Warrant Agreement, dated October 7, 1996, between
BioSeq, Inc. and the Company**
10.22 Stockholders' Agreement, dated October 7, 1996, between
BioSeq, Inc. and the Company**
10.23 License Agreement, dated October 7, 1996, between
BioSeq, Inc. and the Company**
10.24.1 Commercial Loan Agreement, dated as of March 28, 1997,
between The First National Bank of Boston and the
Company**
10.25 Asset Purchase Agreement, dated March 26, 1997 between
Source Scientific, Inc. and the Company**
10.26 Contract, dated March 1, 1997, between National Cancer
Institute and the Company**
10.27 Lease Agreement, dated May 16, 1997, for Gaithersberg,
Maryland facility between B.F. Saul Real Estate
Investment Trust and the Company
10.28 Lease Agreement, dated January 30, 1995 for Garden Grove,
California facility between TR Brell, Cal Corp. and Source
Scientific, Inc., and Assignment of Lease, dated July 2, 1997,
for Garden Grove, California facility between Source
Scientific, Inc. and BBI Source Scientific
11 Statement re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
________________________
++ Management contract or compensatory plan or arrangement.
** In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents
previously filed with the Securities and Exchange Commission,
which documents are hereby incorporated by reference.
(b) Reports on Form 8-K
The Registrant did not file any Current Reports on Form 8-K during the
quarter ended December 31, 1997.
-45-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized..
Date: March 30, 1998 Boston Biomedica, Inc.
By:/s/Richard T. Schumacher
---------------------------------
Richard T. Schumacher
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLES DATE
---------- ------ ----
<S> <C> <C>
/s/Richard T. Schumacher President, Chief Executive Officer, March 30, 1998
-------------------------- and Chairman of the Board
Richard T. Schumacher (Principal Executive Officer)
/s/Kevin W. Quinlan Senior Vice President, Finance; March 30, 1998
-------------------------- Chief Financial Officer; Treasurer
Kevin W. Quinlan and Director
(Principal Accounting Officer)
/s/Calvin A. Saravis Director March 30, 1998
--------------------------
Calvin A. Saravis
/s/Henry A. Malkasian Sr. Director March 30, 1998
--------------------------
Henry A. Malkasian, Sr.
/s/Francis E. Capitanio Director March 30, 1998
--------------------------
Francis E. Capitanio
</TABLE>
-46-
EXHIBIT INDEX
- --------------
<TABLE>
<CAPTION>
Exhibit No. Reference
----------- -----------
<S> <C> <C>
3.1 Amended and Restated Articles of Organization of the Company A**
3.2 Amended and Restated Bylaws of the Company A**
4.1 Specimen Certificate for Shares of the Company's Common Stock A**
4.2 Description of Capital Stock (contained in the Restated A**
Articles of Organization of the Company filed as Exhibit 3.1)
10.1 Agreement, dated January 17, 1994, between Roche Molecular A**
Systems, Inc. and the Company
10.2 Exclusive License Agreement, dated December 6, 1994, between A**
the University of North Carolina at Chapel Hill and the
Company
10.3 Contract, dated September 30, 1995, between the National A**
Institutes of Health and the Company (No. 1-AI55273)
10.4 Contract, dated September 30, 1995, between the National A**
Institutes of Health and the Company (No. 1-AI-55277)
10.6 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. A**
and the Company
10.7 Lease Agreement, dated June 30, 1992, for Rockville, Maryland A**
Facility between Cambridge Biotech Corporation and the Company
10.8 Lease Agreement, dated July 28, 1995, for New Britain, A**
Connecticut Facility between MB Associates and the Company
10.9 Worcester County Institution for Savings Warrant dated A**
December 1, 1995 (No. 1)
10.10 Worcester County Institution for Savings Warrant dated A**
July 26, 1993 (No. 2)
10.11 Stock Purchase Agreement, dated June 5, 1990, between G&G A**
Diagnostics Limited Partnership I and the Company, as amended
10.14 Stock Purchase Agreement, dated April 26, 1996, between Kyowa A**
Medex Co., Ltd. and the Company
10.15 1987 Non-Qualified Stock Option Plan* A**
10.16 Employee Stock Option Plan* A**
10.17 Underwriters Warrants, each dated November 4, 1996, between B**
the Company and each of Oscar Gruss & Son Incorporated and
Kaufman Bros., L.P.
10.20 Purchase Agreement, dated October 7, 1996, between BioSeq, A**
Inc. and the Company
10.21 Warrant Agreement, dated October 7, 1996, between BioSeq, Inc. A**
and the Company
-47-
10.22 Stockholders' Agreement, dated October 7, 1996, between A**
BioSeq, Inc. and the Company
10.23 License Agreement, dated October 7, 1996, between BioSeq, Inc. A**
and the Company
10.24.1 Commercial Loan Agreement, as of dated March 28, 1997, between C**
The First National Bank of Boston and the Company
10.25 Asset Purchase Agreement, dated March 26, 1997 between Source C**
Scientific, Inc. and the Company
10.26 Contract, dated March 1, 1997, between National Cancer D**
Institute and the Company
10.27 Lease Agreement, dated May 16, 1997, for Gaithersberg, Maryland E**
facility between B.F. Saul Real Estate Investment Trust and the
Company
10.28 Lease Agreement, dated January 30, 1995 for Garden Grove, Filed herewith
California facility between TR Brell, Cal Corp. and Source
Scientific, Inc., and Assignment of Lease, dated July 2, 1997,
for Garden Grove, California facility between Source
Scientific, Inc. and BBI Source Scientific
11 Statement re: Computation of Per Share Earnings Filed herewith
21.1 Subsidiaries of the Company Filed herewith
23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
________________________
A Incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-10759)(the "Registration
Statement"). The number set forth herein is the number of the
Exhibit in said registration statement.
B Incorporated by reference to the Registration Statement, where
the Exhibit was filed as Exhibit No. 10.17 and contained in
Exhibit 1.1.
C Incorporated by reference to the Company's Annual Report on Form
10K for the fiscal year ended December 31, 1996.
D Incorporated by reference to the Company's Quarterly Report on
Form 10Q for the fiscal quarter ended March 31, 1997.
E Incorporated by reference to the Company's Quarterly Report on
Form 10Q for the fiscal quarter ended June 30, 1997.
* Management contract or compensatory plan or arrangement.
** In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents
previously filed with the Securities and Exchange Commission, which
documents are hereby incorporated by reference.
-48-
SCHEDULE II
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Recoveries
Allowance for Balance at For Accounts Uncollectible Balance at
Doubtful Beginning Additions to Previously Accounts End of
Accounts of Period Allowance Written Off Written Off Period
- -------------- ---------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
1997 $352,058 $395,272 $194,154 $(494,967) $446,517
1996 142,372 429,677 62,753 (282,744) 352,058
1995 94,723 181,084 - (133,435) 142,372
1994 43,956 102,099 - (51,332) 94,723
</TABLE>
-49-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
BOSTON BIOMEDICA, INC.:
In connection with our audits of the consolidated financial statements
of Boston Biomedica, Inc. and Subsidiaries, as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, which
financial statements are included in this Annual Report on Form 10-K, we have
also audited the consolidated financial statement schedule listed in Item 14
herein.
In our opinion, this consolidated financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 24, 1998
-50-
EXHIBIT 11
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF INCOME PER SHARE
WEIGHTED AVERAGE SHARES
Year Ended December 31,
----------------------------------
1995 1996 1997
---------- --------- ----------
Shares, basic 2,569,641 2,915,522 4,437,801
Net effect of dilutive common stock
equivalents-based on treasury stock
method using average market price 470,547 424,714 342,269
---------- ---------- ----------
Shares, diluted 3,040,188 3,340,236 4,780,070
========== ========== ==========
Net income, basic and diluted $ 102,990 $ 481,220 $1,004,834
========== ========== ==========
Net income per share-basic 0.04 0.17 0.23
Net income per share-diluted 0.03 0.14 0.21
========== ========== ==========
EXHIBIT 21.1
Subsidiaries of the Company
---------------------------
<TABLE>
<CAPTION>
Name Jurisdiction of Organization Location
- ---- ---------------------------- --------
<S> <C> <C>
BBI Clinical Laboratories, Inc. Massachusetts New Britain, CT
BBI Biotech Research Laboratories, Inc. Massachusetts Gaithersburg, MD
BBI Source Scientific, Inc. Massachusetts Garden Grove, CA
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Boston Biomedica, Inc. on Form S-8 (File No 333-24749) of
our report dated February 24, 1998, on our audits of the consolidated
financial statements and financial statements schedule of Boston
Biomedica, Inc. as of December 31, 1997 and 1996, and for the years
ended December 31, 1997, 1996 and 1995, which report is included in this
annual report on form 10-K.
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,772,360
<SECURITIES> 0
<RECEIVABLES> 6,005,227
<ALLOWANCES> 446,517
<INVENTORY> 5,902,821
<CURRENT-ASSETS> 14,850,934
<PP&E> 7,659,627
<DEPRECIATION> 2,679,463
<TOTAL-ASSETS> 23,649,996
<CURRENT-LIABILITIES> 5,217,473
<BONDS> 215,937
0
0
<COMMON> 16,075,275
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,649,996
<SALES> 11,711,026
<TOTAL-REVENUES> 22,299,337
<CGS> 5,773,417
<TOTAL-COSTS> 20,907,385
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,674,723
<INCOME-TAX> 669,889
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,004,834
<EPS-PRIMARY> .23
<EPS-DILUTED> .21
</TABLE>
ASSIGNMENT OF LEASE
--------------------
This Assignment of Lease ("Assignment") is made as of July ___, 1997,
between Source Scientific, Inc., a California corporation ("Assignor") and
BBI-Source Scientific, Inc.
RECITALS
--------
A. TR Brell, Cal Corp., an Illinois corporation("Landlord"), as
Landlord, and Assignor, as Tenant, executed a lease dated as of January 30, 1995
(the "Lease"), a copy of which is attached and incorporated herein by reference
as Exhibit "A." Pursuant to the Lease, Landlord leased to Tenant and Tenant
leased from Landlord that certain property described within the Lease attached
hereto as exhibit," for a term of seven(7) years, commencing on February 1, 1995
and ending on January 31, 2002, subject to earlier termination as provided in
the Lease.
Assignor desires to assign the Lease to Assignee, and Assignee
desires to accept the assignment of the Lease from Assignor and assume the
Lease, and all other obligations under the Lease.
THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and adequacy
of which are hereby acknowledged, Assignor and Assignee agree as follows:
1. Assignment:
-----------
Assignor assigns and transfers to Assignee all right, title, and
interest in the Lease, and Assignee accepts from Assignor, all right, title and
interest in the Lease. This Assignment shall have the effect and be construed
as though the Assignee was the original Tenant under the Lease.
2. Assumption of Lease Obligations:
--------------------------------
Assignee assumes and agrees to perform and fulfill all of the terms,
covenants, conditions and obligations required to be performed and fulfilled by
Assignor as Lessee under the Lease and/or that certain Settlement Agreement
between Landlord and Assignor with the Effective Date of February 15, 1996
("Agreement"), including the making of all payments due to or payable on behalf
of Lessor under the Lease and/or Agreement as they become due and payable.
Notwithstanding the foregoing, the Assignment of the Lease to Assignee
shall not affect the liability of Assignor under the Lease, and Assignor shall
continue to be responsible for the performance of all provisions and conditions
thereof.
This Assignment shall neither operate nor be construed as a notation by
Landlord in favor of Assignor, and Landlord shall retain all rights and remedies
under the Lease against Assignor as if the Lease had not been assigned.
744.101/alease.mgd 1 of 2
3. Interpretation and Governing Law:
---------------------------------
This Assignment shall be governed by and construed in accordance with
California law in effect as of the date of the Assignment and according to its
fair meaning as if prepared jointly and equally by Assignor, Assignee and
Landlord.
It shall be deemed that, for the purpose of enforcement by Landlord of
any term, covenant, condition, restriction and/or obligation provided by the
Lease against Assignee, privity of estate and privity of contract exists between
Landlord and Assignee with respect to any such enforcement.
ASSIGNOR:
__________________________________________
Authorized representative of
Source Scientific, Inc.
ASSIGNEE:
__________________________________________
Authorized representative of
BBI-Source Scientific, Inc.
CONSENT AND APPROVAL:
---------------------
The undersigned, on behalf of and as Landlord's authorized
representative, consents to this Assignment of the Lease to Assignee, provided
however that notwithstanding this Assignment and the Landlord's consent to this
Assignment, Landlord does not in whole or in part waive or relinquish any rights
under the Lease against Assignor or Assignee. Landlord consents to this
Assignment without waiving its rights with respect to future assignments.
LANDLORD:
__________________________________________
Authorized representative of Koll
the Real Estate Services Company,
as authorized representative of
TR Brell, Cal Corp., an Illinois Corporation
744.101/alease.mgd 2 of 2
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
January 30, 1995, is made by and between TR BRELL.,CAL CORP, an Illinois
corporation ("Lessor") and SOURCE SCIENTIFIC, INC., a California
corporation ("Lessee"), (collectively the "Parties," or individually a
"Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of the Lease, and commonly
known by the street address of 7390 Lincoln Way located in the County of
Orange State of California and generally described as (describe briefly
the nature of the property) Approximately 41,184 square feet of space
commonly known as 7390 Lincoln Way, garden Grove, California, as shown by
diagonal lines on exhibit "A" attached hereto. ("Premises"). (See Paragraph
2 for further provisions.)
1.3 Term: SEVEN (7) years and 0 months ("Original Term")
commencing February 1, 1995 ("Commencement Date") and ending January 31,
2002 ("Expiration Date"). (See Paragraph 3 for future provisions.)
1.4 Early Possession ----------------------------------- ("Early Possession
Date").(See Paragraphs 3.2 and 3.3 for future provisions.)
1.5 Base Rent: $26,185 per month ("Base Rent"), payable on the FIRST
day of each month commencing FEBRUARY 1, 1995 (See Addendum, Paragraph 49
and 50) (See Paragraph 4 for further provisions.) X if this box is
checked, there are provisions in this Lease for the Base Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $ N/A as base rent for the period
1.7 Security Deposit: $ 29,678 ("Security Deposit"). (See Paragraph 5
for further provisions.)
1.8 Permitted Use: MANUFACTURE OF MEDICAL., DIAGNOSTIC EQUIPMENT AND RELATED
OFFICE PURPOSES. (See Paragraph 6 for further provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated
herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes):
_____________________________________________________ represents Lessor
exclusively ("Lessor's Broker"); both Lessor and lessee, and
____________________VOIT COMMERCIAL____ represents Lessee exclusively ("Lessee's
Broker"); both Lessee and Lessor. (See Paragraph 15 for further
provisions)
1.11 Guarantor. the obligations of the Lessee under this Lease are to be
guaranteed by N/A ("Guarantor"). (See Paragraph 37 for further
provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 48(a) through 64 and Exhibits A, B, C and D all of which
constitute a part of this Lease.
2. Premises:
2.1 Letting, Lessor hereby leases to Lessee , and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this lease. Unless otherwise provided
herein, any statement of square footage set forth in this lease, or that may
have been used in calculating rental, is an approximation which Lessor and
lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable law, as
defined in paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use. (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 lessee prior Owner/Occupant. the warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises in such
event. Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. Term.
3.1 Term. The Commencement Date, Expiration date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession, All other terms of this Lease, however,
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premise s shall be in effect during such
period Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
1 (a) that it presently is in occupancy of the Premises, is familiar
with the Premises and
NET PAGE 1 Initials _______
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1990-American Idustrial Real Estate Association FORM 204NJ/90
4. Rent.
4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rend and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month, involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. Security Deposit, Lessee shall deposit with Lessor upon execution hereof the
security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful
performance of Lessee's obligations under this lease. If Lessee fails to pay
Base Rent or other rent or charges due hereunder, or otherwise Defaults under
this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all
or any portion of said Security Deposit for the payment of any amount due Lessor
or to reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefor deposit moneys
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Any time the Base Rent increases during the term of
this Lease, Lessee shall, upon written request from Lessor, deposit additional
moneys with Lessor sufficient to maintain the same ratio between the Security
Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. Lessor shall not be required to keep all or part of the Security
Deposit separate from its general accounts. Lessor shall, at the expiration or
earlier termination of the term hereof and after Lessee has vacated the Premises
and performed all of its obligations hereunder through to and including with
respect to Lessee's surrender of the Premises, return to Lessee (or, at
Lessor's option, to the last assignee, if any, of Lessee's interest herein),
that portion of the Security Deposit not used or applied by Lessor. Unless
otherwise expressly agreed in writing by Lessor, no part of the Security Deposit
shall be considered to be held in trust, to bear interest or other increment for
its use, or to be prepayment for any moneys to be paid by Lessee under this
Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the purposes set
forth in Paragraph 1.8, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that creates waste or a nuisance, or
that disturbs owners and/or occupants or, or causes damage to, neighboring
premises or properties.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance " as
used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity or existence, use
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3) "Reportable Use" shall mean (i)the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course ee's business permitted on the Premises, so long as such use is
not a Reportable Use and does not expose the Premises or neighboring properties
to any meaningful risk of contamination or damage or expose Lessor to any
liability therefor. in addition, Lessor may (but without any obligation to do
so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, In its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, has come to be located in, on, under or about the Premises, other than as
previously consented to by Lessor, Lessee shall immediately give written notice
of such fact to Lessor, Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) Indemnification, Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expense, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include,
but not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Law." which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater condition, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee
shall, within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including, but not limited
to, permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 Inspection; Compliance,. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3 (a))shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination, in any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance; Repairs; Utility installations; Trade Fixtures and Alterations.
7.1 Lessee's Obligations. (a) Subject to Addendum Paragraph 52,
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NET PAGE 2
7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall be Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, structural and non-structural whether or not such portion of the
Premises requiring repairs, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for
such repairs occurs as a result of Lessee's use, any prior use, the elements
or the age of such portion of the Premises), including, without limiting the
generality of the foregoing, all equipment or facilities serving the
Premises, such as plumbing, heating, air conditioning, ventilating,
electrical, lighting facilities, boilers, fired or unfired pressure vessels,
fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing system, including fire alarm and/or smoke detection systems
and equipment, fire hydrants, fixtures, walls (interior and exterior),
foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights
landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, about, or adjacent to the Premises,
Lessee shall not cause or permit any Hazardous Substance to be spilled or
released in, on, under or about the Premises (including through the plumbing
or sanitary sewer system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably (recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and
for the maintenance, security and/or monitoring of the Premises, the
elements surrounding same, or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the Premises by or for
Lessee or under its control Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and per form good maintenance
practices. Lessee's obligations shall include restoration, replacements or
renewals when necessary to keep the Premises and all improvements thereon or
a part thereof in good order, condition and state of repair. If Lessee
occupies the Premises for seven (7) years or more, Lessor may require Lessee
to repaint the exterior of the buildings on the Premises as reasonably
required, but not more frequently than once ever seven (7) years.
(b) Lease shall, at Lessee's sole cost and expense, procure and maintain
contracts, with copies to Lessor, in customary form and substance for, and
with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any.
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire
sprinkler and/or standpipe and hose or other automatic fire extinguishing
systems, including fire alarm and/or smoke detection, (iv) landscaping and
irrigation systems. (v) roof covering and drain maintenance and (vi) asphalt
and parking lot maintenance. Addendum Paragraph 52 and Paragraphs
7.2 Lessor's Obligations. Except for the agreements of Lessor contained in 9
(relating to destruction of the Premises) and 14 (relating to condemnation
of the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises,
the improvements located thereon, of the equipment therein, whether
structural or non structural, all of which obligations are intended to be
that of the Lessee under Paragraph 7.1 hereof. It is the intention of the
Parties that the terms of this Lease govern the respective obligations of
the Parties as to maintenance and repair of the Premises. lessee and Lessor
expressly waive the benefit of any statute now or hereafter in effect to the
extent it is inconsistent with the terms of this Lease with respect to, or
which affords Lessee the right to make repairs at the expense of Lessor or
to terminate this Lease by reason of any needed repairs.
7.3 Utility installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility installations " is
used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises.
The term "Trade Fixtures" shall mean Lessee's Machinery and equipment that
can be removed without doing material damage to the Premises. The term
"Alterations" shall mean any modification of the improvements on the
Premises from that which are provided by Lessor under the terms of this
Lease, other than Utility installations or Trade Fixtures, whether by
addition or deletion. "Lessee Owned Alterations and/or Utility
Installations" are defined as Alterations and/or Utility installations made
by lessee that are not yet owned by Lessor as defined in Paragraph 7.4 (a).
Lessee shall not make any Alterations or Utility installations in, on, under
or about the Premises without Lessor's prior written consent, Lessee may,
however, make non-structural Utility installations to the interior of the
Premises (excluding the roof), as long as they are not visible from the
outside, do not involve puncturing, relocating or removing the roof or any
existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $25,000.
(b)Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All
consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by
subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's
acquiring all applicable permits required by governmental authorities, (ii)
the furnishing of copies of such permits together with a copy of the plans
and specifications for the Alteration or Utility Installation to Lessor
prior to commencement of the work thereon, and (iii) the compliance by
Lessee with all conditions of said permits in a prompt and expeditious
manner. Any Alterations or Utility installations by Lessee during the term
of this Lease shall be done in a good and workmanlike manner, with good and
sufficient materials, and in compliance with all Applicable Law. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans
and specifications therefor. Lessor may (but without obligation to do so)
condition its consent to any requested Alteration or Utility installation
that costs $10,000 or more upon Lessee's providing Lessor with a lien and
completion bond in an amount equal to one and one-half times the estimated
cost of such Alteration or Utility installation and/or upon Lessee's posting
an additional Security Deposit with Lessor under Paragraph 36 hereof.
(c) Indemnification. lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on or about the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises.
If Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount5 equal to one and one-half times the
amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises
free from the effect of such lien or claim. In addition, Lessor may require
Lessee to pay Lessor's attorney's fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be
the property of and owned by Lessee, but considered a part of the Premises,
Lessor may, at any time and at its option, elect in writing to Lessee to be
the owner of all or any specified part of the Lessee Owned Alteration and
Utility installations. Unless otherwise instructed per subparagraph 7.4(b)
hereof, all Lessee Owned Alterations and Utility installations shall, at the
expiration or earlier termination of this Lease, become the property of
Lessor and remain upon and be surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor, Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof clean and free of debris
and in good operating order, condition and state of repair, ordinary wear
and tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or
by Lessee performing all of its obligations under this Lease. Except as
otherwise agreed or specified in writing by Lessor, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by
the installation, maintenance or removal of Lessee's Trade Fixtures,
furnishings, equipment, and Alterations and/or Utility Installations, as
well as the removal of any storage tank installed by or for Lessee, and the
removal, replacement, or remediation of any soil, material or ground water
contaminated by Lessee, all as may then be required by Applicable Law and/or
good service practice. Lessee's Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee subject to its obligation to repair
and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For insurance. Regardless of whether the Lessor or Lessee is the
insuring Party, Lessee shall pay, as additional rent, for all insurance required
under this Paragraph 8 except tot he extent of the cost attributable to
liability insurance carried by Lessor in excess of $3,000,000 per occurrence.
Premiums for policy periods commencing prior to or extending beyond the Lease
term shall be prorated to correspond to the Lease term. Payment shall be made by
Lessee to Lessor within ten (10) days following receipt of an invoice for any
amount due.
8.2 Liability Insurance.
(a) Carried by Lessee. See Addendum Paragraph 54.
(b) Carried By Lessor. In the event Lessor is the Insuring Party, Lessor
shall also maintain liability insurance described in Paragraph 8.2(a), above, in
addition to, and not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall not be named as an additional insured therein.
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8.3 Property Insurance--Building, Improvements and Rental Value.
(a) Building and improvements. The insuring Party shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), Insuring loss or
damage to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than
full replacement cost. If lessor is the Insuring Party, however, Lessee Owned
Alteration and Utility Installations shall be insured by Lessee under Paragraph
8.4 rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage, including, coverage for any additional costs resulting
from debris removal and reasonable amounts of coverage for the enforcement of
any ordinance or law regulating the reconstruction or replacement of any
undamaged sections of the Premises required to be demolished or removed by
reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the
annual property Insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
for the city nearest to where the Premises are located. If such insurance
coverage has a deductible clause, the deductible amount shall not exceed $1,000
per occurrence, and Lessee shall be liable for such deductible amount in the
event of an insured Loss, as in Paragraph 9.11(c).
(b) Rental Value. The Insuring Party shall, in addition, obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), Insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any. otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) Adjacent Premises, if the Premises are part of a larger building, or
if the Premises are part of a group of buildings owned by Lessor which are
adjacent to the premises, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) Tenant's improvements. If the Lessor is the Insuring party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations if Lessee is the Insuring Party, the policy carried by Lessee
under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility
Installations. See Addendum Paragraph 54.
8.4 Lessee's Property Insurance.
8.5 Insurance Policies, Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least A:X or such other rating as may be required by a Lender having a lien on
the Premises, as set forth in the most current issue of "Best's Insurance guide.
Lessee shall not due or permit to be done anything which shall invalidate the
Insurance policies referred to in this Paragraph 8. Lessee shall cause to be
delivered to Lessor certified copies of policies of such insurance or
certificates evidencing the existence and amounts of such insurance with the
insureds and loss payable clauses as required by this Lease. No such policy
shall be cancelable or subject to modification except after thirty (30) days
prior written notice to Lessor. Lessee shall at least thirty (30) days prior to
the expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
Insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and
maintain the insurance required to be carried by the insuring Party under this
Paragraph 8, the other Party may, but shall not be required to, procure and
maintain the same, but at Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor ("Waiving Party") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under Paragraph
8. The effect of such releases and waivers of the right to recover damages shall
not be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's gross negligence and/or breach or express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders (collectively, "Lessor Parties") from and against any and all claims,
loss of rents and/or damages, costs, liens, judgments, penalties, permits,
attorney's and consultant's fees, expenses and/or liabilities arising out of,
involving, or in dealing with, the occupancy of the Premises by Lessee, the
conduct of Lessee's business, any ace, omission or neglect or Lessee, its
agents, contractors, employees or invitees, and out of any Default of Breach by
lessee in the performance in a timely manner of any obligation on lessee's part
to be performed under this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or proceeding
involved therein, and whether or not (in the case of claims made against Lessor)
litigated and/or reduced to judgment, and whether well founded or not. In case
any action or proceeding be brought against Lessor by reason of any of the
foregoing matters, Lessee upon notice from Lessor shall defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperated with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability, Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" See Addendum Paragraph 56.
(c) "Insured Loss" shall mean damage or destruction the Premises, other
than Lessee Owned Alterations and Utility Installations, which was caused by an
event required to be covered by the insurance described in Paragraph 8.3(a),
Irrespective of any deductible amounts.
9.2 Partial Damage--Insured Loss. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense (except as to the
deductible which is Lessee's responsibility), repair such damage (but not
Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations as
soon as reasonably possible and this Lease shall continue in full force and
effect; provided, however, that Lessee shall, at Lessor's election, make the
repair of any damage or destruction the total cost to repair of which is $10,000
or less, and, in such event, Lessor shall make the insurance proceeds available
to Lessee on a reasonable basis for that purpose. Unless otherwise agreed,
Lessee shall in no event have any right to reimbursement from Lessor for
(except as to deductible which is Lessee's responsability),
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(Exclusive of Lessee's trade fixtures (except as to the deductable which
or Leese Owned Alterations and is Lessee's responsability)
Utility Installations)
any funds contributed by Lessee to repair any such damage or destruction
9.3 Partial Damage--Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage (exclusive of Lessee's Trade Fixtures, or Lessee Owned Alterations
and Utility Installations), as soon as reasonably possible at Lessor's expense
(except as to the deductible which is Lessee's responsibility), in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in lessor's damages from Lessee except as
released and waived in Paragraph 8.6.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage near End of Term. if at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage, Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in Insurance proceeds for adequate assurance
thereof), needed to make the repairs, If Lessee duly exercises such option
during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in Insurance proceeds, Lessor shall, at
Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during said Exercise Period, then
Lessor may at Lessor's option terminate this lease as of the expiration of said
sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.
9.8 Abatement of Rent; lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage--Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, Insurance Premiums, and other
charges, if any, payable by lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
Impaired. Except for abatement of Base Rent, Real Property Taxes, Insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the premises under
the provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises within ninety (90)
days after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to Lessor and to
any Lenders of which Lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the giving of such
notice. If Lessee gives such notice to Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after receipt of such notice, this Lease shall continue in full
force and effect. "Commence" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.8 Termination--Advance Payments. upon termination of this Lease pursuant
to this Paragraph 9, an equitable adjustment shall be made concerning advance
Base Rent and any other advance payments made by Lessee to Lessor, Lessor shall,
in addition, return to Lessee so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a)Payment of Taxes. Lessee shall pay, as additional rent, the real
Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during
the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be
made at least ten (10) days prior to the delinquency date of the applicable
installment. Lessee shall promptly furnish Lessor with satisfactory evidence
that such taxes have been paid. if any such taxes to be paid by Lessee shall
cover any period of time prior to or after the expiration of earlier termination
of the term hereof, Lessee's share of such taxes shall be equitably prorated to
cover only the period of time prior to or after the expiration or earlier
termination of the term hereof, Lessee's share of such taxes shall be equitably
prorated to cover only the period of time within the tax fiscal year this Lease
is in effect, and Lessor shall reimburse Lessee for any overpayment after such
proration. If Lessee shall fail to pay any Real Property Taxes required by this
Lease to be paid by Lessee. Lessor shall have the right to pay the same, and
Lessee shall reimburse Lessor therefor upon demand.
(b) Advance Payment. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either; (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by
Lessee under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security
Deposit Under Paragraph 5.
10.2 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease. Including but not limited to a change in
the ownership of the Premises or in the Improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 Joint Assessment. if the Premises are not separately assessed. Lessee's
liability shall be an equitable proportion or the Real Property Taxes for all of
the land and improvements included within the tax parcel assessed, such
proportion to be determined by Lessor from the respective valuations
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assigned in the assessor's work sheets or such other information as may be
reasonably available. reasonable determination thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes, Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible,
Lessee shall cause its Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property or, at Lessor's option, as provided in
Paragraph 10.1(b).
11. Utilities. lessee shall contract and pay for all water, gas, heat, light,
power, telephone, trash disposal and other utilities and services supplied to
the Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. Lessor's Consent required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively.
"assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 38.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise). whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the New Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
New Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said Lessor has
consented, or as it exists immediately prior to said transaction or transactions
consulting such reduction, at whichever time said New Worth of Lessee was or is
greater, shall be considered an assignment of this Lease by Lessee to which
Lessor may reasonably withhold its consent. "New Worth of Lessee" for purposes
of this Lease shall be the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's Interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"). Increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater, Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations under
this lease, Lessor may proceed directly against Lessee, any Guarantors or any
one else responsible for the performance of the Lessee's obligations under this
Lease, including the t, without first exhausting Lessor's remedies against any
other person or entity responsible therefor to Lessor, or any security held by
Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent, Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
acception such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c) shall
give Lessor the right (but not the obligation) to require that the Security
Deposit be increased to an amount equal to six(6) times the ten monthly Base
Rent, and Lessor may make the actual receipt by Lessor of the amount required to
establish such Security Deposit a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
12.3 Additional Terms and Conditions Applicable to subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease. Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable tot he sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
Exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or fright to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches or such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) no sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach, Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $1,000.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "Default" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "Breach"
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is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period to cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy same,
or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure by
Lessee to make any payment of Base Rent or any other monetary payment required
to be made by Lessee hereunder, whether to Lessor or to a third party, as and
when due, the failure by Lessee to provide Lessor with reasonable evidence of
insurance or surety bond required under this Lease, or the failure of Lessee to
fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) days following
written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure by
Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3 (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c) above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion. (a) The occurrence of any of the following
events: (i) the making by lessee of any general arrangement or assignment for
the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in
11.U.S.C. $101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located a the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days; provided, however, in the event that any provision of this subparagraph
(e) is contrary to any applicable law, such provision shall be of no
force or effect, and not effect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty. (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation
of Lessee under this Lease, within ten (10) days after written notice to Lessee
(or in case of an emergency, without notice), Lessor may at its option (but
without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required
bonds, insurance policies, or governmental licenses, permits or approvals. The
costs and expenses of any such performance by Lessor shall be due and payable
by Lessee to Lessor upon invoice therefor, if any check given to lessor by
Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its
option, may require all future payments to be made under this Lease by Lessee
to be made only by cashier's check. In the event of a breach of this Lease by
Lessee, as defined in Paragraph 13.1, with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a)Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee; (i) the worth at the time of
the award of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that the Lessee proves could have been reasonably
avoided; (ii) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorneys' fees, and that portion of the leasing
commission paid by Lessor applicable to the unexpired term of this Lease. The
worth at the time of award of the amount referred to in provision (iii) of the
prior sentence shall be computed by discounting such amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time award plus one percent
(1%) Efforts by Lessor to mitigate damages caused by lessee's Default or Breach
of this lease shall not waive Lessor's right to recover damages under this
Paragraph. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lesso
eserve therein the right to recover all or any part thereof in a separate suite
for such rent and/or damages. If a notice and grace period required under
subparagraphs 13.1,(b), (c) or (d). was not previously given, a notice to pay
rent or quit, or to perform or quit, as the case may be, given to Lessee under
any statute authorizing the forfeiture of leases for unlawful detainer shall
also constitute the applicable notice for grace period purposes required by
subparagraphs 13.1(b), (c) or (d), in such case, the applicable grace period
under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute
shall run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two such grace periods
shall constitute both an unlawful detainer and a Breach of this Lease entitling
Lessor to the remedies provided for in this lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Less from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture in Event Of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of such
concessions are hereinafter referred to as "Inducement Provisions." shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration therefore abated, given or paid by Lessor under such an Inducement
Provision shall be immediately due and payable by Lessee to Lessor, and
recoverable by Lessor as additional rent due under this Lease, notwithstanding
any subsequent cure of said Breach by Lessee. the acceptance by Lessor of rent
or the cure of the Breach which initiated the operation of this Paragraph shall
not be deemed a waiver by Lessor of the provisions of this Paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to
lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of base rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by the holders of any ground lease, mortgage or deed of trust covering the
Premises whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed, provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days after such notice are reasonably
required for its performance, then Lessor shall not be in breach of this Lease
if performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes
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all or a portion of the Premises are taken by condemnation and Lessee is
therefore unable to continue to operate Lessee's business from the Premises
title or possession, whichever first occurs. - Lessee may, at Lessee's option,
to be exercised in writing within ten (10) days after Lessor shall have given
Lessee written notice of such taking (or in the absence of such notice, within
ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Leases in accordance with the
forgoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. in the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible
for the payment of any amount in excess of such net severance damages required
to complete such repair. Lessee waives any and all rights it might otherwise
have under Section 1265.130 of the California Code of Civil Procedure to
terminate this Lease as a result of any taking.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.5 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) day after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
attached hereto as Exhibit "D" plus such additional information, confirmation
and/or statements as may be reasonably requested by the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease , of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance or
observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notice purposes. Either
Party may by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received
on a Sunday or legal holiday, it shall be deemed received on the next business
day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof, Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease required such consent. Regardless of
Lessor's knowledge of Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualify statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Neither Lessor nor Lessee shall record this Lease or a short
form memorandum of this Lease.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. See Addendum.
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27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever feasible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation. Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. Attorney's Fees. If any Party brings an action or proceeding to enforce
the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter
defined) in any such proceeding, action, or appeal thereon, shall be entitled to
reasonable attorney's fees. Such fees may be awarded in the same suit or
recovered in a separate suit, whether or not such action or proceeding is
pursued to decision or judgment. The term, "Prevailing Party" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement, judgment, or the
abandonment by the other Party of its claim or defense. The attorney's fees
award shall not be computed in accordance with any court fee schedule, but shall
be such as to fully reimburse all attorney's fees reasonably incurred. Lessor
shall be entitled to attorney's fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary . Lessor may at any
time place on or about the Premises or building any ordinary "For Sale" signs
and Lessor may at any time during the last one hundred twenty (120) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs. All
such activities of Lessor shall be without abatement of rent or liability to
Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. See addendum.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of the
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting). Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting
of the Premises by Lessee shall not constitute an acknowledgment that no Default
or Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph .11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form provided by Lessor and each said Guarantor shall have the same obligations
as Lessee under this Lease, including but not limited to the obligation to
provide the Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if
any such Guarantor fails or refuses, upon reasonable request by Lessor to give:
(a) evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
boar do directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options.
39.1 Definition. As used in this Paragraph 39 the word "Option" has
the following meaning: (a) the right to extend the term of this Lease or to
renew this Lease of to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal to lease the Premises or the
right of first offer to lease the Premises or the right of first refusal to
lease other property of Lessor or the right of first offer to lease other
property of Lessor; (c) the right to purchase the Premises, or the right of
first refusal to purchase the Premises, or the right of first offer to purchase
the Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first offer
to purchase other property of Lessor.
39.2. Options Personal To Original Lessee. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by any
person or entity other than said original Lessee while the original Lessee is in
full and actual possession of the Premises and without the intention or
thereafter assigning or subletting. The Options, if any, herein granted to
Lessee are not assignable, either as a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any Multiple
Options to extend or renew this Lease a later Option cannot be exercised unless
prior Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor have given to Lessee
three (3) or more notices of Default under Paragraph 13.1 during any twelve (12)
month period, whether or not the Defaults are cured, during the twelve (12)
month period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee'' inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenant of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable
hereunder does not include the cost of guard service or other security measures,
and that Lessor shall have no obligation whatsoever to provide same. Lessee
assumes all responsibility for the protection of the Premises, Lessee, its
agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights,
dedications, maps and restrictions do not unreasonably interfere with the use of
the Premises by Lessee and do not materially impede Lessee's access to and from
the Premises and do not reduce Lessee's parking capacity to less than four (4)
spaces per 1000 square feet of the Premises. Lessee agrees to sign within five
(5) days of request, any documents reasonably requested by Lessor to effectuate
any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust of
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer of lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS. STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED
SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at Garden Grove Executed at Garden Grove, CA
on 7/11/95 on 5/26/95
by LESSOR: by LESSEE:
TR BRELL CAL CORP, SOURCE SCIENTIFIC, INC.
An Illinois corporation A California corporation
By: KOLL MANAGEMENT SERVICES, INC.
A Delaware corporation, its agent
By: /s/ By: /s/
Name Printed: Julie Groot Name Printed: Richard A. Sullivan
Title: Senior Manager Title: President and CEO
By: /s/ By:
Name Printed: Michael E. Meyer Name Printed:
Title: Vice President Title:
Address: 12832 Valley View Street, Address: 7390 Lincoln Way
Suite 106
Garden Grove, CA 92645 Garden Grove, CA 92641
Tel. No. (714)891-0707 Tel. No.(714)898-9001
Fax No. (714)895-5553 Fax No. (714)891-1229
NET PAGE 10
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles, CA 90071.
(213)687-8777. Fax No. (213)687-8616.
(Copyright 1990 - by American Industrial Real Estate Association. All Rights
Reserved. No part of these works may be reproduced in any form without
permission in writing. FORM 204N-R-12/91
ADDENDUM TO STANDARD
INDUSTRIAL/COMMERICAL SINGLE-TENANT LEASE (NET)
BY AND BETWEEN
TR BRELL, CAL CORP, AN ILLINOIS CORPORATION ("LESSOR"),
AND
SOURCE SCIENTIFIC SYSTEMS, INC., A DELAWARE CORPORATION ("LESSEE")
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The promises, convenants agreements and declarations made and set forth
herein are intended to and shall have the same force and effect as if set forth
at length in the body of the Lease to which this Addendum is attached (the
"Lease"). To the extent that the provisions of this Addendum are inconsistent
with the terms and conditions of the Lease, the terms of this Addendum shall
control.
48(a). Paragraph 1.7 (Security Deposit). Lessor acknowledges that
Lessor presently holds the Security Deposit referenced in Paragraph 1.7 under
Lessee's existing lease which wil continue to be held by Lessor pursuant to the
terms of this Lease.
49. Paragraph 4.1(Base Rent). The Base Rent shall be increased
effective as of August 1, 1997 to $29,131 per month and increased again
effective as of February 1, 2000 to $32,460.00. Lessor hereby grants Lessee six
(6) months of one-half (1/2) rent for the months of February through July of
1995.
50. Paragraph 6.1(Use). The following is hereby added to paragraph
6.1.
"Lessee shall not do anything or suffer anything to be done in or about
the Premises which will in any way conflict with any law, statute,
ordinance or other governmental rule, regulation or requirement now in
force or which may hereafter be enacted or promulgated. Should any
standard or regulation now or hereafter be imposed on Lessor or Lessee
by a State, federal or local governmental body charged with the
establishment, regulation and enforcement of occupational, health or
safety standards for employers, employees, lessors or lessees, then,
except as otherwise specifically set forth in the Lease, Lessee agrees,
at its sole cost and expense, to comply promptly with such standards or
regulations."
51. Paragraph 6.3(Lessee's Compliance with Law). The following
language is hereby added to Paragraph 6.3:
"In addition to the general obligation of Lessee to comply with laws and
without limitation thereof, Lessee shall comply in all respects with the
Title III of the Americans with Disabilities Act of 1990 (the "ADA") as
respects Lessee's use of, or alteration to, the Premises and Lessor
shall not be liable to Lessee, nor shall this Lease be affected in any
way, by reason of any moratorium, initiative, referendum, statute,
regulation or other governmental decree or action which could in any
manner prevent or limit the parking rights of Lessee hereunder. Any
governmental charges or surcharges or other monetary obligations imposed
relative to parking rights with respect to the Premises shall be
considered assessments and shall be responsible for compliance with the
ADA if it is required with respect to the exterior of the Premises or
the structure of the Building, and such compliance does not relate to
Lessee's specific use of the Premises."
52. Paragraph 7.1(Lessee's Obligations);Paragraph 7.2(Lessor's
Obligations). In connection with Paragraph 7.1 of the Lease, all repairs and
maintenance of the Premises by Lessee as required under the Lease shall be
performed in a first class manner by contractors and other personnel reasonably
approved by Lessor, shall be performed in accordance with a repair and
maintenance plan reasonably approved by Lessor, and shall comply with guidelines
and shall meet such standards of quality as may be reasonably established by
Lessor from time to time during the Term of the Lease, including, without
limitation, providing Lessor with copies of all permits obtained by Lessee and
"as-built" drawings of such work performed by Lessee. In the
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event Lessor determines, at any time during the term of the Lease, that Lessee's
repair and maintenance of the Premises is not meeting the standards therefor
established by Lessor, then Lessor may, but shall not be obligated to, undertake
such repair and maintenance obligations of Lessee on behalf of Lessee, and all
costs and expenses incurred by Lessor in the performance of such repair and
maintenance shall constitute additional rent under this Lease, and shall be
payable by Lessee to Lessor within five (5) days of demand.
Notwithstanding anything to the contrary contained in Paragraphs 7.1 or
7.2, in addition to Monthly Base Rent, throughout the Term of this Lease, Lessee
agrees to pay Lessor as additional rent in accordance with the terms of this
Paragraph certain operating expenses of the Building ("Operating Expenses")
consisting of all Real Property Taxes pursuant to Paragraph 10 of the Lease, the
cost of all insurance premiums for property and liability insurance maintained
by Lessor pursuant to Paragraph 8 of the Lease, and costs and expenses incurred
by Lessor with respect to landscaping, repair and maintenance of the Building
exterior, and other exterior portions of the Premises, parking areas, including
resurfacing, repairing and restriping, walkways, sanitary sewer costs, and trash
disposal, including costs and maintenance of refuse receptacles, costs of
repair and replacement of directional signs and markers, car stops, exterior
lighting and other utilities, reasonable depreciation on improvements,
machinery, and equipment used in connection with such maintenance and any other
costs and expenses incurred by Lessor with respect to the maintenance and repair
of the Building and exterior portions of the Premises.
(a) Estimate Statement. On or about March 1st of each
calendar year during the Term of this Lease, Lessor will endeavor to
deliver to Lessee a statement ("Estimate Statement") wherein Lessor will
estimate the Operating Expenses of the then current calendar year.
Lessee agrees to pay Lessor, as "Additional Rent", one-twelfth (1/12th)
of such Operating Expenses each month thereafter, beginning with the
next installment of rent due, until such time as Lessor issues a revised
Estimate Statement or the Estimate Statement for the succeeding calendar
year, except that, concurrently with the regular monthly rent payments
next due following the receipt of each such Estimate Statement, Lessee
agrees to pay Lessor an amount equal to one monthly installment of such
Operating Expenses (less any applicable Operating Expenses already paid)
multiplied by the number of months from January, in the current calendar
year, to the month of such rent payment next due, all months inclusive.
If at any time during the Term of the Lease, but not more often than
quarterly, Lessor reasonably determines that Operating Expenses for the
current calendar year will be greater than the amount set forth in the
then current Estimate Statement, Lessor may issue a revised Estimate
Statement and Lessee agrees to pay Lessor, within ten (10) days of
receipt of the revised Estimate Statement, the difference between the
amount owed by Lessee under such revised Estimate Statement and the
amount owed by Lessee under the original Estimate Statement for the
portion of the then current calendar year which has expired. Thereafter
Lessee agrees to pay Operating Expenses based on such revised Estimate
Statement until Lessee receives the next calendar year's Estimate
Statement or a new revised Estimate Statement for the current calendar
year.
(b) Actual Statement. By March 1st of each calendar year
during the Term of this Lease, Lessor will also endeavor to deliver to
Lessee a statement ("Actual Statement") which states the actual
Operating Expenses for the preceding calendar year. If the Actual
Statement reveals that actual Operating Expenses are more than the total
Additional Rent paid by Lessee for Operating Expenses on account of the
preceding calendar year, Lessee agrees to pay Lessor the difference in a
lump sum within ten (10) days of receipt of the Actual Statement. If
the Actual Statement reveals that actual Operating Expenses are less
than the Additional Rent paid by Lessee for Operating Expenses on
account of the preceding calendar year, Lessor will credit any
overpayment toward the next monthly installment(s) of Operating Expenses
due under this Lease.
Notwithstanding anything to the contrary contained in Paragraphs
7.1 or 7.2, Lessee agrees to maintain and repair the roof of the Building, at
Lessee's sole cost and expense. If the roof needs to be replaced (as determined
below), Lessor shall cause such work to be performed, but Lessee shall be
responsible for reimbursing Lessor for a portion of the cost ("Replacement
Cost") incurred by Lessor for replacing the roof with a roof of a quality
consistent with the structure and quality of the Building and which is full
warranted for a minimum of 15
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9504800R.OC1/DWW/K4933-002/05-17-95/meg
years, based on the following schedule: (i) if the roof is replaced during
months 1 through 28 of the new Term, then Lessee shall be responsible for 25% of
the Replacement Cost, or (ii) if the roof is replaced during 29 through 56 of
the new Term, then Lessee shall be responsible for 45% of the Replacement Cost,
or (iii) if the roof is replaced during months 57 through 84 of the new Term,
then Lessee shall be responsible for 65% of the Replacement Cost. The roof will
"need" to be replaced if two independent roofing consultants, one selected by
Lessor and the other selected by Lessee, advise Lessor that replacement of the
roof is recommended over further repair in order for the roof to function
properly. If a third roofing consultant is necessary because of disagreement in
the need for roof replacement between the first two consultants, then Lessor and
Lessee shall cause their respective consultants to agree upon and mutually
select a third roofing consultant whose determination shall be conclusive. If
the roof needs to be replaced because of damage caused by Lessee or its agents,
employees, contractors or invitees, then Lessee will be responsible for the
entire Replacement Cost. Lessee shall pay its share of the Replacement Cost
concurrently with Lessor's payment of the balance of the Replacement Cost in
accordance with the terms of Lessor's contract with the roof installation
company.
53. Paragraph 7.3(Utility Installations; Trade Fixtures;
Alterations). The following is added to Paragraph 7.3 of the Lease.
"(d) Security. In connection with Paragraph 7.3 of the
Lease, Lessee shall, at Lessee's sole cost and expense, take such
security measures as Lessee deems appropriate or necessary in order to
secure the Premises and portions thereof in accordance with such
requirements as may be imposed by contractors of Lessee; provided,
however, in the event any such security measures require any alterations
of or additions to the Premises, any such alterations and/or additions
shall be subject to the terms of Paragraphs 7.3 and 7.4 of the Lease."
54. Paragraph 8.2(Liability Insurance). Paragraph 8.2(a) of the
Lease has been intentionally omitted, and is hereby replaced with the following:
"(a) Carried by Lessee. Lessee agrees, at its own expense,
to maintain in full force and effect at all times during the term of
this Lease, as it may be extended for the protection of Lessee and
Lessor, as their interests may appear, policies of insurance issued by a
carrier or carriers acceptable to Lessor and with a rating consistent
with the requirements of Paragraph 8.5 of the Lease, which afford the
following coverages: (i) Worker's compensation: statutory limits; (ii)
Employer's liability: not less than Five Hundred Thousand Dollars
($500,000.00); (iii) Comprehensive general liability insurance including
blanket contractual liability, broad form property damage, personal
injury (including employees), owned/non-owned auto liability, pollution
and hazardous materials liability, completed operations, products
liability, and fire damage: not less than Three Million Dollars
($3,000,000.00) with a combined single limit for both bodily injury and
property damage and naming Lessor, Lessor's agents and Lessor's
mortgagees as additional insureds as their respective interests may
appear; (iv) except to the extent covered by the insurance for the
Premises and leasehold improvements required to be carried by the
Insuring Party under Paragraph 8.3(a) of the Lease, "All Risk" property
insurance (including, without limitation, vandalism, malicious mischief,
water damage, earthquake, damage from pollution and hazardous materials,
course of construction endorsement, sprinkler leakage endorsement,
debris removal and demolition coverage, and boiler and machinery
coverage) on the Premises and the leasehold improvements, Utility
Installations, Alterations, Trade Fixtures, and Lessee's personal
property located on or in the Premises, which shall be in a form
providing coverage comparable to the coverage provided in the standard
ISO All-Risk form and in an amount equal to the full amount of the
replacement cost of the insured items, as the same may from time to time
increase as a result of inflation or and (v) boiler and machinery
insurance, including, but not limited to, steam pipes, pressure pipes,
condensation return pipes and other pressure vessels and HVAC equipment,
with limits per accident of not less than the replacement cost of all
leasehold improvements, Utility Installments (except to the extent
covered by the insurance for the Premises and leasehold improvements
required to be carried by the Insuring Party under
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Paragraph 8.3(a) of the Lease), Alterations, Trade Fixtures, and
Lessee's personal property and all boilers, pressure valves, HVAC
equipment and miscellaneous electrical and mechanical equipment in the
Premises, all with deductibles not to exceed $1,000.00 per occurrence.
The insurance policies set forth above shall not contain any
intra-insured exclusions as between insured persons or organizations,
but shall include coverage for liability assumed under Lease as in
"insured contract" for the performance of Lessee's indemnity obligations
under the Lease. The limits of said insurance required by the Lease or
as carried by Lessee shall, not however, limit the liability of Lessee
nor relieve Lessee of any obligation hereunder. All insurance to be
carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor whose insurance shall be considered
excess insurance only."
55. Paragraph 9 (Damage or Destruction). The following
definitions shall apply for purposes of Paragraph 9.1(a) and 9.1(b).
(a) "Premises Partial Damage" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations, the repair time for which, as reasonably determined by Lessor,
will not exceed one hundred eighty (180) days
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations, the repair time for which, as reasonably determined by Lessor,
will not exceed one hundred eighty (180) days.
Notwithstanding anything to the contrary set forth in Paragraph
9 of the Lease, Lessee hereby waives the provisions of California Civil Code
Sections 1932 and 1933, and any successor sections and any other statues which
are inconsistent with the provisions of Lease and which relate to the
termination of leases when leased property is destroyed, and agree that such
event shall be governed by the terms of the Lease.
56. Paragraph 13.2 (Remedies). The following language is hereby
added to Paragraph 13.2:
"(e) Re-enter the Premises at its option without declaring
the Lease term ended, and re-let the whole or any part thereof for the
account of Lessee, on such terms and conditions and at such rent as
Lessor may deem proper, collecting such rent and applying it on the
amount due from Lessee hereunder and on the expense of such relating and
on any other damage or expense so sustained by Lessor, or on any such
item or items, recovering from Lessee the difference between the
proceeds of such re-letting and the amount of the rentals reserved
hereunder, and any such damage or expense from time to time, which said
sum Lessee agrees to pay upon demand. Lessor shall not, by any re-entry
or other act, be deemed to have terminated this Lease or the liability
of Lessee for the total rental hereunder(net of re-let recovery as
specified above), or any installment thereof then due or thereafter
accruing, or for damages, unless Lessor shall notify Lessee, in writing,
that Lessor has so elected to terminate the Lease."
57. Paragraph 17 (Lessor's Liability). The following is
added to Paragraph 17:
"Lessee acknowledges and agrees that the obligations of Lessor
under this Lease do not constitute personal obligations of the
individual partners, directors, officers or shareholders of Lessor, and
Lessee shall look to the real estate that is the subject of this Lease
and to any insurance proceeds received from insurance policies required
to be carried under this Lease, and to no other assets of Lessor for the
satisfaction of any liability with respect to this Lease, and will not
seek recourse against the individual partners, directors, officers or
shareholders of Lessor or any of their personal assets for such
satisfaction."
58. Paragraph 24 (Waivers). The following language is hereby added to
Paragraph 24:
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"No payment by Lessee or receipt by Lessor of a lesser amount
than the fixed rent payment herein stipulated shall be deemed to be
other than on account of the earliest stipulated rent, nor shall any
endorsement or statement on any check or any letter accompanying any
check or any 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."
59. Paragraph 26 (Holding Over). The following language is
hereby added to Paragraph 26:
"If Lessee remains in possession of all or any part of the
Premises after the expiration of the Term of the Lease without Lessor's
written consent (which may be withheld at Lessor's sole and absolute
discretion), Lessee shall become a Lessee at sufferance only and such
tendency shall not constitute a renewal or extension for any further
term. In such event, Base Rent shall be increased to an amount equal to
one hundred fifty percent(150%) of the Base Rent payable during the last
month of the Term, and any other sums due hereunder shall be payable in
the amount of the terms specified in this Lease. Such tenancy shall be
subject to every other term, condition, and covenant contained herein.
The foregoing provisions of this Paragraph 26 are in addition to and do
not affect any rights of Lessor under the Lease or as otherwise
provided by law. If Lessee fails to surrender the Premises upon the
expiration of this Lease despite the demand to do so by Lessor, Lessee
shall indemnify and hold Lessor harmless from all loss or liability
including, without limitation, any claim made by any succeeding lessee
founded on or resulting from such failure to surrender."
60. Paragraph 30 (Subordination; Attornment ;
Non-Disbursement.) With respect to Paragraph 30 of the Lease, neither Lessor
nor Lessee shall unreasonably withold its consent to changes or amendments to
the Lease requested by any Lender of Lessor having a security interest in the
Premises or the Lease, so long as the changes do not alter the basic business
terms of the Lease or otherwise materially diminish any rights or materially
increase any obligation of the party from who consent to such change or
amendment is requested. Notwithstanding any contrary provision of Paragraph 30.1
of the Lease, Lessee agrees to send by certified mail to any Lender whose
address has been furnished to Lessee, a copy of any notice of default served by
Lessee on Lessor, and if Lessor fails to cure such default within the time
provided for in the Lease, such Lenders shall have an additional thirty (30)
days to cure such default; provided however, that if such default cannot
reasonably be cured within such thirty (30) day period, then such Lenders shall
have such additional time to cure the default as is reasonably necessary under
the circumstances, provided such Lenders commence the cure of such default
within said thirty (30) day period and diligently pursue the same to completion.
60(a.) Paragraph 34 (Signs). Lessee will have no right to
install or maintain any Lessee identification signs (or any other signs, banners
or other such displays) upon the Premises which may be visible from the exterior
of the Premises, except as (I) have been expressly approved by Lessor prior to
the installation thereof, and (ii) are consistent and compatible with (A) the
restrictions contained in this Paragraph 60(a), (B) all governmental regulations
and requirements, ( C ) rules and regulations from time to time promulgated by
Lessor with respect to the Building, a current copy of which is attached hereto
as Exhibit "B", and (D) all private covenants and restrictions now or hereafter
of record affecting the Premises. All approved signs (the "Building Sign") if
any must be maintained, at the sole cost and expense of Lessee, pursuant to a
maintenance program approved and supervised by Lessor. Upon expiration of
earlier termination of the Lease, Lessee, at Lessee's sole cost and expense
(subject to Lessor's supervision), will cause the Builiding Sign to be removed
and the Building to be restored to condition existing prior to the placement of
such sign. If Lessee fails to remove such sign and restore the Building as
provided above within thirty (30) days following Lessor's demand therefor, then
Lessor may perform such work and all costs and expenses incurred by Lessor in so
performing such work will be reimbursed by Lessee to L4essor within ten (10)
days following Lessor's delivery to Lessee of an invoice therefor. The sign
rights herein above provided are personal to the original Lessee executing this
Lease and may not be assigned or transferred to, or utilized by, any other
person or entity.
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61. Net Lease. This Lease shall be deemed and construed to
be a "net lease" and except as herein otherwise expressly set forth Lessee shall
pay to Lessor, absolutely net throughout the Term of this Lease, the Base Rent
(as adjusted persuant to Subparagraph 48(b) above), additional rent and other
payments hereunder, without abatement or set off.
62. Option to Extend Term: Lessor hereby grants to Lessee
one (1) option ("Option to Extend") to extend the Term of this Lease for a
period of five (5) years ('Option Term''). The Option must be exercised if at
all by written notice ("Option to Extend Notice") delivered by Lessee to Lessor
not earlier than one hundred eighty (180) days nor later than ninety (90) days
prior to the end of the initial five (5) year Term. Further, the Option to
Extend shall not be deemed to be properl7y exercised if, as of the date of the
Option Notice and at the end of the initial (5) year Term, Lessee is in default
under the Lease. In the event the initial five (5) year Term shall be extended
as provided in this Paragraph 62, then all of the terms, covenants and
conditions of the Lease shall remain unmodified and in full force and effect,
except for payment of Monthly Basic Rent. Monthly Basic Rent shall be adjusted
as of the commencement date of the Option Term in accordance with the "fair
market rental rate" for the Premises determined as follows.
(a) The term "fair market rental rate" as used
herein will mean the annual amount per rentable square foot, projected
during the relevant period, that a willing, comparable, non-equity
tenant (excluding sublease and assignment transactions) would pay, and a
willing comparable landlord of a comparable industrial building located
in the vicinity of the Building would accept, at arm's length (what
Lessor is accepting in current transactions for the Building may be
considered), for space of comparable size, quality and floor height as
the leased area at issue taking into account the age, quality and layout
of the existing improvements in the lease area at issue and taking into
account items that professional real estate brokers customarily
consider, including, but not limited to rental rates, space
availability, tenant size, tenant improvement allowances, operating
expenses, reduced rent, free rent and any other lease concessions, if
any, then being charged or granted by Lessor or the lessors of such
similar buildings. The fair market rental rate will be an effective
rate, not specifically including, but accounting for appropriate
economic concessions described above.
(b) If a determination of fair market rental rate is
required under this Lease, then Lessor will provide written notice of
Lessor's determination of the fair market rental rate not later than
thirty (30) days after the date upon which Lessee timely exercises the
right giving rise to necessity for such fair market rental rate
determination. Lessee will have thirty (30) days (Lessee's Review
Period") after receipt of Lessor's notice of the fair market rental rate
within which to accept such fair market rental rate or to reasonably
object thereto in writing. Lessee's failure to object to the fair
market rental rate submitted by Lessor in writing within Lessee's Review
Period, Lessor and Lessee will attempt in good faith to agree upon such
fair market rental rate using their best good faith efforts. If Lessor
and Lessee fail to reach an agreement on such fair market rental rate
within fifteen (15) days following the expiration of Lessee's Review
Period (the "Outside Agreement Date"), then each party's determination
will be submitted to appraisal in accordance with the provisions below.
(c) (i) Lessor and Lessee will each appoint one (1)
independent appraiser who by profession must be a real estate broker
who has been active over the five (5) year period ending on the date
of such appointment in the leasing of industrial properties located
in the vicinity of the Building. The determination of the appraisers
will be limited solely to the issue of whether Lessor's or Lessee's
submitted fair market rental rate for the leased area at issue is the
closest to the actual fair market rental rate for such area as
determined by appraisers, taking into account the requirements
specified in Subparagraphs (a) and (b) above. Each such appraiser
will be appointed within fifteen (15) days after the Outside
Agreement Date.
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(ii) The two (2) appraisers so appointed well within
fifteen (15) days of the date of the appointment of the last
appointed appraiser agree upon and appoint a third appraiser who
shall be qualified under the same criteria set forth hereinabove for
qualification of the initial two (2) appraisers.
(iii) The three (3) appraisers will within thirty
(30) days of the appointment of the third appraiser reach a decision
as to whether the parties will use Lessor's or Lessee's submitted
fair market rental rate, and will notify Lessor and Lessee thereof.
(iv) The decision of the majority of the three (3)
appraisers will be binding upon Lessor and Lessee. If either Lessor
or Lessee fails to appoint an appraiser within the time period
specified in Subparagraph (c)(I) hereinabove, the appraiser appointed
by one of them will, within thirty (30) days following the date on
which the party failing to appoint an appraiser could have last
appointed such appraiser, reach a decision based upon the procedures
set forth above (i.e., by selecting either Lessor's or Lessee's
submitted fair market rental rate) and notify Lessor and Lessee
thereof, and such appraiser's decision will be binding upon Lessor
and Lessee.
(v) If the two (2) appraisers fail to agree upon
and timely appoint a third appraiser, both appraisers will be
dismissed and the matter to be decided will be forthwith submitted to
arbitration under the provisions of the American Arbitration
Association based upon the procedures set forth above (i.e., by
selecting either Lessor's or Lessee's submitted fair market rental
rate).
(vi) The cost of appraisal (and, if necessary,
arbitration) will be shared by Lessor and Lessee equally.
(vii) If the process described in Subparagraph (b)
above and this Subparagraph (c) has not resulted in a selection of
Lessor's and Lessee's fair market rental rate by the commencement of
the applicable lease term, then the fair market rental rate estimated
by Lessor will be used until the appraiser(s) reach a decision, with
an appropriate rental credit and other adjustments for any
overpayments of Monthly Base Rent or other amounts if the appraisers
select Lessee's estimate of the fair market rental rate.
63. Tenant Improvements. Lessor shall install, at Lessor's
sole cost and expense. (i) one hundred and twenty (120) square yards of Oxford
Place carpet (with static control), over a new 3/8" commercial pad, throughout
the reception, stairway and top landing area only, and (ii) a 4" Roppe base.
64. Miscellaneous.
64.1 Waiver of Trial By Jury. IN ANY ACTION OR
PROCEEDING ARISING HEREFROM, LESSEE HERBY CONSENTS TO (I) THE
JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA, (II)
SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW, AND (III)
IN THE INTEREST OF SAVING TIME AND EXPENSE, TRIAL WITHOUT A JURY.
64.2 Rules and Regulations. Lessee shall faithfully
observe and comply with the rules and regulations that Lessor shall from
time to time promulgate. Lessor reserves the right from time to time in
its discretion to make all reasonable additions and modifications to the
rules and regulations. Any additions and modifications to the rules and
regulations shall be binding on Lessee when delivered to Lessee.
Lessor's current rules and regulations are attached hereto as Exhibit B.
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IN WITNESS WHEREOF, the parties have executed this Addendum as of the
day and year of execution of the Lease.
"LESSOR" TR BRELL, CAL CORP,
an Illinois corporation
By: Koll Management Services, Inc.
a Delaware corporation, Its
authorized agent
By:_________________________
Name_______________________
Title________________________
"LESSEE" SOURCE SCIENTIFIC, INC.
a California corporation
By:________________________________
Its:_________________________
