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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19371
PHARMCHEM LABORATORIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 77-0187280
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1505-A O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 328-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK NASDAQ NATIONAL MARKET
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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 by 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 (based on the closing price of $4 9/16 as reported on the
Nasdaq/NMS on January 31, 1997) was approximately $26,059,000. Shares of voting
stock held by each executive officer and director and by each holder of 5% or
more of the outstanding voting stock have been treated as shares held by
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares of
the Registrant's Common Stock as of January 31, 1997 was 5,711,648.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the PharmChem Laboratories, Inc. Proxy Statement for the 1997
Annual Meeting of Shareholders to be filed with the Commission on or before
April 30, 1997 are incorporated by reference into Part III of this Annual Report
on Form 10-K. With the exception of those portions which are specifically
incorporated by reference in this Annual Report on Form 10-K, such Proxy
Statement shall not be deemed filed as part of this Report.
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PHARMCHEM LABORATORIES, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
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PAGE
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PART I.
Item 1. Business................................................................. 3
Item 2. Properties............................................................... 8
Item 3. Legal Proceedings........................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders...................... 9
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.... 10
Item 6. Selected Consolidated Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 11
Item 8. Financial Statements and Supplementary Data.............................. 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................... 32
PART III.
Item 10. Directors and Executive Officers of the Registrant....................... 32
Item 11. Executive Compensation................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 32
Item 13. Certain Relationships and Related Transactions........................... 32
PART IV.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K........... 32
Signatures ......................................................................... 36
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PART I
ITEM 1. BUSINESS
Unless the context indicates otherwise, all references herein to
"PharmChem" or the "Company" include PharmChem Laboratories, Inc. and its
wholly-owned subsidiary, Medscreen Limited ("Medscreen").
GENERAL
PharmChem Laboratories, Inc. is a leading independent laboratory providing
integrated drug testing services to corporate and governmental customers seeking
to detect and deter the use of illegal drugs and alcohol. PharmChem is certified
by the U.S. Department of Health and Human Services, including Clinical
Laboratory Improvement Amendments (CLIA) and Substance Abuse and Mental Health
Service Administration (SAMHSA), formerly the National Institute on Drug Abuse,
the College of American Pathologists (CAP) and a number of states to conduct
drug testing using forensic procedures. These forensic procedures provide
accurate and reliable test results and a chain-of-custody for each specimen from
its collection to the reporting of its test result. PharmChem tests for a number
of drugs of abuse, including cocaine, methamphetamine, heroin, phencyclidine
(PCP), marijuana (THC) and alcohol, primarily by urinalysis but also with the
PharmChek(TM) sweat testing system and the PharmScreen(TM) on-site screening
device. In addition to forensic drug testing, PharmChem offers a range of
services which are customized to assist customers in implementing cost-effective
drug testing programs.
PharmChem was incorporated in California in 1987 to acquire PharmChem
Laboratories Operations, Inc., a California corporation which was founded in
1971. In 1991, the Company completed its initial public offering. In 1992,
PharmChem expanded its operations through the acquisitions of London-based
Medscreen (a provider of international drug testing services) and of a certified
laboratory in Fort Worth, Texas. The Company's customers include private and
public employers, criminal justice agencies and drug treatment programs,
primarily in the United States and the United Kingdom.
INDUSTRY BACKGROUND
Historically, the drug testing market has been served by national clinical
laboratory chains, independent national drug testing laboratories, such as
PharmChem, and numerous regional and local laboratories. Thousands of general
clinical laboratories nationwide can conduct forensic and and non-forensic drug
testing, and are increasingly bidding on local contracts. Over the past several
years, however, many corporate and governmental organizations are requiring drug
testing laboratories to be certified to conduct forensic drug tests and to offer
integrated cost-effective testing services. Also, many large organizations,
particularly those in the public sector, use a competitive bidding procedure to
select their drug testing laboratories. The bidding process for these
competitive contracts is often limited to qualified bidders and certified drug
testing laboratories, which can demonstrate the ability to meet the service and
volume levels specified by the customer.
DRUG TESTING OPERATIONS
The essential elements of forensic drug testing are a secure
chain-of-custody for each specimen from its collection to the reporting of its
test result and accurate and reliable testing in which a second independent test
is performed to confirm each positive test result. PharmChem carefully controls
each step of the testing process with detailed written procedures and using the
specific forensic testing methods required for legal defensibility of results.
The Company performs the largest portion of its testing at its laboratory in
Menlo Park, California, which operates six days per week, 24 hours a day. The
Company also provides complete testing services at its Texas Division in Fort
Worth and its London-based subsidiary, Medscreen. The steps in the Company's
forensic drug testing process by urinalysis are as follows:
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Specimen Collection and Transportation. Forensic drug testing begins with
specimen collection conducted under carefully controlled conditions. Once a
donor has provided a specimen, it is assigned a unique specimen identification
number. Information pertinent to the specimen is then recorded on a
chain-of-custody form numbered to match the specimen bottle. Specimens, together
with chain-of-custody forms, are delivered to the Company by courier or U.S.
mail.
Receiving and Accessioning. PharmChem receives specimens in its restricted
accessioning rooms, where they are inspected for tampering and checked for
proper chain-of-custody documentation. Specimens are identified and monitored
using unique bar-coded laboratory accessioning numbers.
Screening. Each specimen submitted to PharmChem is screened for the
presence of the drugs specified by the customer. The Company performs in excess
of 1,200,000 screening tests on more than 250,000 specimens per month to
determine the presence of drugs. The screening methods used by the Company
include enzyme-multiplied immunoassay technique (EMIT)(1), radioimmunoassay
(RIA) and thin layer chromatography (TLC).
Confirmation Testing. Specimens that screen negative are reported to the
customer without further testing. Specimens that screen positive are confirmed
by testing a separate aliquot using a different and independent technology from
that used for the initial screening. Confirmation technologies employed by
PharmChem include gas chromatography/mass spectrometry (GC/MS) and gas
chromatography (GC). GC/MS confirmation is required for federally-regulated drug
testing and most other workplace drug testing and its use has been cited with
approval in numerous legal proceedings.
Quality Assurance/Quality Control (QA/QC). PharmChem carefully monitors
the accuracy and reliability of its test results by internal and external QA/QC
programs. The Company's staff evaluates laboratory performance with open and
blind quality control samples. In addition, the Company is subject to frequent
proficiency testing by various certifying bodies which send their own open and
blind samples to the laboratory. Further, the Company is subject to frequent
inspections by certifying agencies.
Data Review. Each test result undergoes several independent levels of
review before being reported by a certifying scientist.
Reporting of Results. PharmChem transmits most of its test results
electronically using secure communications networks and more recently, through
automated voice reporting systems. Upon release by a certifying scientist, each
test result is made available by the Company's information systems to the
customer's computer, secure facsimile machine or by telephonic inquiry. The
Company routinely reports results for specimens that screen negative within 24
hours of receipt in the laboratory and within 48 hours for specimens that
require confirmation.
CUSTOMER SERVICES AND TECHNICAL SUPPORT
PharmChem provides a variety of drug testing services which are customized
to each customer's specific needs. The Company employs a customer service and
technical support staff specializing in one or more of the following areas of
service.
Specimen Collection. PharmChem manages specimen collection services for a
number of its customers. The Company maintains a list of more than 4,000 clinics
and other organizations throughout the country that offer specimen collection
services that comply with forensic drug testing procedures. PharmChem's customer
service staff identifies collectors conveniently located to customer sites,
prepares customized specimen collection procedures, conducts training of
collection personnel and monitors their performance. In 1996, PharmChem managed
more than 500,000 collections in the U.S., while Medscreen managed approximately
20,000 collections throughout the U.K. and at over 150 shipping ports throughout
the world.
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(1)EMIT is a registered trademark of Behring Diagnostics, Inc.
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Transportation. Most specimens are transported to PharmChem by overnight
or same-day courier, or by U.S. mail. The Company offers special specimen
transportation services for selected areas throughout the country which provide
for pickup of specimens before the close of each business day.
Technical Consultation. The technical specialists on PharmChem's staff are
experienced in drug metabolism and other technical aspects of drug testing.
These specialists respond to requests from customers to interpret test results.
In addition, the Company is often called upon to assemble the complete chain-of-
custody and testing data package for specimen results which have been challenged
and to provide expert witness testimony in legal proceedings. The technical
consultation group also provides comprehensive in-service training for customers
on topics such as substance abuse trends, toxicology and drug pharmacology,
breath alcohol testing and technical information on the Company's testing
procedures.
Program Analysis. PharmChem collects and analyzes data on test results in
order to provide comprehensive monthly statistical reports to meet customers'
regulatory requirements and to assist with drug program management.
RESEARCH AND DEVELOPMENT
Research and development activities are performed by PharmChem's most
experienced scientists and technicians. The Company's research and development
efforts continually focus upon improving laboratory procedures and processes.
The Company believes it has engineered a number of efficiencies to improve the
accuracy and reliability of its drug tests.
PHARMCHEK(TM) SWEAT PATCH
Since 1992, the Company has been investing in PharmChek(TM), a system which
uses sweat to detect the use of illegal drugs. PharmChek(TM) may offer several
advantages over drug detection systems which are currently available. It does
not require the handling of urine or blood, which may be objectionable to some
people. The use of sweat as a testing medium may lengthen the drug use detection
period and decrease testing costs by reducing the need for specialized specimen
collection facilities and staff. While the primary use of PharmChek(TM) has been
to detect illegal drugs, the ability of this system to detect alcohol may also
be explored.
During 1995 and 1996, the Company conducted pilot programs using
PharmChek(TM) with the Michigan Department of Corrections (Michigan DOC) and the
Administrative Office of the United States Courts (Federal Probation). Although
certain issues have arisen in such pilot testing relating to the adhesive
qualities of the product, the Company is working toward improving the product.
In 1995, the U.S. Food and Drug Administration (FDA) cleared PharmChek(TM) for
detecting the use of cocaine, opiates (including heroin), and amphetamines
(including methamphetamine) and, in 1996, clearance was obtained for detecting
the use of phencyclidine (PCP) and marijuana (THC).
The Company has incurred significant costs in connection with the
commercialization of PharmChek(TM) and expects to continue to do so in the
future. To date, sales of PharmChek(TM) by the Company have not been material
and there can be no assurance that it will be commercially accepted by existing
or new customers or generate significant revenues in the future. Refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PHARMSCREEN(TM) ON-SITE SCREENING DEVICE
In recent years there has been a growing trend toward the use of on-site
screening for drugs of abuse by a number of agencies, including some of the
Company's customers. On-site screening relies upon portable diagnostic devices
which may be used at the point of specimen collection to identify drugs of abuse
in urine specimens. This technology is advantageous in that it provides
virtually immediate test results at a lower cost than a laboratory-based testing
program.
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The Company now offers a line of on-site screening devices to supplement
the laboratory-based testing services it has traditionally offered. In 1996,
PharmChem acquired exclusive marketing rights in non-clinical markets for
PharmScreen(TM), a portable, hand-held device used for on-site screening of
drugs of abuse. In 1996, the FDA cleared PharmScreen(TM) for detecting the use
of cocaine, opiates (including heroin), amphetamines (including methamphetamine)
and PCP. PharmScreen(TM) is currently being used on a trial basis by certain
government agencies, including Michigan DOC and Federal Probation.
PharmScreen(TM) provides only a preliminary analytical result, and a more
specific alternative chemical method, such as GC/MS, is necessary to obtain a
confirmed analytical result. To date, sales of PharmScreen(TM) by the Company
have not been material and there can be no assurance that it will be
commercially accepted by existing or new customers or generate significant
revenues in the future.
SALES AND MARKETING
PharmChem sells its integrated drug testing services to corporate and
governmental customers. The sales force uses a consultative selling approach
emphasizing the scope of integrated services offered by the Company and
customizing these services to meet customers' particular needs.
CUSTOMERS
PharmChem provides integrated drug testing services to three primary
customer groups:
Public and Private Employers. Public and private employers use drug
testing as part of their hiring decisions in order to increase safety and reduce
costs associated with drug abuse in the workplace. In addition, an increasing
number of public and private employers test employees in certain positions on a
periodic or random basis and test other employees upon reasonable suspicion of
drug use. Sales to public and private employers accounted for 50%, 49%, and 48%
of the Company's total net sales in 1996, 1995 and 1994, respectively. Sales to
Sears Roebuck & Co. accounted for approximately 10% of the Company's total net
sales in 1996, 1995 and 1994.
Criminal Justice Agencies. Criminal justice agencies use drug testing
results in criminal proceedings and to assist with making parole, drug treatment
and probation decisions. In addition, these agencies use drug testing to monitor
drug treatment of individuals under supervision and to track drug use trends
within the United States. Sales to criminal justice agencies accounted for 37%,
34%, and 38% of the Company's total net sales in 1996, 1995 and 1994,
respectively. Sales to Federal Probation accounted for approximately 19%, 17%
and 19% of the Company's total net sales in 1996, 1995 and 1994, respectively.
Drug Treatment Programs. Drug treatment programs use drug testing to
monitor the treatment and rehabilitation of drug users in their care. Sales to
drug treatment programs accounted for less than 6% of the Company's total net
sales in 1996, 1995 and 1994.
Medscreen. This London-based subsidiary accounted for 8%, 11%, and 9% of
the Company's total net sales in 1996, 1995 and 1994, respectively. At the end
of 1995, Medscreen lost its largest customer, which represented approximately
20% of its revenues, due to the privatization of the British Rail Occupational
Health and Safety unit.
SUPPLIERS
PharmChem is not dependent upon any single supplier for its raw materials.
CONTRACTING
Most of PharmChem's large potential customers, including the majority of
public employers and criminal justice agencies, use a formal competitive bid
process in which the potential customer provides a detailed specification of the
drug testing services it requires. Because many of the Company's customers use a
competitive bidding process, there is no assurance that the Company will be the
successful bidder when such contracts are up for renewal. While price is an
important factor, in most cases these organizations are not
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required to accept the lowest bid, but rather may choose the winning bidders on
the basis of technical superiority and customer service.
The failure to renew a significant contract, if not replaced by comparable
contracts, could result in lower sales, lower profit margins, negative cash
flows and losses. PharmChem's contracts generally provide for no minimum amounts
or payments, and allow termination at the customer's discretion on short notice
with little or no penalty. In particular, many contracts with governmental
agencies, including criminal justice agencies, provide for termination for
convenience. Although the Company's experience has been that its customers
generally do not exercise these early termination rights, there can be no
assurance that this will continue in the future. For some customers, the Company
performs drug testing services under a standard services contract. With other
customers, the Company has no formal contract. In these cases, the Company
typically accepts and tests specimens for an agreed upon price which is
generally renegotiated every twelve months. Backlog is not a significant
statistic for the Company.
COMPETITION
The market for drug testing services became increasingly competitive in the
early 1990's, and continues to be competitive. Drug testing laboratories compete
primarily on the basis of technical capability, customer service and price. The
Company believes it competes favorably in each of these categories. PharmChem
has significantly expanded its scope of services while its average total price
per specimen has remained relatively unchanged. PharmChem's competitors include
national clinical laboratory companies, such as Smith-Kline Beecham Clinical
Laboratories, Laboratory Corporation of America (National Health
Laboratories/Roche Biomedical Laboratories) and Quest Diagnostics (formerly
Corning Clinical Laboratories); independent national drug testing laboratories;
third party administrators; medical review officers; manufacturers and
distributors of on-site screening devices and equipment; and numerous regional
and local laboratories. Consolidation in the national clinical laboratory
industry has continued in recent years and the national clinical laboratories
have greater financial, marketing, laboratory and related resources than the
Company. In addition, some customers and potential customers of the Company
operate their own drug testing facilities or may develop such facilities in the
future. A majority of the Company's sales are derived from competitive bids, and
the Company believes that competitive pressure with respect to these bids,
particularly large multi-year contracts, has intensified.
CERTIFICATION AND GOVERNMENT REGULATION
Laboratories which compete in the forensic drug testing market generally
must be certified by SAMHSA. In addition, some state and local jurisdictions
require their own certification for testing of specimens involving their
residents. Such state and local certifications are essential to the Company's
business in each such respective jurisdiction. The Company's laboratory is
currently certified by SAMHSA, CLIA, CAP and certain state and local
jurisdictions. The Company believes it is certified in all jurisdictions in
which it operates.
The Company is subject to frequent inspection by certifying bodies,
including annual CAP and semi-annual SAMHSA inspections. Inspections generally
result in reports describing areas for improvement or suggesting changes in
procedures. The Company may be required to take actions with respect to the
items noted in the inspection report in order to remain certified. Failure to
meet certification requirements could result in suspension or loss of
certification. The Company has never been decertified as the result of an
inspection. Certification is essential to the Company's business because some of
its customers are required to use a certified laboratory, and many of its
customers look to certification as an indication of reliability and accuracy of
results.
Employee drug testing by federal agencies and certain private employers is
regulated by certain federal agencies. Court precedent currently exists in a
number of states regarding the circumstances under which employers may test
employees and the procedures under which such tests must be conducted. The
circumstances under which drug testing can legally be required by employers is
subject to judicial review, and
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is challenged from time to time by employees, unions and other groups on
constitutional, privacy and other grounds.
DOMESTIC AND FOREIGN OPERATIONS
Refer to Note 10 to the Consolidated Financial Statements for net sales,
income (loss) from operations and identifiable assets by geographic location.
ENVIRONMENTAL MATTERS
A small portion of the Company's business involves testing procedures
requiring the use of chloroform and radioactive reagents, which are considered
to be hazardous materials. Failure to comply with current or future federal,
state or local environmental laws or regulations regarding these hazardous
materials could have a material adverse effect on the Company. The Company
believes that it has adequately notified employees of potential risks associated
with working at the Company and has provided a workplace safe from hazard, as
required by the Occupational Safety and Health Administration and certain state
laws. The Company believes it is in compliance with all applicable environmental
laws and regulations.
EMPLOYEES
As of December 31, 1996, the Company had approximately 350 full-time
employees. PharmChem's employees are not represented by labor organizations. The
Company considers relations with its employees to be good.
SEASONAL OPERATING FACTORS
PharmChem's operations are affected by seasonal trends to which drug
testing laboratories are generally subject. In the past, testing volume tends to
be higher in the second and third calendar quarters and lower in the fourth and
first calendar quarters, primarily due to the hiring patterns of the Company's
public and private employer customer group which affect pre-employment drug
testing. Further, demand for the Company's services is dependent on general
economic conditions.
ITEM 2. PROPERTIES
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LOCATION USE SQUARE FOOTAGE REMAINING LEASE TERM
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1505-A O'Brien Drive Headquarters and 35,719 4 years
Menlo Park, CA 94025 Laboratory
1275 Hamilton Court Warehouse 11,925 2 years
Menlo Park, CA 94025
7606 Pebble Drive Texas Division 15,000 4 years with a 5 year option
Fort Worth, TX 76118
1A Harbour Quay 100 Medscreen 13,350 6 years with a 10 year option
Preston's Road London, Headquarters and
E14 9QZ England Laboratory
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, PharmChem is sued by individuals,
primarily those in the criminal justice system, who have tested positive for
drugs of abuse. In addition, the Company frequently testifies in administrative
and court proceedings involving the results of its tests. To date, the Company
has not experienced any material liability related to these claims, although
there can be no assurance that the Company will not at some time in the future
experience significant liability in connection with such claims. There are no
pending legal proceedings, other than ordinary routine litigation incidental to
the Company's business, to which PharmChem is a party or to which any of its
property is subject and management does not
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believe the outcome of any of the proceedings will have a material impact on its
financial position or results of operations. The Company believes that its
liability insurance coverage is adequate for its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF PHARMCHEM
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NAME AGE POSITION WITH THE COMPANY
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Joseph W. Halligan................ 52 President, Chief Executive Officer and Director
David A. Lattanzio................ 54 Vice President, Finance and Administration and
Chief Financial Officer
Edward V. Collom, Jr.............. 50 Vice President, Business Development
Robert S. Fogerson, Jr............ 44 Vice President, Laboratory Technical Director
Neil A. Fortner................... 42 Vice President, Laboratory Operations
Elizabeth M. Lison................ 39 Vice President, Customer Service
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Mr. Halligan has been President, Chief Executive Officer and Director since
November 1995. From 1988 to 1995, Mr. Halligan was President and CEO of E.S.I.
Consulting Group, a private consulting practice, specializing in advising and
operating high growth, consumer and service oriented companies. Before forming
his consulting practice, Mr. Halligan served from 1983 to 1987 as President and
CEO of a privately-held company, Laura Scudder's, Inc. From 1969 to 1983, Mr.
Halligan served as Senior Vice President of Fotomat Corporation and President of
its subsidiary, Video Services of America. He holds a B.S. in Management and
Business Administration from Columbia Pacific University.
Mr. Lattanzio has been Vice President, Finance and Administration, and
Chief Financial Officer since April 1996. He is responsible for all business
aspects of the Company's operations, including accounting, corporate finance,
treasury, logistics, human resources and risk management. From 1995 to March
1996, Mr. Lattanzio performed private consulting for several companies,
including the Company. He served as Vice President, Finance and Chief Financial
Officer of Mission Foods from 1991 to 1995. Mr. Lattanzio holds a B.B.A. in
Accounting from the University of Notre Dame. He is a certified public
accountant and a member of the Employment Training Panel, State of California.
Mr. Collom has been Vice President, Business Development since March 1996.
He is responsible for sales, marketing and commercial development of PharmChem's
reference laboratory services and the PharmChek(TM) and PharmScreen(TM) product
lines. From 1993 to February 1996, Mr. Collom was the Business Unit Director for
Microgenics/Boehringer Mannheim's Immunoassay Unit. From 1990 to 1993, Mr.
Collom served as Director of Sales and Marketing for Specialty Laboratories,
Inc. He has also served in a variety of sales and marketing management positions
at Johnson & Johnson/Ortho Diagnostics and DuPont Medical Products. He holds a
B.S. from the University of California, Los Angeles, and holds a M.S. from
California State University and a M.B.A. from Claremont College.
Mr. Fogerson has been Vice President, Laboratory Technical Director since
July 1991. He is responsible for all technical aspects of laboratory operations.
From October 1993 through August 1994, he served as Managing Director of the
Company's Medscreen subsidiary. He served as Director, Laboratory Operations
from April 1989 to July 1991. Mr. Fogerson joined PharmChem in 1975 as a
laboratory analyst and has served in a number of capacities since that time,
including Laboratory Supervisor and Laboratory Manager. He is a laboratory
inspector for Navy drug testing laboratories. He holds a B.A. in Physiological
Psychology from Stanford University. Mr. Fogerson is a member of the American
Association of Clinical Chemistry, Society of Forensic Toxicologists, The
International Association of Forensic Toxicologists, and a member and past
president of the California Association of Toxicologists.
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Mr. Fortner has been Vice President, Laboratory Operations, since February
1992. Mr. Fortner joined the Company as Director, Laboratory Operations in July
1991. He is the Scientific Director and is responsible for all production
aspects of laboratory operations. From 1985 to 1991, he served as Director of
Toxicology at Southgate Medical Services. Mr. Fortner has more than 15 years
experience in forensic toxicology and he is a qualified SAMHSA and CAP
laboratory inspector. He is a member of the American Association of Clinical
Chemistry and a full member of the Society of Forensic Toxicologists, the
American Academy of Forensic Sciences and the American Board of Forensic
Examiners. Mr. Fortner holds a B.A. in Biology from Hiram College and a M.S. in
Biochemistry from Western Kentucky University.
Ms. Lison has been Vice President, Customer Service, since March 1997. Ms.
Lison joined the Company's Medscreen subsidiary in 1993, where she held various
management positions in sales and customer service. In June 1996, she relocated
to the Corporate office to serve as Director, Customer Service. From 1979 to
1993, Ms. Lison worked in various aspects of the design and delivery of
workplace drug testing programs for companies based in the U.K. Ms. Lison holds
a B. Tech (Hons) in Medical Science from the University of Bradford, U.K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol PCHM.
STOCK PRICES
The following table summarizes the high and low closing bid prices for the
Company's Common Stock by quarter for years 1996 and 1995, as reported by the
Automated Quotation System of the National Association of Securities Dealers
(Nasdaq). The prices shown represent quotations among securities dealers, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
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CALENDAR CALENDAR
QUARTER HIGH LOW QUARTER HIGH LOW
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Q1 1996 $ 5 $3 1/2 Q1 1995 $ 3 1/8 $1 3/4
Q2 1996 $ 4 $2 7/8 Q2 1995 $ 5 3/8 $1 7/8
Q3 1996 $ 3 7/8 $3 Q3 1995 $ 6 3/4 $4 1/4
Q4 1996 $ 5 3/8 $3 3/8 Q4 1995 $ 5 7/8 $3 5/8
</TABLE>
As of March 14, 1997, there were approximately 220 holders of record of
PharmChem's Common Stock. A large number of shares were held in nominee name.
Based upon information furnished by the Company's proxy solicitor, Skinner &
Co., the Company believes it had approximately 2,000 shareholders as of the same
date.
DIVIDENDS
PharmChem has never paid cash dividends on its Common Stock. The Company
plans to retain all earnings to further the operation and expansion of its
business and therefore does not expect to pay dividends in the foreseeable
future. The Company's current term and revolver credit agreement prohibits the
declaration or payment of dividends.
10
<PAGE> 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales...................................... $41,255 $39,111 $33,640 $29,032 $27,351
Cost of sales.................................. 31,757 29,771 25,777 22,110 17,657
------- ------- ------- ------- -------
Gross profit................................... 9,498 9,340 7,863 6,922 9,694
------- ------- ------- ------- -------
Selling, general and administrative expenses... 7,339 6,966 6,213 5,927 5,009
Marketing rights and research costs............ 1,455 1,039 854 1,002 854
Amortization of goodwill....................... 185 247 246 287 151
Provision for doubtful accounts................ 101 575 72 90 75
Restructuring and unusual charges(1)........... -- 8,775 -- 3,502 --
------- ------- ------- ------- -------
Total operating expenses....................... 9,080 17,602 7,385 10,808 6,089
------- ------- ------- ------- -------
Income (loss) from operations.................. 418 (8,262) 478 (3,886) 3,605
Other income (expense), net.................... (372) (368) (279) (311) 92
------- ------- ------- ------- -------
Income (loss) before income taxes.............. 46 (8,630) 199 (4,197) 3,697
Provision for (benefit from) income taxes...... -- (1,819) 148 (340) 1,437
------- ------- ------- ------- -------
Net income (loss).............................. $ 46 $(6,811) $ 51 $(3,857) $ 2,260
======= ======= ======= ======= =======
Net income (loss) per share.................... $ 0.01 $ (1.23) $ 0.01 $ (0.70) $ 0.39
======= ======= ======= ======= =======
Cash dividends per share....................... -- -- -- -- --
======= ======= ======= ======= =======
Weighted average shares outstanding............ 5,710 5,542 5,560 5,507 5,860
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Working capital................................ $ 1,707 $ 4,283 $ 4,243 $ 3,979 $ 7,856
Total assets................................... 21,468 22,183 28,306 29,049 31,510
Long-term debt, net of current portion......... 1,205 3,401 1,972 1,690 2,931
Shareholders' equity........................... $11,287 $11,029 $17,767 $17,716 $21,568
</TABLE>
- ---------------
(1) As more fully discussed in Note 8 to the Consolidated Financial Statements,
in 1995, the Company recorded a provision for restructuring and unusual
charges of $8.8 million related to the marketing rights and development of
PharmChek(TM), computer and peripheral equipment, Medscreen goodwill and
other unusual charges. The 1993 charges principally reflect a $2.4 million
write-down of Medscreen goodwill and other unusual charges.
Selected quarterly financial data is included in Note 11 to the
Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933, which are subject to the "safe harbor" created by these Sections. The
Company's actual future results could differ materially from those projected in
the forward-looking statements. Some factors which could cause future actual
results to differ materially from the Company's recent results and those
projected in the forward-looking statements are described in this section. Refer
to
11
<PAGE> 12
"Factors Affecting Operating Results." The Company assumes no obligation to
update the forward-looking statements or such factors.
RESULTS OF OPERATIONS
1996 Compared to 1995. Net sales increased 5.5% to $41,255,000 in 1996
from $39,111,000 in 1995. This increase is attributed to sales increases of 7%
to public and private employers and 17% to criminal and justice agencies, which
more than offset sales decreases of 23% to drug treatment programs and 22% at
Medscreen. Medscreen's sales decrease was primarily due to the 1995 loss of its
largest customer and certain one-time equipment sales, which more than offset
new business acquired in 1996. The Company's total volume increased 6% to
3,143,000 from 1995 levels.
Cost of sales increased 6.7% to $31,757,000 in 1996 from $29,771,000 in
1995. The increase was due primarily to increased specimen volume, especially
volume associated with providing non-laboratory related services, such as
specimen collection and transportation. Cost of sales as a percentage of net
sales increased to 77.0% in 1996 from 76.1% in 1995. Gross profit as a
percentage of net sales decreased to 23.0% in 1996 from 23.9% in 1995.
Selling, general and administrative (SG&A) expenses increased 5.4% to
$7,339,000 in 1996 from $6,966,000 in 1995. This increase reflects the Company's
continued rebuilding of the marketing, information systems and administrative
infrastructure. The percent of SG&A expenses to net sales was unchanged at 17.8%
for both years.
Marketing rights and research costs increased 40.0% to $1,455,000 in 1996
from $1,039,000 in 1995. These expenses include the cost associated with the
development and commercialization of new laboratory methods and other drug
testing systems. This increase was due primarily to the expensing in 1996 of
certain costs related to PharmChek(TM) and PharmScreen(TM). Such expenses as a
percentage of net sales increased to 3.5% in 1996 from 2.7% in 1995.
Income from operations increased to $418,000 in 1996 from a loss of
$8,262,000 in 1995. The increase is primarily related to restructuring and
unusual charges in the fourth quarter of 1995 (refer to Note 8 to the
Consolidated Financial Statements). Other expense, which includes interest
expense and interest income, increased slightly to $372,000 in 1996 from
$368,000 in 1995.
The Company had no provision for income taxes in 1996. In 1995, the benefit
from income taxes of $1,819,000 primarily related to the restructuring and
unusual charges recorded in 1995. The Company has recorded a valuation allowance
to reflect the amount of deferred tax assets which may not be realized.
Net income increased to $46,000 in 1996 from a loss of $6,811,000 in 1995,
due primarily to the restructuring and unusual charges in 1995.
1995 Compared to 1994. Net sales increased 16.3% to $39,111,000 in 1995
from $33,640,000 in 1994. Compared to 1994, the Company recorded net sales
increases of 21% to public and private employers, 3% to criminal justice
agencies, 18% to drug treatment programs and 50% at Medscreen. These increases
were attributed principally to a higher volume of specimens than in the prior
year.
Cost of sales increased 15.5% to $29,771,000 in 1995 from $25,777,000 in
1994. The increase was due primarily to increased volume, as well as direct
costs associated with the Company's managed collection services. Increasingly,
public and private employer customers are requesting these services as a part of
their drug testing programs. Cost of sales as a percentage of net sales
decreased to 76.1% in 1995 from 76.6% in 1994.
Selling, general and administrative (SG&A) expenses increased 12.1% to
$6,966,000 in 1995 from $6,213,000 in 1994. The percent of SG&A expenses to net
sales decreased to 17.8% from 18.5%. This reflects the effects of certain cost
reduction steps implemented by management in 1995.
Marketing rights and research costs increased 21.7% to $1,039,000 in 1995
from $854,000 in 1994. This increase was due primarily to an increase in the
number of staff assigned to research functions in 1995.
12
<PAGE> 13
Marketing rights and research costs as a percentage of net sales also increased
to 2.7% in 1995 from 2.5% in 1994.
During the fourth quarter of 1995, the Company recorded a provision for
restructuring and unusual charges of $8.8 million to (1) write-off $4.0 million
of marketing rights and other expenditures related to the PharmChek(TM) sweat
patch; (2) write-down goodwill of $2.0 million related to the purchase in 1992
of Medscreen; (3) write-down certain computer and peripheral equipment of
approximately $1.9 million; and (4) provide for severance and related costs.
Additionally, during the fourth quarter of 1995, the Company increased the
allowance for doubtful accounts and other accruals by $675,000. Together, these
charges reduced 1995 after tax earnings by $7.3 million, or $1.32 per share.
Income from operations decreased to a loss of $8,262,000 in 1995 from
income of $478,000 in 1994. The decrease is primarily related to the
restructuring and unusual charges discussed above. Other expense, which includes
interest expense and interest and other income, increased to $368,000 in 1995
from $279,000 in 1994. This change was due primarily to other income realized in
1994 from a renegotiation and settlement of certain liabilities associated with
the acquisition of Medscreen, offset by lower interest expense in 1995 due to
lower interest rates and a reduction of average debt outstanding.
The benefit from income taxes for 1995 was $1,819,000 and includes a
current provision for federal and state income taxes of $131,000 and a deferred
benefit of $1,950,000 primarily relating to the restructuring and unusual
charges recorded in 1995. The Company recorded a valuation allowance in 1995 to
reflect the amount of deferred tax assets which may not be realized. The
provision for taxes in 1994 amounted to $148,000 and principally reflected
amounts currently due for federal taxes.
Net income decreased to a loss of $6,811,000 in 1995 from income of $51,000
in 1994 due to the restructuring and unusual charges. Excluding these charges,
net income for the year would have been $515,000 versus $51,000 reported in
1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations during the years ended December 31, 1996, 1995 and
1994 provided cash of approximately $2,758,000, $4,626,000 and $1,932,000,
respectively. The decrease in cash flow from operations between 1996 and 1995,
and the increase in cash flow from operations between 1995 and 1994 principally
reflects the non-cash restructuring and unusual charges recorded in 1995.
As of December 31, 1996 and 1995, PharmChem had $240,000 and $647,000 in
cash or cash equivalents, respectively. During 1996, the Company used
approximately $2,731,000 in cash to acquire property and equipment and
approximately $2,295,000 in cash to reduce short and long term debt. During
1995, the Company used approximately $2,732,000 in cash to acquire property and
equipment and approximately $2,648,000 in cash to reduce short and long term
debt. During the third quarter of 1995, the Company agreed to acquire
testing/analysis equipment at a cost of approximately $1,400,000; physical
delivery and financing was completed in December 1995 and in the first quarter
of 1996.
In February 1997, PharmChem amended its revolver and term loan credit
agreement ("Credit Agreement") with a bank with respect to certain financial
covenants. In March 1996, the Company amended the Credit Agreement to provide
for additional credit availability, an extended revolver loan maturity date and
greater covenant flexibility. The revolver was increased from $3,500,000 to
$5,000,000, of which $1,002,000 was outstanding at the end of 1996. The Credit
Agreement provides for borrowings under the revolver limited to 75% of qualified
account receivables. The revolver maturity date was extended from May 1996 until
November 1997. The revolver bears interest at the bank reference rate plus 0.5%
(8.75% at December 31, 1996). As of December 31, 1996, approximately $611,000
was outstanding under the term loan, which expires in November 1997. The term
loan bears interest at the bank reference rate plus 1.0% (9.25% at December 31,
1996). All borrowings are secured by a lien on all assets of the Company.
The Company anticipates that existing cash balances, amounts available
under the Credit Agreement and funds to be generated from future operations will
be sufficient to fund operations and budgeted capital expenditures through 1997.
13
<PAGE> 14
FACTORS AFFECTING OPERATING RESULTS
PharmChem is subject to a number of risks which could affect operating
results and liquidity, which risks include, among others, the following:
Competition and Customer Contracts. The drug testing industry in which
PharmChem competes is often characterized by competitive bidding which results
in the award of contracts based on technical superiority, customer service and
price. The Company competes for customer contracts against firms that may have
greater financial, marketing, laboratory and related resources. The market for
drug testing services became increasingly competitive in the 1990's, and
continues to be competitive. A majority of the Company's sales arise out of
competitively bid contracts. The Company has in the past failed to renew
significant contracts, including the 1996 loss of the contract with the U.S.
Army which represented 4% and 7% of the Company's total sales in 1996 and 1995,
respectively. While many of the Company's contracts have multi-year terms, most
contracts are subject to discretionary termination on short notice by the
Company's customers. In addition, relatively few of the Company's contracts call
for minimum contract amounts or payments. Although the Company's historical
experience has been that customers generally use its services for the entire
length of the contract term, early termination of a substantial contract, if not
replaced by comparable contracts, could have a material adverse effect on the
Company.
PharmChek(TM). Since 1992, the Company has been investing in
PharmChek(TM), a system which uses sweat to detect the use of illegal drugs. The
process of bringing PharmChek(TM) to market has been subject to technical and
regulatory delays and there is no assurance that there will not be similar
delays in the future. Additional testing of PharmChek(TM) by customers is
required before commercial release can occur. To date, sales of PharmChek(TM)
have not been material and there is no assurance that it will be commercially
accepted by existing or new customers or generate significant revenues in the
future. While the company that developed PharmChek(TM) has obtained patents
relating to its technology, there is no assurance as to the validity of such
patents, that the products marketed by the Company will be covered by such
patents, or that competitors will not infringe upon such patents or successfully
design similar or competing products that do not infringe upon such patents. The
Company has incurred significant costs in connection with the commercialization
of PharmChek(TM) and expects to continue to do so in the future. The Company's
investment in PharmChek(TM) marketing rights was approximately $704,000,
$805,000 and $284,000 during 1996, 1995 and 1994, respectively.
Customer Concentration. The Company's two largest customers accounted for
approximately a combined 29% and 27% of the Company's sales in 1996 and 1995,
respectively. The loss of these contracts, if not replaced by comparable
contracts, would result in lower sales, lower profit margins, and in negative
cash flows and losses. The Company has in the past failed to renew significant
contracts which have had adverse effects on the Company. See "Competition and
Customer Contracts" above.
Certification. The Company's laboratory is currently certified by SAMHSA,
CLIA, CAP and a number of states to conduct drug testing using forensic
procedures. Certification is essential to the Company's business because some of
its customers are required to use certified laboratories, and many of its
customers look to certification as an indication of accuracy and reliability of
results. In order to remain certified, the Company is subject to frequent
inspections and proficiency tests. Failure to meet any of the numerous
certification requirements to which the Company is subject could result in
suspension or loss of certification. Such suspension or loss of certification
could have a material adverse effect on the Company.
Fluctuations in Operating Results. Along with competition and customer
contracts, PharmChem's operations are affected by seasonal trends to which drug
testing laboratories are generally subject. In the past, testing volume tends to
be higher in the second and third calendar quarters and lower in the fourth and
first calendar quarters, primarily due to the hiring patterns of the Company's
public and private employer customer group which affect pre-employment drug
testing. Further, demand for the Company's services is dependent on general
economic conditions. Recessionary periods generally result in fewer new hires,
and therefore may lead to fewer pre-employment drug tests for public and private
employer customers. Budget cuts at the federal, state, or local level could
reduce business from the Company's public employer, criminal justice agency and
government funded drug treatment program customers. Because expenses associated
with maintaining the
14
<PAGE> 15
Company's testing work force are relatively fixed over the short term, the
Company's profit margins tend to increase in periods of higher testing volume
and decrease in periods of lower testing volume.
Judicial Decisions and Government Policy. State and federal courts have
generally permitted the use of drug testing under certain circumstances and
using certain procedures. However, challenges to drug testing programs are
raised from time to time by employees, unions and other groups in litigation on
constitutional, privacy and other grounds. In addition, legal precedent in a
number of states governs the circumstances under which employers may test
employees and the procedures under which such tests must be conducted. Although
the Company believes that, to date, no such litigation or law has had a material
adverse impact upon its business, new decisions, legislation or policies which
restrict the use of drug testing could have a material adverse effect on the
Company.
Credit Availability. PharmChem maintains a term and revolver loan credit
agreement with a bank. All borrowings are secured by a lien on all assets of the
Company. The credit agreement contains certain financial covenants, with which
it anticipates that it will be able to comply throughout 1997, although there
can be no assurance that such compliance will be maintained. Management expects
to enter into a new credit agreement with comparable terms prior to the
expiration date of the existing Credit Agreement.
Legal Proceedings. In the ordinary course of its business, PharmChem is
sued by individuals, primarily those in the criminal justice system, who have
tested positive for drugs of abuse. In addition, the Company frequently
testifies in administrative and court proceedings involving the results of its
tests. To date, the Company has not experienced any material liability related
to these claims, although there can be no assurance that the Company will not at
some time in the future experience significant liability in connection with such
claims. There are no pending legal proceedings, other than ordinary routine
litigation incidental to the Company's business, to which PharmChem is a party
or to which any of its property is subject and management does not believe the
outcome of any of the proceedings will have a material impact on its financial
position or results of operations. The Company believes that its liability
insurance coverage is adequate for its business.
Environmental Matters. A small portion of the Company's business involves
testing procedures requiring the use of chloroform and radioactive reagents,
which are considered to be hazardous materials. Failure to comply with current
or future federal, state or local environmental laws or regulations regarding
these hazardous materials could have a material adverse effect on the Company.
The Company believes it is in compliance with all applicable environmental laws
and regulations.
Dependence on Key Personnel. The success of PharmChem is dependent in part
on its key management and technical personnel, the loss of one or more of whom
could have a material adverse effect on the Company. None of the Company's key
employees has an employment contract with the Company. The Company believes that
its future success will depend in part upon its continued ability to attract,
retain and motivate additional highly skilled personnel.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation." This pronouncement encourages recognition of stock-based awards
based on their fair value on the date of grant and requires additional footnote
disclosures. As permitted by this pronouncement, the Company continues to
account for stock-based compensation under the Accounting Pronouncement Board's
Opinion No. 25 "Accounting for Stock Issued to Employees." SFAS No. 123 will not
affect the Company's financial position or results of operations.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." This
pronouncement requires that long-lived assets and certain intangible assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an
15
<PAGE> 16
asset may not be recoverable. An impairment loss is to be recognized when the
sum of undiscounted cash flows is less than the carrying amount of the asset.
Although this pronouncement did not have a material impact on the Company's
financial condition or results of operations at adoption, its provisions are
applicable to any future assessments of its long-lived assets. SFAS No. 121 was
adopted effective January 1, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index at page 32, Item 14.(a)(1).
16
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of PharmChem Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of PharmChem
Laboratories, Inc. (a California corporation) and its subsidiary as of December
31, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 financial statements referred to above present fairly,
in all material respects, the financial position of PharmChem Laboratories, Inc.
and its subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
February 13, 1997
17
<PAGE> 18
PHARMCHEM LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 240 $ 647
------- -------
Accounts receivable.................................................... 8,778 9,463
Less -- allowance for doubtful accounts............................. (610) (462)
------- -------
Accounts receivable, net....................................... 8,168 9,001
------- -------
Inventory.............................................................. 1,014 1,688
Other current assets................................................... 1,122 700
------- -------
TOTAL CURRENT ASSETS........................................... 10,544 12,036
------- -------
PROPERTY AND EQUIPMENT, at cost.......................................... 15,190 12,534
Less -- accumulated depreciation and amortization...................... (8,612) (7,134)
------- -------
Property and equipment, net......................................... 6,578 5,400
------- -------
OTHER ASSETS............................................................. 986 1,202
------- -------
GOODWILL................................................................. 10,181 10,181
Less -- accumulated amortization and write-downs.................... (6,821) (6,636)
------- -------
Goodwill, net.................................................. 3,360 3,545
------- -------
TOTAL ASSETS................................................... $21,468 $22,183
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt...................................... $ 2,335 $ 1,197
Accounts payable....................................................... 3,238 3,773
Accrued compensation................................................... 998 1,187
Accrued collectors and other liabilities............................... 2,266 1,596
------- -------
TOTAL CURRENT LIABILITIES...................................... 8,837 7,753
------- -------
LONG TERM DEBT, net of current portion................................... 1,205 3,401
DEFERRED CREDITS......................................................... 139 --
SHAREHOLDERS' EQUITY:
Common stock, no par value, 10,000 shares authorized, 5,695 and 5,587
shares issued and outstanding at December 31, 1996 and 1995,
respectively........................................................ 18,915 18,703
Accumulated deficit.................................................... (7,628) (7,674)
------- -------
TOTAL SHAREHOLDERS' EQUITY..................................... 11,287 11,029
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $21,468 $22,183
======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
18
<PAGE> 19
PHARMCHEM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
NET SALES..................................................... $41,255 $39,111 $33,640
COST OF SALES................................................. 31,757 29,771 25,777
------- ------- -------
GROSS PROFIT.................................................. 9,498 9,340 7,863
OPERATING EXPENSES:
Selling, general and administrative......................... 7,339 6,966 6,213
Marketing rights and research costs......................... 1,455 1,039 854
Amortization of goodwill.................................... 185 247 246
Provision for doubtful accounts............................. 101 575 72
Restructuring and unusual charges........................... -- 8,775 --
------- ------- -------
Total operating expenses............................ 9,080 17,602 7,385
------- ------- -------
INCOME (LOSS) FROM OPERATIONS................................. 418 (8,262) 478
------- ------- -------
OTHER INCOME (EXPENSE):
Interest income............................................. 63 93 92
Interest expense............................................ (435) (457) (553)
Other....................................................... -- (4) 182
------- ------- -------
Other expense, net.................................. (372) (368) (279)
------- ------- -------
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) INCOME
TAXES....................................................... 46 (8,630) 199
PROVISION FOR (BENEFIT FROM) INCOME TAXES..................... -- (1,819) 148
------- ------- -------
NET INCOME (LOSS)............................................. $ 46 $(6,811) $ 51
======= ======= =======
NET INCOME (LOSS) PER SHARE................................... $ 0.01 $ (1.23) $ 0.01
======= ======= =======
Weighted average number of common
and common equivalent shares................................ 5,710 5,542 5,560
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
19
<PAGE> 20
PHARMCHEM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
------ ------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993........................ 5,509 $18,630 $ (914) $17,716
----- ------- ------- -------
Exercise of stock options......................... 2 -- -- --
Net income........................................ -- -- 51 51
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1994........................ 5,511 18,630 (863) 17,767
----- ------- ------- -------
Exercise of stock options......................... 76 73 -- 73
Net loss.......................................... -- -- (6,811) (6,811)
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1995........................ 5,587 18,703 (7,674) 11,029
----- ------- ------- -------
Exercise of stock options......................... 108 212 -- 212
Net income........................................ -- -- 46 46
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1996........................ 5,695 $18,915 $(7,628) $11,287
===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
20
<PAGE> 21
PHARMCHEM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 46 $(6,811) $ 51
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 1,979 2,626 2,558
Restructuring and unusual charges, net of tax benefit.... -- 7,527 --
Gain on sale of equipment................................ (51) -- --
Change in operating assets and liabilities:
Accounts receivable...................................... 833 (516) (2,228)
Inventory................................................ 674 (15) (89)
Income tax refund receivable............................. (351) -- 1,118
Other current assets..................................... (71) (19) (215)
Accounts payable and other accrued liabilities........... (440) 1,834 737
Deferred credits......................................... 139 -- --
------- ------- -------
Change in operating assets and liabilities.......... 784 1,284 (677)
------- ------- -------
Net cash provided by operating activities........... 2,758 4,626 1,932
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment........................ (2,731) (2,732) (1,810)
Payments for marketing rights............................... -- (805) (284)
Proceeds from sale of equipment............................. 230 -- --
Decrease (increase) in other assets......................... 216 (284) (135)
------- ------- -------
Net cash used in investing activities............... (2,285) (3,821) (2,229)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................... 1,203 1,428 404
Principal payments on long-term debt........................ (2,295) (2,648) (1,935)
Proceeds from exercise of stock options..................... 212 73 --
------- ------- -------
Net cash used in financing activities............... (880) (1,147) (1,531)
------- ------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS..................... (407) (342) (1,828)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................ 647 989 2,817
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 240 $ 647 $ 989
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 548 $ 479 $ 447
======= ======= =======
Cash paid for taxes......................................... $ -- $ 123 $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
21
<PAGE> 22
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY
PharmChem Laboratories, Inc. is a leading independent laboratory providing
integrated drug testing services. PharmChem tests for a number of drugs of
abuse, primarily by urinalysis. In addition to forensic drug testing, PharmChem
offers a range of services which are customized to assist customers in
implementing cost-effective drug testing programs. The Company's customers
include private and public employers, criminal justice agencies and drug
treatment programs primarily in the United States and the United Kingdom (U.K.).
The consolidated financial statements include the accounts of PharmChem
Laboratories, Inc. and its wholly-owned subsidiary, Medscreen Limited
("Medscreen"), a U.K. company (collectively referred to as the "Company").
The Company is subject to a number of risks which include, among others,
competition related to customer contracts, development and marketing of
PharmChek(TM) and PharmScreen(TM), customer concentration and laboratory
certification.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
after elimination of significant intercompany accounts and transactions. The
functional currency of Medscreen is the local currency. The foreign currency
translation adjustment is not material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash and cash equivalents include cash balances and all highly liquid
investments with original maturities of three months or less at the date of the
purchase. At December 31, 1996 and 1995, cash and cash equivalents consist of
demand deposits maintained at established commercial banks. Such cash deposits
periodically exceed the Federal Deposit Insurance Corporation insured limit of
$100,000 for each account.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
short-term, low risk instruments. Although two customers accounted for
approximately 29% of the Company's sales for the year ended December 31, 1996,
concentrations of credit risk with respect to trade receivables is mitigated by
the fact that one of the customers is a federal government agency and the
remaining customer base is diversified among many corporate industries and other
government agencies.
INVENTORY
Inventory represents laboratory and shipping items and is stated at the
lower of cost or market. Cost is determined using standard costs that
approximate actual costs on a first-in, first-out basis.
22
<PAGE> 23
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
up to 10 years. Leasehold improvements and equipment held under capital leases
are amortized over the estimated useful life. At December 31, property and
equipment consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Lab equipment.......................................... $ 7,441 $ 6,783
Computer hardware and software......................... 2,552 1,000
Office equipment....................................... 366 513
Furniture and fixtures................................. 688 668
Leasehold improvements................................. 3,659 3,535
Construction in progress............................... 484 35
-------- --------
15,190 12,534
Less: accumulated depreciation and amortization........ (8,612) (7,134)
-------- --------
Property and equipment, net............................ $ 6,578 $ 5,400
======== ========
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred. Costs of
major replacements and betterments are capitalized. When property is retired or
otherwise disposed of, the cost and accumulated depreciation and amortization
are removed from the appropriate accounts and any gain or loss is included in
current income.
GOODWILL
Goodwill consists of the excess of cost over the fair value of the net
assets of businesses acquired and is being amortized on a straight-line basis
over periods not exceeding 40 years.
REVENUE
Revenue is recognized upon completion of laboratory analyses of specimens
submitted by customers. As a percentage of gross revenues, the Company had sales
to major customers as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customer A............................................. 18.7% 17.2% 18.6%
Customer B............................................. 10.3% 9.7% 9.9%
</TABLE>
INCOME TAXES
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," effective January 1, 1993 which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
23
<PAGE> 24
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME (LOSS) PER SHARE
Net income per share data has been computed using the weighted average
number of shares of common stock and dilutive common equivalent shares from
stock options outstanding (using the treasury stock method). Loss per share was
computed based only on the weighted average number of common shares outstanding
during the period. Common equivalent shares, which represent shares issuable
upon the exercise of outstanding options, were excluded from the calculation of
the loss per share because the effect of including such shares in the
computation would be anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires certain disclosures regarding the
fair value of financial instruments. Cash, accounts receivable, accounts payable
and accrued liabilities are reflected in the financial statements at fair value
because of the short-term maturity of these instruments. The fair value of
long-term debt does not materially differ from its carrying amount since the
majority of such debt bears interest at variable rates and the fixed rate
obligations generally have near-term maturities.
DEFERRED CREDITS
Deferred credits represent unrealized rent abatements granted by the lessor
of the facility occupied by Medscreen, and is being amortized on a straight-line
basis as a reduction to rent expense over the remaining lease term.
INCENTIVE STOCK PLANS
The Company has two stock option plans which reserve shares of common stock
for issuance to executives, key employees, consultants and directors. The
Company accounts for stock-based compensation under the Accounting Pronouncement
Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25). The
exercise price of options granted under these plans is equal to the market price
of the Company's stock on the date of grant, and accordingly, no compensation
cost is recorded under APB 25. The Company has adopted the disclosure only
provisions of Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation," effective January 1, 1996.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to current year presentation.
24
<PAGE> 25
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
Notes payable to bank, long-term debt and capitalized lease obligations at
December 31, consist of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to a bank pursuant to the term and revolver loan agreement,
expiring November 1997, secured by a lien on all assets, interest at
bank reference rate plus 0.5% (8.75% at December 31, 1996)............. $ 1,002 $ 1,850
Notes payable to a bank pursuant to the term and revolver loan agreement,
due in monthly installments of approximately $55 plus interest, due
November 1997, secured by a lien on all assets, interest at bank
reference rate plus 1.0% (9.25% at December 31, 1996).................. 611 1,278
Obligations under capitalized leases, due in monthly installments through
2001, secured by laboratory and office equipment, interest ranging from
6% to 11%.............................................................. 1,821 1,350
Other.................................................................... 106 120
------- -------
3,540 4,598
Less: current portion.................................................... (2,335) (1,197)
------- -------
Long-term portion........................................................ $ 1,205 $ 3,401
======= =======
</TABLE>
In February 1997, the Company amended its revolver and term loan credit
agreement ("Credit Agreement") with a bank to modify certain financial
covenants. In March 1996, the Company amended the Credit Agreement whereby the
revolver loan was increased from $3,500,000 to $5,000,000, the advance rate on
qualified accounts receivable was increased from 70% to 75%, and the maturity
date was extended until November 1997. Management expects to enter into a new
credit agreement with comparable terms prior to the expiration of the existing
Credit Agreement.
The Credit Agreement contains certain financial covenants which, among
others, require the Company to maintain certain levels of net worth, cash flow
and profitability and restricts the payment of dividends. As of December 31,
1996, the Company was in compliance with all covenants related to the Credit
Agreement.
The Company has leased certain laboratory and office equipment with an
original cost of approximately $2,724,000 under capital lease agreements. At
December 31, 1996, the future minimum lease payments, together with the present
value of the net minimum lease payments under these agreements, were as follows
(in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 789
1998................................................................ 553
1999................................................................ 365
2000................................................................ 348
2001................................................................ 44
------
Total minimum lease payments.............................. 2,099
Less: amount representing interest........................ (278)
------
Present value of net minimum lease payments............... $1,821
======
</TABLE>
25
<PAGE> 26
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
The provision for (benefit from) income taxes consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $ -- $ 114 $159
State.................................................... -- 17 --
---- ------- ----
Total current.................................... -- 131 159
---- ------- ----
Deferred:
Federal.................................................. -- (1,654) 1
State.................................................... -- (296) (12)
---- ------- ----
Total deferred................................... -- (1,950) (11)
---- ------- ----
Provision for (Benefit from) income taxes........ $ -- $(1,819) $148
==== ======= ====
</TABLE>
The federal and state tax provisions (benefits) represent the alternative
minimum tax ("AMT") on operations for 1995 while the provision recorded in 1994
reflects the tax on operations at regular rates. No provision has been recorded
on foreign income because of the utilization of tax loss carryforwards.
Undistributed earnings of the Company's foreign subsidiary are not significant.
The provision for (benefit from) income taxes is reconciled with the federal
statutory rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (benefit) computed at the federal statutory
tax rate................................................. $ 16 $(3,021) $ 68
State taxes, net of federal tax benefit.................... 3 (526) --
Effects of foreign operations.............................. -- (121) 35
Amortization and write-down of goodwill.................... 66 724 44
Increase (decrease) in valuation allowance................. (83) 1,470 --
Other...................................................... (2) (345) 1
---- ------- ----
Total tax (benefit from) provision............... $ -- $(1,819) $148
==== ======= ====
</TABLE>
26
<PAGE> 27
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The major components of temporary differences which give rise to the
deferred tax accounts at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------ -------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Reserves and accruals........................................... $ 753 $ 560
Other........................................................... -- 154
------ -------
Total gross current assets.............................. 753 714
Deferred tax valuation allowance................................ (318) (270)
------ -------
Net current asset....................................... $ 435 $ 444
====== =======
Non-current deferred tax assets:
Net operating loss carryforward................................. $ 243 $ 81
Book depreciation less than tax depreciation.................... (283) (92)
Restructuring and unusual charges............................... 876 2,183
Other........................................................... 512 --
------ -------
Total gross non-current asset........................... 1,348 2,172
Deferred tax asset valuation allowance.......................... (718) (1,200)
------ -------
Net non-current asset................................... $ 630 $ 972
====== =======
</TABLE>
The deferred tax asset accounts are classified with "Other current assets"
and "Other assets" on the accompanying Consolidated Balance Sheets. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. Although realization is not assured, the Company believes it is
more probable than not that the net deferred tax asset will be realized in the
future primarily from the generation, in subsequent years, of U.S. source
taxable income. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are lower.
As of December 31, 1996, the Company has net operating loss carryforwards
for federal and state income tax reporting purposes of approximately $368,000
and $1,273,000, respectively. These carryforwards expire on various dates
through 2011. The Company also has net operating loss carryforwards available
for U.K. tax reporting purposes, which are restricted to the U.K. of
approximately $470,000. The Tax Reform Act of 1986 contains provisions which may
limit the net operating loss carryforwards to be used in any given year upon the
occurrence of certain events, including a significant change of ownership.
In February 1997, the Company received a refund of federal income taxes
totaling $351,000. This amount is classified in "Other current assets" on the
accompanying Consolidated Balance Sheets.
The Company's federal income tax returns for 1992 and 1993 are currently
under review by the Internal Revenue Service. In the opinion of management, any
proposed adjustments will not be significant.
27
<PAGE> 28
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCENTIVE STOCK PLANS
1988 INCENTIVE STOCK PLAN
In November 1988, the Company adopted the 1988 Incentive Stock Plan ("the
Plan"). Under this Plan, nonstatutory options and stock purchase rights may be
granted to employees and consultants, while incentive stock options may only be
granted to employees, for up to a total of 1,280,000 shares of common stock. The
Plan, which expires in 1998, is administered by the Officers Compensation
Committee of the Board of Directors (the "Administrator") with the term and
exercise price of the options and rights being generally at the discretion of
the Administrator. Incentive stock options must be granted at a price of at
least fair market value, while nonstatutory options and stock purchase rights
must be granted at a price of at least 85% of the fair market value, based on
the trading price of the common stock on Nasdaq, as of the date of grant. Common
shares purchased pursuant to stock purchase rights issued under the Plan are
subject to repurchase at the original issuance price by the Company upon
termination of employment. The repurchase right lapses at such rate as
determined by the Administrator. Options granted under the Plan vest generally
over a 48 month period and expire ten years after date of grant. As of December
31, 1996, only incentive stock options were outstanding.
Options to purchase approximately 206,000 shares of common stock were
exercisable at December 31, 1996. Effective January 1, 1995 the Company engaged
in a stock option exchange program that effectively repriced all then
outstanding options having an exercise price above the then current market price
of $2.00 ("Repriced grants/canceled" in the following table). The repriced
options began vesting effective January 1, 1995 over a 48 month period. The
exercise price for all options exchanged was $2.00. Option information for the
periods presented is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------
OPTIONS
AVAILABLE NUMBER WEIGHTED
FOR GRANT OF SHARES RANGE AVERAGE
--------- --------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 31, 1993.......... 554,252 432,505 $0.25 - 7.25 $ 4.89
--------- --------- ------------ -----
Granted............................. -- -- -- --
Canceled............................ 215,999 (215,999) 4.50 - 7.25 4.87
Exercised........................... -- (2,251) 0.25 0.25
--------- --------- ------------ -----
Balance at December 31, 1994.......... 770,251 214,255 0.25 - 7.25 4.96
--------- --------- ------------ -----
Granted............................. (687,480) 687,480 2.00 - 4.75 2.95
Canceled............................ 55,711 (55,711) 2.00 - 7.25 2.47
Exercised........................... -- (66,493) 0.25 - 2.00 0.74
Repriced grants..................... (157,171) 157,171 2.00 2.00
Repriced canceled................... 157,171 (157,171) 4.50 - 7.25 6.84
--------- --------- ------------ -----
Balance at December 31, 1995.......... 138,482 779,531 0.25 - 4.75 2.82
--------- --------- ------------ -----
Granted............................. (191,000) 191,000 3.25 - 4.63 3.69
Canceled............................ 165,565 (165,565) 0.25 - 4.00 2.29
Exercised........................... -- (108,145) 0.25 - 2.00 1.94
--------- --------- ------------ -----
Balance at December 31, 1996.......... 113,047 696,821 $0.25 - 4.75 $ 3.32
========= ========= ============ =====
</TABLE>
28
<PAGE> 29
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1992 DIRECTOR OPTION PLAN
In May 1992, the Company adopted the 1992 Director Option Plan ("the
Director Plan") and reserved 250,000 shares of common stock for issuance under
this plan. The options vest over a 48-month period and expire five years from
the date of grant. Options are granted at fair market value and the plan expires
in 2002. As of December 31, 1996, options to purchase 130,000 shares were
outstanding at exercise prices of $2.00 to $8.75 per share, 120,000 options were
available for future grants and 98,000 options were exerciseable. In 1995, 9,374
options were exercised at a weighted average share price of $2.61.
SFAS NO. 123
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recorded in the
consolidated statements of operations for the stock option plans. If the
consolidated statements of operations included compensation cost for 1996 and
1995 grants as set forth in SFAS No. 123, the Company's proforma net income
(loss) and net income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
1996 1995
------ -------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net income(loss), as reported............................. $ 46 $(6,811)
Net income(loss), pro forma............................... (203) (7,119)
Net income(loss), per share, as reported.................. 0.01 (1.23)
Net income(loss), per share, pro forma.................... (0.04) (1.28)
</TABLE>
The fair value of each grant is estimated on the date of grant using the
Binomial option pricing model with the following assumptions: risk-free interest
rate of 6%, corresponding to government securities with original maturities
similar to the estimated option life; option lives ranging from 3 to 5 years;
annual volatility of the Company's stock price of 80%; and a dividend yield of
0.0%. The effects of applying the provisions of SFAS No. 123 are not likely to
be representative of the effects on pro forma net income (loss) in future years.
The weighted average of fair values of options granted during 1996 and 1995
were $2.09 and $1.53, respectively. The options outstanding and exerciseable are
as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISEABLE AT DECEMBER 31, 1996
OPTIONS OUTSTANDING AT DECEMBER 31, 1996 -------------------------------------------------
------------------------------------------------- WEIGHTED
NUMBER WEIGHTED AVERAGE WEIGHTED
RANGE OF OF SHARES AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING EXERCISE PRICE CONTRACT LIFE EXERCISEABLE EXERCISE PRICE
-------------- ----------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 0.25 - $2.00 252,341 $ 1.97 7.2 Years 117,335 $ 1.94
2.88 - 4.75 544,480 3.95 6.4 Years 156,846 4.02
- 8.75 30,000 8.75 0.3 Years 30,000 8.75
-------- ------ - ----- -------- - ------ -
-----
$ 0.25 - $8.75 826,821 $ 3.52 6.1 Years 304,181 $ 3.68
============= ======= ===== ========= =======
</TABLE>
6. PROFIT SHARING PLAN
The Company has a 401(k) plan (the "Plan") which is available to all
employees who have reached age 18 and have completed at least one year of
service. The Plan provides that each participant may contribute a portion of his
or her salary, within certain limits set forth in the U.S. Tax Code. The Company
will make a matching contribution of 10% of the amount contributed by each
participant and may make additional matching or discretionary profit sharing
contributions. The Company's contributions vest after three years of service.
Total contribution expense recorded by the Company for 1996, 1995 and 1994 was
$20,000, $52,000, and $60,000, respectively.
29
<PAGE> 30
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS
Future minimum lease payments for the Company's office, laboratory and
warehouse space at December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1997................................................................ $ 800
1998................................................................ 812
1999................................................................ 816
2000................................................................ 796
2001................................................................ 361
2002 and thereafter................................................. 278
------
Total commitments......................................... $3,863
======
</TABLE>
Rental expense for operating leases amounted to approximately $825,000,
$789,000 and $614,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
8. PRIOR YEAR RESTRUCTURING AND UNUSUAL CHARGES
During the fourth quarter of 1995, the Company recorded a provision for
restructuring and unusual charges as follows (in thousands):
<TABLE>
<CAPTION>
1995
------
<S> <C>
Write-off of marketing rights and other expenditures................ $4,073
Write-down of goodwill applicable to Medscreen...................... 2,000
Write-down of certain computer and peripheral equipment............. 1,881
Other one-time costs -- principally severance....................... 821
------
$8,775
======
</TABLE>
The write-off of marketing rights and other expenditures is related to
costs incurred in connection with the acquisition of marketing rights to
PharmChek(TM). The Company believed it prudent to write-off these costs given
the delays in obtaining necessary FDA approvals and commencing pilot tests, both
of which hampered the scheduled commercial launch of PharmChek(TM). The
Company's investment in PharmChek(TM) marketing rights was approximately
$704,000, $805,000 and $284,000 during 1996, 1995 and 1994, respectively. The
Company expects to continue its investment in PharmChek(TM). To date, there have
been no material revenues generated from PharmChek(TM).
During the fourth quarter of 1995, Medscreen lost a customer which
accounted for approximately 20% of its revenues. As a result, the Company
revised its assessment of the realization of the carrying value of its
investment and an additional write-down of $2,000,000 was recognized in the
fourth quarter of 1995. The write-down was determined based on the projected
discounted cash flows of Medscreen compared with the carrying value of the
Company's investment in Medscreen, including goodwill, at the date of the
write-down.
The write-down of computer and peripheral equipment is consistent with the
Company's plan to begin replacing certain existing systems to enhance service to
its customers and provide the infrastructure to better monitor and control
expenses.
9. LITIGATION
The Company is the defendant in certain legal matters which are normal for
the industry in which the Company operates. Management believes that these
matters, both individually and in the aggregate, will not have a material
adverse impact on the Company's financial position or results of operations.
30
<PAGE> 31
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. GEOGRAPHICAL DATA
Information about the Company's operations in geographic areas where it
operates is as follows:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN TOTAL
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
1996................................................ $ 37,781 $ 3,474 $ 41,255
1995................................................ 34,679 4,432 39,111
1994................................................ 30,677 2,963 33,640
Income (loss) from operations:
1996................................................ 242 176 418
1995(1)............................................. (6,590) (1,672) (8,262)
1994................................................ 725 (247) 478
Identifiable assets at year end:
1996................................................ 16,623 4,845 21,468
1995................................................ 17,298 4,885 22,183
1994................................................ 21,555 6,751 28,306
</TABLE>
- ---------------
(1) Refer to Note 8 for discussion of restructuring and unusual charges recorded
in the fourth quarter.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized selected quarterly financial data is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------
3/31 6/30 9/30 12/31
------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Net sales.................................... $9,867 $10,771 $10,631 $ 9,986
Gross profit................................. 2,241 2,531 2,625 2,101
Net income (loss)............................ (178) 82 155 (13)
Net income (loss) per share.................. $(0.03) $ 0.01 $ 0.03 $ 0.00
Weighted average shares outstanding.......... 5,594 5,791 5,763 5,682
1995
Net Sales.................................... $8,792 $ 9,722 $10,307 $10,290
Gross profit................................. 2,270 2,460 2,480 2,130
Net income (loss)(1)......................... 101 174 180 (7,266)
Net income (loss) per share.................. $ 0.02 $ 0.03 $ 0.03 $ (1.31)
Weighted average shares outstanding.......... 5,561 5,751 5,870 5,574
</TABLE>
- ---------------
(1) Refer to Note 8 for discussion of restructuring and unusual charges recorded
in the fourth quarter.
31
<PAGE> 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10 TO 13 INCLUSIVE.
These items have been omitted in accordance with the General Instructions
to Form 10-K and are answered by reference to those portions of the Registrant's
definitive proxy statement with respect to the 1997 Annual Meeting of
Shareholders which contain the information required by these items. The
Registrant will file with the Commission not later than 120 days after the end
of the fiscal year covered by this report such definitive proxy statement
pursuant to Regulation 14A. Information regarding executive officers of the
Company is contained in Part I of this Annual Report on Form 10-K under caption
"Executive Officers of PharmChem."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE
NUMBER
IN
THIS
REPORT
------
<S> <C>
Report of Independent Public Accountants, Arthur Andersen LLP. ................ 17
Consolidated Balance Sheets at December 31, 1996 and 1995...................... 18
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994................................................................. 19
Consolidated Statements of Shareholders' Equity for the years ended December
31, 1996, 1995 and 1994....................................................... 20
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995
and 1994..................................................................... 21
Notes to Consolidated Financial Statements..................................... 22
</TABLE>
(A)(2) FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............................... 35
</TABLE>
All other schedules are omitted because they are not applicable, not
required, or the required information is shown in the Consolidated Financial
Statements or notes thereto.
32
<PAGE> 33
(A)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------------
<S> <C>
3.01(1) Amended and Restated Articles of Incorporation dated August 21, 1991.
3.02(2) Bylaws, as amended May 19, 1992.
4.01(1) Restated Modification Agreement dated August 14, 1989.
10.01(1) 1988 Incentive Stock Plan, as amended.
10.02(1) Form of Stock Option Agreement.
10.03(1) Form of Stock Option Agreement (providing for accelerated vesting upon death or
disability).
10.04(3) Form of Stock Option Agreement (January 1, 1995).
10.05(1) Form of Stock Purchase Agreement.
10.06(4) 1992 Director Option Plan.
10.07(4) Form of Director Option Agreement.
10.08 Amendment to 1992 Director Option Plan dated February 28, 1996.
10.09 Amendment to 1992 Director Option Plan dated March 4, 1997.
10.10(1) 401(k) Plan.
10.11 Amendment to 401(k) Plan dated August 25, 1996.
10.12(1) Lease Agreements for the Company's offices in Menlo Park, California dated
October 21, 1988 and September 11, 1990, respectively.
10.13(5) Lease Amendment for the Company's offices in Menlo Park, California dated
November 30, 1995.
10.14 Lease Amendment for the Company's offices in Menlo Park, California dated March
6, 1996.
10.15(6) Harbour Quay (London) Lease Documents.
10.16 Lease Agreement for the Company's offices in Fort Worth, Texas dated October 24,
1991.
10.17 Lease Amendment for the Company's offices in Fort Worth, Texas dated December 8,
1992.
10.18 Lease Amendment for the Company's offices in Fort Worth, Texas dated February 9,
1996.
10.19(1) Form of Indemnification Agreement.
10.20(3) Loan and Security Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated November 17, 1994.
10.21(7) Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated March 6, 1995.
10.22(5) Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated September 1, 1995.
10.23(5) Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated March 26, 1996.
10.24 Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated June 19, 1996.
10.25 Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated February 14, 1997.
10.26(4)(8) License and Supply Agreement with Sudormed, Inc. dated March 10, 1992.
10.27(6)(8) License and Supply Agreement with Sudormed, Inc. dated October 25, 1993.
10.28(6)(8) Supply Agreement with SolarCare Technologies Corporation dated August 1, 1993.
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------------
<S> <C>
10.29(5)(8) First Amendment to Supply Agreement dated December 1, 1995.
10.30(4)(8) Probation Division of the Administration Office of The U.S. Courts Contract
dated October 1, 1992.
10.31(6)(8) Sears Merchandise Group Service Agreement dated September 22, 1992.
10.32 Master Lease Purchase Agreement dated December 18, 1995 with Fidelity Leasing
Corporation and Lease Purchase Addenda in connection therewith.
10.33 Master Equipment Lease dated March 17, 1996 with Olympus Commercial Credit.
21.01 List of Subsidiaries.
23.01 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-41363), effective August 8, 1991.
(2) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1992.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995.
(8) Confidential treatment requested as to certain portions of this exhibit.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
(C) EXHIBITS
See (a) (3) above.
(D) FINANCIAL STATEMENT SCHEDULE
See (a) (2) above.
34
<PAGE> 35
PHARMCHEM LABORATORIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (WRITE-OFFS) OF PERIOD
- ------------------------------------------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Period ended:
December 31, 1994..................... $123 $ 72 $-- $ 56 $139
==== ==== == ==== ====
December 31, 1995..................... $139 $955 $-- $632 $462
==== ==== == ==== ====
December 31, 1996..................... $462 $206 $-- $ 58 $610
==== ==== == ==== ====
</TABLE>
35
<PAGE> 36
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, IN THE CITY OF MENLO
PARK, STATE OF CALIFORNIA, ON THIS 17TH DAY OF MARCH, 1997.
PHARMCHEM LABORATORIES, INC.
By: /s/ JOSEPH HALLIGAN
------------------------------------
Joseph Halligan
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joseph W. Halligan, acting individually,
as such person's true and lawful attorney-in-fact and agent, with full power of
substitution, for such person, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this report on Form 10-K,
and to file with same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
<C> <S> <C>
/s/ JOSEPH HALLIGAN President, Chief Executive March 17, 1997
- ------------------------------------------ Officer and Director (Principal
Joseph Halligan Executive Officer)
/s/ DAVID A. LATTANZIO Chief Financial Officer, Vice March 17, 1997
- ------------------------------------------ President, Finance and
David A. Lattanzio Administration (Principal
Accounting and Financial Officer)
/s/ RICHARD IRWIN Chairman of the Board and March 17, 1997
- ------------------------------------------ Director
Richard Irwin
/s/ THOMAS VOLPE Director March 17, 1997
- ------------------------------------------
Thomas Volpe
</TABLE>
36
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------------ ---------------------------------------------------------------------------
<S> <C> <C>
3.01(1) Amended and Restated Articles of Incorporation dated August 21, 1991.
3.02(2) Bylaws, as amended May 19, 1992.
4.01(1) Restated Modification Agreement dated August 14, 1989.
10.01(1) 1988 Incentive Stock Plan, as amended.
10.02(1) Form of Stock Option Agreement.
10.03(1) Form of Stock Option Agreement (providing for accelerated vesting upon
death or disability).
10.04(3) Form of Stock Option Agreement (January 1, 1995).
10.05(1) Form of Stock Purchase Agreement.
10.06(4) 1992 Director Option Plan.
10.07(4) Form of Director Option Agreement.
10.08 Amendment to 1992 Director Option Plan dated February 28, 1996.
10.09 Amendment to 1992 Director Option Plan dated March 4, 1997.
10.10(1) 401(k) Plan.
10.11 Amendment to 401(k) Plan dated August 25, 1996.
10.12(1) Lease Agreements for the Company's offices in Menlo Park, California dated
October 21, 1988 and September 11, 1990, respectively.
10.13(5) Lease Amendment for the Company's offices in Menlo Park, California dated
November 30, 1995.
10.14 Lease Amendment for the Company's offices in Menlo Park, California dated
March 6, 1996.
10.15(6) Harbour Quay (London) Lease Documents.
10.16 Lease Agreement for the Company's offices in Fort Worth, Texas dated
October 24, 1991.
10.17 Lease Amendment for the Company's offices in Fort Worth, Texas dated
December 8, 1992.
10.18 Lease Amendment for the Company's offices in Fort Worth, Texas dated
February 9, 1996.
10.19(1) Form of Indemnification Agreement.
10.20(3) Loan and Security Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated November 17, 1994.
10.21(7) Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated March 6, 1995.
10.22(5) Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated September 1, 1995.
10.23(5) Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated March 26, 1996.
10.24 Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated June 19, 1996.
10.25 Loan Modification Agreement between Silicon Valley Bank and PharmChem
Laboratories, Inc. dated February 14, 1997.
10.26(4)(8) License and Supply Agreement with Sudormed, Inc. dated March 10, 1992.
10.27(6)(8) License and Supply Agreement with Sudormed, Inc. dated October 25, 1993.
10.28(6)(8) Supply Agreement with SolarCare Technologies Corporation dated August 1,
1993.
10.29(5)(8) First Amendment to Supply Agreement dated December 1, 1995.
10.30(4)(8) Probation Division of the Administration Office of The U.S. Courts Contract
dated October 1, 1992.
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
<S> <C> <C>
10.31(6)(8) Sears Merchandise Group Service Agreement dated September 22, 1992.
10.32 Master Lease Purchase Agreement dated December 18, 1995 with Fidelity
Leasing Corporation and Lease Purchase Addenda in connection therewith.
10.33 Master Equipment Lease dated March 17, 1996 with Olympus Commercial Credit.
21.01 List of Subsidiaries.
23.01 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-41363), effective August 8, 1991.
(2) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1992.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995.
(8) Confidential treatment requested as to certain portions of this exhibit.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
<PAGE> 1
Exhibit 10.08
AMENDMENT NO. 1
TO PHARMCHEM LABORATORIES, INC.
1992 DIRECTOR OPTION PLAN
February 28, 1996
This Amendment No. 1 (the "Amendment") to the PharmChem Laboratories,
Inc. 1992 Director Option Plan (the "Plan") is made effective as of the date
set forth above by the Administrator of the Plan pursuant to Section 11(a) of
the Plan. All capitalized terms used herein and not otherwise defined herein
shall have the meanings given them in the Plan.
AMENDMENT
1. The number "15,000" in Section 4(b)(ii) of the Plan is hereby changed to the
number "5,000".
2. The number "15,000" in Section 4(b)(iii) of the Plan is hereby changed to
the number "5,000".
3. A new Section 4(b)(viii) shall be added to the Plan, which section shall
read as follows: "Notwithstanding any other provision of this Section 4(b), a
Director (A) may elect to decline any automatic grant of a First Option or
Subsequent Option which would otherwise occur pursuant to Section 4(b)(ii) or
4(b)(iii), provided that such Director shall receive nothing in lieu of such
grant at any time, and (B) may elect to revoke a previous election to decline a
grant of a First Option or Subsequent Option under the Plan; provided that in
either case such election to decline or election to revoke a previous such
election is made prior to the date such grant would otherwise be made pursuant
to Section 4(b)(ii) or 4(b)(iii), as applicable. The election by a Director to
decline an automatic grant of a First Option or any Subsequent Option which
would otherwise be made pursuant to Section 4(b)(ii) or 4(b)(iii) shall not
operate as an election to decline any future automatic grants of any First
Option or any Subsequent Option pursuant to this Section 4(b)."
In witness whereof, this Amendment is executed effective as of the date
first set forth above by the Administrator of the Plan, which Administrator
consists of the Outside Directors of the Company.
/s/ Richard B. Irwin
------------------------------------
Richard B. Irwin
/s/ Thomas S. Volpe
------------------------------------
Thomas S. Volpe
<PAGE> 1
EXHIBIT 10.09
AMENDMENT NO. 2
TO PHARMCHEM LABORATORIES, INC.
1992 DIRECTOR OPTION PLAN
March 4, 1997
This Amendment No. 2 (the "Amendment") to the PharmChem Laboratories,
Inc. 1992 Director Option Plan (the "Plan") is made effective as of the date
set forth above by the Administrator of the Plan pursuant to Section 11(a) of
the Plan. All capitalized terms used herein and not otherwise defined herein
shall have the meanings given them in the Plan.
AMENDMENT
The Plan is hereby amended as follows:
1. All references to "Director" or "Directors" in Sections 1,
4(b)(ii), (iii), (vii) and (viii), 5 (first paragraph), 8(b) and 12 of the Plan
are hereby changed to "Outside Director" or "Outside Directors," respectively.
2. The first reference to "Director" in each of Sections 4(b)(v)(B)
and 4(b)(vi)(B) is hereby changed to "Outside Director."
IN WITNESS WHEREOF, this Amendment is executed effective as of the date
first set forth above by the Administrator of the Plan, which Administrator
consists of the Outside Directors of the Company.
/s/ Richard D. Irwin
---------------------------------
Richard D. Irwin
/s/ Thomas S. Volpe
---------------------------------
Thomas S. Volpe
<PAGE> 1
EXHIBIT 10.11
UNANIMOUS WRITTEN CONSENT OF
DIRECTORS OF
PHARMCHEM LABORATORIES, INC.,
A CALIFORNIA CORPORATION
The undersigned, constituting all of the Directors of PharmChem
Laboratories, Inc., acting pursuant to the authority of Corporations Code
section 307(b), hereby adopt the following resolutions, effective on the date
of the latest signature hereof.
RECITALS:
1. On June 28, 1994, PharmChem Laboratories, Inc. ("Company" or
"Corporation") established the PharmChem Laboratories, Inc. 401(k) Plan
("40l(k) Plan" or "Plan") by executing an Adoption Agreement for the Fidelity
Prototype Plan. By said Adoption Agreement, the Company selected certain
features of the Plan within the parameters allowed by the Adoption Agreement
and applicable law.
2. Certain amendments to the 401(k) Plan are necessary and
appropriate to meet the Company's current and future business needs and to
encourage employee participation in the Plan. These amendments concern
eligibility to participate in the Plan; Employer contributions to the Plan;
identification of the Plan Administrator; criteria for loans from the Plan;
vesting of Employer matching contributions, and related amendments; and
adoption of a Company policy limiting contributions to the Plan for highly
compensated employees of the Corporation. Therefore, it being deemed to be in
the best interests of this Corporation and its shareholders that said
amendments be adopted,
<PAGE> 2
NOW, THEREFORE, BE IT RESOLVED that, pursuant to section 10.01(a) of
the Plan, the Plan is amended as follows, and the Adoption Agreement is changed
accordingly effective the effective date hereof:
A. Section 1.01(c) of the Adoption Agreement is amended by
identifying the Plan Administrator as follows: A Committee comprised of Joseph
Halligan, President and Chief Executive Officer; David A. Lattanzio, Vice
President and Chief Financial Officer; and Patricia Krause, Director - Planning
and Analysis. The address and the phone number of the Plan Administrator shall
be indicated as follows: 1505A O'Brien Drive, Menlo Park, California 94025,
(415) 328-6200.
B. Section 1.02 EMPLOYER of the Adoption Agreement is amended by
deleting as "Contact's Name" the name Debra Sallen and substituting "David A.
Lattanzio."
C. Section 1.03 COVERAGE of the Adoption Agreement is amended at
subsection (a) by changing the eligibility requirement for participation to
"Three Consecutive Months of Service" instead of "One Year of Service."
D. Section 1.04 COMPENSATION is amended at subsection (a) by
deleting from the definition of Compensation "No exclusions" and by designating
the following exclusions from the definition of Compensation by checking
subparagraphs 1.04(a)(1)-(4); overtime pay; bonuses; commissions; and the value
of a qualified or non-qualified stock option granted to an Employee by the
Employer.
E. Section 1.05 CONTRIBUTIONS is amended by selecting subsection
1.05(a)(2) Discretionary Formula, subparagraph (A), Non-Integrated Allocation
Formula. This
-2-
<PAGE> 3
amendment allows the Employer to decide each Plan Year whether to make a
Discretionary Employer Contribution on behalf of eligible Participants. If such
a contribution is made, it is allocated to Participants in the ratio that each
eligible Participant's Compensation bears to the total Compensation paid to all
eligible Participants for the Plan Year.
F. Section 1.05 CONTRIBUTIONS is further amended at subsection
1.05(a)(3) Eligibility Requirements by selecting subparagraph (A), "is employed
by the Employer on the last day of the Plan Year." This allows a Participant to
share in Employer Contributions for the Plan Year without satisfying any
additional requirements.
G. Section 1.09 PARTICIPANT LOANS is amended at subsection (a) to
delete the provision allowing loans from the Plan for any purpose and
substituting the provision that participant loans shall be allowed "For
hardship withdrawal purposes only," by checking subparagraph 1.09(a)(2).
H. Section 1.07 VESTING SCHEDULE is amended to provide that the
vesting for Employer Matching Contributions shall be "Three-year cliff" rather
than "Six-year graduated vesting."
FURTHER RESOLVED that the officers of the Corporation are instructed to
file an amended Adoption Agreement with the Trustee incorporating the foregoing
amendments.
FURTHER RESOLVED that the Company's total Contributions to the Plan
(whether they constitute Employer Contributions, Deferral Contributions,
Matching Contributions or a combination thereof) for any Plan Year for or on
behalf of any Participant who is a Highly Compensated Employee as defined in
section 414(g) of the Internal Revenue
-3-
<PAGE> 4
Code shall be limited not to exceed 4% of said Employee's Compensation. Said
limit is necessary in order to avoid discrimination in favor of Highly
Compensated Employees which may jeopardize the tax-qualified status of the Plan
and which may require the Company to make additional contributions to the Plan
on behalf of non-highly compensated employee Participants. A "Highly
Compensated Employee" under the Code is a 5% owner of the Company; an Employee
receiving compensation in excess of $100,000; an Employee receiving
compensation in excess of $66,000 who is in the "top-paid group" (top 20%) of
Employees for the year; or an officer receiving compensation in excess of
$60,000.
FURTHER RESOLVED that each of the officers of this Corporation is
authorized, directed and empowered on behalf of this Corporation and in its
name to execute any amendments, reports, summaries, or any other instruments,
documents or amendments thereto, or to do and to cause to be done any and all
other acts and things as such officers in their discretion deem necessary or
appropriate to carry out the purposes of the foregoing resolutions and to
satisfy all applicable legal requirements to effectuate the foregoing
amendments to the Plan.
Dated: 8/25/96 /s/ Thomas S. Volpe
--------------- ----------------------------------
Director - Thomas S. Volpe
Dated: 8/15/96 /s/ Richard D. Irwin
--------------- ----------------------------------
Director - Richard D. Irwin
Dated: 8/14/96 /s/ Joseph W. Halligan
--------------- ----------------------------------
Director - Joseph W. Halligan
-4-
<PAGE> 1
EXHIBIT 10.14
FIRST AMENDMENT TO LEASE AGREEMENT
This FIRST AMENDMENT TO LEASE AGREEMENT ("First Amendment") is made as
of the 6th day of March, 1996, by and between MENLO BUSINESS PARK, a California
general partnership, and PATRICIAN ASSOCIATES, INC., a California corporation
(collectively, "LANDLORD") and PHARMCHEM LABORATORIES, INC., a California
corporation ("TENANT").
RECITALS:
WHEREAS, Landlord and Tenant entered into a lease of premises
consisting of approximately 24,719 square feet in that certain building
commonly known as Building No. 14, Suite A, Menlo Park, California, and having
a street address of 1505 O'Brien Drive, Menlo Park, California (which premises
are defined as the "PREMISES" in the Lease and for the purposes of this First
Amendment shall be known as the "14A PREMISES") pursuant to that certain Lease
dated as of October 21, 1988 (the "LEASE") (all capitalized terms shall have
the meaning set forth in the Lease except as otherwise provided herein);
WHEREAS, Tenant has exercised its option to extend the term of the
Lease for five (5) years until June 1, 2001 (the term of the Lease as extended,
shall hereinafter be referred to as the "TERM", and the portion of the Term
from June 1, 1996 to and including June 1, 2001, is hereinafter referred to as
the "EXTENDED TERM") with respect to the 14A Premises, subject to the terms and
conditions contained herein; and
WHEREAS, Landlord desires to lease to Tenant and Tenant desires to
Lease from Landlord those certain premises known as the mezzanine of Suite 14B
consisting of approximately 9,064 square feet in that certain building commonly
known as Building No. 14, Menlo Park, California, and having a street address
of 1505, O'Brien Drive, Menlo Park, California all as shown on Exhibit "A"
attached hereto (the "MEZZANINE"), pursuant to the terms and conditions
contained in the Lease, as amended hereby.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and the mutual promises set forth
herein, Landlord and Tenant hereby agree as follows notwithstanding anything
contained in the Lease to the contrary:
1. For the remainder of the Term, Landlord hereby leases to Tenant and
Tenant hereby leases from Landlord the Mezzanine, subject to the terms and
conditions contained in the Lease, as amended hereby.
<PAGE> 2
2. The following terms defined in Paragraph 3 of the Lease shall have the
meanings set forth hereinbelow in the Lease, as amended hereby:
(o) "Premises" shall collectively mean the 14A Premises and the
Mezzanine as shown on Exhibit "A" hereto, and the use of the 95 parking spaces
on Lot 14.
(aa) "Tenant's Proportionate Share of Building Expenses" shall
collectively mean (i) the square footage of the Premises, i.e., 33,783, divided
by the square footage of Building 14 (56,460), which equals 59.84%.
(bb) "Tenant's Proportionate Share of Project Expenses" shall
collectively mean (i) the square footage of Lot 14 (116,045) times 59.84%, i.e.,
divided by the square footage of the leasable Lots in the Project (2,060,693),
which equals 3.37%.
3. Notwithstanding the foregoing, from and including June 2, 1996, to and
including December 1, 1997 (the "TERMINATION PERIOD"), in the event that a
present or prospective tenant of Suite 14B wishes to lease both the ground floor
and the Mezzanine, upon sixty (60) days prior written notice from Landlord to
Tenant Landlord shall have the right to terminate Tenant's lease of the
Mezzanine. In the event Landlord does not exercise its right to terminate
Tenant's lease of the Mezzanine during the Termination Period, Landlord's rights
set forth in the preceding sentence shall expire. Such expiration shall not
affect other rights that Landlord has to terminate the Lease as set forth in the
Lease.
4. In addition to the Monthly Rent for the 14A Premises which is due and
payable as set forth in Paragraph 5 of the Lease, Tenant shall pay to Landlord,
in lawful money of the United States, for each calendar month to the term hereof
commencing with the month of March, 1996, Monthly Rent for the Mezzanine in the
amount of $7,704.40, subject to adjustment as provided in Paragraph 5(b) below,
in advance, on the first day of each calendar month of the Term, without
abatement, deduction, claim, offset, prior notice or demand. Monthly Rent for
the Mezzanine for the month of March, 1996, shall be prorated as set forth in
Paragraph 5(d) of the Lease.
5. (a) The first sentence of Paragraph 11(c)(ii) is amended to read as
follows: "In particular, Tenant, at its sole cost, shall keep, operate, and
maintain the Premises in compliance with all, and shall not, through its use and
occupancy, cause or permit the Premises to be in violation of, any
"Environmental Laws" (hereinafter defined)."
(b) Paragraph 11 is further amended to add the following new
subparagraph (d):
<PAGE> 3
(d) "Environmental Laws" shall mean any and all present and
future federal, state and local laws, or requirement under any permit
issued with respect thereto, and other requirements of governmental
entities having jurisdiction thereunder, relating to the protection of
human health, the environment, or Toxic Materials including, without
limitation, the use, handling, transportation, production, disposal,
treatment, discharge or storage thereof.
6. All references to the "Building" and the "Premises" contained in
paragraph 15(a) shall be deemed to refer to Building 14 and the Premises. All
references to "Tenant Improvements" contained in Paragraph 15(b) shall be deemed
to include the "Mezzanine Tenant Improvements" as defined hereinbelow.
7. Tenant shall pay "Building Expenses" as defined in Paragraph 17(a) with
respect to the Premises in amounts equal to 59.84% of the Real Property Taxes
relative to Building 14 or Lot 14 as a whole and 59.84% of "Costs of Operation
and Maintenance" as defined in said paragraph 17(a) with respect to the
operation and maintenance of Building 14 and Lot 14. The Building Expenses with
respect to the Premises shall be calculated and payable in accordance with the
terms of Paragraph 17(a). Tenant's payment of the Building Expenses with
respect to the Premises shall constitute Additional Rent payable by Tenant under
the Lease, as amended hereby.
8. All references to "Premises" in Paragraph 24(b) shall be deemed to
include the Mezzanine.
9. Landlord shall exercise all reasonable efforts to obtain the necessary
approvals to modify the two (2) stairwells in Suite 14B to (a) block entry to
the Mezzanine from the lobby of Suite 14B, and (b) allow secured ingress and
egress to the easterly stairs to the Mezzanine while preserving the security of
the groundfloor space of Suite 14B (the "MEZZANINE TENANT IMPROVEMENTS").
Provided that such approvals are obtained, and provided that security issues are
resolved to the satisfaction of the ground floor tenant of Suite 14B and Tenant,
at no cost to Tenant, Landlord will modify the two (2) stairwells in Suite 14B,
as set forth above. In the event that security issues are not resolved to the
satisfaction of Tenant, Tenant may terminate this Lease on thirty (30) days
written notice to Landlord, without penalty.
10. Landlord hereby grants Tenant a right of first offer (the "RIGHT OF
FIRST OFFER") with respect to all space in Suite 14B of the Building that is not
presently subject to the terms hereof, on the following terms and conditions. If
at any time during the Lease Term, Landlord receives a bona fide offer from an
unrelated third party to lease such space, which offer Landlord is willing to
accept, Landlord shall first offer to Tenant the opportunity to lease such space
at the Prevailing Market Rent, and
<PAGE> 4
otherwise on all other terms and condition set forth herein. Tenant may
exercise the Right of First Offer only by giving written notice to Landlord of
Tenant's exercise of such right within fifteen (15) days following the date of
Tenant's receipt of the Right of First Offer. If Tenant does not exercise the
Right of First Offer within such fifteen (15) day period, then Landlord may
lease such space to any third party on substantially the same terms and
conditions set forth in the Right of First Offer so long as Landlord enters
into a binding lease for such space within 180 days after delivery to Tenant of
the Right of First Offer notice. If Landlord does not enter into such lease
within such 180 day period, then Landlord shall reoffer such space to Tenant as
set forth herein. The "PREVAILING MARKET RENT" shall be equal to the prevailing
market rate for properties of equivalent quality, size, utility and location in
Menlo Park, California. If Tenant has timely exercised its Right or First
Offer, Landlord shall notify Tenant in writing of the proposed new Base Rent,
which shall be equal to the Prevailing Market Rent. Unless Tenant objects to
the Prevailing Market Rent as determined by Landlord within ten (10) days after
receipt of such notice, the amount stated in such notice shall be the Base Rent
for the new space. If Tenant objects to Landlord's proposal, then the Base Rent
for the new space shall be determined by an MAI appraiser. Landlord shall
choose such an appraiser within thirty (30) days after Tenant notifies Landlord
of Tenant's objection to the Prevailing Market Rate determined by Landlord.
If Tenant does not disapprove Landlord's choice of any appraiser by delivery of
written notice of disapproval within five (5) days after written notice of such
choice by Landlord, then Landlord's appraiser shall be deemed to have been
approved by Tenant. If Tenant does not approve Landlord's choice of an
appraiser, then Tenant's notice of disapproval shall name an MAI appraiser
designated by Tenant, and Tenant's appraiser and Landlord's appraiser shall
appoint a third MAI appraiser in which event each appraiser shall determine the
Prevailing Market Rent. The two amounts which are closer shall be averaged, and
such average shall be the Prevailing Market Rent for the new space. Landlord
and Tenant shall each make a good faith effort to have any appraiser it chooses
prepare its assessment of the Prevailing Market Rent promptly. The cost of any
common appraiser shall be split equally by Landlord and Tenant, and, if three
appraisers are utilized, Landlord and Tenant shall each be responsible for the
fees and costs of the appraiser which it appoints. If the Base Rent shall not
have been determined by the Commencement Date of the Renewal Term, Tenant shall
pay Base Rent when due at Tenant's proposed Base Rent until the new Base Rent
is determined. When the actual adjusted Base Rent is determined, Tenant shall
promptly pay Landlord any additional rent due for the months which have elapsed
or, alternatively, Landlord shall credit any excess payment for the elapsed
months to the next monthly installments of Base Rent becoming due.
11. Except as expressly set forth to the contrary in this First
Amendment, the Lease remains unmodified and in full force and effect. To the
extent of any conflict between the terms of
<PAGE> 5
this First Amendment and the terms of the Lease, this First Amendment will
control.
IN WITNESS WHEREOF, this First Amendment has been executed by the
parties hereto as of the date hereinabove written.
LANDLORD: TENANT:
PATRICIAN ASSOCIATES, INC., PHARMCHEM, Inc.
a California corporation a California corporation
By: /s/ Gregory C. Hauser By: /s/ Joe Halligen
-------------------------------- --------------------------------
Print Name: Gregory C. Hauser Print Name: Joseph W. Halligen
------------------------ ------------------------
Its: Vice President Its: CEO
------------------------------- -------------------------------
By: /s/ Kurt D. Schaeffer By: /s/ David Lattanzio
-------------------------------- --------------------------------
Print Name: Kurt D. Schaeffer Print Name: David Lattanzio
------------------------ ------------------------
Its: Vice President Its: VP/CFO
------------------------------- -------------------------------
MENLO BUSINESS PARK,
a California general partnership
By: /s/ John O. Lewis
--------------------------------
John O. Lewis, as general partner
By: Oltmans Investment Company,
as general partner
By: /s/ J.O. Oltmans II
--------------------------------
J.O. Oltmans II, General Partner
By: /s/ Basil C. Johnson
--------------------------------
Basil C. Johnson, General Partner
By: Lorrin C. Tarlton, Jr., and Marilyn L. Tarlton,
Trustees UTD 1/23/75, as general partner
By: /s/ Lorrin C. Tarlton, Jr., Trustee
--------------------------------
Lorrin C. Tarlton, Jr., Trustee
By: /s/ Marilyn L. Tarlton, Trustee
--------------------------------
Marilyn L. Tarlton, Trustee
<PAGE> 1
EXHIBIT "A"
EXHIBIT 10.16
[AETNA LOGO]
OFFICE/SHOWROOM/WAREHOUSE LEASE AGREEMENT
7606 Pebble Drive, Building 28
- -------------------------------------------------------------------------------
OFFICE/SHOWROOM/WAREHOUSE
AEtna Life Insurance Company
- -------------------------------------------------------------------------------
Landlord
AND
Harris Methodist Fort Worth, a Texas Non-Profit Corporation
- -------------------------------------------------------------------------------
Tenant
DATE: October 24, 1991
----------------
<PAGE> 2
OFFICE/SHOWROOM/WAREHOUSE
LEASE AGREEMENT
THE STATE OF TEXAS
COUNTY OF TARRANT
THIS LEASE AGREEMENT, made and entered into as of the ____ day of
October, 1991, by and between the Landlord and Tenant hereinafter named.
WITNESSETH:
1. Definitions and Basic Provisions: The following definitions and
basic provisions shall be used in conjunction with and limited by the reference
thereto in the provisions of this lease:
(a) "Landlord": AEtna Life Insurance Company
(b) "Tenant": Harris Methodist Fort Worth, a Texas Non-Profit
Corporation
(b-1) "HMHS" Harris Methodist Health System, a Texas Non-Profit
Organization
(c) "Premises" shall mean the space outlined in red on the plan
attached hereto as Exhibit "A", said premises consisting of 9,000 square feet
of net rentable area, (in determining net rentable area, all measurements are
from the outer surfaces of walls, whether exterior walls and/or hallway walls,
except party walls where measurements are from centerline.) The Premises are
located within the Riverbend Buildings 21-31 & 38 Office/Showroom/Warehouse
project (the "Project"). The net rentable area of the project is 602,400 square
feet.
(d) "Lease Term": A period of Sixty (60) months, commencing on the
earlier of the date the Tenant opens for business or 60 days from the date
Landlord tenders space to Tenant for construction of their leasehold
improvement (the "commencement date") and ending on Sixty (60) months
thereafter, 1996.
(e) "Basic Rental": $2,625.00 per month.
(f) "Security Deposit": $ Waived.
(g) "Permitted Use": Forensic medical facility, including all
activity related to administration, marketing and operation of a forensic
toxicology testing service.
2. Lease Grant. Landlord, in consideration of the rent to be paid and
the other covenants and agreements to be performed by Tenant and upon the terms
and conditions hereinafter stated, does hereby lease, demise and let unto
Tenant the premises (as defined in paragraph 1(c) hereof) commencing on the
commencement data (as defined in paragraph 1(d) hereof, or as adjusted as
hereinafter provided) and ending on the last day of the lease term, unless
sooner terminated as herein provided. If this lease is executed before the
premises become vacant, or otherwise available and ready for occupancy, or if
any present tenant or occupant of the premises holds over, and Landlord cannot
acquire possession of the premises prior to the commencement date of this
lease, Landlord shall not be deemed to be in default hereunder, and Tenant
agrees to accept possession at such time as Landlord is able to tender the same
and such date shall be deemed to be the commencement date and this lease shall
continue for the lease term described in paragraph 1(d) hereof, Landlord hereby
waives payment of rent covering any period prior to the tendering of possession
of the premises to Tenant hereunder. Likewise, should Tenant occupy the
premises prior to the commencement date specified in paragraph 1(d), the
commencement date shall be altered to coincide with said occupancy with the
ending date of the lease remaining unchanged. By occupying the premises, Tenant
shall be deemed to have accepted the same as suitable for the purpose herein
intended and to have acknowledged that the same comply fully with Landlord's
covenants and obligations.
3. Rent: In consideration of this lease, Tenant promises and agrees to
pay Landlord the basic rental (as defined in paragraph 1(c) hereof) without
deduction or set off, for each month of the entire lease term. One such monthly
installment (to be applied to the first full month after the commencement date)
shall be payable by Tenant to Landlord contemporaneously with the execution
hereof, and a like monthly installment shall be due and payable without demand
on or before the first day of each succeeding calendar month during the term
hereof. Rent for any fractional month at the beginning or end of the lease
shall be prorated.
4. Rental Escalations: The basic rental payable under paragraph 1(c)
hereof is based on factors existing during the calendar year in which the lease
commences ("base year"), said factors including operating expenses which
include landscape, general maintenance, repairs, real property taxes, fire,
casualty and liability insurance, and management for the project. In the event
that during the lease term said operating expenses for 1991 or any succeeding
calendar year exceed $1.00 per square foot per year ("base expense rate") for
the net rentable area of the project (as defined in paragraph 1(c) hereof),
Tenant within thirty (30) days after written notification of the foregoing by
Landlord, shall:
(a) Pay to Landlord as additional rental Tenant's proportionate share
(1,494%), of such excess (the "Excess") over the base expense rate for
the year in question, said proportionate share being defined to mean a
fraction, the numerator of which is the square footage of the Premises
set out in paragraph 1(c), and the denominator of which is the total net
rentable area of the Project also set out in paragraph 1(c). The product
resulting from the application of such fraction to the Excess shall
constitute the amount of additional rent Tenant shall pay. Tenant shall,
on demand, pay to Landlord such amount.
(b) Additionally, beginning January 1 of any calendar year following a
year in which there is an Excess, the basic rental per month set out in
paragraph 1(c) shall be increased by an amount equal to the additional
rent payable during the immediately preceding year, (determined in
accordance with subparagraph 4(a) above) divided by twelve. Any such
additional rent collected, pursuant to this paragraph 4(b), shall be a
credit against the amount of additional rental, if any, due from Tenant
pursuant to paragraph 4(a) for such calendar year. After the end of
every calendar year Landlord will deliver to Tenant a statement
including (i) the previous calendar years operating expenses (as defined
in paragraph 4), (ii) Tenant's proportionate share of any increases,
(iii) the net additional rent due pursuant to paragraph 4(a), if any,
after crediting to Tenant amounts paid as additional rent under 4(b) or
the amount due to be reimbursed to Tenant; provided, however, in no
event shall the monthly rental ever be less than the basic rental
specified in paragraph 1(c).
1
<PAGE> 3
Notwithstanding any expiration or termination of this lease prior to
the lease expiration date (except in the case of a cancellation by mutual
agreement) Tenant's obligation to pay any and all additional rent under
this lease shall cover all periods up to the date lease is
terminated, other than as or by Tenant. Landlord shall be
entitled to estimate the amount of additional rent which shall be due from
Tenant during the last year or portion of a year of the lease term at any
time within thirty (30) prior to the expiration of the lease term, and
Tenant shall pay such amount to Landlord upon demand, (subject to
adjustments when actual expenses are known). Tenant's obligation to pay
any and all additional rent under this lease and Landlord's and Tenant's
obligation to make the adjustments referred to in this paragraph 4 shall
survive any expiration or termination of this lease Landlord shall be
entitled to make.
5. Services:
(a) Landlord agrees to make available to the premises at Landlord's sole
cost and expense 24 hours each day, seven days a week, (i) water at those
points as shown on Exhibit "B"; (ii) air conditioning and heating units at
such locations and in such amounts as shown in Exhibit "B"; (iii) electric
service and outlets as shown on Exhibit "B"; and (iv) electrical lighting
service for all common areas in the manner and to the extent deemed by
Landlord to be standard.
(b) Tenant shall pay for the electricity (including air conditioning and
heating cost) and gas utilized in operating any and all facilities serving
the leased premises.
(c) Failure to any extent to furnish or any stoppage or interruption of
these defined services resulting from any cause shall not render Landlord
liable in any respect for damages to either person, property or business,
nor be construed as an eviction of Tenant or work an abatement of rent,
nor relieve Tenant from fulfillment of any covenant or agreement hereof
except as provided below. Tenant shall have no claim for abatement of rent
or damages on account of any Interruptions in service occasioned thereby
or resulting therefrom. Unless such interruption of service is caused by
Landlord's gross negligence.
6. Leasehold Improvements: Tenant agrees to install at Tenant's cost and
expense the improvements described in Exhibit "B" attached hereto. Landlord
has made no representations as to the conditions of the premises or the Building
or to remodel, repair or decorate, except as expressly set forth herein and in
any exhibits attached hereto, including Exhibit "A".
7. Signs: Tenant shall have the right to install signs upon the exterior of
said building only when first approved in writing by landlord in Landlord's sole
discretion and subject also to any applicable governmental laws, ordinances,
regulations and other requirements. Tenant shall remove all such signs on the
expiration of this Lease. In the event Tenant fails to remove all such signs
within the above time period, Landlord shall be authorized to remove such signs
on Tenant's behalf and at Tenant's sole expense, and Tenant hereby agrees to
indemnify and hold Landlord harmless from and against any and all costs,
expenses, claims and other liabilities of any type arising out of such sign
removal. All sign installations and removals by Tenant shall be made in such a
manner as to avoid injury to or defacement of the Building and other
improvements.
8. Use: Tenant shall use the premises only for the permitted use (as defined
in paragraph 1(g) hereof). Tenant will not occupy or use the premises, or
permit any portion of the premises to be occupied or used, for any business or
purpose other than the permitted use or for any use or purpose which is
unlawful in part or in whole or deemed to be disreputable in any manner or
extrahazardous on account of fire, nor permit anything to be done which will in
any way increase the rate of fire insurance on the Building or contents; and in
event that, by reason of acts of Tenant, there shall by any increase in rate of
insurance on the Building or contents created by Tenant's acts or conduct of
business then such acts of Tenant shall be deemed to be an event of default
hereunder and Tenant hereby agrees to pay to Landlord the amount of such
increase on demand and acceptance of such payment shall not constitute a waiver
of any of Landlord's other rights provided herein. Tenant will conduct its
business and control its agents, employees and invitees in such a manner as not
to create any nuisance, nor interfere with, annoy or disturb other tenants or
Landlord in management of the Building. Tenant will maintain the premises in a
clean, healthful and safe condition and will comply with all laws, ordinances,
orders, rules and regulations (state, federal, municipal and other agencies or
bodies having any jurisdiction thereof) with reference to use, condition or
occupancy of premises. Tenant will not, without the prior written consent of
Landlord, paint, install lighting or decoration, or install any signs, window
or door lettering or advertising media of any type on or about the premises or
any part thereof. Should Landlord agree in writing to any of the foregoing
items in the preceding sentence, Tenant will maintain such permitted item in
good condition and repair at all times.
9. Repairs and Maintenance:
(a) By Landlord: Landlord shall at its expense maintain only the roof,
foundation, underground or otherwise concealed plumbing, and the
structural soundness of the exterior walls (excluding all windows, window
glass, plate glass, and all doors) of the Building in good repair and
condition, except for reasonable wear and tear. Landlord shall not be
responsible for termite eradication. Tenant shall give immediate written
notice to Landlord of the need for repairs or corrections and Landlord
shall proceed promptly to make such repairs or corrections. Landlord's
liability hereunder shall be limited to the cost of such repairs or
corrections.
See Page 2A, Part 1.
Landlord represents that at the beginning date of this Lease the
plumbing, and any fire protection sprinkler system, heating system,
air-conditioning equipment, are in good operating condition. In addition,
Landlord shall maintain the paving outside the Building, the landscaping
and regular mowing of grass and any railroad siding.
(b) By Tenant: Tenant shall at its expense and risk maintain all other
parts of the Building and other improvements on the demised premises in
good repair and condition, including but not limited to repairs (including
all necessary replacements) to the interior plumbing, windows, window
glass, plate glass, doors, heating system, air-conditioning equipment,
fire protection sprinkler system, elevators, and the interior of the
Building in general. All warranties and guarantees in effect on any of the
items mentioned above will be for Tenant's or Landlord's use as
applicable.
In event Tenant should neglect reasonably to maintain the demised
premises, Landlord shall have the right (but not the obligation) to cause
repairs or corrections to be made and any reasonable costs therefor shall
be payable by Tenant to Landlord as additional rental on the next rental
installment date.
10. Alterations and Improvements: At the end or other termination of this
lease, Tenant shall deliver up the premises with all improvements located
thereon (except as described on Exhibit "H", attached hereto and made a part
hereof, and as otherwise herein provided) in good repair and condition,
reasonable wear and tear and casualty damages excepted, and shall deliver to
Landlord all keys to the premises. The cost and expense of any repairs
necessary to restore the condition of the leased premises to said condition in
which they are to be delivered to Landlord shall be borne by Tenant. Tenant
will not make or allow to be made any alterations or physical additions in or
to the premises without the prior written consent of Landlord, which consent
shall not be unreasonably withheld provided, however, Tenant may make minor non
structural, non-building system repairs at any time without the consent of
Landlord (but with notice to Landlord and copy of plans or description of
changes), as to non-structural alterations. All alterations, additions or
improvements (whether temporary or permanent in character) made in or upon the
premises, either by landlord or Tenant, shall be Landlord's property on
termination of this lease and shall remain on the premises without compensation
to Tenant. All furniture, movable trade fixtures and equipment installed by
Tenant may be removed by Tenant at the termination of this lease if Tenant so
elects, and shall be so removed if required by Landlord, or if not so removed
shall, at the option of Landlord, become the property of Landlord. All such
installations, removals and restoration shall be accomplished in a good
workmanlike manner so as not to damage the premises or the primary structure or
structural qualities of the Building or the plumbing, electrical lines or
other utilities.
2
<PAGE> 4
HARRIS METHODIST FORT WORTH, A TEXAS NON-PROFIT CORPORATION
1. Repairs and Maintenance: If Tenant gives written notice to repair and
Landlord does not commence remedial procedures within five (5) business
days after receipt of such notice or complete such repairs with due
diligence, then Tenant shall have the right to make the reasonable
repairs and invoice the Landlord for the amount of reasonable charges.
Landlord shall pay the reasonable charges within thirty (30) days of
receipt of paid invoices and upon failure of Landlord to pay the
reasonable charges, Tenant may offset the amount of reasonable charges
against rent due Landlord under this Lease.
2 (A)
<PAGE> 5
11. Common Areas: The use and occupation by lessee of the leased premises
shall include the use in common with others thereto of the common areas,
parking areas, service roads, loading facilities, sidewalks, and other
facilities as may be designated from time to time by Landlord, subject, however,
to the terms and conditions of this agreement and to reasonable rules and
regulations for the use thereof as prescribed from time to time by Landlord.
All common areas described above shall at all times be subject to the
exclusive control and management of Landlord, and Landlord shall have the right
from time to time to establish, modify and enforce reasonable rules and
regulations with respect to all facilities and areas mentioned in this Article,
so long as they are enforced consistently as to all Tenants in the project.
Landlord shall have the right to construct, maintain, and operate lighting
facilities on all said areas and improvements; to police same; from time to time
to change the area, level, location and arrangement of parking areas and other
facilities hereinabove referred to; and to restrict parking by tenants, their
officers, agents and employees to employee parking areas. See Page 3A Part 1.
All common areas and facilities not within the leased premises, which
Tenant may be permitted to use and occupy, are to be used and occupied under a
revocable license, and if the amount of such areas be diminished, Landlord shall
not be subject to any liability nor shall Tenant be entitled to any compensation
or diminution or abatement of rent, nor shall such diminution of such areas be
deemed constructive or actual eviction.
12. Assignment and Subletting:
(a) Tenant shall not, without Landlord's prior written consent which
consent shall not be unreasonably withheld, assign, sublease, transfer,
encumber this lease or any interest therein. Any attempted assignment
or sublease by Tenant in violation of the terms and covenants of this
paragraph shall be void. See Page 3A, Part 2.
(b) If Tenant requests Landlord's consent to an assignment of the Lease
or subletting of all or a part of the Premises, Landlord shall have the
option (without limiting Landlord's other rights hereunder) of
terminating this Lease upon thirty (30) days notice and of dealing
directly with the proposed assignee. If Landlord should fail to notify
Tenant in writing of its decision within a thirty (30) day period after
Landlord shall be deemed to have refused to consent to any assignment
or subleasing, and to have elected to keep this Lease in full force and
effect.
(c) All cash or other proceeds of any assignment, sale or sublease of
Tenant's Interest in this Lease, whether consented to by Landlord or
not, shall be paid to Landlord notwithstanding the fact that such
proceeds exceed the rentals called for hereunder, unless Landlord
agrees to the contrary in writing, and Tenant hereby assigns all rights
it might have or ever acquire in any such proceeds to Landlord. This
covenant and assignment shall run with the land and shall bind Tenant
and Tenant's heirs, executors, administrators, personal
representatives, successors and assigns. Any assignee, sublessee or
purchaser of Tenant's Interest in this Lease (all such assignees,
sublessees and purchasers being hereinafter referred to as
"Successors"), by assuming Tenant's obligations hereunder shall assume
liability to Landlord for all amounts paid to persons other than
Landlord by such Successor in consideration of any such sale,
assignment or subletting, in violation of the provisions hereof.
13. Indemnity: Landlord shall not be liable for and Tenant will indemnify
and save harmless Landlord of and from all fines, suits, claims, demands, losses
and actions (including attorneys' fees) for any injury to person or damage to or
loss of property on or about the premises caused by the negligence or misconduct
or breach of this Lease by Tenant, Its employees, subtenants, invitees or by any
other person entering the premises or the Building under express or implied
invitation of tenant or arising out of Tenant's use of the premises. Landlord
shall not be liable or responsible for any loss or damage to any property or
death or injury to any person occasioned by theft, fire, Act of God, public
enemy, injunction, riot, strike, insurrection, war, court order, requisition or
other governmental body or authority, by other tenants of the Building or any
other matter beyond control of Landlord, or for any injury or damage or
inconvenience which may arise through repair or alteration of any part of the
Building, or failure to make repairs, or from any cause whatever except
Landlord's gross negligence. See Page 3A, Part 3.
14. Liability Insurance: Tenant shall procure and maintain through the
Lease Term a policy or policies of public liability insurance, at its sole cost
and expense, relating to its respective use and/or occupancy of the Premises,
with limits of not less than $1,000,000.00 with respect to injuries to or death
of any one person, and in an amount not less than $1,000,000.00 with respect to
any one accident or disaster, and of not less than $1,000,000.00 with respect to
property damaged or destroyed. Tenant shall obtain a written obligation from
each insurance company issuing the insurance required to be maintained by Tenant
pursuant to this paragraph to notify Landlord at least ten (10) days prior to
the expiration or cancellation of such insurance. Such policies or duly executed
certificates of insurance shall be promptly delivered to Landlord and renewals
thereof, as required, shall be delivered to Landlord at least thirty (30) days
prior to the expiration of the respective policies.
15. Subordination: Tenant accepts this Lease subject and subordinate to any
mortgage, deed of trust or other lien presently existing or hereafter arising
upon the Premises, or upon the Project and to any renewals, refinancing and
extensions thereof, provided that any such mortgagee or lienholder agree to
recognize and not disturb this Lease so long as Tenant is not in default
hereunder, but Tenant agrees that any such mortgagee shall have the right at any
time to subordinate such mortgage, deed of trust or other lien of this Lease on
such term and subject to such conditions as such mortgages may deem appropriate
in its discretion. Landlord is hereby irrevocably vested with full power and
authority to subordinate this Lease to any first lien mortgage, deed of trust or
other first lien now existing or hereafter placed upon the Premises, or the
Project as a whole, and Tenant agrees upon demand to execute such further
instruments subordinating this Lease or attorning to the holder of any such
liens as Landlord may request provided that any such mortgagee or lienholder
agrees to recognize and not disturb this Lease so long as Tenant is not in
default hereunder. The terms of this Lease are subject to approval by the
Landlord's lender(s), and such approval is a condition precedent to Landlord's
obligations hereunder. In the event that Tenant should fail to execute any
subordination or other agreement required by this paragraph, promptly as
requested. Tenant hereby irrevocably constitutes Landlord as its attorney in
fact to execute such instrument in Tenant's name, place and stead, is being
agreed that such power is one coupled with an interest. Tenant agrees that it
will from time to time upon request by Landlord execute and deliver to such
persons as Landlord shall request a statement in recordable form certifying that
this Lease is unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as so modified),
stating the dates to which rent and other charges payable under this Lease have
been paid, stating that Landlord is not in default hereunder (or if Tenant
alleges a default stating the nature of such alleged default) and further
stating such other matters as Landlord shall reasonably require.
16. Casualty Insurance: Landlord shall, at all times during the term of
this lease maintain a policy or policies of insurance with the premiums thereon
fully paid in advance in amounts equal to the full replacement value of the
building, issued by and binding upon some solvent insurance company, insuring
the Building against loss or damage by fire, explosion, or other hazards and
contingencies Landlord's mortgagees may require; provided that Landlord shall
not be obligated to insure any furniture, equipment, machinery, goods or
supplies not covered by this lease which Tenant may bring or obtain upon the
leased premises, or any additional improvements which Tenant may construct
thereon.
17. Inspection: Landlord or representatives shall have the right to enter
into and upon any and all parts of premises to (i) inspect same or clean or make
repairs or alterations or additions as Landlord may deem necessary upon 36 hours
prior notice and if accompanied by a representative of Tenant but without any
obligation to do so, except as expressly provided for herein), or (ii) if Tenant
elects to vacate the Premises, then during the 90 day period to the expiration
of the Lease, Landlord may show the premises to prospective tenants, purchasers
or lenders upon 36 hour notice and in company of Tenant, and Tenant shall not be
entitled to any abatement or reduction of rent by reason thereof, nor shall such
be deemed to be an actual or constructive eviction. See Page 3A, Part
----------------------
INITIAL
----------------------
LANDLORD TENANT
----------------------
----------------------
3
<PAGE> 6
HARRIS METHODIST FORT WORTH, A TEXAS NON-PROFIT CORPORATION
1. Common Areas: Tenant shall be guaranteed the use of thirty seven
(37) parking spaces during the term of the lease, four (4) of which
shall be marked as "Loading zone" space, at the side and rear entrances,
in locations satisfactory to Landlord and Tenant. The four (4) spaces
are marked "Loading zone" on Exhibit "A" attached hereto and made a pert
hereof.
2. Assignment and Subletting: So long as Tenant is not in default
under this lease, Tenant may assign this Lease to any subsidiary or
parent corporation or other affiliate or Tenant, including, but not
limited to, Harris Methodist Hospital Health Systems as well as any
corporation or entity owned, controlled or related with Harris Methodist
Hospital Health System; provided that, as a precondition to such
assignment of the Lease, Tenant submits to Landlord written proof that,
in Landlord's sole discretion, satisfactorily establishes that (i) the
prospective assignee is financially and otherwise able to perform the
Lease obligations and (ii) the prospective assignees intended use of the
Premises will not conflict with the other Tenant's exclusive use of
their Premises. Notwithstanding anything to the contrary, this Lease can
be assigned to Harris Methodist Forensic Toxicology, Inc. Upon any
assignment, Harris Methodist Fort Worth, a Texas non-profit Corporation
shall not be released from its liabilities and obligations regarding
this Lease.
3. Indemnity: Tenant shall not be liable, and Landlord will
indemnify and save harmless Tenant of and from all suits, fines, claims,
demands, losses and actions (including attorney's fee's) for any injury
to person or damage to or loss of property on or about the Project,
excluding the Premises, caused by the negligence or misconduct or breach
of the Lease by the Landlord and its employees or agents.
4. Inspection: In the event of an emergency on the Premises,
Landlord or a representative shall have the right to immediately enter
the Premises in the company of Tenant's employees, who can be reached at
a designated emergency number twenty four (24) hours a day, seven (7)
days a week. Landlord agrees that the unique nature of Tenant's business
and federal licensing standards require strict security measures.
3(A)
<PAGE> 7
18. Condemnations if, during the term of this lease, or any extension
or renewal thereof, all of the Project should be taken for any public or
quasi-public use under any governmental law, ordinance or regulation or by
right of eminent domain or by private purchase in lieu thereof, this lease
shall terminate and the rent shall be abated during the unexpired portion of
this lease, effective on the date physical possession is taken by the
condemning authority, and Tenant shall have no claim against Landlord for the
value of any unexpired term of this lease.
In the event a portion but not all of the Project shall be taken for
any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain, by private sale in lieu thereof and
the partial taking or condemnation shall render the Project unsuitable for
continued operation, then Landlord shall have the option, in its sole
discretion, of terminating this lease or, at Landlord's sole risk and expense,
restoring and reconstructing the Project to the extent necessary to make same
reasonably tenantable. Should Landlord elect to restore, the lease shall
continue in full force and effect with the rent payable during the unexpired
portion of this lease being adjusted to such an extent as may be fair and
reasonable under the circumstances, and Tenant shall have no claim against
Landlord for the value of any interrupted portion of this lease. See Page 4A,
Part 1.
In the event any condemnation or taking, total or partial, Tenant shall
be entitled to part of the award up to the unamortized cost of Tenant's
leasehold improvements which Tenant paid for. Tenant waives any claim for the
value of the leasehold estate itself.
19. Fire and Other Casualty: In the event that (i) the premises should
be totally destroyed by fire, tornado or other casualty or (ii) in the event
the premises or the Building should be so damaged that rebuilding or repairs
cannot be completed within one hundred eighty (180) days after the date of such
damage, or (iii) in the event of a material uninsured loss to the premises or
Project, Landlord may at its option terminate this lease, in which event the
rent shall be abated during the unexpired portions of this lease effective with
the date of such damage. In the event (See Page 4A, Part 2) Landlord shall
within thirty (30) days after the date of such damage commence to rebuild or
repair the premises and shall proceed with reasonable diligence to restore the
premises to substantially the same condition in which it was immediately prior
to the happening of the casualty, except that Landlord shall not be required to
rebuild, repair or replace any part of the furniture, equipment, fixtures and
other improvements which may have been placed by Tenant or other tenants within
the project or the premises. See Page 4A, Part 3. Unless the casualty was a
result of Tenant's fault or neglect, Landlord shall allow Tenant a fair
diminution of rent during the time the premises are unfit for occupancy. In the
event any mortgagee under a deed of trust, security agreement or mortgage on
the premises should require that the insurance proceeds be used to retire the
mortgage debt, Landlord shall have no obligation to rebuild and this lease
shall terminate upon notice to Tenant. Any insurance which may be carried by
Landlord or Tenant against loss or damage to the project or to the premises
shall be for the sole benefit of the party carrying such insurance and under
its sole control. If Landlord elects not to rebuild or does not rebuild within
180 days (subject to extension for force majeure including adverse weather),
Tenant may terminate this Lease.
20. Holding Over Should Tenant, or any of its successors in interest,
hold over the premises, or any part thereof, after the expiration of the term
of this lease, unless otherwise agreed in writing, such hold over shall
constitute and be construed as tenancy for month to month only, at a rental
equal to the rent payable for the last month of the term of this lease plus
fifty percent (50%) of such amount. The inclusion of the preceding sentence
shall not be construed as Landlord's consent for the Tenant to hold over.
21. Taxes on Tenant's Property: Tenant shall be liable for all taxes
levied or assessed against personal property, furniture or fixtures placed by
Tenant in the premises. If any such taxes for which Tenant is liable are levied
or assessed against Landlord or Landlord's property and if Landlord elects to
pay the same or if the assessed value of Landlord's property is increased by
inclusion of personal property, furniture or fixtures placed by Tenant in the
premises, and Landlord elects to pay the taxes based on such increase, Tenant
shall pay to Landlord upon demand that part of such taxes for which Tenant is
primarily liable hereunder.
22. Events Of Default: The following events shall be deemed to be
defaults by Tenant under this lease:
(a) Tenant shall fail to pay any installment of the rent hereby
reserved and such failure shall continue for a period of ten (10)
days after receipt of written notice, provided Landlord shall only
be required to deliver one such written notice the first time in
any calendar year, and after that, if Tenant again fails to pay
within ten (10) days of being due, it shall constitute a default
without notice being required of Landlord.
(b) Tenant shall fail to comply with any term, provision or
covenant of this lease, other than the payment of rent, and shall
not cure such failure within thirty (30) days after written notice
thereof to Tenant.
(c) Tenant shall make an assignment for the benefit of creditors.
(d) Tenant shall file a petition under any section or chapter of
the National Bankruptcy Act, as amended, or under any similar law
or statute of the United States or any State thereof; or Tenant
shall be adjudged bankrupt or insolvent in proceeding filed against
Tenant thereunder and such adjudication shall not be vacated or set
aside within thirty (30) days.
(e) A receiver or Trustee shall be appointed for all or
substantially all of the assets of Tenant and such receivership
shall not be terminated or stayed within thirty (30) days.
(f) Tenant shall desert or vacate any substantial portion of the
premises for a period of thirty (30) or more days.
23. Remedies: Upon the occurrence of any event of default specified
in paragraph 22 hereof, Landlord shall have the option to pursue any one or
more of the following remedies without any notice or demand whatsoever:
(a) Terminate this lease in which event Tenant shall immediately
surrender the premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may
have for possession or arrearages in rent, enter upon and take
possession and expel or remove Tenant and any other person who may
be occupying said premises or any part hereof, by force if
necessary, without being liable for prosecution or any claim of
damages thereof; and Tenant agrees to pay to Landlord on demand the
amount of all loss and damage which Landlord may suffer by reason
of such termination, whether through inability to relet the
premises on satisfactory terms or otherwise, including the loss of
rental for the remainder of the lease term.
(b) Enter upon and take possession of the premises and expel or
remove Tenant and any other person who may be occupying the
premises or any part thereof, by force if necessary, without being
liable for prosecution or any claim for damages therefor, and if
Landlord so elects, relet the premises on such terms as Landlord
shall deem advisable and receive the rent thereof; and Tenant
agrees to pay to Landlord on demand any deficiency that may arise
by reason of such reletting for the remainder of the lease term.
(c) Enter upon the premises by force if necessary, without being
liable for prosecution or any claim for damages therefor, and do
whatever Tenant is obligated to do under the terms of this lease;
and Tenant agrees to reimburse Landlord on demand for any expenses
which Landlord may incur in thus effecting compliance with Tenant's
obligations under this lease, and Tenant further agrees that
Landlord shall not be liable for any damages resulting to the
Tenant for such action.
No re-entry or taking possession of the premises by Landlord shall be
construed as an election on its part to terminate this lease, unless a written
notice of such intention be given to Tenant. Notwithstanding any such reletting
or re-entry or taking possession, Landlord may at any time thereafter elect to
terminate this lease for a previous default. Pursuit of any of the foregoing
remedies shall not preclude pursuit of any of the other remedies herein
provided or any other remedies provided by law, nor shall pursuit of any remedy
herein provided constitute a forfeiture or waiver of any rent due to Landlord
hereunder or of any damages accruing to Landlord by reason of the violation of
any of the terms, provisions and covenants herein contained. Landlord's
acceptance of rent following an event of default hereunder shall not be
4
<PAGE> 8
HARRIS METHODIST FORT WORTH, A TEXAS NON-PROFIT CORPORATION
1. Condemnation: If twenty percent (20%) or more of the Premises is taken
for any public or quasi-public use under governmental law, ordinance or
regulation, or by right of eminent domain, or by private purchase in
lieu thereof, and such taking materially interferes with Tenant's use of
the remainder of the Premises for which they were leased and renders the
remainder of the Premises unsuitable for continued operation of Tenant's
business, then Tenant may terminate the Lease.
2. Fire and other Casualty: . . . (event) Landlord intends to rebuild the
building, Landlord will notify Tenant within thirty (30) days of such
casualty damage of its intent to rebuild and (Landlord). . . . .
3. Fire and Other Casualty: . . . (premises). In the event of minor damage,
Landlord shall immediately commence to repair such damage and rent shall
be equitably abated, (unless). . . .
4(A)
<PAGE> 9
construed as Landlord's waiver of such event of default. by Landlord of
any violation or breach of any of the terms, conditions, and covenants herein
contained shall be deemed or construed to constitute a waiver of any other
violation or breach of any of the terms, provisions, and covenants herein
contained. Forbearance by Landlord to enforce one or more of the remedies
herein provided upon an event of default shall not be deemed or construed to
constitute a waiver of any other violation of default. The loss or damage that
Landlord may suffer by reason of termination of this lease or the deficiency
from any reletting as provided for above shall include the expense of
repossession and any repairs. Should Landlord at any time terminate this lease
for any default, in addition to any other remedy Landlord may have, Landlord
may recover from Tenant all damages Landlord may incur by reason of such
default, including the cost of recovering the premises and the loss of rental
for the remainder of the lease term.
Landlord shall be in default hereunder in the event Landlord has not
begun and pursued with reasonable diligence the cure of any failure of Landlord
to meet its obligations hereunder within thirty (30) days of the receipt by
Landlord of written notice from Tenant of the alleged failure to perform except
as otherwise provided in this Lease. In no event shall Tenant have the right to
terminate or rescind this Lease as a result of Landlord's default as to any
covenant or agreement contained in this Lease or as a result of the breach of
any promise or inducement hereof, whether in this Lease or elsewhere except as
otherwise provided in this Lease. Tenant hereby waives such remedies of
termination and rescission and hereby agrees that Tenant's remedies for default
hereunder and for breach of any promise or Inducement shall be limited to a suit
for damages and/or injunction. In addition, Tenant hereby covenants that, prior
to the exercise of any such remedies, it will give the mortgagees holding
mortgages on the Project notice and a reasonable time to cure any default by
landlord.
24. LATE CHARGES: Tenant hereby acknowledges that late payment to
Landlord of rent or other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. If any rent or other sum due from Tenant is not
received by Landlord or Landlord's designated agent within ten (10) days after
its due date, then Tenant shall pay to Landlord a late charge to the maximum
amount permitted by law (and in the absence of any governing law, ten percent
(10%) of such overdue amount), plus any reasonable attorney's fees incurred by
Landlord by reason of Tenant's failure to pay rent and/or other charges when
due hereunder. The parties hereby agree that such late charges represent a fair
and reasonable estimate of the cost that Landlord will incur by reason of
Tenant's late payment. Landlord's acceptance of such late charges shall not
constitute a waiver of Tenant's default with respect to such overdue amount or
estop Landlord from exercising any of the other rights and remedies granted
hereunder.
25. SURRENDER OF PREMISES: No act or thing done by the Landlord or its
agents during the term hereby granted shall be deemed an acceptance of a
surrender of the premises unless Landlord expressly so indicates.
26. ATTORNEYS' FEES: In case of default if it should be necessary or
proper for non-defaulting party to bring any action under this lease or to
consult or place said lease, or any amount payable by defaulting party
thereunder, with an attorney concerning or for the enforcement of any of
non-defaulting party's rights hereunder, then defaulting party agrees in each
and any such case to pay to non-defaulting party a reasonable attorneys' fee.
27. LANDLORD'S LIEN: In addition to the statutory landlord's lien,
Landlord shall have, at all times, a valid security interest to secure payment
of all rentals and other sums of money becoming due hereunder from Tenant, and
to secure payment of any damages or loss which Landlord may suffer by reason of
the breach by Tenant of any covenant, agreement or condition contained herein,
upon all goods, wares, equipment, fixtures, furniture, improvements and other
personal property of Tenant presently or which may hereafter be situated on the
premises, and all proceeds therefrom, and such property shall not be removed
therefrom without the consent of Landlord until all arrearages in rent as well
as any and all other sums of money then due to Landlord hereunder shall first
have been paid and discharged and all the covenants, agreements and conditions
hereof have been fully complied with and performed by Tenant. Upon the
occurrence of any event of default by Tenant, Landlord may, in addition to any
other remedies provided herein, enter upon the premises and take possession of
any and all goods, wares, equipment, fixtures, furniture, improvements and
other personal property of Tenant situated on the premises, without liability
for trespass or conversion and sell the same at public or private sale, with or
without having such property at the sale, after giving Tenant reasonable notice
of the time and place of any public sale or of the time after which any private
sale is to be made, at which sale the Landlord or its assigns may purchase
unless otherwise prohibited by law. Unless otherwise provided by law, and
without intending to exclude any other manner of giving Tenant reasonable
notice, the requirement of reasonable notice shall be met if such notice is
given in the manner prescribed in paragraph 29 of this lease at least fifteen
(15) days before the time of sale. The proceeds from any such disposition, less
any and all expenses connected with the taking of possession, holding and
selling of the property (including reasonable attorneys' fees and other
expenses), shall be applied as a credit against the indebtedness secured by the
security interest granted in this paragraph 26. Any surplus shall be paid to
Tenant or as otherwise required by law; and the Tenant shall pay any
deficiencies forthwith. Upon request by Landlord, Tenant agrees to execute and
deliver to Landlord a financing statement in form sufficient to perfect the
security interest of Landlord in the aforementioned property and proceeds
thereof under the provisions of the Uniform Commercial Code in force in the
State of Texas. The statutory lien for rent is not hereby waived, the security
interest herein granted being in addition and supplementary thereto.
28. MECHANIC'S LIENS: Tenant will not permit any mechanic's lien or
liens to be placed upon the premises of the Building or improvements thereon
during the term hereof caused by or resulting from any work performed,
materials furnished or obligation incurred by or at the request of Tenant, and
in the case of the filing of any such lien Tenant will either promptly pay same
or post a sufficient bond and contest such lien. If default in payment thereof
shall continue for twenty (20) days after written notice thereof from Landlord
to the Tenant and if Tenant has not posted a sufficient bond and contested such
lien, the Landlord shall have the right and privilege at Landlord's option of
paying the same or any portion thereof without inquiry as to the validity
thereof, and any amounts so paid, including expenses and interest, shall be so
much additional indebtedness hereunder due from Tenant to Landlord and shall be
repaid to Landlord immediately on rendition of bill therefor, together with
interest at ten percent (10%) per annum until repaid.
29. WAIVER OF SUBROGATION: Anything in this lease to the contrary
notwithstanding, the parties hereto hereby waive to the extent permitted by
their respective insurance carriers any and all rights of recovery, claim,
action or cause of action, against each other, their agents, officers, and
employees, for any loss or damage that may occur to the premises hereby
demised, or any improvements thereto, or said Building of which the premises
are a part, or any improvements thereto, by reason of fire, the elements or
origin, including negligence of the parties hereto, their agents, officers, and
employees.
30. NOTICES: Each provision of this Agreement, or of any applicable
governmental laws, ordinances, regulations, and other requirements with
reference to the sending, mailing or delivery of any notice, or with reference
to the making of any payment by Tenant to Landlord, shall be deemed to be
complied with when and if the following steps are taken:
(a) All rent and other payment required to be made by Tenant to Landlord
hereunder shall be payable to Landlord in Dallas County, Texas, at the
address hereinbelow set forth, or at such other address as Landlord
may specify from time to time by written notice delivered in accordance
herewith;
(b) Any notice or document required to be delivered hereunder shall be
deemed to be delivered if actually received and whether or not received
then on the third day after deposited in the United States mail, postage
prepaid, certified or registered mail (with or without return receipt
5
<PAGE> 10
requested) addressed to the parties hereto at the respective addresses
set out opposite their names below, or at such other address as they
have theretofore specified by written notice delivered in accordance
herewith:
LANDLORD: AEtna Life Insurance Company
14785 Preston Road, Suite 275
Dallas, Texas 75240
TENANT: Harris Methodist Fort Worth, a Texas Non-Profit
Corporation
7606 Pebble Drive
Fort Worth, Texas 76118
ATTN: Mr. Bruce Benard
31. Force Majeure: Whenever a period of time is herein prescribed for
action to be taken by Landlord or Tenant, the Landlord or Tenant shall not be
liable or responsible for, and there shall be excluded from the computation for
any such period of time, any delays due to strikes, riots, Acts of God,
shortages of labor or materials, war, governmental laws, regulations or
restrictions or any other causes of any kind whatsoever which are beyond the
control of Landlord or Tenant.
32. Separability: If any clause or provision of this lease is illegal,
invalid or unenforceable under the present or future laws effective during the
term of this lease, then and in that event, it is the intention of the parties
hereto that the remainder of this lease shall not be affected thereby, and it
is also the intention of the parties to this lease that in lieu of each clause
or provision of this lease that is illegal, invalid, or unenforceable, there be
added as a part of this lease a clause or provision as may be possible and be
legal, valid and enforceable.
33. Entire Agreements; Amendments; Blinding Effect: This lease contains
the entire agreement between the parties and may not be altered, changed or
amended, except by instrument in writing signed by both parties hereto. No
provision of this lease shall be deemed to have been waived by Landlord unless
such waiver be in writing signed by Landlord and addressed to Tenant, nor shall
any custom or practice which may grow up between the parties in the
administration of the terms hereof be construed to waive or lessen the right of
Landlord to insist upon the performance by Tenant in strict accordance with the
terms hereof. The terms, provisions, covenants and conditions contained in this
lease shall apply to, inure to the benefit of and be binding upon the parties
hereto, and upon their respective successors in interest and legal
representatives, except as otherwise herein expressly provided.
34. Quiet Enjoyment: Provided Tenant has performed all of the terms,
covenants, agreements and conditions of this lease, including the payment of
rent, to be performed by Tenant, Tenant shall peaceably and quietly hold and
enjoy the premises for the term hereof, without hindrance from Landlord,
subject to the terms and conditions of this lease.
35. Rules and Regulations: Tenant and Tenant's agents, employees, and
invitees will comply fully and all requirements of the rules and regulations of
the Building and related facilities which are attached hereto as Exhibit "C",
and made a part hereof as though fully set out herein. Landlord shall at all
times have the right to change such rules and regulations or to promulgate
other rules and regulations in such reasonable manner as may be deemed
advisable for safety, care, or cleanliness of the Building and related
facilities or premises, and for preservation of good order therein, all of
which rules and regulations, changes and amendments will be forwarded to Tenant
in writing and shall be carried out and observed by Tenant. Tenant shall
further be responsible for the compliance with such rules and regulations by
the employees, servants, agents, visitors and invitees of Tenant.
36. Broker's or Agent's Commission: Both Landlord and Tenant represent
and warrant that there are no claims for brokerage commissions or finder's fees
in connection with the execution of this lease, except as listed below and Both
Landlord and Tenant agrees to indemnify and hold each other harmless against all
liabilities and costs arising from such claims without limitation attorneys'
fees in connection therewith.
37. Gender: Words of an gender used in this lease shall be held and
construed to include any other gender, and words in the singular number shall
be held to include the plural, unless the context otherwise requires.
38. Joint and Several Liability: If there be more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several. If there
be a guarantor of Tenant's obligations hereunder, the obligations hereunder
imposed upon Tenant shall be the joint and several obligations of Tenant and
such guarantor and Landlord need not first proceed against the Tenant hereunder
before proceeding against such guarantor, nor shall any such guarantor be
released from its guaranty for any reason whatsoever, including without
limitation, in case of any amendments hereto, waivers hereof of failure to give
such guarantor any notices hereunder.
39. Captions: The captions contained in this lease are for convenience
of reference only, and in no way limit or enlarge the terms and conditions of
this lease.
40. Except as otherwise herein expressly provided, time is of the
essence of this Agreement.
41. The failure of Landlord to insist at any time upon the strict
performance of any covenant or agreement or to exercise any option, right,
power or remedy contained in this Lease shall not be construed as a waiver or a
relinquishment thereof for the future. No payment by Tenant or receipt by
Landlord of a lesser amount than the monthly installment or rent due under this
Lease shall be deemed to be other than on account of the earliest rent due
hereunder, no shall any endorsement or statement on any check or any letter
accompanying any check or payment as rent be deemed an accord and satisfaction,
and Landlord's right to recover the balance of such rent or pursue any other
remedy in this Lease provided.
42. Special Provisions: See Page 6A, Attached hereto and made a part
hereof.
EXECUTED as of the date first above written
Brokers and fees to be paid by Landlord:
Brants Realtors, Inc. - Clay Brants--4.5%
Huff, Brous, McDowell & Montesi, Inc.--2.0%
LANDLORD: AEtna Life Insurance Company
By: /s/ Jan Elwell
----------------------------------
Jan Elwell, Director
ATTEST: TENANT: Harris Methodist Fort Worth,
a Texas Non-Profit Corporation
By: /s/ R. William Whitman
- ----------------------------------- ----------------------------------
(Title) R. William Whitman, President
(Title)
6
<PAGE> 11
HARRIS METHODIST FORT WORTH, A TEXAS NON-PROFIT CORPORATION
The following exhibits are attached hereto and incorporated herein:
1. Exhibit A, Page 1
2. Exhibit A, Page 2, Existing Improvements
3. Exhibit A, Page 3, Field Report
4. Exhibit A-1, Site Plan
5. Exhibit A-2, Legal Description
6. Exhibit B, Leasehold Improvements
7. Exhibit C, Rules and Regulations
8. Exhibit D, Sign Specifications
9. Exhibit G, Lease Provision
10. Exhibit H
11. Addendum to Lease Agreement -- Option to Renew
(6A)
<PAGE> 12
ADDENDUM TO LEASE AGREEMENT
OPTION TO RENEW.
42. This Lease shall automatically be extended for two (2) additional terms
of five (5) years each upon all the same terms and conditions as herein
contained, except rent and this option to renew, unless Landlord receives
ninety (90) days written notice from Tenant prior to the expiration of the
initial term, or any renewal term, that Tenant has elected to vacate the
premises. In the event Tenant does not deliver such notice, this Lease shall
automatically be extended without the necessity of execution of any further
instrument or document. However, if at either the date of expiration of the
original or any renewal term of this Lease, Tenant is in default, beyond any
grace period herein provided in the performance of any of the terms or
provisions of this Lease, the extension of the term shall be and become null
and void.
Except as otherwise provided in the immediately preceding paragraph, the monthly
rental for the two five (5) year renewal terms will be increased by the
percentage by which the Consumer Price Index for the last month of the preceding
term exceeds the Consumer Price Index for the month in which the preceding term
began. The increase in the monthly rental payment will be determined as soon as
the indices are available and will be applied retroactively to the beginning of
the applicable month. Any increase will be paid within ten (10) days of the
determination. For purposes of this paragraph, the term "Consumer Price Index"
means the Consumer Price Index - Dallas/Fort Worth Average for All Urban
Consumers - of the Untied States Bureau of Labor Statistics. If the manner in
which the Consumer Price Index is determined by the Bureau of Labor Statistics
is substantially revised, an adjustment will be made in that revised index which
would produce results equivalent, as nearly as possible, to these which would
have obtained if the Consumer Price Index had not been so revised. If the 1982 -
84 - 100 average is no longer used as an index of 100, that change will
constitute a substantial revision. If the Consumer Price Index becomes
unavailable to the public because publication is discontinued, or otherwise,
Landlord will substitute a comparable index based upon changes in the cost of
living or purchasing power of the consumer dollar published by any other
governmental agency, or, if no such index is available, then a comparable index
published by a major bank or other financial institution or by a university or a
recognized financial publication.
<PAGE> 13
[CONCRETE LOADING SCHEMATIC]
<PAGE> 14
EXHIBIT "A"
7606 Pueblo Drive,
Building 20
Existing Improvement
[FLOOR PLAN]
1. Landlord shall place the existing improvements outlined above in good
operating condition prior to the commencement date in accordance with the
Carter and Burgess report attached hereto as Exhibit "A", Page 3.
<PAGE> 15
EXHIBIT "A" Page 3
R & BURGESS, INC
EN - PLANNERS - SURVEYORS
- --------------------------------------------------------------------------------
FIELD REPORT
- --------------------------------------------------------------------------------
PROJECT NAME: Harris Hospital Lease in River Bend PROJECT NO: 9113501F
PRESENT: McHenry Wallace, Jr., P.E. DATE: 9/16/91
- --------------------------------------------------------------------------------
The present lease space appears to have been vacant for some time. It is a
single-story office/warehouse building that has been finished out as 100%
office space. The ceiling has been insulated by laying bat insulation on
the lay in tiles. The only visible damage is to the ceiling tile from roof
leaks.
The HVAC system consists of 8 split system heat pumps with auxiliary
electrical heat. There are three 4 ton units, two 7 ton units, and three 3
ton units for a total of 35 tons. Two of the fan coil units are "twined" to
form one single unit supplying the space with seven zones of control. The
equipment manufacturer is Lennox with the exception of the three ton fan
coil units which are by First Company.
The ductwork is fiber board with flex duct taps out to the diffusers, which
is standard construction for this type of speculative building. There were
no obvious holes or loose duct taps. It should be brought to the hospitals'
attention that this duct system is internally lined and will absorb
contaminants which pass through the filtering system.
The electrical breakers serving the air conditioning system were in the off
position. The units are controlled by programmable thermostats with battery
back up. When power was restored to the units and the thermostats reset the
units would not function due to battery failure. The units appeared to be
in good condition with average maintenance. The filters were dirty and
there were some build up of dirt on the face of the coils, but nothing
severe. The units should be started up, the refigerant charge checked,
filters changed, belt drives changed, coils cleaned, and all amp draws
checked.
The water was turned off to the building. The plumbing fixtures were dirty,
but in decent condition. One flush valve was hung open which was draining
the building water piping. Each rest room block as an electric water heater
mounted on a platform above the ceiling. These heaters might be damaged if
they were operated dry. The rest room exhaust fans had been left on to
ventilate the rest rooms. One of the fans in the women's toilet room
sounded like it had developed bearing problems. One of the room exhaust
fans had fallen from the ceiling along with a water damaged ceiling tile.
The lease space is served by three 225 amp 120/240 volt electrical panels.
The building ground system is bonded to the leaving side of the water
heater. This connection should be moved to the cold water side of the
heater. A phone board was in place at the lease. No other obvious defects
in the electrical system were noted.
- --------------------------------------------------------------------------------
REPORTED BY: McHenry Wallace
- --------------------------------------------------------------------------------
MW/ml
91133501.11
cc: Correspondence
RECEIVED SEP 19 1991
1100 MACON ST./FORT WORTH, TX 76142-4570/(417) 335-2611
MAILING ADDR./P.O. BOX 2932/FORT WORTH, TX 76463-2973
FORT WORTH - HOUSTON - DALLAS - TEXAS
FORT MYERS, FLORIDA
<PAGE> 16
EXHIBIT A-1
[SITE PLAN]
<PAGE> 17
LEGAL DESCRIPTION
Name and Address of Project.
1. Newell & Newell - Phase 5, Building 21
2401-2429 E. Loop 820 North
Fort Worth, Texas
2. Newell & Newell - Phase 5, Building 22
7601-7621 Pebble Drive
Fort Worth, Texas
3. Newell & Newell - Phase 5, Building 23
7533-7561 Pebble Drive
Fort Worth, Texas
4. Newell & Newell - Phase 5, Building 24-
7501-7529 Pebble Drive
Fort Worth, Texas
5. Newell & Newell - Phase 5, Building 25
2400-2430 Gravel Drive
Fort Worth, Texas
6. Newell & Newell - Phase 6, Building 26
2301-2337 E. Loop 820 North
Fort Worth, Texas
7. Newell & Newell - Phase 6, Building 27
7607 Flagstone Drive
7608-7664 Pebble Drive
Fort Worth, Texas
8. Newell & Newell - Phase 6, Building 28
7601-7603 Flagstone Drive
7606-7632 Pebble Drive
Fort Worth, Texas
9. Newell & Newell - Phase 6, Building 29
7509 Flagstone Drive
7532-7538 Pebble Drive
Fort Worth, Texas
10. Newell & Newell - Phase 6, Building 30
7501-7505 Flagstone Drive
7500-7530 Pebble Drive
Fort Worth, Texas
11. Newell & Newell - Phase 6, Building 31
2300-2336 Gravel Drive
Fort Worth, Texas
12. Newell & Newell - Phase 7, Building 38
2217-2249 E. Loop 820 N
Fort Worth, Texas
<PAGE> 18
EXHIBIT "B"
LEASEHOLD IMPROVEMENTS
1. To be attached at a later date.
2. A. The Leasehold Improvements shall be at the Tenant's sole cost
and expense and shall be approved by Landlord in writing prior
to being constructed, which approval shall not be unreasonably
withheld. Tenant shall install, furnish and perform, in
compliance with all federal, state and local laws, rules and
regulations, the Tenant's Work (herein so called) as specified
in Plans and Specifications (herein so called) delivered by
Tenant to Landlord. Such Plans and Specifications shall
incorporate all of Tenant's finish out requirements. Landlord
shall review and make any objections to the Plans and
Specifications within five (5) days of receipt. If Landlord does
not make any objections, the Plans and Specifications shall be
deemed approved. If Landlord timely delivers objections to
Tenant, Tenant shall revise the Plans and Specifications within
five (5) days of receipt of such objections, and resubmit the
Plans and Specifications to Landlord for approval. Landlord
shall have five (5) days to approve the revised Plans and
Specifications. If Landlord delivers additional objections to
Tenant within such five (5) day period, Tenant may elect to
either terminate this Lease or cure such objections within five
(5) days of receipt of such objections. If Landlord does not
make any additional objections, the Plans and Specifications
shall be deemed to be approved.
B. Tenant shall make or cause all Tenant's Work to be constructed
in a good and workmanlike manner using materials comparable to
that of similar leasehold improvements in the project.
C. Any change orders shall be with the consent of Landlord (not to
be unreasonably withheld).
D. Tenant agrees to require any contractors or subcontractors
having employees to carry workmans compensation and commercial
General Liability Insurance.
<PAGE> 19
EXHIBIT "C"
RULES AND REGULATIONS
1. Sidewalks, doorways, vestibules, halls, stairways and similar
areas shall not be obstructed by tenants or their offices, agents, servants,
and employees, or used for any purpose other than ingress and egress to and from
the leased premises and for going from one part of the Building to another part
of the Building.
2. Plumbing fixtures and appliances shall be used only for the
purposes for which constructed, and no sweepings, rubbish, tags or other
unsuitable materials shall be thrown or placed therein. Any stoppage or damage
resulting to any such fixtures or appliances from misuse on the part of a
tenant or such tenant's officers, agents, servants, and employees shall be paid
by such tenant.
3. No signs, posters, advertisements, or notices shall be painted
or affixed on any of the windows or doors, or other part of the Building,
except of such color, size and style and in such places, as shall be first
approved in writing by the Landlord. No nails, hooks or screws shall be driven
in to or inserted in any part of the Building, except by building maintenance
personnel or as directed by the Landlord, provided, Tenant may hang pictures on
the walls of the premises and otherwise decorate the premises in accordance
with normal commercial business offices.
4. Directories will be placed by the Landlord, at Landlord's own
expense, in conspicuous places in the Building. No other directories shall be
permitted.
5. Tenants shall not do anything, or permit anything to be done,
in or about the Building, or bring or keep anything therein, that will in any
way increase the possibility of fire or other casualty or obstruct or interfere
with the rights of, or other wise injure or annoy, other tenants, or do
anything in conflict with the valid pertinent laws, rules and regulations of
any governmental authority.
6. Landlord shall have the power to prescribe the weight and
position of safes or other heavy equipment, which may overstress any portion of
the floor. All damage done to the Building by the improper placing of heavy
items which overstress the floor will be repaired at the sole expense of the
tenant.
7. A tenant shall notify the Landlord when safes or other
equipment are to be taken into or out of the Building. Moving of such items
shall be done under the supervision of the Landlord after receiving written
permission from him.
8. Each tenant shall cooperate with Building employees in keeping
premises neat and clean.
9. No birds, animals or reptiles, or any other creatures, shall be
brought into or kept in or about the building.
10. Should a tenant require telegraphic, telephonic, annunciator or
any other communication service, the Landlord will direct the electricians and
installers where and how the wires are to be introduced and placed, and none
shall be introduced or placed except as the Landlord shall direct.
11. No Access to Roof. Tenant shall have no right of access on the
roof of the Premises of the Building and shall not install, repair, place or
replace any aerial, fan, air conditioner or other device on the roof of the
Premises or the Building without the prior written consent of Landlord. Any
aerial, fan, air conditioner or device installed without such written consent
shall be subject to removal, at Tenant's expense, without notice, at any time.
12. Tenants shall not make or permit any improper noises in the
Building, or otherwise interfere in any way with other tenants, or persons
having business with them.
13. No equipment of any kind shall be operated on the leased
premises that could in any way annoy any other tenant in the Building without
written consent of the Landlord.
14. Tenants shall not use or keep in the Building any inflammable
or explosive fluid or substance, or any illuminating material, unless it is
battery powered, UL, approved.
15. The Landlord has the right to evacuate the Building in event of
emergency or catastrophe.
16. The Landlord reserves the right to rescind any of these Rules
and make such other and further Rules and Regulations in the judgment of
Landlord shall from time to time be needed for the safety, protection, care and
cleanliness of the Building, operations thereof, the preservation of good order
therein, and the protection and comfort of its tenants, their agents, employees
and invoices, which rules when made and notice thereof given to a tenant shall
be binding upon him in like manner as originally herein prescribed. In the
event of any conflict, inconsistency, or other differences between the terms
and provisions of these Rules and Regulations, as now or hereafter in effect
and the terms and provisions of any lease now or hereafter in effect between
Landlord and any tenant in the Building. Landlord shall have the right to rely
on the term or provision in either such case or such Rules and Regulations
which is most restrictive on such tenant and most favorable to Landlord.
17. Notwithstanding the provisions of this Exhibit "C", Tenant may
store and use the materials described on Exhibit "G" on the Premises, as such
list is amended from time to time by written agreement of Landlord and Tenant.
<PAGE> 20
EXHIBIT "D"
SIGN SPECIFICATIONS
A. Type of Sign
Individual letters, each letter to be mounted directly onto the wall.
B. Size of Sign
Maximum letter size is 24", minimum letter size is 12", Multiple rows
are not to exceed 28" total height including space.
Overall length cannot exceed 75% of frontage measurement.
Example: 40 ft. frontage is allowed 30 ft.
Not to exceed 50 feet.
Size must conform to city requirements.
C. Style, Colors and Materials
Helvetica medium, all upper case.
All electrical wiring to be insulated or run in greenfield.
D. Placement and installation
Sign shall be centered on upper facia of building as shown on
attachment.
Transformers to be behind facia.
Final electrical hook-up to be performed by licensed electrician
approved by landlord.
E. Number of Signs and Logos
If lease space fronts on more than one side, another sign may be
allowed on other wall, and size of sign will be determined by that wall
on which it is mounted. Generally speaking, one sign will be allowed.
Logos subject to landlord and architects' approval.
Important
Sign drawings must be submitted for landlord and architects' written
approval before fabrication.
Purpose
Our purpose is providing the tenants with these requirements is to
create a good business image and give the impression of quality and
professionalism.
<PAGE> 21
EXHIBIT "E"
None
<PAGE> 22
EXHIBIT "F"
None
<PAGE> 23
EXHIBIT "G"
LEASE PROVISION
PAGE 1
A. COMPLIANCE WITH ENVIRONMENTAL LAWS:
1. Except as provided in Subsection A (2) below, Tenant covenants and agrees
to not-use, or not permit any subtenant, licensee, concessionaire,
employee, agent or invitee to use, any portion of the Premises or the
Project for the use, placement, storage, transporting, manufacture,
disposal or handling of any Hazardous or Toxic Materials, as defined by
Environmental Laws. The term "Environmental Laws" shall refer to all
federal, state and local laws, regulations, and ordinances that relate to
the use, discharge, generation, removal, disposal, storage or
transportation of substance deemed hazardous to the environment. In the
event Tenant discovers any Hazardous or Toxic Materials on the Premises,
Tenant shall immediately notify Landlord of such fact. Tenant shall
disclose to Landlord in writing the release of any Hazardous or Toxic
Materials on the Premises or any portion of the Project; such disclosure
shall be in writing and shall be made with in twenty-four (24) hours of
said release. Tenant shall not attempt any removal, abatement or
remediation of any Hazardous or Toxic Materials in the Premises, without
first obtaining the prior written consent of Landlord, which consent may
be specifically conditioned on Landlord's right to approve the scope,
timing and techniques of any such work and the appointment of all
contractors, engineers, inspectors and consultants in connection with any
such work. Tenant covenants that any remediation shall be in compliance
with Environmental Laws.
2. Tenant covenants to give Landlord written notice prior to Tenant's
introduction, use, transportation, storage, disposal or discharge of any
Hazardous or Toxic Materials in, on, to, under or around the Premises or
Project. To the extent permitted by Environmental Laws or other applicable
laws, and provided that the requisite permits have been first obtained,
Tenant may use and dispose of the following solvents on the Premises as
described below, without giving Landlord further notice of such use and
disposal:
Solvent Volume Used Disposal
------- ----------- --------
1. METHANAL 14.4L/Mo Evap/Sink
2. ETHANOL 2.0L/Mo Evap/Sink
3. N-BUTYL CHLORIDE 6L/Mo Evap/Sink
4. METHYLENE CHLORIDE 4L/Mo Evap/Sink
5. CHLOROFORM 3.2L/Mo Evap/Sink
6. HEXANE 1.5L/Mo Evap/Sink
7. ETHYL ACETATE 0.3L/Mo Evap/Sink
8. ACETONE 0.1L/Mo Evap/Sink
9. ISOPROPANOL 0.1L/Mo Evap/Sink
10. DERIVATIZING REAGENTS 0.04L/Mo Evap/Sink
3. Tenant shall indemnify and defend Landlord, its shareholders, directors,
officers, employees and agents, and hold them harmless, from and against
any liability, loss, cost, or expense (including remediation costs,
reasonable attorneys' fees and expenses and court costs) arising out of
(i) the use, placement, storage, manufacture, disposal, discharge,
handling, removal,
<PAGE> 24
Cont'd Exhibit "G"
Page 2
transportation or abatement of any Hazardous or Toxic Materials
by or for Tenant or Tenant's subtenants, licensees or
concessionaires, or any of their respective employees, agents
or invitees and/or (ii) arising out of any breach by Tenant of
its obligations under this Exhibit "G" of the Lease. This
provision shall survive termination of the lease.
B. MEDICAL WASTE
In the event Tenant generates any medical waste (as may be defined by
any governmental entity), then Tenant shall be responsible for its
proper disposal (including compliance with any governmental laws, rules
and regulations governing same) at Tenant's sole cost and expense.
Tenant covenants to indemnify and defend Landlord, its shareholders,
directors, officers, employees and agents and hold them harmless, from
any liability, loss, cost or expense (including attorney fees, expenses
and court costs) arising from Tenant's branch of this Section B. This
provision shall survive termination of the Lease.
<PAGE> 25
EXHIBIT "H"
Alterations and Improvements: Title to the following furniture fixtures and
equipment shall not revert to Landlord at termination of the Lease, but shall
remain in Tenant;
1) Casements, cabinets and other furniture provided by or
constructed at Tenant's expense;
2) Fume hoods and flammable storage lockers installed by Tenant;
3) Walk-in refrigerator/freezer units installed by Tenant;
4) Computer systems and movable instrumentation utilized by Tenant
in the performance of its business
5) Movable furniture and fixtures not permanently affixed to the
building
6) Electronic door and security system
Upon termination of this Lease, Tenant will remove the above items in a good
workmanlike manner so as not to damage the premises or the primary structure
or structural qualities of the building, the plumbing, electrical lines or
other utilities, and repair any damages caused by any such removal.
[INITIAL HERE SYMBOL]
<PAGE> 26
ASSIGNMENT OF LEASE
NAMES OF PARTIES
THIS ASSIGNMENT OF LEASE ("Assignment") is made between Harris
Methodist Fort Worth, a Texas non-profit corporation, called Assignor in this
Assignment, and Pharmchem Laboratories, Inc., a California corporation, called
the Assignee in this Assignment.
RECITALS
WHEREAS an Office/Showroom/Warehouse Lease Agreement ("Lease") was
executed on October 24, 1991 to 1996, between AEtna Life Insurance Company, as
the Lessor, and the Assignor, as Lessee, by the terms of which 9,000 square
feet in the Riverbend Buildings 21-31 and 38 (the "Property") was leased to the
Assignor as Lessee for a term of sixty (60) months; and
WHEREAS the Assignor now desires to assign the Lease, a true and
correct copy of which is attached hereto as Exhibit "A" to the Assignee, and
the Assignee desires to accept the assignment:
ASSIGNMENT
In consideration of the sum of Ten and No/100 Dollars ($10.00), receipt
of which is acknowledged by this Assignment, and the agreement of the Assignor
and the Assignee set forth below, the Assignor assigns to the Assignee and the
Assignee's successors and assigns all right, title, and interest in and to the
Lease. The Assignee accepts the assignment and, in addition, expressly assumes
and agrees to perform and fulfill all the terms, covenants, conditions and
obligations required by the Assignor as the Lessee under the Lease, including
the making of all payments due to or payable on behalf of the Lessor when due
and payable.
HOLD HARMLESS
Assignor shall indemnify, defend and hold harmless Assignee and its
directors, officers, employees, agents and shareholders from any and all
claims, liabilities, damages, deficiencies, costs and expenses, including
reasonable attorneys', accountants' and expert witness' fees, costs and
expenses of investigation and the cost of expenses of enforcing the
indemnification (collectively, "Losses") arising out of or relating to the
Lease, including, without limitation, any Loss occurring as a result of the
release, emission, use, storage, manufacture, transport or discharge of
hazardous materials on or about the Property, prior to the date of the closing
of the Asset Purchase Agreement (as hereinafter defined).
-1-
<PAGE> 27
Assignee shall indemnify, defend and hold harmless Assignor and its
directors, officers, employees, agents and shareholders from any and all Losses
arising out of or relating to the Lease, including, without limitation, any
Loss occurring as a result of the release, emission, use, storage, manufacture,
transport or discharge of hazardous materials on or about the Property, after
the date of the closing of the Asset Purchase Agreement.
Assignor and Assignee acknowledge that the indemnification contained
herein is not intended to limit the rights or liabilities of the parties set
forth by the Asset Purchase Agreement executed by Assignor and Assignee on
September 25, 1992.
BINDING ON SUCCESSORS
This agreement shall be binding on and inure to the benefit of the
parties to this Assignment, their successors and assigns.
Executed to be effective as of the 25th day of September, 1992.
ASSIGNOR:
HARRIS METHODIST FORT WORTH
By:
-------------------------------
Printed Name:
---------------------
Title: Vice President
----------------------------
1301 Pennsylvania Avenue
Fort Worth, Texas 76104
ASSIGNEE:
PHARMCHEM LABORATORIES, INC.
By: /s/ Keith W. Patten
-------------------------------
Printed Name: Keith W. Patten
---------------------
Title: Vice President
----------------------------
1505-A O'Brien Drive
Menlo Park, California 94025
-2-
<PAGE> 28
CONSENT OF LESSOR
The undersigned is the Lessor in the Lease described in the foregoing
Assignment. The undersigned consents to the assignment of the Lease to
Pharmchem Laboratories, Inc., and expressly releases the Lessee from any
further liability or obligation under the terms of the Lease subject to the
following terms and conditions:
(1) Assignment of the Lease by Assignor to Assignee with no
modification of terms, except as provided in Item (4) below;
(2) That Assignor is released from all of its liabilities and
obligations under the Lease upon assumption of the Lease by
Assignee, except that the 1992 year end reconciliation charges
applicable over and above the expense stop specifically called out
in Paragraph 4, Rental Escalation, of the Lease shall be due and
owing by Assignor for the time period preceding the assumption of
the Lease;
(3) Waiver by Lessor of its right under Section 12(b) of the Lease to
terminate the Lease and renegotiate new terms with Assignee; and
(4) Lessor grants Assignee a "right of first refusal" for the
immediately adjacent 6,000 square feet (Suites 7610 and 7612) under
terms reasonably acceptable to Lessor and Assignee.
Executed this 17th day of November, 1992.
LESSOR:
AETNA LIFE INSURANCE COMPANY
By: /s/ Janice Y. Elwell
---------------------------------------
Printed Name: Janice Y. Elwell
---------------------------------------
Title: Investment Officer
---------------------------------------
14785 Preston Road, Suite 275
Dallas, Texas 75240
-3-
<PAGE> 1
EXHIBIT 10.17
ADDENDUM TO LEASE AGREEMENT
OPTION TO RENEW.
42. This Lease shall automatically be extended for two (2) additional terms of
five (5) years each upon all the same terms and conditions as herein contained,
except rent and this option to renew, unless Landlord receives ninety (90) days
written notice from Tenant prior to the expiration of the initial term, or any
renewal term, that Tenant has elected to vacate the premises. In the event
Tenant does not deliver such notice, this Lease shall automatically be extended
without the necessity of execution of any further instrument or document.
However, if at either the date of expiration of the original or any renewal
term of this Lease, Tenant is in default, beyond any grace period herein
provided in the performance of any of the terms or provisions of this Lease,
the extension of the term shall be and become null and void.
Except as otherwise provided in the immediately preceding paragraph, the
monthly rental for the two five (5) year renewal terms will be increased by the
percentage by which the Consumer Price Index for the last month of the
preceding term exceeds the Consumer Price Index for the month in which the
preceding term began. The increase in the monthly rental payment will be
determined as soon as the indices are available and will be applied
retroactively to the beginning of the applicable month. Any increase will be
paid within ten (10) days of the determination. For purposes of this paragraph,
the term "Consumer Price Index" means the Consumer Price Index - Dallas/Fort
Worth Average for All Urban Consumers - of the United States Bureau of Labor
Statistics. If the manner in which the Consumer Price Index is determined by
the Bureau of Labor Statistics is substantially revised, an adjustment will be
made in that revised index which would produce results equivalent, as nearly as
possible, to those which would have obtained if the Consumer Price Index had
not been so revised. If the 1982-84-100 average is no longer used as an index
of 100, that change will constitute a substantial revision. If the Consumer
Price Index becomes unavailable to the public because publication is
discontinued, or otherwise, Landlord will substitute a comparable index based
upon changes in the cost of living or purchasing power of the consumer dollar
published by any other governmental agency, or, if no such index is available,
then a comparable index published by a major bank or other financial
institution or by a university or a recognized financial publication.
<PAGE> 2
FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT ("Amendment") is made and
entered into by and between AETNA LIFE INSURANCE COMPANY, herein designated as
Landlord and PHARMCHEM LABORATORIES, INC., herein designated as Tenant.
WITNESSETH
WHEREAS, Landlord and Tenant have heretofore entered into a certain
office/showroom/warehouse Lease (hereinafter referred to as the "Lease"),
dated January 1, 1992 pursuant to which Landlord leased to Tenant and Tenant
leased from Landlord certain premises known as Suite 7606, Building 28,
Riverbend Business Park, East Loop 820 North at Trinity Boulevard, Forth Worth,
Texas 76118 (hereinafter referred to as the "Demised Premises"); and
WHEREAS, Landlord and Tenant have agreed to amend and modify certain
terms and provisions of the Lease and are desirous of evidencing such
agreement.
NOW, THEREFORE, in consideration of the above and foregoing recitals
and the mutual benefits to accrue to each of the parties hereunder, it is
hereby agreed as follows:
1. Paragraph (1) DEFINITIONS AND BASIC PROVISIONS: shall be amended as
follows:
Subsection (c) "Premises:" "9,000 square feet" shall be deleted in its
entirety and "12,000 square feet" shall be inserted in its place. This
additional square footage reflects tenant's expansion into 7610 Pebble
Drive.
Subsection (e) "Basic Rental:" "$2,625.00 per month" shall be deleted in
its entirety and "$3,325.00 per month" shall be inserted in its place as
of January 1, 1993.
2. Exhibit "B" RIVERBEND BUSINESS PARK, TENANT IMPROVEMENTS: shall be
amended by adding the following.
Tenant accepts 7610 Pebble Drive (Expansion Space) in "as-is" condition.
All improvements to this space are to be done at Tenant's expense,
excluding moisture sealing of concrete floor. Any improvements proposed
for this space must be (1) approved in writing by Landlord, and (2)
completed by a licensed contractor.
3. This Amendment shall commence November 23, 1992 and the payment by
Tenant to Landlord of all rent and other charges shall remain due and
owing under the Lease.
WHEREAS, this Amendment shall not constitute an agreement by Landlord
and shall not be binding upon Landlord unless and until this Amendment shall be
executed by Landlord and Tenant and shall be delivered by Landlord to Tenant.
This agreement may not be changed orally, and shall be binding upon and
inure to the benefit of the parties, their respective heirs, successors and, as
permitted, their assigns.
Except as herein expressly amended or modified, all terms, covenants
and provisions of the Lease are hereby confirmed and ratified and shall remain
in full force and effect.
EXECUTED THIS 8th day of December 1992.
LANDLORD: AETNA LIFE INSURANCE COMPANY
/s/ Janice Y. Elwell
---------------------------------------
Janice Y. Elwell
<PAGE> 1
Exhibit 10.18
SECOND AMENDMENT TO LEASE AGREEMENT
WHEREAS, Landlord and Tenant have heretofore entered into a certain
Lease Agreement (hereinafter referred to as the "Lease"), dated January 1, 1992
pursuant to which Landlord leased to Tenant and Tenant leased from Landlord
certain premises known as 7606 Pebble Drive, Building 28, Riverbend Business
Park, Fort Worth, Texas 76118 (hereinafter referred to as the "Demised
Premises"); and
WHEREAS, Landlord and Tenant have agreed to amend and modify certain
terms and provisions of the Lease and/or First Amendment and are desirous of
evidencing such agreement.
NOW, THEREFORE, in consideration of the above and foregoing recitals
and the mutual benefits to accrue to each of the parties hereunder, it is
hereby agreed as follows:
The original Lease Agreement between Landlord and Tenant was duly
assigned to Trinity Business Group, a Texas General Partnership.
Paragraph (1) DEFINITIONS AND BASIC PROVISIONS; shall be amended as
follows:
Subsection (c) "Premises:" "12,000 square feet" shall be deleted in its
entirety and "15,000 square feet" shall be inserted in its place. This
additional square footage reflects tenant's expansion into 7612
Pebble Drive.
Subsection (e) "Basic Rental:" "3,325 per month" shall be deleted in
its entirety and "$4,156.25 per month" shall be inserted in its place
as of February 15, 1996.
Exhibit "B" RIVERBEND BUSINESS PARK, TENANT IMPROVEMENTS: shall be
amended by adding the following:
Tenant accepts 7612 Pebble Drive (Expansion Space) in "as is"
condition. All improvements to this space are to be done at Tenant's
expense. Any improvements proposed for this space must be (1) approved
in writing by Landlord, and (2) completed by a licensed contractor.
This Amendment shall commence February 15, 1996 and the payment by
Tenant and Landlord of all rent and other charges shall remain due and
owing under the Lease.
WHEREAS, this Amendment shall not constitute an agreement by Landlord
and shall not be binding upon Landlord unless and until this Amendment shall be
executed by Landlord and Tenant and shall be delivered by Landlord to Tenant.
This agreement may not be changed orally, and shall be binding upon and
inure to the benefit of the parties, their respective heirs, successors and, as
permitted, their assigns.
Except as herein expressly amended or modified, all terms, covenants
and provisions of the Lease are hereby confirmed and ratified and shall remain
in full force and effect.
LANDLORD: TRINITY BUSINESS GROUP, A TENANT: PHARMCHEM LABORATORIES,
TEXAS GENERAL PARTNERSHIP INC.
By: /s/ Frank J. Macari By: /s/ Joe Halligan
------------------------------- -------------------------------
Frank J. Macari, President of FJM, Inc. Name: Joe Halligan
General Partner of FJM Investment, Ltd. Title: CEO
<PAGE> 1
Exhibit 10.24
AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT dated as of
June 19, 1996 ("the Amendment"), is entered into by and among PHARMCHEM
LABORATORIES, INC., a California corporation, and PHARMCHEM LABORATORIES
OPERATIONS, INC., a California corporation (individually, a "Borrower", and
collectively, the "Borrowers"), and SILICON VALLEY BANK, ("Bank"). Capitalized
terms used herein without definition shall have the same meanings herein as
given to them in the Loan Agreement (defined below).
RECITALS
A. The Borrowers and the Bank have entered into that certain Loan
and Security Agreement dated as of November 17, 1994, and amended by those
certain Loan Modification Agreements dated March 6, 1995, September 1, 1995,
and Amendment No. 3 dated March 26, 1996 (as amended, the "Loan Agreement")
pursuant to which the Bank has agreed to extend and make available to the
Borrowers certain advances of money.
B. The Borrowers desire that the Bank further amend the Loan
Agreement upon the terms and conditions more fully set forth herein.
C. Subject to the representations and warranties of the Borrowers
herein and upon the terms and conditions set forth in this Amendment, the Bank
is willing to so amend the Loan Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recitals and
intending to be legally bound, the parties hereto agree as follows:
SECTION 1. THE BORROWERS' REPRESENTATIONS AND WARRANTIES. Each of the
Borrowers represents and warrants that, immediately before and immediately
after giving effect to this Amendment, no event shall have occurred and be
continuing which constitutes an Event of Default.
SECTION 2. AMENDMENTS TO THE LOAN AGREEMENT.
2.1 Section 1.1 of the Loan Agreement, "Definitions", is
hereby amended by adding the definitions of the following terms to read as
follows:
(a) "ADP" means Borrowers' Automated Data Payroll transactions.
(b) "Cash Management Sublimit" means an amount not to exceed
$450,000 for the daily processing amount of the ADP and Controlled
Disbursements.
1.
<PAGE> 2
(c) "Controlled Disbursements" means daily disbursements made in
connection with Borrower's Controlled Disbursement Agreement.
2.2 Section 2.1(a), "Revolving Advances", is hereby amended by
changing the first sentence thereof in its entirety as follows: "Subject to the
terms and conditions of this Agreement, Bank agrees to make revolving advances
("Advances") to Borrowers in an amount not to exceed the (a) the lesser of the
Committed Line or the Borrowing Base less (b) amounts outstanding under the
Cash Management Sublimit; provided, however, that the sum of (i) all
outstanding Advances, (ii) all outstandings under the Cash Management Sublimit,
and (iii) the outstanding principal of the Term Loan shall not exceed Six
Million Dollars ($6,000,000) at any time. For purposes of this Agreement
"Borrowing Base" shall mean an amount equal to seventy-five percent (75%) of
Eligible Accounts."
2.3 Section 6.3, "Financial Statements, Reports, Certificates", is
hereby amended by changing the first sentence in its entirety as follows:
"Borrowers shall deliver to Bank as soon as available, but in any event within
thirty (30) days after the end of each month which does not represent the end
of a quarter, a company prepared balance sheet, income statement and cash flow
statement covering Borrowers' operations on a consolidated basis during such
period, certified by an officer of each Borrower reasonably acceptable to Bank;
(b) as soon as available, but in any event within forty-five (45) days after
the end of each quarter, a company prepared balance sheet, income statement and
cash flow statement covering Borrowers' operations on a consolidated basis
during that quarter, certified by an officer of each Borrower reasonably
acceptable to Bank; provided, that in the event that the thirtieth (30th) or
forty-fifth (45th) day after the month end or quarter end, respectively, falls
on a weekend or a holiday, the financial statements will then be due on the
following Business Day; (c) as soon as available, but in any event within
ninety (90) days after the end of Borrower's fiscal year, audited financial
statements of Borrowers on a consolidated basis prepared in accordance with
GAAP, consistently applied, together with an unqualified opinion on such
financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (d) promptly upon becoming available, copies of
all statements, reports and notices sent or made available generally by
Borrowers to their respective security holders or to any holders of
Subordinated Debt; (e) immediately upon receipt of notice thereof, a report of
any material legal actions pending or threatened against any Borrower; and (f)
such budgets, sales projections, operating plans or other financial information
as Bank may reasonably request from time to time.
SECTION 3. LIMITATION. The amendments set forth in this Amendment
shall be limited precisely as written and shall not be deemed (a) to be a
modification of any other term or condition of the Loan Agreement or of any
other instrument or agreement referred to therein or to prejudice any right or
remedy which the Bank may now have or may have in the future under or in
connection with the Loan Agreement or any instrument or agreement referred to
therein; or (b) to be a consent to any future amendment or modification to any
instrument or agreement the execution and delivery of which is consented to
hereby, or to any waiver of any of the provisions thereof. Except as expressly
amended hereby, the Loan Agreement shall continue in full force and effect.
2.
<PAGE> 3
SECTION 4. EFFECTIVENESS.
4.1 This Amendment shall become effective upon the last to
occur of:
(a) The execution and delivery of a copy hereof, whether the
same or different copies, by each of the Borrowers, to the Bank;
(b) Bank's receipt of a certificate executed by the Secretary
of each of the Borrowers and the Guarantor certifying:
(i) the name of the officer(s) of the Borrower and
Guarantor authorized to execute Loan Documents on behalf of the
Borrower and Guarantor together with a sample of the true
signatures of such officer(s), with the signature of the
Secretary being certified by a separate authorized officer; and
(c) Bank's receipt of the Reaffirmation of Guaranty, executed
by the Guarantor.
SECTION 6. RELEASE AND WAIVER. EACH BORROWER HEREBY REPRESENTS AND
WARRANTS TO THE BANK THAT IT HAS NO KNOWLEDGE OF ANY FACTS THAT WOULD SUPPORT A
CLAIM, COUNTERCLAIM, DEFENSE OR RIGHT OF SET-OFF, AND HEREBY RELEASES BANK FROM
ALL LIABILITY ARISING UNDER OR WITH RESPECT TO AND WAIVES ANY AND ALL CLAIMS,
COUNTERCLAIMS, DEFENSES AND RIGHTS OF SET-OFF, AT LAW OR IN EQUITY, THAT ANY
BORROWER MAY HAVE AGAINST BANK EXISTING AS OF THE DATE OF THIS AMENDMENT
ARISING UNDER OR RELATED TO THIS AMENDMENT, THE LOAN AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS OR TO THE LOANS CONTEMPLATED HEREBY OR THEREBY OR TO ANY
ACT OR OMISSION TO ACT BY THE BANK WITH RESPECT HERETO OR THERETO.
SECTION 7. COUNTERPARTS. This Amendment may be signed in any number of
counterparts, and by different parties hereto in separate counterparts, with
the same effect as if the signatures to each such counterpart were upon a
single instrument. All counterparts shall be deemed an original of this
Amendment.
3.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
BORROWERS PHARMCHEM LABORATORIES, INC.
By: D. A. Lattanzio
----------------------------------
Printed Name: D. A. LATTANZIO
------------------------
Title: VP, CFO, Treasurer
-------------------------------
PHARMCHEM LABORATORIES OPERATIONS, INC.
By: D. A. Lattanzio
----------------------------------
Printed Name: D. A. LATTANZIO
------------------------
Title: VP, CFO, Treasurer
-------------------------------
BANK SILICON VALLEY BANK
By: Julie Schneider
----------------------------------
Printed Name: JULIE SCHNEIDER
------------------------
Title: AVP
-------------------------------
4.
<PAGE> 1
EXHIBIT 10.25
AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT dated as of
February 14, 1997 (the "Amendment"), is entered into by and among PHARMCHEM
LABORATORIES, INC., a California corporation, and PHARMCHEM LABORATORIES
OPERATIONS, INC., a California corporation (individually, a "Borrower", and
collectively, the "Borrowers"), and SILICON VALLEY BANK, ("Bank"). Capitalized
terms used herein without definition shall have the same meanings herein as
given to them in the Loan Agreement (defined below).
RECITALS
A. The Borrowers and the Bank have entered into that certain Loan
and Security Agreement dated as of November 17, 1994, and amended by those
certain Loan Modification Agreements dated March 6, 1995, September 1, 1995,
Amendment No. 3 dated March 26, 1996, and Amendment No. 4 dated June 19, 1996
(as amended, the "Loan Agreement") pursuant to which the Bank has agreed to
extend and make available to the Borrowers certain advances of money.
B. The Borrowers desire that the Bank further amend the Loan
Agreement upon the terms and conditions more fully set forth herein.
C. Subject to the representations and warranties of the Borrowers
herein and upon the terms and conditions set forth in this Amendment, the Bank
is willing to so amend the Loan Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recitals and
intending to be legally bound, the parties hereto agree as follows:
SECTION 1. THE BORROWERS' REPRESENTATIONS AND WARRANTIES. Each of the
Borrowers represents and warrants that, immediately before and immediately
after giving effect to this Amendment, no event shall have occurred and be
continuing which constitutes an Event of Default.
SECTION 2. AMENDMENTS TO THE LOAN AGREEMENT.
2.1 DEFINITIONS. A new definition of "Fifth Amendment
Effective Date" is added to SECTION 1.1 of the Loan Agreement.
" 'Fifth Amendment Effective Date' means December 30, 1996."
2.2 The first paragraph of SECTION 2.2(a) of the Loan
Agreement, entitled "REVOLVING ADVANCES", is hereby deleted and replaced in its
entirety to read as follows:
1.
<PAGE> 2
"2.1(a) REVOLVING ADVANCES. Subject to the terms and conditions of
this Agreement, Bank agrees to make revolving advances ("Advances") to Borrowers
in an amount not to exceed the lesser of the Committed Line or the Borrowing
Base less the outstanding principal of the Term Loan if Cash Flow Coverage is
equal to or greater than 1.00:1.00 but less than 1.50:1.00. For purposes of this
Agreement "Borrowing Base" shall mean an amount equal to seventy-five percent
(75%) of Eligible Accounts.
2.3 SECTION 6.8 of the Loan Agreement, entitled "QUICK RATIO", is
hereby deleted and replaced in its entirety to read as follows:
"6.8 QUICK RATIO. Borrowers shall maintain, on a monthly basis,
a ratio of Quick Assets to Current Liabilities of at least .80:1.00."
2.4 SECTION 6.11 of the Loan Agreement, entitled "CASH FLOW COVERAGE",
is hereby deleted and replaced in its entirety to read as follows:
"6.11 CASH FLOW COVERAGE. Borrowers shall maintain on a
consolidated basis, a minimum ratio of (a) quarterly EBITDA annualized to (b)
current portion of long term debt plus quarterly interest expense annualized,
as of the last day of each fiscal quarter ("Cash Flow Coverage") of 1.00:1.00.
If Cash Flow Coverage is greater than or equal to 1.00:1.00 but less than
1.50:1.00, then the outstanding principal of the Term Loan shall be reserved
against the Borrowing Base."
2.5 SECTION 6.12 of the Loan Agreement, entitled "PROFITABILITY", is
hereby deleted and replaced in its entirety to read as follows:
"6.12 PROFITABILITY. Borrowers shall be profitable on a
consolidated pre-tax basis for each fiscal quarter commencing March 31, 1997.
for the quarter ending December 31, 1996, a pre-tax loss not to exceed $25,000
shall be allowed."
SECTION 3. LIMITATION. The amendments set forth in this Amendment shall
be limited precisely as written and shall not be deemed (a) to be a
modification of any other term or condition of the Loan Agreement or of any
other instrument or agreement referred to therein or to prejudice any right or
remedy which the Bank may now have or may have in the future under or in
connection with the Loan Agreement or any instrument or agreement referred to
therein; or (b) to be a consent to any future amendment or modification to
any instrument or agreement the execution and delivery of which is consented to
hereby, or to any waiver of any of the provisions thereof. Except as expressly
amended hereby, the Loan Agreement shall continue in full force and effect.
SECTION 4. EFFECTIVENESS.
2.
<PAGE> 3
4.1 This Amendment shall be deemed to be effective as of the Fifth
Amendment Effective Date; provided, however, that such effectiveness is subject
to the condition precedent that Bank shall have received, in form and substance
satisfactory to Bank and its counsel, the following:
(a) The execution and delivery of a copy hereof, whether the same
or different copies, by each of the Borrowers, to the Bank;
(b) Bank's receipt of a certificate executed by the Secretary of
each of the Borrowers and the Guarantor certifying:
(i) the name of the officer(s) of the Borrower and Guarantor
authorized to execute Loan Documents on behalf of the Borrower and
Guarantor together with a sample of the true signatures of such
officer(s), with the signature of the Secretary being certified by a
separate authorized officer; and
(c) Bank's receipt of the Reaffirmation of Guaranty, executed by
the Guarantor.
SECTION 6. RELEASE AND WAIVER. EACH BORROWER HEREBY REPRESENTS AND
WARRANTS TO THE BANK THAT IT HAS NO KNOWLEDGE OF ANY FACTS THAT WOULD SUPPORT A
CLAIM, COUNTERCLAIM, DEFENSE OR RIGHT OF SET-OFF, AND HEREBY RELEASES BANK FROM
ALL LIABILITY ARISING UNDER OR WITH RESPECT TO AND WAIVES ANY AND ALL CLAIMS,
COUNTERCLAIMS, DEFENSES AND RIGHTS OF SET-OFF, AT LAW OR IN EQUITY, THAT ANY
BORROWER MAY HAVE AGAINST BANK EXISTING AS OF THE DATE OF THIS AMENDMENT
ARISING UNDER OR RELATED TO THIS AMENDMENT, THE LOAN AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS OR TO THE LOANS CONTEMPLATED HEREBY OR THEREBY OR TO ANY
ACT OR OMISSION TO ACT BY THE BANK WITH RESPECT HERETO OR THERETO.
SECTION 7. COUNTERPARTS. This Amendment may be signed in any number
of counterparts, and by different parties hereto in separate counterparts, with
the same effect as if the signatures to each such counterpart were upon a
single instrument. All counterparts shall be deemed an original of this
Amendment.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
BORROWERS PHARMCHEM LABORATORIES, INC.
By: David A. Lattanzio
----------------------------------
Printed Name: David Lattanzio
Title: Vice President
PHARMCHEM LABORATORIES OPERATIONS, INC.
By: David A. Lattanzio
----------------------------------
Printed Name: David A. Lattanzio
Title: Vice President
BANK SILICON VALLEY BANK
By: Julie Schneider
---------------------------------
Printed Name: Julie Schneider
Title: Asst. Vice President
4.
<PAGE> 5
SCHEDULE 6.3(b)
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: PharmChem Laboratories, Inc.
PharmChem Laboratories Operations, Inc.
1505A O'Brien Drive
Menlo Park, CA 94025
Each of the undersigned, PHARMCHEM LABORATORIES, INC., a California
corporation ("Pharmchem") and PHARMCHEM LABORATORIES OPERATIONS, INC., a
California corporation ("Operations") (Pharmchem and Operations each being
hereinafter referred to individually as a "Borrower" and collectively as the
"Borrowers") hereby certifies that in accordance with the terms and conditions
of the Loan and Security Agreement among Borrowers and Bank (the "Agreement").
(i) Borrowers are in complete compliance for the period ending _________ of all
required conditions and terms except as noted below and (ii) all
representations and warranties of Borrowers stated in the Agreement are true,
accurate and complete in all material respects as of the date hereof. Attached
herewith are the required documents supporting the above certification. The
Officer further certifies that these are prepared in accordance with Generally
Accepted Accounting Principals (GAAP) and are consistency from one period to
the next except as explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days of Yes No
non-quarter ending months
Quarterly financial statements Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 20 days Yes No
A/R Audit Initial and Semi-Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Monthly
Basis:
Minimum Quick Ratio .80:1.00 ____:1.00 Yes No
Minimum TNW $7,200,000 plus 75% $_____ Yes No
of net profit after
tax
Maximum Debt/TNW 1.75:1.00 ____:1.0 Yes No
Maintain on a Quarterly
Basis:
Profitability Profitable on a pre ________ Yes No
-tax basis*
Minimum Cash Flow 1.00:1.00** ____:1.0 Yes No
Coverage
</TABLE>
* Pre-tax loss of $25,000 allowed at 12/31/96
** If Cash Flow Coverage is greater than 1.00x but less than 1.50x, then the
Term Loan amount outstanding shall be reserved against the Borrowing Base. If
Cash Flow Coverage is 1.50x or greater, then no reserve will be required.
<PAGE> 6
---------------------------------------
BANK USE ONLY
Received by:
---------------------------
AUTHORIZED SIGNER
Date:
----------------------------------
Verified:
------------------------------
AUTHORIZED SIGNER
Date:
----------------------------------
Compliance Status: Yes No
---------------------------------------
COMMENTS REGARDING EXCEPTIONS:
Sincerely,
- -------------------------------
SIGNATURE
- -------------------------------
TITLE
- -------------------------------
DATE
COMMENTS REGARDING EXCEPTIONS:
Sincerely,
- -------------------------------
SIGNATURE
- -------------------------------
TITLE
- -------------------------------
DATE
<PAGE> 7
BORROWING BASE CERTIFICATE
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Borrowers: PharmChem Laboratories, Inc. Lender: Silicon Valley Bank
PharmChem Laboratories Operations, Inc. 3003 Tasman Drive
1505A O'Brien Drive Santa Clara, CA 95054
Menlo Park, CA 94025
Commitment Amount: Five Million Dollars ($5,000,000)
- ----------------------------------------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $
2. Additions (please explain on reverse) $
3. TOTAL ACCOUNTS RECEIVABLE $
ACCOUNTS RECEIVABLE DEDUCTIONS
4. Amounts over 90 days due $
5. Balance of 50% over 90 day accounts $
6. Concentration Limits $
7. Foreign Accounts $
8. Governmental Accounts $
9. Contra Accounts $
10. Promotion or Demo Accounts $
11. Intercompany/Employee Accounts $
12. Other (please explain on reverse) $
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
14. Eligible Accounts (No. 3-No. 13) $
15. LOAN VALUE OF ACCOUNTS (75% of No. 14)
BALANCES
16. Maximum Loan Amount $5,000,000
17. Total Funds Available (Lesser of #16 or #15) $
18. Present balance owing on Line of Credit $
19. Outstanding under ADP Sublimit $
20. Outstanding under Term Loan (if Cash Flow Coverage $
is greater than 1.00x but less than 1.50x)
21. RESERVE POSITIVE (#17-#18, #19 and 20) $
</TABLE>
The undersigned represent and warrant that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement among the undersigned and Silicon Valley Bank.
COMMENTS:
<TABLE>
<S> <C> <C>
PHARMCHEM LABORATORIES OPERATIONS, INC. PHARMCHEM LABORATORIES, INC. ---------------------------------
By: By: BANK USE ONLY
------------------------------------ -------------------------------
Rec'd By:
Title: Title: ----------------
--------------------------------- ---------------------------- Auth. Signer
Date:
--------------------
Verified:
----------------
Auth. Signer
Date:
--------------------
-------------------------
---------------------------------
</TABLE>
<PAGE> 8
REAFFIRMATION OF GUARANTY
TO: Silicon Valley Bank ("Lender")
3003 Tasman Drive
Santa Clara, California 95054
The undersigned (hereinafter referred to as "Guarantor") hereby
acknowledges and agrees that Guarantor has read and is familiar with, and
hereby consents to, all of the terms and conditions of that certain Amendment
No. 5 to Loan and Security Agreement, dated as of February 14, 1997
(hereinafter referred to as the "Amendment") and all of the agreements and
documents referred to therein, and specifically consents to the financial
accommodations extended and to be extended by Lender to PHARMCHEM LABORATORIES,
INC., a California corporation ("Pharmchem") and PHARMCHEM LABORATORIES
OPERATIONS, INC., a California corporation ("Operations") (Pharmchem and
Operations each being hereinafter referred to individually as a "Borrower" and
collectively as the "Borrowers") whose address is 1505A O'Brien Drive, Menlo
Park, California 94025, as set forth therein, and in said agreements and
documents. Guarantor hereby confirms and agrees that all of the terms and
provisions of Guarantor's Unconditional Guaranty (Corporate), dated November
17, 1994 (hereinafter referred to as the "Guaranty"), are hereby ratified and
confirmed, and shall continue in full force and effect as the guaranty of all
obligations of Borrowers under the Agreements (as defined in the Guaranty), as
modified by the Amendment.
Although Lender has informed Guarantor of said foregoing Amendment, and
Guarantor has acknowledged having read the same and consented to all of the
terms and conditions thereof, Guarantor understands and agrees that Lender has
no duty under any agreement with any Borrower, the Guaranty or any agreement
with Guarantor to so notify Guarantor or to seek such an acknowledgement and
consent, and nothing contained herein is intended to, or shall create such a
duty as to any advances or transactions hereafter.
Dated as of February 14, 1997.
MEDSCREEN, LTD.
By: David Lattanzio
--------------------------
Title: Vice President
1.
<PAGE> 1
Exhibit 10.32
MASTER LEASE PURCHASE AGREEMENT
THIS AGREEMENT is entered into the 18th day of December, 1995 between
FIDELITY LEASING CORPORATION ("Lessor") whose address is 7 East Skipback Pike,
Suite 275, Ambler, Pennsylvania 19002, and PHARMCHEM LABORATORIES, INC.
("Lessee") whose address is 1505 A O'Brien Drive, Menlo Park, CA 94025.
Lessor and Lessee from time to time may enter into written agreements in the
form of "Lease Purchase Addenda" for the leasing of equipment by Lessor to
Lessee. To facilitate such transactions, Lessor and Lessee are entering into
this Master Lease Purchase Agreement (the "Master Lease"), the terms and
provisions of which shall be incorporated by reference in each such Lease
Purchase Addendum, and they MUTUALLY AGREE AS FOLLOWS:
1. LEASE PURCHASE ADDENDUM
If Lessor agrees to lease equipment when requested by Lessee, the parties shall
sign a Lease Purchase Addendum ("Addendum") setting forth the particulars
regarding the transaction, including, without limitation, the list of items of
equipment (individually, an "Item" and, collectively, the "Equipment"), the
prices of each Item (including disclosure of all rebates, discounts and other
incentives received or receivable with respect thereto), "Related Costs",
including taxes, transportation, installation and other applicable costs, the
aggregate of the foregoing ("Total Cost"), length of the Basic Term, rental
rates, purchase and renewal options, if any, and other applicable provisions.
"Cost of an Item" shall mean the price of the Item plus its applicable portion
of Related Costs. In the absence of a signed Addendum, this Master Lease shall
not constitute a lease or a commitment by either party to enter into a lease.
2. REQUEST TO LEASE; EQUIPMENT ACCEPTANCE
(A) Request: Specifications. Signing an Addendum shall constitute the
request from Lessee to Lessor to lease the Equipment, and the Addendum and this
Master Lease shall constitute the lease and agreement (the "Lease") regarding
the Equipment. As security for all obligations of Lessee to Lessor now existing
or hereafter arising under this Lease, Lessee grants Lessor a security interest
in all Equipment. At the time of signing the Addendum, Lessee shall furnish
Lessor detailed specifications ("Specifications") of the Items, including
descriptions, prices, delivery terms and instructions, installation provisions
and all other applicable specifications. Lessee assumes full responsibility
with respect to the selection of Items supplied for lease and the specification
thereof; the Lessor shall have no liability or responsibility with respect
thereto regardless of whether the Specifications prove inadequate for the
intended purpose or use.
(B) Inspection: Acceptance. It is Lessee's responsibility to receive
and promptly inspect and test each Item tendered for delivery by a supplier and
the installation thereof. Lessee shall give Lessor written notice of acceptance
of an Item as soon as it can be determined that the Item and its installation
are in compliance with Specifications. As between Lessee and Lessor, the giving
of such written notice shall constitute Lessee's irrevocable acceptance of the
Item or Items designated in the notice, whether or not such Items or their
installation are defective in any respect, and notwithstanding any failure of
an Item or its installation to conform to Specifications, without prejudice
however to rights which Lessor and Lessee, or either of them, may have against
any other person, whether with respect to design, manufacture, condition or
otherwise.
(C) Purchase Cut-Off Date. If, by the "Purchase Cut-Off Date" set
forth in an Addendum, Lessee shall not have given Lessor written notice of
acceptance of an Item, Lessor shall have no obligation to lease the Item to
Lessee. In such event, Lessee shall immediately reimburse Lessor for all
Lessor's costs and expenses with respect thereto, and Lessee shall indemnify and
defend Lessor against and hold Lessor harmless from any and all cost, expense,
loss, liability and damage that Lessor may suffer or that may be asserted
against Lessor by reason of Lessor's failure or refusal to lease such Item. Any
such Item shall be deemed to be deleted from the Addendum and no longer
included in the Equipment.
Page 1
<PAGE> 2
(D) Conditions Precedent. Lessee shall deliver to Lessor such further
instruments, documents and certifications as Lessor reasonably may request,
including without limitation evidences of authority (e.g., corporate
certificates, corporate resolutions, partnership documents and authorizations),
evidence of insurance, purchase orders and acceptances thereof, purchase and
sale agreements and financial information, and instruments and documents to
implement, perfect or continue the perfection of Lessor's rights and remedies as
Lessor of the Equipment, including Uniform Commercial Code forms. Lessee's
delivery of the foregoing and of the Specifications are conditions precedent to
any obligation of Lessor to make any commitments to pay for the Equipment or any
item.
(E) Supplemental Lease Request. If at any time prior to the Closing Date
Lessee requests Lessor to add further items to the Equipment, and if Lessor so
agrees, Lessee shall execute a Lease Purchase Addendum Supplement in a form
supplied by Lessor, which shall become part of the Addendum, subject to all of
its provisions and the provisions of this Master Lease, and the equipment
specified therein shall be items of Equipment under the Lease.
(F) Closing. Following the date ("Closing Date") which is the earlier of (i)
the date Lessee gives Lessor written notice of acceptance of the last item or
(ii) the Purchase Cut-Off Date (or on such other day as is mutually agreed).
Lessor shall send Lessee a Closing Schedule ("Schedule"), setting forth any
adjustments to descriptions and Costs of Items and Total Cost and confirming the
Closing Date, amount of Periodic Rental installments, payment schedules, and
insurance requirements. Lessee's signature on any such Schedule shall signify
the Lessee's agreement that the Schedule is correct. Notwithstanding any
discrepancies or disagreements between Lessor and Lessee regarding the
Schedules, Lessee shall pay all rentals as they become due in accordance with
the terms and conditions of the Lease. If Lessee establishes an error that
affects the amount of rentals, Lessor shall give Lessee a credit for any
overpayment of rentals, and Lessee promptly shall pay Lessor any underpayments.
The Schedules are incorporated herein by reference.
3. LESSEE'S WARRANTIES
(A) Lessee represents and warrants to Lessor that it is a corporation or
partnership duly organized, validly existing and in good standing under the laws
of the jurisdiction of its organization and that it is qualified to do business
in every jurisdiction where the failure to qualify would have a materially
adverse effect on Lessor's rights hereunder; it has taken all corporate or
partnership action which may be required to authorize the execution, delivery
and performance of this Lease, and such execution, delivery and performance will
not conflict with or violate any provision of its Charter or Articles or
Certificate of Incorporation, By-laws or any provisions thereof, or in the case
of a partnership, its Certificate of Partnership or Limited Partnership and its
Partnership Agreement, or result in a default or acceleration of any obligation
under any agreement, order, decree or judgment to which it is a party or by
which it is bound, nor is it now in default under any of the same; there is no
litigation or proceeding pending or threatened against it which may have a
materially adverse effect on Lessee or which would prevent or hinder the
performance by it of its obligations hereunder; this Lease and the attendant
documents constitute valid obligations of the Lessee, binding and enforceable
against it in accordance with their respective terms; no action by or with any
commission or administrative agency is required in connection herewith; it has
the power to own its assets and to transact business in which it is engaged; it
will give to Lessor prompt notice of any change in its name, identity or
structure.
(B) Lessee's written acceptance of an Item and its installation shall
constitute a REPRESENTATION AND WARRANTY BY Lessee to Lessor that: (i) the Item
is personal property in good order ad condition; (ii) the Item conforms to
Specifications; (iii) unless otherwise specified, the Item has not been used
prior to its acceptance by Lessee; and (iv) at all times Lessee shall keep the
Equipment in Lessee's possession at the address specified in the Addendum unless
Lessor shall otherwise consent in writing. Lessee shall not cause, suffer or
permit any Item to be attached or affixed to real property or improvements
thereon (collectively, "Realty") unless Lessor first shall consent thereto in
writing and Lessee shall have obtained from all persons having any interest in
the Realty written consents which approve such attachment, waive any claims to
or encumbrances upon attached Items and consent to the detachment and removal of
such
Page 2
<PAGE> 3
Items at any time by Lessor or Lessee. Notwithstanding attachment of any items
to Realty, all the Equipment at all times shall be and remain personal
property. Upon termination of Lessee's right to possession of the Equipment,
whether by expiration of the Term or otherwise. Lessee at its sole cost and
expense shall detach and remove the Equipment from the Realty and save Lessor
harmless from and indemnify and defend Lessor against any claim, demand, loss,
liability, and damage arising from such detachment or removal, or both.
4. TERM OF LEASE
The Term of the Lease ("Term") will consist of an "Interim Term" and a "Basic
Term." The Interim Term shall begin on the Closing Date, and shall continue
until the time the Basic Term begins. The Basic Term shall begin on the last
day of the calendar month immediately following the month in which the Closing
Date occurs, and shall continue for the length of the Basic Term set forth in
the Addendum.
5. INTERIM RENTAL
During the Interim Term, Lessee shall pay rent ("Interim Rental"), in an amount
determined by Lessor by applying the "Interim Rental Rate" set forth in the
Addendum to the Total Cost, for the number of days from the Closing Date to the
date the Basic Term begins. Such Interim Rental shall be payable on the first
day of the Basic Term.
6. PERIODIC RENTAL
Lessee shall pay rent ("Periodic Rental") for the Basic Term in an amount
calculated by multiplying the Total Cost by the Periodic Rental Rate set forth
in the Addendum multiplied by the number of months constituting the length of
the Basic Term. Lessees shall pay installments of Periodic Rental to Lessor in
accordance with the payment schedule set forth in the Addendum.
7. LATE PAYMENT
If any installment of rent or other sum owing under the Lease shall not be paid
when due and shall remain unpaid for ten (10) days, Lessee shall pay Lessor a
late charge equal to five percent (5%) of the amount delinquent, but in no
event at a rate greater than limited by any applicable law. Such late charge is
in addition to and not in lieu of other rights and remedies Lessor may have.
8. INSURANCE
Lessee shall procure and continuously maintain and pay for (a) all risk
insurance against loss or damage to the Equipment for not less than the full
replacement value thereof naming Lessor as Loss Payee and (b) combined single
limit liability insurance, insuring Lessor and Lessee, all in such amounts and
against such risks and hazards as are set forth in the Addendum, with insurance
companies and pursuant to contracts or policies satisfactory to Lessor. All
contracts and policies shall include provisions for the protection of Lessor
notwithstanding any act or neglect of or breach or default by Lessee, shall
provide that proceeds of all insurance shall be payable first to Lessor to the
extent of its liability or interest as the case may be, shall provide that they
may not be modified, terminated or canceled unless Lessor is given at least
thirty (30) days' advance written notice thereof, and shall provide that the
coverage is "primary coverage" for the protection of Lessee and Lessor
notwithstanding any other coverage carried by Lessee or Lessor protecting
against similar risks. Lessee shall promptly notify any appropriate insurer and
Lessor of each and every occurrence which may become the basis of a claim or
cause of action against the insureds and provide Lessor with all data pertinent
to such occurrence. Lessee shall furnish Lessor with certificates of such
insurance or copies of policies upon request, and shall furnish Lessor with
renewal certificates not less than ten (10) days prior to the renewal date.
9. TAXES
Lessee shall pay all taxes, fees, assessments and other governmental charges of
whatsoever kind or character and by whomsoever payable on or relating to any
Item of Equipment or the sale, purchase, ownership, use, value, value added,
possession, shipment, transportation, delivery or operation thereof or the
exercise of any option, election or performance of any obligation by Lessee
hereunder, which may accrue or be levied, assessed or imposed during the Term
and any Renewal Term or which remain unpaid as of the date of surrender of such
Item to Lessor, and all taxes of any kind imposed by any federal, state,
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local, or foreign taxing authority against Lessor on or measured by any amount
payable by Lessee hereunder, including, without limitation, all license and
registration fees and all sales, use, value, ad valorem, personal property,
excise, gross receipts, stamp or other taxes, imposts, duties and charges
together with any penalties, fines or interest thereon, except taxes of Lessor
on net income imposed by the United States or any state. Lessee shall reimburse
Lessor for any payments made by Lessor which are the obligation of Lessee under
the Lease, but Lessee shall not be obligated to pay any amount under this
Section so long as it shall in good faith and by appropriate proceedings
contest the validity or the amount thereof, unless such contest would adversely
affect Lessor's interest in any Item of Equipment or would subject any Item to
forfeiture or sale. Lessee shall indemnify Lessor on an after-tax basis against
any loss, claim, demand and expense, including legal expense, resulting from
such nonpayment or contest and further agrees to indemnify Lessor against any
and all taxes, assessments and other charges imposed upon Lessor under the laws
of any federal, state, local or foreign government or taxing authority, as a
result of any payment made by Lessee pursuant to this Section. Whenever this
lease terminates as to any Item, Lessee will on request advance to Lessor the
amount estimated by Lessor to equal personal property taxes on the item which
are not yet payable but for which Lessee will afterward become liable
hereunder; Lessor will account to Lessee for such advances. On request of
either Lessor or Lessee, the other will submit written evidence of all payments
required of it under this Section.
10. MAINTENANCE, ETC.
(A) Lessee at its expense at all times shall: (i) keep the Equipment in
good and efficient working order, condition and repair, ordinary wear and tear
excepted, and make all inspections and repairs, including replacement of worn
parts, to effect the foregoing and to comply with requirements of laws,
regulations, rules and provisions and conditions of insurance policies; and
(ii) pay all costs, expenses, fees and charges incurred in connection with the
use or operation of the Equipment and of each item, including but not limited
to repairs, maintenance, storage and servicing. Lessee shall not make any
alterations, substitutions, improvements or additions to the Equipment or
Items, except those required in order to comply with laws, regulations, rules
and insurance policies, unless Lessor first shall have consented thereto in
writing. Notwithstanding any consent by Lessor, Lessee shall pay all costs and
expenses of the foregoing. All replacements, repairs, improvements,
alterations, substitutions and additions shall constitute accessions to the
Equipment and shall be subject to Lessor's security interest.
(B) Lessor hereby transfers and assigns to Lessee, for so long during the
Term and any Renewal Term as Lessee is not in default, Lessor's right, title
and interest in, under and to any assignable factory and dealer warranty,
whether express or implied, with respect to the Equipment. All claims and
actions upon any warranty shall be made and prosecuted by Lessee at its sole
cost and expense. Lessor shall have no obligation to make or prosecute any
claim upon or under a warranty. So long as Lessee shall not be in default,
Lessor shall cooperate with Lessee with respect to a claim on a non-assignable
warranty, at Lessee's expense. Lessee shall have proceeds of a warranty claim
or recovery paid to Lessor. Lessor shall make such proceeds available for any
repair, restoration or replacement to correct such warranted condition. Excess
proceeds shall be used to reduce Lessee's Lease obligations.
11. USE
So long as Lessee shall not be in default, Lessee shall be entitled to the
possession, use and quiet enjoyment of the Equipment during the Term and any
Renewal Term in accordance with the terms of the Lease. Lessee warrants that
the Equipment will at all times be used and operated solely in the conduct of
Lessee's business for the purpose for which it was designed and intended and
under and in compliance with applicable laws and all lawful acts, rules,
regulations and orders of any governmental bodies or officers having power to
regulate or supervise the use of such property, except that Lessee may in good
faith and by appropriate proceedings contest the application of any such rule,
regulation or order in any reasonable manner that will not adversely affect the
interest of Lessor in any Equipment or subject the same to forfeiture or sale.
Lessee will not permit its rights or interest hereunder to be subject to any
lien, charge or encumbrance and will keep the Equipment free and clear of any
and all liens, charges, encumbrances and adverse claims (except those arising
from acts of Lessor).
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12. NET LEASE; LOSS AND DAMAGE
(A) This is a net lease. Lessee assumes all risk of and shall
indemnify Lessor against all damage to and loss of the Equipment from any cause
whatsoever, whether or not such loss or damage is or could have been covered by
insurance. Except as otherwise specifically provided herein, the Lease shall
not terminate and there shall be no abatement, reduction, suspension or
deferment of interim or Periodic Rental for any reason, including damage to or
loss of the Equipment or any one or more items. Lessee promptly shall give
lessor written notice of any material loss or damage, describing completely and
in detail the cause and the extent of loss and damage. At the option of Lessor,
Lessee shall: (i) repair or restore the damaged or lost items to good condition
and working order; or (ii) replace the damaged or lost items with similar
equipment in good condition and working order; or (iii) pay Lessor in cash the
Stipulated Loss Value of the damaged or lost items. Upon Lessee's complying with
the foregoing, Lessor shall pay or cause to be paid over to Lessee the net
proceeds of insurance, if any, with respect to such damage or loss. "Damage" and
"loss" shall include damages and losses of any kind whatsoever including,
without limitation, physical damage and partial or complete destruction,
including intentionally caused damage and destruction, and theft.
(B) If Lessee pays Lessor the Stipulated Loss Value for an item,
that the Lease shall terminate with respect to that item, that shall no longer
be deemed part of the Equipment and Lessee shall be entitled to retain the
item. However, it is understood that Lessor make no representation or warranty
with respect to the item, and further that Lessor shall have no obligation to
pay any tax with respect thereto. In the event that Lessee pays Lessor the
Stipulated Loss Value for an item, no further interim Rental shall be payable
with respect to the item, and Periodic Rental for the remainder of the Term
shall be reduced by multiplying the Cost of that item by the Periodic Rate by
the number of months then remaining in the Basic Term.
13. STIPULATED LOSS VALUE
The "Stipulated Loss Value" of an item shall be a sum computed by Lessor, which
is equal to that portion of the Cost of that item which remains outstanding
presuming that Periodic Rental payments received are first applied to earned
but unpaid interest at the rental rate as specified in the Addendum. The
Stipulated Loss Value for the Equipment shall not exceed the amount set forth
in the Closing Schedule for the Lease Year during which the loss occurs, which
amount shall be pro-rated monthly effective to the month in which payment of
the Stipulated Loss Value is received by Lessor. A "Lease Year" is a
twelve-month period beginning on the Closing Date or on any anniversary thereof.
14. SECURITY INTEREST AND MARKING
(A) This lease is one intended as security and for tax purposes,
both parties will treat this transaction as a secured loan by Lessor to Lessee.
(B) If so requested by Lessor, Lessee will affix tags, supplied by
Lessor, reflecting Lessor's security interest in the Equipment.
15. LESSEE'S INDEMNITIES
Lessee will defend, indemnify and hold harmless Lessor from and against any
claim, cause of action, damage, liability, cost or expense (including but not
limited to legal fees and costs) which may be asserted against or incurred in
any manner by or for the account of Lessor or Lessee: (i) relating to the
Equipment or any part thereof, including without limitation the manufacture,
construction, purchase, delivery, acceptance or rejection, installation,
ownership, sale, leasing, removal or return of the Equipment, or as result of
the use, maintenance, repair, replacement, operation or the condition thereof
(whether defects are latent or discoverable); (ii) by reason or as a result of
any act or omission of Lessee for itself or as agent or attorney-of-fact for
Lessor hereunder; (iii) as a result of claims for patent, trademark or
copyright infringement; or (iv) as a result of product liability claims or
claims for strict liability.
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16. LESSOR MAY PERFORM
If Lessee at any time shall fail to pay to any person any sum which Lessee is
required by the Lease to pay or shall fail to do or perform any other thing
Lessee is required by the Lease to do or perform, Lessor at its option may pay
such sum or do or perform such thing, and Lessee shall reimburse Lessor on
demand for the amount of such payment and for the cost and expense which may be
incurred by Lessor for such acts or performance, together with interest thereon
at the Default Rate from the date of demand until paid.
17. EVENTS OF DEFAULT AND REMEDIES
(A) Events of Default. Each of the following shall constitute an event
of default:
(i) Failure to perform and comply with the provisions and
conditions of Section B hereof; or
(ii) Failure to pay on the date when due, any sum, including
installments of rental, owed by Lessee or any affiliate of
Lessee at anytime to Lessor; or
(iii) Failure to perform and comply with any other provision or
condition of the Lease within thirty (30) days after Lessor
shall have given Lessee written notice of default with respect
thereto; or
(iv) Any event of default occurs with respect to any obligations of
Lessee to lessor on or with respect to any transactions,
debts, undertakings or agreements other than the lease; or
(v) If any representation or warranty made by Lessee herein or in
any statement or certificate furnished by Lessee in connection
with this Agreement proves untrue in any material respect as
of the date of making thereof, and shall not be made good
within thirty (30) days after written notice thereof to
Lessee, or Lessee becomes insolvent or is generally not paying
its debts as they become due or makes an assignment for
benefit of creditors; or
(vi) Proceedings are commenced by Lessee under the Federal
Bankruptcy Code or any similar Federal or State laws for the
relief of debtors are commenced against Lessee and are not
dismissed within sixty (60) days after such commencement, or a
trustee or receiver is appointed for Lessee or a major part of
its property and is not discharged within thirty (30) days
after such appointment; or
(vii) Any item of Equipment is seized or levied on under legal or
governmental process against Lessee or against such item of
Equipment or for any reason Lessor deems itself insecure; or
(viii) The merger, consolidation, reorganization, conversion to a
Subchapter "S" status or dissolution of a corporate or
partnership Lessee which has a materially adverse effect upon
Lessor's position under the Lease.
(B) Remedies. The occurrence of an Event of Default shall terminate any
obligation of Lessor to lease Equipment or items thereof to Lessee. When an
Event of Default has occurred and is continuing, Lessor at its option may:
(i) Proceed by appropriate court action or actions, either at law
or in equity, to enforce performance by the Lessee of the
applicable covenants of this Lease or to recover damages for
the breach thereof; and/or
(ii) Without notice or demand declare immediately due and payable
the entire Stipulated Loss Value of any and all Items of
Equipment then under lease plus any and all amounts which
under the terms of the Lease may be then due; and thereupon
MetLife shall have an immediate right to pursue all remedies
provided by law, including, without limitation, the following:
(a) Lessee agrees to put Lessor in possession of the
Equipment on demand;
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(b) Lessor is authorized to enter any premises where
Equipment is situated and take possession thereof
without notice or demand and without legal proceedings.
(c) At Lessor's request, Lessee will assemble the Equipment
and make it available to Lessor at a place designated by
Lessor which is reasonably convenient to both parties.
(d) Lessee agrees that ten (10) days from the time notice
is sent shall be a reasonable period of notification of
a sale or other disposition of the Equipment;
(e) Lessee agrees to pay on demand the amount of all
expenses reasonably incurred by Lessor in protecting or
realizing on the Equipment;
(f) If Lessor disposes of the Equipment, Lessee agrees to
pay any deficiency remaining after application of the
net proceeds to the amounts due hereunder.
If upon the occurrence of an Event of Default, Lessor brings suit or otherwise
incurs expenses for protection of Lessor's rights, Lessee will pay Lessor its
legal fees, in a reasonable amount, together with Lessor's collection expenses
and court costs. In addition, from and after an Event of Default, Lessee shall
be liable for interest on amounts due Lessor hereunder at a rate per annum
computed monthly which shall be five (5) percentage points above the prime
rate, but not greater than the maximum rate, if any, limited by application law
("Default Rate"); provided however, that Lessee shall not be assessed a late
charge during such period of time that Default Rate is accruing against Lessee
as herein stated. The remedies herein provided in favor of Lessor shall not be
deemed to be exclusive but shall be concurrent and cumulative and in addition
to all other remedies available at law or equity. The exercise or partial
exercise of any remedy shall not restrict Lessor from further exercise of that
remedy or any other remedy.
18. SURRENDER
At any time that Lessee is required to deliver the Equipment to Lessor, Lessee
shall immediately cease using the Equipment and at Lessee's expense shall
redeliver and surrender the Equipment to Lessor in good order, condition and
repair, ordinary wear and tear excepted, securely crated and safely packed, at
a place to be designated by Lessor in the State where the Equipment by the
terms of the Addendum is required to be kept, and, if Lessor so specifies,
loaded FOB on a common or contract carrier designated by Lessor.
19. HOLDOVER
If Lessee shall not immediately redeliver and surrender any Item of Equipment
to Lessor when required by the terms hereof, Lessee shall pay Lessor, at such
time or times as Lessor may demand, a sum equal to a one-month installment of
Periodic Rental for each calendar month or fraction of a month during which
such failure to redeliver and surrender continues.
20. INSPECTION; REPORTS
Lessor, its agents and employees shall have the right to enter upon any
premises where the Equipment or Items are then located to inspect and examine
the same during normal business hours and at any other times if Lessor
reasonably believes any Items or Lessor's rights are in jeopardy of damage or
loss. So long as Lessee is not in default, Lessor shall give Lessee not less
than twenty-four (24) hours notice of such inspection. Lessee shall
immediately give Lessor written notice of any damage to or loss of the
Equipment or any Items from any cause, including without limitation damage or
loss caused by accident, the elements, intentional acts and theft. Such notice
shall set forth an itemization of the affected Items and a detailed account of
the event, including names of any injured persons and a description of any
damaged property arising from any such event or from any use or operation of
the Equipment or any Items, and of any attempt to take, distrain, levy upon,
seize or attach the Equipment or any Items. All rights granted to Lessor herein
are for the benefit of Lessor and shall not be construed to impose any
obligation on Lessor, whether or not Lessor makes any inspections or receives
any reports.
21. FINANCIAL AND OTHER DATE
During the Term and any Renewal Term, Lessee: (a) shall furnish Lessor annual
balance sheets and profit and loss statements of Lessee and any guarantor of
Lessee's obligations accompanies, at Lessor's request, by the audit report of
an independent certified public accountant acceptable to Lessor; and (b) at
Lessor's request, shall furnish Lessor all other financial information and
reports reasonably by Lessor at any time, including quarterly or other interim
balance sheets and profit and loss statements of Lessee and
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any such guarantor. Lessee shall furnish such other information as Lessor may
reasonably request at any times concerning Lessee and its affairs.
22. WARRANTY OF INFORMATION
Lessee warrants that all information furnished and to be furnished to Lessor is
accurate and that all financial statements it has furnished and hereafter may
furnish Lessor, including operating statements and statements of condition, are
and will be prepared in accordance with generally accepted accounting
principles, consistently applied, and reasonably reflect and will reflect, as
of their respective dates, results of the operations and the financial
condition of Lessee and of any other entity they purport to cover.
23. NON-WAIVER
Neither the acceptance by Lessor of any payment or any other performance, nor
any act or failure of Lessor to act or to exercise any rights, remedies or
options in any one or more instances shall constitute a waiver of any such
right, remedy or option or of any other then existing or thereafter accruing
right, remedy or option, or of any breach or default then existing or
thereafter occurring. No purported waiver by Lessor of any right, remedy,
option, breach or default shall be binding unless in writing and signed by an
officer of Lessor. A written waiver by Lessor of any right, remedy, option,
breach or default shall not constitute a waiver of any other then existing or
thereafter accruing right, remedy or option or of any other then existing or
thereafter occurring breach or default.
25. NOTICES; PAYMENTS
(A) A written notice may be given: (i) by delivering the same to a
corporate officer of the party to whom it is directed (the "Addressee"), or to
a general partner if the Addressee is a partnership, or to the owner if the
Addressee is a sole proprietorship, or (ii) by mailing the notice to the
Addressee by first class mail, registered or certified, with postage prepaid,
addressed to the Addressee at the address following its name in the opening
paragraph of this Master Lease or to such other address as Addressee may
specify by notice in writing given in accordance with this Section. A notice so
mailed shall be deemed given on the third business day following the date of
mailing. A "business day" shall be any day that is not a Saturday or Sunday or
a legal holiday.
(B) The Lessee shall make all payments to Lessor at the place where the
notice is to be mailed to Lessor pursuant to subparagraph (A). Payments are
deemed paid when received by Lessor.
25. ASSIGNMENT
(A) Lessee shall not assign the Lease or any rights in or to the Equipment
or Items. Any attempted assignment shall be of no effect, unless Lessor first
shall have consented thereto in writing. Lessor's consent to an assignment in
any one or more instances shall not impose any obligation upon Lessor to
consent to any other or further assignments. Lessor's consent to an assignment
shall not release Lessee from any obligations with respect to the Lease unless
expressly so stated in the written consent.
(B) All rights of Lessor hereunder may be assigned, pledged, mortgaged,
transferred or otherwise disposed of, either in whole or in part, without
notice to Lessee but subject always to the rights of Lessee under this lease.
If Lessee is given notice of any such assignment, Lessee shall acknowledge
receipt thereof in writing. In the event that Lessor assigns this Lease or the
rent due or to become due hereunder or any other interest herein, whether as
security for any of its indebtedness or otherwise, no breach or default by
Lessee hereunder or pursuant to any other agreement between Lessor and Lessee,
should there be one, shall excuse performance by Lessee of any provision
hereof, it being understood that in the event of such default or breach by
Lessor that Lessee shall pursue any rights on account thereof solely against
Lessor. No such assignee shall be obligated to perform any duty, covenant or
condition requested to be performed by Lessor under the terms of this Lease.
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26. SURVIVAL
The representations, warranties, indemnities and agreements of Lessee, and
Lessee's obligations under any and all provisions of the Lease, shall survive
the expiration or other termination of the Lease, shall be binding upon its
successors and assigns and are expressly made for the benefit of and shall be
enforceable by Lessor and its successors and assigns.
27. MISCELLANEOUS
(A) The term "Lessor" shall mean the Lessor named herein and its
successors and assigns.
(B) Whenever the context so requires, any pronoun gender includes all
other genders, and the singular includes the plural. If more than one person
constitute Lessee, whether as a partnership or otherwise, all such persons are
and shall be jointly and severally liable for all agreements, undertakings and
obligations of Lessee.
(C) All captions and section, paragraph and other divisions and
subdivisions are for convenience of reference only and shall not affect the
construction, interpretation or meaning of the agreement or Lease or of any of
the provisions thereof.
(D) This Lease shall be governed by and construed according to the law
of the State of Washington.
(E) This Lease shall be binding upon and, except as limited in Section
25 hereof, shall inure to the benefit of Lessor and Lessee and their respective
successors and assigns.
(F) This Lease cannot be canceled or terminated except as expressly
provided herein.
(G) Wherever Lessor's consent is required hereunder, such consent will
not be unreasonably withheld.
(H) Lessee's obligation to pay or reimburse Lessor for expenses as
provided hereunder shall be limited to reasonable expenses.
28. LESSOR'S DISCLAIMER
Lessee acknowledges and agrees that it has selected both the Equipment of the
type and quantity which is the subject of this Lease and the supplier from whom
the Equipment was purchased. LESSOR MAKES NO REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AS TO THE DESIGN, COMPLIANCE WITH SPECIFICATIONS,
CONDITION, QUALITY, WORKMANSHIP, OR THE SUITABILITY, ADEQUACY, OPERATION, USE
OR PERFORMANCE OF THE EQUIPMENT OR AS TO ITS MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE. ANY DELAY IN DELIVERY SHALL NOT AFFECT THE VALIDITY OF THIS
LEASE. The Lessee understands and agrees that neither the supplier nor any
salesman or any agent of the supplier is an agent of Lessor. No salesman or
agent of supplier is authorized to waive or alter any term or condition of this
Lease, and no representation as to the Equipment or any other matter by the
supplier shall in any way affect Lessee's duty to pay the rent and perform its
obligations as set forth in this Lease. Lessor shall not be liable to Lessee
for any incidental, consequential, or indirect damages or for any act, neglect,
omission, breach or default by any third party.
29. NO AFFILIATION WITH SUPPLIERS
Lessee warrants that neither it nor any of its officers, directors (if a
corporation) or partners (if a partnership) has, directly or indirectly, a
substantial financial interest in the manufacturer or supplier of any Equipment
except as previously disclosed in writing to Lessor.
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30. ENTIRE AGREEMENT
This Master Lease and any Lease Purchase Addenda hereto shall constitute the
entire agreement between the parties and shall not be altered or amended except
by an agreement in writing signed by the parties hereto or their successors or
assigns.
IN WITNESS WHEREOF Lessor and Lessee have signed this agreement as of
the day and year first hereinabove written.
LESSOR: LESSEE:
FIDELITY LEASING CORPORATION
By: By: /s/ Neil Fortner
------------------------ ------------------------
Its Its V.P. Lab Ops
------------------------ ------------------------
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LEASE PURCHASE ADDENDUM NO. 1
THIS ADDENDUM is entered into the 8th day of January, 1996 between FIDELITY
LEASING CORPORATION ("Lessor") whose mailing address is 7 East Skipback Pike
Suite 275, Ambler, Pennsylvania 19002 and PharmChem Laboratories, Inc.
("Lessee") whose address is 1505 A. O'Brien Drive, Menlo Park, CA 94025.
Lessee has requested to lease from Lessor the following items of personal
property (individually, an "Item" and, collectively, the "Equipment") for the
prices and for delivery as follows:
NAME AND ADDRESS OF COMPLETE DESCRIPTION OF
SUPPLIER QUANTITY EQUIPMENT UNIT PRICE
Olympus America, Inc. 1 New Olympus AU800 $265,000.00
P.O. Box 4768 Chemistry Analyzers
Los Angeles, CA 90051 Serial #406704
SALES TAX $ 21,862.50
TOTAL COST $286,862.50
_______________________________________________________________________________
Date Delivery Instructions to be specified
Delivery by Lessee to Supplier TOTAL COST: $286,862.50
Expected:
_______________________________________________________________________________
Street City County State
SHIP TO
LESSEE AT:
- -------------------------------------------------------------------------------
Lessee and Lessor AGREE that subject to the conditions and agreements herein
and in the Master Lease referred to below (i) Lessor shall lease the Equipment
to Lessee, and (ii) Lessee shall lease the Equipment from Lessor and perform
and comply with the provisions of this Agreement.
<TABLE>
<S> <C>
Certain Definitions and Stipulations:
Purchase Cut-Off Date: January 8, 1996
Particular Lease Terms:
Length of Basic Term: Sixty (60) months
Periodic Rental Rate (for each installment) 2.040% percent (%) of Lessor's Cost of the Equipment
Payment Schedule: monthly in arrears
Interim Rental: $5,156.35
</TABLE>
Purchase: On the last day of the term of this Lease or any
extension thereof, Lessee shall purchase for cash all Lessor's interest in
Equipment then under lease for $1.00. Upon payment of the purchase price and of
all Rentals and other sums owing under this Lease, Lessor shall transfer to
Lessee all right and interest of Lessor in and to the Equipment, in its then
condition, without any representation or warranty other than the warranty that
the Equipment is not subject to any liens resulting from acts of Lessor.
Premises where Equipment will be kept: 1505 A O'Brien Drive
Menlo Park, CA 94025
<PAGE> 12
PharmChem-Fidelity
Lease Purchase Addendum 1
Page 2
INSURANCE REQUIRED:
LIABILITY: Not less than $1,000,000 Combined Single Limit Liability
insurance, including bodily injury and death, and property damage,
naming Lessor as additional insured.
PHYSICAL DAMAGE. Not less than the Stipulated Loss Value of the
Equipment at any time All risk physical damage insurance, including
loss by burglary, theft, and malicious mischief, for full replacement
value of the equipment, naming Lessor as loss payee.
EARLY TERMINATION: At any time after the second Lease Year (and so long as
Lessor is not in default), Lessee may terminate this Lease on any Periodic
Rental payment date by giving Lessor at least thirty (30) days advance written
notice, which shall be irrevocable. On the date of termination, Lessee shall
pay Lessor the total of (i) Periodic Rental due on the date and all other
amounts due hereunder, (ii) the Stipulated Loss Value, and (iii) a prepayment
premium. For purposes of this Lease, "Prepayment Premium" shall mean the
amount, if any, payable by Lessee to Lessor to offset the adverse impact to
Lessor of a downward movement in interest rates from either the Acceptance Date
(the date Debtor signed the proposal letter) for fixed rate bids or the Closing
Date for fleet to takedown bids to the date of termination. The Prepayment
Premium is determined by (i) calculating the decrease (expressed in basis
points) in the current weekly average yield of three year U.S. Treasury Notes
(as published in Federal Reserve Statistical Release H.15[519]) from the
applicable Acceptance or Closing Date to the prepayment date, (ii) dividing the
difference by 100, (iii) multiplying the result by the applicable premium
factor shown below, and (iv) multiplying the product by the Stipulated Loss
Value.
NUMBER OF MONTHS REMAINING YEARS PREMIUM FACTOR
- -------------------------- ----- --------------
60-49 (5) .024
48-37 (4) .019
36-25 (3) .014
24-13 (2) .010
12-1 (1) .005
MASTER LEASE: Lessor and Lessee are entering into or have entered into a
Master Lease Purchase Agreement ("Master Lease") dated December 18, 1995. All
of the terms, conditions, agreements and provision of the Master Lease are
incorporated herein by this reference and constitute a part of this Addendum.
If there shall be any conflict between any provision of the Master Lease and a
provision of this Addendum, the provision of the Addendum shall govern.
LESSOR'S DISCLAIMER: Lessee acknowledges and agrees that it has selected both
the Equipment of the type and quantity which is the subject of this Addendum
and the supplier from whom Lessor purchased the Equipment. LESSOR MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE DESIGN, COMPLIANCE
WITH SPECIFICATIONS, CONDITION, QUALITY, WORKMANSHIP, OR THE SUITABILITY,
ADEQUACY, OPERATION, USE OR PERFORMANCE OF THE EQUIPMENT OR AS TO ITS
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. ANY DELAY IN DELIVERY
SHALL NOT AFFECT THE VALIDITY OF THE MASTER LEASE OR THIS ADDENDUM. The Lessee
understands and agrees that neither the supplier nor any salesman nor any agent
of the supplier is authorized to waive or alter any term or condition of the
Master Lease or this Addendum, and no representation as to the Equipment or any
other matter by the supplier shall in any way affect Lessee's duty to pay the
rent and perform its obligations as set forth in the Master Lease or this
Addendum. Lessor shall not be liable to Lessee for incidental, consequential,
or indirect damages or for any act, neglect omission, breach or default by
Lessor or any third party.
MISCELLANEOUS: The parties hereto hereby agree to amend the Master Lease
Purchase Agreement Section 27.D shall be changed such that the laws of the
State of California shall apply. The Master Lease Purchase agreement shall be
amended, with respect to this Lease Purchase Addendum NO. 1 only, such that the
Basic Term shall begin on January 31, 1996.
LESSOR LESSEE:
FIDELITY LEASING CORPORATION PHARMCHEM LABORATORIES, INC.
By: By: /s/ David C. Asheim
---------------------------- ----------------------------
Its: Its: CFO/VP
--------------------------- ---------------------------
<PAGE> 13
LEASE PURCHASE ADDENDUM NO. 2
THIS ADDENDUM is entered into the 19th day of January, 1996 between FIDELITY
LEASING CORPORATION ("Lessor") whose mailing address is 7 East Skippack Pike
Suite 275, Ambler, Pennsylvania 19002 and PharmChem Laboratories, Inc.
("Lessee") whose address is 1505A O'Brien Drive, Menlo Park, CA 94025.
Lessee has requested to lease from Lessor the following items of personal
property (individually, an "Item" and, collectively, the "Equipment") for the
prices and for delivery as follows:
NAME AND ADDRESS OF COMPLETE DESCRIPTION OF
SUPPLIER QUANTITY EQUIPMENT UNIT PRICE
Olympus America, Inc. 1 New Olympus AU800 $265,000.00
P.O. Box 4768 Chemistry Analyzers
Los Angeles, CA 90051 Serial #406705.
SALES TAX $ 21,862.50
TOTAL COST $286,862.50
_______________________________________________________________________________
Date Delivery Instructions to be as specified
Delivery by Lessee to Supplier TOTAL COST: $286,862.50
Expected:
_______________________________________________________________________________
Street City County State
SHIP TO
LESSEE AT:
- -------------------------------------------------------------------------------
Lessee and Lessor AGREE that subject to the conditions and agreements herein
and in the Master Lease referred to below (i) Lessor shall lease the Equipment
to Lessee, and (ii) Lessee shall lease the Equipment from Lessor and perform
and comply with the provisions of this Agreement.
<TABLE>
<S> <C>
Certain Definitions and Stipulations:
Purchase Cut-Off Date: January 15, 1996
Particular Lease Terms:
Length of Basic Term: Sixty (60) months
Periodic Rental Rate (for each installment) 2.0275% percent (%) of Lessor's Cost of the Equipment
Payment Schedule: Monthly in arrears
Interim Rental Rate: $2,227.96 plus $71.72 per day from the Funding Date through
January 31, 1996
</TABLE>
Purchase: On the last day of the term of this Lease or any
extension thereof, Lessee shall purchase for cash all Lessor's interest in
Equipment then under lease for $1.00. Upon payment of the purchase price and of
all Rentals and other sums owing under this Lease, Lessor shall transfer to
Lessee all right and interest of Lessor in and to the Equipment, in its then
condition, without any representation or warranty other than the warranty that
the Equipment is not subject to any liens resulting from acts of Lessor.
Premises where Equipment will be kept: 1505 A O'Brien Drive
Menlo Park, CA 94025
<PAGE> 14
PharChem-Fidelity
Lease Purchase Addendum 2
Page 2
Insurance Required:
Liability: Not less than $1,000,000 Combined Single Limit Liability
insurance, including bodily injury and death, and property damage,
naming Lessor as additional insured.
Physical Damage. Not less than the Stipulated Loss Value of the
Equipment at any time All risk physical damage insurance, including loss
by burglary, theft, and malicious mischief, for full replacement value
of the equipment, naming Lessor as loss payee.
Early Termination: At any time after the second Lease Year ( and so long
as Lessee is not in default), Lessee may terminate this Lease on any Periodic
Rental payment date by giving Lessor at least thirty (30) days advance written
notice, which shall be irrevocable. On the date of termination, Lessee shall
pay Lessor the total of (i) Periodic Rental due on the date and all other
amounts due hereunder, (ii) the Stipulated Loss Value, and (iii) a prepayment
premium. For purposes of this Lease, "Prepayment Premium" shall mean the
amount, if any, payable by Lessee to Lessor to offset the adverse impact to
Lessor of a downward movement in interest rates from either the Acceptance Date
(the date Debtor signed the proposal letter) for fixed rate bids or the Closing
Date for float to takedown bids to the date of termination. The Prepayment
Premium is determined by (i) calculating the decrease (expressed in basis
points) in the current weekly average yield of three year U.S. Treasury Notes
(as published in Federal Reserve Statistical Release H.15[519]) from the
applicable Acceptance or Closing Date to the prepayment date, (ii) dividing
the difference by 100, (iii) multiplying the result by the applicable premium
factor shown below, and (iv) multiplying the product by the Stipulated Loss
Value.
NUMBER OF MONTHS REMAINING YEARS PREMIUM FACTOR
60-49 (5) .024
48-37 (4) .019
36-25 (3) .014
24-13 (2) .010
12-1 (1) .005
Master Lease: Lessor and Lessee are entering into or have entered
into a Master Lease Purchase Agreement ("Master Lease") dated December 18,
1995. All of the terms, conditions, agreements and provision of the Master
Lease are incorporated herein by this reference and constitute a part of this
Addendum. If there shall be any conflict between any provision of the Master
Lease and a provision of this Addendum, the provision of the Addendum shall
govern.
Lessor's Disclaimer: Lessee acknowledges and agrees that it has selected
both the Equipment of the type and quantity which is the subject of this
Addendum and the supplier from whom Lessor purchased the Equipment. LESSOR MAKES
NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE DESIGN, COMPLIANCE
WITH SPECIFICATIONS, CONDITION, QUALITY, WORKMANSHIP, OR THE SUITABILITY,
ADEQUACY, OPERATION, USE OR PERFORMANCE OF THE EQUIPMENT OR AS TO ITS
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. ANY DELAY IN DELIVERY
SHALL NOT AFFECT THE VALIDITY OF THE MASTER LEASE OR THIS ADDENDUM. The Lessee
understands and agrees that neither the supplier nor any salesman nor any agent
of the supplier is authorized to waive or alter any term or condition of the
Master Lease or this Addendum, and no representation as to the Equipment or any
other matter by the supplier shall in any way affect Lessee's duty to pay the
rent and perform its obligations as set forth in the Master Lease or this
Addendum. Lessor shall not be liable to Lessee for incidental, consequential,
or indirect damages or for any act, neglect omission, breach or default by
Lessor or any third party.
Miscellaneous: The parties hereto hereby agree to amend the Master
Lease purchase Agreement Section 27.D shall be changed such that the laws of
the State of California shall apply. The Master Lease Purchase agreement shall
be amended, with respect to this Lease Purchase Addendum NO. 2 only, such that
the Basic Term shall begin on January 31, 1996.
LESSOR LESSEE:
FIDELITY LEASING CORPORATION PHARMCHEM LABORATORIES, INC.
By: By: /s/ David C. Asheim
------------------------ ------------------------
Its Its CFO & VP
------------------------ ------------------------
<PAGE> 15
This FINANCING STATEMENT is presented for filing and will remain effective with
certain exceptions for a period of five years from the date of filing pursuant
to section 9403 of the California Uniform Commercial Code.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. DEBTOR (LAST NAME FIRST--IF AN INDIVIDUAL) 1A. SOCIAL SECURITY OR FEDERAL TAX NO.
PHARMCHEM LABORATORIES, INC. 94-1736167
- ---------------------------------------------------------------------------------------------
1B. MAILING ADDRESS 1C. CITY, STATE 1D. ZIP CODE
1505A O'BRIEN DRIVE MENLO PARK, CA 94025
- ---------------------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR (IF ANY) 2A. SOCIAL SECURITY OR FEDERAL TAX NO.
(LAST NAME FIRST--IF AN INDIVIDUAL)
- ---------------------------------------------------------------------------------------------
2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE
- ---------------------------------------------------------------------------------------------
3. DEBTOR'S TRADE NAMES OR STYLES (IF ANY) 3A. FEDERAL TAX NUMBER
- ---------------------------------------------------------------------------------------------
4. SECURED PARTY 4A. SOCIAL SECURITY NO., FEDERAL TAX NO.
OR BASE TRANSIT AND A.R.A. NO.
NAME FIDELITY LEASING CORPORATION
MAILING ADDRESS 7 EAST SKIPBACK PIKE, SUITE 275 51-0269559
CITY AMBLER, STATE PA 19002 ZIP CODE
- ---------------------------------------------------------------------------------------------
5. ASSIGNEE OF SECURED PARTY (IF ANY) 5A. SOCIAL SECURITY NO., FEDERAL TAX NO.
OR BASE TRANSIT AND A.R.A. NO.
NAME
MAILING ADDRESS
CITY STATE ZIP CODE
- ---------------------------------------------------------------------------------------------
6. This FINANCING STATEMENT covers the following types or items of property
(include description of real property on which located and owner of record when required
by instruction 4).
TWO (2) OLYMPUS AU800 AUTOMATED CHEMISTRY ANALYZERS
SERIAL NUMBERS 406704, 406705
- ---------------------------------------------------------------------------------------------
7. CHECK [X] 7A. [ ] PRODUCTS OF COLLATERAL 7B. DEBTOR(S) SIGNATURE NOT REQUIRED IN
IF APPLICABLE ARE ALSO COVERED ACCORDANCE WITH INSTRUCTION 5(o) ITEM:
[ ] (1) [ ] (2) [ ] (3) [ ] (4)
- ---------------------------------------------------------------------------------------------
8. CHECK [X] [ ] DEBTOR 1S A -TRANSMITTING UTILITY IN ACCORDANCE WITH
IF APPLICABLE UCC 1 9105 (1)(A)
- ---------------------------------------------------------------------------------------------
9. DATE C 10. THIS SPACE FOR USE OF FILING
- -- /s/ David C. Asheim, V.P. 1/18/96 O OFFICER (DATE, TIME, FILE NUMBER
D AND FILING OFFICER)
SIGNATURE(S) OF DEBTOR(S) E
- ------------------------------------------------- -----
PHARMCHEM LABORATORIES, INC.
TYPE OR PRINT NAME(S) OF DEBTOR(S)
- -------------------------------------------------
- -- /s/ Rick S. Brennan, V.P.
SIGNATURE(S) OF DEBTOR(S)
- -------------------------------------------------
FIDELITY LEASING CORPORATION
TYPE OR PRINT NAME(S) OF SECURED PARTY(IES)
- -------------------------------------------------
1
11. Return copy to: 2
3
NAME -- -- 4
ADDRESS 5
CITY 6
STATE 7
ZIP CODE -- -- 8
- ------------------------------------------------- 9
FORM UCC.1-- 0
Approved by the Secretary of State
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit 10.33
OLYMPUS [LOGO]
OLYMPUS COMMERCIAL CREDIT
Division of Olympus Corporation
SCHEDULE "A" TO MASTER EQUIPMENT LEASE
($1.00 PURCHASE OPTION)
This Schedule A No. 1 (Schedule "A") is attached to and made a part of Master
Equipment Lease No. 0103096-1A ("Lease"), dated as of 3-17-96, by and between
Olympus Commercial Credit ("Lessor") and PharmChem Laboratories, Inc., 1505-A
O'Brien Drive, Menlo Park, CA 94025 ("Lessee").
1. GENERAL: Lessor hereby leases to Lessee and Lessee hereby leases from
Lessor the Equipment described below on the terms and conditions set forth
in this Schedule A and in the above referenced Lease.
2. EQUIPMENT DESCRIPTION:
<TABLE>
<CAPTION>
SERIAL
QUANTITY MODEL NUMBER DESCRIPTION
----------------------------------------------------------------------------
<S> <C> <C> <C>
One (1) AU800 Analyzer without ISE and
extended service warranty
</TABLE>
3. EQUIPMENT LOCATION:
1505-A O'Brien Drive
Menlo Park, CA 94025
4. LEASE TERM:
Sixty (60) Months
5. RENT PAYMENT: Begin. First month's payments totaling
$5,885.00 inclusive of taxes, payable on the Commencement Date set forth in
the Acceptance Certificate. $5,885.00 inclusive of applicable taxes,
thereafter payable on the same date of each consecutive month during the
Lease Term.
INVOICING INFORMATION:
Street Address:
------------------------------------------------------------
City, State & Zip Code:
----------------------------------------------------
Department:
----------------------------------------------------------------
Person to Contact:
---------------------------------------------------------
Telephone No.:
-------------------------------------------------------------
Lessee Reference No. to be reflected on invoices:
--------------------------
6. PROPERTY TAXES: To the extent legally permissible, Lessee shall remit all
personal property tax assessments due and payable during the Lease Term
directly to the appropriate jurisdictions.
7. SALES/USE TAXES: Without limiting Section 9 of the Lease, Lessee will be
liable for present and future sales taxes, use and other excise taxes
payable in connection with the transactions described in this Schedule A.
Generally, depending upon applicable law, such taxes will be either (a)
computed by reference to the cost of the related Equipment, paid by Lessor
at the commencement of the Lease Term, and included in the total cost of
the Equipment and reflected in the rent payment, or (b) computed by
reference to the rent and other taxable payments under this Schedule A and
paid by Lessee along with each such payment. Lessor will
<PAGE> 2
determine the amount of such taxes and the manner in which they will be
paid, taking into account any applicable tax exemption certificate and/or
direct pay permit provided by Lessee.
8. DEFAULT: In addition to the events of default set forth in clauses (a)
through (e) of Section 12 of the Lease, occurrence of any of the following
events shall also give Lessor the right to exercise any one or more of the
remedies provided in Section 13 of the Lease; (f) Lessee consolidates with,
or merges with or into, any entity or sells or otherwise transfers all or
substantially all of its assets or stock to any entity, or incurs a
substantial amount of indebtedness other than in the ordinary course of its
business, or engages in a leveraged buy-out or any other form of corporate
reorganization, unless in each case and before the event in question,
Lessee's obligations under each Schedule A hereto are assumed or guaranteed
in a manner reasonably satisfactory to Lessor by an entity having, in
Lessor's opinion, at least as good a financial condition and credit
standing as that of the Lessee immediately before the event; or (g) any
guarantor of Lessee's obligations under the Lease or this Schedule A
(hereinafter, "Guarantor"), becomes insolvent or makes an assignment for
the benefit of creditors, applies for or consents to the appointment or a
receiver, trustee, conservator or liquidator of Guarantor or of all or a
substantial part of Guarantor's assets, or if such receiver, trustee,
conservator or liquidator is appointed without the application of consent
of Guarantor, or Guarantor becomes bankrupt or commits an act of
bankruptcy, or any individual Guarantor dies.
9. PURCHASE OPTION: Upon expiration of the Lease Term of this Schedule A,
Lessee shall have the option to purchase all, the items of Equipment
subject to and described in this Schedule A for the aggregate purchase
price of One Dollar ($1.00), provided that (i) this Schedule A has not been
terminated earlier and no default has occurred and is continuing. Upon
payment to Lessor, Lessor shall transfer title to such Equipment to Lessee
all on an AS IS, WHERE IS, BASIS WITHOUT RECOURSE TO OR WARRANTY OF LESSOR
except that Lessor shall represent that it owns such Equipment free of any
lien placed on such Equipment by, through or under Lessor.
10. DEFINITIONS: The terms used in this Schedule A, which are not otherwise
defined herein, shall have the meanings set forth in the Lease identified
above.
11. LEASE TERMS AND CONDITIONS: Lessor and Lessee agree that this Schedule A
shall constitute a lease of the Equipment described in Section 2 of this
Schedule A upon the execution and delivery to Lessor by Lessee of an
Acceptance Certificate. This Schedule A shall be subject to the terms and
conditions of the Lease, which are hereby incorporated herein by reference
and made a part hereof to the same extent as if such terms and conditions
were set forth herein. In the event of a conflict between the terms of the
Lease and this Schedule A, this Schedule A will prevail with respect to the
transaction evidenced by, and the Equipment described in, this Schedule A.
12. COUNTERPARTS: This Schedule A may be executed in any number of
counterparts, each of which shall be deemed an original but all such
counterpart together shall constitute but one and the same instrument. If
Lessor sells, transfers or grants a security interest in all or any part of
this Schedule A, the Equipment covered hereby and/or sums payable
hereunder, only that counterpart marked "Secured Party's Original" shall be
effective to transfer Lessor's rights herein and all other counterparts
shall be marked "Duplicate" to indicate that they are not "Secured Party's
Original."
13. ADDITIONAL TERMS AND PROVISIONS:
IN WITNESS WHEREOF, Lessor and Lessee have caused this Schedule A to be duly
executed by their authorized representative. Lessee acknowledges by its
representative below, that it is familiar with all of the terms and conditions
of the Lease referred to herein including those set forth on the reverse side
thereof.
Lessor: OLYMPUS COMMERCIAL CREDIT Lessor: OLYMPUS COMMERCIAL CREDIT
By: By: /s/ John M. Tabone
------------------------------- -------------------------------
Name: Richard Kester Name: John M. Tabone
------------------------------ ------------------------------
Title: Senior Vice President Title: Vice President
----------------------------- -----------------------------
Date: Date: 3-17-96
----------------------------- -----------------------------
Lessee: PharmChem Laboratories, Inc.
By: /s/ David C. Asheim
-------------------------------
Name: David C. Asheim
------------------------------
Title: CFO & VP
-----------------------------
(Corporation or Partnership Only)
Date: 1-8-96
-----------------------------
<PAGE> 3
[OLYMPUS LETTERHEAD]
No. 0103096-1A
--------------
MASTER EQUIPMENT LEASE
between
Olympus Commercial Credit,
Two Corporate Center Drive, Melville, NY 11747-3157 (LESSOR)
and
Pharmchem Laboratories, Inc.,
1505-A O'Brien Drive, Menlo Park, CA 94025
- -------------------------------------------------------------------------------
- ---------------------------------------------------------------------- (LESSEE)
1. LEASE: Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the personal property described on the attached Schedule A, and
any additional Schedules A that may be executed between the parties from
time to time (hereinafter, with all replacement parts, repairs,
additions and accessories incorporated therein and/or affixed thereto,
all referred to herein as "Equipment").
2. TERM AND RENTAL: Subject to the conditions herein stated, the Equipment
shall be leased for the term stated on the applicable Schedule A and
such term shall commence with the delivery of the Equipment to Lessee,
its agent or carrier, whichever shall be earlier (Commencement Date).
Lessee agrees to pay the total rent for the term, which shall be in the
total amount of all rental payments stated on the applicable Schedule A
plus such additional rentals as provided herein. All payments shall be
made in advance on the Commencement Date and on the same day of each
month thereafter, and sent to the address specified by Lessor.
This master Equipment Lease (Lease) is a "net" lease, and Lessee
acknowledges and agrees that Lessee's obligation to pay all rent and
other sums payable hereunder, and the rights of Lessor in and to such
payments, shall be absolute and unconditional and shall not be subject
to any abatement, reduction, setoff, defense, counterclaim or recoupment
due or alleged to be due, or by reason of, any past, present or future
claims which Lessee may have against Lessor, the manufacturer of the
Equipment, or against any person for any reason whatsoever.
3. TITLE: Lessor shall at all times retain title to the Equipment. All
documents of title and evidence of delivery shall be delivered to the
Lessor. Lessee will not change or remove any insignia or lettering which
is on the Equipment at the time of delivery or which is thereafter
placed thereon indicating Lessor's ownership thereof, and at any time
during the lease term, upon request of Lessor, Lessee will affix to the
Equipment, in a prominent place, labels, plates or other markings
supplied by Lessor stating that the Equipment is owned by Lessor. Lessor
may at Lessee's expense cause this Lease to be filed, recorded, refiled,
rerecorded or financing statements (which may be signed by the Lessor
only if permitted by statute) to be filed as permitted or required by
law. Lessee at its expense shall protect and defend Lessor's title, at
all times keeping the Equipment free from any legal process and/or
encumbrances whatsoever, including, but not limited to liens,
attachments, levies and executions, and shall give Lessor immediate
written notice thereof and shall indemnify Lessor for any loss caused by
the failure of Lessee to take action as provided herein.
4. CHOICE OF LAW AND JURISDICTION; COSTS: This transaction is deemed to
have been made in New York and shall be construed in accordance with the
laws of the State of New York, without reference to conflicts of laws.
All controversies, disputes and claims arising out of or relating to
this transaction, or the breach or threatened breach of this Agreement,
shall be adjudicated by a court of competent jurisdiction within the
County of Suffolk, State of New York or the Federal District Court in
the Eastern District of New York. The Lessee hereby waives personal
service of process provided that process is served by certified or
registered mail. Lessee hereby waives any objection that it may have
regarding the personal jurisdiction or venue of any court in the State
of New York, County of Sulfolk. Lessee agrees to pay any and all
reasonable costs, legal fees and expenses incurred by Lessor resulting
from all controversies, disputes or claims which are adjudicated or
settled favorable to Lessor.
5. DELIVERY: Upon acceptance of Schedule A, Lessor will notify Lessee of
the Scheduled Delivery Date. Delivery shall be f.o.b. Lessor's shipping
point. Lessor shall ship by the most appropriate method but by doing so
shall not thereby assume any liability in connection with the shipment.
Risk of loss shall pass to Lessee upon delivery of the Equipment by
Lessor to the carrier. Lessee warrants that as of the date of delivery,
Lessee has unconditionally accepted each item of Equipment and will
cause a duly authorized representative of Lessee to promptly execute
and deliver an acceptance certificate to Lessor.
6. LIMITED WARRANTIES: EXCEPT FOR THE LIMITED WARRANTIES SET FORTH BELOW,
LESSOR MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED,
INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, CONCERNING ANY PRODUCT, OR ANY PATENTS OR TECHNOLOGY
USED OR INCLUDED IN ANY PRODUCT. ALL OTHER GUARANTIES, WARRANTIES,
CONDITIONS AND REPRESENTATIONS WHATSOEVER, EITHER EXPRESS OR IMPLIED,
WHETHER ARISING UNDER ANY STATUTE, LAW, COMMERCIAL USAGE OR OTHERWISE
ARE HEREBY EXPRESSLY EXCLUDED.
Subject to the exclusion and upon the conditions stated below, Lessor
warrants that the Products sold shall conform to the description in the
Purchase Order and shall be free from defects in workmanship and
materials under normal use and service for the duration of terms as
stated on the warranty card to the original Lessee by Lessor. If any
Product should prove to be defective within said period, Lessor agrees,
at its option, either (i) to repair or, at Lessor's election (ii) to
replace with an equivalent product any defective Product, provided that
investigation and factory inspection disclose that such defect developed
under normal and proper use. Shipment charges to or from an authorized
Lessor service facility shall be paid by Lessee. Excluded from this
warranty and not warranted by Lessor in any fashion, either express or
implied are:
(a) accessories to Products, not manufactured by Lessor;
(b) any Product which has been repaired, tampered with or modified by
persons other than Lessor's own authorized service personnel unless
such repair by others is made with the written consent of Lessor;
(c) defects or damage to Products resulting from misuse, negligence or
improper storage.
LESSEE ACKNOWLEDGES AND AGREES THAT LESSOR SHALL NOT BE RESPONSIBLE FOR
ANY DAMAGES THAT LESSEE MAY INCUR FROM DELAYED SHIPMENT, PRODUCT
FAILURE, PRODUCT DESIGN OR PRODUCTION OR FROM ANY OTHER CAUSE, WHETHER
LIABILITY IS ASSERTED IN CONTRACT OR TORT (INCLUDING NEGLIGENCE AND
STRICT PRODUCT LIABILITY). IN NO EVENT SHALL LESSOR BE LIABLE FOR LOSS
OF PROFITS, LOSS OF USE OR ANY INCIDENTAL, CONSEQUENTIAL OR SPECIAL
DAMAGES OF ANY KIND.
Representations and warranties made by any person, including dealers and
representatives of Lessor, which are inconsistent or in conflict with
the terms of this warranty, shall not be binding upon Lessor unless
reduced to writing and approved by an expressly authorized officer of
Lessor.
In the event of a substantial adverse change in Lessee's financial condition,
Lessor may, at Lessor's option, prior to the delivery of the Equipment,
terminate this Lease and all Lessor's obligations hereunder upon written notice
to Lessee.
The Master Equipment Lease, including appended Schedule(s) A, is non-cancellable
by Lessee. Lessee warrants that all information submitted to Lessor herewith or
at any other time is true and correct. Lessor reserves the right to assign the
Master Equipment Lease, including appended Schedule(s) A, at any time.
ACCEPTED: Olympus Commercial Credit (LESSOR)
TITLE DATE
BY
X Vice Treasurer 2-17-96
- ------------------------------------------------------------------------------
BY
X
- ------------------------------------------------------------------------------
By execution hereof, the signer hereby certifies that he has read this Agreement
and that he is duly authorized to execute this Lease on behalf of Lessee.
LESSEE SIGNATURE TITLE DATE
BY
X David C. Asheim CFO & VP 1-8/96
- ------------------------------------------------------------------------------
BY
X
- ------------------------------------------------------------------------------
REV 4/96
DISTRIBUTION: White - Original; Yellow - Corporate; Pink - Customer
<PAGE> 4
[OLYMPUS LETTERHEAD]
VIA FEDERAL EXPRESS
March 14, 1996
Richard Merkel
PharmChem Laboratories, Inc.
1505-A O'Brien Drive
Menlo Park, CA 94025
Lease Agreement Number: 0103096-1A
Dear Mr. Merkel:
While reviewing your file, it has come to our attention that your order has been
completed with regards to your lease agreement. I have enclosed a new Delivery
and Acceptance Certificate which needs to be signed by the appropriate person as
acceptance of your equipment.
Please also find enclosed an invoice for the Advance Rental payment which is due
upon acceptance of your equipment.
Please return both the Delivery and Acceptance Certificate and the Advance
Rental payment and enclose in the self-addressed envelope provided as quickly as
possible so that we may process your lease in an expedient manner.
Thank you for your attention to this matter.
Sincerely,
OLYMPUS COMMERCIAL CREDIT
/s/ Lorraine Pfeifer
- ---------------------------
Lorraine Pfeifer
Contract/Sales Coordinator
Corporate Leasing
Enclosures
<PAGE> 5
[OLYMPUS LETTERHEAD]
ACCEPTANCE CERTIFICATE
Acceptance Certificate To Schedule A No. 1
--------------------------------------
Dated As of , 19
----------------------------------------------------------- ---
To That Certain Master Equipment Lease No. 0103096-1A
-------------------------------------
Dated As of , 19
----------------------------------------------------------- ---
By and Between Olympus Commercial Credit, as Lessor,
and PharmChem Laboratories, Inc., 1505-A O'Brien Drive, Menlo Park, as Lessee
---------------------------------------------------------------
CA 94025
--------
Lessee acknowledges that all of the Equipment specified in the above
referenced Lease Schedule (i) has been delivered to, inspected by, and accepted
as of this date for lease by lessee, (ii) is of a size, design, capacity and
manufacture acceptable to Lessee and suitable for Lessee's purposes, (iii) is in
good working order, repair and condition, and (iv) has been installed to
Lessee's satisfaction or located, as the case may be, at the location specified
in the Lease Schedule.
Lessee confirms and agrees that no default under the above referenced
Master Equipment Lease has occurred and is continuing.
The person signing this Acceptance Certificate on behalf of Lessee hereby
certifies that such person has read and acknowledges all terms and conditions of
the Master Equipment Lease and Schedule A and is duly authorized to execute this
Acceptance Certificate on behalf of Lessee.
The terms used in this Acceptance Certificate shall have the same meanings
defined in the Master Equipment Lease designated above.
This Acceptance Certificate is executed by Lessee on the date set forth
below confirming acceptance of the Equipment. Lessee agrees that its obligation
to commence rental payments under the above referenced Schedule A shall commence
as of the date hereof ("Commencement Date").
LESSEE: PharmChem Laboratories, Inc.
-----------------------------------------------------------------------
By: David C. Asheim
---------------------------------------------------------------------------
Name: David C. Asheim
-------------------------------------------------------------------------
Title: VP & CFO
------------------------------------------------------------------------
(Corporation or Partnership Only)
Date: 3/17/96
-------------------------------------------------------------------------
<PAGE> 6
[OLYMPUS LETTERHEAD]
O L Y M P U S C O M M E R C I A L C R E D I T
LEASE INVOICE
PharmChem Laboratories, Inc.
Accounts Payable
1505-A O'Bien Drive
Menlo Park, CA 94025
Lease No.: 0103096-1A
Invoice No.: 0103096-1
Amount Due: $5,885.00
Due Date: UPON RECEIPT
To ensure proper credit to your account please make checks payable to:
OLYMPUS COMMERCIAL CREDIT
Two Corporate Center Drive
Melville, New York 11747-3157
Attn: Lorraine Pfeifer
1-800-321-6378
<PAGE> 1
Exhibit 21.01
PHARMCHEM LABORATORIES, INC.
List of Subsidiaries
Medscreen Limited
1A Harbour Quay
100 Preston's Road
London, E14 9QZ
England
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K into the Company's previously filed
Registration Statements (File Nos. 33-45481 and 33-64770) on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March 17, 1997
2
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<PERIOD-TYPE> YEAR
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<ALLOWANCES> 610
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0
0
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