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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER 0-19371
[PHARMCHEM LABORATORIES, INC. LOGO]
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0187280
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1505-A O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 328-6200
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 1999, the registrant had outstanding 5,784,206 shares of
Common Stock, no par value.
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PHARMCHEM LABORATORIES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements ...............................3
Condensed Consolidated Balance Sheets (unaudited) at
June 30, 1999 and December 31, 1998........................................4
Condensed Consolidated Income Statements (unaudited) for the
Three and Six Months ended June 30, 1999 and 1998..........................5
Condensed Consolidated Statements of Comprehensive Income
(unaudited) for the Three and Six Months ended
June 30, 1999 and 1998.....................................................6
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Six Months ended June 30, 1999 and 1998 ..........................7
Notes to Condensed Consolidated Financial Statements (unaudited)...........8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .....................16
Item 6. Exhibits and Reports on Form 8-K ........................................16
SIGNATURE ..........................................................................17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that the condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and the notes
thereto for the year ended December 31, 1998 included in the Company's Annual
Report on Form 10-K.
These financial statements have been prepared in all material respects
in conformity with the standards of accounting measurements set forth in
Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," and
the rules and regulations as specified in the Securities Exchange Act of 1934
and reflect all adjustments, consisting only of normal recurring adjustments
which, in the opinion of management, are necessary to summarize fairly the
Company's consolidated financial position, the results of operations and cash
flows for the periods presented. The results of operations for such interim
periods are not necessarily indicative of the results to be expected for the
full year.
3
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,124 $ 802
Accounts receivable, net 7,614 6,522
Inventory 1,522 1,525
Prepaids and other current assets 753 719
-------- --------
TOTAL CURRENT ASSETS 11,013 9,568
-------- --------
PROPERTY AND EQUIPMENT, net 8,873 8,508
OTHER ASSETS 828 997
GOODWILL, net 2,898 2,990
-------- --------
TOTAL ASSETS $ 23,612 $ 22,063
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 827 $ 2,379
Current portion of long-term debt 1,057 465
Accounts payable 3,099 3,123
Accrued compensation 994 1,155
Accrued collectors and other liabilities 3,315 2,765
-------- --------
TOTAL CURRENT LIABILITIES 9,292 9,887
LONG-TERM DEBT, net of current portion 2,356 656
OTHER NONCURRENT LIABILITIES 232 610
-------- --------
TOTAL LIABILITIES 11,880 11,153
-------- --------
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000 shares authorized,
5,784 and 5,782 shares issued and outstanding
at June 30, 1999 and December 31, 1998,
respectively 19,096 19,090
Accumulated other comprehensive income (loss) (45) 83
Accumulated deficit (7,319) (8,263)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 11,732 10,910
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 23,612 $ 22,063
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 11,149 $ 11,451 $ 21,323 $ 20,979
COST OF SALES 7,865 8,215 15,089 15,523
-------- -------- -------- --------
GROSS PROFIT 3,284 3,236 6,234 5,456
OPERATING EXPENSES
Selling, general and administrative 2,610 2,804 5,049 5,012
Marketing rights and research 18 13 37 40
Amortization of goodwill 46 46 92 92
-------- -------- -------- --------
Total operating expenses 2,674 2,863 5,178 5,144
-------- -------- -------- --------
INCOME FROM OPERATIONS 610 373 1,056 312
Interest expense 48 90 104 189
Other expense (income), net (3) (9) (20) (12)
-------- -------- -------- --------
Total other expenses 45 81 84 177
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 565 292 972 135
PROVISION FOR INCOME TAXES 204 46 28 81
-------- -------- -------- --------
NET INCOME $ 361 $ 246 $ 944 $ 54
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.06 $ 0.04 $ 0.16 $ 0.01
======== ======== ======== ========
Diluted $ 0.06 $ 0.04 $ 0.16 $ 0.01
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 5,784 5,758 5,783 5,754
======== ======== ======== ========
Diluted 5,903 5,826 6,006 5,821
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
NET INCOME $ 361 $ 246 $ 944 $ 54
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation (59) (1) (128) 15
----- ----- ----- -----
COMPREHENSIVE INCOME $ 302 $ 245 $ 816 $ 69
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 944 $ 54
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 930 995
Provision for doubtful accounts 92 93
Changes in operating assets and liabilities (1,009) 85
------- -------
Net cash provided by operating activities 957 1,227
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,258) (1,150)
Proceeds from sales of equipment 5 --
------- -------
Net cash used in investing activities (1,253) (1,150)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) on revolving lines of credit, net (1,552) 389
Principal payments on long-term debt (290) (277)
Proceeds from issuance of term note
and capital lease transaction 2,582 --
Proceeds from exercise of stock options 6 28
------- -------
Net cash provided by financing activities 746 140
------- -------
FOREIGN CURRENCY TRANSLATION (128) 15
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 322 232
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 802 372
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,124 $ 604
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<PAGE> 8
PHARMCHEM LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Earnings per Share
The Company computes and discloses its earnings per share in accordance
with SFAS No. 128, "Earnings Per Share," which requires the presentation of
basic and diluted earnings per share. Basic earnings per share is calculated
using the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated using the weighted average
number of common shares and dilutive potential common shares outstanding during
the period. Dilutive potential common shares represent shares issuable upon the
exercise of outstanding options and are calculated using the treasury stock
method.
Options to purchase 116,000 shares and 66,000 shares of the Company's
common stock for the three months and six months ended June 30, 1999,
respectively, were not included in the computation of diluted earnings per share
because their exercise prices were greater than the average market price of the
Company's common stock of $2.70 and $3.12 per share, respectively. Options to
purchase 80,000 shares of the Company's common stock for the three months and
six months ended June 30, 1998, were not included in the computation of diluted
earnings per share because their exercise prices were greater than the average
market price of the Company's common stock of $2.51 per share. Weighted average
dilutive options of 119,000 and 223,000 were used in the computation of earnings
per share for the three month and six month periods ended June 30, 1999,
respectively. Weighted average dilutive options of 68,000 and 67,000 were used
in the computation of earnings per share for the three month and six month
periods ended June 30, 1998, respectively.
2. Inventory
Inventory represents laboratory materials, collection materials and
products and is stated at the lower of cost or market. Cost is determined using
standard costs, including freight, that approximate actual costs on a first-in,
first-out basis. Inventory consisted of the following at June 30, 1999 and
December 31, 1998, respectively:
<TABLE>
<CAPTION>
JUNE December
1999 1998
------ ------
(In thousands)
<S> <C> <C>
Laboratory materials ..... $ 480 $ 529
Collection materials ..... 819 801
Products ................. 223 195
------ ------
$1,522 $1,525
====== ======
</TABLE>
8
<PAGE> 9
3. Reportable Segments
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective December 31, 1998. Prior period
amounts have been restated to conform to the presentation required by SFAS No.
131. The Company has two reportable segments, Domestic and International,
providing integrated drug testing services. The Domestic segment serves the
United States and the International segment serves primarily the United Kingdom
and also includes the European, Asian, Middle Eastern and South American
markets. The Domestic segment is serviced by the Company's California and Texas
operations and the International segment is serviced by Medscreen, the Company's
London-based subsidiary. The accounting policies of the segments are the same as
those described in the Summary of Significant Accounting Policies in the
accompanying notes to the consolidated financial statements for the year ended
December 31, 1998 included in the Company's Annual Report on Form 10-K. The
Company evaluates segment profit based on income or loss from operations before
intercompany interest, other income or expense and income taxes and excluding
goodwill amortization. Intersegment sales and transfers are not material.
Information about the Company's segments as of and for the three and six month
periods ended June 30 is as follows:
<TABLE>
<CAPTION>
Domestic International Total
-------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C>
Three Months Ending June 30,
1999: Net sales from external customers ..... $ 9,370 $ 1,779 $ 11,149
Segment profit ........................ 291 365 656
1998: Net sales from external customers ..... $ 9,763 $ 1,688 $ 11,451
Segment profit ........................ 163 256 419
Six Months Ending June 30,
1999: Net sales from external customers ..... $ 17,845 $ 3,478 $ 21,323
Segment profit ........................ 527 621 1,148
1998: Net sales from external customers ..... $ 17,737 $ 3,242 $ 20,979
Segment profit (loss) ................. (54) 458 404
</TABLE>
9
<PAGE> 10
4. Debt
PharmChem maintains a revolving line of credit agreement ("Credit
Agreement") with a bank. At June 30, 1999, the maximum that could be borrowed
and the amount outstanding under the Credit Agreement were $5,547,000 and
$827,000, respectively. As of June 30, 1999, the Company was in compliance with
all debt covenants.
On April 20, 1999, the Company entered into a $1,500,000 variable rate
installment note ("Installment Note") with its bank. The proceeds from the
Installment Note were immediately used to reduce the amount outstanding under
the Company's revolving line of credit. The Installment Note is subject to the
terms and conditions of the Credit Agreement, bears interest at the prime rate
plus 1.0% and is payable over 60 months.
On April 30, 1999, the Company entered into a $1,082,000 capital lease
agreement with a lessor to refinance certain modules of the Company's Unified
Database software project. The lease agreement bears interest at 8.5% and is
payable over 36 months.
Item 2. 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 the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. The Company
assumes no obligation to update the forward-looking statements or such factors.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------- ---------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
------- ------- ------ ------ ------- ------- ------ ------
(As a % of net sales) (As a % of net sales)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES:
Public and private employers analyses $ 4,142 $ 4,871 37.2% 42.5% $ 7,399 $ 8,488 34.7% 40.5%
Criminal justice agencies analyses 4,336 3,704 38.9 32.3 8,559 7,269 40.2 34.6
Drug rehabilitation programs analyses 368 452 3.2 4.0 748 780 3.5 3.7
Domestic products 524 736 4.7 6.4 1,139 1,200 5.3 5.7
Medscreen analyses & products 1,779 1,688 16.0 14.8 3,478 3,242 16.3 15.5
------- ------- ------ ------ ------- ------- ------ ------
Total net sales 11,149 11,451 100.0 100.0 21,323 20,979 100.0 100.0
COST OF SALES 7,865 8,215 70.5 71.7 15,089 15,523 70.8 74.0
------- ------- ------ ------ ------- ------- ------ ------
GROSS PROFIT 3,284 3,236 29.5 28.3 6,234 5,456 29.2 26.0
------- ------- ------ ------ ------- ------- ------ ------
OPERATING EXPENSES:
Selling, general and administrative 2,610 2,804 23.4 24.5 5,049 5,012 23.6 23.9
Marketing rights and research 18 13 0.2 0.1 37 40 0.2 0.2
Amortization of goodwill 46 46 0.4 0.4 92 92 0.4 0.4
------- ------- ------ ------ ------- ------- ------ ------
Total operating expenses 2,674 2,863 24.0 25.0 5,178 5,144 24.2 24.5
------- ------- ------ ------ ------- ------- ------ ------
INCOME FROM OPERATIONS 610 373 5.5 3.3 1,056 312 5.0 1.5
------- ------- ------ ------ ------- ------- ------ ------
OTHER EXPENSES, net 45 81 0.5 0.8 84 177 0.5 0.8
PROVISION FOR INCOME TAXES 204 46 1.8 0.4 28 81 0.1 0.4
------- ------- ------ ------ ------- ------- ------ ------
NET INCOME $ 361 $ 246 3.2% 2.1% $ 944 $ 54 4.4% 0.3%
======= ======= ====== ====== ======= ======= ====== ======
</TABLE>
Net sales for the three months ended June 30, 1999 decreased $302,000
(2.6%) to $11,149,000 in 1999 from $11,451,000 in 1998. The Company's domestic
workplace analyses sales decreased $729,000 (15.0%) which more than offset an
increase in domestic criminal justice analyses sales of $632,000 (17.1%) and
higher Medscreen sales of $91,000 (5.4%). Domestic specimen (including product
related analyses) volume was relatively unchanged, with an increase in criminal
justice specimens more than offsetting a decrease in workplace specimens.
Specimen volume at Medscreen, the Company's London-based subsidiary, increased
4.7%. Average selling prices for domestic laboratory analyses (including product
related analyses) decreased 1.9% due to the higher mix of lower priced criminal
justice volume. Sales of PharmScreen(R) On-site Screening Devices decreased
$152,000 (28.6%) and sales of PharmChek(R) Drugs of Abuse Patch decreased
$62,000 (31.3%), attributed in part to the timing of shipments compared to the
prior year.
Net sales for the six months ended June 30, 1999 increased $344,000
(1.6%) to $21,323,000 in 1999 from $20,979,000 in 1998. Domestic criminal
justice analyses sales increased $1,290,000 (17.7%) on higher specimen volume of
114,000 (15.6%) in 1999, which more than offset a $1,089,000 (12.8%) decrease in
domestic workplace analyses attributed to decreased specimen volume of 76,000
(17.1%). Total domestic specimen volume increased 3.1% compared to the prior
year and domestic product sales decreased $61,000 (5.1%). Medscreen sales
increased $236,000 (7.3%) reflecting a 20.6% increase in specimen volume and
higher product sales.
11
<PAGE> 12
Cost of sales for the three months ended June 30, 1999 decreased
$350,000 (4.3%) to $7,865,000 in 1999 from $8,215,000 in 1998. The decrease in
cost of sales reflects lower collector fees, reduced product costs and the
favorable impact of the Company's ongoing cost reduction program and laboratory
process improvement program. Cost of sales as a percentage of net sales
decreased to 70.5% in 1999 from 71.7% in 1998. Gross profit as a percentage of
net sales increased to 29.5% in 1999 from 28.3% in 1998.
Cost of sales for the six months ended June 30, 1999 decreased $434,000
(2.8%) to $15,089,000 in 1999 from $15,523,000. The success of the Company's
cost reduction program has resulted in a 4.8% decrease in variable cost per
specimen processed. Savings and efficiencies have been realized in direct labor,
collector fees, collection inventories and results reporting. Cost of sales as a
percentage of net sales decreased to 70.8% in 1999 from 74.0% in 1998. Gross
profit as a percentage of net sales increased to 29.2% in 1999 from 26.0% in
1998.
Selling, general and administrative (SG&A) expenses for the three months
ended June 30, 1999 decreased $194,000 (6.9%) to $2,610,000 in 1999 from
$2,804,000 in 1998. The decrease partially reflects lower personnel costs and
legal expenses. SG&A expenses as a percentage of net sales decreased to 23.4% in
1999 from 24.5% in 1998.
SG&A expenses for the six months ending June 30, 1999 increased $37,000
(0.7%) to $5,049,000 in 1999 from $5,012,000 in 1998. SG&A expenses as a
percentage of net sales decreased slightly to 23.6% in 1999 from 23.9% in 1998.
Income from operations for the three months ended June 30, 1999 was
$610,000 compared to $373,000 in 1998. Income from operations for the six months
ended June 30, 1999 was $1,056,000 compared to $312,000. Interest expense
decreased by approximately 45.0% in 1999 for both the second quarter and
year-to-date and is attributed to lower average debt levels in 1999.
Provision for Income Taxes for the three months ended June 30, 1999 was
$204,000 compared to an income tax provision of $46,000 during 1998. The
increase in 1999 reflects the increased profitability of the domestic operations
in 1999 combined with Medscreen's utilization of net operating loss
carryforwards in 1998. The Company recorded a provision for income taxes of
$28,000 and $81,000, respectively, for the six months ending June 30, 1999 and
1998. During the first quarter of 1999, the Company realized an income tax
credit of $336,000. This income tax credit reflects the reversal of a liability
established in a prior year when the Internal Revenue Service (IRS) disputed the
deductibility of research expenses incurred in the years 1992 through 1994
related to the development of PharmChek(R). The IRS issued a final determination
in favor of the Company's position in the first quarter of 1999.
Net income for the three months ended June 30, 1999 was $361,000 or
$0.06 per diluted common share compared to net income of $246,000 or $0.04 per
diluted common share in 1998. Net income for the six months ended June 30, 1999
was $944,000 or $0.16 per diluted common share compared to $54,000 or $0.01 per
diluted common share in 1998. Excluding the impact of the $336,000 income tax
credit, net income for the six months ended June 30, 1999 would have been
$608,000 or $0.10 per diluted share.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations during the six month period ended June 30
provided cash of approximately $932,000 in 1999 and $1,227,000 in 1998. The
decrease in cash flow from operations between 1999 and 1998 principally reflects
the prior year's improvements in working capital, which more than offset the
increase in net income in 1999. As of June 30, 1999, the Company had $1,124,000
in cash and cash equivalents. During the six months ended June 30, 1999, the
Company used approximately $1,258,000 in cash to acquire property and equipment,
principally for information systems and laboratory equipment, entered into a
capital lease transaction valued at $1,082,000 and entered into a $1,500,000
installment note with its bank, whereby the proceeds were used to reduce amounts
outstanding under the revolving line of credit.
The Company maintains a Credit Agreement with a bank. All borrowings are
secured by a lien on all assets of the Company. The Credit Agreement provides
for borrowings under the revolver limited to 85% of qualified accounts
receivables up to a maximum of $6,000,000. At June 30, 1999, the maximum that
could be borrowed was $5,547,000 and approximately $827,000 was outstanding
under the Credit Agreement. Year-to-date net repayments on the revolver were
approximately $1,552,000 as of June 30, 1999. 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 June 30, 1999, the Company was in compliance with
its financial covenants.
On April 20, 1999, the Company entered into a $1,500,000 variable rate
installment note ("Installment Note") with its bank. The proceeds from the
Installment Note were immediately used to reduce the amount outstanding under
the Company's revolving line of credit. The Installment Note is subject to the
terms and conditions of the Credit Agreement, bears interest at the prime rate
plus 1.0% and is payable over 60 months.
On April 30, 1999, the Company entered into a $1,082,000 lease agreement
with a lessor to refinance certain modules of the Company's Unified Database
software project. The lease agreement bears interest at 8.5% and is payable over
36 months. Proceeds from the lease agreement are expected to be used to finance
the Company's ongoing capital expenditure program.
The Company anticipates that existing cash balances, amounts available
under existing and future credit agreements and funds to be generated from
future operations will be sufficient to fund operations and forecasted capital
expenditures through the foreseeable future.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for disclosing information about operating segments and enterprise-wide
information about customers and geographic activities. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company adopted SFAS No.
131 effective December 31, 1998 and prior period amounts have been restated to
conform to the presentation required by SFAS No. 131.
13
<PAGE> 14
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk with respect to its debt
outstanding and foreign currency transactions. The Company's revolving credit
agreement and installment note carry interest at the prime rate plus 1.0%. As
the prime rate increases, the Company will incur higher relative interest
expense and similarly, a decrease in the prime rate will reduce relative
interest expense. In recent years, there have not been significant fluctuations
in the prime rate. A 1.0% change in the prime rate would not materially change
interest expense assuming levels of debt consistent with historical amounts. Due
to the Company's international operations, certain transactions are conducted in
foreign currencies. Medscreen's transactions are denominated approximately 85%
in pound sterling and 15% in US currency. During the six month periods ending
June 30, 1999 and 1998, Medscreen's net sales represented 16.3% and 15.5%,
respectively, of the Company's total net sales and, as a result, the impact of
market risk on foreign currency transactions is not considered material. These
market risks are not considered significant and, therefore, the Company does not
intend to engage in hedging transactions.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of date-sensitive devices,
systems and computer applications that were deployed using two digits rather
than four digits to define the applicable year. Therefore, these technologies
may improperly recognize a year containing "00" as 1900 rather than the year
2000. This may result in a system failure or miscalculations causing disruptions
of operations. The Company is subject to various risks associated with the Y2K
impact on information systems software and hardware.
The Company has completed its assessment of the Y2K impact on internal
information systems. The assessment identified operational inefficiencies and
Y2K non-compliance of the existing laboratory information system ("LIS"). The
Company has commenced replacing its existing LIS with a new system that is Y2K
ready. The new LIS is expected to be implemented early in the fourth quarter of
1999. The Company estimates the cost to purchase and install the new LIS and
related hardware will be approximately $1 million. Excluding the LIS
expenditures, the Company estimates additional Y2K related expenditures of
approximately $150,000 representing consulting costs and payroll for employees
dedicated to Y2K projects.
Due to the large volume of electronic transmissions, the Company has
conducted inquiries of customers, vendors and key business partners to identify
Y2K issues and continues to evaluate responses. During the second quarter of
1999, the Company commenced transmissions of test results to selected customers
using a four digit year to determine which customers can and cannot receive such
electronic results with a year field of four digits. The Company's various
internal drug test results reporting systems have been reprogrammed and tested
in a parallel systems environment and the Company has tested external results
reporting services. Beginning in August, the Company has commenced transmitting
results using a four digit year to a majority of customers capable of receiving
a four digit year field.
The Company has reviewed its significant facilities systems and found
that they are not date sensitive. With respect to other facilities systems and
financial accounting systems, the Company is in the process of obtaining
documentation of Y2K compliance or replacing systems that are not Y2K compliant.
14
<PAGE> 15
For the period January 1, 1996 through June 30, 1999, the Company has
invested approximately $6.1 million in new information systems which have been
designed to enhance its operational capabilities as well as meet Y2K
requirements. The Company expects to complete all Y2K projects at various dates
in the third and fourth quarter of 1999. All investments in information systems
and other Y2K projects have been funded or are expected to be funded by
internally generated cash, leases or bank financing.
The Company is in the process of refining its contingency plans to
consider additional scenarios whereby Y2K readiness is not significantly
achieved by the Company and/or its key customers, business partners and vendors.
The Company believes that the "most reasonably likely worst case Year 2000
scenario" would result from a failure of third party transportation systems
which would prevent the Company from receiving specimens to test. These
contingency plans, including issues involving providers of transportation
services, are expected to be completed in the third quarter of 1999. If the
Company determines that any critical supplier is not Y2K compliant, it will seek
alternate suppliers and, if it finds that alternate suppliers are not available,
the Company will purchase inventory in advance in excess of normal purchase
levels. In the event of information systems failures, the Company may utilize
appropriate manual procedures or alternate information systems for an interim
period. Due to the general uncertainty inherent in the Y2K issues, resulting in
part from the uncertainty of Y2K readiness of third party providers, suppliers
and customers, the Company is unable to determine at this time whether the
consequences of Y2K non-compliance will have a material impact on the Company's
results of operations, liquidity or financial position.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held on May 18, 1999, the Company's
shareholders took the following actions:
(a) The following directors were elected to serve until the next
Annual Meeting:
Joseph W. Halligan - 4,439,557 shares in favor and 29,487 shares
withheld;.
Richard D. Irwin - 4,440,257 shares in favor and 28,787 shares
withheld; and
Donald R. Stroben - 4,440,157 shares in favor and 28,887 shares
withheld.
(b) Ratification of the appointment of KPMG LLP as Independent
Certified Public Accountants for the Company for the 1999 fiscal
year, by a vote of 4,445,557 shares in favor, 9,587 shares
against and 13,900 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.33 - Variable Rate Installment Note between Comerica
Bank-California and PharmChem Laboratories, Inc.
dated April 14, 1999.
Exhibit 10.34 - Lease Agreement for computer software between
American Technologies Credit, Inc. and PharmChem
Laboratories, Inc. dated March 29, 1999
(effective April 30, 1999).
Exhibit 10.35 - Lease Amendment for the Company's offices in
Menlo Park, California dated May 7, 1999.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements 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.
PharmChem Laboratories, Inc.
(Registrant)
Date: August 4, 1999 By: /S/ David A. Lattanzio
-------------------------------------
David A. Lattanzio
Chief Financial Officer and
Vice President, Finance and
Administration (Principal Financial
and Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.33 - Variable Rate Installment Note between Comerica Bank-California
and PharmChem Laboratories, Inc. dated April 14, 1999.
10.34 - Lease Agreement for computer software between American
Technologies Credit, Inc. and PharmChem Laboratories, Inc. dated
March 29, 1999 (effective April 30, 1999).
10.35 - Lease Amendment for the Company's offices in Menlo Park,
California dated May 7, 1999.
27 - Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.33
CA 00191 (11/98)
VARIABLE RATE-INSTALLMENT NOTE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION #
<S> <C> <C> <C>
$1,500,000.00 April 14, 1999 April 14, 2004 77-0187280
- --------------------------------------------------------------------------------
</TABLE>
For Value Received, the undersigned promise(s) to pay to the order of Comerica
Bank-California ("Bank"), at any office of the Bank in the State of California
One Million Five Hundred Thousand and no/100 Dollars (U.S.) in installments of
$26,315.79 * each plus interest on the unpaid balance from the date of this Note
at a per annum rate equal to the Bank's base rate from time to time in effect
plus 1.000% per annum until maturity, whether by acceleration or otherwise, or
until Default, as later defined, and after that at a default rate equal to the
rate of interest otherwise prevailing under this Note plus 3% per annum (but in
no event in excess of the maximum rate permitted by law). Interest shall be
calculated for the actual number of days the principal is outstanding on the
basis of a 360-day year if this Note evidences a business or commercial loan or
a 365-day year if a consumer loan. The Bank's "base rate" is that annual rate of
interest so designated by the Bank and which is charged by the Bank from time to
time. Interest rate changes will be effective for interest computation purposes
as and when the Bank's base rate changes. Installments of principal and accrued
interest due under this Note shall be payable on the 14th day of each month,
commencing August 14, 1999, and the entire remaining unpaid balance of principal
and accrued interest shall be payable on the Maturity Date set forth above. If
the frequency of principal and interest installments is not otherwise specified,
installments of principal and interest due under this Note shall be payable
monthly on the first day of each month.
* Monthly Interest only payments due and payable commencing May 14, 1999 through
July 14, 1999.
In the event the periodic installments set forth above are inclusive of
interest, these installments are calculated at an assumed fixed interest rate
and an assumed amortization term. The amortization term ends on April 14, 2004.
In the event this Note evidences a business or commercial loan and the Bank's
base rate changes, the Bank, at its sole option, may from time to time
recalculate the periodic installment amount so that the remaining periodic
installments will fully amortize the remaining loan balance within the remaining
amortization term in equal installments at the interest rate then being charged
under this Note. THE UNDERSIGNED AGREE(S) TO PAY THE PERIODIC INSTALLMENTS AS
THEY MAY BE RECALCULATED BY THE BANK, AT THE BANK'S SOLE OPTION, FROM TIME TO
TIME AND ACKNOWLEDGE(S) THAT A RECALCULATION SHALL NOT AFFECT THE MATURITY DATE
OR THE OTHER TERMS AND PROVISIONS OF THIS NOTE. If this Note or any installment
under this Note shall become payable on a day other than a day on which the Bank
is open for business, this payment may be extended to the next succeeding
business day and interest shall be payable at the rate specified in this Note
during this extension. Any payments of principal in excess of the installment
payments required under this Note need not be accepted by the Bank (except as
required under applicable law), but if accepted shall apply to the installments
last falling due. A late installment charge equal to 5% of each late installment
may be charged on any installment payment not received by the Bank within 10
calendar days after the installment due date, but acceptance of payment of this
charge shall not waive any default under this Note.
This Note and any other indebtedness and liabilities of any kind of the
undersigned (or any of them) to the Bank, and any and all modifications,
renewals or extensions of it, whether joint or several, contingent or absolute,
now existing or later arising, and however evidenced (collectively
"Indebtedness") are secured by and the Bank is granted a security interest in
all items deposited in any account of any of the undersigned with the Bank and
by all proceeds of these items (cash or otherwise), all account balances of any
of the undersigned from time to time with the Bank, by all property of any of
the undersigned from time to time in the possession of the Bank and by any other
collateral, rights and properties described in each and every deed of trust,
mortgage, security agreement, pledge, assignment and other agreement which has
been or will at any time(s) later be, executed by any (or all) of the
undersigned to or for the benefit of the Bank (collectively "Collateral").
Notwithstanding the above, (i) to the extent that any portion of the
Indebtedness is a consumer loan, that portion shall not be secured by any deed
of trust or mortgage on or other security interest in any of the undersigned's
principal dwelling or in any of the undersigned's real property which is not a
purchase money security interest as to that portion, unless expressly provided
to the contrary in another place, or (ii) if the
1
<PAGE> 2
undersigned (or any of them) has (have) given or give(s) Bank a deed of trust or
mortgage covering real property, that deed of trust or mortgage shall not secure
this Note or any other Indebtedness of the undersigned (or any of them), unless
expressly provided to the contrary in another place.
If the undersigned (or any of them) or any guarantor under a guaranty of all or
part of the Indebtedness ("guarantor") (a) fail(s) to pay this Note or any of
the Indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to
pay any Indebtedness owing on a demand basis upon demand; or (b) fail(s) to
comply with any of the terms or provisions of any agreement between the
undersigned (or any of them) or any guarantor and the Bank; or (c) become(s)
insolvent or the subject of a voluntary or involuntary proceeding in bankruptcy,
or a reorganization, arrangement or creditor composition proceeding, (if a
business entity) ceases(s) doing business as a going concern, (if a natural
person) die(s) or become(s) incompetent, (if a partnership) dissolve(s) or any
general partner of it dies, become incompetent or becomes the subject of a
bankruptcy proceeding or (if a corporation or a limited liability company) is
the subject of a dissolution, merger or consolidation; or (d) if any warranty or
representation made by any of the undersigned or any guarantor in connection
with this Note or any of the Indebtedness shall be discovered to be untrue or
incomplete; or (3) if there is any termination, notice of termination, or breach
of any guaranty, pledge, collateral assignment or subordination agreement
relating to all or any part of the Indebtedness; or (f) if there is any failure
by any of the undersigned or any guarantor to pay when due any of its
indebtedness (other than to the Bank) or in the observance or performance of any
term, covenant or condition in any document evidencing, securing, or relating to
such Indebtedness; or (g) if the Bank deems itself insecure, believing that the
prospect of payment of this Note or any of the Indebtedness is impaired or shall
fear deterioration, removal or waste of any of the Collateral; or (h) if there
is filed or issued a levy or writ of attachment or garnishment or other like
judicial process upon the undersigned (or any of them) or any guarantor or any
of the Collateral, including without limit, any accounts of the undersigned (or
any of them) or any guarantor with the Bank, then the Bank, upon the occurrence
of any of these events (each a "Default"), may at its option and without prior
notice to the undersigned (or any of them), declare any or all of the
Indebtedness to be immediately due and payable (notwithstanding any provisions
contained in the evidence thereof to the contrary), sell or liquidate all or any
portion of the Collateral, set off against the Indebtedness any amounts owing by
the Bank to the undersigned (or any of them), charge interest at the default
rate provided in the document evidencing the relevant Indebtedness and exercise
any one or more of the rights and remedies granted to the Bank by any agreement
with the undersigned (or any of them), declare any or all of the Indebtedness to
be immediately due and payable (notwithstanding any provisions contained in the
evidence thereof to the contrary), sell or liquidate all or any portion of the
Collateral, set off against the Indebtedness any amounts owing by the Bank to
the undersigned (or any of them), charge interest at the default rate provided
in the document evidencing the relevant Indebtedness and exercise any one or
more of the rights and remedies granted to the Bank by an agreement with the
undersigned (or any of them) or given to it under applicable law. In addition,
if this Note is secured by a deed of trust or mortgage covering real property,
then the trustor or mortgagor shall not mortgage or pledge the mortgaged
premises as security for any other indebtedness or obligations. This Note,
together with all other Indebtedness secured by said deed of trust or mortgage,
shall become due and payable immediately, without notice, at the option of the
Bank, (a) if said trustor or mortgagor shall mortgage or pledge the mortgaged
premises for any other Indebtedness or obligations or shall convey, assign or
transfer the mortgaged premises by deed, installment sale contract or other
instrument, or (b) if the title to the mortgaged premises shall become vested in
any other person or party in any manner whatsoever, or (c) if there is any
disposition (through one or more transactions) of legal or beneficial title to a
controlling interest of said trustor or mortgagor. All payments under this Note
shall be in immediately available United States funds, without setoff or
counterclaim.
If this Note is signed by two or more parties (whether by all as makers or by
one or more as an accommodation party or otherwise), the obligations and
undertakings under this Note shall be that of all and any two or more jointly
and also of each severally. This Note shall bind the undersigned, and the
undersigned's respective heirs, personal representatives, successors and
assigns.
The undersigned waive(s) presentment, demand, protest, notice of dishonor,
notice of demand or intent to demand, notice of acceleration or intent to
accelerate, and all other notices and agree(s) that no extension or indulgence
to the undersigned (or any of them) or release,
2
<PAGE> 3
substitution or nonenforcement of any security, or release or substitution of
any of the undersigned, any guarantor or any other party, whether with or
without notice, shall affect the obligations of any of the undersigned. The
undersigned waive(s) all defenses or right to discharge available under Section
3-605 of the California Uniform Commercial Code and waive(s) all other
suretyship defenses or right to discharge. The undersigned agree(s) that the
Bank has the right to sell, assign, or grant participations, or any interest, in
any or all of the Indebtedness, and that, in connection with this right, but
without limiting its ability to make other disclosures to the full extent
allowable, the Bank may disclose all documents and information which the Bank
now or later has relating to the undersigned or the Indebtedness. The
undersigned agree(s) that the Bank may provide information relating to this Note
or to the undersigned to the Bank's parent, affiliation, subsidiaries and
service providers.
The undersigned agree(s) to reimburse the holder or owner of this Note for any
and all costs and expenses (including without limit, court costs, legal expenses
and reasonable attorney fees, whether inside or outside counsel is used, whether
or not suit is instituted and, if suit is instituted, whether at the trial court
level, appellate level, in a bankruptcy, probate or administrative proceeding or
otherwise incurred in collecting or attempting to collect this Note or incurred
in any other matter or proceeding relating to this Note.
The undersigned acknowledge(s) and agree(s) that there are no contrary
agreements, oral or written, establishing a term of this Note and agree(s) that
the terms and conditions of this Note may not be amended, waived or modified
except in a writing signed by an officer of the Bank expressly stating that the
writing constitutes an amendment, waiver or modification of the terms of this
Note. As used in this Note, the word "undersigned" means, individually and
collectively, each maker, accommodation party, endorser and other party signing
this Note in a similar capacity. If any provision of this Note in unenforceable
in whole or part for any reason, the remaining provisions shall continue to be
effective. THIS NOTE IS MADE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA
WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
The maximum interest rate shall not exceed the highest applicable usury ceiling.
THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY
AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY
IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN
ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS.
This Note is subject to the Loan & Security Agreement dated November 18, 1997
and any and all subsequent renewals thereof.
INITIAL HERE: DAL
-----
PharmChem Laboratories, Inc.
By: /S/ David A. Lattanzio Its: VP & CFO
-------------------------------- -------------------------------------
SIGNATURE OF David A. Lattanzio TITLE VP & CFO
1505-A O'Brien Drive Menlo Park CA USA 94025
- --------------------------------------------------------------------------------
STREET ADDRESS CITY STATE COUNTRY ZIP CODE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
For Bank Use Only OCAR #
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan Officer Initials Loan Group Name Obligor(s) Name
JLW CBB - Palo Alto PharmChem Laboratories, Inc.
- ----------------------------------------------------------------------------------------------------
Loan Officer I.D. No. Loan Group No. Obligor # Note # Amount
48201 95745 6106027478 $1,500,000.00
- ----------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 1
EXHIBIT 10.34
LEASE AGREEMENT
ORDER NO.: LA-1440
-----------------------------------------------
LESSEE
PharmChem Laboratories, Inc.
-----------------------------------------------
STREET
1505A O'Brien Drive
-----------------------------------------------
CITY STATE COUNTY ZIP
Menlo Park CA 94025
-----------------------------------------------
NAME AND TITLE
David Lattanzio, Chief Financial Officer
-----------------------------------------------
AMERICAN TECHNOLOGIES CREDIT, INC.
18101 Von Karman o Suite 140-253 o Irvine, CA 92612
Telephone 714/436-6500 o Facsimile 714/436-6599
TERMS AND CONDITIONS OF LEASE
1. LEASED PROPERTY: Subject to the following terms and conditions, American
Technologies Credit, Inc. ("Lessor") hereby agrees to lease to Lessee
the Hardware; Software and other Equipment ("Property") described on the
Lease Schedule(s) ("Schedule(s)") referencing this Lease Agreement
("Agreement"), and Lessee agrees to lease the Property from Lessor. Each
Schedule that the parties may from time to time enter into with respect
to this Agreement incorporates the terms of the Agreement and
constitutes a separate lease agreement and is referred to herein as the
"Lease".
2. TERM: This Lease, with respect to any Schedule, shall become effective
upon acceptance by Lessor and the term for any Schedule(s) shall
commence on the day Lessee certifies that the Property has been
delivered to and is usable by Lessee ("Commencement Date"). Lessee
agrees that its remedies, should it find fault with any of the Property,
shall be and are solely against the manufacturer/vendor/licensor
("Supplier") and not against Lessor. This Lease shall give Lessee the
right to use the Property at the location(s) delineated on the
Schedule(s). The initial base term of the Lease shall be the first day
of the calendar month following the Commencement Date ("Base Lease
Term"). The Base Lease Term shall be extended for an additional one-year
period (the "extended Base Lease Term") at the rate delineated on the
respective Schedule(s) unless Lessee provides to Lessor written notice
of Lessee's election not to extend the Base Lease Term at least one
hundred eighty (180) days prior to the expiration of the initial Base
Lease Term. Notwithstanding the provisions of Section 19 below, such
written notice may be delivered to Lessor by hand or by certified mail
and shall not be effective unless it is actually received by Lessor at
least one hundred eighty (180) days prior to the expiration of the
initial Base Lease Term. At the expiration of the initial Base Lease
Term (or, if extended, at the expiration of the extended Base Lease
Term), Lessee shall do one of the following: (A) purchase all, but not
less than all, of the Property for its then Fair Market Value ("FMV"),
plus applicable sales tax; (B) promptly return all, but not less than
all, of the Property and lease replacement property from Lessor which
has a cost equal to or greater than the original cost of the Property;
or (C) extend the Schedule for a period of one additional year at the
rental rate delineated on the respective Schedule. With respect to
Option (A), FMV is the price a willing buyer (who is neither a used
property dealer or reseller) would pay for the Property in an arm's
length transaction to a willing seller under no compulsion to sell. Such
FMV shall be determined on the basis that: (i) the Property is assumed
to be in the condition in which it is to be maintained under the Lease
and is in complete compliance with all other terms of the Lease; (ii)
the Property is assumed to be installed and/or in full service and is
valued on an installed basis; and (iii) the cost of removal of the
Property from its present location is not deducted from the valuation.
If Lessee elects to purchase the Property and the parties are not able
to agree on FMV at least 60 days prior to the expiration of the
applicable term, Lessor shall appoint an
<PAGE> 2
independent appraiser (reasonably acceptable to Lessee) who shall
determine FMV, and the parties acknowledge and agree that such
determination shall be final, binding and conclusive with respect to the
parties' agreed upon purchase price. Lessee shall be responsible for the
cost of the appraisal. With respect to Option (B), Lessee and Lessor
shall each have absolute discretion regarding their agreement or lack of
agreement to the terms of a lease for replacement property. If Lessee
has not elected Option (A) or (B) by the end of the initial Base Lease
Term or, if extended, the extended Base Lease Term, then Option (C)
shall prevail. Thereafter, this Lease will continue subject to
termination by either Lessee or Lessor at the end of any month, provided
at least ninety days' prior written notice is delivered to the other
party. Each Schedule shall be deemed to incorporate therein these
specific terms and conditions and shall have an independent initial Base
Lease Term and extension period(s).
3. RENTALS: The monthly rent payable with respect to any Schedule(s) shall
be the amount shown with respect to such Schedule(s). Lessee shall pay
to Lessor the monthly rent for each Schedule, in advance, for each month
or any part thereof that this Lease, with respect to said Schedule(s),
is in effect. The first such payment shall be made on the first day of
the calendar month following the Commencement Date. A prorata portion of
the monthly rental charges based on a daily rental of one-thirtieth
(1/30th) of the monthly rental calculated from the Commencement Date to
the end of the calendar month, shall be due and payable at the
Commencement Date. If rent or any other amount is not paid within ten
days of its due date, Lessee agrees to pay a late charge equal to five
percent (5%) of the unpaid amount. Each month thereafter, past due
amounts remaining unpaid hereunder shall bear interest at the lesser of
one and one-half percent (1 1/2%) per month, compounded monthly, or the
maximum rate allowed by law. All rent shall be paid at the place of
business of Lessor shown above or such other place as Lessor may
designate by written notice to Lessee. Except as otherwise provided in
this Lease, Lessee's obligation to pay rent shall be absolute and
unconditional under all circumstances, notwithstanding: (i) any setoff,
counterclaim, recoupment, defense or other right which Lessee may have
against Lessor for any reason whatsoever; or (ii) any defect in the
title, right to use, condition, operation, fitness for use, damage or
destruction of or to the Property or any interruptions or cessations in
use or possession thereof for any reason whatsoever, Lessee hereby
waives, to the extent permitted by law, the following rights and
remedies which may be conferred upon Lessee by law: (a) right to cancel
or terminate this Lease except in accordance with the express terms
hereof, (b) right to revoke acceptance of the Property, (c) right to
recover damages from Lessor for any breach of warranty and (d) right to
recover any consequential damages whatsoever.
4. ADDITIONS AND MODIFICATIONS: All additions and modifications to the
Property become an integral part of the Property and are owned by
Lessor. Software, as described on any Schedule(s), includes all updates,
revisions, upgrades, new versions, enhancements, modifications,
derivative works, maintenance fixes, translations, adaptations, and
copies of the foregoing or of the original version of the Software
whether obtained from the Supplier, or from any source whatsoever, and
references in this Lease to Software will be interpreted as references
to any and all of the foregoing. All additions and modifications to the
Property must be free and clear of any liens or rights of other parties.
5. NO WARRANTIES: Lessor not being the Supplier, manufacturer, developer,
publisher, distributor, or licensor of the Property, MAKES NO WARRANTIES
OR REPRESENTATIONS, EXPRESS OR IMPLIED, NOR SHALL IT BE DEEMED TO HAVE
MADE ANY SUCH WARRANTIES OR REPRESENTATIONS AS TO THE MERCHANTABILITY,
COMPATIBILITY, FITNESS, DESIGN, CONDITIONS, QUALITY OR CAPACITY OF THE
LEASED PROPERTY, OR ANY OTHER REPRESENTATION
<PAGE> 3
OR WARRANTY WHATSOEVER WITH RESPECT TO THE PROPERTY. LESSEE REPRESENTS
THAT ALL OF THE PROPERTY ARE OF A SIZE, DESIGN, AND CAPACITY SELECTED BY
IT, AND THAT IT IS SATISFIED THAT THE SAME IS SUITABLE FOR LESSEE'S
PURPOSES. Lessor assigns to Lessee during the term of the Lease any
warranty rights it may have received from the Supplier as a result of
Lessor's purchase of the Property. If Lessee has any claims regarding
the Property or any other matter arising from Lessee's relationship with
the Supplier, Lessee must make them against the Supplier. This provision
survives the termination of the Lease.
6. USE, OPERATION AND MAINTENANCE: Lessee at its own expense, will provide
a suitable place for the operation of the Property, and keep in force
for the term of the Lease the best standard Supplier's maintenance
agreement(s) which will cause the Supplier(s) to make all the necessary
repairs, adjustments, and replacements in accordance with such
maintenance agreement(s) and entitle Lessee (through Lessor, if
necessary) to obtain available enhancements, updates, upgrades and
changes.
7. RISK OF LOSS: During the period the Property is in transit, is in the
possession of Lessee, and until the Property is returned to Lessor,
Lessee shall assume all responsibility for loss or damage and shall hold
Lessor harmless against the same. In the event that, during the term of
the Lease or until the Property shall have been returned, if any of the
Property shall be confiscated, taken, requisitioned, lost, stolen,
destroyed or irreparably damaged for any cause whatsoever (such
occurrences being hereinafter called "Casualty Occurrences"), Lessee
shall immediately and fully inform Lessor. In the case of Software, the
erasure, inoperability or other incapacity of the Software triggered by
a preprogrammed termination or limiting design or routine embedded in
the Software shall also be deemed a "Casualty Occurrence". Following a
Casualty Occurrence, on the next succeeding rent payment date, Lessee
shall pay to Lessor, in addition to all past due rentals and other
amounts then late and outstanding, an amount equal to the Casualty Value
as determined by the attached Casualty Schedule as of the date of the
Casualty Occurrence. Upon the making of such payment by Lessee, the
rental for such Schedule(s) shall cease to accrue as of the date of such
payment and the term of the Lease as to such Schedule(s) shall
terminate. Insurance proceeds received by Lessor as the result of a
Casualty Occurrence with respect to any Schedule(s) shall be applied in
reduction of Lessee's obligation to pay the Casualty Value. The Casualty
Value as of any rent payment date (or as of any other date on which
Casualty Value is payable) shall be an amount equal to that percentage
of the Purchase Price or License Fee as is set forth in the Casualty
Schedule attached hereto, opposite the number of such rent payment date
or such other date. The Purchase Price or License Fee of any Property
shall be the total cost paid by Lessor with respect to the Property.
8. INDEMNITY AND INSURANCE: Lessee assumes liability for, and agrees at its
own expense to indemnify and defend Lessor, its employees, officers,
directors and assigns, from and against any and all claims, liabilities,
losses, damages, and expenses (including legal expenses) of every kind
or nature (including, without limitation, claims based upon strict
liability) arising out of the use, condition (including latent and other
defects, whether or not discoverable by Lessee or Lessor), operation or
ownership of any items of Property (including, without limitation, any
claim for patent, trademark or copyright infringement) or any
interruptions of service, loss of business, or consequential damages.
These indemnities and assumptions survive termination of this Lease.
Lessee, at its expense, shall procure and maintain in full force and
effect at all times that this Lease is in force and effect such public
liability (including, without limitation, contractual liability
insurance), property damage liability, fire with extended coverage,
theft, and other insurance in such form and amounts and with such
companies as shall be satisfactory to Lessor. Lessor shall be named as
an additional insured and loss payee on all policies which shall provide
<PAGE> 4
that no cancellation thereof shall be effective without thirty (30)
days' prior written notice to Lessor and shall not be invalidated as to
Lessor by any act, omission or neglect of Lessee.
9. TAXES: Lessee shall pay directly, all License fees, registration fees,
assessments and taxes which may now or hereafter be imposed upon the
ownership, sale (if authorized), possession or use of the Property,
excepting only those based on Lessor's income, and shall keep the
Property fee and clear of all levies, liens or encumbrances arising
therefrom. While Lessee is responsible for payment of all personal
property taxes, Lessor will file all personal property tax returns.
Lessor shall not be responsible for contesting any valuation of or tax
imposed on the Property, but may do so strictly as an accommodation to
Lessee and shall not be liable or accountable to Lessee therefor.
10. OWNERSHIP: Lessor at all times retains ownership, title and/or control
over Lessee's right to use the Property in accordance with the terms of
the lease. To the extent Software subject to this Lease may also be the
subject of a license agreement between the Supplier and Lessee, Lessee
acknowledges that the License to use the Software is being provided to
Lessee solely because of payments made by Lessor to the Supplier and,
accordingly, Lessee agrees that Lessor has an interest in the license.
Lessee agrees that if it or any of its affiliates receives anything of
value from the Supplier (including without limitation, a trade-in,
substitution, discount or upgrade allowance) other than Lessee's rights
to use the Software reflected on the Schedule for the term of this
Lease, Lessee will advise Lessor and pay to Lessor an amount equal to
such additional value obtained by Lessee. Lessee agrees that it will not
surrender, transfer or modify the license agreement without first
obtaining the written consent of Lessor. Lessee will at all times
protect and defend, at its own cost and expense, the title and/or
License rights of Lessor from and against all claims, liens and legal
processes and keep all Property free and clear from all such claims,
liens and processes. The Property is and shall remain personal property
of Lessor.
11. EFFECTS OF TERMINATION OR EXPIRATION OF LEASE TERM: In the event Lessee
elects to return the Property to Lessor in accordance with the express
terms of the Lease, Le will discontinue its use of the Property pay to
Lessor an inspection, refurbishment and restocking feel equal to five
percent (5) of the Lessor's original cost of the Property, and
immediately, at its own expense, ship the Property, with all manuals,
cables, cartons and packing materials as originally furnished by
Supplier, to a location within the United States in accordance with the
Property return instructions provided by Lessor. In the case of
Software, Lessee will destroy all intangible Software items, and deliver
to Lessor all tangible items constituting Software. At Lessor's request,
Lessee will also certify in a written form acceptable to Lessor that:
(I)an inspection, refurbishment and restocking feel equal to five
percent (5) of the Lessor's original cost of the Property, and
immediately, at its own expense, ship the Property, with all manuals,
cables, cartons and packing materials as originally furnished by
Supplier, to a location within the United States in accordance with the
Property return instructions provided by Lessor. In the case of
Software, Lessee will destroy all intangible Software items, and deliver
to Lessor all tangible items constituting Software. At Lessor's request,
Lessee will also certify in a written form acceptable to Lessor that:
(i) all the tangible Software has been delivered to Lessor; (ii) all
intangible records have been destroyed; (iii) Lessee has not retained
the Software in any form; (iv) Lessee will not use the Software after
termination and (v) Lessee has not received from Supplier(s) anything of
value relating to or in exchange for Lessee's use, rental or possession
of the Software during the term of the Lease (including a trade-in,
substitution or upgrade allowance). Until Lessee has complied with all
of the requirements of this Section, rent payment obligations will
continue from month to month at the rental rate delineated on the
Schedule. TERMINATION OF ANY LEASE
<PAGE> 5
TERM (OR TERMINATION OF THE LICENSE) SHALL NOT ABSOLVE USER FROM PAYMENT
OF ACCRUED PERIODIC PAYMENTS OR FROM COMPLIANCE WITH THE USE AND
DISCLOSURE RESTRICTIONS OF THIS AGREEMENT, OR FROM ITS OBLIGATIONS TO
INDEMNIFY LESSOR.
12. PERFORMANCE OF LESSEE'S OBLIGATIONS BY LESSOR: If Lessee fails duly and
promptly to perform any of its obligations under this Lease, Lessor may,
at its option, immediately or at any time thereafter perform the same
for the account of Lessee without thereby waiving Lessee's default, and
any amount paid, expense (including reasonable attorney's fees), penalty
or other liability incurred by Lessor in such performance shall be
payable by Lessee to Lessor upon demand, with interest thereon at the
rate set forth in Paragraph 3, above.
13. RIGHT OF INSPECTION: In addition to its rights of entry and inspection
stated elsewhere in this Lease, Lessor may from time to time during
reasonable business hours enter upon any premises where any of the
Property may be located for the purpose of confirming the existence,
condition, and proper maintenance of the Property.
14. DEFAULT: An Event of Default shall occur if: (a) Lessee fails to pay
within ten (10) days after the due date, any installment of rent; (b)
Lessee fails to perform or observe any covenant, condition, obligation
to be performed or observed by it under this Lease and such failure
continues uncured for fifteen (15) days after written notice thereof to
Lessee by Lessor; (c) Lessee makes as assignment for the benefit of its
creditors, files any petition or takes any action under any bankruptcy,
reorganization or insolvency laws; (d) an involuntary petition is filed
under any bankruptcy statute against Lessee or any receiver, trustee or
custodian is appointed to take possession of Lessee's properties, unless
such petition or appointment is set aside or withdrawn within sixty days
of said filing or appointment; (e) Lessee attempts to or does remove,
transfer, sell, sublicense, encumber, part with possession, or sublet
any of the Property; (f) Lessee attempts to assign or transfer this
Lease or its interest under the Lease or moves the Property from the
location(s) set forth on the Schedule without Lessor's prior written
consent; or (g) Lessee undergoes a sale, buyout, change in control, or
change in ownership of any type, form or manner which, as judged solely
by Lessor, results in a material deterioration in Lessee's credit
worthiness.
15. REMEDIES: If an Event of Default shall occur and be continuing, Lessor
may exercise at its sole option, but not specifically limited thereto,
any one or more of the following remedies: (a) terminate this Lease and
Lessee's rights hereunder, (b) proceed, by appropriate court action or
actions either at law or in equity, to enforce performance by Lessee of
the applicable covenants of this Lease or to recover damages for the
breach thereof, (c) by notice in writing to Lessee, recover all amounts
due on or before the date Lessor declared this Lease to be in default,
plus, as liquidated damages for loss of a bargain and not as a penalty,
accelerate, and declare to be immediately due and payable, all rentals
and other sums payable hereunder, without any presentment, demand,
protest or further notice (all of which hereby are expressly due and
payable, and (d) take immediate possession of the Property, or any part
thereof, from Lessee free from all claims by Lessee. In the case of
Software, it is acknowledged and agreed that the unauthorized use,
disclosure, or transfer of the Software could cause Lessor incalculable,
irreparable, and serious harm. Therefore, if Lessee is found to be using
(in whatever manner) any portion of the Software after the applicable
Lease Term or if Licensor terminates a License or Lessee's right to use
the Software thereunder for an alleged breach of the License's use,
disclosure, or transfer restrictions, then liquidated damages shall be
payable immediately to Lessor in an amount equal to two (2) times the
amount paid by Lessor with respect to the Software. The exercise of any
of the foregoing
<PAGE> 6
remedies by Lessor shall not constitute a termination of this Lease
unless Lessor so notifies Lessee in writing. In the event Lessor
repossesses the Hardware, Lessor may (A) lease the Hardware or any
portion thereof, in such a manner, for such time and upon such terms as
Lessor may determine, or (B) sell the Hardware or any portion thereof,
at one or more public or private sales, in such manner, and at such
times and upon such terms as Lessor may determine. In the event that
Lessor leases the Hardware, any rentals received by Lessor for the
remaining lease term (the period ending on the date when the initial
Base Lease Term for the Hardware would have expired), shall be applied
to the payment of (i) all costs and expenses (including reasonable
attorney's fees) incurred by Lessor in retaking possession of, and
removing, storing, repairing, refurbishing and leasing such Hardware,
and (ii) the rentals for the remainder of the initial term and all other
sums, then remaining unpaid under this Lease. The remaining balance of
such rentals, if any, shall be applied to reimburse Lessee for any sums
previously paid by Lessee as liquidated damages. All rentals received by
Lessor for the period commencing after the remaining initial Base Lease
Term shall be retained by Lessor. Lessee shall remain liable to Lessor
to the extent that the aggregate amount of the sums referred to in
clauses (i) and (ii) above shall exceed the aggregate rentals received
by Lessor under such leases for the respective remaining lease term
applicable to the Hardware covered by such leases. In the event that
Lessor shall sell or otherwise dispose of (other than pursuant to a
lease) the Hardware, the proceeds thereof shall be applied to the sum of
(1) all costs and expenses (including reasonable attorney's fees)
incurred by Lessor in retaking possession of, and removing, storing,
repairing, refurbishing and selling or otherwise disposing of such
Hardware, (2) the rentals accrued under this Lease, but unpaid up to the
time of such sale or other disposition, (3) any and all other sums
(other than rentals) then owing to Lessor by Lessee hereunder, and (4)
the Casualty Value of such Hardware determined as of the date of such
sale or other disposition in accordance with the Casualty Schedule
attached hereto. The remaining balance of such proceeds, if any, shall
be applied first to reimburse Lessee for any sums previously paid by
Lessee as liquidated damages, and any remaining amounts shall be
retained by Lessor. Lessee shall remain liable to Lessor to the extent
that the aggregate amount of the sums referred to in clauses (1) THROUGH
(4) ABOVE SHALL EXCEED THE AGGREGATE PROCEEDS RECEIVED BY Lessor in
connection with the sale or disposition of the Property Lessor's
remedies, as discussed in this Agreement, including but not limited to
remedies discussed in this paragraph shall not be construed as a waiver
of subsequent or continuing defaults or breaches.
16. ATTORNEY'S FEES AND VENUE OF LITIGATION: THE PARTIES AGREE THAT ALL
DISPUTES, WHETHER BASED IN TORT OR CONTRACT, RELATING TO OR ARISING OUT
OF THIS LEASE WILL BE SUBMITTED TO THE ORANGE COUNTY, CALIFORNIA OFFICE
OF ENDISPUTE, INC., DBA J-A-M-S/ENDISPUTE ("JAMS") FOR A TRIAL OF ALL
ISSUES OF LAW AND FACT CONDUCTED BY A RETIRED JUDGE OR JUSTICE FROM THE
PANEL OF JAMS, APPOINTED PURSUANT TO A GENERAL REFERENCE UNDER
CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 638(1) OR ANY AMENDMENT,
ADDITION, OR SUCCESSOR SECTION THERETO) UNLESS LESSOR OR ITS ASSIGNEE
SELECTS AND ALTERNATIVE FORUM. IF THE PARTIES ARE UNABLE TO AGREE ON A
MEMBER OF THE JAMS PANEL, THEN ONE SHALL BE APPOINTED BY THE PRESIDING
JUDGE OF THE CALIFORNIA SUPERIOR COURT FOR THE COUNTY OF ORANGE. IN THE
EVENT THAT JAMS IN THE COUNTY OF ORANGE CEASES TO EXIST, THEN THE
PARTIES AGREE THAT ALL DISPUTES ARISING UNDER THIS LEASE FOR ANY BREACH
WILL BE FILED AND CONDUCTED IN THE CALIFORNIA SUPERIOR COURT OF THE
COUNTY OF ORANGE, UNLESS LESSOR OR ITS ASSIGNEE SELECTS AN ALTERNATIVE
FORUM. LESSEE AGREES TO SUBMIT TO THE PERSONAL JURISDICTION OF THE
CALIFORNIA SUPERIOR COURT FOR THE COUNTY OF
<PAGE> 7
ORANGE. LESSEE AND LESSOR WAIVE THEIR RIGHTS TO A JURY TRIAL IN ANY
ACTION ARISING OUT OF OR RELATING TO THIS LEASE. If any party to this
Lease brings any action to enforce any of the terms, or to recover for
any breach, then the prevailing party is entitled to recover reasonable
attorneys' fees and costs, including all JAMS-related costs and costs of
collection, from the other party.
17. TRANSPORTATION; INSTALLATION/DEINSTALLATION: All transportation, rigging
and drayage charges on delivery or redelivery of the Property to and
from Lessee shall be paid by Lessee. All installation and deinstallation
charges including packing materials and any fees and charges for
maintenance certification or recertification by the
Manufacturer/Supplier/ Licensor shall be paid by Lessee.
18. FURTHER ASSURANCES; OFFER AND ACCEPTANCE; LESSEE'S FINANCIAL
INFORMATION: Lessee's signing of this Lease shall constitute a firm
offer. In consideration of Lessor's time and effort in reviewing and
acting on the offer, Lessee agrees that its offer shall be irrevocable
for a period twenty (2) business days after the date it is submitted to
Lessor. Lessor's signing of this Lease shall constitute acceptance of
Lessee's offer to enter into the Lease. Upon acceptance by Lessor,
Lessee shall execute and deliver such instruments and assurances as
Lessor deems necessary for confirmation, assignment and assurance of
performance by Lessee of its obligation hereunder or for perfection of
this Lease, including but not limited to the filing of Uniform
Commercial Code Financing Statements (which Lessee agrees may be
executed by Lessor on Lessee's behalf). Lessee further authorizes Lessor
to insert in each Lease Schedule and in other appropriate documentation
the serial number(s) and other identifying data of the Property, and to
insert applicable lease dates and assignment dates as necessary to
complete such supplemental documentation. Prior to Lessor's acceptance
of the Lease and throughout the term of the Lease, Lessee shall provide
Lessor with all credit information reasonably requested by Lessor,
including but not limited to comparative audited financial statements
for the most current annual and interim reporting period.
19. NOTICES: ALL NOTICES TO LESSOR MUST BE IN WRITING AND SENT CERTIFIED
MAIL RETURN RECEIPT REQUESTED TO THE ADDRESS ABOVE OR SUCH OTHER ADDRESS
AS TO WHICH LESSEE HAS BEEN NOTIFIED IN WRITING.
20. AGREEMENTS: All agreements, representations, and warranties contained in
this Lease, or in any document or certificate delivered pursuant hereto
or in connection herewith, shall survive the expiration or other
termination of this Lease. Any provision of this Lease which may be
determined by competent authority to be prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, Lessee hereby waives any provision of law
which renders any provision hereof prohibited or unenforceable in any
respect. THIS LEASE SHALL BE CONSTRUED IN ACCORDANCE WITH AND SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA. Time is of the essence
on this Lease.
21. ASSIGNMENT: WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, LESSEE SHALL
NOT ASSIGN THIS LEASE OR ITS INTEREST HEREUNDER IN ANY FORM OR MANNER
INCLUDING, BUT NOT LIMITED TO, AN ASSIGNMENT DUE TO A SALE, MERGER,
LIQUIDATION, SUBLEASE, LEVERAGED BUYOUT, CHANGE OF OWNERSHIP OR
CHANGE-IN-CONTROL. LESSOR MAY ASSIGN ANY OF ITS RIGHTS IN THE LEASE
AND/OR THE PROPERTY TO AN ASSIGNEE ("ASSIGNEE"). LESSEE HEREBY CONSENTS
TO SUCH ASSIGNMENT AS SHALL BE DESIGNATED BY WRITTEN NOTICE GIVEN TO
<PAGE> 8
LESSEE AND FURTHER AGREES AS FOLLOWS: (1) THAT ASSIGNEE DOES NOT ASSUME
ANY OF THE OBLIGATIONS OF LESSOR HEREUNDER; (2) TO PAY ALL ASSIGNED
AMOUNTS DUE UNDER THE LEASE DIRECTLY TO ASSIGNEE UNCONDITIONALLY WITHOUT
OFFSET AND LESSEE FURTHER AGREES THAT SUCH MONIES SHALL BE PAYABLE
NOTWITHSTANDING ANY DEFENSE OR COUNTERCLAIM WHATSOEVER, WHETHER BY
REASON OR BREACH OF THE LEASE, THE EXERCISE OF ANY RIGHT HEREUNDER, OR
OTHERWISE, WHICH IT MAY OR MIGHT NOW OR HEREAFTER HAVE AS AGAINST LESSOR
(LESSEE RESERVING ITS RIGHT TO ASSERT ANY SUCH DEFENSE OR COUNTERCLAIM
DIRECTLY AGAINST LESSOR); AND (3) THAT SUBJECT TO AND WITHOUT IMPAIRMENT
OF LESSEE'S LEASEHOLD RIGHTS IN AND TO THE PROPERTY, LESSEE SHALL HOLD
POSSESSION OF THE PROPERTY FOR ASSIGNMENT TO THE EXTENT OF ASSIGNEE'S
RIGHTS THEREIN.
22. UNIFORM COMMERCIAL CODE ACKNOWLEDGEMENT: Lessee acknowledges that it has
received and approved any written "Supply Contract" covering the
Property purchased from the Supplier for lease and Lessor has informed
or advised Lessee, either previously or by this Lease, of this
following: (i) the identity of the Supplier; (ii) that Lessee may have
rights under the Supply Contract; and (iii) that Lessee may contact the
Supplier for a description of any such rights. This Lease is a "Finance
Lease". (The terms "Finance Lease", "Supply Contract" and "Supplier" as
used in this Lease have the meanings only as ascribed to them under
Division 10 of the California Uniform Commercial Code and have no effect
of any tax or accounting treatment.) This provision survives termination
of the Lease.
- --------------------------------------------------------------------------------
THIS LEASE AGREEMENT AND THE APPLICABLE SCHEDULE(S) CONTAIN THE ENTIRE AGREEMENT
BETWEEN LESSOR AND LESSEE WITH RESPECT TO THE SUBJECT MATTER HEREOF. THE LEASE
CAN ONLY BE MODIFIED IN WRITING, WITH SUCH MODIFICATIONS SIGNED BY A PERSON
AUTHORIZED TO SIGN AGREEMENTS ON BEHALF OF LESSEE AND BY AN AUTHORIZED SIGNER OF
LESSOR. NO ORAL OR OTHER WRITTEN AGREEMENTS, REPRESENTATIONS OR PROMISES SHALL
BE RELIED UPON BY, OR BE BINDING ON, THE PARTIES UNLESS MADE A PART OF THIS
LEASE BY A WRITTEN MODIFICATION SIGNED BY AN AUTHORIZED SIGNER OF LESSEE AND
LESSOR.
LESSEE: /s/ DAVID A. LATTANZIO LESSOR: /s/ IRENE TANIHARA
------------------------------ ---------------------------------
Authorized Signature Authorized Signature
- --------------------------------------------------------------------------------
OFFER AND ACCEPTANCE
This Lease is subject to approval
and acceptance by the American
Technologies Credit, Inc. Finance
Committee. BY SIGNING BELOW, THE
SIGNER CERTIFIES THAT HE HAS READ ACCEPTANCE
THE AGREEMENT, INCLUDING THE
REVERSE SIDE, AND THAT HE IS AMERICAN TECHNOLOGIES
AUTHORIZED TO SIGN ON BEHALF OF CREDIT, INC.
LESSEE. UNTIL THIS LEASE HAS BEEN
SIGNED BY AN AUTHORIZED SIGNER OF
LESSOR, IT SHALL CONSTITUTE A FIRM
OFFER BY LESSEE.
OFFER
<TABLE>
<S> <C> <C>
LESSEE: PharmChem Laboratories, Inc.
By: /s/ DAVID A. LATTANZIO By: /s/ IRENE TANIHARA
------------------------ -------------------------------------------------
Name/Title: DAVID LATTANZIO, VP Name/Title: IRENE TANIHARA, ASSISTANT VICE PRESIDENT
------------------------ -----------------------------------------
Date: 3/10/99 Date: 3/29/99
------------------------------- ------------------------------------------------
</TABLE>
<PAGE> 9
ADDENDUM "A"
TO
LEASE AGREEMENT ORDER NO. LA-1440
WITH RESPECT TO LEASE SCHEDULE 1
This Addendum is supplemental to and made a part of Lease Agreement Order No.
LA-1440 dated 03/29/99 (the "Agreement"), Lease Schedule No. 1 dated 03/29/99
(the "Schedule"), and other documents under the Lease and Schedule (collectively
forming the "Lease"). The parties to the Lease include PharmChem Laboratories,
Inc. ("Lessee") and American Technologies Credit, Inc. ("Lessor").
Capitalized terms used in this Addendum without definition shall have the
meanings set forth in the Lease, unless the context hereof specifically requires
otherwise. This Addendum is to be construed as supplemental to, and a part of
the Lease.
Lessee and Lessor acknowledge and agree that the Lease is hereby amended with
respect to Lease Schedule No. 1, as follows:
I. SECTION 2. TERM: In line twenty-three (23) through to line
twenty-five (25) delete the text that reads "(A) purchase all,
but not less than all, of the Property for its then Fair Market
Value ("FMV"), plus applicable sales tax;" and in its stead
insert the following text:
"(A) PURCHASE ALL, BUT NOT LESS THAN ALL, OF THE PROPERTY FOR A
FAIR MARKET VALUE ("FMV) PURCHASE PRICE NOT TO EXCEED TEN
PERCENT (10%) OF THE TOTAL COST PAID BY LESSOR WITH RESPECT TO
THE PROPERTY, PLUS ALL APPLICABLE SALES/USE TAXES THEREON AND
ALL ACCRUED BUT UNPAID INTEREST, TAXES, PENALTIES AND/OR OTHER
SUMS DUE UNDER THE LEASE;"
II. SECTION 6. USE, OPERATION AND MAINTENANCE: Section 6 USE,
OPERATION AND MAINTENANCE shall be deleted in its entirety and
the following inserted in its stead:
"LESSEE, AT ITS OWN EXPENSE, WILL PROVIDE A SUITABLE PLACE FOR
THE OPERATION OF THE PROPERTY, AND SHALL, AT ITS OWN EXPENSE,
MAINTAIN THE PROPERTY, INCLUDING ALL REPAIRS, ADJUSTMENTS, AND
REPLACEMENTS NEEDED FOR LESSEE'S USE OF THE PROPERTY DURING THE
APPLICABLE TERM OF THE LEASE."
III. SECTION 7. RISK OF LOSS: After the last sentence of Section 7
RISK OF LOSS the following additional sentences shall be added:
"Notwithstanding the provisions of Section 7 RISK OF LOSS, in
the event of a Casualty Occurrence, Lessee shall have the
option, after providing Lessor with written notice of its
election of said option, of itself procuring replacement
property (the "Replacement Property") which shall, in turn
substitute for the Property that was the subject of the Casualty
Occurrence and continuing the Lease without any interruption
whatsoever. Lessee shall use its own funds and/or insurance
proceeds relating to the Property that was the subject of the
Casualty Occurrence to procure the Replacement Property and
Lessor shall obtain good title in and to the Replacement
Property free and clear of any liens and/or encumbrances of any
kind whatsoever. It is a further condition of Lessee that the
Replacement Property shall be of equal or greater value than the
Property that was the subject of the Casualty Occurrence and, at
Lessor's sole and absolute discretion, be deemed to be like-kind
property. Once the Replacement Property is delivered to and is
usable by Lessee the Replacement Property shall then serve as
the Property under this Lease."
1
<PAGE> 10
IV. SECTION 9. TAXES: Beginning in line five (05) and continuing
through to line seven (07) delete in its entirety the sentence
beginning with "While Lessee is responsible for payment" and
ending with the words "Lessor will file all personal property
tax returns[.]" and in its stead insert the following:
"Lessee is and shall at all times be responsible for payment of
all personal property taxes on the Property and ALL REQUIRED
PERSONAL PROPERTY TAX RETURNS RELATED TO THE PROPERTY SHALL BE
FILED BY LESSEE UNLESS OTHERWISE PROVIDED IN WRITING."
V. SECTION 10. OWNERSHIP: Section 10 OWNERSHIP shall be deleted in
its entirety and the following inserted in its stead:
"LESSOR AT ALL TIMES RETAINS OWNERSHIP, TITLE AND/OR CONTROL
OVER LESSEE'S RIGHT TO USE THE PROPERTY IN ACCORDANCE WITH THE
TERMS OF THE LEASE. THE PROPERTY IS AND SHALL REMAIN PERSONAL
PROPERTY OF LESSOR."
VI. SECTION 14. DEFAULT: Beginning in line thirteen (13) and
continuing through to line eighteen (18) delete in its entirety
the text beginning with "(f) Lessee attempts to assign or
transfer this Lease" and ending with the text "results in a
material deterioration in Lessee's credit worthiness[.]" and in
its stead insert the following:
"(f) LESSEE ATTEMPTS TO ASSIGN OR TRANSFER THIS LEASE OR ITS
INTEREST UNDER THE LEASE OR MOVES THE PROPERTY FROM THE
LOCATION(S) SET FORTH ON THE SCHEDULE WITHOUT LESSOR'S PRIOR
WRITTEN CONSENT (WHICH CONSENT SHALL NOT BE UNREASONABLY
WITHHELD BY LESSOR); OR (G) LESSEE UNDERGOES A SALE, BUYOUT,
CHANGE IN CONTROL, OR CHANGE IN OWNERSHIP OF ANY TYPE, FORM OR
MANNER WHICH, AS JUDGED BY LESSOR, RESULTS IN A MATERIAL
DETERIORATION IN LESSEE'S CREDIT WORTHINESS. UNDER SUBPART (G),
ABOVE, IT IS A REQUIREMENT OF THIS LEASE THAT LESSEE MUST OBTAIN
LESSOR'S PRIOR WRITTEN CONSENT (WHICH CONSENT SHALL NOT BE
UNREASONABLY WITHHELD BY LESSOR)."
VII. SECTION 16. ATTORNEY'S FEES AND VENUE OF LITIGATION: Beginning
in line ten (10) and continuing through to line eleven (11)
delete the words that read "UNLESS LESSOR OR ITS ASSIGNEE
SELECTS AN ALTERNATIVE FORUM[.]" and in their stead insert the
following:
"UNLESS LESSOR OR ITS ASSIGNEE SELECTS AN ALTERNATIVE FORUM IN
AN APPLICABLE COUNTY IN THE STATE OF CALIFORNIA WHERE
JURISDICTION AND VENUE WOULD APPLY UNDER CALIFORNIA LAW."
VIII. SECTION 18. FURTHER ASSURANCES: OFFER AND ACCEPTANCE; LESSEE'S
FINANCIAL INFORMATION: In line four (04) delete the text that
reads "twenty (20)" and in its stead insert the following text:
"TWELVE (12)"
IX. SECTION 18. FURTHER ASSURANCES: OFFER AND ACCEPTANCE: LESSEE'S
FINANCIAL INFORMATION: After the last sentence of Section 18
FURTHER ASSURANCES; OFFER AND ACCEPTANCE; LESSEE'S FINANCIAL
INFORMATION the following sentence shall be added:
"NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, IF
LESSOR DOES NOT EXECUTE THIS LEASE AND RETURN A COPY OF SAID
LEASE TO LESSEE WITHIN THE TWELVE (12) BUSINESS DAY PERIOD, ALL
AS SET FORTH ABOVE, LESSOR SHALL HAVE BEEN DEEMED TO HAVE
REJECTED THE OFFER MADE BY LESSEE WITH RESPECT TO THIS LEASE AND
LESSEE SHALL BE ENTITLED FORTHWITH TO THE RETURN OF ITS FULL
DEPOSIT (AS SET FORTH ON LEASE SCHEDULE NO. 1) FROM LESSOR."
2
<PAGE> 11
X. SECTION 21. ASSIGNMENT: In line two (02) after the text that
reads "LESSOR," and before the word that reads "LESSEE" insert
the following text:
"WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD BY LESSOR,"
In all other respects the terms and conditions of the Lease, as originally
written, shall remain in full force and effect. The Lease, as amended herein,
sets forth the entire and final understanding between the parties with respect
thereto. The terms of this Addendum have been negotiated and jointly drafted by
Lessee and Lessor and, therefore, the language of the Addendum shall not be
construed in favor or against either party. The undersigned represent that they
have the authority to enter into this Agreement, and that the same shall be
legally binding and enforceable on the respective principals.
IN WITNESS WHEREOF the parties hereto, by their authorized signatories, have
executed this Addendum at the date set forth below their respective signatures.
<TABLE>
<CAPTION>
<S> <C>
Lessee: PharmChem Laboratories, Inc. Lessor: American Technologies Credit, Inc.
------------------------------ ------------------------------
By: /s/ DAVID A. LATTANZIO By: /s/ IRENE TANIHARA
---------------------------------- ----------------------------------
Name: DAVID A. LATTANZIO Name: IRENE TANIHARA
-------------------------------- --------------------------------
Title: VP Title: AVP
------------------------------- -------------------------------
Date: 3/10/99 Date: 3/29/99
--------------------------------- ---------------------------------
</TABLE>
3
<PAGE> 12
ADDENDUM "B"
to
LEASE SCHEDULE 1
to
LEASE AGREEMENT ORDER NO. LA-1440
This Addendum is supplemental to and made a part of Lease Agreement Order No.
LA-1440 , dated 03/29/99 , (the "Lease"), and Lease Schedule 1, and other
related documents under the Lease and Schedule (together forming the
"Agreement"). The parties to the Agreement include PharmChem Laboratories, Inc.,
as Lessee, and American Technologies Credit, Inc. as Lessor.
Capitalized terms used in this Addendum without definition shall have the
meanings set forth in the Lease, unless the context hereof otherwise
specifically requires. This Addendum is to be construed as supplemental to, and
part of, the Lease. In the event of any inconsistency between the Lease and this
Addendum, the terms and provisions of this Addendum shall prevail.
Lessee and Lessor hereby agree that the above-referenced Agreement is revised as
indicated below.
Section 11. EFFECTS OF TERMINATION OR EXPIRATION OF LEASE TERM:
Sentence one (1) shall be change to read; "...pay to Lessor an
inspection, refurbishment and restocking fee equal to one percent (1%)
of the original lease amount, and immediately, at its own expense, ship
the Property,..."
Section 13. RIGHT OF INSPECTION:
The following shall be added at the end of sentence one (1):
"...provided Lessee is notified in writing twenty-four (24) hours in
advance."
Section 14. DEFAULT:
The following shall be added at the end of this Section: "It shall not
be deemed to be a Change-In-Control during the term of this Lease if
company stock is bought and sold in the normal course of business. It is
the intent of the parties hereto that a Change-In-Control shall mean a
sale, liquidation, merger or some other form of change in ownership
which would materially impact Lessee's structure."
In all other respects, the terms and conditions of the Agreement shall remain in
full force and effect as originally set forth. The Agreement sets forth the
entire and final understanding between the parties with respect hereto. Lessee
and Lessor acknowledge and agree that they jointly negotiated and drafted this
Addendum and, therefore, any ambiguities herein shall not be construed against
either party. The undersigned represent that they have the authority to enter
into this Agreement, and that the same shall be legally binding and enforceable
on the respective principals.
IN WITNESS WHEREOF, the parties hereto, by their authorized signatories, have
executed this Addendum at the date set forth their respective signatures.
LESSEE: LESSOR:
PharmChem Laboratories, Inc. American Technologies Credit, Inc.
By: /s/ DAVID A. LATTANZIO By: /s/ IRENE TANIHARA
---------------------------------- ----------------------------------
Name: DAVID A. LATTANZIO Name: IRENE TANIHARA
-------------------------------- --------------------------------
Title: VP Title: ASSISTANT VICE PRESIDENT
------------------------------- -------------------------------
Date: 3/10/99 Date: 3/29/99
-------------------------------- --------------------------------
<PAGE> 13
AMERICAN TECHNOLOGIES CREDIT, INC.
18101 Von Karman Avenue o Suite 140-253 o Irvine o CA 92612
Telephone 714/436-6500 o Facsimile 714/436-6599
April 27, 1999
PharmChem Laboratories, Inc.
1505A O'Brien Drive
Menlo Park, CA 94025
Ladies/Gentlemen:
Reference is made to that Lease Agreement Order No. LA-1440 , dated March 29,
1999 , by and between PharmChem Laboratories, Inc., as Lessee, and American
Technologies Credit, Inc. (the "Agreement"), and to Lease Schedule 1 and all
related subsidiary documents under the Agreement (collectively the "Lease").
Notwithstanding anything to the contrary contained therein, and to the limited
extent hereof, this Letter Agreement amends and supersedes the said Lease and is
hereby incorporated by reference therein.
Capitalized terms used in this Letter Agreement without definition shall have
the meanings set forth in the Lease, unless the context hereof otherwise
specifically requires. This Letter Agreement is to be construed as supplemental
to, and part of, the Lease.
It is agreed and acknowledged that the final Property cost has been revised from
$1,000,000.00 to $1,082,445.50. As a result, the following revisions to the
Agreement are required:
<TABLE>
<CAPTION>
LEASE SCHEDULE 1 AS STATED AS REVISED
---------------- --------- ----------
<S> <C> <C>
MONTHLY RENT $29,150.00 $31,553.29
DEPOSIT $29,150.00 $31,553.29
DELIVERY ORDER AS STATED AS REVISED
MONTHLY RENT $29,150.00* $31,553.29**
</TABLE>
* Plus applicable Sales/Use Tax
** Sales/Use Tax Exempt
In all other respects, the terms and conditions of the Lease, as originally
written, shall remain in full force and effect. The Lease, as amended herein,
sets forth the entire and final understanding between the parties with respect
hereto. The terms of this Letter Agreement have been negotiated and jointly
drafted by American Technologies Credit, Inc. and Lessee and, therefore, the
language of the Letter Agreement shall not be construed in favor or against
either party. The undersigned represent that they have the authority to enter
into this Lease, and that the same shall be legally binding and enforceable on
the respective principals. Please acknowledge your acceptance of same by your
authorized signature below and return the original of this Letter Agreement to
American Technologies Credit, Inc. within five (5) days from the date hereof.
ACKNOWLEDGED AND ACCEPTED ON THIS Very truly yours,
28TH DAY OF APRIL __, 1999 AMERICAN TECHNOLOGIES CREDIT, INC.
PharmChem Laboratories, Inc.
BY: /s/ DAVID A. LATTANZIO /s/ IRENE TANIHARA
------------------------------ ------------------------------
NAME: David Lattanzio Irene Tanihara
---------------------------- Assistant Vice President
TITLE: Vice President
---------------------------
<PAGE> 14
LEASE AGREEMENT ORDER NO. LA-1440, LEASE SCHEDULE NO. 1
(collectively the "Lease")
ASSIGNMENT OF LEASE - WITHOUT RECOURSE
TO THE CITY GROUP/EQUIPMENT FINANCING, INC.
RE Lease between PharmChem Laboratories, Inc. as Lessee and undersigned,
dated 03/29/99 having aggregate unpaid Initial Base Lease Term rentals
assigned hereunder of $1,072,811.86, which equals the sum of Thirty-Four
(34) monthly rental payment(s) of $31,553.29 each, plus one final
payment of $N/A (the "Assigned Base Rent") payable over the assigned
portion of the Initial Base Lease Term ("Assigned Term").
For value received undersigned ("Assignor") hereby sells, assigns, transfers and
sets over to The CIT Group/Equipment Financing, Inc., its successors and assigns
("Assignee"), WITHOUT RECOURSE to Assignor (except for Assignee's rights in the
event of any breach by Assignor of its representations, warranties and covenants
herein, as such rights are described herein), the annexed above-named Lease
("Lease"), together with All Assignor's rights in the Lease (excepting the
rights expressly retained herein by Assignor as "Retained Rights"), all right,
title and interest in the Assigned Base Rent due and to become due thereunder
including, without limitation, the right to all other sums payable under the
Lease such as casualty value payments, the termination payment (if any),
indemnity payments, reimbursements for insurance, transportation, installation
or removal, taxes and maintenance.
Assignor also assigns to Assignee all of Assignor's rights and remedies under
the Lease and any guaranty thereof, including the right to take, in Assignor's
or Assignee's name, any and all proceedings, legal, equitable or otherwise, that
Assignor might otherwise take, save for this Assignment and hereby appoints
Assignee as its agent and attorney-in-fact to carry out such actions.
Notwithstanding the foregoing, nothing herein shall be construed as constituting
an assignment of Assignor's (i) rights to terminate the Lease at the end of the
Assigned Term, (ii) rights of the Lessor during the extension period(s)
specified in the Lease and (iii) rights under any guaranty or collateral which
expressly serves as security for solely the Retained Rights, including but not
limited to Assignor's retention of ownership of the Property after all assigned
obligations have been satisfied by Lessee (collectively, the "Retained Rights").
As security for all amounts due to Assignor under the Lease, Assignor hereby
grants to Assignee a security interest in all property covered by and described
in the Lease. TITLE TO ALL SUCH PROPERTY SHALL REMAIN IN THE ASSIGNOR AND IS NOT
TRANSFERRED TO ASSIGNEE FOR ANY PURPOSE. Upon the first to occur of either (a)
full satisfaction of Lessee's obligations under the Lease during the Assigned
Term and (b) full satisfaction of Assignor's obligations to Assignee under this
Assignment, if any, Assignee shall reassign the Lease, and any assigned guaranty
or other security therefor to Assignor and promptly take all necessary actions
to terminate its security interest in the Property. In the event of such
reassignment, Assignee shall warrant that the Lease and Property are not subject
to any liens created by Assignee.
Assignee shall have no obligation of Assignor as Lessor under the Lease.
Assignee will not, without the prior written consent of Assignor, provided to
Lessee directly any amount(s) by which Lessee may terminate the Lease. Any such
requests made by Lessee to Assignee shall promptly be forwarded in writing by
Assignee to Assignor.
Assignor warrants that: Assignor, by virtue of its purchase of the property
described in the Lease, is the owner of such property free from all liens and
encumbrances except the Lease and except that with respect to software included
in the Property, Assignor may have acquired only a qualified ownership of such
software by virtue of Assignor's purchase of the software from the software
vendor, the Lease is the only document executed between lessor and lessee
concerning the property described in the Lease; the Lease and any accompanying
guaranties, waivers and/or other instruments are genuine and enforceable and are
and will continue free from defenses, set-offs and counterclaims; all
signatures, names, addresses, amounts and other statements and facts contained
therein are true and correct; the aggregate unpaid initial base lease term
rentals shown above is correct; the property has been delivered to lessee under
the Lease on the date set forth below in satisfaction condition and has been
accepted by lessee, and that Assignor will comply with all its warranties and
other obligations with respect thereto; the Lease transaction conforms to all
applicable laws and regulations; the Lease constitutes and will continue to
constitute a valid reservation of unencumbered title to or first lien upon or
security interest in the property covered thereby, effective against all
persons; if filing, recordation or any other action or procedure is permitted or
required by statute or regulation to perfect such reservation of title, lien or
security interest, the same has been accomplished.
<PAGE> 15
ASSIGNMENT OF LEASE WITHOUT RECOURSE
PAGE TWO OF TWO
If Assignor breaches any agreement, representation or warranty contained in this
Assignment or the Lease, Assignor will, upon Assignee's request, promptly
repurchase the Lease for an amount (the "Discounted Repurchase Amount") equal to
the sum of (i) the outstanding balance of Assigned Base Rent payable by Lessee
for the unexpired Assigned Term remaining on the date of demand discounted at
the same interest rate and by the same method used by Assignee when purchasing
the Lease, plus (ii) accrued and unpaid Assigned Based Rent, taxes and other
Lease charges, plus (iii) reasonable expenses of collection, repossession,
transportation and storage incurred by Assignee. Assignor agrees that Assignee
may in Assignor's name endorse all remittances received, and Assignor gives
express permission to Assignee to release, on terms satisfactory to Assignee or
by operation of law or otherwise, or to compromise or adjust any and all rights
against and grant extensions of time of payment to Lessee or any other persons
obligated on the Lease or on any accompanying guaranty, or to agree to the
substitution of a lessee, without notice to Assignor and without affecting
Assignor's obligations hereunder; provided, however, that prior to Assignee
taking any of such actions, Assignee shall give Assignor ten (10) days prior
written notice of its intended action(s) and a right to repurchase the Lease for
an amount equal to the Discounted Repurchase Amount within ten (10) days of the
date of such notice. If Assignor has not repurchased the Lease within ten (10)
business days of such notice, then Assignor shall be deemed to have reflected
such offer and waived any objections it may have with respect to Assignee's
intended actions.
In the event that Assignee has declared a default under the Lease and determines
to repossess the Leased Property, it shall notify Assignor in writing that it
intends to repossess the Property in accordance with the Lease and shall give
Assignor a right of first refusal to repurchase the Lease for an amount equal to
the Discounted Repurchase Amount within ten (10) business days after such
notice. If Assignor has not given written notice of its intent to repurchase the
Lease to Assignee within 10 business days, then Assignor shall be deemed to have
rejected such offer and Assignee shall have all rights and remedies available to
it under the Uniform Commercial Code with respect to the foreclosure of its
security interest in the Property. The foregoing provision shall not, however,
be construed to unnecessarily impair or restrict Assignee from fully exercising
all rights and remedies available to it in order to protect its security
interest in the Lease and the property described in the Lease.
Assignor and Assignee agree that Assignee shall provide notice to Lessee of this
Assignment, in the form of the Letter attached hereto as Exhibit "A". During the
Assigned Term, Assignor shall have no authority to, and will not, without
Assignee's prior written consent, accept payments of rents or of option prices,
repossess or consent to the return of the property described in the Lease or
modify the terms thereof or of any accompanying guaranty. Assignee's knowledge
at any time of any breach of or non-compliance with any of the foregoing shall
not constitute any waiver by Assignee. Assignor waives notice of acceptance
hereof.
All notices hereunder shall be in writing (unless otherwise agreed in writing by
the parties) and shall be personally delivered or sent by the United States
mail, postage prepaid (certified or registered), or by an overnight express mail
service and shall be deemed given when sent to the intended recipient; provided
that, notwithstanding the foregoing, when a notice is sent by United States
mail, postage prepaid (certified or registered), it shall be deemed received
only upon actual receipt. All such notices to Assignor shall be sent to American
Technologies Credit, Inc., 18101 Von Karman Avenue, Suite 140-253, Irvine,
California, Attention: Chief Financial Officer.
The property covered by the Lease was delivered to Lessee on 04/30/99.
Date 04/30/99 Lessor-Assignor
------------------------
AMERICAN TECHNOLOGIES CREDIT, INC.
By: /s/ IRENE TANIHARA
-------------------------------------
Name: IRENE TANIHARA
-----------------------------------
Title: ASSISTANT VICE PRESIDENT
----------------------------------
<PAGE> 1
EXHIBIT 10.35
THIRD AMENDMENT TO LEASE AGREEMENT
This Third Amendment to Lease Agreement (the "Amendment") is made and entered
into as of May 7, 1999, by and between AMB Property, L.P., a Delaware limited
partnership ("Landlord"), and PharmChem Laboratories, Inc., a California
corporation ("Tenant"), with reference to the following facts.
RECITALS
A. Lincoln Menlo Associates Limited, a California limited partnership and
Tenant have entered into that certain Lease Agreement dated as of June
28, 1993 as subsequently amended on December 28, 1993 (First Amendment)
and December 20, 1995 (Second Amendment), hereinafter collectively the
"Lease") for the leasing of certain premises consisting of approximately
11,925 rentable square feet located at 1275 Hamilton Court, Menlo Park,
California (the "Premises") as such Premises are more fully described in
the Lease.
B. Lincoln has assigned its interest to Landlord.
C. Landlord and Tenant now wish to amend the Lease to provide for, among
other things, the extension of the Term of the Lease, all upon and
subject to each of the terms, conditions, and provisions set forth
herein.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are
true and correct and are hereby incorporated herein as though
set forth in full.
2. Term: The Term of the Lease shall be extended from July 1, 1999
to June 30, 2006 (the "Extended Term").
3. Base Rent: The Basic Lease Information and Section 3 of the
Lease are hereby modified to provide that during the Extended
Term of the Lease the monthly Base Rent payable by Tenant to
Landlord, in accordance with the provisions of Section 3 of the
Lease shall be in accordance with the following schedule:
<TABLE>
<CAPTION>
Period Monthly Base Rent
------ -----------------
<S> <C>
07/01/99 - 06/30/01 $7,155.00
07/01/01 - 02/28/03 $7,751.00
03/01/03 - 10/31/04 $8,109.00
11/01/04 - 06/03/06 $8,467.00
</TABLE>
4. Condition of Premises: Tenant acknowledges and agrees that its
possession of the Premises after July 1, 1999 is a continuation
of Tenant's possession of the Premises under the Lease. Tenant
is familiar with the condition of the Premises, and agrees to
accept the Premises in their existing condition "AS IS", without
any obligation of Landlord to remodel, improve or alter the
Premises, to perform any other construction or work of
improvement upon the Premises, or to provide Tenant with any
construction or refurbishing allowance. As of the date of this
Amendment, Tenant represents and warrants to Landlord that
Tenant is not aware of any dangerous conditions or other defects
existing in or about the Premises or the Building, and that
unless Tenant provides Landlord with written notice to the
contrary prior to June 30, 1999 such representation and warranty
shall be true as if the same were made on such date.
5. Brokers: Tenant warrants that it has had no dealing with any
real estate broker or agent in connection with the negotiation
of this Amendment whose commission shall be payable by Landlord.
If Tenant has dealt with any person, real estate broker or agent
with respect to this Amendment, Tenant shall be solely
responsible for the payment of any fee due to said person or
firm, and Tenant shall hold Landlord free and harmless against
any liability with respect thereto, including attorneys' fees
and costs.
1
<PAGE> 2
6. Right to Terminate: Subject to the limitations and conditions
set forth herein, Tenant shall have a right to terminate the
Lease ("Termination Option") effective as of May 31, 2001
("Termination Date"). If Landlord does not receive written
notice from Tenant of its exercise of this Termination Option
prior to August 31, 2000 all rights under this Termination
Option shall automatically terminate and shall be of no further
force or effect. Tenant's exercise of the Termination Option
shall be subject to the following terms and conditions
(collectively the "Termination Conditions"): (1) Tenant shall
provide to Landlord a termination fee of thirty-eight thousand
three hundred fifty and 00/100 ($38,350.00) along with Tenant's
timely written notice of exercise of the Termination Option; (2)
Tenant shall be liable for performance of all obligations
required to be performed by Tenant under the Lease, as and when
such obligations are required to be performed under the Lease
through the Termination Date; and (3) Tenant shall vacate and
surrender the Premises as of the Termination Date in accordance
with the provisions of the Lease.
If Tenant exercises the Termination Option, upon termination of
the Lease, the vacation and surrender of the Premises by Tenant,
and satisfaction of the Termination Conditions (above) of this
Agreement, Landlord and Tenant shall have no further rights,
obligations or claims with respect to each other arising from
this Agreement or the Lease, except for those obligations of
Tenant under the Lease which are expressly required to survive
and continue after the termination or expiration of the Lease.
Tenant and Landlord hereby acknowledge and agree that certain
obligations of Tenant survive the termination or expiration of
the Lease, pursuant to the terms and provisions of the Lease,
and the parties further agree that it is the intention of Tenant
and Landlord that this Agreement not affect such ongoing
obligations of Tenant.
7. Effect of Amendment: Except as modified herein, the terms and
conditions of the Lease shall remain unmodified and continue in
full force and effect. In the event of any conflict between the
terms and conditions of the lease and this Amendment, the terms
and conditions of this Amendment shall prevail.
8. Definitions: Unless otherwise defined in this Amendment, all
terms not defined in this Amendment shall have the meaning set
forth in the Lease.
9. Authority: Subject to the provisions of the Lease, this
Amendment shall be binding upon and inure to the benefit of the
parties hereto, their respective heirs, legal representatives,
successors and assigns. Each party hereto and the persons
signing below warrant that the person signing below on such
party's behalf is authorized to do so and to bind such party to
the terms of this Amendment.
10. The terms and provisions of the Lease are hereby incorporated in
this Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
TENANT:
PharmChem Laboratories, Inc.,
a California corporation
By: /S/ JOE HALLIGAN
-------------------------------
Its: CEO
-------------------------------
Date: 6/3/1999
-----------------------------
LANDLORD:
AMB Property L.P.,
a Delaware limited partnership
By AMB Property Corporation, its General Partner
By: /S/ GAYLE STARR
-------------------------------
Vice President
Date: 6/12/99
-------------------------------
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,124
<SECURITIES> 0
<RECEIVABLES> 8,170
<ALLOWANCES> 605
<INVENTORY> 1,522
<CURRENT-ASSETS> 11,013
<PP&E> 20,077
<DEPRECIATION> 11,204
<TOTAL-ASSETS> 23,612
<CURRENT-LIABILITIES> 9,292
<BONDS> 0
0
0
<COMMON> 19,096
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,612
<SALES> 0
<TOTAL-REVENUES> 21,323
<CGS> 0
<TOTAL-COSTS> 15,089
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 92
<INTEREST-EXPENSE> 104
<INCOME-PRETAX> 972
<INCOME-TAX> 28
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 944
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
