-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RnpJVuHFcSva0/UpSPvEid6ZiQXFjZZbPqVS+yXeJ2zqwcwvzf1tssUp4Ezoy6R5 giizGIRSly7lWpTj1ThL/w== 0000889812-95-000535.txt : 19951030 0000889812-95-000535.hdr.sgml : 19951030 ACCESSION NUMBER: 0000889812-95-000535 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MICROBIOLOGY INC CENTRAL INDEX KEY: 0000744962 STANDARD INDUSTRIAL CLASSIFICATION: 2836 IRS NUMBER: 112653613 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-12106 FILM NUMBER: 95577046 BUSINESS ADDRESS: STREET 1: 771 OLD SAW MILL RIVER ROAD CITY: TARRYTOWN STATE: NY ZIP: 10591 BUSINESS PHONE: 9143475767 MAIL ADDRESS: STREET 1: 771 OLD SAW MILL RIVER ROAD CITY: TARRYTOWN STATE: NY ZIP: 10591 10-K405 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year ended June 30, 1995 Commission File Number 0-14983 APPLIED MICROBIOLOGY, INC. (Exact Name of Registrant as Specified in its Charter) New York 11-2653613 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 771 Old Saw Mill River Road Tarrytown, New York 10591 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including Area Code: (914) 347-5767 Securities registered pursuant to Section 12(b) of the Act: Common Stock (par value $.005 per share) Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value $.005 per share) Title of Class Redeemable Warrants Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the registrant's best knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $ 23,100,828 as of September 20, 1995. The number of shares outstanding of Registrant's Common Stock as of September 20, 1995: 18,192,183 FORM 10-K REPORT INDEX 10-K Part and Item No. Page No. - - ------------ -------- PART I Item 1 Business . . . . . . . . . . . . . . . . . . . . . . .3 Item 2 Properties . . . . . . . . . . . . . . . . . . . . . 11 Item 3 Legal Proceedings. . . . . . . . . . . . . . . . . . 11 Item 4 Submission of Matters to a Vote of Security Holders. 11 PART II Item 5 Market Price of Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . 13 Item 6 Selected Financial Data. . . . . . . . . . . . . . . 14 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . 15 Item 8 Financial Statements and Supplementary Data . . . . 19 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . 19 PART III Item 10 Directors and Executive Officers of the Registrant . 20 Item 11 Executive Compensation . . . . . . . . . . . . . . . 24 Item 12 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . 30 Item 13 Certain Relationships and Related Transactions . . . 32 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . . . . . . . . 35 2 PART I Item 1. BUSINESS The Company Applied Microbiology, Inc., (the "Company") is a New York corporation which was incorporated on June 29, 1983. The Company researches, develops, manufactures, and sells Food Ingredients, and researches, develops and manufactures Special Dietary Foods and Pharmaceuticals. Food Ingredients PRESERVATIVES The Company believes that it is the world's principal producer of the naturally occurring antimicrobial peptide nisin. The Company manufactures Nisaplin , a food grade preparation of nisin, at its plant in Beaminster, Dorset, U.K., with processes it considers proprietary trade secrets. Nisaplin has been used in foods as a natural antimicrobial preservative for more than 20 years and is approved for use in over 40 countries worldwide. Applications include the prevention of food-borne illness resulting from spoilage of dairy and bakery products, dressings and sauces and canned foods. DAIRY STARTER CULTURES The Company manufactures and markets bacterial starter cultures used by the dairy industry in certain territories in Europe. Effective July 1, 1995, the Company expanded its territory to include the United States. Some of the dairy starter cultures are manufactured by Mauri Laboratories, a Burns Philp company, which also acts as a distributor for Nisaplin in Australia and other areas of the Pacific. DAIRY HYGIENE PRODUCTS The Company manufactures and sells a preparation of nisin which the Company markets as Ambicin N, which is the active ingredient in an animal hygiene product applied to the udders of lactating dairy cattle before and after milking. Udder washes Bovine mastitis is an important infectious disease of dairy cows that costs the U.S. dairy industry an estimated $2 billion annually. The Company has developed a germicidal solution based on Ambicin N that is applied to the teats of cows as a dip or spray before and after milking in order to prevent the spread of mastitis. This dermatological preparation is a potent broad spectrum germicide that acts rapidly against the bacteria that cause mastitis. 3 On December 15, 1988, the Company entered into a License and License Option Agreement ("Agreement"), as amended November 25, 1991 and July 1, 1993, with Babson Brothers ("Babson") of Naperville, Illinois. Babson is a leading U.S. manufacturer and distributor of equipment and supplies to the dairy industry. Under the Agreement, Babson's exclusive territories include North America and Puerto Rico. On a non-exclusive basis, Babson's territories extend to Latin America, Switzerland, Republic of Korea and Taiwan. The Company supplies Ambicin N to Babson and earns royalties on sales of Consept teat dip by Babson. In July 1991, Babson commenced manufacturing and marketing an Ambicin N-based teat dip product in the U.S. under its trademark Consept. Under a July 1991 agreement with CFPI, a French specialty chemical manufacturer, the Company licensed CFPI to manufacture and market Ambicin N-based formulations for use as topical germicides in the prevention of mastitis in nine European countries. CFPI introduced its product in France in 1992. Udder wipes The Company has developed a moistened towel using an Ambicin N-based formulation that is for use in preparing dairy cows for milking. Trials in dairy cows at Cornell Veterinary College have shown the product to be effective in reducing mastitis. It is anticipated that this product will be launched in the first calendar quarter of 1996. Special Dietary Foods The Company is evaluating certain proprietary Special Dietary Food products in the areas of cardiovascular disease, diabetes, infectious disease, and gastrointestinal disorders. Special Dietary Foods are foods that supply particular dietary needs or that may aid in the dietary management of disease and are sometimes known as medical foods, functional foods, or nutraceuticals. On May 17, 1995, the Company acquired an exclusive option from a division of Orion Corporation ("Orion"), the largest pharmaceutical company in Finland, to sell Orion's patented salt alternative in the United States. This product, currently being sold in Finland and Japan by Orion and its licensee, has significantly less sodium than regular salt and contains potassium and magnesium, essential minerals that may help in the dietary management of blood pressure. High blood pressure, or hypertension, affects approximately 50 million Americans. Should the Company exercise the aforementioned option by October 17, 1995, it will be granted an exclusive license to make, have made, use and sell the product in the U.S. Upon the exercise of the option, the Company intends to initially market this product to physicians for recommendation to their hypertensive patients and to those at risk of developing hypertension. 4 Pharmaceuticals Nisin The Company is developing nisin in different proprietary formulations as a potential treatment for ulcer disease (with Astra Merck in the territory of the United States), for superficial skin infections (with the ConvaTec division of Bristol-Myers Squibb in many of the countries of the world except for the Far East), and as an anti-gingival and breath freshener (with SmithKline Beecham on a worldwide basis). Astra Merck, Bristol-Myers Squibb and SmithKline Beecham have the right to terminate their respective agreements with the Company. Without partners, the Company is developing drugs that may be useful against hospital-acquired infections, and infections of the colon, and mastitis infections in lactating dairy cattle. During each phase of the drug development process, scientific and business evaluations of the cost, risk, and potential return on investment are undertaken on a product by product basis. There can be no assurance that the development programs with or without partners will continue should there be a negative evaluation of the cost and risks of continuing to develop a particular product. The development of nisin as a therapeutic agent for these, and other indications can be a long, difficult, and expensive process. Thus, there can be no assurance that a nisin-based drug product will be approved by the U.S. Food and Drug Administration ("FDA") or its regulatory equivalent in a foreign country. See "Governmental Regulation." Hospital-Acquired Infections The Company believes that nisin and its recombinant structural analogues may have potential for systemic use via intravenous administration for the treatment of severe hospital-acquired infections. These infections are caused by bacterial pathogens that resist treatment with all, or nearly all currently available antibiotics and they are responsible for many deaths annually. The Company has established that nisin is highly active in laboratory studies against bacterial isolates of staphylococci, enterococci and pneumococci, including the multiple drug-resistant strains which are often the cause of such infections in hospitalized patients, and for which current antibiotics are increasingly becoming less effective. In preliminary experiments, a single injection of nisin prevented the death of mice that had been given a lethal inoculum of Staphylococcus aureus. The Company is also evaluating nisin in a rabbit model of endocarditis -- a debilitating infection of heart valves. Infections of the Colon Antibiotic-associated diarrhea and pseudomembranous colitis are infections of the colon that are caused by Clostridium difficile (C. difficile). These infections are often encountered by patients receiving antibiotic therapy and result in diarrhea and inflammation of the colon. C. difficile is usually treated with the drug vancomycin; however, this use of vancomycin correlates 5 to a significant degree with the rise in vancomycin-resistant enterococci. The Company is investigating the feasibility of delivering nisin in an oral form directly to the colon using a proprietary capsule. Subject to completing feasibility and safety studies, the Company expects to begin to clinical evaluations in humans in 1996. Bovine Mastitis Infections The presence of antibiotics in milk arising from treated cows precludes its use for human consumption and requires that the milk be discarded at considerable cost to the farmer. The Company believes that its product may be a safe and effective alternative to antibiotics for the treatment of this disease. A study to determine the dose and frequency required for intra-mammary administration of nisin is presently underway at Cornell University School of Veterinary Medicine. Based on results from this and other studies in lactating dairy cattle, the Company plans to initiate a set of final field trials in 1996. Ulcer Disease Chronic gastritis and recurrent gastric and duodenal ulcer disease have been found to be associated with colonization of the gastric and duodenal mucosa by the gram negative bacterium Helicobacter pylori (H. pylori). The Company has determined that nisin can be formulated so as to efficiently kill H. pylori. Many of the characteristics of nisin are well-suited to this application, namely: nisin is effective against H. pylori in the laboratory; nisin is stable in the acid environment in the stomach; and nisin is not degraded by the digestive enzymes in the stomach. It is, however, degraded by the pancreatic enzymes found in the gastrointestinal tract beyond the stomach and, as a result, should not have the side effects associated with antibiotics. The Company has established an in vitro system for use in formulation development work. Utilizing this system, nisin has been shown to be effective against H. pylori isolated from patients having ulcer disease. The Company is working on optimizing the delivery of nisin to the site of infection in the gastric mucosa using an animal model. Human trials are expected to begin in 1996. In March 1994, the Company entered into an exclusive License and Supply Agreement with the Astra/Merck Group of Merck & Co., Inc. (now Astra Merck) to develop and market in the U.S. drug products based on nisin for the treatment of gastrointestinal disorders, including ulcers. Oral Care Formulations with nisin as the active agent have been developed and shown to reduce plaque accumulation and gingival inflammation in animal and human volunteers. Prototypes of nisin-based mouth rinse formulations are currently undergoing stability tests. In parallel work, suitable manufacturing procedures for incorporation of nisin into a chewing gum have been 6 established and formulations providing satisfactory release of the nisin upon chewing have been developed. If research and development activities yield positive results, and if an acceptable rate of return on investment can be attained, human trials are expected to begin in 1996. In June 1993, the Company and SmithKline Beecham entered into a worldwide agreement to jointly develop oral healthcare and oral hygiene products which utilize nisin. Skin Infections The Company is developing nisin in a topical form for the treatment of superficial skin infections such as acne and impetigo. Studies commissioned at The Rockefeller University have shown nisin to be effective against more than 150 clinical isolates of multiple antibiotic-resistant organisms, including Staphylococcus aureus. In comparative studies in a pigskin model, the bactericidal action of a nisin-based formulation and a leading commercial product against antibiotic-resistant Staphylococcus aureus and Streptococcus pyogenes were evaluated. The bacterial kill by the nisin formulation was better than that of the commercial product by 10-fold or greater in these studies. If research and development activities continue to yield positive results, and if an acceptable rate of return on investment can be attained, human trials are expected to begin in 1996. In June 1994, the Company concluded an exclusive License and Supply Agreement with Calgon Vestal Laboratories, now a subsidiary of Bristol-Myers Squibb Company, (formerly a subsidiary of Merck & Co., Inc.), to develop and market antimicrobial products intended for use in the treatment of skin infections including impetigo and acne, and wound care. The territory includes North America, the EC, and certain other countries. Governmental Regulation Healthcare and Cosmetics Products which are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in humans or animals are subject to extensive governmental regulation. All such products must undergo extensive characterization, and are subject to regulation for quality assurance, toxicology and safety. Products containing such agents must undergo thorough preclinical and clinical evaluations of performance as to safety and efficacy under approved protocols. The Company intends to pursue regulatory approval for the pharmaceutical and related uses of its products. The Company's proposed pharmaceutical products will be subject to the regulatory approval processes for new drugs. The Company believes that its products for the treatment of bovine mastitis will be considered animal drugs which are subject to approval by the FDA Center for Veterinary Medicine in the U.S. and by other developed countries' regulatory agencies. Its proposed cosmetic products will be marketable only after they are included in a Positive List for use as Cosmetics Preservatives in the EC and member countries. Use of the 7 Company's products in oral hygiene in the U.S. will be subject to the approval process for new drugs by the FDA, but the regulatory process for such use in other countries, including the EC and member countries, will vary by country. Depending upon the ingredients of a specific product, some special dietary food products will be marketed in the U.S. under the Dietary Supplement Health and Education Act. To take a product from the discovery stage through research and preclinical development to the point where the Company and/or its partners can make the necessary filings (to the FDA and governmental agencies outside the U.S.) to conduct human clinical trials may take several years. Regulatory requirements for human clinical trials are substantial, depend upon a variety of factors, vary by country, and will further add to the time necessary to determine whether a product candidate can be approved for human use. There can be no assurance that the Company's proposed products will prove to be safe and effective under these regulatory procedures. Foods and Food Processing Ingredients added to or used in food which are considered "food additives" require FDA approval in the U.S. unless, based on the submission of safety and functionality data, such ingredients are considered generally recognized as safe ("GRAS"). Use of GRAS food ingredients does not require FDA approval, but companies frequently submit petitions to the FDA which request that the FDA affirm GRAS status. The Company submitted a request to the FDA for such affirmation for the Company's nisin preparation. The FDA has affirmed that nisin or a nisin preparation which meets certain specifications is GRAS for use in pasteurized cheese spreads and pasteurized cheese spreads with fruits, vegetables, or meats (GRAS Affirmed uses). The use of Nisaplin or nisin in cheese products and foods, other than for GRAS Affirmed uses, may occur based on the manufacturer or user determining that such use is GRAS or may necessitate a submission to FDA and FDA concurrence in an amendment of the current GRAS Affirmation regulation for nisin. Should such a submission to the FDA become necessary, timely action by the FDA cannot be assured. The Company believes that the Nutrition Labeling and Education Act of 1990 and the FDA's implementing regulations permit the use of nisin in low-fat cheeses, low-fat salad dressings and additional foods. In general, outside of the U.S. products such as Nisaplin or nisin when used in food must be included on the "Positive List" of food additives in the country where the food product is to be sold. The regulations vary from country to country. To date, the Company has obtained permission in over 40 countries for Nisaplin to be used in a variety of foods, predominantly processed cheese products, canned foods and fruit juices. The Company advises customers on the legal status regarding use and labeling of the Company's products in their own country. 8 Research and Development The Company conducts research and development to expand uses of its current antimicrobial products in food preservation and in human and veterinary healthcare, to identify new antimicrobial products, and to improve the production process for the Company's antimicrobial products. These efforts are conducted with industrial and academic co-workers in various countries. During the fiscal year ended June 30, 1995, approximately $1,840,000 was spent on research and development by the Company. Proprietary Rights Nisaplin is a trade mark which is registered and defended by the Company in the EC countries, the U.S., Russia, and other countries. Ambicin N is a registered trade mark of the Company in the U.S and other countries. The Company also owns patents and patent applications relating to, among other things, the expression and production of proteins by recombinant Bacillus strains; plasmid vectors and methods of construction in gram positive bacteria; expression and production of recombinant lysostaphin; novel bacteriocin compositions and their use as broad spectrum bactericides; the use of bacteriocin compositions to treat bovine mastitis; the use of bacteriocin compositions in oral healthcare; the use of bacteriocin compositions on skin for healthcare and hygiene; the use of bacteriocin compositions in gastrointestinal healthcare; the use of nisin in alcoholic beverages; and antibotulinal protection of foods. The Company has exclusive licenses under certain patents and patent applications relating to the use of nisin to prevent microbial spoilage in foods and alcoholic beverages. Under an agreement with the University of Maryland, the Company has obtained exclusive licenses under patents and applications relating to the cloning, expression and alteration of genes encoding nisin, subtilin, and related peptides and their production. Under an agreement with the Institute of Food Research, Norwich, U.K., the Company owns certain strains of bacteria producing nisin and related patents, and may obtain exclusive licenses to certain nisin-related mutants and related patents. The Company maintains trade secret protection for bacterial strains, technical know-how, and other information it considers proprietary and beneficial for the manufacture, use, regulatory approval, and marketing of the Company's products. The Company maintains non-disclosure safeguards, including confidentiality agreements, with employees, certain consultants and Scientific Advisory Board members. There can be no assurance, however, that others may not independently develop similar technology or that secrecy will not be breached despite any agreements which exist. 9 Manufacturing The Company's Nisaplin and Ambicin N products are manufactured by the Company at its 30,000 square foot plant at Beaminster, Dorset, U.K. In addition, at its Beaminster facility, the Company produces certain dairy starter cultures which are marketed to the dairy industry. The Beaminster plant and technical facilities are adequate for the Company's current business. As demand for nisin increases, particularly for Ambicin N produced to the more exacting standards for pharmaceutical products, the Company may utilize contract manufacturing with third parties, upgrade and expand its current production facilities in Beaminster, and/or purchase, lease or build a new manufacturing facility. Marketing and Sales The Company maintains sales offices in the U.S., U.K. and the Republic of Ireland. In addition, the Company markets Nisaplin through a combination of direct selling efforts and an extensive network of distributors and agents throughout the world. The Company maintains a scientific and technical sales group in the U.K. to support existing customers and to develop new applications for products marketed to the food and beverage industries. Financial Information About Industry Segments The Company's business has been in a single industry segment, the research, development, production and marketing of antimicrobial proteins for various applications. For financial data pertaining to the amount of revenue and operating profit and loss of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements." Employees As of June 30, 1995, the Company had 92 full-time employees, of which four were executive employees, 13 were administrative, 16 were engaged in marketing and sales, and 59 were involved in research, process development, and manufacturing. The Company does not have a collective bargaining agreement with any of its personnel and considers its relationship with its employees to be satisfactory. 10 Item 2. PROPERTIES Effective as of January 1, 1995, the Company's headquarters are located at 771 Old Saw Mill River Road, Tarrytown, New York 10591 (Tel: 914-347-5767, Fax: 914-347-6370). These facilities include office space as well as the Company's U.S. laboratory where the Company conducts its pharmaceutical research and development. Pursuant to a seven year lease, the Company pays an annual rent in the amount of $378,650 during the first year, which sum is due in monthly installments. The rent is subject to annual increases over the term of the lease. However, since the premises were not ready to be occupied by the Company's research laboratory until June 12, 1995, until that date the rent consisted of a nominal amount. Prior to January 1, 1995, the Company's headquarters were located at facilities owned by an affiliate of David Guttmann, the Company's Chairman. The Company paid $24,085 for such space and related services in the fiscal year ended June 30, 1995. Until June 12, 1995 the Company research facilities were located at the Public Health Research Institute of the City of New York. The Company paid $235,178 for such space and related services in the fiscal year ended June 30, 1995. The Company's U.K. headquarters are located at Clarks Mill, Stallard Street, Trowbridge, U.K., and comprise approximately 3,000 square feet which are rented under a lease expiring in 2114 and providing for a current annual rent of GBP 34,000 ($54,000). The Company's 30,000 square foot manufacturing and research facility is located in Beaminster, U.K., and is owned by the Company. Item 3. LEGAL PROCEEDINGS No material proceedings are pending to which the Company or any of its property is subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of shareholders of the Company held in March 1995, holders of 13,998,678 shares of common stock ratified the appointment of KPMG Peat Marwick LLP as the Company's independent auditors. The appointment was opposed by the holders of 22,240 shares of Common Stock, and 95,500 abstained. 11 The following persons were elected as directors: Name For Against - - ---- --- ------- Fredric D. Price 13,998,279 118,139 David Guttmann 13,998,779 117,639 Ian Clack 13,998,779 117,639 Douglas Cotter 13,998,779 117,639 Audrey T. Cross 13,998,779 117,639 John P. Friend 13,998,179 118,239 Robert E. Pollack 13,998,779 117,639 12 PART II Item 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock and Warrants are traded on the Nasdaq National Market System under the symbol AMBI. Trading of the Company's Common Stock on the Pacific Stock Exchange was discontinued as of November 4, 1994. The following table sets forth the high and low bid quotations for the Company's Common Stock and Warrants through the quarter ended December 31, 1993. These quotations have been reported by the National Association of Securities Dealers, Inc. and represent quotations by dealers without adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions. As a result of the Company's admission to the Nasdaq National Market System, commencing January 1, 1994, the prices quoted for the Common Stock represent actual sale prices. Common Stock Warrants ------------ -------- Fiscal Quarter High Low High Low - - ------- ---- --- ---- --- Ended March 31, 1993 $3.875 $3.00 $.75 $.50 Ended June 30, 1993 $5.125 $2.75 $1.625 $.375 Ended September 30, 1993 $6.25 $4.00 $2.25 $1.25 Ended December 31, 1993 $6.25 $4.875 $2.25 $1.75 Ended March 31, 1994 $6.50 $5.50 $2.50 $2.00 Ended June 30, 1994 $5.75 $3.25 $2.375 $.875 Ended September 30, 1994 $4.00 $3.00 $1.375 $1.00 Ended December 31, 1994 $4.625 $2.625 $2.00 $0.875 Ended March 31, 1995 $3.25 $2.50 $0.875 $0.625 Ended June 30, 1995 $2.875 $1.375 $0.625 $0.25 13 The Company has not paid a cash dividend on its Common Stock. The Company intends to retain all earnings for the foreseeable future for use in the operation and expansion of its business and, accordingly, the Company does not contemplate paying any cash dividends on its Common Stock in the near future. Item 6. SELECTED FINANCIAL DATA The following tables summarize certain financial data that are qualified by the more detailed financial statements included herein. Figures are stated in thousands of United States Dollars, except per share amounts. Year ended June 30 1995 1994 1993 1992(1) 1991 ---- ---- ---- ------- ---- Sales 11,264 9,614 12,083 9,796 8,600 Write-off of Purchased Research and Development ---- ---- 22,504 ---- ---- Other Costs and Expenses 11,337 8,374 8,891 6,653 5,846 Tax Expense 254 185 423 1,090 969 Net Income/(Loss) 283 1,756 (19,423) 2,282 1,892 Net Earnings/(Loss) per Share 0.01 .09 (1.37) 2.41 2.04 Selected Balance Sheet Data: 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Working Capital 7,333 7,352 5,750 1,990 394 Total Assets 13,788 11,808 10,724 8,059 6,928 Total Liabilities 3,163 1,544 2,255 3,363 4,089 Redeemable Preferred Stock 1,500 1,500 1,500 ---- ---- Stockholders' Equity 9,125 8,764 6,969 3,196 1,339 - - --------------- (1) In connection with the consummation of the BP Transactions, which are described in Note 1 of the Notes to the Consolidated Financial Statements included elsewhere herein, and pursuant to which the Company acquired its Aplin & Barrett ("A&B") subsidiary, the Company adopted 14 A&B's fiscal year which ends on June 30. The Company filed a Transition Report on Form 10-K for the fiscal period January 1, 1992 through August 31, 1992 to provide for the transition to A&B's historical financial information. Such Transition Report provided information with respect to the Company immediately prior to the consummation of the BP Transactions. For the previous year, the table sets forth the financial results of Aplin & Barrett. The Company has not paid a cash dividend to its public shareholders on its Common Stock, although A&B did pay dividends to its stockholder before A&B was acquired by the Company. The Company does not contemplate paying any cash dividends on its Common Stock in the near future. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto of the Company included elsewhere herein. Introduction As a consequence of the closing on August 31, 1992 of the BP Transactions which are described in Note 1 to the Consolidated Financial Statements, and which for financial reporting purposes are accounted for as a reverse acquisition, the results for the years ended June 30, 1995 and June 30, 1994 are those of the Company for the whole year. The results for the year ended June 30, 1993 are those of A&B for the full year and those of the Company other than A&B ("AMBI results") for the period from September 1, 1992 through June 30, 1993. General The Company's historical revenues have been primarily attributable to sales of its own products. The Company also acts as selling agent for certain products of both affiliated as well as unaffiliated companies. Effective July 1, 1995, the Company assumed responsibility for selling products in the U.S. on behalf of an affiliated company. In addition, the Company receives royalty income from users of its patented technology. Cost of sales includes both direct and indirect manufacturing costs. Research costs include internal expenditures as well as expenses associated with third party collaborators. Selling, general and administrative expenses include salaries and overheads, and third party fees and expenses as well as costs associated with selling of the Company's products. The Company capitalizes patent costs and amortizes them over periods of nine months to fifteen years. 15 Results of Operations The Company has an accumulated deficit due primarily to the write-off of purchased goodwill (amortized over five years from 1986 - 1990) and purchased research and development costs (written-off in the year ended June 30, 1993 in connection with the BP Transactions described in Note 1 of the Notes to the Consolidated Financial Statements included elsewhere herein). Three years ended June 30, 1995, 1994 and 1993 Sales Sales increased 17% to $11.3 million in 1995 from $9.6 million in 1994. Sales of Nisaplin increased by 15% and accounted for 77% of the total sales. Sales in the U.S. and U.K. declined, but were offset by increases principally in South America and Europe. Sales of Dairy Hygiene products declined by 21%, due to reduced activity by users in the U.S. and delays by users in launching their products in Europe. Sales of Dairy Starter Cultures increased by 39%. The Company's 1994 sales of $9.6 million were 20% lower than the 1993 sales of $12.1 million. The figures for 1993 included sales of $2.1 million from products sold by the Company under an agency agreement which terminated June 30, 1993; accordingly there were no sales of these products included in the 1994 figures. Sales of Nisaplin declined largely as a result of a reduction in sales to Australia, where the 1993 figure had been increased by a change in marketing arrangements pursuant to which inventory previously treated as on consignment was sold outright to the distributor. Cost of Sales Cost of sales was $3.3 million in 1995, a decrease of 8% from the 1994 figure of $3.5 million. As a percentage of revenues, it decreased to 29% of sales compared to 37% in 1994. The decrease was principally due to lower raw material costs following a change in method of manufacture. Cost of sales was $3.5 million in 1994, a decrease of 38% from the 1993 figure of $5.7 million, and as a percentage of revenues was 37% compared to 47% of sales in 1993. The decrease in cost of sales as a percentage of sales was largely due to the inclusion in sales of a greater proportion of products manufactured by the Company than in the previous year. These products generate higher gross margins than products for which the Company acts as a distributor. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") were $5 million, $3.5 million, and $2.2 million in 1995, 1994 and 1993 respectively, representing increases of 44% in 1995 from 1994, and 62% in 1994 from 1993. SG&A as a percentage of sales was 45%, 36%, and 18% 16 in 1995, 1994, and 1993, respectively. The main components of the increase in SG&A expenses in 1995 were attributable to increased sales commissions paid to agents and distributors and increased costs of additional personnel. There were also costs involved in the relocation of the Company's corporate headquarters, and losses on the sale of some equipment. The main components of the increase in 1994 were recruitment of additional sales staff and professional fees. Research Costs Research costs were $1.8 million, $0.7 million, and $0.5 million in 1995, 1994, and 1993, respectively, representing increases of 150% in 1995 from 1994, and 60% in 1994 from 1993. Research costs as a percentage of sales were 16%, 8% and 4%, respectively. The increases in costs in 1995 and 1994 were related to the hiring of new personnel as well as the initiation of new programs. Other Expenses Other expenses in 1995 primarily consisted of $.3 million of costs associated with an office lease termination and costs associated with the relocation of the Company's office and laboratory facilities. Income Before Tax Expense Income before tax expense was $0.5 million in 1995, compared with $1.9 million in 1994. The decrease was a result of the Company's increased expenditures in the areas of research and marketing as described above. In 1993, the Company had a loss before tax expense of $19 million. This figure included the write-off of purchased research and development referred to in Results of Operations above. Tax Expense The Company's effective tax rate for 1995 was 47%. The Company incurred a loss on its U.S. operations for which no tax benefit was recognized. The Company's U.K. profits are taxable at the U.K. corporation tax rate of 33%. In 1994 the Company's effective tax rate was 10%, as U.S. pre-tax income was substantially offset by net operating losses carried forward. Pre-tax income in 1993 included a large loss relating to the write-off of purchased research and development costs which were not deductible and therefore did not generate a corresponding tax benefit. The effective tax rate may be expected to vary in the future depending upon the respective levels of income in the U.S. and the U.K. Refer to Note 13 of the Notes to the Consolidated Financial Statements for a further analysis of the tax charge. Fourth Quarter Results Sales in the fourth quarter of fiscal 1995 were $2.9 million, an increase of 25% over the corresponding 17 quarter for the previous year. Sales of Nisaplin were up 28%, due mainly to increased volumes which resulted from orders placed by several large customers. Operating income for the quarter was $0.2 million, an increase of 187% compared to the previous year, largely as a result of the increased sales. Quarterly Variations On a quarter-to-quarter basis, the Company's sales and income may vary widely, as a result of various factors, including, for example, customers placing orders in anticipation of a price increase and customers adjusting finished goods inventory levels. As a result, the Company may report sales increases or declines and/or income gains or losses for a particular quarter that may not reflect end-customer usage of the Company's products. Liquidity and Capital Resources As of June 30, 1995 the Company had working capital of $7.3 million, which included cash and cash equivalents of $3.3 million. On June 30, 1994 working capital was $7.4 million, which included cash and cash equivalents of $5 million. The reduction in cash and cash equivalents in 1995 was primarily attributable to funding of operations and capital expenditures, compensated by, among other things, the sale of equipment and capital lease proceeds. For details of capital lease obligations refer to Note 4 of the Notes to the Consolidated Financial Statements. As of June 30, 1995 the Company has 1,500 shares of redeemable preferred stock outstanding with an involuntary liquidation value of $1,500,000. For additional details refer to Note 9 of the Notes to the Consolidated Financial Statements. The Company anticipates expansion of its research and development work, and increased marketing costs as more products are launched. It anticipates, among other things, expanding its facilities, acquiring additional equipment, and hiring additional personnel. The Company does not expect its income to rise significantly during this time of expansion. In addition, the nature of research and development is such that new discoveries and improvements may require additional financing to take advantage of market opportunities afforded by such discoveries and improvements. The Company is therefore considering, among other things, raising capital through corporate partnerships, private placements, and public offerings of securities. Inflation and Prevailing Economic Conditions The Company does not believe inflation has had a significant impact on the Company's operations. The Company does not believe exchange rates have had a significant impact on the Company's operations. The consolidated results of the Company have been favorably effected by the increase in the U.S. Dollar/Great Britain pound exchange rate. Seasonality The Company does not believe there is any significant seasonal effect on the Company's operations. 18 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are included herein commencing on page F-1. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 19 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Officers and Directors The officers and directors of the Company are as follows: Year Joined Name Company Position ---- ----------- -------- Fredric D. Price (49) 1994 President, Chief Executive Officer, Acting Chief Financial Officer and Director David Guttmann (49) 1983 Chairman Stephen C. Benoit (37) 1995 Vice President-Marketing and Sales Peter Blackburn, Ph.D. (45) 1985 Executive Vice President Ian Clack (52) 1992 Director Douglas A. Cotter, Ph.D. (52) 1995 Director Audrey T. Cross, Ph.D. (49) 1995 Director John P. Friend, Ph.D. (51) 1989 Director Robert E. Pollack, Ph.D. (54) 1995 Director Benjamin Sporn (57) 1986 Vice President-Legal and Secretary - - ---------------------- Fredric Price has been President, Chief Executive Officer and a Director of the Company since September 1994. In addition, he has been the Company's acting Chief Financial Officer since January 1995. From July 1991 to September 1994, he was Vice President, Finance and Administration and Chief Financial Officer of Regeneron Pharmaceuticals, Inc. For more than five years prior to joining Regeneron, he was head of RxFDP, a consulting firm which provided strategic planning, market development, and new product introduction services to pharmaceutical and other health care businesses. From 1973 to 1986 he was at Pfizer Pharmaceuticals, where he was a Vice President with both line and staff responsibilities. Mr. Price is on the Executive Committee of the Board of Directors of the New York Biotechnology Association. He has a BA from Dartmouth College and an MBA from the Wharton School of the University of Pennsylvania. 20 David Guttmann has served as Director of the Company since its inception in June 1983 and the Company's Chairman since January 1987. Until September 1994 Mr. Guttmann also served as Chief Executive Officer and President of the Company. Mr. Guttmann also serves as Chairman of Ace Surgical Supply Co., Inc., and is a member of the Board of Creative Technologies Corp., a publicly traded company. Stephen C. Benoit was appointed Vice President-Marketing and Sales of the Company in January 1995. Prior thereto he was with Calgene, Inc. where he served as Vice President of Marketing from 1992 to 1994, as Vice President Strategic Planning from 1990 to 1992, and as Director Financial Planning and Analysis from 1987 to 1990. He received a B.B.A. and M.B.A. in finance from Loyola Marymount University, Los Angeles, California. Peter Blackburn, Ph.D. has been Executive Vice President of the Company since January 1987. In 1985 Dr. Blackburn became the Company's Senior Scientist and Co-Director of Research and in 1986 he was appointed Associate Member in Applied Genetics at the Public Health Research Institute of New York City. From 1984 to 1985 he was a senior investigator with Enzo Biochem, Inc. From 1979 to 1984 he was an Assistant Professor of Biochemistry at the Rockefeller University and received the Irma T. Hirschl Career Scientist Award (1979-1985). He was a director of the Company from 1990 until 1994. Dr. Blackburn received a B.Sc. with First Class Honors and a Ph.D in Biochemistry from the University of Sheffield, England. Ian Clack was appointed Managing Director and Chief Executive of Burns Philp & Company Limited ("BPC") in 1994. From 1962 to 1994, Mr. Clack served in various administrative functions and executive capacities with BPC. Mr. Clack was elected a Director of the Company in August 1992. He received a degree in Applied Chemistry from the Caulfield Institute of Technology. Douglas A. Cotter, Ph.D., was elected a Director of the Company in January 1995. Dr. Cotter has been President of Healthcare Decisions, Inc. since 1985. Healthcare Decisions, Inc. provides corporate development services to the healthcare and biotechnology industries in connection with mergers and acquisitions, divestitures, strategic planning and corporate partnering. Prior thereto for 19 years he held various management positions in research, product development, business development and clinical information systems in the medical products business of Corning Glass Works. Dr. Cotter is a director of Respironics, Inc., a public company. He is also an Adjunct Professor of Biomedical Engineering at Boston University. He has a B.S. in engineering from Duke University and M.S. and Ph.D. degrees in engineering from North Carolina State University. Audrey T. Cross, Ph.D., was elected a Director of the Company in January 1995. Dr. Cross has been Associate Clinical Professor at the Institute of Human Nutrition at the School of Public Health of Columbia University since 1988. She also works as a consultant in the areas of nutrition and health policy. She has served as a special assistant to the United States Secretary of Agriculture as Coordinator for Human Nutrition Policy and has worked with both the United States Senate and the California State Senate on nutrition policy matters. Dr. Cross received a B.S. in dietetics, a Master of Public Health in nutrition and a Ph.D. from the University of California at Berkeley, and a J.D. from the Hastings College of Law at the University of 21 California at San Francisco. John P. Friend, Ph.D. has been with BPC since 1981 and is currently General Manager, Technology and Research. He was elected a Director of the Company in July 1989. He received a B.Sc. and a Ph.D. from the University of Sydney (Australia) in colloid chemistry and a M.Sc. in biotechnology from the University of New South Wales. Robert E. Pollack, Ph.D., was elected a Director of the Company in January 1995. Dr. Pollack has been a Professor of Biological Sciences at Columbia University since 1978. In addition, from 1982 to 1989 he was Dean of Columbia College. Prior thereto he was Professor of Microbiology at the State University of New York School of Medicine at Stony Brook, Senior Scientist at Cold Spring Harbor Laboratory, Special NIH fellow at the Weizmann Institute in Israel, and NIH Fellow in the Department of Pathology at New York University School of Medicine. He is the author of more than a hundred research papers on the molecular biology of viral oncogenesis, a dozen articles in the popular press, and three books. He received a B.A. in physics from Columbia University and a Ph.D. in biology from Brandeis University. Benjamin Sporn has been legal counsel to the Company since 1990 and has served as Secretary of the Company since 1986. He was an attorney with AT&T from 1964 until December 1989 when he retired from AT&T as a General Attorney for Intellectual Property Matters. Mr. Sporn is also Chairman of the Board of Directors of Creative Technologies Corp. and of Micel Corp. Mr. Sporn was a director of the Company from 1986 until 1994. He received a BSE degree from Rensselaer Polytechnic Institute and a J.D. degree from American University. The directors serve for a term of one year and until their successors are duly elected and qualified. Officers serve at the pleasure of the Board of Directors. There are no family relationships among directors or executive officers. Arrangements Regarding the Election of Directors The by-laws of the Company provide that until September 1, 1996 the Board of Directors is to consist of seven directors, and that designated actions by the Board require the affirmative vote of not less than six directors. The by-laws further provide that David Guttmann and Fredric Price are designated "Prior Directors," and that the Board of Directors is to nominate two persons designated by the Prior Directors as the Board's nominees for election as directors at meetings of shareholders. Committees of the Board of Directors The Company has an audit committee consisting of Drs. Friend and Cotter. In addition, the Company has a compensation committee consisting of Drs. Cotter, Cross and Pollack. 22 Scientific Advisory Board The Company has certain scientific advisors with expertise in areas of benefit to the Company, who serve on its Scientific Advisory Board and consult with the Company concerning the Company's research and development programs. Following are members of the Scientific Advisory Board working with the Company: Robert E. Pollack, Ph.D. - Dr. Pollack has been a Professor of Biological Sciences at Columbia University since 1978. In addition, from 1982 to 1989 he was Dean of Columbia College. Prior thereto he was Professor of Microbiology at the State University of New York School of Medicine at Stony Brook, Senior Scientist at Cold Spring Harbor Laboratory, Special NIH fellow at the Weizmann Institute in Israel, and NIH Fellow in the Department of Pathology at New York University School of Medicine. He is the author of more than a hundred research papers on the molecular biology of viral oncogenesis, a dozen articles in the popular press, and three books. He received a B.A. in physics from Columbia University and a Ph.D. in biology from Brandeis University. Edward Goldberg, Ph.D. - Dr. Goldberg is professor of molecular biology and microbiology at the Tufts University School of Medicine, Dentistry and Veterinarian Medicine. He is an authority on the mechanism of recognition and infection of bacteria by viruses. He has also done extensive research on the genetics, structure and function of ion exchanges related to bacterial pH control and multi drug antiporters in bacteria . He holds a B.A. in Chemistry from Columbia University and a Ph.D. in Biology from Johns Hopkins University. Richard Novick, M.D. - Dr. Novick is professor of medicine and microbiology at New York University Medical School and an Investigator at the Skirball Institute for Biomolecular Medicine. During a postdoctoral fellowship at the National Institute for Medical Research in Mill Hill, England, he discovered the first plasmids in Staphylococci, those responsible for penicillin resistance. Dr. Novick holds a B.S. from Yale University and an M.D. with honors in Microbiology from New York University Medical School. Marvin Moser, M.D. - Dr. Moser is clinical professor of medicine at Yale and senior medical consultant at the National High Blood Pressure Education Program of the National Heart, Lung and Blood Institute. Dr. Moser's work has focused on non pharmacological approaches to the prevention and control of hypertension and he has published extensively on this subject with over 300 publications. He has contributed to over 30 books and numerous physician and patient education programs. Dr. Moser holds a B.A. from Cornell University and an M.D. from Downstate University College of Medicine. Stephen R. Peikin, M.D. - Dr. Peikin is professor of medicine and head of the division of gastroenterology and liver diseases at Cooper Hospital Medical Center, the Robert Wood Johnson Medical School, Camden, New Jersey. He is an authority on the release of the hormone cholecystokinin and its effects on satiety. He is the holder of a U.S. patent on a method of 23 stimulating satiety through the administration of an oral trypsin inhibitor. He holds a B.A. from Temple University and an M.D. from the Thomas Jefferson University. Dr. Pollack is Chairman of the Scientific Advisory Board. Members of the Scientific Advisory Board receive a per diem fee of $1,000 for each meeting of the Board attended by them, plus reasonable expenses. In addition, the Company has issued to each member of the Scientific Advisory Board stock options to purchase 10,000 shares of the Company's Common Stock. The options so issued have exercise prices ranging from $1.875 to $3.00 per share and are vested. Such options expire five years from the date of grant. See Note 9 of the Notes to Consolidated Financial Statements. Item 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company during the three fiscal years ended June 30, 1995 (i) to its Chief Executive Officer and (ii) to the three highest paid employees of the Company whose cash compensation exceeded $100,000 per year in any such year (other than the individuals listed in the table, no employee of the Company or of its A&B subsidiary received compensation in excess of $100,000): 24 SUMMARY COMPENSATION TABLE(1)(2) Annual Compensation (a) (b) (c) (d) (e) Name and Principal Position Period Salary ($) Bonus All other ($) Compensation Fredric Price, President, Chief Executive Officer 9/12/94- and Director (3) 6/30/95 210,000 15,000 Peter Blackburn, Executive Vice 7/1/92- President 6/30/93 112,794 15,000 7/1/93- 6/30/94 119,713 5,700 7/1/94- 6/30/95 150,000 23,153 Benjamin T. Sporn, Vice President- 7/1/92- Legal 6/30/93 110,910 7/1/93- 6/30/94 117,400 7/1/94- 6/30/95 129,000 Alan English Executive Vice 7/1/92- President 6/30/93 84,690 9,021 7/1/93- 6/30/94 89,772 10,791 7/1/94- 6/30/95 59,267 11,500 77,139 (4) ------------------------- (1) The above compensation does not include the use of an automobile and other personal benefits, the total value of which do not exceed as to any named officer or director or group of executive officers the lesser of $50,000 or 10% of such person's or persons' cash compensation. 25 (2) Pursuant to the regulations promulgated by the Securities and Exchange Commission (the "Commission"), the table omits a number of columns reserved for types of compensation not applicable to the Company. (3) Mr. Price became the Company's Chief Executive Officer on September 12, 1994. (4) Consists of a payment made in connection with the termination of Mr. English's employment on January 31, 1995. None of the individuals listed above received any long-term incentive plan awards during the fiscal year. Employment Agreements Effective September 1994 the Company entered into an employment agreement with Fredric Price. The agreement provides for an annual salary of $260,000 plus a performance related bonus. He was also granted options to purchase up to a total of 500,000 shares of Common Stock, vesting in equal installments over a five year period commencing at the conclusion of his first year of employment. In addition, he was granted 15,325 shares of Common Stock on the first anniversary of the agreement. A further 15,326 shares of Common Stock are to be granted on the second anniversary of the agreement. Although employment is at will, salary and certain benefits continue for twelve months after notice of termination. Stock Option Plans The Board of Directors has adopted and the shareholders have approved four Stock Option Plans (the "Plan(s)"): 1. The Incentive Stock Option Plan provides for the grant of qualified incentive stock options to officers and key employees. 2. The Non-qualified Stock Option Plan provides for the grant of options to various persons who render certain services to the Company. 3. The 1989 Stock Option Plan provides for the grant of options to either group which, in the case of employees, may be incentive stock options. 4. The 1991 Stock Option Plan provides for the grant of options to either group which, in the case of employees, may be incentive stock options. Each of the Incentive and Non-qualified Stock Option Plans permits the purchase of an aggregate of up to 250,000 shares of Common Stock. The 1989 Stock Option Plan permits the purchase of an aggregate of up to 500,000 shares of Common Stock. The 1991 Stock Option Plan permits the purchase of an aggregate of up to 1,500,000 shares of Common Stock. The 26 purpose of the Plans is to attract and retain competent executive personnel and other key employees and consultants and to provide incentives to all such persons to use their effort and skill for the advancement and betterment of the Company by permitting them to participate in the ownership of the Company. Options granted as qualified incentive stock options are intended to qualify as Incentive Stock Options within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. The exercise price of Incentive Stock Options granted under the Plans shall not be less than the fair market value (110% of the fair market value for 10% or greater shareholders) of the Common Stock on the date of grant. Incentive Stock Options may not be exercised later than ten years from the date of grant (five years for 10% or greater shareholders). Determinations as to recipients of stock options under the Plans and other terms of such grants are made by the Company's Board of Directors. The following table sets forth information with regard to aggregated option values at June 30, 1995 of options granted (i) to the Company's Chief Executive Officer, and (ii) to the two highest paid employees of the Company whose cash compensation exceeded $100,000 per year in such year. On September 12, 1994, Mr. Price was granted 500,000 options to purchase shares at $3.2625 per share. On January 9, 1995, Mr. Benoit was granted 50,000 options to purchase shares at $3.00 per share. AGGREGATED OPTION/ SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES Individual Grants
(a) (b) (c) (d) (e) Name Shares Value Number of Unexercised Value of Unexercised In-the Acquired on realized ($) Options at FY-End (#) Money Options at FY-End Exercise (#) Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- Peter Blackburn 0 0 170,000 0 $18,750 0 Benjamin T. Sporn 0 0 75,000 0 0 0 Fredric Price 0 0 0 500,000 0 0
27 Pension Plans Applied Microbiology, Inc. Eligible employees of the Company are entitled to participate in the Burns Philp Inc. Retirement Plan for Non-Bargaining Unit Employees, a non-contributory pension plan (the "Pension Plan") maintained by BPC. Assuming retirement at age 65, the Pension Plan provides benefits equal to the greater of (a) 1.1% of the employee's final average earnings multiplied by the employee's final average earnings in excess of the average of the contribution and the benefit basis in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year of Social Security retirement age, multiplied by the employee's years of credited service up to 35, minus any predecessor plan benefit in the case of an employee who participated in a predecessor plan or (b) $24 multiplied by the number of years of credited service up to 25 years plus $12 multiplied by the years of employment from 26-40 years, minus any predecessor plan benefit in the case of an employee who participated in a predecessor plan. The "final average earnings" are the average monthly earnings during the five highest-paid consecutive calendar years within the last ten calendar years of credited service with the Company. Earnings include the salary and bonus listed in the summary compensation table. Earnings which may be considered under the Pension Plan are limited to $150,000 per year subject to annual cost of living adjustments as determined by the IRS. The following table sets forth estimated annual benefits payable upon retirement, assuming retirement at age 65 in 1995 and a straight annuity benefit, according to years of credited service and final average earnings. The benefits listed are not subject to any deduction for Social Security or other offset amounts. Years of Credited Service final average earnings 15 20 25 30 35 - - ------------- ---- ---- ---- ---- ---- $25,000 $4,320 $5,760 $7,200 $8,250 $9,625 $50,000 $10,598 $14,130 $17,663 $21,196 $24,728 $75,000 $17,160 $22,880 $28,601 $34,321 $40,041 $100,000 $23,723 $31,630 $39,538 $47,446 $55,353 $150,000 and up $36,846 $49,130 $61,413 $73,696 $85,978 Peter Blackburn and Benjamin Sporn each have approximately 2.5 years, and Fredric Price and Stephen Benoit have 0.75 and 0.6 years, respectively, of credited service under the Pension Plan as of June 30, 1995, and, at age 65, would have 22, 10, 17 and 28 years of credited service, respectively. 28 A&B Pension Plan Eligible A&B employees are entitled to participate in the Burns Philp (U.K.) plc Pension Plan, a defined benefit plan providing a pension of one sixtieth of final pensionable earnings for each year of service at a normal retirement age of 65. Pensionable earnings are basic salary less the basic U.K. state pension. The following table sets forth estimated annual benefits payable upon retirement, assuming retirement at age 65 in 1995 and a straight annuity benefit, according to years of credited service and final pensionable earnings. Estimated benefits are shown in U.S. dollars based on an average exchange rate of $1.5781 per GBP for 1995. The benefits listed are not subject to any deductions. Years of Credited Service final average earnings 15 20 25 30 35 - - ------------ ---- ---- ---- ---- ---- $25,000 $5,043 $6,724 $8,405 $10,085 $11,766 $50,000 $11,293 $15,057 $18,821 $22,585 $26,350 $75,000 $17,543 $23,390 $29,238 $35,085 $40,933 $100,000 $23,793 $31,724 $39,655 $47,585 $55,516 $150,000 $36,293 $48,390 $60,488 $72,585 $84,683 $200,000 $48,793 $65,057 $81,321 $97,585 $113,850 Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the period from July 1, 1994 through June 30, 1995 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with. 29 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of September 20, 1995, information regarding the beneficial ownership of the Company's Common Stock based upon the most recent information available to the Company for (i) each person known by the Company to own beneficially more than five (5%) percent of the Company's outstanding Common Stock, (ii) each of the Company's officers and directors and (iii) all officers and directors of the Company as a group. Unless otherwise indicated, each stockholder's address is c/o the Company, 771 Old Saw Mill River Road, Tarrytown, New York 10591. 30 Shares Owned Beneficially and of Record (1) Name and Address No. of Shares % of Total - - ---------------- ------------- ---------- Fredric D. Price (2) 115,325 * David Guttmann (3) 628,000 3.41 Stephen C. Benoit 0 -- Peter Blackburn (4) 170,000 * Ian Clack 222 Sutter Street San Francisco, CA 10,000 * Douglas A. Cotter (5) 1500 Providence Highway Norwood, MA 02062 11,000 * Audrey T. Cross (4) 259 Sunset Avenue Englewood, NJ 07631 10,000 * John P. Friend 7 Bridge Street Sydney, NSW 2000 Australia 0 -- Robert E. Pollack (4) 813B Sherman Fairchild Columbia University New York, NY 10027 20,000 * Benjamin Sporn (6) 104,125 * Burns Philp & Company Limited(7) 7 Bridge Street Sydney, NSW 2000 Australia 11,583,837 63.67 All Officers and Directors as a Group (10 persons) (2)(3)(4)(5) and (6) 1,068,450 5.87 - - ------------------------------ * Less than 1% (1) Includes shares issuable within 60 days upon the exercise of all options and 31 warrants. Shares issuable under options or warrants are owned beneficially but not of record. (2) Includes 100,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (3) 408,000 of the shares shown as owned by Mr. Guttmann are owned of record by a family member; however, such shares may be deemed to be beneficially owned by Mr. Guttmann. Includes shares issuable on exercise of options by Mr. Guttmann to acquire a total of 210,000 shares. (4) Consists of shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (5) Includes 10,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (6) Includes 75,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (7) Consists of shares owned by subsidiaries. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the fiscal year ended June 30, 1995, the Company's A&B subsidiary made sales of approximately $2,117,000 to Mauri Laboratories Pty Limited ("Mauri"). In addition, it purchased approximately $832,000 of goods from Mauri. Mauri is a wholly-owned subsidiary of BPC which currently holds a controlling interest in the Company (as described below). Certain of A&B's U.K. based staff provide accounting and administrative services for other U.K. based subsidiaries of BPC. During the fiscal year ended June 30, 1995, A&B, as a result of these activities, received income from Burns Philp (U.K.) plc. of approximately $75,000. A&B manufactures certain products on a contract basis for Imperial Biotechnology Limited ("IBT") at its U.K production site. During the fiscal year ended June 30, 1995, A&B received income of approximately $77,000 as a result of these activities. IBT is a 50% owned affiliate of BPC. From time to time, the Company advances funds to Burns Philp Inc., a wholly owned subsidiary of BPC. During the fiscal year ended June 30, 1995, the Company received interest income of approximately $63,000 in respect of such advances. Pursuant to an Agreement for the Purchase and Sale of Stock dated as of June 30, 1992 32 (the "Purchase Agreement"), in July 1993 the Company issued 935,000 shares of Common Stock to BPC. As a result of this issuance and of prior acquisitions of shares of Common Stock, BPC currently owns 11,583,837 shares of Common Stock, and controls the Company. Under the Purchase Agreement, the Company and BPC entered into the following arrangements and understandings with respect to election of directors and related matters: The by-laws of the Company were amended to provide, among other things, that until September 1, 1996 the Board of Directors shall consist of seven directors. The by-laws further provided that David Guttmann, Peter Blackburn and Benjamin Sporn were designated "Prior Directors," and that the Board of Directors was to nominate three persons designated by the Prior Directors as the Board's nominees for election as directors at meetings of shareholders. In September 1994, the Company hired Fredric D. Price as President and Chief Executive Officer. In connection with this hiring, four directors: Peter Blackburn, Alan English, Colin Kop and Benjamin Sporn resigned from the Board. Mr. Price was elected to the Board and designated a Prior Director by the remaining Prior Director, Mr. Guttmann. The Board then authorized Mr. Price to propose three new directors to fill the remaining vacancies. In January 1995, Drs. Audrey T. Cross, Douglas A. Cotter and Robert E. Pollack were proposed by Mr. Price and elected to the Board. See "Directors and Executive Officers of the Registrant--Arrangements Regarding the Election of Directors." The amended by-laws also provide that the following actions by the Company shall require the prior favorable vote of not less than six directors: termination of the Company's chief executive officer, or a change in his or her responsibilities or compensation, or the retention of any chief executive officer; removal of the Company's chairman or the election of any person as chairman other than the person last elected to such position; the issuance of any shares of capital stock or of securities convertible or exercisable into shares of capital stock except as to outstanding warrants, options and other convertible securities; the grant of options to any officer or director; any merger, or any acquisition or disposition of assets in excess of $250,000; the incurrence of a commitment or obligation in excess of $650,000; any change in the Company's charter or by-laws; any transaction with any affiliate of BPC, including any overhead charge or any other intercompany charge or allocation, but excluding the continuation of certain current agency agreements; any dividend or other distribution except on the 1992 Redeemable Preferred; any purchase by BPC (whether in the public market or in private transactions, or otherwise) of any shares of the Company's Common Stock which would increase BPC's percentage ownership of the outstanding Common Stock beyond the percentage ownership of such stock owned by BPC on August 31, 1992 subject to certain increases provided for in the Agreement. BPC also agreed that: BPC and its affiliates will for a four-year period vote all shares of the Company stock from time to time owned by them in favor of election as directors of the Prior Directors and their nominees. 33 BPC and its affiliates will for a four-year period be entitled to purchase shares of Common Stock (in the public market or in private transactions, or otherwise) only as permitted in the Company's by-laws. So long as BPC and its affiliates shall have control of the Company, BPC will not sell, in a single transaction or in a series of transactions occurring within a period of up to 18 months, to any single purchaser or to any "group," a block of the Company shares owned by BPC or its affiliates which shall be sufficient in itself both to (i) divest BPC and its affiliates of control of the Company and (ii) vest control of the Company in the purchaser or purchasers, unless BPC shall cause the purchaser to tender for the purchase of all shares of the Company which are owned by all shareholders of the Company on the same terms and conditions as those which apply to the sale by BPC. The term "control" has the meaning assigned to it in Rule 405 of Regulation C under the Securities Act, and "group" has the meaning assigned to in Rule 13D of the Securities Exchange Act. However, BPC is permitted to sell, without compliance with this provision, a block of shares to an underwriter for the purposes of a broad distribution of the shares. An affiliate of BPC will, if required by the Company, for a four-year period maintain its bank comfort letter in respect of not more than GBP 300,000 of bank borrowings by the Company. So long as BPC or its affiliates owns at least 50% of the Company's total voting power and for five years after BPC and its affiliates ceases to own at least 50% of the Company's total voting power, neither BPC nor any of its affiliates will manufacture, sell or otherwise deal in or with nisin or Nisaplin (or any derivative products) except under distribution agreements with the Company on terms equivalent to those in effect on June 30, 1992. At such time after the five-year period aforesaid that BPC shall be permitted to engage in the businesses aforesaid, BPC will nevertheless continue to refrain from using trade secrets and other confidential information which are the property of the Company. BPC has certain demand and "piggyback" registration rights for its shareholdings. Change of Accountants and Fiscal Year In connection with the consummation of the BP Transactions, the Company in September 1992 engaged KPMG Peat Marwick LLP as its independent accountants, and the Company changed its fiscal year to end on June 30 of each year. 34 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. and 2. Financial Statements and Schedules The financial statements are listed in the Index to Financial Statements on page F-1 and are filed as part of this annual report. 3. Exhibits The Index to Exhibits following the Signature Page indicates the exhibits which are being filed herewith and the exhibits which are incorporated herein by reference. (b) Reports on Form 8-K No Reports on Form 8-K were filed during the last quarter of the fiscal year ended June 30, 1995. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APPLIED MICROBIOLOGY, INC. By: /s/ Fredric D. Price Fredric D. Price, President, CEO and Director Dated: September 28, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below as of September 28, 1995 by the following persons on behalf of Registrant and in the capacities indicated. /s/ Fredric D. Price Fredric D. Price, President, CEO and Director (Principal Accounting and Financial Officer) /s/ Ian Clack Ian Clack, Director /s/ Douglas A. Cotter Douglas A. Cotter, Director /s/ Audrey T Cross Audrey T. Cross, Director /s/ John P. Friend John P. Friend, Director /s/ David Guttmann David Guttmann, Chairman of the Board /s/ Robert Pollack Robert E. Pollack, Director EXHIBITS Except where otherwise indicated, the following exhibits are incorporated by reference to the correspondingly numbered exhibit in the Company's Registration Statement on Form S-1 (No. 33-4822): 3.01 Certificate of Incorporation(1) 3.01a Certificate of Amendment to the Certificate of Incorporation(2) 3.02 Amended and Restated By-laws(2) 4.01 Form of Warrant Agreement and Form of Warrant Certificate for Warrants included in Units 10.01 Form of Incentive Stock Option Plan 10.02 Form of Non-qualified Stock Option Plan 10.02a Form of 1989 Stock Option Plan(1) 10.02b Form of 1991 Stock Option Plan(1) 10.04 Credit and Security Agreement with PHRI dated October 31, 1985, and Note and Warrant issued in connection therewith 10.08 Agreements with Ace Surgical Supply Company, Inc. dated November 29, 1983 and January 10, 1986 10.09 Various Demand Notes with Stanley Marketing, HABA Distributors, Inc., Baby Connections, D. Guttmann and Ace Surgical 10.24 Exclusive Option and Collaborative Research Agreement dated July 1, 1988 between the Company and the University of Maryland(3) 10.25 License and License Option Agreement dated December 15, 1988 between the Company and Babson Brothers Company(3) 10.27 Option Agreement dated April 1, 1989 between the Company and Calgon Corporation(3) 10.28 Agreement between the Company and BPC.(4) 37 10.32 Development and Supply Agreement dated as of March 19, 1991 by and between the Company and Ciba- Geigy AG.(1) 10.32a Termination Agreement dated August 31, 1993 by and between the Company and Ciba-Geigy AG.(5) 10.34 Consulting Agreement dated June 29, 1992 between the Company and Donald A.M. McKay(6) 10.36 Agreement, dated October 6, 1992 between the Company and PHRI(6) 10.37 Agreement for the Purchase and Sale of Stock dated as of June 30, 1993 by and among the Company and BP(7) 10.38 Technology and License Agreement dated as of June 29, 1992 by and among the Company and Fermtec Prochim SpA.(7) 10.39 Investment Banking Agreement dated May 19, 1992 between the Company and Wertheim Schroder & Company ("WSC")(2) 10.40 Letter dated June 29, 1992 from WSC to the Company regarding the fairness of the BP Transactions(2) 10.41 Agreement dated May 3, 1993 between the Company and SmithKline Beecham p.l.c. (Schedules omitted)(5) 10.41a Amendment dated August 16, 1994 to Development and Supply Agreement dated as of May 3, 1993 between the Company and SmithKline Beecham p.l.c. (subject to request for confidential treatment)(8) 10.43 Supply Agreement dated as of January 1, 1994 by and between the Astra/Merck Group of Merck & Co., Inc. (8)* 10.44 Development and License Agreement dated as of January 1, 1994 by and between the Astra/Merck Group of Merck & Co., Inc. (8)* 10.45 Supply Agreement dated as of June 30, 1994 by and between the Company and Calgon Vestal Laboratories, Inc. (8)* 38 10.46 License Agreement dated as of June 30, 1994 by and between the Company and Calgon Vestal Laboratories, Inc. (8)* 10.47 Employment Agreement dated August 30, 1994 between the Company and Fredric D. Price (8) 10.48 Lease dated as of February 7, 1995, between the Company and Keren Limited Partnership (9) 10.49 Master Lease Agreement dated as of June 28, 1995, between the Company and General Electric Capital Corporation (9) 23.01 Consent of KPMG Peat Marwick LLP (9) 27 Financial Data Schedule - - ---------------------------- (1) Incorporated by reference to the Company's Report on Form 10-K for 1991. (2) Incorporated by reference to the Company's Report on Form 8-K dated September 4, 1992. (3) Incorporated by reference to the Company's Report on Form 10-K for 1988. (4) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended June 10, 1989. (5) Incorporated by reference to the Company's Report on Form 10-K for 1993. (6) Incorporated by reference to the Company's Report on Form 10-K for the fiscal period January 31, 1992 through August 31, 1992. (7) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended June 30, 1992. (8) Incorporated by reference to the Company's Report on Form 10-K for 1994. (9) Filed herewith. * Subject to an order by the Securities and Exchange Commission granting confidential treatment. Specific portions of the document for which confidential treatment has been granted have been blacked out. Such portions have been filed separately with the Commission pursuant to the application for confidential treatment. 39 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K JUNE 30, 1995 PAGE INDEPENDENT AUDITORS' REPORT F-2 CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1995 AND 1994 F-3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993 F-4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993 F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993 F-6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-7 F-1 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Applied Microbiology, Inc.: We have audited the consolidated financial statements of Applied Microbiology, Inc. and subsidiary as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Applied Microbiology, Inc. and subsidiary as of June 30, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP New York, New York July 21, 1995 F-2 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
JUNE 30 JUNE 30 1995 1994 $000 $000 ------- ------- ASSETS Current assets: Cash and cash equivalents 3,337 5,048 Trade accounts receivable less allowance for doubtful accounts of $14,000 (1994 $32,000) 1,836 1,319 Inventories 2,865 1,458 Prepayments and other current assets 694 611 Due from affiliated companies 627 6 ------- ------- Total current assets 9,359 8,442 Property and equipment, net 3,446 2,545 Patent costs and licensed technology, net of amortization of $691,000 (1994 $483,000) 881 779 Other asset 102 42 ------- ------- TOTAL ASSETS 13,788 11,808 ------- ------- ------- ------- LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of notes payable and lease obligation 149 13 Accounts payable and accrued expenses 1,306 744 Due to affiliated companies 191 234 Other liabilities 89 62 Dividends payable 34 26 Taxes payable 257 11 ------- ------- Total current liabilities 2,026 1,090 Notes payable and lease obligation 770 22 Deferred taxes payable 367 432 ------- ------- TOTAL LIABILITIES 3,163 1,544 ------- ------- ------- ------- REDEEMABLE PREFERRED STOCK $0.01 par value. Issued and outstanding 1,500 shares at June 30, 1995 and June 30, 1994 (aggregate involuntary liquidation value $1,500,000) 1,500 1,500 ------- ------- STOCKHOLDERS' EQUITY: Common stock, $0.005 par value, authorized 25,000,000 shares. Issued and outstanding 18,176,858 shares at June 30, 1995 and 18,155,858 at June 30, 1994 91 91 Additional paid-in capital 39,500 39,453 Accumulated deficit (29,958) (30,113) Currency translation adjustment (508) (667) ------- ------- TOTAL STOCKHOLDERS' EQUITY 9,125 8,764 ------- ------- COMMITMENTS AND CONTINGENT LIABILITIES TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY 13,788 11,808 ------- ------- ------- -------
See accompanying notes to consolidated financial statements. F-3 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED JUNE 30 1995 1994 1993 $000 $000 $000 Sales 11,264 9,614 12,083 Cost of sales (3,258) (3,526) (5,705) -------- -------- -------- GROSS PROFIT 8,006 6,088 6,378 Other operating income 462 542 247 Selling, general and administrative expenses (5,041) (3,496) (2,160) Research costs (1,840) (737) (460) Depreciation and amortization (767) (582) (521) Write-off of purchased research and development costs - - (22,504) -------- -------- -------- OPERATING INCOME/(LOSS) 820 1,815 (19,020) Foreign exchange loss (49) (30) (39) Interest income 148 159 65 Interest expense (2) (3) (6) Other expenses (380) - - -------- -------- -------- INCOME/(LOSS) BEFORE TAX EXPENSE 537 1,941 (19,000) Tax expense (254) (185) (423) -------- -------- -------- NET INCOME/(LOSS) 283 1,756 (19,423) -------- -------- -------- -------- -------- -------- NET EARNINGS/(LOSS) PER SHARE $0.01 $0.09 ($1.37) See accompanying notes to consolidated financial statements. F-4 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock C o m m o n S t o c k Applied Aplin & Barrett Microbiology Shares $000 Shares $000 Shares $000 ------ ---- ------ ---- ------ ---- Balance at July 1, 1992 - - - - 2,128,515 3,890 Issue of stock in respect of: - - - acquisition of Aplin & Barrett Ltd - - 8,450,000 43 - - - - - technology agreement - - 850,000 4 - - - - - licencing agreement - - 10,000 - - - Adjustments due to reverse acquisition 1,145 - 7,528,727 37 (2,128,515) (3,890) Provision for extra shares to be issued - - - - - - Net loss for the year - - - - - - Preference dividend paid and provided - - - - - - Arising on translation during the year - - - - - - ------ ---- ---------- ---- ---------- ------ Balance at June 30, 1993 1,145 - 16,838,727 84 - - Issue of common stock provided for in 1993 - - 935,000 5 - - Conversion of preferred stock to common stock (1,145) - 327,131 2 - - Common stock issued for cash on exercise of options and warrants - - 55,000 - - - Net income for the year - - - - - - Preference dividend paid and provided - - - - - - Arising on translation during the year - - - - - - ------ ---- ---------- ---- ---------- ------ Balance at June 30, 1994 - - 18,155,858 91 - - Common stock issued for cash on exercise of options and warrants - - 21,000 - - - Net income for the year - - - - - - Preference dividend paid and provided - - - - - - Arising on translation during the year - - - - - - ------ ---- ---------- ---- ---------- ------ Balance at June 30, 1995 - - 18,176,858 91 - - ------ ---- ---------- ---- ---------- ------ ------ ---- ---------- ---- ---------- ------ Additional Accumulated Currency Paid-In Deficit Translation Capital Adjustment TOTAL $000 $000 $000 $000 ---- ---- ---- ---- Balance at July 1, 1992 12,597 (12,006) 215 4,696 Issue of stock in respect of: - - - acquisition of Aplin & Barrett Ltd 36,926 - - 36,969 - - - technology agreement 3,715 - - 3,719 - - - licencing agreement 35 - - 35 Adjustments due to reverse acquisition (17,973) - - (21,826) Provision for extra shares to be issued 4,091 - - 4,091 Net loss for the year - (19,423) - (19,423) Preference dividend paid and provided - (313) - (313) Arising on translation during the year - - (979) (979) --------- --------- ------- -------- Balance at June 30, 1993 39,391 (31,742) (764) 6,969 Issue of common stock provided for in 1993 (5) - - - Conversion of preferred stock to common stock (2) - - - Common stock issued for cash on exercise of options and warrants 69 - - 69 Net income for the year - 1,756 - 1,756 Preference dividend paid and provided - (127) - (127) Arising on translation during the year - - 97 97 --------- --------- ------- -------- Balance at June 30, 1994 39,453 (30,113) (667) 8,764 Common stock issued for cash on exercise of options and warrants 47 - - 47 Net income for the year - 283 - 283 Preference dividend paid and provided - (128) - (128) Arising on translation during the year - - 159 159 --------- --------- ------- -------- Balance at June 30, 1995 39,500 (29,958) (508) 9,125 --------- --------- ------- -------- --------- --------- ------- --------
See accompanying notes to consolidated financial statements. F-5 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30 1995 1994 1993 $000 $000 $000 Cash flows from operating activities: Net income/(loss) 283 1,756 (19,423) Adjustments to reconcile net income/(loss) to net cash (used in)/provided by operating activities: Depreciation and amortization 767 582 521 Loss on sale of equipment 129 - - Write-off of purchased R&D - - 22,504 Deferred income tax (benefit)/expense (81) (16) 4 Changes in assets and liabilities: (Increase)/decrease in trade accounts receivable (468) 472 (471) (Increase)/decrease in inventories (1,345) 32 528 (Increase)/decrease in other assets (124) (169) 680 (Increase)/decrease in amounts due from affiliated companies (614) 256 (68) Increase/(decrease) in taxes payable 232 (208) 340 Increase/(decrease) in accounts payable and accrued expenses 540 (239) 143 (Decrease)/increase in amounts due to affiliated companies (91) 150 (1,517) Increase/(decrease) in other liabilities 33 (77) 97 ------- ------- ------- Net cash (used in)/provided by operating activities (739) 2,539 3,338 ------- ------- ------- Cash flows from investing activities: Acquisitions of property and equipment (1,269) (337) (252) Proceeds on sale of equipment 19 - - Patent costs and licenced technology (393) (323) (571) Business acquired - - (374) ------- ------- ------- Net cash used in investing activities (1,643) (660) (1,197) ------- ------- ------- Cash flows from financing activities: Dividends paid (120) (192) (222) (Decrease)/increase in bank overdraft - (289) 85 Notes payable proceeds/(repayment) (6) (13) 15 Capital lease proceeds 721 - - Proceeds from issuance of preferred stock - - 1,500 Proceeds from issuance of common stock 47 69 35 ------- ------- ------- Net cash provided by/(used in) financing activities 642 (425) 1,413 ------- ------- ------- Net (decrease)/increase in cash and cash equivalents (1,740) 1,454 3,554 Cash and cash equivalents at beginning of year 5,048 3,571 21 Effect of exchange rate movement 29 23 (4) ------- ------- ------- Cash and cash equivalents at end of year 3,337 5,048 3,571 ------- ------- -------
See accompanying notes to consolidated financial statements. F-6 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND ACQUISITION OF APLIN & BARRETT LIMITED AND CHANGE OF CONTROL Applied Microbiology, Inc. ('The Company') is a New York corporation which was incorporated on June 29, 1983. The Company has developed non-toxic proteins which destroy bacteria. It markets its products by direct sale and through licenses or joint ventures with companies that have established positions in target markets. During 1989, a wholly owned subsidiary of Burns, Philp & Company Limited (hereinafter, Burns, Philp & Company Limited and/or any of its wholly owned subsidiaries will be referred to as "the Burns Philp Group") acquired 1,000,000 shares of common stock in the Company. On May 14, 1992, the Company issued 348,837 shares of common stock to the Burns Philp Group at US$4.30 per share, for a total consideration of $1,500,000. On August 31, 1992, the Company issued a further 8,450,000 shares of common stock of the Company to the Burns Philp Group in exchange for acquiring all the issued and outstanding shares of Aplin & Barrett Limited ("A&B"). Aplin & Barrett Limited is a U.K. company, whose principal activities are the manufacture and marketing of preservatives, pharmaceutical products, cheese starter cultures, and other ingredients for the dairy industry. Since 1985, A&B had been part of the Burns Philp Group. Also on August 31, 1992, the Burns Philp Group paid to the Company $1,500,000 in consideration for acquiring 1,500 shares of non-convertible preferred stock of the Company having an aggregate liquidation value of $1,500,000. An additional 935,000 shares of the Company's common stock were reserved for issuance to the Burns Philp Group in July 1993 if A&B's fiscal 1993 budgeted revenues from certain products were realized. This condition was met, and provision made for the issuing of those shares. The shares were issued on July 2, 1993. The preceding transactions were consummated pursuant to an Agreement for the Purchase and Sale of Stock dated as of June 30, 1992 (the "Purchase Agreement"). Pursuant to an agreement dated June 29, 1992, (the "Technology Agreement") with the Burns Philp Group, the Company licensed certain purification technology (the "Technology") from the Burns Philp Group in exchange for 850,000 shares of the Company's common stock. The technology was valued at $3,719,000 based on the market value of the Company's stock issued. As a result of the preceding transactions (the "BP transactions"), and of prior acquisitions of shares of the Company's common stock, the Burns Philp Group currently owns 11,583,837 shares of common stock, which constitutes approximately 64% of the currently issued and outstanding shares of common stock. In addition to the ownership of common stock, the Burns Philp Group owns 1,500 shares valued at $1,500,000 of non-convertible preferred stock of the Company. Following the BP transactions, the Company continues as a publicly traded corporation with A&B as a wholly owned operating subsidiary. The acquisition of A&B by the Company and the issuance of common stock to the Burns Philp Group resulted in the Burns Philp Group obtaining a majority voting interest in the Company. Generally accepted accounting principles require that the company whose stockholders retain the majority voting interest in a combined business be treated as the acquiror for accounting purposes. As a consequence, the BP transactions have been accounted for as a "reverse acquisition" for financial reporting purposes and A&B is deemed to have acquired, at the date of the BP transactions, a 65% interest in the Company. Despite the financial reporting requirement to account for the acquisition as a "reverse acquisition", the Company remains the continuing legal entity and registrant for Securities and Exchange Commission reporting purposes. F-7 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS In previous years, due to the "reverse acquisition", the reporting currency for the combined entity was the Great Britain pounds sterling (GBP). During the year ended June 30, 1995, management concluded that presentation of the financial statements in U.S. dollars was more meaningful to the Company's investor base and accordingly, the Company has adopted the U.S. dollar ($) as its reporting currency as of and for the year ended June 30, 1995. Accordingly, all prior year information has been restated in that currency. The Company has adopted A&B's June 30 fiscal year which commences on July 1 and ends on June 30. Pursuant to the change in fiscal year, the Company filed a transitional period 10K report for the eight month period up to August 31, 1992. The financial statements for the years ended June 30, 1995 and 1994 include the results of both Applied Microbiology, Inc. and Aplin & Barrett Limited for the full year. Those for the year ended June 30, 1993 include Applied Microbiology, Inc. results for the 10 months then ended, and Aplin & Barrett Limited results for the full year. In accordance with generally accepted accounting principles as outlined in FASB Statement No. 2 "Accounting for Research and Development Costs" and FASB Interpretation No. 4 "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method", the adjustments to the consolidated financial statements account for the Burns Philp Group's purchase of the value of the Company's research and development costs that relate to products that are not yet commercially successful, as an expense in 1993. 2. SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed by the Company are in accordance with generally accepted accounting principles and are as follows: a) Consolidation The consolidated financial statements include the results of operations and financial position of the Company and its wholly owned subsidiary, A&B, after elimination of material inter- company accounts and transactions. The acquisition of A&B on August 31, 1992 has been accounted for by the purchase method, and specifically as a "reverse acquisition" as described in note 1 above. b) Cash Equivalents The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents included in the accompanying financial statements include money market accounts. c) Inventories Inventories are valued at the lower of cost (first-in, first- out, including attributable overhead expenditure) or market value, and consist of: 1995 1994 $000 $000 Raw materials 144 96 Work in process 1,262 611 Finished products 1,459 751 ------ ------ 2,865 1,458 ------ ------ F-8 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS d) Property and Equipment Property and equipment are stated at cost. Depreciation is provided using the straight-line method to depreciate assets over their estimated useful lives. The estimated useful lives are as follows: Buildings and building improvements - 50 years Furniture and fixtures - 20 years Machinery and equipment - 5 or 10 years Office equipment - 3, 5 or 6 years Motor vehicles - 5 years Leased assets - 3 or 5 years e) Patent Costs and Licensed Technology Patent costs and licensed technology have been capitalized and are being amortized on a straight-line basis over periods ranging from nine months to fifteen years. f) Research and Development Research and development costs are expensed as incurred. g) Net Earnings/(Loss) Per Share Earnings per share for the years ended June 30, 1995 and June 30, 1994 are computed based on the weighted average number of shares actually outstanding plus the shares that would be outstanding assuming the exercise of dilutive stock options, all of which are considered to be common stock equivalents. The number of shares that would be issued from the exercise of stock options and warrants has been reduced by the number of shares that could have been purchased from the proceeds at the average market price of the Company's stock. Common stock equivalents are not included in the computation of average shares outstanding for 1993 because the effect of such inclusion would be to increase earnings per share.
1995 1994 1993 (No. of shares) (No. of shares) (No. of shares) Average shares outstanding 18,168,187 18,032,102 14,384,525 Net effect of dilutive stock options 33,375 755,218 - ---------- ---------- ---------- Total average shares 18,201,562 18,787,320 14,384,525 ---------- ---------- ---------- $000 $000 $000 ---------- ---------- ---------- Net income/(loss) 283 1,756 (19,423) Preferred stock dividend (128) (127) (313) Net income/(loss) attributable to common stockholders 155 1,629 (19,736) ---------- ---------- ---------- Net earnings/(loss) per share of common stock $0.01 $0.09 ($1.37)
F-9 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS h) Foreign Currencies Transactions in currencies other than the local currency are recorded at the rate at the date of the transaction. Balances denominated in currencies other than the local currency are translated at the exchange rate at the balance sheet date. Assets and liabilities of the Company's foreign subsidiary are generally translated at current rates, and related translation adjustments are reported as a component of stockholders' equity. Statement of operations accounts are translated at the average rates of exchange reported during the year. Stockholders' equity amounts are translated at historical rates, and variances from the balance sheet rate are recorded as a currency translation adjustment. i) Taxation The Company accounts for deferred taxes using the liability method. j) Reclassifications Certain reclassifications have been made to the prior year's financial statements to conform with the current year's presentation. 3. PROPERTY AND EQUIPMENT
1995 1994 $000 $000 Cost: Land 113 120 Buildings and building improvements 1,198 1,058 Plant and other assets 5,321 5,149 Leased assets: Furniture and fixtures 179 - Office equipment 84 - Machinery and equipment 647 - --------- --------- 7,542 6,327 Accumulated depreciation and amortization (4,096) (3,782) --------- --------- Net book value 3,446 2,545 --------- --------- --------- ---------
4. CAPITAL LEASES On June 30, 1995, the Company entered into an agreement to lease certain lab and office equipment. The terms of the lease met the criteria for capitalization under the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 13, "Accounting for Leases." Accordingly the lease has been classified as a capital lease in the accompanying financial statements. The lease agreement contains a purchase option whereby at the expiration of the lease the Company may purchase the leased assets at the estimated fair market value. As the agreement was exectuted on the last day of the fiscal year, no amortization expense on the leased assets is included in the accompanying financial statements. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments.
Year ending June 30: $ 000 1996 241 1997 241 1998 241 1999 210 2000 210 ----------- Total minimum lease payments 1,143 Less amount representing interest (233) ----------- Present value of net minimum lease payments 910 ----------- -----------
F-10 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4. CAPITAL LEASES continued The obligation is secured by the leased assets and is guaranteed by the Burns Philp Group. This obligation is reflected in the balance sheet at June 30, 1995 as current and non-current obligations of $143,000 and $767,000, respectively. 5. NOTES PAYABLE In connection with the purchase of an automobile, the Company borrowed approximately $25,000 in December of 1992. This loan bears interest at a rate of 8.0% per annum and matures on December 6, 1996. The loan is secured by the automobile and as of June 30, 1995 and 1994, the outstanding balance of the loan was approximately $9,000 and $15,000, respectively. 6. BANK LINE OF CREDIT The Company maintains a line of credit for working capital purposes in the U.K. of GBP 300,000 (at June 30, 1995 rate = $478,000) and pays interest on outstanding balances at the rate of 1% over Barclays Bank plc base rate. The arrangement expires in October 1995 and is reviewed for renewal on an annual basis. The facility was not being used at June 30, 1995. This line of credit includes an annual fee of approximately $986. 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The following items are included in accounts payable and accrued expenses:
1995 1994 $000 $000 -------- -------- Accounts payable 837 451 Accrued expenses 469 293 -------- -------- 1,306 744 -------- --------
F-11 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. PREFERRED STOCK The Company is authorized to issue up to 5,000,000 shares of preferred stock, with a $0.01 par value, in one or more series and to fix the powers, designations, preferences and rights of each series. The outstanding issue of 1,500 shares of non-voting, non-convertible preferred stock at June 30, 1995 and 1994 is entitled to cumulative annual dividends at the prime rate of Citibank N.A. in effect from time to time payable in quarterly installments commencing January 1, 1993. These shares are mandatorily redeemable at $1,000 per share plus accrued dividends on consummation by the Company of a public offering of its securities for cash on Form S-1 or an equivalent form. Dividends payable on this stock at June 30, 1995 were approximately $34,000, which were paid in July. The Company's previous issue of 1,145 shares of non-voting preferred stock which was outstanding at June 30, 1993 was converted to common stock during the year ended June 30, 1994 (see note 9 below). 9. CAPITAL STOCK The Company had issued 1,145 shares of non-voting preferred stock entitled to cumulative dividends at the rate of $120 per share payable in semi-annual installments commencing July 1, 1992. The preferred stock was converted by all of the preferred stockholders in September 1993 to common stock. Each share of preferred stock which had a value of $1,000 was converted in accordance with the terms of the preferred stock offering at a conversion price of $3.50 per share of common stock into 285.7 shares of common stock. The Company had outstanding warrants for the purchase of its common stock as follows: Number of Exercise price warrants per share -------- --------- Balance at July 1, 1992 1,473,136 $1.25-$6.00 Cancelled (99,768) $4.625 ---------- Balance at June 30, 1993 1,373,368 $1.25-$6.00 Issued 50,000 $4.625 Expired (20,000) $1.25 Exercised (25,000) $1.25 ---------- Balance at June 30, 1994 1,378,368 $1.25-$6.00 Exercised (3,000) $1.25 ---------- Balance at June 30, 1995 1,375,368 $1.25-$6.00 ---------- At June 30, 1995, 1,524,025 shares were issuable upon exercise of the above warrants. All such warrants were available to be exercised immediately. The warrants expire between 1995 and 2003. Certain of the warrants include anti-dilution clauses. On April 10, 1986, the Company adopted a Nonqualified Stock Option Plan whereby options to purchase 250,000 shares of the Company's common stock may be granted to consultants and Business Advisory Board and Scientific Advisory Board members. The Company adopted three Incentive Stock Option Plans ('Incentive Plans') whereby options to purchase an aggregate of 2,250,000 shares of the Company's common stock may be granted to officers, directors, employees, consultants and others who render services to the Company. The exercise price per share for the options granted under the Incentive Plans may not be less than the fair value of the Company's common stock on the date of grant. The options expire between 1995 and 2004. A summary of stock option activity related to the Company's stock option plans is as follows: Number of Exercise price options per share ------- --------- Balance at July 1, 1992 1,353,250 $1.25-$4.875 Cancelled (190,000) Market price ---------- Balance at June 30, 1993 1,163,250 $1.25-$4.875 Issued 64,000 $4.00-$6.00 Expired (217,500) $1.25-$4.875 Exercised (30,000) $1.25 ---------- Balance at June 30, 1994 979,750 $1.25-$6.00 Issued 560,000 $3.00-$3.625 Exercised (18,000) $1.25-$2.56 ---------- Balance at June 30, 1995 1,521,750 $1.25-$6.00 ---------- Each of these options is entitled to one share of common stock. F-12 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. SEGMENT REPORTING a) Significant customers There were no significant unaffiliated customers comprising over 10% of sales during the years 1995, 1994 and 1993. Sales to affiliated companies represented 19%, 26%, and 28% of consolidated sales in 1995, 1994, and 1993. b) Information about the Company's Operations in Different Geographic Areas Year ended June 30, 1995
United United Adjustments Consolidated States Kingdom & Eliminations $000 $000 $000 $000 ----- ------ ------ ------ Sales to unaffiliated customers 6 9,141 - 9,147 Transfer between geographic areas 3,635 - (3,635) - Sales to affiliated customers - 2,117 - 2,117 ----- ------ ------ ------ Total revenue 3,641 11,258 (3,635) 11,264 ----- ------ ------ ------ Operating profit (88) 908 - 820 ----- ------ ------ ------ Identifiable assets 6,673 9,207 (2,092) 13,788 Year ended June 30, 1994 Sales to unaffiliated customers 52 7,080 - 7,132 Transfer between geographic areas 4,022 (42) (3,980) - Sales to affiliated customers - 2,482 - 2,482 ----- ------ ------ ------ Total revenue 4,074 9,520 (3,980) 9,614 ----- ------ ------ ------ Operating profit 1,779 19 17 1,815 ----- ------ ------ ------ Identifiable assets 6,147 6,627 (966) 11,808
F-13 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. SEGMENT REPORTING continued b) Information about the Company's Operations in Different Geographic Areas continued Year ended June 30, 1993
United United Adjustments Consolidated States Kingdom & Eliminations $000 $000 $000 $000 ----- ------ ------ ------ Sales to unaffiliated customers 375 8,271 - 8,646 Transfer between geographic areas 3,890 184 (4,074) - Sales to affiliated customers - 3,437 - 3,437 ----- ------ ------ ------ Total revenue 4,265 11,892 (4,074) 12,083 ----- ------ ------ ------ Operating profit 2,508 851 (22,379) (19,020) ----- ------ ------ ------ Identifiable assets 4,419 6,322 (17) 10,724
Transfers between geographic areas are accounted for as arms- length transactions. Operating profit is total revenue less operating expenses. Identifiable assets are those assets which are identifiable with the operations in each geographic area. Of the U.S. sales to unaffiliated customers there were no export sales. Sales of the U.K. operation to unaffiliated customers by geographical area were as follows:-
1995 1994 1993 $000 $000 $000 -------- -------- -------- North America 585 685 - Europe 4,816 3,531 5,798 South America 1,983 1,497 1,475 Other 1,757 1,367 998 -------- -------- -------- 9,141 7,080 8,271 -------- -------- --------
c) Industry The Company's business and that of A&B have been in a single industry segment - the research, development, production and marketing of antimicrobial proteins and dairy ingredients for various applications. F-14 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. RELATED PARTY TRANSACTIONS a) Transactions with affiliated companies were as follows: 1995 1994 1993 $000 $000 $000 ---- ---- ---- Sales to subsidiaries of common parent: Mauri Laboratories Pty. Ltd 2,117 2,107 3,366 Burns Philp Food Inc. - 375 71 Purchases from subsidiary of common parent: Mauri Laboratories Pty. Ltd 832 528 383 Income from manufacturing on behalf of associate of parent: Imperial Biotechnology Ltd (formerly IBT Products Ltd) 77 - - Income from manufacturing on behalf of subsidiary of common parent: Burns Philp R&D Ltd (formerly Imperial Biotechnology Ltd) - 36 74 Management fees received from subsidiaries of common parent: Burns Philp (U.K.) Plc 75 67 66 Burns Philp R&D Ltd (formerly Imperial Biotechnology Ltd) - 28 28 Loan interest received from subsidiaries of common parent: Burns Philp Inc. 63 48 - Burns Philp (U.K.) Plc - 16 34 From time to time the Company advances money to affiliated companies. Interest receivable on these advances is as shown above. In addition, the Company periodically incurs expenditures on behalf of affiliated companies for which it is reimbursed and reimburses affiliates for expenditures incurred on its behalf. The Company paid an affiliate $20,000 during fiscal year 1995 for rent of office space and facilities (1994 $38,000; 1993 $27,000). Other related party transactions are described in note 1 above. b) Amounts due from/(to) affiliated companies were as follows: 1995 1994 $000 $000 ---- ---- Subsidiaries of common parent: Burns Philp (U.K.) Plc (10) 6 Burns Philp Inc. - (140) Mauri Laboratories Pty. Ltd 446 (71) Burns Philp R&D Ltd (formerly Imperial Biotechnology Ltd) - (20) Burns Philp Food Inc. - (3) ---- ---- 436 (228) ---- ---- Disclosed as: Due from affiliated companies 627 6 Due to affiliated companies (191) (234) ---- ---- 436 (228) ---- ---- F-15 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. OTHER EXPENSES In September 1994, the Company terminated a lease. In February 1995 the Company settled a dispute arising from this termination, and an amount of $232,000 was included in the Statement of Operations. In addition to the above, the Company had incurred professional fees relating to its proposed relocation. A portion of these fees were considered irrecoverable, and $59,000 was included in the Statement of Operations. During the year ended June 30, 1995, the Company terminated the employment of a senior executive based in the U.K. Costs of this termination, $89,000, were included in the Statement of Operations. 13. INCOME TAXES The income tax expense consists of: 1995 1994 1993 $000 $000 $000 ---- ---- ---- Current 335 201 419 Deferred (81) (16) 4 ---- ---- ---- 254 185 423 The taxing authorities in the U.K. have questioned the appropriateness of certain income tax deductions taken by A&B for the fiscal years ended June 30, 1994 and June 30, 1993 relative to payments made by A&B to the Company. The deductions aggregate GBP 2,683,000 (approximately $4,278,000) for fiscal 1994 and GBP 2,601,000 (approximately $4,147,000) for fiscal 1993. In 1995 the deductions aggregate GBP 2,302,000 (approximately $3,633,000). A&B believes that these deductions are appropriate. If the taxing authorities ultimately deny these deductions, A&B, based on advice of outside counsel, believes that it is more likely than not that its position will be upheld upon appeal. The tax effect of the potential disallowance of these deductions has not been reflected in the accompanying consolidated financial statements. Income tax expense attributed to pre-tax income differed from the amounts computed by applying the U.S. federal statutory tax rate to pre-tax income as a result of the following: 1995 1994 1993 $000 $000 $000 ---- ---- ---- Computed 'expected' tax expense 188 679 (6,650) Increase/(reduction) in income taxes resulting from: Change in the beginning-of- the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense 86 (652) (884) Non-deductibility of write-off of purchased research and development - - 7,876 Lower tax rate on foreign earnings (16) (1) (19) State and local taxes - 140 95 Other items (4) 19 5 ------- ------- ------- 254 185 423 F-16 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. INCOME TAXES Continued The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows: 1995 1994 $000 $000 ---- ---- Deferred tax asset Net operating loss carryforwards 2,118 2,032 Less valuation allowance (2,118) (2,032) ------- ------- - - ------- ------- Deferred tax liability Plant and equipment differences between depreciation and capital allowances (230) (287) Pension costs deductible as paid (136) (150) Other (1) 5 ------- ------- (367) (432) ------- ------- Net deferred tax liability (367) (432) At June 30, 1995, the Company has net operating loss carryforwards for United States federal income tax purposes of approximately $6,050,000 which are available to offset future United States federal taxable income, if any, through 2010. Pretax income of the Company and its source for the years ended June 30, 1995, 1994 and 1993 is as follows: YEAR TOTAL FOREIGN DOMESTIC ---- ----- ------- -------- 1993 (19,000) 995 (19,995) 1994 1,941 61 1,880 1995 537 783 (246) 14. COMMITMENTS AND CONTINGENT LIABILITIES In July 1991, the Company entered into an exclusive license agreement whereby the Company received a license, with the right to sublicense, the use of a deodorant formulation. In exchange, the Company has agreed to pay royalties (as defined). Through June 30, 1995, the Company has not earned any revenue from these licenses. The Company has entered into various research and license agreements with certain universities to supplement the Company's research activities and to obtain for the Company rights to certain technology. The agreements generally require the Company to fund the research and to pay royalties based upon a percentage of product sales. The Company has consulting agreements with several of its Scientific Advisory Board members and other consultants. These agreements generally are for a term of one year and are terminable at the Company's option. Under operating leases, the Company and A & B lease certain office and laboratory space in the U.S. and the U.K. These leases expire in the years 2002 and 2013. Payments under these leases were approximately $54,000 in 1995, $49,000 in 1994 and $46,000 in 1993. Future noncancellable minimum payments under these leases are as follows: Year $000 1996 433 1997 433 1998 433 1999 433 2000 433 Thereafter 1462 ------ Total 3627 ------ F-17 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. SUPPLEMENTAL CASH FLOW INFORMATION 1995 1994 1993 $000 $000 $000 ---- ---- ---- Interest paid 2 3 6 ---- ---- ---- ---- ---- ---- Taxes paid 103 373 29 ---- ---- ---- ---- ---- ---- 16. PENSION BENEFITS i) The Company participates in a defined benefit pension plan of Burns Philp Inc., an affiliated company, and the plan is called the 'Burns Philp Inc. Retirement Plan for Non-Bargaining Unit Employees'. This plan provides retirement benefits based upon years of service, or a combination of employee compensation and years of service. Contributions payable to the plan were approximately $28,000 in 1995 and $11,000 in 1994. There were no contributions to the plan in prior years. ii) A&B participates in a defined benefit pension plan of Burns Philp (U.K.) plc, an affiliated company called 'The Burns Philp (U.K.) plc Pension Plan'. The plan provides a pension of one sixtieth of final pensionable earnings for each year of service at a normal retirement age of 65. Pensionable earnings is basic salary less the basic U.K. state pension. On death in service, a lump sum benefit of three times basic salary is paid. In addition, on death at any time, a spouse's pension of one-half of the pension (or prospective pension) becomes payable. There is a special category of membership, which is closed to new entrants, which provides a cash sum based on final salary and length of service at retirement. Employee Groups covered Permanent U.K. employees who have completed six months service. Funding policy That the assets should be at least equal to the present value of obligations in respect of service to the valuation date taking account of the projected final earnings of active members. Types of assets held The investments comprise Managed Fund Units, and since October 1 1991, have been managed by Pensions Management (SWF) Limited. F-18 APPLIED MICROBIOLOGY, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. PENSION BENEFITS Continued The funding status of the Burns Philp (U.K.) plc Pension Plan as of June 30, 1995 and 1994 is as follows: 1995 1994 $000 $000 ---- ---- Actuarial present value of benefit obligations: Vested benefit obligation (3,200) (3,184) -------- -------- Accumulated benefit obligation (3,490) (3,472) -------- -------- Projected benefit obligation for service rendered to date (4,152) (4,131) Plan assets at fair value 4,285 3,639 -------- -------- Plan assets in excess of/(less than) projected benefit obligation 133 (492) Unrecognized net loss 616 1,289 Unrecognized net transition asset (338) (350) -------- -------- Prepaid cost 411 447 -------- -------- -------- -------- Of the above prepaid costs of $411,000 at June 30, 1995, $395,000 (1994 $384,000) relates to A&B as determined by actuarial valuation, and is therefore included in the accounts of the Company. On termination of the plan these monies would be returned to the contributing companies. Net pension cost for 1995, 1994, and 1993 included the following components: 1995 1994 1993 $000 $000 $000 ---- ---- ---- Service costs - benefits earned during the period 183 118 77 Interest cost on projected benefit obligation 262 192 147 Actual return on plan assets (292) (222) (178) Net amortization and deferral 39 15 (3) ------- ------- ------- Net pension cost 192 103 43 Assumptions used in accounting for the pension plan as at June 30 1995, 1994 and 1993 were: 1995 1994 1993 % % % Discount rate 9 8 9 Rates of increase in compensation levels 7 7 7 Expected return on assets 10 10 10 F-19 EX-10.48 2 FORM OF LEASE AGREEMENT KEREN LIMITED PARTNERSHIP, Landlord and APPLIED MICROBIOLOGY, INC., Tenant --------------------------------------- LEASE --------------------------------------- The Landmark at Eastview Towns of Greenburgh and Mount Pleasant Westchester County, New York TABLE OF CONTENTS Article Page 1 - Demise and Rent and Definitions . . . . . . . . . . . . . 1 2 - Use . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3 - Condition of Premises . . . . . . . . . . . . . . . . . . 5 4 - Tax Payments . . . . . . . . . . . . . . . . . . . . . . 8 5 - Operating Expense Payments . . . . . . . . . . . . . . . 10 6 - Subordination, Notice to Superior Lessors and Superior Mortgagees . . . . . . . . . . . . . . . . . . . . . . . 14 7 - Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . 17 8 - Assignment, Subletting and Mortgaging . . . . . . . . . . 17 9 - Compliance With Legal and Insurance Requirements . . . . 26 10 - Insurance . . . . . . . . . . . . . . . . . . . . . . . 28 11 - Rules and Regulations . . . . . . . . . . . . . . . . . 30 12 - Alterations . . . . . . . . . . . . . . . . . . . . . . 31 13 - Landlord's and Tenant's Property . . . . . . . . . . . . 33 14 - Repairs and Maintenance . . . . . . . . . . . . . . . . 34 15 - Electric Energy . . . . . . . . . . . . . . . . . . . . 35 16 - Heat, Ventilation and Air-Conditioning . . . . . . . . . 38 17 - Other Services; Service Interruption . . . . . . . . . . 39 18 - Access and Name of Project . . . . . . . . . . . . . . . 40 19 - Notice of Occurrences . . . . . . . . . . . . . . . . . 43 20 - Non-Liability and Indemnification . . . . . . . . . . . 43 21 - Damage or Destruction . . . . . . . . . . . . . . . . . 44 22 - Eminent Domain . . . . . . . . . . . . . . . . . . . . . 46 23 - Surrender and Holding Over . . . . . . . . . . . . . . . 48 24 - Default . . . . . . . . . . . . . . . . . . . . . . . . 49 i 25 - Re-entry by Landlord . . . . . . . . . . . . . . . . . . 50 26 - Damages . . . . . . . . . . . . . . . . . . . . . . . . 51 27 - Affirmative Waivers . . . . . . . . . . . . . . . . . . 54 28 - No Waivers . . . . . . . . . . . . . . . . . . . . . . . 54 29 - Curing Defaults . . . . . . . . . . . . . . . . . . . . 55 30 - Broker . . . . . . . . . . . . . . . . . . . . . . . . . 55 31 - Notices . . . . . . . . . . . . . . . . . . . . . . . . 56 32 - Estoppel Certificates . . . . . . . . . . . . . . . . . 56 33 - Execution and Delivery of Lease . . . . . . . . . . . . 57 34 - Recording of Lease . . . . . . . . . . . . . . . . . . . 57 35 - Parking . . . . . . . . . . . . . . . . . . . . . . . . 57 36 - Environmental Compliance . . . . . . . . . . . . . . . . 57 37 - Signs . . . . . . . . . . . . . . . . . . . . . . . . . 58 38 - Approval Contingency . . . . . . . . . . . . . . . . . . 59 39 - Relocation of Premises . . . . . . . . . . . . . . . . . 59 40 - Partnership or Multi-Person Tenant . . . . . . . . . . . 60 41 - Miscellaneous . . . . . . . . . . . . . . . . . . . . . 61 42 - Right of First Offer . . . . . . . . . . . . . . . . . . 63 43 - Expansion Option . . . . . . . . . . . . . . . . . . . . 65 ii EXHIBITS Exhibit A - Plan of Premises Exhibit B - Schedule of Fixed Rent Exhibit C - Rules and Regulations Exhibit D - Parking Area Exhibit E - Plans and Specifications Exhibit F - First Offer Space Exhibit G - Expansion Space Exhibit H - Cleaning Schedule iii LEASE, dated as of February 7, 1995, between KEREN LIMITED PARTNERSHIP, a Delaware limited partnership having an office at 777 Old Saw Mill River Road, Tarrytown, New York 10591- 6705 (herein called "Landlord"), and APPLIED MICROBIOLOGY, INC., a New York corporation having an office at 170 53rd Street, Brooklyn, New York 11232-4319 (herein called "Tenant"). W I T N E S S E T H : ARTICLE 1 - Demise and Rent and Definitions 1.01. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises (as defined in Sec- tion 1.02) in the building formerly known as the IBM Building and identified as such on the plan attached hereto as Exhibit A (herein called the "Building") on Landlord's land (herein called "Land") located along Old Saw Mill River Road, partly in the Town of Greenburgh and partly in the Town of Mount Pleasant, in the County of Westchester and State of New York and called "The Landmark at Eastview." Landlord intends to and shall have the right at any time to cause part or parts of the Land to become a separate tax lot or separate tax lots in connection with future development thereof. If Landlord does so, any separate tax lots that do not include the Premises shall be excluded from the Land and "Land" shall mean only the land in the tax lot of which the Premises are a part. The Land and all of the buildings and other improvements presently and hereafter located thereon are herein collectively called the "Project." The buildings and other improvements presently and hereafter located on the Land are herein collectively called the "Improvements." 1.02. The premises (herein called the "Premises") leased to Tenant consist of approximately 20,427 square feet of space, and are shown on Exhibit A. Tenant shall have, as appurtenant to the Premises, the non-exclusive right to use in common with others, subject to the terms and conditions of this Lease, including the Rules and Regulations (as hereinafter defined): (a) the common lobbies, corridors, stairways and elevators of the Building, if any, and (b) if the Premises includes less than the rentable floor area of any floor, the common toilets, corridors and lobby, if any, of such floor. 1.03. The term of this Lease (herein called the "Term") shall commence on the date (herein called the "Commencement Date") that is the earlier of (i) the Substantial Completion Date (as hereinafter defined) or (ii) the date on which Tenant takes occupancy of the Premises for any use permitted under this Lease (provided, however, that Tenant's use of certain space in the Building pursuant to that certain license agreement between Landlord and Tenant dated December 23, 1994 shall not affect the determination of the Commencement Date) and shall end at 11:59 p.m. on the last day of the month in which the seventh anniversary of the Commencement Date occurs, or on such earlier date upon which the Term shall expire or be canceled or terminated pursuant to any of the conditions or covenants of this Lease or pursuant to law. Promptly following the Commencement Date the parties hereto shall enter into an agreement in form and substance satisfactory to Landlord setting forth the Commencement Date. If this Lease contains any renewal option or options, then upon the valid exercise of any renewal option, the word "Term" shall be deemed to include the renewal period for which said option or options was or were exercised. 1.04. The rents shall be and consist of (a) fixed rent (herein called the "Fixed Rent") at the rate or rates per annum set forth on Exhibit B which shall be payable in equal monthly installments in advance on the first day of each and every calendar month during the Term (except that Tenant shall pay, upon the execution and delivery of this Lease by Tenant, the sum of $31,554.17, to be applied against the first installment or installments of Fixed Rent becoming due under this Lease), and (b) additional charges (herein called the "Additional Charges") consisting of all other sums of money as shall become due from and payable by Tenant to Landlord hereunder; all the Fixed Rent and Additional Charges shall be paid in lawful money of the United States to Landlord at its office c/o Keren Developments Inc., 777 Old Saw Mill River Road, Tarrytown, New York 10591-6705, Attention: Accounts Receivable, or such other place, or to Landlord's agent and at such other place, as Landlord shall designate by notice to Tenant. 1.05. Tenant shall pay the Fixed Rent and Additional Charges promptly when due without notice or demand therefor and without any abatement, deduction or setoff for any reason whatsoever, except as may be expressly provided for in this Lease or by law. If the Commencement Date occurs on a day other than the first day of a calendar month, the Fixed Rent for the partial calendar month at the commencement of the Term shall be prorated. 1.06. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct Fixed Rent or Additional Charges shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or provided at law. 1.07. Tenant shall pay the Fixed Rent and Additional Charges as above and as herein provided, by good and sufficient check (subject to collection) drawn on a New York City bank which is a member of the New York Clearing House or a successor thereto. 2 1.08. If Tenant fails to make any payment of Fixed Rent or Additional Charges within 5 business days after the due date thereof, Tenant shall pay to Landlord a late charge of 4% of the amount of such payment. Such late charge shall be due and payable on demand. 1.09. If any of the Fixed Rent or Additional Charges shall be or become uncollectible, reduced or required to be refunded because of any Legal Requirements (as defined in Sec- tion 1.10(i)), Tenant shall enter into such agreement(s) and take such other steps (without additional expense to Tenant) as Landlord may reasonably request and as may be legally permissible to permit Landlord to collect the maximum rents which from time to time during the continuance of such legal rent restriction may be legally permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction, (a) the rent shall become and thereafter be payable in accordance with the amounts reserved herein for the periods following such termination and (b) Tenant shall pay to Landlord, to the maximum extent legally permissible, an amount equal to (i) the rent which would have been paid pursuant to this Lease but for such legal rent restriction, less (ii) the rent actually paid by Tenant during the period such legal rent restriction was in effect. 1.10. The following terms, whenever used in this Lease, shall have the meanings indicated: (a) The term "and/or" when applied to two or more matters or things shall be construed to apply to any one or more or all thereof as the circumstances warrant at the time in question. (b) The term "Business Days" shall mean all days except Saturdays, Sundays and days observed by the Federal or the state governments as legal holidays. (c) The term "Business Hours" shall mean 9:00 a.m. to 6:00 p.m. (d) The terms "herein" and "hereunder," and words of similar import, shall be construed to refer to this Lease as a whole, and not to any particular Article or Section, unless expressly so stated. (e) The term "Insurance Requirements" shall mean the rules, regulations, orders and requirements of the New York Board of Underwriters and/or the New York Fire Insurance Rating Organization and/or any other similar body performing the same or similar functions and having jurisdiction or cognizance over the Building and/or the Premises, whether now or hereafter in force, and the 3 reasonable requirements of any insurance policy maintained by Landlord. (f) The term "Landlord" shall mean only the owner at the time in question of the Building or of a lease of the Building, so that in the event of any transfer or transfers of title to the Building or of Landlord's interest in a lease of the Building, the transferor shall be and hereby is relieved and freed of all obligations of Landlord under this Lease accruing after such transfer, and provided that such transferee has assumed and agreed to perform and observe all obligations of Landlord herein during the period it is the holder of Landlord's interest under this Lease. (g) The term "Lease Interest Rate" shall mean a rate equal to the lesser of (a) the rate announced by Citibank, N.A. or its successor from time to time as its prime or base rate, plus 4%, or (b) the maximum applicable legal rate, if any, from the date such amount became due and payable to the date of payment thereof by Tenant. (h) The term "Lease Year " shall mean the 12-month period beginning on the Commencement Date or commencing on any anniversary of the Commencement Date. (i) The term "Legal Requirements" shall mean laws and ordinances of any or all of the federal, state, city, town, county, borough and village governments and rules, regulations, orders and directives of any and all departments, subdivisions, bureaus, agencies or offices thereof, and of any other governmental, public or quasi- public authorities having jurisdiction over the Building and/or the Premises, and the direction of any public officer pursuant to law, whether now or hereafter in force. (j) The term "person" shall mean any natural person or persons, a partnership, a corporation, and any other form of business or legal association or entity. (k) The term "Tenant" shall mean the Tenant herein named or any assignee or other successor in interest (immediate or remote) of the Tenant herein named, which at the time in question is the owner of the Tenant's estate and interest granted by this Lease; but the foregoing provisions of this subsection shall not be construed to permit any assignment of this Lease not otherwise permitted hereunder or to relieve the Tenant herein named or any assignee or other successor in interest (whether immediate or remote) of the Tenant herein named from the full and prompt payment, performance and observance of the 4 covenants, obligations and conditions to be paid, performed and observed by Tenant under this Lease. ARTICLE 2 - Use 2.01. Tenant shall use and occupy the Premises solely as laboratories and/or general and executive offices and for no other purpose. 2.02. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business in the Premises or any part thereof (other than the present certificate of occupancy for the Premises or for the Building), Tenant, at its expense, shall duly procure and thereafter maintain such license or permit and, upon written request of Landlord, submit the same to Landlord for inspection. Tenant shall at all times comply with the terms and conditions of each such license or permit. Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy, the Premises, or any part thereof, in any manner (a) which violates the certificate of occupancy for the Premises or for the Building or any other permit or license issued pursuant to any Legal Requirements; (b) which causes or is liable to cause injury to the Building or any equipment, facilities or systems therein; (c) which constitutes a violation of the Legal Requirements or Insurance Requirements; (d) which impairs the character or appearance of the Building as a first class office and research building; (e) which impairs the proper and economic maintenance, operation and repair of the Building and/or its equipment, facilities or systems; or (f) which unreasonably annoys or inconveniences other tenants or occupants of the Project. Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy, the Premises, or any part thereof, for (i) the production or disposal of any toxic chemicals, (ii) a banking, trust company, or safe deposit business, or (iii) a restaurant and/or bar. ARTICLE 3 - Condition of Premises 3.01. Tenant is leasing the Premises "as is" on the date hereof, except for the Tenant Improvements (as hereinafter defined); and the taking of possession by Tenant of the Premises shall be conclusive evidence as against Tenant that the Premises and the Building were in good and satisfactory condition at the time such possession was taken. 3.02. If Landlord is unable to give possession of the Premises on the Commencement Date because of the fact that a temporary or permanent certificate of occupancy has not been procured, or for any other reason (including, but not limited to, the occurrence of any of the events described in Sec- tion 41.04), Landlord shall not be subject to any liability for 5 failure to give possession on the Commencement Date and the validity of this Lease shall not be impaired under such circumstances, nor shall the same be construed in any way to extend the Term, but the Fixed Rent and Additional Charges payable hereunder shall be abated (provided Tenant is not responsible for the inability to obtain possession) until Landlord tenders possession to Tenant. Tenant hereby waives the provisions of Section 223-a of the Real Property Law of the State of New York, and agrees that the provisions of this Article are intended to constitute "an express provision to the contrary" within the meaning of said Section 223-a. 3.03. Landlord agrees to install and construct at the Premises the tenant improvements (the "Tenant Improvements") described in the plans and specifications identified in Exhibit E attached hereto (the "Tenant Improvement Plans"). The materials to be installed and the work to be rendered and performed by Landlord, or which Landlord causes to be rendered or performed by outside contractors, pursuant to this Section 3.03 shall hereinafter be called "Landlord's Work". 3.04. The cost of constructing the Tenant Improvements (the "TI Cost") shall be borne and paid as follows: (a) Landlord shall bear and pay up to the first $500,000 of the TI Cost and shall provide to Tenant copies of all invoices and/or bills relating to the first $500,000 of the TI cost. (b) If the TI Cost is less than $500,000 then Tenant shall receive a credit against the first monthly Fixed Rent payment(s) due under the Lease equal to the difference between $500,000 and the TI Cost. (c) If the TI Cost exceeds $500,000, Tenant shall bear and pay such excess, as Additional Charges within 10 days after demand by Landlord (which may be made from time to time after such excess begins to accrue), which demand shall be accompanied by copies of all invoices and/or bills relating to the Landlord's Work (to the extent not theretofore provided to Tenant). (d) Landlord shall have right to stop Landlord's Work if Tenant fails to pay any sums due under paragraph 3.04(c). 3.05. (a) Landlord shall give Tenant notice (the "Landlord's Anticipated Completion Notice") approximately 30 days prior to the date when Landlord expects Landlord's Work to be substantially complete, but Landlord shall have no liability 6 as a consequence of the substantial completion of Landlord's Work before or after such date. (b) Landlord shall give Tenant notice (the "Landlord's Substantial Completion Notice") on (or promptly after) the date that Landlord's Work has been (or is deemed to have been) substantially completed. For purposes of this Lease, subject to Section 3.05(c), the "Substantial Completion Date" shall be the later of (i) the date of giving of Landlord's Substantial Completion Notice or (ii) the date 30 days after the date of the giving of Landlord's Anticipated Completion Notice. If the Landlord's Substantial Completion Notice is not based upon the deemed substantial completion of Landlord's Work pursuant to Section 3.06(b), then such Notice shall be accompanied by a certification of Landlord's architect or construction consultant ("Landlord's Certification") certifying the substantial completion of Landlord's Work. (c) The Landlord's Substantial Completion Notice shall be conclusive and binding on Tenant unless Tenant disputes Landlord's determination of the Substantial Completion Date within 15 days thereafter. Landlord and Tenant shall endeavor in good faith to resolve such a dispute, but until the resolution thereof (whether by mutual agreement or adjudication), Landlord's determination shall apply for all purposes hereof. 3.06. (a) Landlord's Work shall be deemed substantially completed for the purposes of this Section 3.06, notwithstanding the fact that minor or insubstantial details of construction, mechanical adjustment or decoration remain to be performed, the noncompletion of which does not materially interfere with Tenant's use of the Premises. (b) Landlord's Work shall also be deemed substantially completed for purposes of this Section 3.06 if a delay shall occur in the substantial completion of the Landlord's Work as the result of: (i) any request by Tenant that Landlord delay the completion of any Landlord's Work; (ii) any breach or default by Tenant in the performance of its obligations under this Lease; (iii) any negligent or wrongful act of Tenant or its officers, agents, servants or contractors; or (iv) any reasonably necessary displacement of the Landlord's Work from its place in Landlord's construction schedule resulting from any of the 7 causes for delay described above and the fitting of such Landlord's Work back into such schedule. ARTICLE 4 - Tax Payments 4.01. For the purposes of this Article 4 and other provisions of this Lease: (a) The term "Taxes" shall mean (i) the real estate taxes, assessments and special assessments imposed upon the Project by any federal, state, municipal or other governments or governmental bodies or authorities excluding however any income or franchise taxes imposed on Landlord and (ii) any expenses incurred by Landlord in contesting such taxes or assessments and/or the assessed value of the Improvements and/or the Land, which expenses shall be allocated to the Tax Year to which such expenses relate. If at any time during the Term the methods of real estate taxation prevailing on the date hereof shall be altered so that in lieu of, or as an addition to or as a substitute for, the whole or any part of such real estate taxes, assessments and special assessments now imposed on real estate there shall be levied, assessed or imposed (x) a tax, assessment, levy, imposition, license fee or charge wholly or partially as a capital levy or otherwise on the rents received therefrom, or (y) any other such additional or substitute tax, assessment, levy, imposition or charge, then all such taxes, assessments, levies, impositions, fees or charges or the part thereof so measured or based shall be deemed to be included within the term "Taxes" for the purposes hereof. (b) The term "Tax Year" shall mean the period of 12 calendar months beginning on January 1, 1998, and each succeeding 12-month period thereafter. (c) The term "Tenant's Proportionate Share" shall mean 2.77%, subject to change as provided in Sec- tion 4.06 and subject to change as provided below in this subdivision (c). If any building or buildings is or are enlarged, demolished or removed from the Land or any new building or buildings is or are erected on the Land, then, except as is otherwise provided in Section 5.02, the term "Tenant's Proportionate Share" shall mean the percentage that represents a fraction the numerator of which is the number of square feet of gross rentable area in the Premises and the denominator of which is the aggregate number of square feet of gross rentable area of all the buildings on the Land, subject to change as provided in Section 4.06. 8 4.02. Any Taxes for a real estate fiscal tax year, a part of which is included within a particular Tax Year and a part of which is not so included, shall be apportioned on the basis of the number of days in the real estate fiscal tax year included in the particular Tax Year for the purpose of making the computations under Section 4.03. 4.03. For each Tax Year, any part of which shall occur during the Term, Tenant shall pay to Landlord an amount (prorated to the extent provided in Section 4.05, if applicable) (herein called the "Tax Payment") equal to Tenant's Proportionate Share of the Taxes for such Tax Year. The Tax Payment for each Tax Year shall be due and payable in installments in the same manner and at the same time that the Taxes for such Tax Year are first due and payable to the appropriate taxing authority. Landlord shall bill Tenant for any Tax Payment installment(s) payable by Tenant pursuant to this Article, such bill to set forth in reasonable detail the computation of the Tax Payment and the particular installment(s) thereof being billed. In the event of any increase or decrease in the Taxes for any Tax Year, whether during or after such Tax Year, the Tax Payment for such Tax Year shall be appropriately adjusted and paid or refunded, as the case may be, in accordance therewith. 4.04. If Landlord shall receive a refund of the Taxes for any Tax Year, Landlord shall either pay to Tenant, or permit Tenant to credit against subsequent payments under this Lease, Tenant's Proportionate Share of the net refund (after deducting from such total refund the costs and expenses, including, but not limited to, appraisal, accounting and legal fees of obtaining the same, to the extent that such costs and expenses were not included in the Taxes for such Tax Year); provided, however, such payment or credit to Tenant shall in no event exceed Tenant's Tax Payment paid for such Tax Year. 4.05. If a Tax Year ends after the expiration or termination of the Term, the Tax Payment therefor shall be prorated to correspond to that portion of such Tax Year occurring within the Term. 4.06. If Landlord causes part or parts of the Land to become a separate tax lot or separate tax lots, then, except as is otherwise provided in Section 5.02, the term "Tenant's Proportionate Share" shall be the percentage that represents a fraction, the numerator of which is the number of square feet of gross rentable area in the Premises and the denominator of which is the aggregate number of square feet of gross rentable area of all the buildings in the separate tax lot of which the Premises are a part. 9 ARTICLE 5 - Operating Expense Payments 5.01. For the purposes of this Article 5 and other provisions of this Lease: (a) The term "Operating Expenses" shall mean all expenses paid or incurred by Landlord or on Landlord's behalf in respect of the repair, maintenance and operation of the Project, including, without limitation, all expenses paid or incurred as a result of Landlord complying with its obligations under this Lease. Operating Expenses shall include, without limitation, (i) salaries, wages, medical, surgical, union and general welfare benefits (including, without limitation, group life insurance and pension and welfare payments and contributions and all other fringe benefits paid to, for or with respect to all persons (whether employees of Landlord or its managing agent) engaged in the repair, operation and maintenance of the Project; (ii) payroll taxes, workers' compensation, uniforms, dry cleaning, and related expenses for such persons; (iii) the cost of all charges for gas, steam, electricity, heat, ventilation, air-conditioning, water and other utilities furnished to the buildings within the Project (including, without limitation, the common areas thereof) together with any taxes on such utilities (excluding however, the cost of electricity, heat, ventilating and air-conditioning described in clauses (9) and (10) of this definition); (iv) the cost of painting any portion of the Project other than rentable areas; (v) the cost of building and cleaning supplies and equipment, cost of replacements for tools and equipment used in the operation, maintenance, and repair of the Project and charges for public telephone service for the Project; (vi) financial expenses incurred in connection with the operation of the Project, such as insurance premiums (including, without limitation, liability insurance, fire and casualty insurance, rent insurance and any other insurance), reasonable attorneys' fees and disbursements (exclusive of any such fees and disbursements incurred in applying for any reduction of Taxes or in connection with the leasing of space in the Project or the enforcement of leases), auditing and other professional fees and expenses, association dues and any other ordinary and customary financial expenses incurred in connection with the operation of the Project; (vii) the cost or rentals of all supplies (including, without limitation, cleaning supplies), tools, materials and equipment, and sales and other taxes thereon; (viii) cost of hand tools and other movable equipment used in the repair, maintenance or operation of the Project; (ix) the cost of all charges for window and other cleaning and janitorial and security services; (x) charges of independent contractors for the 10 provision of goods and/or services otherwise includible as Operating Expenses under this Section 5.01; (xi) the cost of repairs and replacements made by Landlord; (xii) the cost of alterations and improvements to the Project made by reason of Legal Requirements or Insurance Requirements (subject to the amortization requirements set forth in clause (12) below); (xiii) payments under service contracts; (xiv) management fees or, if no managing agent is employed by Landlord, a sum in lieu thereof which is not in excess of the then prevailing rates for management fees of similar properties in Westchester County (but not less than 3-1/2% of the rents and additional charges); and (xv) all other charges properly allocable to the repair, operation and maintenance of the Project in accordance with generally accepted accounting principles ("GAAP") (and, except as provided in clause (11) below, not required under GAAP to be capitalized); excluding, however, (1) depreciation, (2) interest on and amortization of debts, (3) ground rent, (4) leasehold improvements made for existing or future tenants of the Project, (5) brokerage commissions, (6) refinancing costs, (7) costs and expenses in connection with the construction of new buildings, (8) Taxes, (9) the cost of Basic Electric and HVAC Electric (as such terms are defined in Section 15.01) furnished to the Premises or to other tenants of the Project, (10) the cost of producing and furnishing steam and chilled water to provide heat, ventilating and air-conditioning furnished to the Premises or to other tenants of the Project, (11) salaries of officers of Keren Developments Inc. at or above the level of vice president, and (12) the cost of any improvement, machinery or equipment that is required to be capitalized for federal income tax purposes, except (x) expenditures designed to result in savings or a reduction of Operating Expenses (e.g., energy saving devices), and (y) expenditures required by law, in either of which case such expenditure shall, subject to the immediately following sentence, be included in Operating Expenses for the Operating Year in which such expenditure is incurred and subsequent Operating Years, on a straight line basis, to the extent that such items are depreciated over an appropriate period considering the useful life thereof with an interest factor equal to the rate announced by Citibank, N.A. or its successor as its prime or base rate at the time Landlord incurs such expenditure. Notwithstanding the foregoing, in no event shall any expenditure of the type described in the foregoing clause (12)(x) be included in Operating Expenses during any one Operating Year in an amount in excess of the amount of Operating Expenses saved during such year (as reasonably estimated by Landlord) as the result of the expenditure in question, and in the event that such an excess exists for any Operating Year, the period for depreciating such 11 item(s) shall be extended until Landlord has fully included such excess in Operating Expenses. If Landlord leases any equipment designed to result in savings or reductions in Operating Expenses, then the rentals and other costs paid pursuant to such leasing shall be included in Operating Expenses for the Operating Year in which they are incurred. Any cost or expense shall be included in Operating Expenses for any Operating Year no more than once, notwithstanding that such cost or expense may fall under more than one of the categories listed above. Landlord may use related or affiliated entities to provide services or furnish materials for the Project provided that the rates or fees charged by such entities are competitive with those charged by unrelated or unaffiliated entities for the same services or materials. Operating Expenses shall be calculated on the accrual basis of accounting. (b) The term "Operating Year" shall mean the calendar year beginning on January 1, 1998, and each succeeding calendar year thereafter. (c) The term "Operating Statement" shall mean a written statement prepared by Landlord or its agent, setting forth Landlord's computation of the sum payable by Tenant under this Article for a specified Operating Year. 5.02. For each Operating Year, any part of which occurs during the Term, Tenant shall pay to Landlord an amount (prorated to the extent provided in Section 5.06, if applicable) (herein called the "Operating Payment") equal to Tenant's Proportionate Share of the Operating Expenses for such Operating Year. Said payments shall be made as provided in Section 5.03. Tenant's Proportionate Share with respect to Operating Expenses shall not be subject to adjustment pursuant to Section 4.06 (and the third sentence of Section 1.01 shall not apply to change the definition of the "Land" for computing Tenant's Proportionate Share with respect to Operating Expenses). Also, Tenant's Proportionate Share shall not be subject to adjustment pursuant to the second sentence of Section 4.01(c) upon the erection of a new building or buildings upon the Land unless the operating expenses for such new building(s) are generally included in the determination of operating expenses of the Project under provisions analogous to this Article 5 in leases of space at the Project that contain such provisions. 5.03. Landlord shall furnish to Tenant, prior to the commencement of each Operating Year, a written statement setting forth Landlord's estimate of the Operating Payment for such Operating Year. Tenant shall pay to Landlord on the first day of each month during such Operating Year an amount equal to one-twelfth of Landlord's estimate of the Operating Payment for 12 such Operating Year. If, however, Landlord shall furnish any such estimate for an Operating Year subsequent to the commence- ment thereof, then (a) until the first day of the month following the month in which such estimate is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section in respect of the last month of the preceding Operating Year; (b) after such estimate is furnished to Tenant or included in or together with such estimate, Landlord shall give notice to Tenant stating whether the installments of the Operating Payment previously made for such Operating Year were greater or less than the installments of the Operating Payment to be made for such Operating Year in accordance with such estimate, and (i) if there shall be a deficiency, Tenant shall pay to Landlord the amount thereof within 10 days after demand therefor, or (ii) if there shall have been an overpayment, Landlord shall promptly either refund to Tenant the amount thereof or permit Tenant to credit the amount thereof against subsequent payments under this Article or Article 4; and (c) on the first day of the month following the month in which such estimate is furnished to Tenant, and monthly thereafter throughout the remainder of such Operating Year, Tenant shall pay to Landlord an amount equal to one- twelfth of the Operating Payment shown on such estimate. Landlord may, at any time during each Operating Year, furnish to Tenant a revised statement of Landlord's estimate of the Operating Payment for such Operating Year; and in such case, the Operating Payment for such Operating Year shall be adjusted and paid or refunded, as the case may be, substantially in the same manner as provided in the preceding sentence. 5.04. Within 120 days after the end of each Operating Year Landlord shall furnish to Tenant an Operating Statement for such Operating Year. If the Operating Statement shows that the sums paid by Tenant under Section 5.03 exceeded the Operating Payment to be paid by Tenant for such Operating Year, Landlord shall promptly either refund to Tenant the amount of such excess or permit Tenant to credit the amount of such excess against subsequent payments under this Article or Article 4; and if the Operating Statement for such Operating Year shows that the sums so paid by Tenant were less than the Operating Payment to be paid by Tenant for such Operating Year, Tenant shall pay to Landlord the amount of such deficiency within 10 days after demand therefor. 5.05. (a) Tenant, upon notice given within 60 days of the receipt of such Operating Statement, may elect to have Tenant's designated (in such notice) agent (who may be an employee of Tenant) examine such of Landlord's books and records as are directly relevant to the Operating Statement in question. (If Tenant shall not give such notice within such 13 60-day period, then the Operating Statement as furnished by Landlord shall be conclusive and binding upon Tenant.) Tenant, pending the resolution of any contest shall continue to pay all sums as determined to be due in the first instance by Landlord's Operating Statement and upon the resolution of such contest, suitable adjustment shall be made in accordance therewith with appropriate refund to be made by Landlord to Tenant (or credit allowed Tenant against the Fixed Rent and Additional Charges becoming due). (b) If the resolution of any contest over disputed Operating Expenses finds that Operating Expenses are more than 4% less than as reported in the applicable Operating Statement from Landlord to Tenant, the Landlord shall pay the reasonable cost of Tenant's audit. 5.06. If an Operating Year ends after the expiration or termination of this Lease, any Additional Charges in respect thereof payable under this Article shall be equitably prorated to correspond to that portion of the Operating Year occurring within the Term. ARTICLE 6 - Subordination, Notice to Superior Lessors and Superior Mortgagees 6.01. The holder of any mortgage which may now or hereafter affect the Land and/or the Building and/or any Superior Lease (as hereinafter defined) may elect that this Lease and all rights of Tenant hereunder shall have priority over such mortgage and, upon notification by such holder to Tenant, this Lease shall be deemed to have priority over such mortgage, whether this Lease is dated prior to or subsequent to the date of such mortgage. Except for any mortgage where the holder gave the aforesaid notification that this Lease shall have priority over such mortgage, this Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate to all ground leases, overriding leases and underlying leases of the Land and/or the Improvements now or hereafter existing and to all mortgages which may now or hereafter affect the Land and/or the Improvements and/or any of such leases, including, without limitation, that certain Mortgage Consolidation, Modification, Extension and Spreader Agreement dated as of September 30, 1987, between Landlord, as Mortgagor, and Swiss Bank Corporation, New York Branch (herein called "Swiss Bank"), as Mortgagee, and that certain Restated Mortgage dated as of September 30, 1987, between Landlord, as Mortgagor, and Union Carbide Corporation (now known as Union Carbide Chemicals and Plastics Company Inc.) (herein called "Carbide"), as Mortgagee, whether or not such mortgages shall also cover other lands and/or buildings and/or leases, to each and every advance made or hereafter to be made under such mortgages, and to all renewals, modifications, replacements and extensions of such 14 leases and such mortgages and spreaders and consolidations of such mortgages. This Section shall be self-operative and no further instrument of subordination or priority (as described in the first sentence of this Section) shall be required. In confirmation of such subordination or priority (as described in the first sentence of this Section), Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord, the lessor under any such lease or the holder of any such mortgage or any of their respective successors in interest may reasonably request to evidence such subordination or priority; and if Tenant fails to execute, acknowledge or deliver any such instruments within 10 days after request therefor, Tenant hereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-fact, coupled with an interest, to execute and deliver any such instruments for and on behalf of Tenant. Any lease to which this Lease is, at the time referred to, subject and subordinate is herein called a "Superior Lease," and the lessor of a Superior Lease or its successor in interest, at the time referred to, is herein called a "Superior Lessor" and any mortgage (a) to which this Lease is, at the time referred to, subject and subordinate or (b) to which this Lease shall have priority due to the effect of the first sentence of this Section is herein called a "Superior Mortgage" and the holder of a Superior Mortgage is herein called a "Superior Mortgagee." 6.02. If any act or omission of Landlord would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right (a) until it has given written notice of such act or omission to Landlord and each Superior Mortgagee and each Superior Lessor whose name and address shall previously have been furnished to Tenant, and (b) until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when such Superior Mortgagee or Superior Lessor shall have become entitled under such Superior Mortgage or Superior Lease, as the case may be, to remedy the same (which reasonable period shall in no event be less than the longer of 180 days or the period to which Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy), provided such Superior Mortgagee or Superior Lessor shall with due diligence give Tenant notice of intention to, and commence and continue to, remedy such act or omission. The current address of Swiss Bank, a Superior Mortgagee, is Swiss Bank Tower, 15th Floor, 10 East 50th Street, New York, New York 10022, Attention of Real Estate Department, Mr. Roy Chin, Director, Restructuring. The current address of Carbide, a Superior Mortgagee, is 39 Old Ridgebury Road, Danbury, Connecticut 06817-0001, Attention of Mr. James N. Barton, Director of General Services. Notwithstanding anything to the contrary contained herein, if 15 Tenant is prevented from having any access to the Premises solely because of a breach of this Lease by Landlord, and such access has not been restored within 30 days after notice thereof from Tenant to Landlord, and to each Superior Mortgagee and Superior Lessor, then Tenant shall have the right to receive an abatement of the Fixed Rent for the period following such 30th day until the date Tenant's access to the Premises is restored. 6.03. If any Superior Mortgagee or Superior Lessor shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease or deed, then at the request of such party so succeeding to Landlord's rights (herein called a "Successor Landlord") and upon such Successor Landlord's written agreement to accept Tenant's attornment, Tenant shall attorn to and recognize such Successor Landlord as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment. Upon such attornment this Lease shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Lease except that the Successor Landlord shall not (a) be liable for any previous act or omission of Landlord under this Lease; (b) be subject to any offset, not expressly provided for in this Lease, which theretofore shall have accrued to Tenant against Landlord; (c) be obligated to complete any work to prepare the Premises for Tenant's occupancy; (d) be obligated to make any payment to or on behalf of Tenant; (e) be required to account for any security deposit other than any actually delivered to the Successor Landlord; or (f) be bound by any previous modification of this Lease or by any previous prepayment of more than one month's Fixed Rent, unless such modification or prepayment shall have been expressly approved in writing by the lessor of the Superior Lease or the holder of the Superior Mortgage through or by reason of which the Successor Landlord shall have succeeded to the rights of Landlord under this Lease. 6.04. If any prospective or actual Superior Mortgagee or Superior Lessor requires any modification of this Lease, Tenant shall, upon notice thereof from Landlord, promptly execute and deliver to Landlord the instrument accompanying said notice from Landlord to effect such modification if such instrument does not adversely affect in any material respect any of Tenant's rights under this Lease and does not increase in any material respect any of Tenant's obligations under this Lease. 6.05. Provided Tenant is not in default beyond any applicable notice or grace period under this Lease, the 16 subordination of this Lease and the rights of Tenant hereunder to any Superior Mortgage or Superior Lease shall be conditioned upon the execution and delivery to Tenant by the Superior Mortgagee or Superior Lessor thereunder of a subordination and non-disturbance agreement with respect to this Lease, in such Superior Mortgagee's or Superior Lessor's standard form. Tenant agrees to execute and deliver such agreement to such Superior Mortgagee or Superior Lessor promptly upon request. ARTICLE 7 - Quiet Enjoyment 7.01. So long as Tenant pays all of the Fixed Rent and Additional Charges and performs all of Tenant's other obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy the Premises without hindrance, ejection or molestation by Landlord or any person lawfully claiming through or under Landlord, subject, nevertheless, to the provisions of this Lease and to any Superior Leases and Superior Mortgages. This covenant shall be construed as a covenant running with the Land, and is not, nor shall it be construed as, a personal covenant of Landlord, except to the extent of Landlord's interest in this Lease and only so long as such interest shall continue, and thereafter this covenant shall be binding only upon subsequent successors in interest of Landlord's interest in this Lease, to the extent of their respective interests, as and when they shall acquire the same, and so long as they shall retain such interest. ARTICLE 8 - Assignment, Subletting and Mortgaging 8.01. Tenant shall not, whether voluntarily, involuntarily, or by operation of law or otherwise (a) assign or otherwise transfer this Lease, or offer or advertise to do so, (b) sublet the Premises or any part thereof, or offer or advertise to do so, or allow the same to be used, occupied or utilized by anyone other than Tenant, or (c) mortgage, pledge, encumber or otherwise hypothecate this Lease or the Premises or any part thereof in any manner whatsoever, without in each instance obtaining the prior consent of Landlord and all Superior Mortgagees. 8.02. (a) If and so long as Tenant is a corporation or a partnership, the following shall be deemed to be an assignment of this Lease under Section 8.01 prohibited by said Section unless Tenant obtains the prior consent of Landlord and all Superior Mortgagees (which Landlord shall undertake to obtain, provided Landlord has not rejected such proposed assignment or exercised its rights under Section 8.07 hereof): one or more sales or transfers of stock or partnership interests, voluntarily, involuntarily, by operation of law or otherwise, or the issuance of new stock or partnership interests, by which an aggregate of more than 50% of Tenant's 17 stock or partnership interests shall be vested in a party or parties who are not stockholders or partners as of the date hereof. This Section shall not apply to transactions with a corporation or partnership into or with which Tenant is merged or consolidated or to which substantially all of Tenant's assets are transferred or any affiliate of Tenant if (a) the successor to Tenant has a tangible net worth computed in accordance with generally accepted accounting principles at least equal to the greater of (i) the tangible net worth of Tenant immediately prior to such merger, consolidation or transfer, or (ii) the tangible net worth on the date of this Lease of the original Tenant herein named, and (b) proof satisfactory to Landlord of such tangible net worth is delivered to Landlord at least 10 days prior to the effective date of any such transaction. The provisions of this Sec- tion shall not apply to any stock or partnership interests listed on a national securities exchange (as defined in the Securities Exchange Act of 1934, as amended) or is traded in the over-the-counter market with quotations reported by the National Association of Securities Dealers through its automated system for reporting quotations. (b) Notwithstanding anything to the contrary contained in Section 8.01, but subject to the provisions of Sections 8.13 and 8.15, Tenant shall have the right to sublet the Premises to any affiliate of Tenant without Landlord's consent, upon written notice to Landlord to be accompanied by a conformed or photostatic copy of the proposed sublease. For the purposes of this Section 8.02, the term "affiliate of Tenant" shall mean (i) any corporation which, directly or indirectly, controls, is controlled by or is under common control with, Tenant, and (ii) any joint venture, partnership or similar entity controlled by Tenant; and the term "control" shall mean, in the case of a corporation, ownership, directly or indirectly, of more than 50% of each class of the voting stock, and in the case of a joint venture or partnership or similar entity, ownership, directly or indirectly, of more than 50% of all of the interests therein." (c) Tenant shall have the right without the consent of Landlord to permit persons who are not its employees to work with Tenant's employees in research projects within the Premises; provided, however: (i) such persons will be treated as Tenant's invitees, and as such, must comply with all the Rules and Regulations that Tenant must comply with under this Lease, and Tenant will be fully responsible for the acts and omissions of such persons; 18 (ii) such persons shall not pay Tenant any rent or user fee for the use of any portion of the Premises; (iii) such persons' use of the Premises (1) is temporary and project-specific, (2) does not encompass a substantial portion of the Premises and (3) is not pursuant to (or equivalent in substance to) a sublease of the Premises or any portion thereof. 8.03. If this Lease is assigned, whether or not in violation of the provisions of this Lease, Landlord may collect rent from the assignee. If the Premises or any part thereof are sublet or used or occupied by anybody other than Tenant, whether or not in violation of this Lease, Landlord may, after default by Tenant, and expiration of Tenant's time to cure such default, collect rent from the subtenant or occupant. In either event, Landlord may apply the net amount collected to the Fixed Rent and Additional Charges herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of Section 8.01, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the performance by Tenant of Tenant's obligations under this Lease. The consent by Landlord and any Superior Mortgagee to assignment, mortgaging, subletting or use or occupancy by others shall not in any way be considered to relieve Tenant from obtaining the consent of Landlord and all Superior Mortgagees to any other or further assignment, mortgaging, subletting or use or occupancy by others not expressly permitted by this Article. References in this Lease to use or occupancy by others (that is, anyone other than Tenant) shall not be construed as limited to subtenants and those claiming under or through subtenants but as including also licensees and others claiming under or through Tenant, immediately or remotely. 8.04. Any assignment or transfer, whether made with Landlord's and all Superior Mortgagees' consent pursuant to Section 8.01 or without the requirement of Landlord's and all Superior Mortgagees' consent pursuant to Section 8.02, shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord an agreement in form and substance reasonably satisfactory to Landlord and all Superior Mortgagees whereby the assignee shall assume the obligations of this Lease on the part of Tenant to be performed or observed and whereby the assignee shall agree that the provisions in Section 8.01 shall, notwithstanding such assignment or transfer, continue to be binding upon it in respect of all future assignments and transfers. Notwithstanding any assignment or transfer, whether or not in violation of the provisions of this Lease, and notwithstanding 19 the acceptance of the Fixed Rent or Additional Charges by Landlord from an assignee, transferee, or any other party, the original named Tenant shall remain fully liable for the payment of the Fixed Rent and Additional Charges and for the other obligations of this Lease on the part of Tenant to be performed or observed. 8.05. The liability of Tenant and any immediate or remote successor in interest of Tenant and the due performance of the obligations of this Lease on Tenant's part to be performed or observed shall not be discharged, released or impaired in any respect by any agreement or stipulation made by Landlord with the then Tenant extending the time of, or modifying any of the obligations of, this Lease, or by any waiver or failure of Landlord to enforce any of the obligations of this Lease. 8.06. Neither the listing of any name other than that of Tenant, whether on the door of the Premises or on any directory, or otherwise, nor the acceptance by Landlord of any check not drawn by Tenant in payment of Fixed Rent or Additional Charges, shall operate to vest any right or interest in this Lease or in the Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of the Premises or to the use or occupancy thereof by others. 8.07. Except as specifically provided to the contrary in this Article 8, if Tenant shall at any time or times during the Term desire to assign this Lease or sublet all or any part of the Premises, Tenant shall give notice thereof to Landlord and all Superior Mortgagees (the "Initial Notice"). The Initial Notice shall be accompanied by a summary of all material terms of the proposed assignment or sublease (the "Term Sheet"). The Initial Notice shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord's designee) may, at its option, (i) sublease such space from Tenant upon the terms and conditions hereinafter set forth or (ii) terminate this Lease (if the proposed transaction is an assignment or a sublease of all or substantially all of the Premises). Said options may be exercised by Landlord by notice to Tenant (the "Recapture Notice") at any time within 20 days after the Initial Notice has been received by Landlord (the "20-day Period"). During the 20-day Period Tenant shall not assign this Lease or sublet such space to any person. If Landlord does not desire to exercise its rights (the "Recapture Rights") under the foregoing clauses (i) and (ii) then Landlord shall give written notice (the "Rejection of Recapture Notice") to Tenant within the 20-day Period that Landlord is not exercising its Recapture Rights. If Landlord fails to give either the Recapture Notice or Rejection of Recapture Notice within the 20-day Period, such failure shall be deemed to be 20 the same as Landlord sending a Rejection of Recapture Notice. If, after receiving the Rejection of Recapture Notice, Tenant still desires to proceed with the transaction described in the Term Sheet, then, within 120 days thereafter, Tenant shall send to Landlord a second written notice (the "Second Notice") accompanied by a conformed or photostatic copy of the proposed assignment or sublease, the effective or commencement date of which shall be at least 60 days after the giving of the Second Notice, (b) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the Premises, and (c) current financial information with respect to the proposed assignee or subtenant, including, without limitation, its most recent financial report. During such 60-day period Tenant shall not assign this Lease or sublet such space to any person except for the proposed assignee and sublessee under the form of assignment or sublease which Tenant has submitted for approval to Landlord and all Superior Mortgagees, provided, however, such assignment or sublease remains contingent upon the approval of Landlord and all Superior Mortgagees before becoming effective. 8.08. If Landlord exercises its option to terminate this Lease pursuant to Section 8.07 above in the case where Tenant desires either to assign this Lease or sublet all or substantially all of the Premises, then this Lease shall end and expire on the date that such assignment or sublet was to be effective or commence, as the case may be, and the Fixed Rent and Additional Charges shall be paid and apportioned to such date. 8.09. If Landlord exercises its option to sublet the Premises which Tenant desires to sublet, such sublease to Landlord or its designee (as subtenant) shall be at the lower of (i) the rental rate per rentable square foot of the Fixed Rent and Additional Charges then payable pursuant to this Lease or (ii) the rentals set forth in the Term Sheet and shall be for the same term as that of the proposed subletting, and: (a) the sublease shall be expressly subject to all of the covenants, agreements, terms, provisions and conditions of this Lease except such as are irrelevant or inapplicable, and except as otherwise expressly set forth to the contrary in this Section; (b) such sublease shall be upon the same terms and conditions as those contained in the Term Sheet, except such as are irrelevant or inapplicable and except as otherwise expressly set forth to the contrary in this Section; 21 (c) such sublease shall give the sublessee the unqualified and unrestricted right, without Tenant's permission, to assign such sublease or any interest therein and/or to further sublet the Premises or any part or parts thereof and to make any and all changes, alterations, and improvements in the Premises; (d) such sublease shall provide that any assignee or further subtenant of Landlord or its designee may, at the election of Landlord, be permitted to make alterations, decorations and installations in such space or any part thereof and shall also provide in substance that any such alterations, decorations and installations in such space therein made by any assignee or subtenant of Landlord or its designee must be removed, in whole or in part, by such assignee, subtenant and/or Landlord, prior to or upon the expiration or other termination of such sublease, if one year or more remains in the Term of this Lease on the date of the expiration or other termination of the term of such sublease. Landlord, the assignee and/or subtenant shall repair any damage and injury to such sublet space caused by the removal of such installations, alterations or decorations, so that, except for reasonable wear and tear, and damage by fire or other casualty, the Premises are in substantially the same condition as the Premises were at the beginning of the term of such sublease. If less than one year remains in the Term of this Lease at the expiration or other termination of such sublease, then Landlord and the assignee and/or subtenant shall have the right, but not the obligation, to remove such subtenant's or assignee's installations, alterations or decorations. (e) such sublease shall provide that (i) the parties to such sublease expressly negate any intention that any estate created under such sublease be merged with any other estate held by either of said parties, (ii) any assignment or further subletting by Landlord or its designee (as the sublessor) may be for any purpose or purposes that Landlord, in Landlord's uncontrolled discre- tion, shall deem suitable or appropriate, and (iii) at the expiration of the term of such sublease, Tenant will accept the space covered by such sublease in its then existing condition, subject to (i) the obligations of the subtenant to make such repairs thereto as may be necessary to preserve the premises demised by such sublease in good order and condition, and (ii) the applicable removal and repair obligation described in paragraph 8.09(d). 8.10. If Landlord does not exercise its options pursuant to Section 8.07 to so sublet the Premises or terminate this Lease and providing that Tenant is not in default of any of Tenant's obligations under this Lease, Landlord's consent 22 (which shall be in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld, provided and upon condition that: (a) Tenant shall have complied with the provisions of Section 8.07 and Landlord shall not have exercised any of its options under said Section 8.07 within the time permitted therefor; (b) in Landlord's reasonable judgment the proposed assignee or subtenant is engaged in a business and the Premises will be used in a manner which (i) is in keeping with the then standards of the Building, (ii) is limited to any of the uses expressly permitted under Sec- tion 2.01, and (iii) will not violate any negative covenant as to use contained in any other lease of space in the Project; (c) the proposed assignee or subtenant is a reputable person of good character and with sufficient financial worth considering the responsibility involved, and Landlord has been furnished with reasonable proof thereof; (d) neither (i) the proposed assignee or sublessee nor (ii) any person which, directly or indirectly, controls, is controlled by, or is under common control with, the proposed assignee or sublessee or any person who controls the proposed assignee or sublessee, is then an occupant of any part of the Project unless no space in the Project, comparable to space Tenant desires to assign or sublet, is then available for leasing by Landlord; (e) the proposed assignee or sublessee is not a person with whom Landlord is then negotiating or in the prior six-month period was negotiating to lease space in the Project, unless no space in the Project, comparable to space Tenant desires to assign or sublet, is then available for leasing by Landlord; (f) the form of the proposed sublease (if Tenant proposes to sublease all of the Premises) shall be in form reasonably satisfactory to Landlord and shall comply with the applicable provisions of this Article; and (g) the consent of any Superior Mortgagee whose Superior Mortgage requires the consent of the Superior Mortgagee shall have been obtained. 8.11. Tenant shall reimburse Landlord on demand for any reasonable costs that may be incurred by Landlord in 23 connection with any proposed assignment or sublease, whether consented to by Landlord or not, including, without limitation, the reasonable costs of making investigations as to the acceptability of the proposed assignee or subtenant, and reasonable legal costs incurred in connection with the granting of any requested consent. 8.12. The amount of the aggregate rent per rentable square foot to be paid by a proposed subtenant under a proposed sublease shall not be less than 90% of the then current market rent per rentable square foot for the Premises as though the Premises were vacant. The rental and other material terms and conditions of any actual sublease shall be substantially the same as those contained in the proposed sublease furnished to Landlord pursuant to Section 8.07. Tenant shall not (a) advertise or publicize in any way the availability of the Premises without prior notice to and approval by Landlord, or (b) list the Premises for subletting, whether through a broker, agent, representative or otherwise at a rental rate less than the Fixed Rent and Additional Charges at which Landlord is then offering to lease comparable space in the Project. 8.13. Except for any subletting by Tenant to Landlord or its designee pursuant to the provisions of this Article, each subletting pursuant to this Article shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such subletting to Landlord or any such subletting to any other subtenant and/or acceptance of rent or additional rent by Landlord from any subtenant, Tenant shall and will remain fully liable for the payment of the Fixed Rent and Additional Charges due and to become due hereunder and for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and all acts and omissions of any licensee or subtenant or anyone claiming under or through any subtenant which shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant. Tenant further agrees that notwithstanding any such subletting, no other and further subletting of the Premises by Tenant or any person claiming through or under Tenant (except as provided in Section 8.09) shall or will be made except upon compliance with and subject to the provisions of this Article. If Landlord shall decline to give its consent to any proposed assignment or sublease in accordance with the terms hereof, or if Landlord shall exercise any of its options under Sec- tion 8.07, Tenant shall indemnify, defend and hold harmless Landlord against and from any and all loss, liability, damages, costs and expenses (including reasonable counsel fees) resulting from any claims that may be made against Landlord by the proposed assignee or sublessee or by any brokers or other 24 persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. 8.14. If (a) Landlord fails to exercise all of its options under Section 8.07 and Landlord consents to a proposed assignment or sublease, and (b) Tenant fails to execute and deliver the assignment or sublease to which Landlord consented within 60 days after the giving of such consent, then Tenant shall again comply with all of the provisions and conditions of Section 8.07 before assigning this Lease or subletting all or any part of the Premises. 8.15. With respect to each and every sublease or subletting authorized by Landlord under the provisions of this Lease, it is further agreed that: (a) no subletting shall be for a term ending later than one day prior to the expiration date of this Lease; (b) no sublease shall be valid, and no subtenant shall take possession of the Premises or any part thereof, until an executed counterpart of such sublease has been delivered to Landlord; and (c) each sublease shall provide that it is subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and that in the event of termination, reentry or dispossess by Landlord under this Lease Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublessor, under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not (i) be liable for any previous act or omission of Tenant under such sublease, (ii) be subject to any offset which theretofore accrued to such subtenant against Tenant, or (iii) be bound by any previous modification of such sublease or by any previous prepayment of more than one month's rent. 8.16. If Landlord gives its consent to any assignment of this Lease or to any sublease, Tenant shall, in consideration therefor, pay to Landlord, as Additional Charges: (a) in the case of an assignment, an amount equal to 50% of (i) all sums and other considerations paid to Tenant by the assignee for or by reason of such assignment (including, without limitation, sums paid for the sale of Tenant's fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property (collectively, the "Tenant Property")), less 25 (ii) the sum of (x) the then net unamortized or undepreciated costs of the Tenant Property being assigned, as determined on the basis of amortization or depreciation used in Tenant's federal income tax returns, and (y) the reasonable out-of-pocket costs incurred by Tenant to effectuate such assignment, including reasonable legal fees, reasonable brokerage fees and the reasonable costs of constructing tenant improvements, if any, which are required to be paid for by Tenant pursuant to such assignment; and (b) in the case of a sublease, 50% of (i) any rents, additional charges or other consideration payable under the sublease to Tenant by the subtenant (including, without limitation, sums paid for the sale or rental of the Tenant Property) which are in excess of the Fixed Rent and Additional Charges accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms hereof, less (ii) the sum of the following (which shall be deducted each month from the excess referred to in clause (i) for such month, ratably over the term of the sublease), (x) in the case of the sale of the Tenant Property, the then net unamortized or undepreciated costs determined on the basis of amortization or depreciation used in Tenant's federal income tax returns, and (y) the reasonable out-of-pocket costs incurred by Tenant to effectuate such sublease, including reasonable legal fees, reasonable brokerage fees and the reasonable cost of constructing tenant improvements, if any, which are required to be paid for by Tenant pursuant to such sublease. ARTICLE 9 - Compliance With Legal and Insurance Requirements 9.01. Tenant shall give prompt notice to Landlord of any notice it receives of the violation of any Legal Requirements or Insurance Requirements with respect to the Premises or the use or occupation thereof. Tenant shall, at Tenant's expense, comply with all Legal Requirements and Insurance Requirements which shall, in respect of the Premises or the use and occupation thereof, or the abatement of any nuisance in, on or about the Premises, impose any violation, order or duty on Landlord or Tenant, arising from (a) Tenant's use of the Premises, (b) the manner of conduct of Tenant's business or operation of its installations, equipment or other property therein, (c) any cause or condition created by or at the instance of Tenant, or (d) breach of any of Tenant's obligations hereunder, and Tenant shall pay all the costs, expenses, fines, penalties and damages which may be imposed upon Landlord or any Superior Lessor or Superior Mortgagee by reason of or arising out of Tenant's failure to fully and 26 promptly comply with and observe the provisions of this Section. However, Tenant need not comply with any such Legal Requirements and Insurance Requirements so long as Tenant is contesting the validity thereof, or the applicability thereof to the Premises, in accordance with Section 9.02. Subject to the provisions of Section 9.03, Landlord, at its expense, shall comply with all other Legal Requirements and Insurance Requirements as shall affect the Premises, but may similarly defer compliance so long as Landlord shall be contesting the validity or applicability thereof. 9.02. Tenant, at its expense, after notice to Landlord, may contest, by appropriate proceedings prosecuted diligently and in good faith, the validity, or applicability to the Premises, of any Legal Requirements and Insurance Requirements, provided that (a) neither Landlord nor any Superior Mortgagee or Superior Lessor shall be subject to criminal penalty or to prosecution for a crime, nor shall the Premises or any part thereof be subject to being condemned or vacated, by reason of noncompliance or otherwise by reason of such contest; (b) Tenant shall indemnify Landlord and any Superior Mortgagees and Superior Lessors against the cost thereof and against all liability for damages, interest, penalties and expenses (including reasonable attorneys' fees and expenses), resulting from or incurred in connection with such contest or noncompliance; (c) such noncompliance or contest shall not constitute or result in any violation of any Superior Lease or Superior Mortgage, or if any such Superior Lease Superior Mortgage shall permit such noncompliance or contest on condition of the taking of action or furnishing of security by Landlord, such action shall be taken and such security shall be furnished at the expense of Tenant; and (d) Tenant shall keep Landlord advised as to the status of such proceedings. Without limiting the application of the above, Landlord and/or a Superior Mortgagee and/or Superior Lessor shall be deemed subject to prosecution for a crime if Landlord or the Superior Mortgagee or Superior Lessor or any managing agent for the Project, or any officer, director, partner, shareholder or employee of Landlord or a Superior Mortgagee or Superior Lessor or any managing agent for the Project, as an individual, is charged with a crime of any kind or degree whatever, whether by service of a summons or otherwise, unless such charge is withdrawn before Landlord or the Superior Mortgagee or Superior Lessor or any managing agent for the Project, or such officer, director, partner, shareholder or employee of Landlord or the Superior Mortgagee or Superior Lessor or any managing agent for the Project (as the case may be) is required to plead or answer thereto. 9.03. If Landlord or any Superior Mortgagee or Superior Lessor is required under this Lease or pursuant to law to comply with any Legal Requirements or Insurance Requirements 27 affecting the Premises and the cost of such compliance is reasonably expected to exceed $100,000 per annum, then Landlord may, at its option, elect to terminate this Lease by giving not less than 30 days' notice thereof to Tenant. If Tenant gives notice to Landlord, within 15 days after the giving by Landlord of such notice of termination, that Tenant shall cause the required repairs or alterations to be made at Tenant's expense, then (a) such notice of termination shall be ineffective, and (b) Tenant shall, at Tenant's expense, promptly and diligently cause such repairs or alterations to be performed and shall indemnify and hold harmless Landlord and the Superior Mortgagees and Superior Lessors from any and all costs, expenses, penalties and/or liabilities in connection therewith. The provisions of Article 12 hereof, to the extent applicable, shall apply to the work (and the plans and specifications therefor) which Tenant shall be required to perform or cause to be performed under this Section. ARTICLE 10 - Insurance 10.01. Tenant shall not violate, or permit the violation of, any Insurance Requirements and shall not do, or permit anything to be done, or keep or permit anything to be kept in the Premises which would subject Landlord or any Superior Mortgagee or Superior Lessor to any liability or responsibility for bodily injury or death or property damage, or which would increase any insurance rate in respect of insurance maintained by or for the benefit of Landlord over the rate which would otherwise then be in effect or which would result in insurance companies of good standing refusing to insure all or any part of the Project or any contents thereof in amounts reasonably satisfactory to Landlord, or which would result in the cancellation of or the assertion of any defense by the insurer in whole or in part to claims under any policy of insurance in respect of the Project. Landlord represents that, to its knowledge, the type of use of the Premises described in Section 2.01 hereof will not, in and of itself, increase the insurance premiums payable by Landlord for insurance policies maintained by Landlord with respect to the Project. 10.02. If, by reason of any failure of Tenant to comply with the provisions of Section 9.01 or Section 10.01, the premiums on insurance maintained by or for the benefit of Landlord shall be higher than they otherwise would be, Tenant shall reimburse Landlord, on demand, for that part of such premiums attributable to such failure on the part of Tenant. A schedule or "make up" of rates for insurance maintained by or for the benefit of Landlord issued by the New York Fire Insurance Rating Organization or other similar body making rates for such insurance shall be conclusive evidence of the 28 facts therein stated and of the several items and charges in the insurance rate then applicable to such insurance. 10.03. Tenant, at its expense, shall maintain at all times during the Term (a) "all risk" property insurance covering the Tenant's Property (hereinafter defined) with a limit of not less than 80% of the replacement cost thereof, and (b) commercial general liability insurance, including a contractual liability endorsement, with respect to Tenant's indemnification obligations hereunder, in respect of the Premises and the conduct or operation of business therein, with Landlord and its managing agent, if any, and any Superior Lessors and Superior Mortgagees, including, without limitation, Swiss Bank and Carbide, whose names and addresses shall have been furnished to Tenant, as additional insureds, with limits of not less than $5,000,000 combined single limit bodily injury and property damage liability. The limits of such insurance shall not limit the liability of Tenant hereunder. Tenant shall deliver to Landlord and any additional insureds certificates and copies of the binders for such insurance in form reasonably satisfactory to Landlord issued by the insurance company or its authorized agent no later than 10 days before the Commencement Date and prior to the commencement of any work by Tenant. Tenant shall procure and pay for renewals of such insurance from time to time before the expiration thereof, and Tenant shall deliver to Landlord and any additional insureds certificates and copies of the binders for such renewal policy issued by the insurance company or its authorized agent at least 30 days before the expiration of any existing policy. All such policies shall be issued by companies licensed to do business in New York State and reasonably satisfactory to Landlord. All such policies shall be noncancellable in respect of Landlord and any additional insureds unless 30 days' prior written notice is given to Landlord and all additional insureds and all such policies shall provide that no act or omission of Tenant shall affect or limit the obligations of the insurer in respect of Landlord and the additional insureds. 10.04. Each party agrees to have included in each of its insurance policies (insuring the Building and Landlord's property therein in the case of Landlord, and insuring the Tenant's Property in the Premises in the case of Tenant, against loss, damage or destruction by fire or other casualty) a waiver of the insurer's right of subrogation against the other party during the Term or, if such waiver is unobtainable or unenforceable, (a) an express agreement that such policy shall not be invalidated if the insured waives the right of recovery against any party responsible for a casualty covered by the policy before the casualty, or (b) any other form of permission for the release of the other party. If such waiver, agreement or permission shall not be, or shall cease to be, 29 obtainable from either party's then current insurance company, the insured party shall so notify the other party promptly after learning thereof, and shall use its best efforts to obtain the same from another insurance company described in Section 10.03. If such waiver, agreement or permission is obtainable only by payment of an additional charge, the insured party shall so notify the other party promptly after learning thereof, and the insured party shall not be required to obtain said waiver, agreement or permission unless the other party pays the additional charge therefor. Each party hereby releases the other, in respect of any claim (including a claim for negligence) which it might otherwise have against the other for loss, damage or destruction in respect of its property occurring during the Term to the extent to which it is insured under a policy or policies containing a waiver of subrogation or permission to release liability, as provided in the preceding sentences of this Section. Nothing contained in this Section shall be deemed to relieve either party of any duty imposed elsewhere in this Lease to repair, restore or rebuild or to nullify any abatement of rents provided for elsewhere in this Lease. 10.05. Landlord may from time to time, but not more frequently than once every year, require that the amount of commercial general liability insurance to be maintained by Tenant under Section 10.03 be reasonably increased, so that the amount thereof adequately protects Landlord's interest. 10.06. Landlord agrees that during the Term, Landlord shall maintain property insurance covering the Building. Nothing contained in this Section shall, however, act to diminish or relieve Tenant of any of Tenant's insurance obligations under this Lease. ARTICLE 11 - Rules and Regulations 11.01. Tenant and its employees and agents shall faithfully observe and comply with the rules and regulations attached hereto as Exhibit C, and such reasonable changes therein (whether by modification, elimination or addition) as Landlord at any time or times hereafter makes and communicates to Tenant, which, in Landlord's reasonable judgment, shall be necessary for the reputation, safety, care and appearance of the Project, or the preservation of good order therein, or the operation or maintenance of the Project or its equipment and fixtures, and which do not unreasonably affect the conduct of Tenant's business in the Premises (such rules and regulations as changed from time to time being herein called the "Rules and Regulations"); provided, however, that in case of any conflict or inconsistency between the provisions of this Lease and any of the Rules and Regulations, the provisions of this Lease shall control. 30 11.02. Nothing in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations against any other tenant or any employees or agents of any other tenant, and Landlord shall not be liable to Tenant for violation of the Rules and Regulations by any other tenant or its employees, agents, invitees or licensees. Landlord shall enforce the Rules and Regulations in a non- discriminatory manner with respect to all tenants of the Project. ARTICLE 12 - Alterations 12.01. Tenant may from time to time after the completion of Landlord's Work and, at its expense, make alterations (herein called the "Alterations") in and to the Premises, excluding structural changes, provided and upon condition that: (a) the outside appearance of the Building shall not be affected; (b) the Alterations are nonstructural and the strength of the Building shall not be affected; (c) the Alterations are to the interior of the Premises and no part of the Building outside of the Premises shall be affected; (d) the proper functioning of the mechanical, electrical, sanitary and other service systems of the Building shall not be adversely affected and the usage of such systems by Tenant shall not be increased beyond their then available capacity; (e) before proceeding with any Alteration, Tenant shall submit to Landlord for Landlord's approval (which shall not be unreasonably withheld or delayed if the approval of all Superior Mortgagees whose Superior Mortgages require the approval of the Superior Mortgagee shall have been obtained) two sets of plans and specifications for the work to be done, and Tenant shall not proceed with such work until it obtains such approval; (f) Tenant shall pay to Landlord upon demand the reasonable cost and expense of Landlord in (i) reviewing said plans and specifications and (ii) inspecting the Alterations to determine whether the same are being performed in accordance with the approved plans and specifications and all Legal Requirements and Insurance Requirements, including, without limitation, the reasonable out-of-pocket fees or cost of any architect, engineer or draftsman, including the cost, based upon the actual salaries and fringe benefits of architects, engineers or draftsmen who are employees of Landlord, for such purposes; (g) before proceeding with any Alteration which will cost more than $100,000 (exclusive of the costs of decorating work and items constituting the Tenant's Property), as estimated, at Tenant's expense, by a reputable contractor reasonably satisfactory to Landlord and all Superior Mortgagees, Tenant shall obtain and deliver to Landlord such security as shall be satisfactory to Landlord and all Superior Mortgagees; and (h) Tenant shall fully and promptly comply with and observe the Rules and Regulations of Landlord then in force with respect to the making of the Alterations. Tenant agrees that any review 31 or approval by Landlord of any plans and/or specifications with respect to any Alterations is solely for Landlord's benefit, and without any representation or warranty whatsoever to Tenant with respect to the adequacy, correctness or efficiency thereof or otherwise. Notwithstanding anything to the contrary contained herein, Tenant shall have the right to move or rearrange Tenant's trade fixtures and machinery within the Premises without Landlord's consent provided such rearrangement does not involve structural changes, adversely affect the Building systems, or exceed the weight-bearing capacity of any floor area. 12.02. Tenant, at its expense, shall obtain all necessary governmental permits and certificates for the commencement and prosecution of the Alterations and for final approval thereof upon completion, and shall cause the Alterations to be performed in compliance therewith and with all applicable Legal Requirements and Insurance Requirements. The Alterations shall be diligently performed in a good and workmanlike manner, using new materials at least equal in quality and class to the original installations. The Alterations shall be performed by contractors first approved by Landlord under the supervision of a licensed architect, which approval Landlord will not unreasonably withhold or delay. The Alterations shall be performed in such a manner as not to violate union contracts affecting the Project, or create any work stoppage, picketing, labor disruption or dispute or any interference with the business of Landlord or any tenant of the Project. In addition, the Alterations shall be performed in such a manner as not to otherwise unreasonably interfere with or delay and as not to impose any additional expense upon Landlord in the construction, maintenance, repair, operation or cleaning of the Project, and if any such additional expense shall be incurred by Landlord as a result of Tenant's performance of the Alterations, Tenant shall pay such additional expense to Landlord on demand. Throughout the performance of the Alterations, Tenant shall carry, or cause its contractors to carry, workers' compensation insurance in statutory limits, "Builder's Risk" insurance reasonably satisfactory to Landlord, and commercial general liability insurance, with completed operation endorsement, for any occurrence in or about the Project, under which Landlord and its managing agent and any Superior Lessors and Superior Mortgagees, whose names and addresses were furnished to Tenant shall be named as additional insureds, in such limits as Landlord may reasonably require, with insurers reasonably satisfactory to Landlord. Tenant shall furnish Landlord with reasonably satisfactory evidence that such insurance is in effect before the commencement of the Alterations and, on request, at reasonable intervals during the continuance of the Alterations. If any Alterations involve the removal of any fixtures, equipment or other property in the Premises which are 32 not Tenant's Property, such fixtures, equipment or other property shall be replaced prior to the end of the Term at Tenant's expense with new fixtures, equipment or other property of like utility and at least equal value. Upon completion of any Alterations (other than mere decorations) Tenant shall deliver to Landlord scaled and dimensioned reproducible mylars of "as-built" plans for such Alteration. 12.03. Tenant, at its expense, and with diligence and dispatch, shall procure the cancellation or discharge of all notices of violation arising from or otherwise connected with the Alterations, or any other work, labor, services or materials done for or supplied to Tenant, or any person claiming through or under Tenant, which shall be issued by the County of Westchester or the Town of Greenburgh or the Town of Mount Pleasant or any other public authority having or asserting jurisdiction. Tenant shall indemnify and save harmless Landlord and any Superior Mortgagees and Superior Lessors from and against any and all mechanics' and other liens and encumbrances filed in connection with the Alterations, or any other work, labor, services or materials done for or supplied to Tenant, or any person claiming through or under Tenant, including, without limitation, security interests in any materials, fixtures or articles so installed in and constituting part of the Premises and against all costs, expenses and liabilities incurred in connection with any such lien or encumbrance or any action or proceeding brought thereon. Tenant, at its expense, shall procure the satisfaction or discharge of record of all such liens and encumbrances within 20 days after the filing thereof. However, nothing herein contained shall prevent Tenant from contesting, in good faith and at its own expense, any notice of violation, provided that Tenant shall comply with the provisions of Sec- tion 9.02. ARTICLE 13 - Landlord's and Tenant's Property 13.01. All fixtures, equipment, improvements and appurtenances, including, without limitation, utility lines and equipment, attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant, shall be and remain a part of the Premises, shall be deemed the property of Landlord and shall not be removed by Tenant, except as provided in Section 13.02. Further, any carpeting or other personal property in the Premises on the Commencement Date, unless installed and paid for by Tenant, shall be and shall remain Landlord's property and shall not be removed by Tenant. 13.02. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment, whether or not attached to or built into the 33 Premises, which are installed in the Premises by or for the account of Tenant without expense to Landlord and can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (herein collectively called the "Tenant's Property ") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of the Tenant's Property is removed, Tenant shall repair or pay the cost of repairing any damage to the Premises or to the Building resulting from the installation and/or removal thereof. Any equipment or other property for which Landlord shall have granted any allowance or credit to Tenant shall not be deemed to have been installed by or for the account of Tenant without expense to Landlord, shall not be considered the Tenant's Property, and shall be deemed the property of Landlord. Notwithstanding anything contained herein to the contrary, the Tenant Improvements shall remain the property of Landlord and shall not be removed by Tenant at the end of the Term. 13.03. At or before the expiration date of this Lease, or within 15 days after the date of any earlier termination of this Lease, Tenant, at its expense, shall remove from the Premises all of the Tenant's Property, and Tenant shall repair any damage to the Premises or the Building resulting from any installation and/or removal of the Tenant's Property. Any other items of the Tenant's Property which shall remain in the Premises after the expiration date of this Lease, or after a period of 15 days following an earlier termination date, may, at the option of Landlord, be deemed to have been abandoned, and in such case such items may be retained by Landlord as its property or disposed of by Landlord, without accountability, in such manner as Landlord shall determine at Tenant's expense. ARTICLE 14 - Repairs and Maintenance 14.01. Tenant shall, at its expense, throughout the Term, take good care of the Premises, the fixtures and appurtenances therein and the Tenant's Property. Tenant shall be responsible for all repairs and replacements, interior and exterior, structural and nonstructural, ordinary and extraordinary, in and to the Premises and the Building and the facilities and systems thereof, the need for which arises out of (a) the performance or existence of any work by Tenant or Alterations, (b) the installation, use or operation of the Tenant's Property in the Premises, (c) the moving of the Tenant's Property in or out of the Premises or the Building, or (d) the act, omission, misuse or neglect of Tenant or any of its subtenants or its or their employees, agents, contractors or invitees. Tenant, at its expense, shall promptly repair or replace all scratched, damaged or broken doors and glass in and 34 about the Premises and shall be responsible for all repairs, painting, maintenance and replacement of wall and floor coverings (with respect to floor coverings, ordinary wear and tear excepted) in the Premises and for the repair and maintenance of all sanitary and electrical fixtures and equipment therein unless the necessity for such repairs arises from causes outside the Premises not attributable to the acts, omissions, misuse or neglect of Tenant or any of its subtenants or its or their employees, agents and/or invitees. Tenant shall promptly make, at Tenant's expense, all repairs in or to the Premises for which Tenant is responsible. Any repairs required to be made by Tenant to the mechanical, electrical, sanitary, heating, ventilating, air-conditioning or other systems of the Building shall be performed only by contractor(s) approved by Landlord which approval shall not be unreasonably withheld or delayed. Any other repairs in or to the Building and the facilities and systems thereof for which Tenant is responsible, may be performed by Landlord at Tenant's expense. 14.02. Landlord shall promptly make all repairs and replacements, structural and otherwise, interior and exterior, as and when needed in or about the Premises, except for those repairs and replacements for which Tenant is responsible pursuant to any of the provisions of this Lease. 14.03. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant, nor shall Tenant's covenants and obligations under this Lease be reduced or abated in any manner whatsoever, by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease, or required by law, to make in or to any portion of the Building or the Premises, or in or to the fixtures, equipment or appurtenances of the Building or the Premises. Landlord, however, shall use reasonable efforts to minimize any interference with or interruption of Tenant's business while making such repairs and changes in the Premises; provided Landlord shall not be required to pay any overtime charges or premium rates in connection therewith. ARTICLE 15 - Electric Energy 15.01. Subject to the provisions of this Article, Landlord shall furnish the electric energy that Tenant shall reasonably require in the Premises for the purposes permitted under this Lease. Landlord represents that the electric power available to the Premises as of the date hereof is at least 35 watts per actual square foot in the laboratory portion of the Premises and 3 watts per actual square foot in the office portion of the Premises. Except for electric energy required 35 to operate motors on the air handlers providing heat, ventilating and conditioning to the Premises ("HVAC Electric"), such electric energy furnished after December 31, 1997 may at Landlord's option either be calculated pursuant to the mathematical model which Landlord will furnish to Tenant or be furnished through a meter or meters and related equipment, installed and maintained by Landlord at Tenant's expense, measuring the amount of electric energy furnished to the Premises. Tenant shall pay Landlord for such electric energy furnished after December 31, 1997, as Additional Charges, within ten days after Landlord bills Tenant therefor, which bills shall be rendered not more often than monthly. The amount of such Additional Charges (a) for HVAC Electric shall be 105% of Landlord's cost and (b) for other electric energy furnished to the Premises ("Basic Electric") shall be based upon rates equal to 105% of the rates that would be applicable if such electric energy were supplied directly to Tenant through a meter or meters on a direct meter basis by the public utility company then supplying electric energy to the area of Westchester County in which the Premises are located; provided that such Additional Charges for Basic Electric shall in no event be based on rates that are less than 105% of the average of the rates at which Landlord purchases electric energy for the Project directly from such public utility company; including in each case, without limitation, those charges applicable to or computed on the basis of electric consumption, demand and hours of use, any sales or other taxes regularly passed on to or collected from similar consumers by such public utility company, fuel rate adjustments and surcharges, and weighted in each case to reflect differences in consumption or demand applicable to each rate level. Tenant and its authorized representatives may have access to such meter or meters (if any) on at least three days' notice to Landlord, for the purposes of verifying Landlord's meter readings (if any). From time to time during the Term of this lease, Landlord may, in its sole discretion, install or eliminate, or increase or reduce the number of, such meters or vary the portions of the Premises which they serve or replace any or all of such meters. Tenant shall not be obligated to pay for HVAC Electric or Basic Electric furnished from the Commencement Date through Decem- ber 31, 1997. 15.02. If pursuant to any Legal Requirements, the charges to Tenant pursuant to Section 15.01 shall be reduced below that to which Landlord is entitled under such Section, the deficiency shall be paid by Tenant within 10 days after being billed therefor, as additional rent for the use and maintenance of the electric distribution system of the Building. 15.03. Landlord shall not be liable in any event to Tenant for any failure or defect in the supply or character of 36 electric energy furnished to the Premises by reason of any requirement, act or omission of the public utility serving the Building with electric energy or for any other reason not attributable solely to Landlord's willful misconduct or gross negligence. 15.04. Tenant may, at Tenant's option, have Landlord furnish and install all replacement lighting tubes, lamps, bulbs and ballasts required in the Premises, and Tenant shall pay to Landlord or its designated contractor upon demand the then established charges therefor of Landlord or its designated contractor, as the case may be, if Tenant has the Landlord, or its designated contractor, install such lighting replacements. 15.05. Tenant's use of electric energy in the Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Premises. In order to insure that such capacity is not exceeded and to avert possible adverse effect upon the Building's distribution of electricity via the Building's electric system, Tenant shall not, without Landlord's prior consent in each instance (which shall not be unreasonably withheld, based upon availability of electric energy in the Building as allocated by Landlord to various areas of the Building) connect any fixtures, appliances or equipment (other than normal business machines which do not materially increase Tenant's electrical consumption) to the Building's electric system or make any alterations or additions to the electric system of the Premises existing on the Commencement Date. Should Landlord grant such consent, all additional risers or other equipment required therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant to Landlord on demand. Landlord shall have the right to require Tenant to pay sums on account of such cost prior to the installation of any such risers or equipment. 15.06. If required by any Legal Requirements, Landlord, upon at least sixty days' notice to Tenant, or any longer period required for the applicable public utility company to supply the Premises directly with electrical energy, may discontinue Landlord's provision of electric energy (or either HVAC Electric or Basic Electric, as the case may be) hereunder. If Landlord discontinues provision of electric energy pursuant to this Section, Tenant shall not be released from any liability under this Lease, except that as of the date of such discontinuance, Tenant's obligation to pay Landlord Additional Charges under Section 15.01 for electric energy (or either HVAC Electric or Basic Electric, as the case may be) thereafter supplied to the Premises shall cease. As of such date, Landlord shall permit Tenant to receive electric energy directly from the public utility company supplying electric energy to the Project, and Tenant shall pay all costs and 37 expenses of obtaining such direct electrical service. Such electric energy may be furnished to Tenant by means of the then existing Building system feeders, risers and wiring to the extent that the same are available, suitable and safe for such purpose. All meters and additional panel boards, feeders, risers, wiring and other conductors and equipment which may be required to obtain electric energy directly from such public utility company shall be furnished and installed by Landlord at Landlord's expense (which shall constitute an Operating Expense, amortized on a straight line basis over the useful life of the items in question, as reasonably determined by Landlord). ARTICLE 16 - Heat, Ventilation and Air-Conditioning 16.01. Landlord shall maintain and operate the heating, ventilating and air-conditioning systems serving the Premises, and shall furnish heat, ventilating and air- conditioning in the Premises as may be reasonably required (except as otherwise provided in this Lease and except for any special requirements of Tenant arising from its particular use of the Premises) for reasonably comfortable occupancy of the Premises with 12 air changes per hour in the laboratory space of the Premises and with 4 air changes per hour in the office space of the Premises available at all times. If Tenant shall require heat, ventilating or air conditioning service in addition to the foregoing, Landlord shall furnish such service for such times upon not less than 48 hours advance notice from Tenant. Tenant shall pay Landlord for heat, ventilating and air-conditioning furnished to the Premises after December 31, 1997, as Additional Charges, within ten days after Landlord bills Tenant therefor, which bills shall be rendered not more often than monthly. The amount of such Additional Charges for a given period of time shall be equal to 105% of the total cost to Landlord of delivering steam and chilled water for the Premises during such period. Tenant shall not be obligated to pay for steam or chilled water furnished from the Commencement Date through December 31, 1997. 16.02. The performance by Landlord of its obligations under Section 16.01 is subject to Tenant's compliance with the conditions of occupancy and connected load established by Landlord. Use of the Premises, or any part thereof, in a manner exceeding the heating, ventilating and/or air-conditioning design conditions (including occupancy and connected electrical load), or rearrangement of partitioning which interferes with normal operation of the heating, ventilating and/or air-conditioning in the Premises, or the use of computer or data processing machines or other machines or equipment, may require changes in the heating, ventilating and/or air-conditioning systems servicing the Premises, in order to provide comfortable occupancy. Such changes, so 38 occasioned, shall be made by Tenant, at its expense, as Alterations in accordance with the provisions of Article 12, but only to the extent permitted and upon the conditions set forth in that Article. ARTICLE 17 - Other Services; Service Interruption 17.01. Landlord shall furnish adequate hot and cold water to the Premises for drinking, lavatory and cleaning purposes. If Tenant uses water for any other purpose (such as laboratory purpose), Landlord may install and maintain, at Tenant's expense, meters to measure Tenant's consumption of cold water and/or hot water for such other purposes. Tenant shall reimburse Landlord for the quantities of cold water and hot water shown on such meters on demand. 17.02. Landlord shall cause the Premises, including the exterior and the interior of the windows thereof but excluding any laboratory space, to be cleaned in accordance with the cleaning schedule attached hereto as Exhibit I. Tenant shall pay to Landlord on demand the costs incurred by Landlord for (a) extra cleaning work in the Premises required because of (i) misuse or neglect on the part of Tenant or its subtenants or its or their employees or visitors, (ii) the use of portions of the Premises for special purposes requiring greater or more difficult cleaning work than office areas, (iii) interior glass partitions or unusual quantity of interior glass surfaces, and (iv) special materials or finishes on items installed by Tenant or its subtenants or its or their employees or visitors or at its or their request; (b) removal from the Premises and the Building of any refuse or rubbish of Tenant in excess of that ordinarily accumulated in business office occupancy or at times other than Landlord's standard cleaning times; and (c) the use of the Premises by Tenant or its subtenants or its or their employees or visitors other than during Business Hours on Business Days. 17.03. Landlord, its cleaning contractor and their employees shall have access to the Premises after 5:30 p.m. and before 8:00 a.m. unless Tenant gives Landlord written notice that Tenant does not want Landlord, its cleaning contractor or their employees in the Premises or a designated portion thereof, and Tenant shall thereafter be responsible for cleaning the Premises or such portion thereof, until 30 days after further written notice from Tenant to Landlord requesting that Landlord's cleaning contractor again be responsible for cleaning the Premises or such portion thereof. Landlord, its cleaning contractor and their employees shall have the right to use, without charge therefor, all light, power and water in the Premises reasonably required to clean the Premises as required under Section 17.02. 39 17.04. If Landlord shall furnish either gas or steam to the Premises, Landlord shall not be liable in any event to Tenant for any failure or defect in the supply or character of the gas or steam furnished to the Premises by reason of any requirement, act or omission of the public utility serving the Building with steam or for any other reason not attributable solely to Landlord's willful misconduct or gross negligence. Tenant's use of gas or steam in the Premises shall not at any time exceed the capacity of any of the gas lines and equipment or steam lines and equipment in or otherwise then serving the Premises. 17.05. Landlord reserves the right, without any liability to Tenant and without affecting Tenant's covenants and obligations hereunder, to stop or interrupt or reduce service of any of the heating, ventilating, air-conditioning, electric, sanitary, elevator, gas, steam, water or other Building systems serving the Premises, or to stop or interrupt or reduce any other services required of Landlord under this Lease (whether or not specified in Article 16 or this Article 17), whenever and for so long as may be necessary, by reason of (a) accidents, emergencies, strikes or the occurrence of any of the other events described in Section 41.04, (b) the making of repairs or changes which Landlord is required or is permitted by this Lease or by law to make or in good faith deems necessary, (c) difficulty in securing proper supplies of fuel, gas, steam, water, electricity, labor or supplies, or (d) any other cause beyond Landlord's reasonable control, whether similar or dissimilar. Landlord shall use reasonable efforts (a) to minimize any interference with or interruption to Tenant's business at the Premises caused by the interruption of such services to the Premises and (b) to give Tenant reasonable notice (except in the case of an emergency, when Landlord or its agents may enter the Premises with no notice at any time or times), in the event of such an interruption of services to the Premises. ARTICLE 18 - Access and Name of Project 18.01. Except for the space within the inside surfaces of all walls, hung ceilings, floors, windows and doors bounding the Premises, all of the Building, including, without limitation, exterior Building walls, core corridor walls and doors and any core corridor entrances, any terraces or roofs adjacent to the Premises and any space in or adjacent to the Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other Building facilities, and the use thereof, as well as reasonable access thereto through the Premises for the purposes of operation, maintenance, decoration and repair, are reserved to Landlord. 40 18.02. Landlord reserves the right, and Tenant shall permit Landlord, to install, erect, use and maintain pipes, ducts and conduits in and through the Premises provided the same do not result in a material loss of usable area in the Premises. In the exercise of its rights under this Sec- tion 18.02, Landlord shall use reasonable efforts to minimize any interference with, or interruption to, Tenant's business at the Premises. 18.03. Landlord and its agents shall have the right to enter and/or pass through the Premises at any time or times (a) to examine the Premises and to show them to actual and prospective Superior Lessors, Superior Mortgagees, or prospective purchasers, mortgagees or lessees of the Building and (b) to make such repairs, alterations, additions and improvements in or to the Premises and/or in or to the Building or its facilities and equipment as Landlord is required or desires to make. Landlord shall be allowed to take all materials into and on the Premises that may be required in connection therewith, without any liability to Tenant and without any reduction of Tenant's covenants and obligations hereunder. In the exercise of its rights under this Sec- tion 18.03, Landlord shall use reasonable efforts to minimize any interference with, or interruption to, Tenant's business at the Premises. 18.04. If at any time any windows of the Premises are temporarily darkened or obstructed by reason of any repairs, improvements, maintenance and/or cleaning in or about the Building, or if any part of the Building, other than the Premises, is temporarily or permanently closed or inoperable, the same shall be without any reduction or diminution of Tenant's obligations under this Lease. 18.05. During the period of 18 months prior to the expiration date of this Lease, Landlord and its agents may exhibit the Premises to prospective tenants. In the exercise of its rights under this Section 18.05, Landlord shall use reasonable efforts to minimize any interference with, or interruption to, Tenant's business at the Premises. 18.06. If, during the last month of the Term, Tenant has removed all or substantially all of the Tenant's Property from the Premises, Landlord may, without notice to Tenant, immediately enter the Premises and alter, renovate and decorate the same, without reducing or diminishing Tenant's obligations under this Lease. 18.07. Landlord reserves the right, at any time, without incurring any liability to Tenant therefor, and without affecting or reducing or diminishing any of Tenant's obligations hereunder, to make such changes, alterations, 41 additions and improvements in or to the Building and the fixtures and equipment thereof, as well as in or to the entrances, doors, halls, passages, elevators, escalators and stairways thereof, and other public parts of the Building, as Landlord shall deem necessary or desirable. In the exercise of its rights under this Section 18.07, Landlord shall use responsible efforts to minimize any interference with, or interruption to, Tenant's business at the Premises. 18.08. Landlord may adopt any name for the Project. Landlord reserves the right to change the name and/or address of the Project at any time. 18.09. Landlord and its agents shall have the right to permit access to the Premises at any time, whether or not Tenant shall be present, (a) by any receiver, trustee, sheriff, marshal or other public official entitled to, or purporting to be entitled to, such access (i) for the purpose of taking possession of or removing any property of Tenant or of any other occupant of the Premises, or (ii) for any other lawful purpose, or (b) by any representative of the fire, police, building, sanitation or other department or instrumentality of any town, county, city, state or federal government. Nothing contained in, nor any action taken by Landlord under this Section, shall be deemed to constitute recognition by Landlord that any person other than Tenant has any right or interest in this Lease or the Premises. 18.10. If Tenant is not present when for any reason entry into the Premises is necessary or permissible, Landlord or Landlord's agents may enter same by a master key, or may forcibly enter same, without rendering Landlord or such agents liable therefor (if during such entry Landlord or such agents accord reasonable care to the Tenant's Property), and such entry shall not be deemed an actual or constructive eviction and shall have no effect upon Tenant's obligations under this Lease. 18.11. Landlord agrees to use reasonable efforts (a) to keep confidential any information regarding Tenant's business which Landlord obtains in the course of its entry into the Premises and (b) to require its agents and their employees to keep confidential any such information such agents or employees obtain in the course of their entry into the Premises, provided that nothing herein shall preclude disclosure of such information to the extent required by law or to the extent necessary to enforce Tenant's obligations hereunder. 42 ARTICLE 19 - Notice of Occurrences 19.01. Tenant shall give prompt notice to Landlord of (a) any occurrence in or about the Premises for which Landlord might be liable, (b) any fire or other casualty in the Premises, (c) any damage to or defect in the Premises, including the fixtures, equipment and appurtenances thereof, for the repair of which Landlord might be responsible, and (d) any damage to or defect in any part or appurtenance of the Building's sanitary, electrical, heating, ventilating, air- conditioning, elevator or other systems located in or passing through the Premises or any part thereof. ARTICLE 20 - Non-Liability and Indemnification 20.01. Neither Landlord nor any Superior Lessor or Superior Mortgagee shall be liable to Tenant for any loss, injury or damage to Tenant or to any other person, or to its or their property, irrespective of the cause of such injury, damage or loss, unless caused by or resulting from the negligence or willful misconduct of Landlord or the Superior Lessor or Superior Mortgagee, in the operation or maintenance of the Premises or the Project. Neither Landlord nor any Superior Lessor or Superior Mortgagee shall be liable (a) for any damage caused by other tenants or persons in, on or about the Project, or (b) even if resulting from negligence or willful misconduct, for consequential damages of Tenant or any subtenant or licensee of Tenant. 20.02. Notwithstanding any provision to the contrary, Tenant shall look solely to the estate and property of Landlord in and to the Project in the event of any claim against Landlord or any partner, director, officer, agent or employee of Landlord arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Premises, and the liability of Landlord arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Premises, shall be limited to such estate and property of Landlord. No other properties or assets of Landlord or any partner, director, officer, agent or employee of Landlord shall be subject to levy, execution or other enforcement procedures for the satisfaction of any judgment (or other judicial process) or for the satisfaction of any other remedy of Tenant arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Premises, and if Tenant acquires a lien on or interest in any other properties or assets by judgment or otherwise, Tenant shall promptly release such lien on or interest in such other properties and assets by executing, acknowledging and delivering to Landlord an instrument to that effect prepared by Landlord's attorneys. 43 20.03. Tenant shall indemnify and hold harmless Landlord and all Superior Lessors and all Superior Mortgagees, including, without limitation, Swiss Bank and Carbide, and its and their respective partners, directors, officers, agents and employees from and against any and all claims arising from or in connection with (a) the conduct or management of the Premises or of any business therein, or any work or thing whatsoever done, or any condition created (other than by Landlord) in or about the Premises during the Term or during the period of time, if any, prior to the Commencement Date that Tenant may have been given access to the Premises; (b) any act, omission or negligence of Tenant or any of its subtenants or licensees or its or their employees or contractors; (c) any accident, injury or damage whatever (unless caused by Landlord's negligence or willful misconduct) occurring in, at or upon the Premises; (d) any breach or default by Tenant in the full and prompt payment and performance of Tenant's obligations under this Lease; and (e) the failure of Tenant or any of its subtenants or licensees or its or their employees or contractors to comply with all Legal Requirements and Insurance Requirements; together with all costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon, including, without limitation, all reasonable attorneys' fees and expenses. In case any action or proceeding is brought against Landlord and/or any Superior Lessor or Superior Mortgagee and/or its or their partners, directors, officers, agents and/or employees by reason of any such claim, Tenant, upon notice from Landlord or such Superior Lessor or Superior Mortgagee, shall resist and defend such action or proceeding (by counsel reasonably satisfactory to Landlord). ARTICLE 21 - Damage or Destruction 21.01. If the Building or the Premises shall be partially or totally damaged or destroyed by fire or other casualty (and if this Lease shall not be terminated as provided in this Article) Landlord shall repair the damage and restore and rebuild the Building and/or the Premises (except for the Tenant's Property) with reasonable dispatch after notice to it of the damage or destruction and the collection of the insurance proceeds attributable to such damage. 21.02. Subject to the provisions of Section 21.05, if all or part of the Premises is damaged or destroyed or rendered completely or partially untenantable on account of fire or other casualty, the Fixed Rent and Additional Charges under Article 4 and Article 5 shall be reduced in the proportion that the untenantable area of the Premises bears to the total area of the Premises, for the period from the date of the damage or destruction (a) to a date 30 days after the date Tenant receives notice from Landlord that the damage to the 44 Premises is substantially repaired, or (b) if the Building and not the Premises is so damaged or destroyed, the date on which the Premises is made tenantable; provided, however, should Tenant reoccupy a portion of the Premises during the period the repair work is taking place and prior to the date the Premises are substantially repaired or made tenantable the Fixed Rent and Additional Charges under Article 4 and Article 5 allocable to such reoccupied portion, based upon the proportion which the area of the reoccupied portion of the Premises bears to the total area of the Premises, shall be payable by Tenant from the date of such occupancy. 21.03. (a)(i) If the Premises shall be materially (i.e., 40% or more) damaged or destroyed by fire or other casualty, or (ii) if the Building shall be so damaged or destroyed by fire or other casualty (whether or not the Premises are damaged or destroyed) that its repair or restoration requires the expenditure (as estimated by a reputable contractor or architect designated by Landlord) of more than 20% of the full insurable value of the Building immediately prior to the casualty, then in either such case Landlord may terminate this Lease by giving Tenant notice to such effect within 180 days after the date of the fire or other casualty and the Fixed Rent and Additional Charges shall be prorated and adjusted as of the date of termination. Landlord shall not exercise its right to terminate this Lease pursuant to clause (a)(ii) above unless Landlord shall also terminate the leases of the other tenants in the Building whose leases contain provisions similar to such clause. (b) Notwithstanding anything to the contrary contained in Section 21.04 hereof, if (i) a material portion (i.e., 40% or more) of the Premises shall be damaged or destroyed or otherwise rendered untenantable by fire or other casualty, and (ii) Landlord fails to substantially restore the Premises within 180 days after the date of the fire or other casualty (which 180-day period shall be extended by any delays caused by the acts or omissions of Tenant and/or its agents, employees or contractors ("Tenant Delays") or by any of the causes set forth in clauses (a) and (b) of Section 41.04), then Tenant shall have the right thereafter to terminate this Lease by giving Landlord and the Superior Mortgagees notice to such effect prior to the substantial completion of such restoration, in which event the Fixed Rent and Additional Charges shall be prorated and adjusted as of the date of termination. If Landlord determines during such 180-day period that through no fault of Tenant or its agents, employees or contractors that the restoration of the Premises will exceed such 180-day period, then, unless the same is caused by Tenant Delays, Landlord shall make reasonable efforts to give notice to Tenant of such extended restoration period, but Landlord shall have no 45 liability as a consequence of its failure to give such notice. 21.04. Except as herein expressly provided, Tenant shall not be entitled to terminate this Lease and no damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises or of the Building pursuant to this Article. Landlord shall use its best efforts to make such repair or restoration promptly and in such manner as not unreasonably to interfere with Tenant's use and occupancy of the Premises, but Landlord shall not be required to do such repair or restoration work except during Business Hours on Business Days. 21.05. Notwithstanding any of the foregoing provisions of this Article, if by reason of some act or omission on the part of Tenant or any of its subtenants or its or their partners, directors, officers, servants, employees, agents or contractors, Landlord or any Superior Lessor or any Superior Mortgagee shall be unable to collect all or substantially all of the insurance proceeds (including, without limitation, rent insurance proceeds) applicable to damage or destruction of the Premises or the Building by fire or other casualty, then, without prejudice to any other remedies which may be available against Tenant, there shall be no reduction of the Fixed Rent or Additional Charges. 21.06. Landlord will not carry insurance of any kind on the Tenant's Property and shall not be obligated to repair any damage to or replace the Tenant's Property. 21.07. The provisions of this Article shall be deemed an express agreement governing any case of damage or destruction of the Premises by fire or other casualty, and Sec- tion 227 of the Real Property Law of the State of New York, providing for such a contingency in the absence of an express agreement, and any other law of like import, now or hereafter in force, shall have no application in such case. ARTICLE 22 - Eminent Domain 22.01. Except as otherwise provided in Sec- tion 22.05, if the whole of the Building or the Premises shall be taken by condemnation or in any other manner for any public or quasi-public use or purpose, this Lease shall terminate as of the date of vesting of title on such taking (herein called the "Date of the Taking"), and the Fixed Rent and Additional Charges shall be prorated and adjusted as of such date. 22.02. Except as otherwise provided in Sec- tion 22.05, if any part of the Building or the Land shall be so taken, this Lease shall be unaffected by such taking, except 46 that (a) Landlord may, at its option, terminate this Lease by giving Tenant notice to that effect within 90 days after the Date of the Taking, and (b) if 20% or more of the Premises shall be so taken and the remaining area of the Premises shall not be reasonably sufficient for Tenant to continue the operation of its business in substantially the same manner as prior to the taking, Tenant may terminate this Lease by giving Landlord notice to that effect within 90 days after the Date of the Taking. This Lease shall terminate on the date that such notice from Landlord or Tenant to the other shall be given, and the Fixed Rent and Additional Charges shall be prorated and adjusted as of such termination date. Upon such partial taking and this Lease continuing in force as to any part of the Premises, the Fixed Rent and Additional Charges shall be adjusted according to the rentable area remaining. 22.03. Except as otherwise provided in Sec- tion 22.05, Landlord shall be entitled to receive the entire award or payment in connection with any taking without deduction therefrom for any estate vested in Tenant by this Lease and Tenant shall receive no part of such award. Tenant hereby expressly assigns to Landlord all of its right, title and interest in and to every such award or payment. Notwith- standing anything contained herein to the contrary, Tenant shall have the right to make a claim, separate from (and not in diminution of) Landlord's, for the value of Tenant's Property taken as well as for moving costs incurred by Tenant in connection with any taking. 22.04. Except as otherwise provided in Sec- tion 22.05, in the event of any taking of less than the whole of the Building and/or the Land which does not result in termination of this Lease, Landlord, at its expense, and whether or not any award or awards shall be sufficient for the purpose, shall proceed with reasonable diligence to repair the remaining parts of the Building and the Premises (other than those parts of the Premises which are the Tenant's Property) to substantially their former condition to the extent that the same may be feasible (subject to reasonable changes which Landlord shall deem desirable) and so as to constitute complete and tenantable the Building and the Premises. 22.05. If the temporary use or occupancy of all or any part of the Premises is taken by condemnation or in any other manner for any public or quasi-public use or purpose, this Lease and the Term shall remain unaffected by such taking and Tenant shall continue to be responsible for all of its obligations under this Lease (except to the extent prevented from so doing by reason of such taking). In such event Tenant shall be entitled to claim, prove and receive the entire award unless the period of temporary use or occupancy extends beyond the expiration date of this Lease, in which event Landlord 47 shall be entitled to claim, prove and receive that portion of the award attributable to the restoration of the Premises, and the balance of such award shall be apportioned between Landlord and Tenant as of the expiration date of this Lease. If such temporary use or occupancy terminates prior to the expiration date of this Lease, Tenant, at its own expense, shall restore the Premises as nearly as possible to its condition prior to the taking. ARTICLE 23 - Surrender and Holding Over 23.01. On the last day of the Term, or upon any earlier termination of this Lease, or upon any reentry by Landlord upon the Premises, Tenant shall quit and surrender the Premises to Landlord "broom-clean" and in good order, condition and repair, except for ordinary wear and tear and such damage or destruction as Landlord is required to repair or restore under this Lease, and Tenant shall remove all of the Tenant's Property therefrom except as otherwise expressly provided in this Lease. No act or thing done by Landlord or its agents shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing and signed by Landlord. 23.02. If Tenant remains in possession of the Premises after the termination of this Lease without the execution of a new lease, Tenant, at the option of Landlord, shall be deemed to be occupying the Premises as a tenant from month to month, subject to all of the other terms and conditions of this Lease insofar as the same are applicable to a month-to-month tenancy, but at a monthly rental equal to the greater of (a) two times the monthly Fixed Rent last payable by Tenant hereunder, plus all Additional Charges payable hereunder, and (b) Landlord's then asking price, on a monthly basis, for comparable space in the Building (or, if Landlord has no asking price, the monthly rental equal to the prevailing rate for comparable space in comparable buildings in the vicinity of the Building). Nothing contained in this Sec- tion shall (i) imply any right of Tenant to remain in the Premises after the termination of this Lease without the execution of a new lease, (ii) imply any obligation of Landlord to grant a new lease or (iii) be construed to limit any right or remedy that Landlord has against Tenant as a holdover tenant or trespasser. 23.03. Tenant expressly waives, for itself and for any person claiming through or under Tenant, any rights which Tenant or any such person may have under the provisions of Sec- tion 2201 of the New York Civil Practice Law and Rules and of any similar or successor law of same import then in force, in connection with any holdover proceedings which Landlord may institute to enforce the terms and conditions of this Lease. 48 ARTICLE 24 - Default 24.01. This Lease and the Term are subject to the limitation that whenever Tenant, or any Guarantor, makes an assignment for the benefit of creditors, or files a voluntary petition under any bankruptcy or insolvency law, or an involuntary petition alleging an act of bankruptcy or insolvency is filed against Tenant or such Guarantor under any bankruptcy or insolvency law, or whenever a petition is filed by or against Tenant or such Guarantor under the reorganization provisions of the United States Bankruptcy Act or under the provisions of any law of like import, or whenever a petition is filed by Tenant or such Guarantor under the arrangement provisions of the United States Bankruptcy Act or under the provisions of any law of like import, or whenever a permanent receiver of Tenant or such Guarantor, or of or for the property of Tenant or such Guarantor is appointed, then Landlord (a) if such event occurs without the acquiescence of Tenant or such Guarantor, as the case may be, at any time after the event continues for 60 days, or (b) in any other case at any time after the occurrence of any such event, may give Tenant a notice of intention to end the Term at the expiration of five days from the date of service of such notice of intention, and upon the expiration of said five-day period this Lease, whether or not the Term shall theretofore have commenced, shall terminate with the same effect as if that day were the expiration date of this Lease, but Tenant shall remain liable for damages as provided in Article 26. 24.02. This Lease is subject to the further limitations that: (a) if Tenant defaults (i) in the payment of any Fixed Rent or Additional Charges, or (ii) in the payment of any sum due to Landlord from Tenant under any other agreement between Landlord and Tenant executed in connection with this Lease, and, in either case, such default continues for five days after notice of default from Landlord to Tenant, or (b) if Tenant, whether by action or inaction, is in default of any of its obligations under this Lease (other than a default in the payment of Fixed Rent or Additional Charges) and such default continues and is not remedied within 30 days after Landlord gives to Tenant a notice specifying the same, or, in the case of a default which cannot with due diligence be cured within a period of 30 days and the continuance of which for the period required for cure will not (i) subject Landlord or any Superior Lessor or Superior Mortgagee to prosecution for a crime (as more particularly described in Section 9.02) or (ii) result in the termination of any Superior Lease or 49 foreclosure of any Superior Mortgage, if Tenant does not, (1) within said 15-day period advise Landlord of Tenant's intention to take all steps necessary to remedy such default, (2) duly commence within said 15-day period, and thereafter diligently prosecute to completion all steps necessary to remedy the default and (3) complete such remedy within a reasonable time after the date of said notice of Landlord, or (c) if any event occurs or any contingency arises whereby this Lease or the estate hereby granted or the unexpired balance of the Term would, by operation of law or otherwise, devolve upon or pass to any person, firm or corporation other than Tenant, except as expressly permitted by Article 8, or (d) if Tenant vacates or abandons the Premises, or (e) if Tenant defaults under any other lease with Landlord at the Project and such default is not remedied within the applicable grace period, if any, provided therefor under such other lease then in any of said cases Landlord may give to Tenant a notice of intention to end the Term at the expiration of 10 days from the date of the service of such notice of intention, and upon the expiration of said 10 days this Lease, whether or not the Term theretofore had commenced, shall terminate with the same effect as if that day were the expiration date of this Lease, but Tenant shall remain liable for damages as provided in Article 26. ARTICLE 25 - Re-entry by Landlord 25.01. If Tenant defaults in the payment of any Fixed Rent or Additional Charges, and such default continues for five days after notice of default, or if this Lease terminates as provided in Article 24, Landlord or Landlord's agents and employees may immediately or at any time thereafter re-enter the Premises, or any part thereof, either by summary dispossess proceedings or by any suitable action or proceeding at law without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any person therefrom, to the end that Landlord may have, hold and enjoy the Premises. The word "re-enter," as used herein, is not restricted to its technical legal meaning. If this Lease is terminated under the provisions of Article 24, or if Landlord re-enters the Premises under the provisions of this Article 25, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of 50 default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord the Fixed Rent and Additional Charges payable up to the time of such termination of this Lease, or of such recovery of possession of the Premises by Landlord, as the case may be, and shall also pay to Landlord damages as provided in Article 26. 25.02. In the event of a breach or threatened breach by Tenant of any of its obligations under this Lease, Landlord shall also have the right of injunction. The special remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies to which Landlord may lawfully be entitled at any time and Landlord may invoke any remedy allowed at law or in equity as if specific remedies were not provided for herein. 25.03. If this Lease terminates under the provisions of Article 24, or if Landlord re-enters the Premises under the provisions of this Article, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Landlord shall be entitled to retain all monies, if any, paid by Tenant to Landlord, whether as advance rent, security or otherwise, but such monies shall be credited by Landlord against any Fixed Rent or Additional Charges due from Tenant at the time of such termination or re-entry or, at Landlord's option, against any damages payable by Tenant under Article 26 or pursuant to law. ARTICLE 26 - Damages 26.01. If this Lease is terminated under the provisions of Article 24, or if Landlord re-enters the Premises under the provisions of Article 25, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay to Landlord as damages, at the election of Landlord, either: (a) a sum which at the time of such termination of this Lease or at the time of any such re-entry by Landlord, as the case may be, represents the then present value (determined using a discount rate equal to the rate announced at such time by Citibank, N.A. or its successor as its prime or base rate) of the excess, if any, of (i) the aggregate amount of the Fixed Rent and the Additional Charges under Article 4 and Article 5 which would have been payable by Tenant (conclusively presuming the average monthly Additional Charges under Article 4 and Article 5 to be the same as were payable for the year, or if less than 51 365 days have then elapsed since the Commencement Date, the partial year, immediately preceding such termination or re- entry) for the period commencing with such earlier termination of this Lease or the date of any such re-entry, as the case may be, and ending with the date contemplated as the expiration date hereof if this Lease had not so terminated or if Landlord had not so re-entered the Premises, over (ii) the aggregate rental value of the Premises for the same period, or (b) sums equal to the Fixed Rent and the Additional Charges which would have been payable by Tenant had this Lease not so terminated, or had Landlord not so re-entered the Premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the date contemplated as the expiration date hereof if this Lease had not so terminated or if Landlord had not so re-entered the Premises, provided, however, that if Landlord shall relet the Premises during said period, landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting the expenses incurred or paid by Landlord in terminating this Lease or in re-entering the Premises and in securing possession thereof, as well as the reasonable expenses of reletting, including, without limitation, altering and preparing the Premises for new tenants, brokers' commissions, legal fees, and all other reasonable expenses properly chargeable against the Premises and the rental therefrom, it being understood that any such reletting may be for a period shorter or longer than what would have been the remaining Term, but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, nor shall Tenant be entitled in any suit for the collection of damages pursuant to this subdivision to a credit in respect of any net rents from a reletting, except to the extent that such net rents are actually received by Landlord. If the Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such reletting and of the expenses of reletting. If the Premises or any part thereof is or are relet to any unrelated third party in an arm's length transaction by Landlord for what would have been the unexpired portion of the Term, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall, prima facie, be the fair and reasonable rental value for the Premises, or part 52 thereof, so relet during the term of the reletting. Landlord shall not be liable in any way whatsoever for its failure or refusal to relet the Premises or any part thereof, or if the Premises or any part thereof are relet, for its failure to collect the rent under such reletting, and no such refusal or failure to relet or failure to collect rent shall release or affect Tenant's liability for damages or otherwise under this Lease. 26.02. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Term would have expired if it had not been so terminated under the provisions of Article 24, or under any provisions of law, or had Landlord not re-entered the Premises. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Nothing herein contained shall be construed to limit or prejudice the right of Landlord to prove for and obtain as damages by reason of the termination of this Lease or re-entry on the Premises for the default of Tenant under this Lease an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved whether or not such amount be greater than, equal to, or less than any of the sums referred to in Section 26.01. 26.03. In addition, if this Lease is terminated under the provisions of Article 24, or if Landlord re-enters the Premises under the provisions of Article 25, Tenant agrees that: (a) the Premises then shall be in the same condition as that in which Tenant has agreed to surrender the same to Landlord at the expiration of the Term; (b) Tenant shall have performed prior to any such termination any covenant of Tenant contained in this Lease for the making of any Alteration or for restoring or rebuilding the Premises or the Building, or any part thereof; and (c) for the breach of any covenant of Tenant set forth above in this Section 26.03, Landlord shall be entitled immediately, without notice or other action by Landlord, to recover, and Tenant shall pay, as and for liquidated damages therefor, the reasonable cost of 53 performing such covenant (as estimated by an independent contractor selected by Landlord). ARTICLE 27 - Affirmative Waivers 27.01. Tenant, on behalf of itself and any and all persons claiming through or under Tenant, does hereby waive and surrender all right and privilege which it, they or any of them might have under or by reason of any present or future law, to redeem the Premises or to have a continuance of this Lease after being dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as provided in this Lease. 27.02. If Tenant is in arrears in payment of Fixed Rent or Additional Charges, Tenant waives Tenant's right, if any, to designate the items to which any payments made by Tenant are to be credited, and Landlord may apply any payments made by Tenant to such items as Landlord sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items to which any such payments shall be credited. 27.03. Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, including, without limitation, any claim of injury or damage, and any emergency and other statutory remedy with respect thereto. 27.04. Tenant shall not interpose any counterclaim of any kind in any summary proceeding commenced by Landlord to recover possession of the Premises unless the failure by Tenant to interpose such counterclaim would preclude Tenant from asserting the subject matter of such counterclaim in a separate action, and shall not seek to consolidate such proceeding with any action which may have been or will be brought by Tenant or any other person. ARTICLE 28 - No Waivers 28.01. The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the obligations of this Lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or of the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. The receipt by Landlord of Fixed Rent or Additional 54 Charges with knowledge of breach by Tenant of any obligation of this Lease shall not be deemed a waiver of such breach. ARTICLE 29 - Curing Defaults 29.01. If Tenant defaults in the performance of any of Tenant's obligations under this Lease, Landlord, without thereby waiving such default, may (but shall not be obligated to) perform the same for the account and at the expense of Tenant, without notice in a case of emergency, and in any other case only if such default continues after the expiration of 30 days from the date Landlord gives Tenant notice of the default. 29.02. Bills for any expenses incurred by either Landlord or Tenant in connection with any performance by either party for the account of the other party, and bills for all costs, expenses and disbursements, including reasonable counsel fees, involved in (a) Landlord collecting or endeavoring to collect the Fixed Rent or Additional Charges or (b) Landlord or Tenant enforcing or endeavoring to enforce any rights against the other party or their obligations hereunder, including any cost, expense and disbursement of Landlord involved in instituting and prosecuting summary proceedings or in recovering possession of the Premises after default by Tenant or upon the expiration or sooner termination of this Lease, and interest at the Lease Interest Rate on all sums advanced by Landlord or Tenant and reimbursable by the other hereunder, may be sent by either party to the other party monthly, and such amounts shall be due and payable in accordance with the terms of such bills. 29.03. Notwithstanding anything to the contrary contained herein, the prevailing party in any action or proceeding to enforce rights or obligations hereunder shall be entitled to recover its costs and expenses in connection therewith from the other party. ARTICLE 30 - Broker 30.01. Each of Tenant and Landlord represents to the other that no broker except Cushman & Wakefield, Inc. (herein called the "Broker") was instrumental in bringing about or consummating this Lease and that it had no conversations or negotiations with any broker except the Broker concerning the leasing of the Premises. Each of Tenant and Landlord shall indemnify and hold the other harmless against and from any claims for any brokerage commissions and all costs, expenses and liabilities in connection therewith, including, without limitation, attorneys' fees and expenses, arising out of any conversations or negotiations had by such indemnifying party with any broker other than the Broker. Landlord shall pay any 55 brokerage commissions due the Broker as per a separate agreement between Landlord and the Broker. ARTICLE 31 - Notices 31.01. Any notice, consent, approval or other communication required or permitted to be given, rendered or made by either party to the other shall be in writing (whether or not so stated elsewhere in this Lease) and shall be deemed to have been properly given, rendered or made only if either sent by (a) registered or certified mail, return receipt requested, posted in a United States post office station or letter box in the continental United States, or (b) reputable overnight courier, in either event addressed to the other party at the address hereinabove set forth (except that after the Commencement Date, Tenant's address, unless Tenant shall give notice to the contrary, shall be the Premises), and shall be deemed to have been given, rendered or made either (i) on the first day after the day so mailed with respect to notice by certified or registered mail, unless mailed outside of the State of New York, in which case it shall be deemed to have been given, rendered or made on the third business day after the day so mailed, or (ii) on the day received if sent by overnight courier. Either party may, by notice as aforesaid, designate a different address or addresses for notices, statements, demands, consents, approvals or other communications intended for it. A duplicate original of any notice given to Landlord shall be simultaneously and similarly sent by Tenant to the attention of Executive Vice President, Keren Developments, Inc., 777 Old Saw Mill River Road, Tarrytown, New York 10591-6705. A duplicate copy of any notice given to Tenant shall be simultaneously sent in the same manner to the attention of Marshall J. Cohen, Esq., Stadtmauer Bailkin, 110 East 59th Street, New York, New York 10022. ARTICLE 32 - Estoppel Certificates 32.01. Each party shall, at any time and from time to time, if requested by the other party with not less than 10 days' prior notice, execute and deliver to the other a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), certifying the dates to which the Fixed Rent and Additional Charges have been paid, stating whether or not, to the best knowledge of the signer, the other party is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which the signer shall have knowledge, and stating whether or not, to the best knowledge of the signer, any event has occurred which with the giving of notice or passage of time, or both, would constitute such a default, and, if so, specifying each such 56 event, it being intended that any such statement delivered pursuant hereto shall be deemed a representation and warranty to be relied upon by the party requesting the certificate and by others with whom such party may be dealing, regardless of independent investigation. Tenant also shall include in any such statement such other information concerning this Lease as Landlord may reasonably request. ARTICLE 33 - Execution and Delivery of Lease 33.01. Submission by Landlord of the within Lease for review and execution by Tenant shall confer no rights nor impose any obligations on either party unless and until both Landlord and Tenant shall have executed this Lease and duplicate originals thereof shall have been delivered to the respective parties. ARTICLE 34 - Recording of Lease 34.01. At the request of Landlord, Tenant shall promptly execute, acknowledge and deliver to Landlord a memorandum in respect of this Lease and/or any amendment or modification of this Lease sufficient for recording, setting forth only the matters required to be set forth pursuant to Section 291-c of the New York Real Property Law. Such memorandum shall not in any circumstance be deemed to change or otherwise affect any of the terms of this Lease. Tenant shall not record this Lease or said memorandum or any other document related hereto. ARTICLE 35 - Parking 35.01. Landlord shall, without charge to Tenant (except as consequence of the cost thereof being included in Operating Expenses), provide and maintain, for the non- exclusive use of Tenant's employees and invitees, parking areas sufficient to accommodate at least 60 standard size automobiles in the area(s) shown as "parking" on the plan, including 10 spaces specially striped and marked attached hereto as Exhibit D for "Tenant's Officers and Visitors". In the event Landlord utilizes such parking areas for Landlord's development purposes, Landlord will provide Tenant with substantially equivalent parking facilities. ARTICLE 36 - Environmental Compliance 36.01. Tenant assumes sole and full responsibility for compliance with all applicable Federal, state and local environmental statutes, regulations and ordinances (including licensing and permitting) (herein called the "Environmental Laws") in respect of the Premises from and after the Commencement Date and agrees to indemnify, defend, save and 57 hold harmless Landlord and all Superior Lessors and Superior Mortgagees, and its and their respective partners, directors, officers, agents and employees from and against any and all claims, demands, losses and liability (including reasonable attorneys' fees) resulting from any alleged or actual violation thereof by Tenant or any of its subtenants or licensees or its or their employees or contractors. Tenant assumes sole and full responsibility for all present and future acts or omissions of Tenant or any of its subtenants or licensees or its or their employees or contractors while at, near or on the Project and covenants and agrees to indemnify, defend, save and hold harmless Landlord and all Superior Lessors and Superior Mortgagees, and its and their respective partners, directors, officers, agents and employees, from and against any and all claims, demands, losses, and liability (including reasonable attorneys' fees) resulting from any alleged or actual violation thereof, including, but not limited to, personal injury (and death resulting therefrom), property damage, damage to natural resources, and strict liability under Environmental Laws. The provisions of this Section 36.01 shall survive the expiration or termination of this Lease. 36.02 Landlord shall indemnify Tenant and its partners, directors, officers, agents and employees against any and all claims, demands, losses and liability (including reasonable attorneys' fees) resulting from any alleged or actual violation of Environmental Laws at the Premises by Landlord or any of its agents, employees or contractors. Landlord assumes sole and full responsibility for all present and future acts or omissions of Landlord or any of its agents, employees or contractors while at, near or on the Project and covenants and agrees to indemnify, defend, save and hold harmless Tenant and its respective directors, officers, agents and employees, from and against any and all claims, demands, losses, and liability (including reasonable attorneys' fees) resulting from such acts or omissions, including, but not limited to, personal injury (and death resulting therefrom), property damage, damage to natural resources, and strict liability under Environmental Laws. 36.03. Landlord represents, as of the date hereof, that Landlord knows of no violations of any Environmental Laws at the Premises caused by International Business Machines Corporation (the previous tenant). ARTICLE 37 - Signs 37.01. Tenant may not place signs anywhere in the Project, including on the exterior of the Building, without the prior written consent of Landlord. Landlord agrees to place signs, in a style and materials mutually satisfactory to Landlord and Tenant, on roads within the Project and outside of 58 the Building, as is reasonably necessary to direct Tenant's invitees and contractors to the Premises. ARTICLE 38 - Approval Contingency 38.01. This Lease shall not be effective until and unless approved in writing by Swiss Bank and Carbide. If Swiss Bank or Carbide disapproves this Lease, then this Lease shall be deemed null and void and of no effect. Any such approval in accordance with the provisions of this Article 38 shall be deemed retroactive to the Commencement Date. Notwithstanding any provision to the contrary, if Tenant occupies the Premises or causes any work to be performed thereon prior to receipt of Swiss Bank's or Carbide's approval or disapproval, then as between Tenant and Landlord the provisions of this Lease shall be applicable and enforceable. If either Swiss Bank or Carbide does not give its approval or disapproval within 60 days after the date hereof, either party may give notice of cancellation of this Lease to the other after said 60-day period but prior to the giving of said approval, and if either party gives such cancellation notice timely, this Lease shall be deemed null and void and of no effect. ARTICLE 39 - Relocation of Premises 39.01. Landlord may, at its option, before or after the Commencement Date, elect by notice to Tenant to substitute for the Premises other equivalent space in the Project (herein called the "Substitute Premises") designated by Landlord, provided that the Substitute Premises contains at least the same usable square foot area as the Premises. Landlord's notice shall be accompanied by a plan of the Substitute Premises, and such notice or the plan shall set forth the usable square foot area of the Substitute Premises. Tenant shall vacate and surrender the Premises and shall occupy the Substitute Premises promptly (and, in any event, not later than 15 days) after Landlord has substantially completed the work to be performed by Landlord in the Substitute Premises pursuant to Section 39.02. Tenant shall pay the same Fixed Rent and Additional Charges under Article 4 and Article 5 with respect to the Substitute Premises as were payable with respect to the Premises, without regard to the usable square foot area of the Substitute Premises. 39.02. Tenant shall not be entitled to any compensation for any inconvenience or interference with Tenant's business, nor to any abatement or reduction of Fixed Rent or Additional Charges, but Landlord shall, at Landlord's expense, do the following: (a) furnish and install in the Substitute Premises fixtures, equipment, improvements and appurtenances at least equal in kind and quality to those contained in the Premises at the time such notice of 59 substitution is given by Landlord, (b) provide to Tenant personnel to perform under Tenant's direction the moving of Tenant's Property from the Premises to the Substitute Premises, (c) promptly reimburse Tenant for Tenant's actual and reasonable out-of-pocket costs incurred by Tenant in connection with the relocation of any telephone or other communications equipment from the Premises to the Substitute Premises, and (d) promptly reimburse Tenant for any other actual and reasonable out-of-pocket costs incurred by Tenant in connection with the Tenant's move from the Premises to the Substitute Premises provided such costs are approved by Landlord in advance, which approval shall not be unreasonably withheld or delayed. Tenant shall cooperate with Landlord so as to facilitate the prompt completion by Landlord of its obligations under this Section and the prompt surrender by Tenant of the Premises. Without limiting the generality of the preceding sentence, Tenant shall provide to Landlord promptly any approvals or instructions, and any plans and specifications or any other information reasonably requested by Landlord. 39.03. From and after the date that Tenant actually vacates and surrenders the Premises to Landlord, this Lease (a) shall no longer apply to the Premises, except in respect of obligations which accrued on or prior to such surrender date, and (b) shall apply to the Substitute Premises as if the Substitute Premises had been the space originally demised under this Lease. 39.04. Notwithstanding anything contained herein to the contrary, Landlord's rights under this Article 39 to relocate Tenant may not be exercised at any time when 60% or more of the rentable square footage in the Building is subject to leases. ARTICLE 40 - Partnership or Multi-Person Tenant 40.01. If the original Tenant herein named is a partnership (or is comprised of two or more persons, individually or as co-partners of a partnership) or if Tenant's interest in this Lease is assigned to a partnership (or to two or more persons, individually or as co-partners of a partnership), the following provisions shall apply: (a) the liability of each of the persons at any time comprising Tenant shall be joint and several, (b) each of the persons at any time comprising Tenant shall be bound by (i) any written instrument executed by Tenant or any successor Tenant changing, modifying, extending or discharging this Lease, in whole or in part, or surrendering all or any part of the Premises to Landlord, (ii) any Notices given by Tenant or by any of the persons comprising Tenant, and (iii) any statement executed by Tenant or any of the persons comprising Tenant, pursuant to Sec- tion 32.01, (c) any notices given to Tenant or to any of such 60 persons shall be binding on Tenant and all such persons, (d) if Tenant admits new partners, all of such new partners shall, by their admission to Tenant, be deemed to have assumed joint and several liability for the performance of all of Tenant's obligations under this Lease, (e) Tenant shall give prompt notice to Landlord of the admission of any such new partners, and on demand of Landlord shall cause each such new partner to execute and deliver to Landlord an agreement in form satisfactory to Landlord wherein each such new partner assumes joint and several liability for the performance of all of Tenant's obligations under this Lease (but neither Landlord's failure to request any such agreement nor the failure of any such new partner to execute or deliver any such agreement to Landlord shall vitiate the provisions of clause (d) of this Section), and (f) the death, adjudication of incompetency or withdrawal of an individual comprising Tenant or of an individual partner shall not relieve him or his personal representatives of any liability for the performance of Tenant's obligations under this Lease. Nothing in this Article 40 shall apply to a joint venturer or partner of the Tenant in joint research projects whose personnel are using a portion of the Premises in conformity with Section 8.02(c). ARTICLE 41 - Miscellaneous 41.01. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease or in any other written agreement which may be made between the parties concurrently with the execution and delivery of this Lease and which expressly refer to this Lease. All understandings and agreements heretofore had between the parties are merged in this Lease and any other written agreements made concurrently herewith, which alone fully and completely express the agreement of the parties and which are entered into after full investigation, neither party relying upon any statement or representation not embodied in this Lease or any other written agreements made concurrently herewith. 41.02. No agreement shall be effective to change, modify, waive, release, discharge, terminate or effect an abandonment of this Lease, in whole or in part, unless such agreement is in writing, refers expressly to this Lease and is signed by the party against whom enforcement of the change, modification, waiver, release, discharge, termination or effectuation of the abandonment is sought. If Tenant shall at any time request Landlord to relet the Premises for Tenant's account, Landlord or its agent is authorized to receive keys for such purpose without releasing Tenant from any of its obligations under this Lease, and Tenant hereby releases 61 Landlord of any liability for loss or damage to any of the Tenant's Property in connection with such reletting. 41.03. Except as otherwise expressly provided in this Lease, the obligations of this Lease shall bind and benefit the successors and assigns of the parties hereto with the same effect as if mentioned in each instance where a party is named or referred to; provided, however, that (a) no violation of the provisions of Article 8 shall operate to vest any rights in any successor or assignee of Tenant and (b) the provisions of this Article shall not be construed as modifying the conditions of limitation contained in Article 24. No provision in this Lease shall be construed for the benefit of any third party except as expressly provided herein. 41.04. The obligations of Tenant hereunder shall not be affected, impaired or excused, nor shall Landlord have any liability to Tenant, because (a) Landlord is unable to fulfill, or is delayed in fulfilling, any of its obligations under this Lease by reason of strike, other labor trouble, governmental preemption of priorities or other controls in connection with a national or other public emergency, or shortage of fuel, supplies or labor, or any other cause, whether similar or dissimilar, beyond Landlord's reasonable control; or (b) of any failure or defect in the supply, quantity or character of electricity, steam, oil, gas or water furnished to the Premises, by reason of any requirement, act or omission of the public utility or other entity serving the Building with electric energy, steam, oil, gas or water, or for any other reason whether similar or dissimilar, beyond Landlord's reasonable control. 41.05. All references in this Lease to the consent or approval of Landlord shall be deemed to mean only the written consent or approval of Landlord and no consent or approval of Landlord shall be effective for any purpose unless such consent or approval is set forth in a written instrument executed by Landlord. If Tenant requests Landlord's consent and Landlord fails or refuses to give such consent, Tenant shall not be entitled to any damages for any withholding by Landlord of its consent, it being intended that Tenant's sole remedy shall be an action for specific performance or injunction, and that such remedy shall be available only in those cases where this Lease provides that Landlord may not unreasonably withhold its consent or where as a matter of law Landlord may not unreasonably withhold its consent. 41.06. If an excavation is made upon land adjacent to or under the Building, or is authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter the Premises for the purpose of performing such work as said person shall deem necessary or 62 desirable to preserve and protect the Building from injury or damage and to support the same by proper foundations, without any claim for damages or liability against Landlord and without reducing or otherwise affecting Tenant's obligations under this Lease. 41.07. Tenant agrees that the exercise of its rights pursuant to the provisions of Article 12 or of any other provisions of this Lease or the Exhibits hereto shall not be done in a manner which would violate Landlord's union contracts affecting the Project, nor create any work stoppage, picketing, labor disruption or dispute or any interference with the business of Landlord or any tenant or occupant of the Project. 41.08. Irrespective of the place of execution or performance, this Lease shall be governed by and construed in accordance with the laws of the State of New York. If any provision of this Lease or the application thereof to any person or circumstances shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Lease and the application of that provision to other persons or circumstances shall not be affected but rather shall be enforced to the extent permitted by law. The table of contents, captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. Each covenant, agreement, obligation or other provision of this Lease on Tenant's part to be performed, shall be deemed and construed as a separate and independent covenant of Tenant, not dependent on any other provision of this Lease. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. ARTICLE 42 - Right of First Offer 42.01. (a) If at any time during the Term of this Lease all or a portion (in either case, the "Offered Space") of the rentable space in the Building other than the Premises (the "First Offer Space"; which is shown on Exhibit F hereto) becomes vacant and not subject to any lease or other right of occupancy, and Landlord does not desire itself to use or occupy all or a material portion thereof, then, provided Tenant is not in default beyond any applicable notice and grace periods, if any, under this Lease, Landlord shall make a good faith offer to rent the Offered Space to Tenant (the "First Offer") by sending a written notice to Tenant (the "Offered Space Notice") prior to submitting a formal written offer to rent the Offered Space to any other potential tenant. The Offered Space Notice shall set forth (i) the fixed rent Landlord is then considering 63 charging for the Offered Space, (ii) an identification of the Offered Space and (iii) such other matters as Landlord may deem appropriate for such Offered Space Notice. Tenant must notify the Landlord in writing, within 30 days after such written notice is given, stating whether Tenant accepts or rejects the First Offer (the "Election Notice"), time being of the essence with respect to the giving of the Election Notice. If Tenant fails to give an Election Notice within such 30-day period, then Tenant will be deemed to have rejected the First Offer. The First Offer Space shall include the Expansion Space (as hereinafter defined) provided Tenant has not previously exercised its rights under Article 43 hereof. Landlord shall have no obligation to pay for or perform any work in the Offered Space to prepare it for Tenant's occupancy. (b) If Tenant accepts, by means of the Election Notice, the First Offer contained in the Offered Space Notice within the required 30-day period, then Landlord shall lease to Tenant the Offered Space, on the same terms and conditions as those contained in this Lease and for a term commencing on the first day of the month immediately following the month in which the Election Notice is given and continuing coterminous with the Term of this Lease, except (i) the Fixed Rent will be payable at the rate contained in the Offered Space Notice, (ii) Tenant's Proportionate Share under this Lease shall be increased to include the Offered Space and (iii) as may otherwise be set forth in the Offered Space Notice. Such demise of the Offered Space shall be reflected by an amendment to this Lease to include the Offered Space as part of the Premises (but Tenant's failure to execute and deliver such an amendment shall not affect its obligations with respect to the Offered Space). (c) If Tenant rejects (or is deemed to have rejected) the First Offer then: (i) Landlord shall have a period of 365 days (the "365-day Period") from the giving of the Offered Space Notice to enter into a lease for all or a part of the Offered Space for a fixed rent per rentable square foot of not less than 90% of the fixed rent per rentable square foot contained in the Offered Space Notice and on such other material business terms as are not substantially more favorable to the lessee than those contained in the Offered Space Notice. (ii) If Landlord does not enter into a lease for the Offered Space within the 365-day Period, the right of First Offer accorded to Tenant in this Section 42.01 shall be deemed revived and reinstated with respect to any subsequent desire of Landlord to lease all or part of the Offered Space after the 365-day Period (but shall not be deemed to revive the 64 particular First Offer theretofore rejected or deemed rejected by Tenant); and (iii) Notwithstanding the foregoing, in the event that Landlord shall submit a new Offered Space Notice to Tenant within the 365-day Period applicable to a previous First Offer which Tenant rejected or was deemed to reject, and Tenant shall also reject or be deemed to have rejected the First Offer in the new Offered Space Notice, then the provisions of subparagraph (c)(i) above shall be deemed to apply to the terms and conditions of the new Offered Space Notice, and the terms of this subparagraph (c)(iii) shall always be applicable to the most recent Offered Space Notice with respect to which Tenant shall have rejected or been deemed to have rejected a First Offer. ARTICLE 43 - Expansion Option 43.01. Landlord grants Tenant the option (the "Expansion Option") to rent approximately 6,577 rentable square feet of the additional space in the Building that is shown on Exhibit G hereto (the "Expansion Space"). The Expansion Option may be exercised only by Tenant's written notice given to Landlord within 365 days after the date hereof, time being of the essence with respect to the giving of such notice, and only if Tenant shall not be in default beyond any applicable notice and grace period under this Lease either as of the date of the giving of such written notice by Tenant or the first day of the month immediately following the month in which Tenant gives such written notice. If Tenant exercises the Expansion Option in accordance with this Section 43.01, then Landlord shall lease to Tenant the Expansion Space on the same terms and conditions as those contained in this Lease and for a term commencing on the first day of the month immediately following the month in which Tenant gives written notice of its exercise of the Expansion Option and continuing coterminous with the Term of this Lease. Tenant's Proportionate Share under this Lease shall be adjusted to reflect the inclusion of the Expansion Space. The demise of the Expansion Space shall be accomplished by an amendment to this Lease to include the Expansion Space as part of the Premises (but Tenant's failure to execute and deliver such an amendment shall not affect its obligations with respect to the Expansion Space). If Tenant exercises its Expansion Option Landlord shall have no obligation to pay for or perform any work in the Expansion Space, to prepare such space for Tenant's occupancy. Tenant shall have forever waived its right to exercise the Expansion 65 Option if it fails for any reason whatsoever to give notice of exercise to Landlord within the 365-day period after the date hereof, whether such failure is inadvertent or intentional. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. LANDLORD: KEREN LIMITED PARTNERSHIP By: Keren Management Limited Partnership, General Partner By: Keren Developments Inc., its general partner By:_________________________ Name: James F. Kay Title: President TENANT: APPLIED MICROBIOLOGY, INC. By:________________________________ Name: Fredric Price Title: President Tenant's Federal Identification Number 11-2653613 66 ) : ss.: ) On the ____ day of January, 1995, before me personally came James F. Kay to me known, who, being by me duly sworn, did depose and say that he resides at _________________, __________________; that he is the President of Keren Developments Inc. which corporation is the general partner of Keren Management Limited Partnership, which limited partnership is the general partner of KEREN LIMITED PARTNERSHIP, the partnership described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation (Keren Developments Inc.) as general partner of Keren Management Limited Partnership, as general partner of Keren Limited Partnership. -------------------------- Notary Public STATE OF NEW YORK ) : ss.: COUNTY OF ) On the ____ day of January, 1995, before me personally came Fredric Price, to me known, who, being by me duly sworn, did depose and say that he resides at _____________________, _____________________________________; that he is the President of APPLIED MICROBIOLOGY, INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation. -------------------------- Notary Public PLAN OF PREMISES EXHIBIT A SCHEDULE OF FIXED RENT FIXED RENT PERIOD PER ANNUM Commencement Date - The day preceding the $378,650.00 the first anniversary of the Commencement Date First Anniversary - The day preceding the $401,369.00 of the Commencement second anniversary of Date the Commencement Date Second Anniversary - December 31, 1997 $424,088.00 of the Commencement Date January 1, 1998 - December 31, 1998 $449,394.00 January 1, 1999 - December 31, 1999 $449,394.00 January 1, 2000 - December 31, 2000 $449,394.00 January 1, 2001 - December 31, 2001 $449,394.00 January 1, 2002 - The last day of the $449,394.00 month in which the seventh anniversary of the Commencement Date occurs. EXHIBIT B RULES AND REGULATIONS 1. The rights of each tenant in the entrances, corridors and elevators servicing the Building are limited to ingress to and egress from such tenant's premises for the tenant and its employees, licensees and invitees, and no tenant shall use, or permit the use of, the entrances, corridors or elevators for any other purpose. No tenant shall invite to the tenant's premises, or permit the visit of, persons in such numbers or under such conditions as to interfere with the use and enjoyment of any of the plazas, entrances, corridor, elevators and other facilities of the Building by any other tenants. Fire exits and stairways are for emergency use only, and they shall not be used for any other purpose by the tenants, their employees, licensees or invitees. No tenant shall encumber or obstruct, or permit the encumbrance or obstruction of any of the sidewalks, plazas, entrances, corridors, elevators, fire exits or stairways of the Building. Landlord reserves the right to control and operate the public portions of the Building and the public facilities, as well as facilities furnished for the common use of the tenants, in such manner as it in its reasonable judgment deems best for the benefit of the tenants generally. 2. Landlord may refuse admission to the Building outside of Business Hours on Business Days (as such terms are defined in the lease to which this Exhibit is attached) to any person not known to the watchman in charge or not having a pass issued by Landlord or the tenant whose premises are to be entered or not otherwise properly identified, and Landlord may require all persons admitted to or leaving the Building outside of Business Hours on Business Days to provide appropriate identification. Landlord will supply identification cards and be reimbursed by Tenant at Landlord's cost plus 5%. Tenant shall be responsible for all persons for whom it issues any such pass and shall be liable to Landlord for all acts or omissions of such persons. Tenant shall promptly notify Landlord in writing of any lost identification cards and will reimburse Landlord at cost plus 5% for replacement of identification cards. Any person whose presence in the Building at any time shall, in the reasonable judgment of Landlord, be prejudicial to the safety, character or reputation of the Building or of its tenants may be denied access to the Building or may be ejected therefrom. During any invasion, riot, public excitement or other commotion, Landlord may prevent all access to the Building by closing the doors or otherwise for the safety of the tenants and protection of property in the Building. 3. No tenant shall obtain or accept for use in its premises towel, barbering, bootblacking, floor polishing, cleaning or other similar services from any persons reasonably prohibited by Landlord in writing from furnishing such services. EXHIBIT C Page 1 Such services shall be furnished only at such reasonable hours, and under such reasonable regulations, as may be fixed by Landlord from time to time. 4. The cost of repairing any damage to the public portions of the Building or the public facilities or to any facilities used in common with other tenants, caused by a tenant or its employees, agents, contractors, licensees or invitees, shall be paid by such tenant. 5. No awnings or other projections shall be attached to the outside walls of the Building. No curtains, blinds, shades or screens which are different from the standards adopted by Landlord for the Building shall be attached to or hung in, or used in connection with, any exterior window or door of the premises of any tenant, without the prior written consent of Landlord. Such curtains, blinds, shades or screens must be of a quality, type, design and color, and attached in the manner reasonably approved by Landlord. 6. No lettering, sign, advertisement, notice or object shall be displayed in or on the exterior windows or doors, or on the outside of any tenant's premises, or at any point inside any tenant's premises where the same might be visible outside of such premises, without the prior written consent of Landlord. In the event of the violation of the foregoing by any tenant, Landlord may remove the same without any liability, and may charge the expense incurred in such removal to the tenant violating this rule. Interior signs, elevator cab designations and lettering on doors and the Building directory shall, if and when approved by Landlord, be inscribed, painted or affixed for each tenant by Landlord at the expense of such tenant, and shall be of a size, color and style acceptable to Landlord. 7. The sashes, sash doors, skylights, windows and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by any tenant, nor shall any bottles, parcels or other articles be placed on the window sills or on the peripheral air conditioning enclosures, if any. 8. No showcases or other articles shall be put in front of or affixed to any part of the exterior of the Building, nor placed in the halls, corridors or vestibules except within the Premises. 9. No noise, including, but not limited to, music or the playing of musical instruments, recordings, radio or television, which, in the reasonable judgment of Landlord, might disturb other tenants in the Building, shall be made or permitted by any tenant. Nothing shall be done or permitted in the premises of any tenant which would impair or interfere with the EXHIBIT C Page 2 use or enjoyment by any other tenant of any other space in the Building. 10. Additional locks or bolts of any kind which shall not be operable by the Grand Master Key for the Building shall not be placed upon any of the doors or windows by any tenant, nor shall any changes be made in locks or the mechanism thereof which shall make such locks inoperable by said Grand Master Key. Additional keys for a tenant's premises and toilet rooms shall be procured only from Landlord who may make a reasonable charge therefor. Each tenant shall, upon the termination of its tenancy, turn over to Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such tenant, and in the event of the loss of any keys furnished by Landlord, such tenant shall pay to Landlord the cost thereof. 11. All removals, or the carrying in or out of any safes, freight, furniture, packages, boxes, crates or any other object or matter of any description must take place during such hours and in such elevators, and in such manner as Landlord or its agent may determine from time to time. The persons employed to move safes and other heavy objects shall be reasonably acceptable to Landlord and, if so required by law, shall hold a Master Rigger's license. Arrangements will be made by Landlord with any tenant for moving large quantities of furniture and equipment into or out of the Building. All reasonable labor and engineering costs incurred by Landlord in connection with any moving specified in this rule, including a reasonable charge for overhead and profit, shall be paid by tenant to Landlord, on demand. 12. Landlord reserves the right to inspect all objects and matter to be brought into the Building and to exclude from the Building all objects and matter which violate any of these Rules and Regulations or the lease of which this Exhibit is a part. Landlord may require any person leaving the Building with any package or other object or matter to submit a pass, listing such package or object or matter, from the tenant from whose premises the package or object or matter is being removed, but the establishment and enlargement of such requirement shall not impose any responsibility on Landlord for the protection of any tenant against the removal of property from the premises of such tenant. Landlord shall in no way be liable to any tenant for damages or loss arising from the admission, exclusion or ejection of any person to or from the premises or the Building under the provisions of this Rule or of Rule 2 hereof. 13. No tenant shall occupy or permit any portion of its premises to be occupied as an office for a public stenographer or public typist, or for the storage, manufacture, or sale of liquor, narcotics, dope, tobacco in any form, or as a barber, beauty or manicure shop, or as a school. No tenant shall use or EXHIBIT C Page 3 permit its premises or any part thereof to be used for manufacturing or the sale at retail or auction of merchandise, goods or property of any kind. 14. Landlord shall have the right to prohibit any advertising or identifying sign by any tenant which, in Landlord's reasonable judgment, tends to impair the reputation of the Building or its desirability as a building for others, and upon written notice from Landlord, such tenant shall refrain from and discontinue such advertising or identifying sign. 15. Landlord shall have the right to prescribe the weight and position of safes and other objects of excessive weight, and no safe or other object whose weight exceeds the lawful load for the area upon which it would stand shall be brought into or kept upon any tenant's premises. If, in the reasonable judgment of Landlord, it is necessary to distribute the concentrated weight of any heavy object, the work involved in such distribution shall be done at the expense of the tenant and in such manner as Landlord shall reasonably determine. 16. No machinery or mechanical equipment other than ordinary portable business machines may be installed or operated in any tenant's premises without Landlord's prior written consent which consent shall not be unreasonably withheld or delayed, and in no case (even where the same are of a type so excepted or as so consented to by Landlord) shall any machines or mechanical equipment be so placed or operated as to disturb other tenants; but machines and mechanical equipment which may be permitted to be installed and used in a tenant's premises shall be so equipped, installed and maintained by such tenant as to prevent any disturbing noise, vibration or electrical or other interference from being transmitted from such premises to any other area of the Building. 17. Landlord, its contractors, and their respective employees, shall have the right to use, without charge therefor, all light, power and water in the premises of any tenant while cleaning or making repairs or alterations in the premises of such tenant. 18. No premises of any tenant shall be used for lodging or sleeping or for any immoral or illegal purpose. 19. The requirements of tenants will be attended to only upon application at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties, unless under special instructions from Landlord. EXHIBIT C Page 4 20. Canvassing, soliciting and peddling in the Building are prohibited and each tenant shall cooperate to prevent the same. 21. No tenant shall cause or permit any unusual or objectionable odors to emanate from its premises which would annoy other tenants or create a public or private nuisance. No cooking shall be done in the premises of any tenant except as is expressly permitted in such tenant's lease. 22. Nothing shall be done or permitted in any tenant's premises, and nothing shall be brought into or kept in any tenant's premises, which would impair or interfere with any of the Building's services or the proper and economic heating, ventilating, air conditioning, cleaning or other servicing of the Building or the premises, or the use or enjoyment by any other tenant of any other premises, nor shall there be installed by any tenant any ventilating, air-conditioning, electrical or other equipment of any kind which, in the reasonable judgment of Landlord, might cause any such impairment or interference. 23. No acids, vapors or other materials shall be discharged or permitted to be discharged into the waste lines, vents or flues of the Building which may damage them. The water and wash closets and other plumbing fixtures in or serving any tenant's premises shall not be used for any purpose other than the purposes for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other foreign substances shall be deposited therein. All damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees shall have, caused the same. Any cuspidors or containers or receptacles used as such in the premises of any tenant or for garbage or similar refuse, shall be emptied, cared for and cleaned by and at the expense of such tenant. 24. All entrance doors in each tenant's premises shall be left locked and all windows shall be left closed by the tenant when the tenant's premises are not in use. Entrance doors shall not be left open at any time. Each tenant, before closing and leaving its premises at any time, shall turn out all lights. 25. Hand trucks not equipped with rubber tires and side guards shall not be used within the Building. 26. All windows in each tenant's premises shall be kept closed, and all blinds therein above the ground floor shall be lowered as reasonably required because of the position of the sun, during the operation of the Building air-conditioning system to cool or ventilate the tenant's premises. If Landlord shall elect to install any energy saving film on the windows of any premises or to install energy saving windows in place of the EXHIBIT C Page 5 present windows, each tenant shall cooperate with the reasonable requirements of Landlord in connection with such installation and thereafter the maintenance and replacement of the film and/or windows and permit Landlord to have access to the tenant's premises at reasonable times during Business Hours to perform such work. In connection with any installation or maintenance required in this Paragraph 26, Landlord shall use reasonable efforts to minimize any interference with, or interruption to, Tenant's business at the Premises. 27. Landlord reserves the right to rescind, alter or waive any rule or regulation at any time prescribed for the Building when, in its reasonable judgment, it deems it necessary, desirable or proper for its best interest and for the best interests of the tenants generally, and no alteration or waiver of any rule or regulation in favor of one tenant shall operate as an alteration or waiver in favor of any other tenant. Landlord shall not be responsible to any tenant for the nonobservance or violation by any other tenant of any of the rules and regulations at any time prescribed for the Building. EXHIBIT C Page 6 PARKING AREA EXHIBIT D DESCRIPTION OF PLANS AND SPECIFICATIONS FOR THE TENANT IMPROVEMENTS EXHIBIT E DESCRIPTION OF FIRST OFFER SPACE EXHIBIT F DESCRIPTION OF EXPANSION SPACE EXHIBIT G CLEANING SCHEDULE EXHIBIT H EX-10.49 3 MASTER LEASE AGREEMENT MASTER LEASE AGREEMENT THIS MASTER LEASE AGREEMENT, dated as of June 28, 1995, ("Agreement"), between General Electric Capital Corporation, with an office at 303 International Circle, Suite 300, Hunt Valley, MARYLAND 21031, (hereinafter called, together with its successors and assigns, if any, "Lessor"), and Applied Microbiology, Inc., a corporation, organized and existing under the laws of the State of New York, with its mailing address and chief place of business at 771 Old Saw Mill River Road, Tarrytown, NY 10591 (hereinafter called "Lessee"). WITNESSETH: I. LEASING: (a) Subject to the terms and conditions set forth below, Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor, the equipment ("Equipment") described in Annex A to any schedule hereto ("Schedule") and this Agreement shall be effective from and after the date of execution hereof. Terms defined in a Schedule and not otherwise defined herein shall have the meanings ascribed to them in such Schedule. (b) The obligation of Lessor to purchase Equipment from the manufacturer or supplier thereof ("Supplier"), and to lease the same to Lessee under any Schedule shall be subject to receipt by Lessor, prior to the Lease Commencement Date (with respect to such Equipment), of each of the following documents in form and substance satisfactory to Lessor: (i) a Schedule relating to the Equipment then to be leased hereunder, (ii) a Purchase Order Assignment and Consent in the form of Annex B to the applicable Schedule, unless Lessor shall have delivered its purchase order for such Equipment, (iii) evidence of insurance which complies with the requirements of Section X, and (iv) such other documents as Lessor may reasonably request. As a further condition to such obligations of Lessor, Lessee shall, upon delivery of such Equipment (but not later than the Last Delivery Date specified in the applicable Schedule) execute and deliver to Lessor a Certificate of Acceptance (in the form of Annex C to the applicable Schedule) covering such Equipment. Lessor hereby appoints Lessee its agent for inspection and acceptance of the Equipment from the Supplier. Upon execution by Lessee of any Certificate of Acceptance, the Equipment described thereon shall be deemed to have been delivered to, and irrevocably accepted by, Lessee for lease hereunder. II. TERM, RENT AND PAYMENT: (a) The rent payable hereunder and Lessee's right to use the Equipment shall commence on the date of execution by Lessee of the Certificate of Acceptance for such Equipment ("Lease Commencement Date"). The term of this Agreement shall be the period specified in the applicable Schedule. If any term is extended, the word "term" shall be deemed to refer to all extended terms, and all provisions of this Agreement shall apply during any extended terms, except as may be otherwise specifically provided in writing. (b) Rent shall be paid to Lessor at its address stated above, except as otherwise directed by Lessor. Payments of rent shall be in the amount set forth in, and due in accordance with, the provisions of the applicable Schedule. If one or more Advance Rentals are payable, such Advance Rental shall be (i) set forth on the applicable Schedule, (ii) due upon acceptance by Lessor of such Schedule, and (iii) when received by Lessor, applied to the first rent payment and the balance, if any, to the final rental payment(s) under such Schedule. In no event shall any Advance Rental or any other rent payments be refunded to Lessee. If rent is not paid within ten days of its due date, Lessee agrees to pay a late charge of five cents ($.05) per dollar on, and in addition to, the amount of such rent but not exceeding the lawful maximum, if any. (c) So long as no default shall have occurred and be continuing under the terms of this agreement, neither Lessor nor its agents, employees, creditors, or assigns will disturb Lessee's quiet, peaceful and uninterrupted possession of the Equipment during the term of this Lease and Lessee's uninterrupted use thereof for its intended purpose. III. RENT ADJUSTMENT: (a) The periodic rent payments in each Schedule have been calculated on the assumption (which, as between Lessor and Lessee, is mutual) that the maximum effective corporate income tax rate (including any surcharge but exclusive of any minimum tax rate) for calendar year taxpayers ("Effective Rate") will be thirty-five percent (35%) for each year of the lease term. (b) If, solely as a result of Congressional enactment of any law (including, without limitation, any modification of, or amendment or addition to, the Internal Revenue Code of 1986 ("Code"), the Effective Rate is higher than thirty-five percent (35%) for any year during the lease term, then Lessor shall have the right to increase such rent payments by requiring payment of a single additional sum equal to the product of (i) the Effective Rate (expressed as a decimal) for such year less .35 (or, in the event that any adjustment has been made hereunder for any previous year, the Effective Rate (expressed as a decimal) used in calculating the next previous adjustment) times (ii) the adjusted Stipulated Loss Value divided by the difference between the new Effective Tax Rate (expressed as a decimal) and one (1). The adjusted Stipulated Loss Value shall be the Stipulated Loss Value (calculated as of the first rental due in the year for which such adjustment is being made) less the product of the Tax Benefits that would be allowable under Section 168 of the Code (as of the first day of the year for which such adjustment is being made and all subsequent years of the lease term). Lessee shall pay to Lessor the full amount of the additional rent payment on the later of (i) receipt of notice or (ii) the first day of the year for which such adjustment is being made. (c) Lessee's obligations under this Section III shall survive any expiration or termination of this Agreement. IV. TAXES: Except as provided in Sections III and XV(c), Lessee shall have no liability for taxes imposed by the United States of America or any State or political subdivision thereof which are on or measured by the net income of Lessor. Lessee shall report (to the extent that it is legally permissible) any pay promptly all other taxes, fees and assessments due, imposed, assessed or levied against any Equipment (or the purchase, ownership, delivery, leasing, possession, use or operation therof), this Agreement (or any rentals or receipts hereunder), any Schedule, Lessor or Lessee by any foreign, federal, state or local government or taxing authority during or related to the term of this Agreement, including, without limitation, all license and registration fees, and all sales, use, personal property, excise, gross receipts, franchise, stamp or other taxes, imposts, duties and charges, together with any penalties, fines or interest thereon (all hereinafter called "Taxes"). Lessee shall (i) reimburse Lessor upon receipt of written request for reimbursement for any Taxes charged to or assessed against Lessor, (ii) on request of Lessor, submit to Lessor written evidence of Lessee's payment of Taxes, (iii) on all reports or returns show the ownership of the Equipment by Lessor, and (iv) send a copy thereof to Lessor. The obligations of Lessee under this Section IV shall survive any expiration or termination of this Agreement. V. REPORTS: (a) Lessee will notify Lessor in writing, within ten (10) days after any tax or other lien shall attach to any Equipment, of the full particulars thereof and of the location of such Equipment on the date of such notification. (b) Lessee will within ninety (90) days of the close of each fiscal year of Lessee, deliver to Lessor, Lessee's complete financial statements, certified by a recognized firm of certified public accountants. Lessee will, within thirty (30) days after the date on which they are filed, deliver to Lessor all Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Upon request Lessee will deliver to Lessor quarterly, within ninety (90) days of the close of each fiscal quarter of Lessee, in reasonable detail, copies of Lessee's quarterly financial report certified by the chief financial officer of Lessee. Upon request, Lessee will deliver to Lessor one copy of each financial statement, report, notice or proxy statement sent by Lessee to shareholders generally and one copy of each regular or periodic report, registration statement or prospectus filed by Lessee with any securities exchange or the Securities and Exchange Commission or any successor agency, such copies to be delivered to Lessor within thirty (30) days after they become available or are otherwise filed. (c) Lessee will permit Lessor to inspect any Equipment during normal business hours. (d) Lessee will keep the Equipment at the Equipment Location (specified in the applicable Schedule) and will give Lessor prior written notice of any relocation of Equipment. Upon the written request of Lessor, Lessee will notify Lessor forthwith in writing of the location of any Equipment as of the date of such notification. (e) Lessee will promptly and fully report to Lessor in writing if any Equipment is lost or damaged (where the estimated repair costs would exceed ten percent (10%) of its then fair market value), or is otherwise involved in an accident causing personal injury or property damage. (f) Within thirty (30) days after any request by Lessor, Lessee will furnish a certificate of an authorized officer of Lessee stating that he has reviewed the activities of Lessee and that, to the best of his knowledge, there exists no default (as described in Section XII) or event which with notice or lapse of time (or both) would become such a default. VI. DELIVERY, USE AND OPERATION: (a) All Equipment shall be shipped directly from the Supplier to Lessee. (b) Lessee agrees that the Equipment will be used by Lessee solely in the conduct of its business and in a manner complying with all applicable federal, state, and local laws and regulations and any applicable insurance policies and Lessee shall not discontinue use of the Equipment. (c) LESSEE SHALL NOT ASSIGN, MORTGAGE, SUBLET OR HYPOTHECATE ANY EQUIPMENT, OR THE INTEREST OF LESSEE HEREUNDER, NOR SHALL LESSEE REMOVE ANY EQUIPMENT FROM THE CONTINENTAL UNITED STATES, WITHOUT THE PRIOR WRITTEN CONSENT OF THE LESSOR. (d) Lessee will keep the Equipment free and clear of all liens and encumbrances other than those which result from acts of Lessor. VII. SERVICE: (a) Lessee will, at its sole expense, maintain each unit of Equipment in good operating order, repair, condition and appearance in accordance with manufacturer's recommendations, normal wear and tear expected. Lessee shall, if at any time requested by Lessor, affix in a prominent position on each unit of Equipment plates, tags or other identifying labels showing ownership thereof by Lessor. (b) Lessee will not, without the prior consent of Lessor, affix or install any accessory, equipment or device on any Equipment if such addition will impair the originally intended function or use of such Equipment. All additions, repairs, parts, supplies, accessories, equipment, and devices furnished, attached or affixed to any Equipment which are not readily removable shall be made only in compliance with applicable law, including Internal Revenue Service guidelines, shall be free and clear of all liens, encumbrances or rights of others, and shall become the property of Lessor. Lessee will not, without the prior written consent of Lessor and subject to such conditions as Lessor may impose for its protection, affix or install any Equipment to or in any other personal or real property. (c) Any alterations or modifications to the Equipment that may, at any time during the term of this Agreement, be required to comply with any applicable law, rule or regulation shall be made at the expense of Lessee. VIII. STIPULATED LOSS VALUE: Lessee shall promptly and fully notify Lessor in writing if any unit of Equipment shall be or become worn out, lost, stolen, destroyed, irreparably damaged in the reasonable determination of Lessee, or permanently rendered unfit for use from any cause whatsoever (such occurrences being hereinafter called "Casualty Occurrences"). On the rental payment date next succeeding a Casualty Occurrence (the "Payment Date"), Lessee shall pay Lessor the sum of (x) the Stipulated Loss Value of such unit calculated as of the rental next preceding such Casualty Occurrence ("Calculation Date") and (y) all rentals and other amounts which are due hereunder as of the Payment Date. Upon payment of all sums due hereunder, the term of this lease as to such unit shall terminate and (except in the case of the loss, theft or complete destruction of such unit) Lessor shall be entitled to recover possession of such unit. IX. LOSS OR DAMAGE: Lessee hereby assumes and shall bear the entire risk of any loss, theft, damage to, or destruction of, any unit of Equipment from any cause whatsoever from the time the Equipment is shipped to Lessee. X. INSURANCE: Lessee agrees, at its own expense, to keep all Equipment insured for such amounts and against such hazards as Lessor may require, including, but not limited to, insurance for damage to or loss of such Equipment and liability coverage for personal injuries, death or property damage, with Lessor named as additional insured and with a loss payable clause in favor of Lessor, as its interest may appear, irrespective of any breach of warranty or other act or omission of Lessee. All such policies shall be with companies, and on terms, satisfactory Lessor. Lessor agrees to deliver to Lessor evidence of insurance satisfactory to Lessor. No Insurance shall be subject to any co-insurance clause. Lessee hereby appoints Lessor as Lessees. attorney-in-fact to make proof of loss and claim for insurance, and to make adjustments with insurers and to receive payment of and execute or endorse all documents, checks or drafts in connection with payments made as a result of such insurance policies. Any expense of Lessor in adjusting or collecting insurance shall be borne by Lessee. Lessee will not make adjustments with insurers except (i) with respect to claims for damage to any unit of Equipment where the repair costs do not exceed ten percent (10%) of such unit's fair market value, or (ii) with Lessor's written consent. Said policies shall provide that the insurance may not be altered or cancelled by the insurer until after thirty (30) days' written notice to Lessor. Lessor may, at its option, apply proceeds of insurance, in whole or in part, to (i) repair or replace Equipment or any portion thereof, or (ii) satisfy any obligation of Lessee to Lessor hereunder. XI. RETURN OF EQUIPMENT: (a) Upon any expiration or termination of this Agreement or any Schedule, Lessee shall promptly, at its own cost and expense: (i) perform any testing and repairs required to place the affected units of Equipment in the same condition and appearance as when received by Lessee (reasonable wear and tear excepted) and in good working order for their originally intended purpose; (ii) if deinstallation, disassembly or crating is required, cause such units to be deinstalled, disassembled and crated by an authorized manufacturer's representative or such other service person as is satisfactory to Lessor; and (iii) return such units to a location within the continental United States as Lessor shall direct. (b) Until Lessee has fully complied with the requirements of Section XI(a) above, Lessee's rent payment obligation and all other obligations under this Agreement shall continue from month to month notwithstanding any expiration or termination of the lease term. Lessor may terminate such continued leasehold interest upon ten (10) days' notice to Lessee. XII. DEFAULT: (a) Lessor may in writing declare this Agreement in default if: Lessee breaches its obligation to pay rent or any other sum when due and fails to cure the breach within ten (10) days; Lessee breaches any of its insurance obligations herewith under Section X; Lessee breaches any of its other obligations hereunder and fails to cure that breach within thrity (30) days after written notice thereof; any representation or warranty made by or on behalf of Lessee in connection with this Agreement shall be false or misleading in any material respect; Lessee or any guarantor becomes insolvent or ceases to do business as a going concern; any Equipment is illegally used; a petition is filed by or against Lessee or any guarantor under any bankruptcy or insolvency laws; there is a revocation or anticipatory repudiation of any guarantor's obligations under any guaranty issued in connection with this Agreement; Lessee or any guarantor shall be in default under any material obligation and the applicable grace period with respect thereto shall have expired; Lessee or any guarantor shall have terminated its existence, consolidated with, merged into or conveyed or leased substantially all of its assets as an entirety to any person (such actions being referred to as an "Event"), unless not less than sixty (60) days prior to such Event: (x) such person is organized and existing under the laws of the United States or any state, and executes and delivers to Lessor an agreement containing an effective assumption by such person of the due and punctual performance of this Lease or guaranty thereof, as the case may be, and (y) Lessor is reasonably satisfied as to the credit worthiness of such person; if Lessee or any guarantor is a privately held corporation and effective control of Lessee's or any guarantor's voting capital stock, issued and outstanding from time to time, is not retained by the present stockholders (unless Lessee shall have provided sixty (60) days' prior written notice to Lessor of the proposed disposition of stock and Lessor shall have consented thereto in writing); or if Lessee or any guarantor is a publicly held corporation as a result of or in connection with a material change in the ownership of Lessee's or any guarantor's capital stock, Lessee's or any guarantor's debt-to-worth ratio equals or exceeds twice Lessee's or any guarantor's debt-to-worth ratio as of the date of this Lease (unless Lessor shall have given its prior written consent thereto), if Lessee or any guarantor is a natural person, any death or incompetency of Lessee or such guarantor. As used herein, "debt-to-worth ratio" shall mean the ratio of (x) total liabilities which, in accordance with generally accepted accounting principles ("GAAP") would be included in the liability side of a balance sheet to (y) tangible net worth including the sum of the par or stated value of all outstanding capital stock, surplus and undivided profits, less any amounts attributable to goodwill, patents, copyrights, mailing lists, catalogs, trademarks, bond discount and underwriting expenses, organization expense and other intangibles, all determined in accordance with GAAP. Any provision of this Agreement to the contrary notwithstanding, Lessor may exercise all rights and remedies hereunder independently with respect to each Schedule. (b) After default, at the requrest of Lessor, Lessee shall comply with the provisions of Section XI(a). Lessee hereby authorizes Lessor to enter, with or without legal process, any premises where any Equipment is believed to be and take possession thereof. Lessee shall, without further demand, forthwith pay to Lessor as liquidated damages for loss of a bargain and not as a penalty, the Stipulated Loss Value of the Equipment (calculated as of the rental date next preceding the declaration of default), and all rentals and other sums then due hereunder. Lessor may terminate this Agreement as to any or all of the Equipment, provided that a termination shall occur only upon written notice by Lessor to Lessee and only as to the items of Equipment specified in any such notice. Lessor may, but shall not be required to, sell Equipment at private or public sale, in bulk or in parcels, with or without notice, and without having the Equipment present at the place of sale; or Lessor may, but shall not be required to, lease, otherwise dispose of or keep idle all or part of the Equipment; and Lessor may use Lessee's premises for any or all of the foregoing without liability for rent, costs, damages or otherwise. The proceeds of sale, lease or other disposition, if any, shall be applied in the following order of priorities: (1) to pay all of Lessor's costs, charges and expenses incurred in taking, removing, holding, repairing and selling, leasing or otherwise disposing of Equipment; then, (2) to the extent not previously paid by Lessee, to pay Lessor all sums due from Lessee hereunder; then (3) to reimburse to Lessee any sums previously paid by Lessee as liquidated damages; and (4) any surplus shall be retained by Lessor. Lessee shall pay any deficiency in (1) and (2) forthwith. (c) The foregoing remedies are cumulative, and any or all thereof may be exercised in lieu of or in addition to each other or any remedies at law, in equity, or under statute. Lessee waives notice of sale or other disposition (and the time and place thereof), and the manner and place of any advertising. Lessee shall pay Lessor's actual attorney's fees incurred in connection with the enforcement, assertion, defense or preservation of Lessor's rights and remedies hereunder, or if prohibited by law, such lesser sum as may be permitted. Waiver of any default shall be a waiver of any other or subsequent default. (d) Any default under the terms of this or any other agreement between Lessor and Lessee may be declared by Lessor a default under this and any such other agreement. XIII. ASSIGNMENT: Lessor may, without the consent of Lessee, assign this Agreement or any Schedule or any interests therein. Lessee agrees that if Lessee receives written notice of an assignment from Lessor, Lessee will pay all rent and all other amounts payable under any assigned Equipment Schedule to such assignee or as instructed by Lessor. Lessee further agrees to confirm in writing receipt of the notice of assignment as may be reasonably requested by assignee. Lessee hereby waives and agrees not to assert against any such assignee any defense, set-off, recoupment, claim or counterclaim which Lessee has or may at any time have against Lessor for any reason whatsoever. XIV. NET LEASE; NO SET-OFF, ETC: This Agreement is a net lease. Lessee's obligation to pay rent and other amounts due hereunder shall be absolute and unconditional. Lessee shall not be entitled to any abatement or reductions of, or set-offs against, said rent or other amounts, including, without limitation, those arising or allegedly arising out of claims (present or future, alleged or actual, and including claims arising out of strict tort or negligence of Lessor) of Lessee against Lessor under this Agreement or otherwise. Nor shall this Agreement terminate or the obligations of Lessee be affected by reason of any defect in or damage to, or loss of possession, use or destruction of, any Equipment from whatsoever cause. It is the intention of the parties that rents and other amounts due hereunder shall continue to be payable in all events in the manner and at the times set forth herein unless the obligation to do so shall have been terminated pursuant to the express terms hereof. XV. INDEMNIFICATION: (a) Lessee hereby agrees to indemnify, save and keep harmless Lessor, its agents, employees, successors and assigns from and against any and all losses, damages, penalties, injuries, claims, actions and suits, including legal expenses, of whatsoever kind and nature, in contract or tort or otherwise, unless caused by the gross negligence or willful misconduct of Lessor, and including, but not limited to, Lessor's strict liability in tort, arising out of (i) the selection, manufacture, purchase, acceptance or rejection of Equipment, the ownership of Equipment during the term of this Agreement, and the delivery, lease, possession, maintenance, uses, condition, return or operation of Equipment (including, without limitation, latent and other defects, whether or not discoverable by Lessor or Lessee and any claim for patent, trademark or copyright infringement or environmental damage) or (ii) the condition of Equipment sold or disposed of after use by Lessee, any sublessee or employees of Lessee. Lessee shall, upon request, defend any actions based on, or arising out of, any of the foregoing. (b) The Lease has been entered into on the assumption that (i) the Lease will be treated for federal income tax purposes as a true lease and the Lessor will be treated as the owner and lessor of the Equipment and the Lessee will be treated as the lessee of the Equipment, and (ii) on the Lease Commencement Date for any unit of Equipment, such unit will qualify for all of the items of deduction and credit specified in Section C of applicable Schedule ("Tax Benefits") in the hands of Lessor (all references to Lessor in this Section XV include Lessor and the consolidated tax payer group of which Lessor is a member). (c) If for any reason whatsoever (i) tax counsel of Lessor shall determine that Lessor is not entitled to claim on its federal income tax return all or any portion of the Tax Benefits with respect to any Equipment or (ii) any such Tax Benefit claimed on the federal income tax return of Lessor is disallowed or adjusted by the Internal Revenue Service or (iii) any such Tax Benefit is recomputed or recaptured (any such determination, disallowance, adjustment, recomputation, or recapture being hereinafter called a "Loss"), then Lessee shall pay to Lessor, as an indemnity and as additional rent, such amount as shall, in the reasonable opinion of Lessor, cause Lessor's after-tax economic yields and cash flows, computed on the same assumptions, including tax rates (unless any adjustment has been made under Section III hereof, in which case the Effective Rate used in the next preceding adjustment shall be substituted), as were utilized by Lessor in originally evaluating the transaction (such yields and flows being hereinafter called the "Net Economic Return") to equal the Net Economic Return that would have been realized by Lessor if such Loss had not occurred. Such amount shall be payable upon demand accompanied by a statement describing in reasonable detail such Loss and the computation of such amount. Anything in this paragraph to the contrary notwithstanding, Lessee shall have no obligation to indemnify Lessor from or against any such Loss to the extent that such Loss is caused by: (i) any failure by Lessor to properly or timely claim on its federal income tax return any Tax Benefits on any Equipment (unless such failure is based upon a determination by tax counsel of Lessor that Lessor is not entitled to claim such Tax Benefits with respect to such Equipment); (ii) any failure of Lessor to have sufficient taxable income to benefit from the Tax Benefits; (iii) any liability of the Lessor for any alternative minimum taxes; (iv) the status of Lessor for purposes of federal income taxes; (v) any sale or other disposition of any Equipment by Lessor other than after an event of default by Lessee; (vi) any tax election made or not made by Lessor relating to the Tax Benefits; or (vii) any event which results in a payment by Lessee in an amount equal to, or measured by, the Stipulated Loss Value to the extent that such Loss was included in Lessor's calculation of such Stipulated Loss Value. (d) all of Lessor's rights, privileges and indemnities contained in this Section XV shall survive the expiration or other termination of this Agreement and the rights, privileges and indemnities contained herein are expressly made for the benefit of, and shall be enforceable by Lessor, its successors and assigns. XVI. DISCLAIMER: LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT WITHOUT ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES. LESSOR DOES NOT MAKE, HAS NOT MADE, NOR SHALL LESSOR BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE EQUIPMENT LEASED HEREUNDER OR ANY COMPONENT THEREOF, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE. All such risks as between Lessor and Lessee, are to be borne by Lessee. Without limiting the foregoing, Lessor shall have no responsibility or liability to lessee or any other person with respect to any of the following, regardless of any negligence of Lessor (i) any liability, loss or damage caused or alleged to be caused directly or indirectly by any Equipment, any inadequacy thereof, any deficiency or defect (latent or otherwise) therein, or any other circumstance in connection therewith; (ii) the use, operation or performance of any Equipment or any risks relating thereto; (iii) any interruption of service, loss of business or anticipated profits or consequential damages, or (iv) the delivery, operation, servicing, maintenance, repair, improvement or replacement of any Equipment. If, and so long as, no default exists under this Lease, Lessee shall be, and hereby is, authorized during the term of this Lease to assert and enforce, at Lessee's sole cost and expense, from time to time, in the name of and for the account of Lessor and/or Lessee, as their interests may appear, whatever claims and rights Lessor may have against any Supplier of the Equipment. XVII. REPRESENTATIONS AND WARRANTIES OF LESSEE: Lessee hereby represents and warrants to Lessor that on the date hereof and on the date of execution of each Schedule: (a) Lessee has adequate power and capacity to enter into, and perform under, this Agreement and all related documents (together, the "Documents") and is duly qualified to do business wherever necessary to carry on its present business and operations, including the jurisdiction(s) where the Equipment is or is to be located: (b) The Documents have been duly authorized, executed and delivered by Lessee and constitute valid, legal and binding agreements, enforceable in accordance with their terms, except to the extent that the enforcement of remedies therein provided may be limited under applicable bankruptcy and insolvency laws. (c) No approval, consent or withholding of objections is required from any governmental authority or instrumentality with respect to the entry into or performance by Lessee of the Documents except such as have already been. (d) The entry into and performance by Lessee of the Documents will not: (i) violate any judgment, order, law or regulation applicable to Lessee or any provision of Lessee's Certificate of Incorporation or By-Laws; or (ii) result in any breach of, constitute a default under or result in the creation of any lien, charge, security interest or other encumbrance upon any Equipment pursuant to any indenture, mortgage, deed of trust, bank loan or credit agreement or other instrument (other than this Agreement) to which Lessee is a party. (e) There are no suits or proceedings pending or threatened in court or before any commission, board or other administrative agency against or affecting Lessee, which if decided adversely will have a material adverse effect on the ability of Lessee to fulfill its obligations under this Agreement. (f) The Equipment accepted under any Certificate of Acceptance is and will remain tangible personal property. (g) Each financial statement delivered to Lessor has been prepared in accordance with GAAP consistently applied, and since the date of the most recent such financing statement, there has been no material adverse change. (h) Lessee is and will be at all times validly existing and in good standing under the laws of the State of its incorporation (specified in the first sentence of this Agreement). (i) The Equipment will at all times be used for commercial or business purposes. XVIII. PURCHASE OPTION: (a) So long as no default exists hereunder and the lease has not been earlier terminated, Lessee may at lease expiration, upon at least one hundred eighty (180) days' prior written notice to Lessor, purchase all (but not less than all) of the Equipment in any Schedule on an AS IS, WHERE IS BASIS without recourse to or warranty from Lessor, express or implied ("AS IS BASIS") for cash equal to its then Fair Market Value (plus all applicable sales taxes). (b) "Fair Market Value," shall mean the price which a willing buyer (who is neither a lessee in possession nor a used equipment dealer) would pay for the Equipment in an arm's-length transaction to a willing seller under no compulsion to sell; provided, however, that in such determination: (i) the Equipment shall be assumed to be in the condition in which it is required to be maintained and returned under this Agreement; (ii) in the case of any installed Equipment, that Equipment shall be valued on an installed basis; and (iii) costs of removal from current location shall not be a deduction from such valuation. If Lessor and Lessee are unable to agree on the Fair Market Value at least one hundred thirty-five (135) days before lease expiration, Lessor shall appoint an independent appraiser (reasonably acceptable to Lessee) to determine Fair Market Value, and that determination shall be final, binding and conclusive. Lessee shall bear all costs associated with any such appraisal. (c) Lessee shall be deemed to have waived this option unless it provides Lessor with written notice of its irrevocable election to exercise the same within fifteen (15) days after Fair Market Value is determined (by agreement or appraisal). XIX. MISCELLANEOUS: (A) LESSEE HEREBY UNCONDITIONALLY WAIVES IT RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS LEASE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND LESSOR RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STAUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENT OF LITIGATION, THIS LEASE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. (b) Unless and until Lessee exercises its rights under Section XVIII above, nothing herein contained shall give or convey to Lessee any right, title or interest in and to any Equipment except as a lessee. Any cancellation or termination by Lessor, pursuant to the provision of this Agreement, any Schedule, supplement or amendment hereto, or the lease of any Equipment hereunder, shall not release Lessee from any then oustanding obligations to Lessor hereunder. All Equipment shall at all times remain personal property of Lessor regardless of the degree of its annexation to any real property and shall not by reason of any installation in, or affixation to, real or personal property become a part thereof. (c) Time is of the essence of this Agreement. Lessor's failure at any time to require strict performance by Lessee of any of the provisions hereof shall not waive or diminish Lessor's right thereafter to demand strict compliance therewith. Lessee agrees, upon Lessor's request, to execute any instrument necessary or expedient for filing, recording or perfecting the interest of Lessor. All notices required to be given hereunder shall be deemed adequately given if sent by registered or certified mail to the addressee at its address stated herein, or at such other place as such addressee may have designated in writing and shall be deemed effective when sent. This Agreement and any Schedule and Annexes thereto constitute the entire agreement of the parties with respect to the subject matter hereof. NO VARIATION OR MODIFICATION OF THIS AGREEMENT OR ANY WAIVER OF ANY OF ITS PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE PARTIES HERETO. LESSOR /s/ SMS LESSEE /s/ BTS (d) In case of a failure of Lessee to comply with any provision of this Agreement, Lessor shall have the right, but shall not be obligated to, effect such compliance, in whole or in part; and all moneys spent and expenses and obligations incurred or assumed by Lessor in effecting such compliance shall constitute additional rent due to Lessor within five days after the date Lessor sends notice to Lessee requesting payment. Lessor's effecting such compliance shall not be a waiver of Lessee's default. (e) Any rent or other amount not paid to Lessor when due hereunder shall bear interest, both before and after any judgment or termination hereof, at the lesser of eighteen percent (18%) per annum or the maximum rate allowed by law. Any provisions in this Agreement and any Schedule which are in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto. IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: General Electric Capital Corporation Applied Microbiology, Inc. By: /s/ Steven M. Spivey By: /s/ Benjamin T. Sporn Name: Steven M. Spivey Name: Benjamin T. Sporn Title: Senior Credit Analyst Title: Vice President Legal & Secretary MARY LOU MURRAY Notary Public, State of New York No. 60-4644049 Qualified in Westchester County Commission Expires 2/28/1996 EX-23.01 4 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.01 INDEPENDENT AUDITORS' CONSENT The Board of Directors Applied Microbiology, Inc.: We consent to incorporation by reference in the Registration Statement No. 33-73332 on Form S-8 of Applied Microbiology, Inc. of our report dated July 21, 1995, relating to the consolidated balance sheets of Applied Microbiology, Inc. and subsidiary as of June 30, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1995, which report appears in the June 30, 1995 annual report on Form 10-K of Applied Microbiology, Inc. KPMG Peat Marwick LLP New York, New York September 28, 1995 EX-27 5 FINANCIAL DATA SCHEDULE
5 12-MOS JUN-30-1995 JUN-30-1995 3337 0 1850 14 2865 9359 7542 4096 13788 2026 0 91 1500 0 9034 13788 11264 11874 3258 10955 380 0 2 537 254 283 0 0 0 283 0.01 0.01
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