-----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, WlH5ie5s88CzJ7gvTmbPwdQC1Zog2gEldI3RoObvjqzGf8cXwv8/cPQutDoSIgo7 Qko90rG9bc6dqUOE5HgYrw== 0000891618-99-003508.txt : 19990809 0000891618-99-003508.hdr.sgml : 19990809 ACCESSION NUMBER: 0000891618-99-003508 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMCHEM LABORATORIES INC CENTRAL INDEX KEY: 0000876645 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 770187280 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19371 FILM NUMBER: 99678867 BUSINESS ADDRESS: STREET 1: 1505 A OBRIEN DR CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4153286200 10-Q 1 FORM 10-Q FOR PERIOD ENDED 06/30/1999 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________ COMMISSION FILE NUMBER 0-19371 [PHARMCHEM LABORATORIES, INC. LOGO] (Exact name of registrant as specified in its charter) CALIFORNIA 77-0187280 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 1505-A O'BRIEN DRIVE MENLO PARK, CALIFORNIA 94025 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 328-6200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of July 31, 1999, the registrant had outstanding 5,784,206 shares of Common Stock, no par value. ================================================================================ 2 PHARMCHEM LABORATORIES, INC. QUARTERLY REPORT ON FORM 10-Q INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements ...............................3 Condensed Consolidated Balance Sheets (unaudited) at June 30, 1999 and December 31, 1998........................................4 Condensed Consolidated Income Statements (unaudited) for the Three and Six Months ended June 30, 1999 and 1998..........................5 Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months ended June 30, 1999 and 1998.....................................................6 Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months ended June 30, 1999 and 1998 ..........................7 Notes to Condensed Consolidated Financial Statements (unaudited)...........8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................10 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders .....................16 Item 6. Exhibits and Reports on Form 8-K ........................................16 SIGNATURE ..........................................................................17
2 3 PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that the condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K. These financial statements have been prepared in all material respects in conformity with the standards of accounting measurements set forth in Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," and the rules and regulations as specified in the Securities Exchange Act of 1934 and reflect all adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to summarize fairly the Company's consolidated financial position, the results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. 3 4 PHARMCHEM LABORATORIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
June 30, December 31, 1999 1998 -------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,124 $ 802 Accounts receivable, net 7,614 6,522 Inventory 1,522 1,525 Prepaids and other current assets 753 719 -------- -------- TOTAL CURRENT ASSETS 11,013 9,568 -------- -------- PROPERTY AND EQUIPMENT, net 8,873 8,508 OTHER ASSETS 828 997 GOODWILL, net 2,898 2,990 -------- -------- TOTAL ASSETS $ 23,612 $ 22,063 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Revolving line of credit $ 827 $ 2,379 Current portion of long-term debt 1,057 465 Accounts payable 3,099 3,123 Accrued compensation 994 1,155 Accrued collectors and other liabilities 3,315 2,765 -------- -------- TOTAL CURRENT LIABILITIES 9,292 9,887 LONG-TERM DEBT, net of current portion 2,356 656 OTHER NONCURRENT LIABILITIES 232 610 -------- -------- TOTAL LIABILITIES 11,880 11,153 -------- -------- SHAREHOLDERS' EQUITY Common stock, no par value, 10,000 shares authorized, 5,784 and 5,782 shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively 19,096 19,090 Accumulated other comprehensive income (loss) (45) 83 Accumulated deficit (7,319) (8,263) -------- -------- TOTAL SHAREHOLDERS' EQUITY 11,732 10,910 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 23,612 $ 22,063 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 PHARMCHEM LABORATORIES, INC. CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited) (In thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- NET SALES $ 11,149 $ 11,451 $ 21,323 $ 20,979 COST OF SALES 7,865 8,215 15,089 15,523 -------- -------- -------- -------- GROSS PROFIT 3,284 3,236 6,234 5,456 OPERATING EXPENSES Selling, general and administrative 2,610 2,804 5,049 5,012 Marketing rights and research 18 13 37 40 Amortization of goodwill 46 46 92 92 -------- -------- -------- -------- Total operating expenses 2,674 2,863 5,178 5,144 -------- -------- -------- -------- INCOME FROM OPERATIONS 610 373 1,056 312 Interest expense 48 90 104 189 Other expense (income), net (3) (9) (20) (12) -------- -------- -------- -------- Total other expenses 45 81 84 177 -------- -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 565 292 972 135 PROVISION FOR INCOME TAXES 204 46 28 81 -------- -------- -------- -------- NET INCOME $ 361 $ 246 $ 944 $ 54 ======== ======== ======== ======== EARNINGS PER SHARE: Basic $ 0.06 $ 0.04 $ 0.16 $ 0.01 ======== ======== ======== ======== Diluted $ 0.06 $ 0.04 $ 0.16 $ 0.01 ======== ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 5,784 5,758 5,783 5,754 ======== ======== ======== ======== Diluted 5,903 5,826 6,006 5,821 ======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 PHARMCHEM LABORATORIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands)
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1999 1998 1999 1998 ----- ----- ----- ----- NET INCOME $ 361 $ 246 $ 944 $ 54 OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation (59) (1) (128) 15 ----- ----- ----- ----- COMPREHENSIVE INCOME $ 302 $ 245 $ 816 $ 69 ===== ===== ===== =====
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 7 PHARMCHEM LABORATORIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, ----------------------- 1999 1998 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 944 $ 54 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 930 995 Provision for doubtful accounts 92 93 Changes in operating assets and liabilities (1,009) 85 ------- ------- Net cash provided by operating activities 957 1,227 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (1,258) (1,150) Proceeds from sales of equipment 5 -- ------- ------- Net cash used in investing activities (1,253) (1,150) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (repayments) on revolving lines of credit, net (1,552) 389 Principal payments on long-term debt (290) (277) Proceeds from issuance of term note and capital lease transaction 2,582 -- Proceeds from exercise of stock options 6 28 ------- ------- Net cash provided by financing activities 746 140 ------- ------- FOREIGN CURRENCY TRANSLATION (128) 15 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 322 232 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 802 372 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,124 $ 604 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 7 8 PHARMCHEM LABORATORIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Earnings per Share The Company computes and discloses its earnings per share in accordance with SFAS No. 128, "Earnings Per Share," which requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares represent shares issuable upon the exercise of outstanding options and are calculated using the treasury stock method. Options to purchase 116,000 shares and 66,000 shares of the Company's common stock for the three months and six months ended June 30, 1999, respectively, were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the Company's common stock of $2.70 and $3.12 per share, respectively. Options to purchase 80,000 shares of the Company's common stock for the three months and six months ended June 30, 1998, were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the Company's common stock of $2.51 per share. Weighted average dilutive options of 119,000 and 223,000 were used in the computation of earnings per share for the three month and six month periods ended June 30, 1999, respectively. Weighted average dilutive options of 68,000 and 67,000 were used in the computation of earnings per share for the three month and six month periods ended June 30, 1998, respectively. 2. Inventory Inventory represents laboratory materials, collection materials and products and is stated at the lower of cost or market. Cost is determined using standard costs, including freight, that approximate actual costs on a first-in, first-out basis. Inventory consisted of the following at June 30, 1999 and December 31, 1998, respectively:
JUNE December 1999 1998 ------ ------ (In thousands) Laboratory materials ..... $ 480 $ 529 Collection materials ..... 819 801 Products ................. 223 195 ------ ------ $1,522 $1,525 ====== ======
8 9 3. Reportable Segments The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective December 31, 1998. Prior period amounts have been restated to conform to the presentation required by SFAS No. 131. The Company has two reportable segments, Domestic and International, providing integrated drug testing services. The Domestic segment serves the United States and the International segment serves primarily the United Kingdom and also includes the European, Asian, Middle Eastern and South American markets. The Domestic segment is serviced by the Company's California and Texas operations and the International segment is serviced by Medscreen, the Company's London-based subsidiary. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K. The Company evaluates segment profit based on income or loss from operations before intercompany interest, other income or expense and income taxes and excluding goodwill amortization. Intersegment sales and transfers are not material. Information about the Company's segments as of and for the three and six month periods ended June 30 is as follows:
Domestic International Total -------- ------------- -------- (In thousands) Three Months Ending June 30, 1999: Net sales from external customers ..... $ 9,370 $ 1,779 $ 11,149 Segment profit ........................ 291 365 656 1998: Net sales from external customers ..... $ 9,763 $ 1,688 $ 11,451 Segment profit ........................ 163 256 419 Six Months Ending June 30, 1999: Net sales from external customers ..... $ 17,845 $ 3,478 $ 21,323 Segment profit ........................ 527 621 1,148 1998: Net sales from external customers ..... $ 17,737 $ 3,242 $ 20,979 Segment profit (loss) ................. (54) 458 404
9 10 4. Debt PharmChem maintains a revolving line of credit agreement ("Credit Agreement") with a bank. At June 30, 1999, the maximum that could be borrowed and the amount outstanding under the Credit Agreement were $5,547,000 and $827,000, respectively. As of June 30, 1999, the Company was in compliance with all debt covenants. On April 20, 1999, the Company entered into a $1,500,000 variable rate installment note ("Installment Note") with its bank. The proceeds from the Installment Note were immediately used to reduce the amount outstanding under the Company's revolving line of credit. The Installment Note is subject to the terms and conditions of the Credit Agreement, bears interest at the prime rate plus 1.0% and is payable over 60 months. On April 30, 1999, the Company entered into a $1,082,000 capital lease agreement with a lessor to refinance certain modules of the Company's Unified Database software project. The lease agreement bears interest at 8.5% and is payable over 36 months. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD LOOKING STATEMENTS "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, which are subject to the "safe harbor" created by these Sections. The Company's actual future results could differ materially from those projected in the forward-looking statements. Some factors which could cause future actual results to differ materially from the Company's recent results and those projected in the forward-looking statements are described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The Company assumes no obligation to update the forward-looking statements or such factors. 10 11 RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial data (dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30, --------------------------------------- --------------------------------------- 1999 1998 1999 1998 1999 1998 1999 1998 ------- ------- ------ ------ ------- ------- ------ ------ (As a % of net sales) (As a % of net sales) NET SALES: Public and private employers analyses $ 4,142 $ 4,871 37.2% 42.5% $ 7,399 $ 8,488 34.7% 40.5% Criminal justice agencies analyses 4,336 3,704 38.9 32.3 8,559 7,269 40.2 34.6 Drug rehabilitation programs analyses 368 452 3.2 4.0 748 780 3.5 3.7 Domestic products 524 736 4.7 6.4 1,139 1,200 5.3 5.7 Medscreen analyses & products 1,779 1,688 16.0 14.8 3,478 3,242 16.3 15.5 ------- ------- ------ ------ ------- ------- ------ ------ Total net sales 11,149 11,451 100.0 100.0 21,323 20,979 100.0 100.0 COST OF SALES 7,865 8,215 70.5 71.7 15,089 15,523 70.8 74.0 ------- ------- ------ ------ ------- ------- ------ ------ GROSS PROFIT 3,284 3,236 29.5 28.3 6,234 5,456 29.2 26.0 ------- ------- ------ ------ ------- ------- ------ ------ OPERATING EXPENSES: Selling, general and administrative 2,610 2,804 23.4 24.5 5,049 5,012 23.6 23.9 Marketing rights and research 18 13 0.2 0.1 37 40 0.2 0.2 Amortization of goodwill 46 46 0.4 0.4 92 92 0.4 0.4 ------- ------- ------ ------ ------- ------- ------ ------ Total operating expenses 2,674 2,863 24.0 25.0 5,178 5,144 24.2 24.5 ------- ------- ------ ------ ------- ------- ------ ------ INCOME FROM OPERATIONS 610 373 5.5 3.3 1,056 312 5.0 1.5 ------- ------- ------ ------ ------- ------- ------ ------ OTHER EXPENSES, net 45 81 0.5 0.8 84 177 0.5 0.8 PROVISION FOR INCOME TAXES 204 46 1.8 0.4 28 81 0.1 0.4 ------- ------- ------ ------ ------- ------- ------ ------ NET INCOME $ 361 $ 246 3.2% 2.1% $ 944 $ 54 4.4% 0.3% ======= ======= ====== ====== ======= ======= ====== ======
Net sales for the three months ended June 30, 1999 decreased $302,000 (2.6%) to $11,149,000 in 1999 from $11,451,000 in 1998. The Company's domestic workplace analyses sales decreased $729,000 (15.0%) which more than offset an increase in domestic criminal justice analyses sales of $632,000 (17.1%) and higher Medscreen sales of $91,000 (5.4%). Domestic specimen (including product related analyses) volume was relatively unchanged, with an increase in criminal justice specimens more than offsetting a decrease in workplace specimens. Specimen volume at Medscreen, the Company's London-based subsidiary, increased 4.7%. Average selling prices for domestic laboratory analyses (including product related analyses) decreased 1.9% due to the higher mix of lower priced criminal justice volume. Sales of PharmScreen(R) On-site Screening Devices decreased $152,000 (28.6%) and sales of PharmChek(R) Drugs of Abuse Patch decreased $62,000 (31.3%), attributed in part to the timing of shipments compared to the prior year. Net sales for the six months ended June 30, 1999 increased $344,000 (1.6%) to $21,323,000 in 1999 from $20,979,000 in 1998. Domestic criminal justice analyses sales increased $1,290,000 (17.7%) on higher specimen volume of 114,000 (15.6%) in 1999, which more than offset a $1,089,000 (12.8%) decrease in domestic workplace analyses attributed to decreased specimen volume of 76,000 (17.1%). Total domestic specimen volume increased 3.1% compared to the prior year and domestic product sales decreased $61,000 (5.1%). Medscreen sales increased $236,000 (7.3%) reflecting a 20.6% increase in specimen volume and higher product sales. 11 12 Cost of sales for the three months ended June 30, 1999 decreased $350,000 (4.3%) to $7,865,000 in 1999 from $8,215,000 in 1998. The decrease in cost of sales reflects lower collector fees, reduced product costs and the favorable impact of the Company's ongoing cost reduction program and laboratory process improvement program. Cost of sales as a percentage of net sales decreased to 70.5% in 1999 from 71.7% in 1998. Gross profit as a percentage of net sales increased to 29.5% in 1999 from 28.3% in 1998. Cost of sales for the six months ended June 30, 1999 decreased $434,000 (2.8%) to $15,089,000 in 1999 from $15,523,000. The success of the Company's cost reduction program has resulted in a 4.8% decrease in variable cost per specimen processed. Savings and efficiencies have been realized in direct labor, collector fees, collection inventories and results reporting. Cost of sales as a percentage of net sales decreased to 70.8% in 1999 from 74.0% in 1998. Gross profit as a percentage of net sales increased to 29.2% in 1999 from 26.0% in 1998. Selling, general and administrative (SG&A) expenses for the three months ended June 30, 1999 decreased $194,000 (6.9%) to $2,610,000 in 1999 from $2,804,000 in 1998. The decrease partially reflects lower personnel costs and legal expenses. SG&A expenses as a percentage of net sales decreased to 23.4% in 1999 from 24.5% in 1998. SG&A expenses for the six months ending June 30, 1999 increased $37,000 (0.7%) to $5,049,000 in 1999 from $5,012,000 in 1998. SG&A expenses as a percentage of net sales decreased slightly to 23.6% in 1999 from 23.9% in 1998. Income from operations for the three months ended June 30, 1999 was $610,000 compared to $373,000 in 1998. Income from operations for the six months ended June 30, 1999 was $1,056,000 compared to $312,000. Interest expense decreased by approximately 45.0% in 1999 for both the second quarter and year-to-date and is attributed to lower average debt levels in 1999. Provision for Income Taxes for the three months ended June 30, 1999 was $204,000 compared to an income tax provision of $46,000 during 1998. The increase in 1999 reflects the increased profitability of the domestic operations in 1999 combined with Medscreen's utilization of net operating loss carryforwards in 1998. The Company recorded a provision for income taxes of $28,000 and $81,000, respectively, for the six months ending June 30, 1999 and 1998. During the first quarter of 1999, the Company realized an income tax credit of $336,000. This income tax credit reflects the reversal of a liability established in a prior year when the Internal Revenue Service (IRS) disputed the deductibility of research expenses incurred in the years 1992 through 1994 related to the development of PharmChek(R). The IRS issued a final determination in favor of the Company's position in the first quarter of 1999. Net income for the three months ended June 30, 1999 was $361,000 or $0.06 per diluted common share compared to net income of $246,000 or $0.04 per diluted common share in 1998. Net income for the six months ended June 30, 1999 was $944,000 or $0.16 per diluted common share compared to $54,000 or $0.01 per diluted common share in 1998. Excluding the impact of the $336,000 income tax credit, net income for the six months ended June 30, 1999 would have been $608,000 or $0.10 per diluted share. 12 13 LIQUIDITY AND CAPITAL RESOURCES The Company's operations during the six month period ended June 30 provided cash of approximately $932,000 in 1999 and $1,227,000 in 1998. The decrease in cash flow from operations between 1999 and 1998 principally reflects the prior year's improvements in working capital, which more than offset the increase in net income in 1999. As of June 30, 1999, the Company had $1,124,000 in cash and cash equivalents. During the six months ended June 30, 1999, the Company used approximately $1,258,000 in cash to acquire property and equipment, principally for information systems and laboratory equipment, entered into a capital lease transaction valued at $1,082,000 and entered into a $1,500,000 installment note with its bank, whereby the proceeds were used to reduce amounts outstanding under the revolving line of credit. The Company maintains a Credit Agreement with a bank. All borrowings are secured by a lien on all assets of the Company. The Credit Agreement provides for borrowings under the revolver limited to 85% of qualified accounts receivables up to a maximum of $6,000,000. At June 30, 1999, the maximum that could be borrowed was $5,547,000 and approximately $827,000 was outstanding under the Credit Agreement. Year-to-date net repayments on the revolver were approximately $1,552,000 as of June 30, 1999. The Credit Agreement contains certain financial covenants which, among others, require the Company to maintain certain levels of net worth, cash flow and profitability, and restricts the payment of dividends. As of June 30, 1999, the Company was in compliance with its financial covenants. On April 20, 1999, the Company entered into a $1,500,000 variable rate installment note ("Installment Note") with its bank. The proceeds from the Installment Note were immediately used to reduce the amount outstanding under the Company's revolving line of credit. The Installment Note is subject to the terms and conditions of the Credit Agreement, bears interest at the prime rate plus 1.0% and is payable over 60 months. On April 30, 1999, the Company entered into a $1,082,000 lease agreement with a lessor to refinance certain modules of the Company's Unified Database software project. The lease agreement bears interest at 8.5% and is payable over 36 months. Proceeds from the lease agreement are expected to be used to finance the Company's ongoing capital expenditure program. The Company anticipates that existing cash balances, amounts available under existing and future credit agreements and funds to be generated from future operations will be sufficient to fund operations and forecasted capital expenditures through the foreseeable future. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for disclosing information about operating segments and enterprise-wide information about customers and geographic activities. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 131 effective December 31, 1998 and prior period amounts have been restated to conform to the presentation required by SFAS No. 131. 13 14 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk with respect to its debt outstanding and foreign currency transactions. The Company's revolving credit agreement and installment note carry interest at the prime rate plus 1.0%. As the prime rate increases, the Company will incur higher relative interest expense and similarly, a decrease in the prime rate will reduce relative interest expense. In recent years, there have not been significant fluctuations in the prime rate. A 1.0% change in the prime rate would not materially change interest expense assuming levels of debt consistent with historical amounts. Due to the Company's international operations, certain transactions are conducted in foreign currencies. Medscreen's transactions are denominated approximately 85% in pound sterling and 15% in US currency. During the six month periods ending June 30, 1999 and 1998, Medscreen's net sales represented 16.3% and 15.5%, respectively, of the Company's total net sales and, as a result, the impact of market risk on foreign currency transactions is not considered material. These market risks are not considered significant and, therefore, the Company does not intend to engage in hedging transactions. YEAR 2000 The Year 2000 ("Y2K") issue is the result of date-sensitive devices, systems and computer applications that were deployed using two digits rather than four digits to define the applicable year. Therefore, these technologies may improperly recognize a year containing "00" as 1900 rather than the year 2000. This may result in a system failure or miscalculations causing disruptions of operations. The Company is subject to various risks associated with the Y2K impact on information systems software and hardware. The Company has completed its assessment of the Y2K impact on internal information systems. The assessment identified operational inefficiencies and Y2K non-compliance of the existing laboratory information system ("LIS"). The Company has commenced replacing its existing LIS with a new system that is Y2K ready. The new LIS is expected to be implemented early in the fourth quarter of 1999. The Company estimates the cost to purchase and install the new LIS and related hardware will be approximately $1 million. Excluding the LIS expenditures, the Company estimates additional Y2K related expenditures of approximately $150,000 representing consulting costs and payroll for employees dedicated to Y2K projects. Due to the large volume of electronic transmissions, the Company has conducted inquiries of customers, vendors and key business partners to identify Y2K issues and continues to evaluate responses. During the second quarter of 1999, the Company commenced transmissions of test results to selected customers using a four digit year to determine which customers can and cannot receive such electronic results with a year field of four digits. The Company's various internal drug test results reporting systems have been reprogrammed and tested in a parallel systems environment and the Company has tested external results reporting services. Beginning in August, the Company has commenced transmitting results using a four digit year to a majority of customers capable of receiving a four digit year field. The Company has reviewed its significant facilities systems and found that they are not date sensitive. With respect to other facilities systems and financial accounting systems, the Company is in the process of obtaining documentation of Y2K compliance or replacing systems that are not Y2K compliant. 14 15 For the period January 1, 1996 through June 30, 1999, the Company has invested approximately $6.1 million in new information systems which have been designed to enhance its operational capabilities as well as meet Y2K requirements. The Company expects to complete all Y2K projects at various dates in the third and fourth quarter of 1999. All investments in information systems and other Y2K projects have been funded or are expected to be funded by internally generated cash, leases or bank financing. The Company is in the process of refining its contingency plans to consider additional scenarios whereby Y2K readiness is not significantly achieved by the Company and/or its key customers, business partners and vendors. The Company believes that the "most reasonably likely worst case Year 2000 scenario" would result from a failure of third party transportation systems which would prevent the Company from receiving specimens to test. These contingency plans, including issues involving providers of transportation services, are expected to be completed in the third quarter of 1999. If the Company determines that any critical supplier is not Y2K compliant, it will seek alternate suppliers and, if it finds that alternate suppliers are not available, the Company will purchase inventory in advance in excess of normal purchase levels. In the event of information systems failures, the Company may utilize appropriate manual procedures or alternate information systems for an interim period. Due to the general uncertainty inherent in the Y2K issues, resulting in part from the uncertainty of Y2K readiness of third party providers, suppliers and customers, the Company is unable to determine at this time whether the consequences of Y2K non-compliance will have a material impact on the Company's results of operations, liquidity or financial position. 15 16 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of the Company held on May 18, 1999, the Company's shareholders took the following actions: (a) The following directors were elected to serve until the next Annual Meeting: Joseph W. Halligan - 4,439,557 shares in favor and 29,487 shares withheld;. Richard D. Irwin - 4,440,257 shares in favor and 28,787 shares withheld; and Donald R. Stroben - 4,440,157 shares in favor and 28,887 shares withheld. (b) Ratification of the appointment of KPMG LLP as Independent Certified Public Accountants for the Company for the 1999 fiscal year, by a vote of 4,445,557 shares in favor, 9,587 shares against and 13,900 shares abstained. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 10.33 - Variable Rate Installment Note between Comerica Bank-California and PharmChem Laboratories, Inc. dated April 14, 1999. Exhibit 10.34 - Lease Agreement for computer software between American Technologies Credit, Inc. and PharmChem Laboratories, Inc. dated March 29, 1999 (effective April 30, 1999). Exhibit 10.35 - Lease Amendment for the Company's offices in Menlo Park, California dated May 7, 1999. Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K: None. 16 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. PharmChem Laboratories, Inc. (Registrant) Date: August 4, 1999 By: /S/ David A. Lattanzio ------------------------------------- David A. Lattanzio Chief Financial Officer and Vice President, Finance and Administration (Principal Financial and Accounting Officer) 17 18 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.33 - Variable Rate Installment Note between Comerica Bank-California and PharmChem Laboratories, Inc. dated April 14, 1999. 10.34 - Lease Agreement for computer software between American Technologies Credit, Inc. and PharmChem Laboratories, Inc. dated March 29, 1999 (effective April 30, 1999). 10.35 - Lease Amendment for the Company's offices in Menlo Park, California dated May 7, 1999. 27 - Financial Data Schedule.
EX-10.33 2 VARIABLE RATE INSTALLMENT NOTE 1 EXHIBIT 10.33 CA 00191 (11/98) VARIABLE RATE-INSTALLMENT NOTE
- -------------------------------------------------------------------------------- AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION # $1,500,000.00 April 14, 1999 April 14, 2004 77-0187280 - --------------------------------------------------------------------------------
For Value Received, the undersigned promise(s) to pay to the order of Comerica Bank-California ("Bank"), at any office of the Bank in the State of California One Million Five Hundred Thousand and no/100 Dollars (U.S.) in installments of $26,315.79 * each plus interest on the unpaid balance from the date of this Note at a per annum rate equal to the Bank's base rate from time to time in effect plus 1.000% per annum until maturity, whether by acceleration or otherwise, or until Default, as later defined, and after that at a default rate equal to the rate of interest otherwise prevailing under this Note plus 3% per annum (but in no event in excess of the maximum rate permitted by law). Interest shall be calculated for the actual number of days the principal is outstanding on the basis of a 360-day year if this Note evidences a business or commercial loan or a 365-day year if a consumer loan. The Bank's "base rate" is that annual rate of interest so designated by the Bank and which is charged by the Bank from time to time. Interest rate changes will be effective for interest computation purposes as and when the Bank's base rate changes. Installments of principal and accrued interest due under this Note shall be payable on the 14th day of each month, commencing August 14, 1999, and the entire remaining unpaid balance of principal and accrued interest shall be payable on the Maturity Date set forth above. If the frequency of principal and interest installments is not otherwise specified, installments of principal and interest due under this Note shall be payable monthly on the first day of each month. * Monthly Interest only payments due and payable commencing May 14, 1999 through July 14, 1999. In the event the periodic installments set forth above are inclusive of interest, these installments are calculated at an assumed fixed interest rate and an assumed amortization term. The amortization term ends on April 14, 2004. In the event this Note evidences a business or commercial loan and the Bank's base rate changes, the Bank, at its sole option, may from time to time recalculate the periodic installment amount so that the remaining periodic installments will fully amortize the remaining loan balance within the remaining amortization term in equal installments at the interest rate then being charged under this Note. THE UNDERSIGNED AGREE(S) TO PAY THE PERIODIC INSTALLMENTS AS THEY MAY BE RECALCULATED BY THE BANK, AT THE BANK'S SOLE OPTION, FROM TIME TO TIME AND ACKNOWLEDGE(S) THAT A RECALCULATION SHALL NOT AFFECT THE MATURITY DATE OR THE OTHER TERMS AND PROVISIONS OF THIS NOTE. If this Note or any installment under this Note shall become payable on a day other than a day on which the Bank is open for business, this payment may be extended to the next succeeding business day and interest shall be payable at the rate specified in this Note during this extension. Any payments of principal in excess of the installment payments required under this Note need not be accepted by the Bank (except as required under applicable law), but if accepted shall apply to the installments last falling due. A late installment charge equal to 5% of each late installment may be charged on any installment payment not received by the Bank within 10 calendar days after the installment due date, but acceptance of payment of this charge shall not waive any default under this Note. This Note and any other indebtedness and liabilities of any kind of the undersigned (or any of them) to the Bank, and any and all modifications, renewals or extensions of it, whether joint or several, contingent or absolute, now existing or later arising, and however evidenced (collectively "Indebtedness") are secured by and the Bank is granted a security interest in all items deposited in any account of any of the undersigned with the Bank and by all proceeds of these items (cash or otherwise), all account balances of any of the undersigned from time to time with the Bank, by all property of any of the undersigned from time to time in the possession of the Bank and by any other collateral, rights and properties described in each and every deed of trust, mortgage, security agreement, pledge, assignment and other agreement which has been or will at any time(s) later be, executed by any (or all) of the undersigned to or for the benefit of the Bank (collectively "Collateral"). Notwithstanding the above, (i) to the extent that any portion of the Indebtedness is a consumer loan, that portion shall not be secured by any deed of trust or mortgage on or other security interest in any of the undersigned's principal dwelling or in any of the undersigned's real property which is not a purchase money security interest as to that portion, unless expressly provided to the contrary in another place, or (ii) if the 1 2 undersigned (or any of them) has (have) given or give(s) Bank a deed of trust or mortgage covering real property, that deed of trust or mortgage shall not secure this Note or any other Indebtedness of the undersigned (or any of them), unless expressly provided to the contrary in another place. If the undersigned (or any of them) or any guarantor under a guaranty of all or part of the Indebtedness ("guarantor") (a) fail(s) to pay this Note or any of the Indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to pay any Indebtedness owing on a demand basis upon demand; or (b) fail(s) to comply with any of the terms or provisions of any agreement between the undersigned (or any of them) or any guarantor and the Bank; or (c) become(s) insolvent or the subject of a voluntary or involuntary proceeding in bankruptcy, or a reorganization, arrangement or creditor composition proceeding, (if a business entity) ceases(s) doing business as a going concern, (if a natural person) die(s) or become(s) incompetent, (if a partnership) dissolve(s) or any general partner of it dies, become incompetent or becomes the subject of a bankruptcy proceeding or (if a corporation or a limited liability company) is the subject of a dissolution, merger or consolidation; or (d) if any warranty or representation made by any of the undersigned or any guarantor in connection with this Note or any of the Indebtedness shall be discovered to be untrue or incomplete; or (3) if there is any termination, notice of termination, or breach of any guaranty, pledge, collateral assignment or subordination agreement relating to all or any part of the Indebtedness; or (f) if there is any failure by any of the undersigned or any guarantor to pay when due any of its indebtedness (other than to the Bank) or in the observance or performance of any term, covenant or condition in any document evidencing, securing, or relating to such Indebtedness; or (g) if the Bank deems itself insecure, believing that the prospect of payment of this Note or any of the Indebtedness is impaired or shall fear deterioration, removal or waste of any of the Collateral; or (h) if there is filed or issued a levy or writ of attachment or garnishment or other like judicial process upon the undersigned (or any of them) or any guarantor or any of the Collateral, including without limit, any accounts of the undersigned (or any of them) or any guarantor with the Bank, then the Bank, upon the occurrence of any of these events (each a "Default"), may at its option and without prior notice to the undersigned (or any of them), declare any or all of the Indebtedness to be immediately due and payable (notwithstanding any provisions contained in the evidence thereof to the contrary), sell or liquidate all or any portion of the Collateral, set off against the Indebtedness any amounts owing by the Bank to the undersigned (or any of them), charge interest at the default rate provided in the document evidencing the relevant Indebtedness and exercise any one or more of the rights and remedies granted to the Bank by any agreement with the undersigned (or any of them), declare any or all of the Indebtedness to be immediately due and payable (notwithstanding any provisions contained in the evidence thereof to the contrary), sell or liquidate all or any portion of the Collateral, set off against the Indebtedness any amounts owing by the Bank to the undersigned (or any of them), charge interest at the default rate provided in the document evidencing the relevant Indebtedness and exercise any one or more of the rights and remedies granted to the Bank by an agreement with the undersigned (or any of them) or given to it under applicable law. In addition, if this Note is secured by a deed of trust or mortgage covering real property, then the trustor or mortgagor shall not mortgage or pledge the mortgaged premises as security for any other indebtedness or obligations. This Note, together with all other Indebtedness secured by said deed of trust or mortgage, shall become due and payable immediately, without notice, at the option of the Bank, (a) if said trustor or mortgagor shall mortgage or pledge the mortgaged premises for any other Indebtedness or obligations or shall convey, assign or transfer the mortgaged premises by deed, installment sale contract or other instrument, or (b) if the title to the mortgaged premises shall become vested in any other person or party in any manner whatsoever, or (c) if there is any disposition (through one or more transactions) of legal or beneficial title to a controlling interest of said trustor or mortgagor. All payments under this Note shall be in immediately available United States funds, without setoff or counterclaim. If this Note is signed by two or more parties (whether by all as makers or by one or more as an accommodation party or otherwise), the obligations and undertakings under this Note shall be that of all and any two or more jointly and also of each severally. This Note shall bind the undersigned, and the undersigned's respective heirs, personal representatives, successors and assigns. The undersigned waive(s) presentment, demand, protest, notice of dishonor, notice of demand or intent to demand, notice of acceleration or intent to accelerate, and all other notices and agree(s) that no extension or indulgence to the undersigned (or any of them) or release, 2 3 substitution or nonenforcement of any security, or release or substitution of any of the undersigned, any guarantor or any other party, whether with or without notice, shall affect the obligations of any of the undersigned. The undersigned waive(s) all defenses or right to discharge available under Section 3-605 of the California Uniform Commercial Code and waive(s) all other suretyship defenses or right to discharge. The undersigned agree(s) that the Bank has the right to sell, assign, or grant participations, or any interest, in any or all of the Indebtedness, and that, in connection with this right, but without limiting its ability to make other disclosures to the full extent allowable, the Bank may disclose all documents and information which the Bank now or later has relating to the undersigned or the Indebtedness. The undersigned agree(s) that the Bank may provide information relating to this Note or to the undersigned to the Bank's parent, affiliation, subsidiaries and service providers. The undersigned agree(s) to reimburse the holder or owner of this Note for any and all costs and expenses (including without limit, court costs, legal expenses and reasonable attorney fees, whether inside or outside counsel is used, whether or not suit is instituted and, if suit is instituted, whether at the trial court level, appellate level, in a bankruptcy, probate or administrative proceeding or otherwise incurred in collecting or attempting to collect this Note or incurred in any other matter or proceeding relating to this Note. The undersigned acknowledge(s) and agree(s) that there are no contrary agreements, oral or written, establishing a term of this Note and agree(s) that the terms and conditions of this Note may not be amended, waived or modified except in a writing signed by an officer of the Bank expressly stating that the writing constitutes an amendment, waiver or modification of the terms of this Note. As used in this Note, the word "undersigned" means, individually and collectively, each maker, accommodation party, endorser and other party signing this Note in a similar capacity. If any provision of this Note in unenforceable in whole or part for any reason, the remaining provisions shall continue to be effective. THIS NOTE IS MADE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. The maximum interest rate shall not exceed the highest applicable usury ceiling. THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS. This Note is subject to the Loan & Security Agreement dated November 18, 1997 and any and all subsequent renewals thereof. INITIAL HERE: DAL ----- PharmChem Laboratories, Inc. By: /S/ David A. Lattanzio Its: VP & CFO -------------------------------- ------------------------------------- SIGNATURE OF David A. Lattanzio TITLE VP & CFO 1505-A O'Brien Drive Menlo Park CA USA 94025 - -------------------------------------------------------------------------------- STREET ADDRESS CITY STATE COUNTRY ZIP CODE
- ---------------------------------------------------------------------------------------------------- For Bank Use Only OCAR # - ---------------------------------------------------------------------------------------------------- Loan Officer Initials Loan Group Name Obligor(s) Name JLW CBB - Palo Alto PharmChem Laboratories, Inc. - ---------------------------------------------------------------------------------------------------- Loan Officer I.D. No. Loan Group No. Obligor # Note # Amount 48201 95745 6106027478 $1,500,000.00 - ----------------------------------------------------------------------------------------------------
3 EX-10.34 3 LEASE AGREEMENT 1 EXHIBIT 10.34 LEASE AGREEMENT ORDER NO.: LA-1440 ----------------------------------------------- LESSEE PharmChem Laboratories, Inc. ----------------------------------------------- STREET 1505A O'Brien Drive ----------------------------------------------- CITY STATE COUNTY ZIP Menlo Park CA 94025 ----------------------------------------------- NAME AND TITLE David Lattanzio, Chief Financial Officer ----------------------------------------------- AMERICAN TECHNOLOGIES CREDIT, INC. 18101 Von Karman o Suite 140-253 o Irvine, CA 92612 Telephone 714/436-6500 o Facsimile 714/436-6599 TERMS AND CONDITIONS OF LEASE 1. LEASED PROPERTY: Subject to the following terms and conditions, American Technologies Credit, Inc. ("Lessor") hereby agrees to lease to Lessee the Hardware; Software and other Equipment ("Property") described on the Lease Schedule(s) ("Schedule(s)") referencing this Lease Agreement ("Agreement"), and Lessee agrees to lease the Property from Lessor. Each Schedule that the parties may from time to time enter into with respect to this Agreement incorporates the terms of the Agreement and constitutes a separate lease agreement and is referred to herein as the "Lease". 2. TERM: This Lease, with respect to any Schedule, shall become effective upon acceptance by Lessor and the term for any Schedule(s) shall commence on the day Lessee certifies that the Property has been delivered to and is usable by Lessee ("Commencement Date"). Lessee agrees that its remedies, should it find fault with any of the Property, shall be and are solely against the manufacturer/vendor/licensor ("Supplier") and not against Lessor. This Lease shall give Lessee the right to use the Property at the location(s) delineated on the Schedule(s). The initial base term of the Lease shall be the first day of the calendar month following the Commencement Date ("Base Lease Term"). The Base Lease Term shall be extended for an additional one-year period (the "extended Base Lease Term") at the rate delineated on the respective Schedule(s) unless Lessee provides to Lessor written notice of Lessee's election not to extend the Base Lease Term at least one hundred eighty (180) days prior to the expiration of the initial Base Lease Term. Notwithstanding the provisions of Section 19 below, such written notice may be delivered to Lessor by hand or by certified mail and shall not be effective unless it is actually received by Lessor at least one hundred eighty (180) days prior to the expiration of the initial Base Lease Term. At the expiration of the initial Base Lease Term (or, if extended, at the expiration of the extended Base Lease Term), Lessee shall do one of the following: (A) purchase all, but not less than all, of the Property for its then Fair Market Value ("FMV"), plus applicable sales tax; (B) promptly return all, but not less than all, of the Property and lease replacement property from Lessor which has a cost equal to or greater than the original cost of the Property; or (C) extend the Schedule for a period of one additional year at the rental rate delineated on the respective Schedule. With respect to Option (A), FMV is the price a willing buyer (who is neither a used property dealer or reseller) would pay for the Property in an arm's length transaction to a willing seller under no compulsion to sell. Such FMV shall be determined on the basis that: (i) the Property is assumed to be in the condition in which it is to be maintained under the Lease and is in complete compliance with all other terms of the Lease; (ii) the Property is assumed to be installed and/or in full service and is valued on an installed basis; and (iii) the cost of removal of the Property from its present location is not deducted from the valuation. If Lessee elects to purchase the Property and the parties are not able to agree on FMV at least 60 days prior to the expiration of the applicable term, Lessor shall appoint an 2 independent appraiser (reasonably acceptable to Lessee) who shall determine FMV, and the parties acknowledge and agree that such determination shall be final, binding and conclusive with respect to the parties' agreed upon purchase price. Lessee shall be responsible for the cost of the appraisal. With respect to Option (B), Lessee and Lessor shall each have absolute discretion regarding their agreement or lack of agreement to the terms of a lease for replacement property. If Lessee has not elected Option (A) or (B) by the end of the initial Base Lease Term or, if extended, the extended Base Lease Term, then Option (C) shall prevail. Thereafter, this Lease will continue subject to termination by either Lessee or Lessor at the end of any month, provided at least ninety days' prior written notice is delivered to the other party. Each Schedule shall be deemed to incorporate therein these specific terms and conditions and shall have an independent initial Base Lease Term and extension period(s). 3. RENTALS: The monthly rent payable with respect to any Schedule(s) shall be the amount shown with respect to such Schedule(s). Lessee shall pay to Lessor the monthly rent for each Schedule, in advance, for each month or any part thereof that this Lease, with respect to said Schedule(s), is in effect. The first such payment shall be made on the first day of the calendar month following the Commencement Date. A prorata portion of the monthly rental charges based on a daily rental of one-thirtieth (1/30th) of the monthly rental calculated from the Commencement Date to the end of the calendar month, shall be due and payable at the Commencement Date. If rent or any other amount is not paid within ten days of its due date, Lessee agrees to pay a late charge equal to five percent (5%) of the unpaid amount. Each month thereafter, past due amounts remaining unpaid hereunder shall bear interest at the lesser of one and one-half percent (1 1/2%) per month, compounded monthly, or the maximum rate allowed by law. All rent shall be paid at the place of business of Lessor shown above or such other place as Lessor may designate by written notice to Lessee. Except as otherwise provided in this Lease, Lessee's obligation to pay rent shall be absolute and unconditional under all circumstances, notwithstanding: (i) any setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor for any reason whatsoever; or (ii) any defect in the title, right to use, condition, operation, fitness for use, damage or destruction of or to the Property or any interruptions or cessations in use or possession thereof for any reason whatsoever, Lessee hereby waives, to the extent permitted by law, the following rights and remedies which may be conferred upon Lessee by law: (a) right to cancel or terminate this Lease except in accordance with the express terms hereof, (b) right to revoke acceptance of the Property, (c) right to recover damages from Lessor for any breach of warranty and (d) right to recover any consequential damages whatsoever. 4. ADDITIONS AND MODIFICATIONS: All additions and modifications to the Property become an integral part of the Property and are owned by Lessor. Software, as described on any Schedule(s), includes all updates, revisions, upgrades, new versions, enhancements, modifications, derivative works, maintenance fixes, translations, adaptations, and copies of the foregoing or of the original version of the Software whether obtained from the Supplier, or from any source whatsoever, and references in this Lease to Software will be interpreted as references to any and all of the foregoing. All additions and modifications to the Property must be free and clear of any liens or rights of other parties. 5. NO WARRANTIES: Lessor not being the Supplier, manufacturer, developer, publisher, distributor, or licensor of the Property, MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, NOR SHALL IT BE DEEMED TO HAVE MADE ANY SUCH WARRANTIES OR REPRESENTATIONS AS TO THE MERCHANTABILITY, COMPATIBILITY, FITNESS, DESIGN, CONDITIONS, QUALITY OR CAPACITY OF THE LEASED PROPERTY, OR ANY OTHER REPRESENTATION 3 OR WARRANTY WHATSOEVER WITH RESPECT TO THE PROPERTY. LESSEE REPRESENTS THAT ALL OF THE PROPERTY ARE OF A SIZE, DESIGN, AND CAPACITY SELECTED BY IT, AND THAT IT IS SATISFIED THAT THE SAME IS SUITABLE FOR LESSEE'S PURPOSES. Lessor assigns to Lessee during the term of the Lease any warranty rights it may have received from the Supplier as a result of Lessor's purchase of the Property. If Lessee has any claims regarding the Property or any other matter arising from Lessee's relationship with the Supplier, Lessee must make them against the Supplier. This provision survives the termination of the Lease. 6. USE, OPERATION AND MAINTENANCE: Lessee at its own expense, will provide a suitable place for the operation of the Property, and keep in force for the term of the Lease the best standard Supplier's maintenance agreement(s) which will cause the Supplier(s) to make all the necessary repairs, adjustments, and replacements in accordance with such maintenance agreement(s) and entitle Lessee (through Lessor, if necessary) to obtain available enhancements, updates, upgrades and changes. 7. RISK OF LOSS: During the period the Property is in transit, is in the possession of Lessee, and until the Property is returned to Lessor, Lessee shall assume all responsibility for loss or damage and shall hold Lessor harmless against the same. In the event that, during the term of the Lease or until the Property shall have been returned, if any of the Property shall be confiscated, taken, requisitioned, lost, stolen, destroyed or irreparably damaged for any cause whatsoever (such occurrences being hereinafter called "Casualty Occurrences"), Lessee shall immediately and fully inform Lessor. In the case of Software, the erasure, inoperability or other incapacity of the Software triggered by a preprogrammed termination or limiting design or routine embedded in the Software shall also be deemed a "Casualty Occurrence". Following a Casualty Occurrence, on the next succeeding rent payment date, Lessee shall pay to Lessor, in addition to all past due rentals and other amounts then late and outstanding, an amount equal to the Casualty Value as determined by the attached Casualty Schedule as of the date of the Casualty Occurrence. Upon the making of such payment by Lessee, the rental for such Schedule(s) shall cease to accrue as of the date of such payment and the term of the Lease as to such Schedule(s) shall terminate. Insurance proceeds received by Lessor as the result of a Casualty Occurrence with respect to any Schedule(s) shall be applied in reduction of Lessee's obligation to pay the Casualty Value. The Casualty Value as of any rent payment date (or as of any other date on which Casualty Value is payable) shall be an amount equal to that percentage of the Purchase Price or License Fee as is set forth in the Casualty Schedule attached hereto, opposite the number of such rent payment date or such other date. The Purchase Price or License Fee of any Property shall be the total cost paid by Lessor with respect to the Property. 8. INDEMNITY AND INSURANCE: Lessee assumes liability for, and agrees at its own expense to indemnify and defend Lessor, its employees, officers, directors and assigns, from and against any and all claims, liabilities, losses, damages, and expenses (including legal expenses) of every kind or nature (including, without limitation, claims based upon strict liability) arising out of the use, condition (including latent and other defects, whether or not discoverable by Lessee or Lessor), operation or ownership of any items of Property (including, without limitation, any claim for patent, trademark or copyright infringement) or any interruptions of service, loss of business, or consequential damages. These indemnities and assumptions survive termination of this Lease. Lessee, at its expense, shall procure and maintain in full force and effect at all times that this Lease is in force and effect such public liability (including, without limitation, contractual liability insurance), property damage liability, fire with extended coverage, theft, and other insurance in such form and amounts and with such companies as shall be satisfactory to Lessor. Lessor shall be named as an additional insured and loss payee on all policies which shall provide 4 that no cancellation thereof shall be effective without thirty (30) days' prior written notice to Lessor and shall not be invalidated as to Lessor by any act, omission or neglect of Lessee. 9. TAXES: Lessee shall pay directly, all License fees, registration fees, assessments and taxes which may now or hereafter be imposed upon the ownership, sale (if authorized), possession or use of the Property, excepting only those based on Lessor's income, and shall keep the Property fee and clear of all levies, liens or encumbrances arising therefrom. While Lessee is responsible for payment of all personal property taxes, Lessor will file all personal property tax returns. Lessor shall not be responsible for contesting any valuation of or tax imposed on the Property, but may do so strictly as an accommodation to Lessee and shall not be liable or accountable to Lessee therefor. 10. OWNERSHIP: Lessor at all times retains ownership, title and/or control over Lessee's right to use the Property in accordance with the terms of the lease. To the extent Software subject to this Lease may also be the subject of a license agreement between the Supplier and Lessee, Lessee acknowledges that the License to use the Software is being provided to Lessee solely because of payments made by Lessor to the Supplier and, accordingly, Lessee agrees that Lessor has an interest in the license. Lessee agrees that if it or any of its affiliates receives anything of value from the Supplier (including without limitation, a trade-in, substitution, discount or upgrade allowance) other than Lessee's rights to use the Software reflected on the Schedule for the term of this Lease, Lessee will advise Lessor and pay to Lessor an amount equal to such additional value obtained by Lessee. Lessee agrees that it will not surrender, transfer or modify the license agreement without first obtaining the written consent of Lessor. Lessee will at all times protect and defend, at its own cost and expense, the title and/or License rights of Lessor from and against all claims, liens and legal processes and keep all Property free and clear from all such claims, liens and processes. The Property is and shall remain personal property of Lessor. 11. EFFECTS OF TERMINATION OR EXPIRATION OF LEASE TERM: In the event Lessee elects to return the Property to Lessor in accordance with the express terms of the Lease, Le will discontinue its use of the Property pay to Lessor an inspection, refurbishment and restocking feel equal to five percent (5) of the Lessor's original cost of the Property, and immediately, at its own expense, ship the Property, with all manuals, cables, cartons and packing materials as originally furnished by Supplier, to a location within the United States in accordance with the Property return instructions provided by Lessor. In the case of Software, Lessee will destroy all intangible Software items, and deliver to Lessor all tangible items constituting Software. At Lessor's request, Lessee will also certify in a written form acceptable to Lessor that: (I)an inspection, refurbishment and restocking feel equal to five percent (5) of the Lessor's original cost of the Property, and immediately, at its own expense, ship the Property, with all manuals, cables, cartons and packing materials as originally furnished by Supplier, to a location within the United States in accordance with the Property return instructions provided by Lessor. In the case of Software, Lessee will destroy all intangible Software items, and deliver to Lessor all tangible items constituting Software. At Lessor's request, Lessee will also certify in a written form acceptable to Lessor that: (i) all the tangible Software has been delivered to Lessor; (ii) all intangible records have been destroyed; (iii) Lessee has not retained the Software in any form; (iv) Lessee will not use the Software after termination and (v) Lessee has not received from Supplier(s) anything of value relating to or in exchange for Lessee's use, rental or possession of the Software during the term of the Lease (including a trade-in, substitution or upgrade allowance). Until Lessee has complied with all of the requirements of this Section, rent payment obligations will continue from month to month at the rental rate delineated on the Schedule. TERMINATION OF ANY LEASE 5 TERM (OR TERMINATION OF THE LICENSE) SHALL NOT ABSOLVE USER FROM PAYMENT OF ACCRUED PERIODIC PAYMENTS OR FROM COMPLIANCE WITH THE USE AND DISCLOSURE RESTRICTIONS OF THIS AGREEMENT, OR FROM ITS OBLIGATIONS TO INDEMNIFY LESSOR. 12. PERFORMANCE OF LESSEE'S OBLIGATIONS BY LESSOR: If Lessee fails duly and promptly to perform any of its obligations under this Lease, Lessor may, at its option, immediately or at any time thereafter perform the same for the account of Lessee without thereby waiving Lessee's default, and any amount paid, expense (including reasonable attorney's fees), penalty or other liability incurred by Lessor in such performance shall be payable by Lessee to Lessor upon demand, with interest thereon at the rate set forth in Paragraph 3, above. 13. RIGHT OF INSPECTION: In addition to its rights of entry and inspection stated elsewhere in this Lease, Lessor may from time to time during reasonable business hours enter upon any premises where any of the Property may be located for the purpose of confirming the existence, condition, and proper maintenance of the Property. 14. DEFAULT: An Event of Default shall occur if: (a) Lessee fails to pay within ten (10) days after the due date, any installment of rent; (b) Lessee fails to perform or observe any covenant, condition, obligation to be performed or observed by it under this Lease and such failure continues uncured for fifteen (15) days after written notice thereof to Lessee by Lessor; (c) Lessee makes as assignment for the benefit of its creditors, files any petition or takes any action under any bankruptcy, reorganization or insolvency laws; (d) an involuntary petition is filed under any bankruptcy statute against Lessee or any receiver, trustee or custodian is appointed to take possession of Lessee's properties, unless such petition or appointment is set aside or withdrawn within sixty days of said filing or appointment; (e) Lessee attempts to or does remove, transfer, sell, sublicense, encumber, part with possession, or sublet any of the Property; (f) Lessee attempts to assign or transfer this Lease or its interest under the Lease or moves the Property from the location(s) set forth on the Schedule without Lessor's prior written consent; or (g) Lessee undergoes a sale, buyout, change in control, or change in ownership of any type, form or manner which, as judged solely by Lessor, results in a material deterioration in Lessee's credit worthiness. 15. REMEDIES: If an Event of Default shall occur and be continuing, Lessor may exercise at its sole option, but not specifically limited thereto, any one or more of the following remedies: (a) terminate this Lease and Lessee's rights hereunder, (b) proceed, by appropriate court action or actions either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease or to recover damages for the breach thereof, (c) by notice in writing to Lessee, recover all amounts due on or before the date Lessor declared this Lease to be in default, plus, as liquidated damages for loss of a bargain and not as a penalty, accelerate, and declare to be immediately due and payable, all rentals and other sums payable hereunder, without any presentment, demand, protest or further notice (all of which hereby are expressly due and payable, and (d) take immediate possession of the Property, or any part thereof, from Lessee free from all claims by Lessee. In the case of Software, it is acknowledged and agreed that the unauthorized use, disclosure, or transfer of the Software could cause Lessor incalculable, irreparable, and serious harm. Therefore, if Lessee is found to be using (in whatever manner) any portion of the Software after the applicable Lease Term or if Licensor terminates a License or Lessee's right to use the Software thereunder for an alleged breach of the License's use, disclosure, or transfer restrictions, then liquidated damages shall be payable immediately to Lessor in an amount equal to two (2) times the amount paid by Lessor with respect to the Software. The exercise of any of the foregoing 6 remedies by Lessor shall not constitute a termination of this Lease unless Lessor so notifies Lessee in writing. In the event Lessor repossesses the Hardware, Lessor may (A) lease the Hardware or any portion thereof, in such a manner, for such time and upon such terms as Lessor may determine, or (B) sell the Hardware or any portion thereof, at one or more public or private sales, in such manner, and at such times and upon such terms as Lessor may determine. In the event that Lessor leases the Hardware, any rentals received by Lessor for the remaining lease term (the period ending on the date when the initial Base Lease Term for the Hardware would have expired), shall be applied to the payment of (i) all costs and expenses (including reasonable attorney's fees) incurred by Lessor in retaking possession of, and removing, storing, repairing, refurbishing and leasing such Hardware, and (ii) the rentals for the remainder of the initial term and all other sums, then remaining unpaid under this Lease. The remaining balance of such rentals, if any, shall be applied to reimburse Lessee for any sums previously paid by Lessee as liquidated damages. All rentals received by Lessor for the period commencing after the remaining initial Base Lease Term shall be retained by Lessor. Lessee shall remain liable to Lessor to the extent that the aggregate amount of the sums referred to in clauses (i) and (ii) above shall exceed the aggregate rentals received by Lessor under such leases for the respective remaining lease term applicable to the Hardware covered by such leases. In the event that Lessor shall sell or otherwise dispose of (other than pursuant to a lease) the Hardware, the proceeds thereof shall be applied to the sum of (1) all costs and expenses (including reasonable attorney's fees) incurred by Lessor in retaking possession of, and removing, storing, repairing, refurbishing and selling or otherwise disposing of such Hardware, (2) the rentals accrued under this Lease, but unpaid up to the time of such sale or other disposition, (3) any and all other sums (other than rentals) then owing to Lessor by Lessee hereunder, and (4) the Casualty Value of such Hardware determined as of the date of such sale or other disposition in accordance with the Casualty Schedule attached hereto. The remaining balance of such proceeds, if any, shall be applied first to reimburse Lessee for any sums previously paid by Lessee as liquidated damages, and any remaining amounts shall be retained by Lessor. Lessee shall remain liable to Lessor to the extent that the aggregate amount of the sums referred to in clauses (1) THROUGH (4) ABOVE SHALL EXCEED THE AGGREGATE PROCEEDS RECEIVED BY Lessor in connection with the sale or disposition of the Property Lessor's remedies, as discussed in this Agreement, including but not limited to remedies discussed in this paragraph shall not be construed as a waiver of subsequent or continuing defaults or breaches. 16. ATTORNEY'S FEES AND VENUE OF LITIGATION: THE PARTIES AGREE THAT ALL DISPUTES, WHETHER BASED IN TORT OR CONTRACT, RELATING TO OR ARISING OUT OF THIS LEASE WILL BE SUBMITTED TO THE ORANGE COUNTY, CALIFORNIA OFFICE OF ENDISPUTE, INC., DBA J-A-M-S/ENDISPUTE ("JAMS") FOR A TRIAL OF ALL ISSUES OF LAW AND FACT CONDUCTED BY A RETIRED JUDGE OR JUSTICE FROM THE PANEL OF JAMS, APPOINTED PURSUANT TO A GENERAL REFERENCE UNDER CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 638(1) OR ANY AMENDMENT, ADDITION, OR SUCCESSOR SECTION THERETO) UNLESS LESSOR OR ITS ASSIGNEE SELECTS AND ALTERNATIVE FORUM. IF THE PARTIES ARE UNABLE TO AGREE ON A MEMBER OF THE JAMS PANEL, THEN ONE SHALL BE APPOINTED BY THE PRESIDING JUDGE OF THE CALIFORNIA SUPERIOR COURT FOR THE COUNTY OF ORANGE. IN THE EVENT THAT JAMS IN THE COUNTY OF ORANGE CEASES TO EXIST, THEN THE PARTIES AGREE THAT ALL DISPUTES ARISING UNDER THIS LEASE FOR ANY BREACH WILL BE FILED AND CONDUCTED IN THE CALIFORNIA SUPERIOR COURT OF THE COUNTY OF ORANGE, UNLESS LESSOR OR ITS ASSIGNEE SELECTS AN ALTERNATIVE FORUM. LESSEE AGREES TO SUBMIT TO THE PERSONAL JURISDICTION OF THE CALIFORNIA SUPERIOR COURT FOR THE COUNTY OF 7 ORANGE. LESSEE AND LESSOR WAIVE THEIR RIGHTS TO A JURY TRIAL IN ANY ACTION ARISING OUT OF OR RELATING TO THIS LEASE. If any party to this Lease brings any action to enforce any of the terms, or to recover for any breach, then the prevailing party is entitled to recover reasonable attorneys' fees and costs, including all JAMS-related costs and costs of collection, from the other party. 17. TRANSPORTATION; INSTALLATION/DEINSTALLATION: All transportation, rigging and drayage charges on delivery or redelivery of the Property to and from Lessee shall be paid by Lessee. All installation and deinstallation charges including packing materials and any fees and charges for maintenance certification or recertification by the Manufacturer/Supplier/ Licensor shall be paid by Lessee. 18. FURTHER ASSURANCES; OFFER AND ACCEPTANCE; LESSEE'S FINANCIAL INFORMATION: Lessee's signing of this Lease shall constitute a firm offer. In consideration of Lessor's time and effort in reviewing and acting on the offer, Lessee agrees that its offer shall be irrevocable for a period twenty (2) business days after the date it is submitted to Lessor. Lessor's signing of this Lease shall constitute acceptance of Lessee's offer to enter into the Lease. Upon acceptance by Lessor, Lessee shall execute and deliver such instruments and assurances as Lessor deems necessary for confirmation, assignment and assurance of performance by Lessee of its obligation hereunder or for perfection of this Lease, including but not limited to the filing of Uniform Commercial Code Financing Statements (which Lessee agrees may be executed by Lessor on Lessee's behalf). Lessee further authorizes Lessor to insert in each Lease Schedule and in other appropriate documentation the serial number(s) and other identifying data of the Property, and to insert applicable lease dates and assignment dates as necessary to complete such supplemental documentation. Prior to Lessor's acceptance of the Lease and throughout the term of the Lease, Lessee shall provide Lessor with all credit information reasonably requested by Lessor, including but not limited to comparative audited financial statements for the most current annual and interim reporting period. 19. NOTICES: ALL NOTICES TO LESSOR MUST BE IN WRITING AND SENT CERTIFIED MAIL RETURN RECEIPT REQUESTED TO THE ADDRESS ABOVE OR SUCH OTHER ADDRESS AS TO WHICH LESSEE HAS BEEN NOTIFIED IN WRITING. 20. AGREEMENTS: All agreements, representations, and warranties contained in this Lease, or in any document or certificate delivered pursuant hereto or in connection herewith, shall survive the expiration or other termination of this Lease. Any provision of this Lease which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, Lessee hereby waives any provision of law which renders any provision hereof prohibited or unenforceable in any respect. THIS LEASE SHALL BE CONSTRUED IN ACCORDANCE WITH AND SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA. Time is of the essence on this Lease. 21. ASSIGNMENT: WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, LESSEE SHALL NOT ASSIGN THIS LEASE OR ITS INTEREST HEREUNDER IN ANY FORM OR MANNER INCLUDING, BUT NOT LIMITED TO, AN ASSIGNMENT DUE TO A SALE, MERGER, LIQUIDATION, SUBLEASE, LEVERAGED BUYOUT, CHANGE OF OWNERSHIP OR CHANGE-IN-CONTROL. LESSOR MAY ASSIGN ANY OF ITS RIGHTS IN THE LEASE AND/OR THE PROPERTY TO AN ASSIGNEE ("ASSIGNEE"). LESSEE HEREBY CONSENTS TO SUCH ASSIGNMENT AS SHALL BE DESIGNATED BY WRITTEN NOTICE GIVEN TO 8 LESSEE AND FURTHER AGREES AS FOLLOWS: (1) THAT ASSIGNEE DOES NOT ASSUME ANY OF THE OBLIGATIONS OF LESSOR HEREUNDER; (2) TO PAY ALL ASSIGNED AMOUNTS DUE UNDER THE LEASE DIRECTLY TO ASSIGNEE UNCONDITIONALLY WITHOUT OFFSET AND LESSEE FURTHER AGREES THAT SUCH MONIES SHALL BE PAYABLE NOTWITHSTANDING ANY DEFENSE OR COUNTERCLAIM WHATSOEVER, WHETHER BY REASON OR BREACH OF THE LEASE, THE EXERCISE OF ANY RIGHT HEREUNDER, OR OTHERWISE, WHICH IT MAY OR MIGHT NOW OR HEREAFTER HAVE AS AGAINST LESSOR (LESSEE RESERVING ITS RIGHT TO ASSERT ANY SUCH DEFENSE OR COUNTERCLAIM DIRECTLY AGAINST LESSOR); AND (3) THAT SUBJECT TO AND WITHOUT IMPAIRMENT OF LESSEE'S LEASEHOLD RIGHTS IN AND TO THE PROPERTY, LESSEE SHALL HOLD POSSESSION OF THE PROPERTY FOR ASSIGNMENT TO THE EXTENT OF ASSIGNEE'S RIGHTS THEREIN. 22. UNIFORM COMMERCIAL CODE ACKNOWLEDGEMENT: Lessee acknowledges that it has received and approved any written "Supply Contract" covering the Property purchased from the Supplier for lease and Lessor has informed or advised Lessee, either previously or by this Lease, of this following: (i) the identity of the Supplier; (ii) that Lessee may have rights under the Supply Contract; and (iii) that Lessee may contact the Supplier for a description of any such rights. This Lease is a "Finance Lease". (The terms "Finance Lease", "Supply Contract" and "Supplier" as used in this Lease have the meanings only as ascribed to them under Division 10 of the California Uniform Commercial Code and have no effect of any tax or accounting treatment.) This provision survives termination of the Lease. - -------------------------------------------------------------------------------- THIS LEASE AGREEMENT AND THE APPLICABLE SCHEDULE(S) CONTAIN THE ENTIRE AGREEMENT BETWEEN LESSOR AND LESSEE WITH RESPECT TO THE SUBJECT MATTER HEREOF. THE LEASE CAN ONLY BE MODIFIED IN WRITING, WITH SUCH MODIFICATIONS SIGNED BY A PERSON AUTHORIZED TO SIGN AGREEMENTS ON BEHALF OF LESSEE AND BY AN AUTHORIZED SIGNER OF LESSOR. NO ORAL OR OTHER WRITTEN AGREEMENTS, REPRESENTATIONS OR PROMISES SHALL BE RELIED UPON BY, OR BE BINDING ON, THE PARTIES UNLESS MADE A PART OF THIS LEASE BY A WRITTEN MODIFICATION SIGNED BY AN AUTHORIZED SIGNER OF LESSEE AND LESSOR. LESSEE: /s/ DAVID A. LATTANZIO LESSOR: /s/ IRENE TANIHARA ------------------------------ --------------------------------- Authorized Signature Authorized Signature - -------------------------------------------------------------------------------- OFFER AND ACCEPTANCE This Lease is subject to approval and acceptance by the American Technologies Credit, Inc. Finance Committee. BY SIGNING BELOW, THE SIGNER CERTIFIES THAT HE HAS READ ACCEPTANCE THE AGREEMENT, INCLUDING THE REVERSE SIDE, AND THAT HE IS AMERICAN TECHNOLOGIES AUTHORIZED TO SIGN ON BEHALF OF CREDIT, INC. LESSEE. UNTIL THIS LEASE HAS BEEN SIGNED BY AN AUTHORIZED SIGNER OF LESSOR, IT SHALL CONSTITUTE A FIRM OFFER BY LESSEE. OFFER LESSEE: PharmChem Laboratories, Inc. By: /s/ DAVID A. LATTANZIO By: /s/ IRENE TANIHARA ------------------------ ------------------------------------------------- Name/Title: DAVID LATTANZIO, VP Name/Title: IRENE TANIHARA, ASSISTANT VICE PRESIDENT ------------------------ ----------------------------------------- Date: 3/10/99 Date: 3/29/99 ------------------------------- ------------------------------------------------
9 ADDENDUM "A" TO LEASE AGREEMENT ORDER NO. LA-1440 WITH RESPECT TO LEASE SCHEDULE 1 This Addendum is supplemental to and made a part of Lease Agreement Order No. LA-1440 dated 03/29/99 (the "Agreement"), Lease Schedule No. 1 dated 03/29/99 (the "Schedule"), and other documents under the Lease and Schedule (collectively forming the "Lease"). The parties to the Lease include PharmChem Laboratories, Inc. ("Lessee") and American Technologies Credit, Inc. ("Lessor"). Capitalized terms used in this Addendum without definition shall have the meanings set forth in the Lease, unless the context hereof specifically requires otherwise. This Addendum is to be construed as supplemental to, and a part of the Lease. Lessee and Lessor acknowledge and agree that the Lease is hereby amended with respect to Lease Schedule No. 1, as follows: I. SECTION 2. TERM: In line twenty-three (23) through to line twenty-five (25) delete the text that reads "(A) purchase all, but not less than all, of the Property for its then Fair Market Value ("FMV"), plus applicable sales tax;" and in its stead insert the following text: "(A) PURCHASE ALL, BUT NOT LESS THAN ALL, OF THE PROPERTY FOR A FAIR MARKET VALUE ("FMV) PURCHASE PRICE NOT TO EXCEED TEN PERCENT (10%) OF THE TOTAL COST PAID BY LESSOR WITH RESPECT TO THE PROPERTY, PLUS ALL APPLICABLE SALES/USE TAXES THEREON AND ALL ACCRUED BUT UNPAID INTEREST, TAXES, PENALTIES AND/OR OTHER SUMS DUE UNDER THE LEASE;" II. SECTION 6. USE, OPERATION AND MAINTENANCE: Section 6 USE, OPERATION AND MAINTENANCE shall be deleted in its entirety and the following inserted in its stead: "LESSEE, AT ITS OWN EXPENSE, WILL PROVIDE A SUITABLE PLACE FOR THE OPERATION OF THE PROPERTY, AND SHALL, AT ITS OWN EXPENSE, MAINTAIN THE PROPERTY, INCLUDING ALL REPAIRS, ADJUSTMENTS, AND REPLACEMENTS NEEDED FOR LESSEE'S USE OF THE PROPERTY DURING THE APPLICABLE TERM OF THE LEASE." III. SECTION 7. RISK OF LOSS: After the last sentence of Section 7 RISK OF LOSS the following additional sentences shall be added: "Notwithstanding the provisions of Section 7 RISK OF LOSS, in the event of a Casualty Occurrence, Lessee shall have the option, after providing Lessor with written notice of its election of said option, of itself procuring replacement property (the "Replacement Property") which shall, in turn substitute for the Property that was the subject of the Casualty Occurrence and continuing the Lease without any interruption whatsoever. Lessee shall use its own funds and/or insurance proceeds relating to the Property that was the subject of the Casualty Occurrence to procure the Replacement Property and Lessor shall obtain good title in and to the Replacement Property free and clear of any liens and/or encumbrances of any kind whatsoever. It is a further condition of Lessee that the Replacement Property shall be of equal or greater value than the Property that was the subject of the Casualty Occurrence and, at Lessor's sole and absolute discretion, be deemed to be like-kind property. Once the Replacement Property is delivered to and is usable by Lessee the Replacement Property shall then serve as the Property under this Lease." 1 10 IV. SECTION 9. TAXES: Beginning in line five (05) and continuing through to line seven (07) delete in its entirety the sentence beginning with "While Lessee is responsible for payment" and ending with the words "Lessor will file all personal property tax returns[.]" and in its stead insert the following: "Lessee is and shall at all times be responsible for payment of all personal property taxes on the Property and ALL REQUIRED PERSONAL PROPERTY TAX RETURNS RELATED TO THE PROPERTY SHALL BE FILED BY LESSEE UNLESS OTHERWISE PROVIDED IN WRITING." V. SECTION 10. OWNERSHIP: Section 10 OWNERSHIP shall be deleted in its entirety and the following inserted in its stead: "LESSOR AT ALL TIMES RETAINS OWNERSHIP, TITLE AND/OR CONTROL OVER LESSEE'S RIGHT TO USE THE PROPERTY IN ACCORDANCE WITH THE TERMS OF THE LEASE. THE PROPERTY IS AND SHALL REMAIN PERSONAL PROPERTY OF LESSOR." VI. SECTION 14. DEFAULT: Beginning in line thirteen (13) and continuing through to line eighteen (18) delete in its entirety the text beginning with "(f) Lessee attempts to assign or transfer this Lease" and ending with the text "results in a material deterioration in Lessee's credit worthiness[.]" and in its stead insert the following: "(f) LESSEE ATTEMPTS TO ASSIGN OR TRANSFER THIS LEASE OR ITS INTEREST UNDER THE LEASE OR MOVES THE PROPERTY FROM THE LOCATION(S) SET FORTH ON THE SCHEDULE WITHOUT LESSOR'S PRIOR WRITTEN CONSENT (WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD BY LESSOR); OR (G) LESSEE UNDERGOES A SALE, BUYOUT, CHANGE IN CONTROL, OR CHANGE IN OWNERSHIP OF ANY TYPE, FORM OR MANNER WHICH, AS JUDGED BY LESSOR, RESULTS IN A MATERIAL DETERIORATION IN LESSEE'S CREDIT WORTHINESS. UNDER SUBPART (G), ABOVE, IT IS A REQUIREMENT OF THIS LEASE THAT LESSEE MUST OBTAIN LESSOR'S PRIOR WRITTEN CONSENT (WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD BY LESSOR)." VII. SECTION 16. ATTORNEY'S FEES AND VENUE OF LITIGATION: Beginning in line ten (10) and continuing through to line eleven (11) delete the words that read "UNLESS LESSOR OR ITS ASSIGNEE SELECTS AN ALTERNATIVE FORUM[.]" and in their stead insert the following: "UNLESS LESSOR OR ITS ASSIGNEE SELECTS AN ALTERNATIVE FORUM IN AN APPLICABLE COUNTY IN THE STATE OF CALIFORNIA WHERE JURISDICTION AND VENUE WOULD APPLY UNDER CALIFORNIA LAW." VIII. SECTION 18. FURTHER ASSURANCES: OFFER AND ACCEPTANCE; LESSEE'S FINANCIAL INFORMATION: In line four (04) delete the text that reads "twenty (20)" and in its stead insert the following text: "TWELVE (12)" IX. SECTION 18. FURTHER ASSURANCES: OFFER AND ACCEPTANCE: LESSEE'S FINANCIAL INFORMATION: After the last sentence of Section 18 FURTHER ASSURANCES; OFFER AND ACCEPTANCE; LESSEE'S FINANCIAL INFORMATION the following sentence shall be added: "NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, IF LESSOR DOES NOT EXECUTE THIS LEASE AND RETURN A COPY OF SAID LEASE TO LESSEE WITHIN THE TWELVE (12) BUSINESS DAY PERIOD, ALL AS SET FORTH ABOVE, LESSOR SHALL HAVE BEEN DEEMED TO HAVE REJECTED THE OFFER MADE BY LESSEE WITH RESPECT TO THIS LEASE AND LESSEE SHALL BE ENTITLED FORTHWITH TO THE RETURN OF ITS FULL DEPOSIT (AS SET FORTH ON LEASE SCHEDULE NO. 1) FROM LESSOR." 2 11 X. SECTION 21. ASSIGNMENT: In line two (02) after the text that reads "LESSOR," and before the word that reads "LESSEE" insert the following text: "WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD BY LESSOR," In all other respects the terms and conditions of the Lease, as originally written, shall remain in full force and effect. The Lease, as amended herein, sets forth the entire and final understanding between the parties with respect thereto. The terms of this Addendum have been negotiated and jointly drafted by Lessee and Lessor and, therefore, the language of the Addendum shall not be construed in favor or against either party. The undersigned represent that they have the authority to enter into this Agreement, and that the same shall be legally binding and enforceable on the respective principals. IN WITNESS WHEREOF the parties hereto, by their authorized signatories, have executed this Addendum at the date set forth below their respective signatures.
Lessee: PharmChem Laboratories, Inc. Lessor: American Technologies Credit, Inc. ------------------------------ ------------------------------ By: /s/ DAVID A. LATTANZIO By: /s/ IRENE TANIHARA ---------------------------------- ---------------------------------- Name: DAVID A. LATTANZIO Name: IRENE TANIHARA -------------------------------- -------------------------------- Title: VP Title: AVP ------------------------------- ------------------------------- Date: 3/10/99 Date: 3/29/99 --------------------------------- ---------------------------------
3 12 ADDENDUM "B" to LEASE SCHEDULE 1 to LEASE AGREEMENT ORDER NO. LA-1440 This Addendum is supplemental to and made a part of Lease Agreement Order No. LA-1440 , dated 03/29/99 , (the "Lease"), and Lease Schedule 1, and other related documents under the Lease and Schedule (together forming the "Agreement"). The parties to the Agreement include PharmChem Laboratories, Inc., as Lessee, and American Technologies Credit, Inc. as Lessor. Capitalized terms used in this Addendum without definition shall have the meanings set forth in the Lease, unless the context hereof otherwise specifically requires. This Addendum is to be construed as supplemental to, and part of, the Lease. In the event of any inconsistency between the Lease and this Addendum, the terms and provisions of this Addendum shall prevail. Lessee and Lessor hereby agree that the above-referenced Agreement is revised as indicated below. Section 11. EFFECTS OF TERMINATION OR EXPIRATION OF LEASE TERM: Sentence one (1) shall be change to read; "...pay to Lessor an inspection, refurbishment and restocking fee equal to one percent (1%) of the original lease amount, and immediately, at its own expense, ship the Property,..." Section 13. RIGHT OF INSPECTION: The following shall be added at the end of sentence one (1): "...provided Lessee is notified in writing twenty-four (24) hours in advance." Section 14. DEFAULT: The following shall be added at the end of this Section: "It shall not be deemed to be a Change-In-Control during the term of this Lease if company stock is bought and sold in the normal course of business. It is the intent of the parties hereto that a Change-In-Control shall mean a sale, liquidation, merger or some other form of change in ownership which would materially impact Lessee's structure." In all other respects, the terms and conditions of the Agreement shall remain in full force and effect as originally set forth. The Agreement sets forth the entire and final understanding between the parties with respect hereto. Lessee and Lessor acknowledge and agree that they jointly negotiated and drafted this Addendum and, therefore, any ambiguities herein shall not be construed against either party. The undersigned represent that they have the authority to enter into this Agreement, and that the same shall be legally binding and enforceable on the respective principals. IN WITNESS WHEREOF, the parties hereto, by their authorized signatories, have executed this Addendum at the date set forth their respective signatures. LESSEE: LESSOR: PharmChem Laboratories, Inc. American Technologies Credit, Inc. By: /s/ DAVID A. LATTANZIO By: /s/ IRENE TANIHARA ---------------------------------- ---------------------------------- Name: DAVID A. LATTANZIO Name: IRENE TANIHARA -------------------------------- -------------------------------- Title: VP Title: ASSISTANT VICE PRESIDENT ------------------------------- ------------------------------- Date: 3/10/99 Date: 3/29/99 -------------------------------- -------------------------------- 13 AMERICAN TECHNOLOGIES CREDIT, INC. 18101 Von Karman Avenue o Suite 140-253 o Irvine o CA 92612 Telephone 714/436-6500 o Facsimile 714/436-6599 April 27, 1999 PharmChem Laboratories, Inc. 1505A O'Brien Drive Menlo Park, CA 94025 Ladies/Gentlemen: Reference is made to that Lease Agreement Order No. LA-1440 , dated March 29, 1999 , by and between PharmChem Laboratories, Inc., as Lessee, and American Technologies Credit, Inc. (the "Agreement"), and to Lease Schedule 1 and all related subsidiary documents under the Agreement (collectively the "Lease"). Notwithstanding anything to the contrary contained therein, and to the limited extent hereof, this Letter Agreement amends and supersedes the said Lease and is hereby incorporated by reference therein. Capitalized terms used in this Letter Agreement without definition shall have the meanings set forth in the Lease, unless the context hereof otherwise specifically requires. This Letter Agreement is to be construed as supplemental to, and part of, the Lease. It is agreed and acknowledged that the final Property cost has been revised from $1,000,000.00 to $1,082,445.50. As a result, the following revisions to the Agreement are required:
LEASE SCHEDULE 1 AS STATED AS REVISED ---------------- --------- ---------- MONTHLY RENT $29,150.00 $31,553.29 DEPOSIT $29,150.00 $31,553.29 DELIVERY ORDER AS STATED AS REVISED MONTHLY RENT $29,150.00* $31,553.29**
* Plus applicable Sales/Use Tax ** Sales/Use Tax Exempt In all other respects, the terms and conditions of the Lease, as originally written, shall remain in full force and effect. The Lease, as amended herein, sets forth the entire and final understanding between the parties with respect hereto. The terms of this Letter Agreement have been negotiated and jointly drafted by American Technologies Credit, Inc. and Lessee and, therefore, the language of the Letter Agreement shall not be construed in favor or against either party. The undersigned represent that they have the authority to enter into this Lease, and that the same shall be legally binding and enforceable on the respective principals. Please acknowledge your acceptance of same by your authorized signature below and return the original of this Letter Agreement to American Technologies Credit, Inc. within five (5) days from the date hereof. ACKNOWLEDGED AND ACCEPTED ON THIS Very truly yours, 28TH DAY OF APRIL __, 1999 AMERICAN TECHNOLOGIES CREDIT, INC. PharmChem Laboratories, Inc. BY: /s/ DAVID A. LATTANZIO /s/ IRENE TANIHARA ------------------------------ ------------------------------ NAME: David Lattanzio Irene Tanihara ---------------------------- Assistant Vice President TITLE: Vice President --------------------------- 14 LEASE AGREEMENT ORDER NO. LA-1440, LEASE SCHEDULE NO. 1 (collectively the "Lease") ASSIGNMENT OF LEASE - WITHOUT RECOURSE TO THE CITY GROUP/EQUIPMENT FINANCING, INC. RE Lease between PharmChem Laboratories, Inc. as Lessee and undersigned, dated 03/29/99 having aggregate unpaid Initial Base Lease Term rentals assigned hereunder of $1,072,811.86, which equals the sum of Thirty-Four (34) monthly rental payment(s) of $31,553.29 each, plus one final payment of $N/A (the "Assigned Base Rent") payable over the assigned portion of the Initial Base Lease Term ("Assigned Term"). For value received undersigned ("Assignor") hereby sells, assigns, transfers and sets over to The CIT Group/Equipment Financing, Inc., its successors and assigns ("Assignee"), WITHOUT RECOURSE to Assignor (except for Assignee's rights in the event of any breach by Assignor of its representations, warranties and covenants herein, as such rights are described herein), the annexed above-named Lease ("Lease"), together with All Assignor's rights in the Lease (excepting the rights expressly retained herein by Assignor as "Retained Rights"), all right, title and interest in the Assigned Base Rent due and to become due thereunder including, without limitation, the right to all other sums payable under the Lease such as casualty value payments, the termination payment (if any), indemnity payments, reimbursements for insurance, transportation, installation or removal, taxes and maintenance. Assignor also assigns to Assignee all of Assignor's rights and remedies under the Lease and any guaranty thereof, including the right to take, in Assignor's or Assignee's name, any and all proceedings, legal, equitable or otherwise, that Assignor might otherwise take, save for this Assignment and hereby appoints Assignee as its agent and attorney-in-fact to carry out such actions. Notwithstanding the foregoing, nothing herein shall be construed as constituting an assignment of Assignor's (i) rights to terminate the Lease at the end of the Assigned Term, (ii) rights of the Lessor during the extension period(s) specified in the Lease and (iii) rights under any guaranty or collateral which expressly serves as security for solely the Retained Rights, including but not limited to Assignor's retention of ownership of the Property after all assigned obligations have been satisfied by Lessee (collectively, the "Retained Rights"). As security for all amounts due to Assignor under the Lease, Assignor hereby grants to Assignee a security interest in all property covered by and described in the Lease. TITLE TO ALL SUCH PROPERTY SHALL REMAIN IN THE ASSIGNOR AND IS NOT TRANSFERRED TO ASSIGNEE FOR ANY PURPOSE. Upon the first to occur of either (a) full satisfaction of Lessee's obligations under the Lease during the Assigned Term and (b) full satisfaction of Assignor's obligations to Assignee under this Assignment, if any, Assignee shall reassign the Lease, and any assigned guaranty or other security therefor to Assignor and promptly take all necessary actions to terminate its security interest in the Property. In the event of such reassignment, Assignee shall warrant that the Lease and Property are not subject to any liens created by Assignee. Assignee shall have no obligation of Assignor as Lessor under the Lease. Assignee will not, without the prior written consent of Assignor, provided to Lessee directly any amount(s) by which Lessee may terminate the Lease. Any such requests made by Lessee to Assignee shall promptly be forwarded in writing by Assignee to Assignor. Assignor warrants that: Assignor, by virtue of its purchase of the property described in the Lease, is the owner of such property free from all liens and encumbrances except the Lease and except that with respect to software included in the Property, Assignor may have acquired only a qualified ownership of such software by virtue of Assignor's purchase of the software from the software vendor, the Lease is the only document executed between lessor and lessee concerning the property described in the Lease; the Lease and any accompanying guaranties, waivers and/or other instruments are genuine and enforceable and are and will continue free from defenses, set-offs and counterclaims; all signatures, names, addresses, amounts and other statements and facts contained therein are true and correct; the aggregate unpaid initial base lease term rentals shown above is correct; the property has been delivered to lessee under the Lease on the date set forth below in satisfaction condition and has been accepted by lessee, and that Assignor will comply with all its warranties and other obligations with respect thereto; the Lease transaction conforms to all applicable laws and regulations; the Lease constitutes and will continue to constitute a valid reservation of unencumbered title to or first lien upon or security interest in the property covered thereby, effective against all persons; if filing, recordation or any other action or procedure is permitted or required by statute or regulation to perfect such reservation of title, lien or security interest, the same has been accomplished. 15 ASSIGNMENT OF LEASE WITHOUT RECOURSE PAGE TWO OF TWO If Assignor breaches any agreement, representation or warranty contained in this Assignment or the Lease, Assignor will, upon Assignee's request, promptly repurchase the Lease for an amount (the "Discounted Repurchase Amount") equal to the sum of (i) the outstanding balance of Assigned Base Rent payable by Lessee for the unexpired Assigned Term remaining on the date of demand discounted at the same interest rate and by the same method used by Assignee when purchasing the Lease, plus (ii) accrued and unpaid Assigned Based Rent, taxes and other Lease charges, plus (iii) reasonable expenses of collection, repossession, transportation and storage incurred by Assignee. Assignor agrees that Assignee may in Assignor's name endorse all remittances received, and Assignor gives express permission to Assignee to release, on terms satisfactory to Assignee or by operation of law or otherwise, or to compromise or adjust any and all rights against and grant extensions of time of payment to Lessee or any other persons obligated on the Lease or on any accompanying guaranty, or to agree to the substitution of a lessee, without notice to Assignor and without affecting Assignor's obligations hereunder; provided, however, that prior to Assignee taking any of such actions, Assignee shall give Assignor ten (10) days prior written notice of its intended action(s) and a right to repurchase the Lease for an amount equal to the Discounted Repurchase Amount within ten (10) days of the date of such notice. If Assignor has not repurchased the Lease within ten (10) business days of such notice, then Assignor shall be deemed to have reflected such offer and waived any objections it may have with respect to Assignee's intended actions. In the event that Assignee has declared a default under the Lease and determines to repossess the Leased Property, it shall notify Assignor in writing that it intends to repossess the Property in accordance with the Lease and shall give Assignor a right of first refusal to repurchase the Lease for an amount equal to the Discounted Repurchase Amount within ten (10) business days after such notice. If Assignor has not given written notice of its intent to repurchase the Lease to Assignee within 10 business days, then Assignor shall be deemed to have rejected such offer and Assignee shall have all rights and remedies available to it under the Uniform Commercial Code with respect to the foreclosure of its security interest in the Property. The foregoing provision shall not, however, be construed to unnecessarily impair or restrict Assignee from fully exercising all rights and remedies available to it in order to protect its security interest in the Lease and the property described in the Lease. Assignor and Assignee agree that Assignee shall provide notice to Lessee of this Assignment, in the form of the Letter attached hereto as Exhibit "A". During the Assigned Term, Assignor shall have no authority to, and will not, without Assignee's prior written consent, accept payments of rents or of option prices, repossess or consent to the return of the property described in the Lease or modify the terms thereof or of any accompanying guaranty. Assignee's knowledge at any time of any breach of or non-compliance with any of the foregoing shall not constitute any waiver by Assignee. Assignor waives notice of acceptance hereof. All notices hereunder shall be in writing (unless otherwise agreed in writing by the parties) and shall be personally delivered or sent by the United States mail, postage prepaid (certified or registered), or by an overnight express mail service and shall be deemed given when sent to the intended recipient; provided that, notwithstanding the foregoing, when a notice is sent by United States mail, postage prepaid (certified or registered), it shall be deemed received only upon actual receipt. All such notices to Assignor shall be sent to American Technologies Credit, Inc., 18101 Von Karman Avenue, Suite 140-253, Irvine, California, Attention: Chief Financial Officer. The property covered by the Lease was delivered to Lessee on 04/30/99. Date 04/30/99 Lessor-Assignor ------------------------ AMERICAN TECHNOLOGIES CREDIT, INC. By: /s/ IRENE TANIHARA ------------------------------------- Name: IRENE TANIHARA ----------------------------------- Title: ASSISTANT VICE PRESIDENT ---------------------------------- EX-10.35 4 LEASE AMENDMENT 1 EXHIBIT 10.35 THIRD AMENDMENT TO LEASE AGREEMENT This Third Amendment to Lease Agreement (the "Amendment") is made and entered into as of May 7, 1999, by and between AMB Property, L.P., a Delaware limited partnership ("Landlord"), and PharmChem Laboratories, Inc., a California corporation ("Tenant"), with reference to the following facts. RECITALS A. Lincoln Menlo Associates Limited, a California limited partnership and Tenant have entered into that certain Lease Agreement dated as of June 28, 1993 as subsequently amended on December 28, 1993 (First Amendment) and December 20, 1995 (Second Amendment), hereinafter collectively the "Lease") for the leasing of certain premises consisting of approximately 11,925 rentable square feet located at 1275 Hamilton Court, Menlo Park, California (the "Premises") as such Premises are more fully described in the Lease. B. Lincoln has assigned its interest to Landlord. C. Landlord and Tenant now wish to amend the Lease to provide for, among other things, the extension of the Term of the Lease, all upon and subject to each of the terms, conditions, and provisions set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and Tenant agree as follows: 1. Recitals: Landlord and Tenant agree that the above recitals are true and correct and are hereby incorporated herein as though set forth in full. 2. Term: The Term of the Lease shall be extended from July 1, 1999 to June 30, 2006 (the "Extended Term"). 3. Base Rent: The Basic Lease Information and Section 3 of the Lease are hereby modified to provide that during the Extended Term of the Lease the monthly Base Rent payable by Tenant to Landlord, in accordance with the provisions of Section 3 of the Lease shall be in accordance with the following schedule:
Period Monthly Base Rent ------ ----------------- 07/01/99 - 06/30/01 $7,155.00 07/01/01 - 02/28/03 $7,751.00 03/01/03 - 10/31/04 $8,109.00 11/01/04 - 06/03/06 $8,467.00
4. Condition of Premises: Tenant acknowledges and agrees that its possession of the Premises after July 1, 1999 is a continuation of Tenant's possession of the Premises under the Lease. Tenant is familiar with the condition of the Premises, and agrees to accept the Premises in their existing condition "AS IS", without any obligation of Landlord to remodel, improve or alter the Premises, to perform any other construction or work of improvement upon the Premises, or to provide Tenant with any construction or refurbishing allowance. As of the date of this Amendment, Tenant represents and warrants to Landlord that Tenant is not aware of any dangerous conditions or other defects existing in or about the Premises or the Building, and that unless Tenant provides Landlord with written notice to the contrary prior to June 30, 1999 such representation and warranty shall be true as if the same were made on such date. 5. Brokers: Tenant warrants that it has had no dealing with any real estate broker or agent in connection with the negotiation of this Amendment whose commission shall be payable by Landlord. If Tenant has dealt with any person, real estate broker or agent with respect to this Amendment, Tenant shall be solely responsible for the payment of any fee due to said person or firm, and Tenant shall hold Landlord free and harmless against any liability with respect thereto, including attorneys' fees and costs. 1 2 6. Right to Terminate: Subject to the limitations and conditions set forth herein, Tenant shall have a right to terminate the Lease ("Termination Option") effective as of May 31, 2001 ("Termination Date"). If Landlord does not receive written notice from Tenant of its exercise of this Termination Option prior to August 31, 2000 all rights under this Termination Option shall automatically terminate and shall be of no further force or effect. Tenant's exercise of the Termination Option shall be subject to the following terms and conditions (collectively the "Termination Conditions"): (1) Tenant shall provide to Landlord a termination fee of thirty-eight thousand three hundred fifty and 00/100 ($38,350.00) along with Tenant's timely written notice of exercise of the Termination Option; (2) Tenant shall be liable for performance of all obligations required to be performed by Tenant under the Lease, as and when such obligations are required to be performed under the Lease through the Termination Date; and (3) Tenant shall vacate and surrender the Premises as of the Termination Date in accordance with the provisions of the Lease. If Tenant exercises the Termination Option, upon termination of the Lease, the vacation and surrender of the Premises by Tenant, and satisfaction of the Termination Conditions (above) of this Agreement, Landlord and Tenant shall have no further rights, obligations or claims with respect to each other arising from this Agreement or the Lease, except for those obligations of Tenant under the Lease which are expressly required to survive and continue after the termination or expiration of the Lease. Tenant and Landlord hereby acknowledge and agree that certain obligations of Tenant survive the termination or expiration of the Lease, pursuant to the terms and provisions of the Lease, and the parties further agree that it is the intention of Tenant and Landlord that this Agreement not affect such ongoing obligations of Tenant. 7. Effect of Amendment: Except as modified herein, the terms and conditions of the Lease shall remain unmodified and continue in full force and effect. In the event of any conflict between the terms and conditions of the lease and this Amendment, the terms and conditions of this Amendment shall prevail. 8. Definitions: Unless otherwise defined in this Amendment, all terms not defined in this Amendment shall have the meaning set forth in the Lease. 9. Authority: Subject to the provisions of the Lease, this Amendment shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, legal representatives, successors and assigns. Each party hereto and the persons signing below warrant that the person signing below on such party's behalf is authorized to do so and to bind such party to the terms of this Amendment. 10. The terms and provisions of the Lease are hereby incorporated in this Amendment. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first above written. TENANT: PharmChem Laboratories, Inc., a California corporation By: /S/ JOE HALLIGAN ------------------------------- Its: CEO ------------------------------- Date: 6/3/1999 ----------------------------- LANDLORD: AMB Property L.P., a Delaware limited partnership By AMB Property Corporation, its General Partner By: /S/ GAYLE STARR ------------------------------- Vice President Date: 6/12/99 ------------------------------- 2 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,124 0 8,170 605 1,522 11,013 20,077 11,204 23,612 9,292 0 0 0 19,096 0 23,612 0 21,323 0 15,089 0 92 104 972 28 0 0 0 0 944 .16 .16
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