-----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, RVb8i7ML/N7+qwzTIZI5cJ0fXFBj7eU8McH2r+zlFLPMb2FXhtdMKK7lffZlbzo5 GQ6PFXV9jgaxsLZ9r7OIZA== 0000927356-98-001551.txt : 19980923 0000927356-98-001551.hdr.sgml : 19980923 ACCESSION NUMBER: 0000927356-98-001551 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980922 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BI INC CENTRAL INDEX KEY: 0000716629 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 840769926 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12410 FILM NUMBER: 98712947 BUSINESS ADDRESS: STREET 1: 6400 LOOKOUT RD CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3035302911 MAIL ADDRESS: STREET 1: 6400 LOOKOUT RD CITY: BOULDER STATE: CO ZIP: 80301 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: JUNE 30, 1998 Commission File Number: 0-12410 BI INCORPORATED --------------- (Exact name of registrant as specified in its charter) Colorado -------- (State or other jurisdiction of incorporation or organization) 84-0769926 ---------- (I.R.S. Employer Identification No.) 6400 Lookout Road, Boulder, Colorado 80301 ------------------------------------------ (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (303) 218-1000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At September 15, 1998, there were 7,641,685 shares of Common Stock outstanding and the aggregate market value of Common Stock held by non-affiliates was $62,105,233. DOCUMENTS INCORPORATED BY REFERENCE Part III, Items 10, 11, 12 and 13 are incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on November 5, 1998. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[_] PART I ITEM 1. BUSINESS. GENERAL BI Incorporated (the "Company") is the leading manufacturer and provider of electronic monitoring equipment and services, institutional management software systems, and community correctional services to the criminal justice market worldwide. Since entering the market in 1984, BI's electronic monitoring business unit ("EM") has developed four generations of home arrest products. Three companies, acquired from 1990-1992, were combined to form BI's monitoring service centers, allowing the Company to provide additional services to corrections agencies. In December 1995, the Company acquired the assets of JurisMonitor, Inc. to address the needs of programs designed to reduce risk in domestic violence cases. In December 1993, the Company acquired an exclusive license for its Institutional Management System ("IMS") software from SCC Communications Corp. of Boulder, Colorado, upon which BI's PREMIER IMS product and correctional information systems business unit ("CIS") is based. Recognizing yet another need within corrections, BI purchased the product rights to an automated case load management service in December 1990. BI's PROFILETM and PROFILE Plus TM products generate revenue in the Company's community correctional services business unit ("CCS") . The Company expanded this business unit through the acquisition of four additional companies in fiscal 1997. On October 10, 1996, the Company completed the merger with Community Corrections Corporation, Justice Alternatives Inc. and Tennessee Probation Services, Inc., collectively referred to as "CCC." CCC provides probation services to misdemeanant probationers through correctional service centers in Georgia, Florida, Tennessee and South Carolina. On January 31, 1997, the Company acquired Peregrine Corrections, Inc. ("PCI") of Denver, Colorado. PCI is an industry leader in day-reporting, a non-residential criminal sentencing alternative for felony probationers. PCI provides services through correctional service centers in Colorado, Illinois, New Mexico, Oregon and Washington. INDUSTRY AND MARKET BACKGROUND According to the U.S. Bureau of Justice Statistics latest report, 5.7 million adults were under some form of correctional supervision at December 31, 1997. The number of prisoners under the jurisdiction of federal or state correctional authorities on that date reached a record high of 1.7 million. Moreover, 3.9 million adults were under parole or probation sanction. The total adult correctional population has nearly tripled over the last 15 years. There are approximately 3,000 jails in the United States who could be users of the Company's integrated system for management of inmate data. These are the targeted populations for the Company's products and services. At June 30, 1998 the Company was monitoring approximately 17,400 offenders daily on home arrest; approximately 40,000 misdemeanant and felon probationers were being managed through the Company's CCS correctional service centers; seven jails were using BI's IMS software; and approximately 20,000 offenders were using BI's automated PROFILE service. 1 The Company believes that its comprehensive product lines provide viable, cost-effective solutions to the problem of prison and jail overcrowding, as well as providing additional innovative tools for corrections agencies and jails to manage the vast amount of information required more efficiently. Monitoring, supervision and day reporting services provided by BI enable corrections agencies to manage probation and parole populations effectively for less than traditional institutional incarceration. This alternative provides a lower cost solution to agencies because home arrest and supervision programs are structured in a way that allows the offender to pay for these services. PRODUCTS ELECTRONIC MONITORING EQUIPMENT AND SERVICES - -------------------------------------------- BI Home Escort(TM) System 9000 Series: The Company's premier product --------------------------------------- line, the BI Home Escort System, consists of a radio frequency transmitter, worn on an offender's ankle, a receiver unit called a field monitoring device ("FMD"), the model 9000, installed in the offender's home. The transmitter produces uniquely encoded signals which are received by the FMD. Using standard telephone lines, the FMD relays the information to the agency's host computer or monitoring service of choice. The host computer can communicate with several hundred FMDs at one time. If the offender moves beyond a certain distance from the FMD, the radio signal is broken and an indication of the break in transmission is relayed by the FMD to the host computer. Monitoring center personnel enter predetermined curfews into the host computer using BI's proprietary software. If an offender fails to comply with these terms or tampers with the transmitter, the host computer signals a violation and the officer in charge is alerted according to predetermined agency criteria. The BI Home Escort System is equipped with proprietary security features which include patented electronic tamper detection devices that cause a tamper signal to be transmitted to the host computer if the individual tampers with either the ankle bracelet or the FMD. The call back characteristic of the series confirms the location of the FMD at specified intervals. These tamper detection devices, the system's ability to crosscheck breaks in the transmission with pre-programmed curfew terms and the host computer's operating system effectively differentiate the BI Home Escort System from its competitors' products. The Home Escort Series features small and lightweight equipment and has established unprecedented industry standards for security, performance, sophisticated encoding and encryption of messages. Additional features include patented voice verification technology and the host computer's capability to automatically fax reports to agencies. Part of the BI 9000 Home Escort series is the BI 9200 REACT(TM), a ----------------- remote, in-home alcohol testing device which can be used stand-alone or in conjunction with electronic home arrest. It combines voice verification, triple tamper protection and fuel cell technology to provide corrections officials with an increased level of security and actual analyses of offenders' blood alcohol levels. The unit is ergonomically designed, lightweight and easy to install. Also integral to the BI 9000 Home Escort Series is the BI 9020 Drive- ------------- BI(TM) Monitor. The Drive-BI is a hand-held, portable unit used to receive - -------------- encoded transmissions from the BI 9010 ankle bracelet transmitters worn by offenders. The Drive-BI does not require installation of an FMD in the offender's home. Rather, a compliance officer has the capability to drive by the individual's residence or work place and uses the portable receiving unit to verify compliance with the terms of the program. 2 BI JurisMonitor(TM) The BI JurisMonitor System is a cost effective ------------------- approach to domestic violence intervention and compliance with court orders, combining electronic monitoring technology with a coordinated community response. In the JurisMonitor system, the offender wears an ankle bracelet that emits a continuous signal. The victim is provided with an FMD base unit which sets off an alarm when the transmitter comes within the proximity of the base unit. In addition, the monitoring unit in the offender's home verifies curfew compliance and detects tampering or attempts to shield the bracelet. When the FMD detects the presence of the offender, four events are set into motion: an audible alarm sounds within the home; the monitoring center is alerted; the unit begins an audio recording and police are dispatched based on the protocols established by the jurisdiction. The BI K2 Home Escort(TM) System uses time-tested software to manage -------------------------------- and monitor subjects from the agency's site without relying on services of a third-party vendor. The system allows agencies to customize the database to accommodate specific conditions for individual subjects, such as defining records and schedules, adding comments and determining alert-handling procedures. Based on a standard DOS/Novell operating system, K2 provides top security and reliability, disk mirroring, redundancy and a fault-resistant design for a variety of electronic and alcohol field monitors. BI Monitoring Services: BI Incorporated uses its electronic ---------------------- monitoring products to provide corrections agencies with comprehensive electronic home arrest monitoring services. Monitoring services include entering data, monitoring the status of individuals as displayed by the host computer and communicating any violations and other information according to predetermined agency criteria. Corrections officials use BI's equipment without having to provide agency staff to monitor individuals or obtain capital to purchase host system computer equipment. This allows flexibility, control, security and dramatic savings over the costs of incarceration. BI certifies its monitoring center personnel, who monitor subjects from monitoring centers in Boulder, Colorado and Anderson, Indiana, 24 hours a day, seven days a week. The two monitoring centers are fully redundant and feature unprecedented system uptime and accurate data entry and reporting. CORRECTIONS INFORMATION SYSTEMS - ------------------------------- The BI PREMIER(TM) Institutional Management System is an application --------------------------------------------------- software product that offers centralized, integrated management of jail information. It provides jails and prisons of all sizes with comprehensive inmate tracking from entry through release while supporting a broad range of additional jail and prison operations. IMS generates a full range of management information reports and enables authorized users to query the jail database and create specialized reports from industry-standard personal computer database packages. COMMUNITY CORRECTIONAL SERVICES - ------------------------------- With offices located in 10 states, BI's CCS business unit provides corrections agencies with community supervision services. BI's services help agencies with their caseloads by providing enrollment services, maintaining frequent face-to-face contact, collecting fees and following up when probationers do not report as scheduled. By working directly with corrections professionals, BI can provide direct supervision, education and treatment from day reporting centers. Automated Reporting and Collections ("ARC") programs and services allow corrections professionals to automate the management of their overburdened caseloads. Using a 900# telephone service, BI PROFILE(TM) manages administrative and low-risk caseloads. The offender must answer a series of questions asked by a computer, such as change of address, telephone number or employment, compliance with court orders and restitution payments. Information collected by the computer is recorded and archived. Through BI's monitoring center, BI PROFILE reports the exceptions or missed calls to officials. This enables officers to supervise offenders who need more intensive supervision. PROFILE PLUS(TM) combines the efficiency of automated caseload ---------------- management with the 3 collection of fixed fees. Offenders have historically been reluctant to voluntarily submit such fees; BI's technology has dramatically increased the collection rate. When an offender makes a monthly call to PROFILE PLUS, the supervision fees are charged to the offender's home telephone bill. BI collects the fees and passes them along to the agency. The Company recognized revenue of $13,559,000, $12,322,000 and $14,678,000 in 1998, 1997, and 1996 respectively, from the sale of electronic monitoring products representing 21.9%, 25.5% and 37.4% of total revenue during the respective years. Service, monitoring and rental income was $44,458,000 or 71.7% of total revenue in 1998, $34,169,000 or 70.6% in 1997 and $22,189,000 or 56.6% in 1996. Revenue from the sale of its IMS software was $3,195,000, $1,211,000 and $1,522,000 in 1998, 1997 and 1996. These sources of revenue reflect the continuing expanding acceptance of corrections agencies to use the Company's products and services. PRODUCT DEVELOPMENT The Company designs and engineers the primary hardware and software elements of its product lines, other than the host computer systems. The Company solicits customer input to enhance its current products and to develop and design new products. The Company completed the second phase of the development of its base open system architecture platform for its IMS product mid-year fiscal 1998. In addition, the Company advanced the development of its next generation monitoring software. It is anticipated that the Company will begin to utilize this software during fiscal 1999 to enhance customer satisfaction and improve efficiencies. For the years ended June 30, 1998, 1997, and 1996, the Company had research and development expenses of approximately $3,000,000, $3,000,000, and $2,700,000, respectively. MANUFACTURING The Company performs final assembly, testing, and quality control of its products at its facility in Boulder, Colorado. The Company generally uses standard parts and components obtained from a variety of vendors. The Company has not experienced and does not anticipate any difficulty in obtaining the necessary manufacturing assemblies, parts and components. SALES, DISTRIBUTION AND MARKETING The Company markets and sells its products and services to Federal, state and local government agencies throughout the United States directly through its sales personnel. The Company's IMS product is increasingly offered through marketing relationships by large system integrators. The Company sold its electronic monitoring products to distributors in The Netherlands, South Africa, Singapore and five provinces in Canada. The Company believes the success of these programs will open up other international opportunities. Customers may acquire the Company's products and services by purchase, rental or lease-purchase. Certain purchase contracts have terms up to 18 months contingent upon delivery schedules of the Company's products and services. Under a typical rental arrangement, the term is for a period of up to one year, payments are due monthly and the Company retains title to the equipment. Under the typical lease-purchase agreement, the lease is for a term of 24 to 36 months, payments are due monthly and generally the customer has the option to acquire the equipment at a nominal cost at the end of the lease term. Payments by governmental entities under rental and lease-purchase arrangements are contingent upon annual appropriations. Certain 4 government agency contracts are paid directly by the offender using the Company's products and services. Although there can be no assurance, the Company believes that the likelihood of nonpayment due to lack of appropriations is remote. See Notes 1 and 3 to the Consolidated Financial Statements. SIGNIFICANT CUSTOMERS In fiscal 1998, the Administrative Office of the U.S. Federal Courts accounted for 10% of the Company's total revenue. This customer accounted for 12% of total revenue in both fiscal years 1997 and 1996. A loss of this customer could have a material, adverse effect on the Company. CUSTOMER SERVICE, SUPPORT AND WARRANTIES The Company believes that extensive customer service and support are critical to maintaining a leading position in the criminal justice market. The Company provides extensive support services to its electronic monitoring customers including complete installation, training and ongoing technical assistance. The Company operates a toll-free hot-line, which customers with products under warranty or covered by extended service contracts may use to request assistance on the operation of the Company's monitoring systems. The Company can perform many remote diagnostic procedures using telephones and modems, and historically, using these procedures, has been able to correct difficulties experienced by its customers. The Company provides customers any updates of its monitoring system software during the warranty period and to customers on extended service contracts. The Company arranges for 24-hour hardware service on computer equipment and peripherals, and directly provides 24-hour software support. Products manufactured by the Company are serviced at its Boulder, Colorado facility. The Company provides a full warranty on all its hardware products for one year from the date of delivery or for the term of a lease. The Company also offers, for a fee, annual extended service contracts which provide the same coverage. Certain of the warranties provided by the Company's suppliers are for a period less than the period provided by the Company to its customers. The Company also arranges for 24 hour customer support for its Institutional Management System and provides full warranty support after system acceptance per the terms of the individual contracts. The Company also offers, for a fee, annual extended service contracts which provide the same coverage. The two subsidiaries comprising the CCS business unit, CCC and PCI, are both service companies that contract directly with correctional jurisdictions or judicial entities. Both companies have built their reputations on providing excellent customer and client service and each offers the standard company warranties when providing electronic monitoring or REACT equipment as part of its service offerings. BACKLOG AND RECURRING REVENUE The Company includes only firm purchase orders in its backlog, which can vary significantly from month to month. The Company believes that its backlog at any particular time is generally not indicative of the level of future sales. The CIS business unit which has contracts lasting from one month to approximately 24 months carried a backlog of $5,300,000 into fiscal year 1999 of which $3,300,000 should represent fiscal year 5 1999 revenue. The Company had approximately $4,139,000 of monthly recurring monitoring, service and rental revenue during June 1998, compared to approximately $3,400,000 during June 1997. COMPETITION The Company believes there are eight competitors in the manufacturing of EM equipment and 15 competitors in the monitoring of this equipment. It is anticipated that competition will increase as additional companies and corrections agencies recognize the benefits of EM programs. The principal methods of competition are price, quality of products and service, experience and proven product performance. While the Company believes that its products and services are currently superior to those of its competitors, there can be no assurance that this competitive advantage will be maintained. Because of the relatively immature state of the corrections information management systems market, the current competition to BI's PREMIERTM Institutional Management System is extremely fragmented. It consists of approximately five applications companies who provide Institutional Management Systems with widely varying degrees of functionality. With the acquisition of CCC and PCI, BI entered into new areas within the corrections market. CCC provides misdemeanant probation services to over 180 jurisdictions in Georgia, Tennessee, South Carolina and Florida. Currently, there are more than 40 smaller competitors providing similar services in these states. PCI is the only national for-profit company providing day reporting services to the corrections industry. There are less than 50 private providers that operate day reporting centers on a local or regional basis. It is expected that as the market expands, other for-profit competitors will enter this market. REGULATION Some of the hardware products produced by the Company's Electronic Monitoring Business Unit emit radio frequency energy and/or connect to the telephone network. These products require approval by the Federal Communications Commission (FCC) and safety approval by a nationally recognized test laboratory (NRTL). The Company has received approvals by the FCC and an NRTL for its products that are sold in the United States. It will be necessary to obtain these approvals for future radio frequency and telecommunications products. Approvals or waivers from certain foreign governments are also required to export these products into those countries and the Company has received these approvals or waivers. Approvals or waivers will be necessary for future radio frequency and telecommunications products. INSURANCE The Company maintains general and professional liability insurance coverage at $7,000,000 and $5,000,000, respectively. Management of the Company believes such insurance is adequate for its existing operations. 6 PATENTS AND PROPRIETARY TECHNOLOGY The Company has 26 United States and 15 foreign patents granted or acquired as well as seven foreign patents pending. These patents expire between 2001 and 2011. The Company licenses proprietary voice verification technology exclusively for its home arrest product. All required licenses associated with fiscal year 1998 usage were purchased in advance. The Company entered into two license agreements during fiscal year 1998 involving exclusive rights to certain tracking technologies related to the criminal justice market. In December 1993, the Company acquired an exclusive license for its Institutional Management System software. There can be no assurance that the protection afforded by these patents and licenses will provide the Company with a competitive advantage, or that the Company will be able to successfully assert its intellectual property rights in infringement actions. In addition, there can be no assurance that the Company's current products or products under development will not infringe other patents or proprietary rights of others. EMPLOYEES At June 30, 1998, the Company had 613 full-time employees and 211 part-time or temporary employees, none of whom were represented by a union. Of these 824 employees, 371 were electronic monitoring staff, 380 community correctional services employees, 31 corrections information services personnel and 42 corporate staff. Management believes that its relations with its employees are good. EXECUTIVE OFFICERS OF THE COMPANY At June 30, 1998 the executive officers of the Company were as follows:
- ------------------------------------ ----------- ---------------------------------------------------- Name Age Position - ------------------------------------ ----------- ---------------------------------------------------- David J. Hunter 53 President and Chief Executive Officer - ------------------------------------------------------------------------------------------------------- Mckinley C. Edwards, Jr. 56 Executive Vice President and Chief Operating Officer, Secretary and Treasurer - ------------------------------------------------------------------------------------------------------- Jacqueline A. Chamberlin 43 Vice President of Finance and Chief Financial Officer =======================================================================================================
All executive officers serve at the discretion of the Board of Directors. David J. Hunter joined the Company in June 1981 and served as Operations Manager and Vice President of Operations from January 1982, Vice President and Chief Operating Officer since July 1982, and was elected to the Board of Directors in December 1982. In April 1985, he was elected President and Chief Executive Officer. Mckinley C. Edwards, Jr. has been Executive Vice President and Chief Operating Officer since November 1996. He joined the Company in November 1983 as Manufacturing Manager, was elected Vice President of Manufacturing in November 1984. In April 1985 he was promoted to Executive Vice President of Operations was elected as Treasurer and Secretary in June 1986 and was elected to the Board of Directors in 1990. 7 Jacqueline A. Chamberlin has been Vice President of Finance and Chief Financial Officer since November 1993. She joined the Company in January 1983 and served as Accounting Manager through November 1985, Controller until May 1992 and Vice President of Accounting up to November 1993. ITEM 2. PROPERTIES. The Company currently leases approximately 75,000 square feet at its two facilities located in Boulder, Colorado. The leases for these facilities expire in September 2010. Under certain conditions both leases provide BI with an option to terminate, with a one-year notice, beginning in September 2000. The Company also leases approximately 10,400 square feet for its eastern monitoring office in Anderson, Indiana. The lease, dated November 24, 1995, expires in September 2005 with an option to terminate after four years and a second option to terminate after seven years. In addition, the Company leases facilities at 62 other locations for a total of approximately 129,000 square feet. These facilities are associated with its day reporting and probation services and are located in Georgia, Tennessee, Colorado, New Mexico, South Carolina, Oregon, Florida, Illinois, New Jersey and Washington. Many of the Company's leases contain renewal rights and cancellation rights. At the present time, such facilities are adequate for the Company's purposes. ITEM 3. LEGAL PROCEEDINGS. On May 6, 1997, Melody Trout filed a complaint naming State Farm Mutual Automobile Insurance Co., General Securities Services Corporation, Billy Wyatt, and BI Incorporated as defendants in the Circuit Court of Stoddard County, Missouri, alleging negligence in manufacturing by BI Incorporated, negligence in monitoring by General Securities Services Corporation and reckless and wanton behavior by Billy Wyatt resulting in a wrongful death. The Plaintiff seeks damages in the amount of $3,000,000. On January 29, 1998, a settlement was reached concerning a complaint filed by Jeremy Cohlhepp on October 29, 1996. The settlement amount was immaterial and within insurance coverage limits. On February 6, 1998, Bill M. Kirby filed a complaint naming BI Incorporated as the defendant. The suit alleges negligence and misrepresentation resulting in a wrongful death. The plaintiff seeks damages of $3,977,500. On March 12, 1998, Arturo Marines filed a complaint naming the State of Texas Board of Pardons and Paroles and BI Incorporated as defendants. The civil suit was filed for product liability, and misrepresentation, breach of warranty, and general negligence. The plaintiff seeks $250 million in damages. On April 6, 1998, Joyce Cerda filed a complaint naming BI Incorporated as the defendant in the Court of Cook County. The suit was filed for product liability and negligence. The plaintiff seeks medical and funeral expenses in excess of $150,000. On July 20, 1998, Joseph Gill Sr. filed a complaint naming Rudolph McGriff, City of Philadelphia and BI Incorporated as defendants in the Court of Common Pleas in Philadelphia County, 8 Pennsylvania. The suit brings two counts, a survival action and a wrongful death action, and asks for damages in excess of $100,000. On August 27, 1997, CB Partners, Michael Connor and Michael Connor, IRA, filed a Class Action Complaint in District Court, County of Boulder, State of Colorado, against the Company and certain of its officers and directors, being David J. Hunter, Mckinley C. Edwards, Jr., Richard Willmarth, Jacqueline A. Chamberlin, Frank N. Randall, Jr., and Jeremy N. Kendall. The complaint includes various claims under the Colorado Securities Act as well as for common law fraud. The complaint alleges, among other things, that various public filings and press releases made by the Company in 1996 contained material misstatements and omissions, including that the Company's revenues and earnings were inflated as a result of allegedly shipping products to customers with the understanding that the customer had no obligation to pay for the products and could return them at any time. The Complaint also alleges that the Company failed to disclose (a) the nature of the competition in its monitoring services line of business and (b) that one of the Company's products in the in-home alcohol testing area did not work properly and was therefore unmarketable. The complaint seeks rescission, damages in an unspecified amount and attorneys' fees on behalf of all persons who purchased the Company's common stock between April 24, 1996 and September 12, 1996. The Company believes the complaint is without merit and intends to defend against this action. The matter is presently in discovery. Management believes the Company has adequate legal defenses and/or insurance coverage against all claims and intends to defend them. There can be no assurances however, that any individual case will result in an outcome favorable to the Company. In the event of any adverse outcome, neither the amount nor the likelihood of any potential liability which might result is reasonably estimable. The Company currently believes that the amount of the ultimate potential loss would not be material to the Company's financial position or results of operations. However, an adverse future outcome in any individual case, including legal defense costs, could have a material effect on the Company's reported results of operations in a particular quarter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 9 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock is traded on the NASDAQ Stock Market under the symbol "BIAC." The following table sets forth for the periods indicated the range of high and low bid prices for the Common Stock as reported by NASDAQ. The bid quotations represent inter-dealer quotations, without retail mark-ups, mark- downs or commissions and may not necessarily represent actual transactions.
- ------------------------------------------------------------------------------------------------- Fiscal Year Ended June 30, 1998 - ------------------------------------------------------------------------------------------------- High Low - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- First Quarter $ 9.13 $ 6.38 - ------------------------------------------------------------------------------------------------- Second Quarter 9.25 6.75 - ------------------------------------------------------------------------------------------------- Third Quarter 12.75 8.75 - ------------------------------------------------------------------------------------------------- Fourth Quarter 11.88 9.00 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- Fiscal Year Ended June 30, 1997 - ------------------------------------------------------------------------------------------------- First Quarter $14.00 $ 6.00 - ------------------------------------------------------------------------------------------------- Second Quarter 8.25 6.13 - ------------------------------------------------------------------------------------------------- Third Quarter 7.88 6.50 - ------------------------------------------------------------------------------------------------- Fourth Quarter 8.00 5.88 =================================================================================================
As of June 30, 1998, there were approximately 4,500 holders of record of the Common Stock. The Company has never paid cash dividends. It is the Company's intention to retain earnings to finance the expansion of its business, and therefore it does not anticipate paying cash dividends in the foreseeable future. Payment of dividends, if any, will be at the discretion of the Board of Directors after taking into account various factors, including the Company's financial condition, results of operations, current and anticipated cash needs, plans for expansion and restrictions, if any, under its debt obligations. The Company's current line of credit requires the Company to obtain the lender's prior written consent to the payment of any dividends. Currently, however, the Company does not owe any amounts on the line of credit, and therefore is not subject to these dividend restrictions. 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The following selected Consolidated Statement of Operations data and Consolidated Balance Sheet data have been derived from the Consolidated Financial Statements of the Company. The financial data set forth below should be read in conjunction with the Consolidated Financial Statements and notes thereto and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this Annual Report on Form 10-k. Historical results are not necessarily indicative of results for any future period.
Year Ended June 30, ------------------------------------------------ 1998 1997 (2) 1996 1995 1994 ------------------------------------------------ (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Total revenue $62,001 $48,401 $39,212 $29,874 $22,701 Cost of operations 30,938 23,461 19,200 13,788 10,645 ------- ------- ------- ------- ------- Gross profit 31,063 24,940 20,012 16,086 12,056 Selling, general and administrative expenses 18,186 14,672 10,916 8,873 8,494 Provision for doubtful accounts 1,806 1,732 228 374 60 Depreciation and amortization 3,224 2,241 1,395 1,250 1,233 Research and development expenses 3,034 3,002 2,661 2,117 1,553 Income before income taxes and extraordinary item 4,813 3,293 4,812 3,472 716 Income tax provision (2,142) (1,460) (1,949) (1,150)(1) (352) ------- ------- ------- ------- ------- Income before extra- ordinary item 2,671 1,833 2,863 2,322 364 Cumulative effect on prior years of change in method of accounting for income taxes 75 ------- ------- ------- ------- ------- Net income $ 2,671 $ 1,833 $ 2,863 $ 2,322 $ 439 ======= ======= ======= ======= ======= Diluted earnings per share $ .34 $ .25 $ .40 $ .34 $ .06 ======= ======= ======= ======= ======= Weighted average number of outstanding common shares - diluted 7,841 7,451 7,160 6,883 7,227 ======= ======= ======= ======= ======= BALANCE SHEET DATA: Working capital 14,825 14,541 $18,172 $12,938 $11,709 Total assets 61,989 55,421 42,820 36,881 36,871 Long-term debt, net of current maturities (excludes Capital Lease) 0 0 0 146 209 Total stockholders' equity 44,907 40,620 37,206 32,332 32,186
(1) Fiscal year 1995 tax expense was reduced by $225,000 ($.03 per share) by the release of a deferred tax asset valuation allowance. (2) During fiscal 1997 the Company acquired CCC which provides probation services and PCI which provides day reporting services. See Note six of the consolidated financial statements. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain information in "Management's Discussion and Analysis" and other statements periodically reported by the Company contain forward-looking statements that involve risks and uncertainties. Management believes that its expectations are based on reasonable assumptions. However, no assurances can be given that its goals will be achieved. It should be noted that the earnings history of the Company has not been consistent year to year. Factors that could cause actual results to differ materially include, but are not limited to: fluctuations due to timing of award of government contracts; pricing pressures; liability in excess of insurance coverage; changes in federal, state and local regulations; new product introductions by competitors or unexpected delays of new product introductions by the Company; raw material availability; changes in telecommunications regulations or technologies; the inability of the Company or others upon which it depends to adequately address and correct problems resulting from "Year 2000" issue; or the loss of a significant contract through lack of appropriations or otherwise. RESULTS OF OPERATIONS: The following tables provide a breakdown of selected results by Business Unit. The total amounts are audited and agree with the audited Consolidated Statement of Operations. The Company's Business Units consist of Electronic Monitoring (EM), Community Correctional Services (CCS) and Corrections Information Systems (CIS).
Twelve Months Ended June 30, 1998 ---------------------------------------------------------------------------------------- EM CCS CIS Total ---------------------------------------------------------------------------------------- Revenue (unaudited, in thousands) Recurring Revenue Service & Monitoring $26,848 $16,688 $ 180 $43,716 Rental 742 742 Direct Sales 13,822 3,195 17,017 Other Income 526 526 ---------------------------------------------------------------------------------------- Total Revenue 41,938 16,688 3,375 62,001 Gross Profit 23,729 6,232 1,102 31,063 Gross Profit % 56.6% 37.3% 32.7% 50.1%
Twelve Months Ended June 30, 1997 ---------------------------------------------------------------------------------------- EM CCS CIS Total ---------------------------------------------------------------------------------------- Revenue (unaudited, in thousands) Recurring Revenue Service & Monitoring $22,551 $10,413 $ 197 $33,161 Rental 1,008 1,008 Direct Sales 12,750 1,211 13,961 Other Income 271 271 ---------------------------------------------------------------------------------------- Total Revenue 36,580 10,413 1,408 48,401 Gross Profit 19,975 4,972 (7) 24,940 Gross Profit % 54.6% 47.7% (0.5)% 51.5%
12
Twelve Months Ended June 30, 1996 -------------------------------------------------------------------------------------- EM CCS CIS Total -------------------------------------------------------------------------------------- Revenue (unaudited, in thousands) Recurring Revenue Service & Monitoring $21,357 $21,357 Rental 832 832 Direct Sales 15,094 $ 1,522 16,616 Other Income 407 407 -------------------------------------------------------------------------------------- Total Revenue 37,690 1,522 39,212 Gross Profit 20,264 (252) 20,012 Gross Profit % 53.8% (16.6)% 51.0%
Revenue Total revenue for fiscal year 1998 increased 28.1% to $62,001,000 compared to $48,401,000 in fiscal year 1997. The Company is continuing to expand recurring revenue which includes service, monitoring and rental income although there can be no assurances that the Company will be successful in continuing this expansion. These revenue sources, which are generated within all three business units increased to $44,458,000 or 71.7% of total revenue in fiscal 1998 from $34,169,000 or 70.6% of total revenue in fiscal 1997. All three business units reported revenue increases for fiscal 1998 as compared to fiscal 1997. The EM business unit revenue increased 14.6% to $41,938,000 in fiscal 1998 compared to $36,580,000 in fiscal 1997. Some government agencies purchase equipment and run their own monitoring programs, others elect to utilize both monitoring equipment and services offered by the Company, while other agencies purchase equipment from the Company and then contract with the Company for the service portion of the monitoring. Recurring revenue which is comprised of electronic monitoring and rental income increased 17.1% to $27,590,000 in fiscal 1998 from $23,559,000 in fiscal 1997. This increase in recurring revenue relates to the continuing trend of government agencies to contract for electronic monitoring rather than purchasing equipment. During the current year the Company was awarded a renewal of a significant monitoring contract representing 26% of fiscal 1998 monitoring revenue. Direct sales revenue increased to $13,822,000 in fiscal 1998 from $12,750,000 in fiscal 1997. The CCS business unit recurring revenue increased $6,275,000 or 60.3% to $16,688,000 in fiscal 1998 compared to $10,413,000 in fiscal 1997. CCS provides probation and day reporting services in 12 states through its 65 community correctional service centers. During fiscal 1998 CCS opened 12 new centers and increased the number of offenders receiving services from approximately 35,000 to approximately 40,000. During fiscal 1997 the Company acquired two companies providing probation and day reporting services, discussed in Note six to the consolidated financial statements. These acquisitions accounted for $15,167,000 of revenue in fiscal 1998. Fiscal 1997 acquisition revenue was generated through nine months of revenue from probation services and five months of revenue from day reporting services totaling $9,082,000. The Company anticipates continued revenue growth in this business unit for fiscal year 1999. The CIS business unit significantly increased revenue by 139.7% to $3,375,000 in fiscal 1998 compared to $1,408,000 in fiscal 1997. Direct sales revenue associated with the Institutional Management System (IMS) applications software product increased to $3,195,000 in fiscal 1998 from $1,211,000 in fiscal 1997. The CIS business unit has contracts lasting from one month to approximately twenty four months in duration. This substantial increase in revenue is a direct result of the significant increase in new contracts awarded which is reflected in the $5,300,000 of backlog as of the end of fiscal year 1998. 13 Total revenue increased 23.4% to $48,401,000 in fiscal 1997 from $39,212,000 in fiscal 1996. Direct sales decreased $2,655,000 or 16.0% to $13,961,000 in fiscal 1997 compared to $16,616,000 in fiscal 1996. This decrease was due to a change in market strategy emphasizing recurring revenue. Service, monitoring and rental income increased to $34,169,000 in fiscal year 1997 or 54.0% over the $22,189,000 in fiscal 1996. This increase relates largely to two acquisitions in the CCS business unit during fiscal 1997, discussed in Note six to the consolidated financial statements. Gross Profit Total gross profit as a percentage of total revenue for fiscal year 1998 decreased to 50.1% or $31,063,000 compared to 51.5% or $24,940,000 in fiscal year 1997. The decline in overall gross profit reflects the increasing significance of the CCS business unit. Probation and day reporting services offered through the CCS business unit require relatively high direct labor costs which are recognized as direct costs of sales which reduce gross profit. The EM business unit increased its total gross profit to 56.6% or $23,729,000 in fiscal 1998 compared to 54.6% or $19,975,000 in fiscal 1997. This increase was due to a substantial improvement in gross profits on direct sales revenue. Direct sales gross profit increased to 56.9% in fiscal 1998 compared to 51.9% in fiscal 1997 as a result of manufacturing cost improvements and favorable production variances during fiscal 1998. EM recurring revenue gross profit was comparable in both periods at approximately 55%. The CCS business unit had a decrease in its gross profit to 37.3% for fiscal year 1998 compared to 47.7% in fiscal 1997. The 1998 decrease was due to additional integration costs incurred in fiscal 1998 associated with the probation and day reporting service acquisitions in fiscal 1997 discussed in Note six to the consolidated financial statements, as well as start up expenses associated with opening 12 new probation and day reporting service offices in the southeast, central and northwest regions. In addition, the 1998 decrease was partially due to the acquisition of the day reporting company in January 1997 which provides services in Colorado, New Mexico, Illinois and Oregon. This acquisition affected gross profits for five months of fiscal 1997 and for twelve months of fiscal 1998. Day reporting services require relatively high direct labor costs which are recognized as direct costs of sales which reduce gross profit. The Company expects cost reductions and improved operating efficiencies to increase the CCS gross profit percentage over time. The CIS business unit improved its gross profit substantially to 32.7% in fiscal 1998 compared to (0.5)% in fiscal 1997. This improvement is a result of continued cost reductions and increased order volume. Increased revenue along with the completion of the open system architecture in fiscal 1998 is expected to improve the CIS gross profit percentage over time. Total gross profit as a percentage of total revenue increased to 51.5% in fiscal 1997 compared to 51.0% in fiscal 1996. Gross profit on direct sales was 47.6% in fiscal 1997 compared to 48.4% in fiscal 1996. The IMS product line included in direct sales, as a result of cost reductions, improved its gross profit to a slightly profitable position in fiscal 1997 as compared to a negative gross profit in fiscal 1996. Service, monitoring and rental gross profit increased to 52.8% in fiscal 1997 compared to 52.1% in fiscal 1996. Higher service usage rates, and lower costs related to monitoring labor and telephone expenses resulted in improved margins for electronic monitoring in fiscal 1997. Selling, General and Administrative (S,G&A) S,G&A expenses for the fiscal year 1998 increased $3,514,000 to $18,186,000 compared to $14,672,000 in the corresponding period a year ago. S,G&A expense as a percentage of total revenue decreased to 29.3% in fiscal 1998 compared to 30.3% in fiscal 1997. The Company expects S,G&A expenses for fiscal year 1999 to decrease slightly as a percentage of total revenue as compared to fiscal year 1998. 14 The EM business unit increased its S,G&A expenses $1,259,000 in fiscal 1998 resulting in expenses of 29.6% of EM revenue in fiscal 1998 compared to 30.5% in fiscal 1997. This increase is related to market expansion and diversification as well as increases in account management and technical services related to increasing customer satisfaction and growth of existing customer sites. The Company expects to increase marketing expenses associated with continuing market expansion activities throughout fiscal year 1999. The CCS business unit increased its S,G&A expenses $1,697,000 in fiscal 1998 as compared to fiscal 1997 resulting in expenses of 27.0% of CCS revenue in fiscal 1998 compared to 26.9% in fiscal 1997 as a result investments in infrastructure and staffing to support the growth of the business unit. The CIS business unit increased its S,G&A expenses $558,000 in fiscal 1998 but as a result of a significant increase in revenue decreased expenses to 37.9% of CIS revenue in fiscal 1998 compared to 51.2% in fiscal 1997. This increase was associated with infrastructure costs necessary to manage deployment and implementation of existing contracts. S,G&A expenses increased to $14,672,000, or 30.3% of revenue in 1997 from $10,916,000, or 27.8% of revenue in 1996. The increase of $3,756,000 was largely related to expenses associated with selling, marketing, account management and commission expense on increased revenue, as well as market expansion and diversification expenses. At June 30, 1997, the Company had 605 full-time employees, compared to 283 employees at June 30, 1996. This increase is largely explained by the addition of 297 full time employees associated with the acquisitions discussed in Note six of the consolidated financial statements. Provision for Doubtful Accounts The provision for doubtful accounts was $1,806,000 or 2.9% of total revenue in fiscal 1998 compared to $1,732,000 or 3.6% of total revenue in fiscal 1997. The provision relates largely to the Company's CCS business unit. Probation service revenue is 100% paid by the offender and carries an increased risk of default. Day reporting revenue for fiscal 1998 was 24.5% paid by the offender and the remaining paid by government agencies. The Company has initiated collection activities that have improved its collection results. The Company accrued approximately 10% of CCS revenue to allowance for doubtful accounts during 1998 compared to approximately 13% in 1997. The Company is implementing additional collection procedures to reduce payment defaults within the CCS business unit. The Company believes the industry average payment default associated with similar for-profit companies is approximately 20%. The EM business unit decreased doubtful account expenses by $185,000 in fiscal 1998 compared to fiscal 1997 due to emphasizing collection improvements. The provision for doubtful accounts increased $1,504,000 to $1,732,000 in fiscal 1997 from $228,000 in fiscal 1996. This increase relates largely to the Company's new probation service income during 1997. In 1996, revenue was generated by either government agencies or qualified service providers, both of which carried extremely low risk of payment default. Probation service income is 100% paid by offenders and carries a higher risk of default. In response to this the Company accrued approximately 13% of CCS revenue to allowance for doubtful accounts. Amortization and Depreciation (A&D) A&D expenses increased $983,000 to $3,224,000 or 5.2% of revenue in fiscal 1998 from $2,241,000 or 4.6% of revenue in fiscal 1997. Approximately $150,000 was due to a full year of amortization of acquisition goodwill in fiscal 1998 compared to a partial year of amortization in fiscal 1997, see Note six of the consolidated financial statements. The remaining increase was due primarily to additions to property, plant and equipment during 1998. 15 A&D expenses increased $846,000 to $2,241,000 in 1997 from $1,395,000 in 1996. The increase was due primarily to additions to property, plant and equipment and the amortization of acquisition goodwill discussed in Note six of the consolidated financial statements. Research and Development Expenses (R&D) R&D expenses increased $32,000 to $3,034,000 in 1998 from $3,002,000 in 1997. The Company's R&D expenditures were largely related to EM business unit expenses associated with software development efforts for improved automation to the Company's electronic monitoring centers, and the evaluation and enhancement of existing electronic monitoring products. The Company expects to continue expenditures for improvements to the monitoring operations and development of future home arrest products in fiscal 1999. As a percentage of EM revenue EM business unit R&D expense was 5.8% in fiscal 1998 compared to 6.9% in fiscal 1997. R&D expenses increased to $3,002,000 in 1997 from $2,661,000 in 1996. The increase was related to software development for automation improvements to the Company's monitoring center as well as development of future home arrest products. Net Income and Income Taxes The Company recorded income tax expense of $2,142,000 and $1,460,000 for 1998 and 1997 respectively, which differs from the statutory rate largely as a result of state income taxes and non-deductible goodwill amortization expense. For fiscal 1998, the Company had net income of $2,671,000 or $.34 diluted earnings per share compared to fiscal 1997 net income of $1,833,000 or $.25 diluted earnings per share. The changes in net income relate primarily to the items discussed above. Impact of Year 2000 Issues The Year 2000 issue is related to computer software utilizing two digits rather than four to define the appropriate year. As a result, any of the Company's computer programs or any of the Company's suppliers or vendors that have date sensitive software may incur system failures or generate incorrect data if "00" is recognized as 1900 rather than 2000. The Company has been addressing Year 2000 issues throughout fiscal year 1998 and has modified or is in the process of modifying any products or services that are affected by Year 2000 issues. The Company has a formal comprehensive Year 2000 readiness plan in place and under the oversight of executive management. The Company estimates that approximately $100,000 of costs have been incurred and expensed in fiscal year 1998 related to addressing Year 2000 events. It is estimated that another $200,000 to $300,000 of costs will be incurred during fiscal year 1999 related to completion of the Year 2000 readiness plan. Approximately two-thirds of this amount will be related to fixed asset additions for new computer related equipment. The remaining one-third will be expensed as incurred. The Company's greatest risk for a material disruption in services lies in a potential disruption of telecommunication services due to an external telecommunication service provider's failure to be Year 2000 compliant and the resulting impact upon the Company's monitoring services. The Company has contacted and obtained assurances from some of its telecommunications providers, MCI, AT&T and WorldCom that their 16 networks are Year 2000 compliant. The Company is currently seeking similar assurances from Sprint, US West, Ameritech and a few smaller regional providers. BI has a redundant monitoring system that would allow the eastern monitoring center to process alerts if for any reason the western monitoring center was to go down, or vice versa. In addition, the Company has backup telecommunication provider connectivity if for any reason the primary carrier has a disruption in service. The Company has been in the process throughout fiscal year 1998 of replacing its internal business and business unit operating computer systems. These replacements were required to meet current and future needs of the business as well as to reduce various administrative and operating functions. These new systems are Year 2000 compliant and are scheduled for deployment in fiscal year 1999. The systems have been independently verified and tested to be Year 2000 compliant. The Company believes that based upon changes and modifications already made and those that are currently planned for implementation in fiscal year 1999 the impact of Year 2000 issues will not be material. However, to the extent the Company or third parties on which it relies do not timely achieve Year 2000 readiness, the Company's results of operations may be adversely affected. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1998, the Company generated $7,399,000 of cash from operating activities, realized $450,000 through the liquidation of short-term investments, received $1,343,000 from the issuance of common stock associated with the exercise of stock options, expended $5,032,000 for capital equipment and leasehold improvements, expended $3,176,000 for equipment associated with rental and monitoring contracts, and expended $826,000 for capitalized internally developed software. The total of all cash flow activities resulted in a decrease in the balance of cash and cash equivalents of $548,000 for fiscal 1998. The Company's working capital increased $284,000 to $14,825,000 at June 30, 1998. This increase was primarily the result of increases in accounts receivable as a result of increased sales volume in fiscal 1998 and investment in sales- type leases. The Company is emphasizing improved collections across all business units and expects to reduce its past due receivables in fiscal year 1999 as compared to fiscal 1998. During fiscal 1998 direct sales customers have increasingly requested and obtained financing through the Company in the form of sales-type leases. Investment in lease financing has increased $1,109,000 during fiscal 1998. Such lease financing carries a low risk of default and is at favorable interest rates to the Company. The Company has an available $5,000,000 line of credit with Bank One, Boulder, Colorado which expires in October 1999. No amounts were drawn against this line at June 30, 1998. Working capital may be obtained by financing certain operating and sales- type leases under recourse and non-recourse borrowing arrangements. These borrowings would be collateralized with a security interest in the leased equipment. At June 30, 1998, the Company had unfunded leases in the amount of $7,866,000 which could be used as collateral for future borrowing arrangements. The Company believes it will have adequate sources of cash and available bank line of credit to fund anticipated working capital needs for its existing business through fiscal 1999. New Accounting Pronouncements 17 In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 establishes standards for the reporting and presentation of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company will adopt SFAS 130 in 1999 and does not expect such adoption to have a material impact on the Company's results of operations. In June 1997, the FASB issued SFAS 131, Disclosure about Segments of an Enterprise and Related Information. SFAS 131 revises the current requirements for reporting business segments by redefining such segments according to management's disaggregation of the business for purposes of making operating decisions and allocating internal resources. SFAS 131 is effective for fiscal years beginning after December 15, 1997, and the Company will adopt SFAS 131 in 1999. In October 1997, the FASB approved AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition and the subsequent amendment thereto. SOP 97-2 supersedes SOP 91-1, Software Revenue Recognition and is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company will adopt SOP 97-2 in 1999 and does not expect such adoption to have a material impact on its financial position or results of operations. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Report of Independent Accountants and the Consolidated Financial Statements are set forth on pages F-1 to F-18 of this report. Schedule II is included on page F-19. All other financial statement schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no changes in accountants and no significant disagreements with accountants on accounting and financial disclosure. 18 PART III Items 10 (except as to executive officers, see Part I), 11, 12 and 13 are hereby incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on November 5, 1998. ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements Report of Independent Accountants Consolidated Balance Sheet at June 30, 1998 and 1997 Consolidated Statement of Operations for each of the three years in the period ended June 30, 1998 Consolidated Statement of Changes in Stockholders' Equity for each of the three years in the period ended June 30, 1998 Consolidated Statement of Cash Flows for each of the three years in the period ended June 30, 1998 Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedules: Schedule II - Valuation and qualifying accounts All other financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (b) The Company did not file any reports on Form 8-K during the last quarter of the period covered by this report. (c) Exhibits: 3.1 Articles of Incorporation, as amended, of the Registrant (1) 3.2 Bylaws, as amended, of the Registrant (2) 4.1 Form of Common Stock Certificate (3) 4.2 BI Incorporated Employee Non-Qualified Stock Option Plan. Filed as an exhibit to Form S-8, March 24, 1988 (Registration No. 33-20843), and incorporated by reference, and modified by exhibit to Form S-8, filed with the Commission on December 28, 1990, and incorporated by reference. 4.3 BI Incorporated Director and Key Employee Non-Qualified Stock Option Plan. Filed with the Commission on May 29, 1990, as an exhibit to Form S-8, and incorporated by reference, and modified by exhibit to Form S-8, filed with the Commission on April 28, 1993, and incorporated by reference. 19 4.4 BI Incorporated 1991 Employee Stock Purchase Plan. Filed with the commission on December 28, 1990 as an exhibit to Form S-8, Registration No 33-38428, and incorporated by reference. 4.5 BI Incorporated 1991 Stock Option Plan. Filed with the Commission on December 20, 1991 as an exhibit to Form S-8, and modified by exhibit to Form S-8, filed with the Commission on April 28, 1993, and incorporated by reference, and modified by exhibit to Form S-8, filed with the Commission on March 2, 1995, and incorporated by reference. 4.6 BI Incorporated 1996 Stock Option Plan. Incorporated by reference from the Company's proxy statement for the annual meeting of shareholders held November 7, 1996. *4.7 Property lease between the Company and Terrence J. O'Connor (landlord) dated May 15, 1990 with Addendum's dated February 9, 1996 and October 10, 1996 concerning building located at 6400 Lookout Road, Boulder, Colorado, 80301. *4.8 Property leases between the Company and Point II, LLC (landlord) concerning building located at 6325 Gunpark Drive, Boulder, Colorado, 80301 dated February 9, 1996 with Addendum's dated June 13, 1996 and February 26, 1997 and lease dated February 21, 1997. 10.2 Form of Employment Agreement, previously filed with the Commission as an exhibit to 1994 Form 10-K and incorporated by reference. 21.1 Subsidiaries of the Registrant *23.1 Consent of PricewaterhouseCoopers LLP *27.1 Financial Data Schedules * Filed herewith IN THE EVENT THAT YOU HAVE RECEIVED A COPY OF THIS ANNUAL REPORT ON FORM 10-K WHICH DOES NOT CONTAIN EXHIBITS, THE COMPANY WILL, UPON WRITTEN REQUEST DIRECTED TO JACKIE CHAMBERLIN AT THE COMPANY'S PRINCIPAL OFFICES REFERRED TO ON THE 10-K COVER PAGE, PROVIDE A COPY OF ANY EXHIBIT FILED AS PART OF THIS REPORT UPON PAYMENT OF A REASONABLE FEE. (1) Incorporated by reference from the Company's Proxy Statement for the Annual meeting of shareholders held November 7, 1991. (2) Incorporated by reference from the Company's Registration Statement on Form S-18 (Registration No. 2-82311-D) effective May 4, 1983. (3) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-36683) filed September 4, 1990. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. BI Incorporated By: ______________________ David J. Hunter President Date: , 1998 ----------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- - ------------------------ David J. Hunter President, Chief Executive Officer and Director (Principal Executive Officer) ___________, 1998 - ------------------------ Jacqueline A. Chamberlin Vice President of Finance (Principal Financial and Accounting Officer) ___________, 1998 - ------------------------ Jeremy N. Kendall Chairman ___________, 1998 - ------------------------ William E. Coleman Vice Chairman ___________, 1998 - ------------------------ Mckinley C. Edwards, Jr. Director ___________, 1998 - ------------------------ Beverly J. Haddon Director ___________, 1998 - ------------------------ Perry M. Johnson Director ___________, 1998 - ------------------------ Barry J. Nidorf Director ___________, 1998 - ------------------------ Byam K. Stevens, Jr. Director ___________, 1998 21 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF BI INCORPORATED: IN OUR OPINION, THE CONSOLIDATED FINANCIAL STATEMENTS LISTED IN THE INDEX APPEARING UNDER ITEM 14(A) 1. AND 2. ON PAGE 19 PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF BI INCORPORATED AND ITS SUBSIDIARIES AT JUNE 30, 1998 AND 1997, AND THE RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1998, IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. THESE FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT; OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON OUR AUDITS. WE CONDUCTED OUR AUDITS OF THESE STATEMENTS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING STANDARDS WHICH REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS, ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AND EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR THE OPINION EXPRESSED ABOVE. PRICEWATERHOUSECOOPERS LLP BROOMFIELD, COLORADO August 14, 1998 F-1 BI INCORPORATED CONSOLIDATED BALANCE SHEET (in thousands)
June 30, June 30, 1998 1997 ------------------------- ------------------------- ASSETS Current assets Cash and cash equivalents $ 1,146 $ 1,694 Short-term investments 0 450 Receivables, net 12,188 8,647 Investment in sales-type leases, net 4,337 3,993 Inventories, net 3,393 3,861 Deferred income taxes 751 779 Prepaid expenses 866 665 ------- ------- Total current assets 22,681 20,089 Investment in sales-type leases, net 3,529 2,764 Rental and monitoring equipment, net 4,872 4,366 Property and equipment, net 13,250 10,667 Software, net 2,282 1,987 Intangibles, net 12,047 12,908 Other assets 3,328 2,640 ------- ------- $61,989 $55,421 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 3,163 $ 1,836 Accrued compensation and benefits 1,940 1,409 Deferred revenue 1,647 1,362 Income taxes payable 347 404 Other liabilities 759 537 ------- ------- Total current liabilities 7,856 5,548 Capital lease obligation 6,897 7,030 Deferred revenue and other 2,329 2,223 Commitments (Notes 7 and 10) Stockholders' equity Common stock, no par value, 75,000 shares authorized; 7,640 shares issued and outstanding June 30, 1998 and 7,417 shares issued and outstanding June 30, 1997 34,076 32,460 Retained earnings 10,831 8,160 ------- ------- Total stockholders' equity 44,907 40,620 ------- ------- $61,989 $55,421 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-2 BI INCORPORATED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands except per share amounts)
Year ended June 30, ----------------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------- Revenues Service and monitoring income $43,716 $33,161 $21,357 Direct sales 17,017 13,961 16,616 Rental income 742 1,008 832 Other income 526 271 407 ------- ------- ------- Total revenues 62,001 48,401 39,212 ------- ------- ------- Costs and expenses Cost of service and monitoring income 22,616 15,859 10,338 Cost of direct sales 8,101 7,320 8,570 Cost of rental income 221 282 292 Selling, general and administrative expenses 18,186 14,672 10,916 Provision for doubtful accounts 1,806 1,732 228 Amortization and depreciation 3,224 2,241 1,395 Research and development expenses 3,034 3,002 2,661 ------- ------- ------- Total costs and expenses 57,188 45,108 34,400 ------- ------- ------- Income before income taxes 4,813 3,293 4,812 Income tax provision (2,142) (1,460) (1,949) ------- ------- ------- Net income $ 2,671 $ 1,833 $ 2,863 ======= ======= ======= Basic earnings per share $0.36 $0.25 $0.42 ======= ======= ======= Weighted average number of outstanding common shares - basic 7,506 7,252 6,781 ======= ======= ======= Diluted earnings per share $0.34 $0.25 $0.40 ======= ======= ======= Weighted average number of outstanding common and common equivalent shares - diluted 7,841 7,451 7,160 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 BI INCORPORATED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
Common Stock Treasury Stock Retained ------------------------------------------------------- Shares Amount Shares Amount Earnings Total ---------------------------------------------------------------------------------- Balance June 30, 1995 6,865 $28,883 (154) ($15) $ 3,464 $32,332 Exercise of stock options and warrants 405 2,045 2,045 Stock repurchases and retirement (290) (987) 154 15 (972) Issuance of common stock pursuant to stock purchase plan 24 151 151 Tax benefit from exercise of stock options 787 787 Net income 2,863 2,863 ------ ------ ------ ------ ------ ------ Balance June 30, 1996 7,004 30,879 0 0 6,327 37,206 Exercise of stock options and warrants 200 1,186 1,186 Stock repurchases and retirement (360) (2,559) (2,559) Issuance of common stock pursuant to stock purchase plan 15 90 90 Tax benefit from exercise of stock options 183 183 Stock issued as part of acquisition 558 2,681 2,681 Net income 1,833 1,833 ------ ------ ------ ------ ------- ------- Balance June 30, 1997 7,417 32,460 0 0 8,160 40,620 Exercise of stock options 202 1,198 1,198 Issuance of common stock pursuant to stock purchase plan 21 145 145 Tax benefit from exercise of stock options 273 273 Net income 2,671 2,671 ------ ------ ------ ------ ------- ------- Balance June 30, 1998 7,640 $34,076 0 $ 0 $10,831 $44,907 ====== ====== ====== ====== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 BI INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
For the twelve months ended June 30, ---------------------------------------------------------------------- 1998 1997 1996 ---------------------------------------------------------------------- Cash flows from operating activities: Net income $ 2,671 $ 1,833 $ 2,863 Adjustments to reconcile net income to net cash from operating activities: Amortization and depreciation 7,133 6,668 5,716 Provision for doubtful accounts 1,806 1,732 228 Provision for (benefit from) deferred income taxes (575) (414) 311 Changes in assets and liabilities: Receivables (5,347) (830) (3,100) Investment in STLs (1,109) 1,034 (1,795) Inventories, net 468 (841) 425 Accounts payable 1,327 (80) 1,079 Accrued expenses 703 (762) 265 Deferred revenue 459 (245) (3) Income taxes payable 217 587 657 Prepaids and other assets (354) 370 (55) ------- -------- ------- Net cash from operating activities 7,399 9,052 6,591 ------- -------- ------- Cash flows from investing activities: Capital expenditures (5,032) (2,522) (1,695) Increase in rental and monitoring equipment (3,176) (2,905) (2,761) Increase in capitalized software (826) (837) (696) Investment in intangibles (623) (309) 0 Cash paid for acquisitions net of cash acquired 0 (4,234) 0 Change in short-term investments 450 649 (723) Other 0 (152) (35) ------- -------- ------- Net cash used in investing activities (9,207) (10,310) (5,910) ------- -------- ------- Cash flows from financing activities: Payments on capital lease obligation (83) (28) 0 Proceeds from issuance of common stock 1,343 1,276 2,196 Purchase of common stock 0 (2,559) (972) ------- -------- ------- Net cash from (used in) financing activities 1,260 (1,311) 1,224 ------- -------- ------- Net change in cash and cash equivalents (548) (2,569) 1,905 Cash and cash equivalents at beginning of period 1,694 4,263 2,358 ------- -------- ------- Cash and cash equivalents at end of period $ 1,146 $ 1,694 $ 4,263 ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BI Incorporated designs, manufactures, markets and supports electronic monitoring systems and other automatic identification devices. The Company provides 24-hour monitoring services using equipment it manufactures. The Company also develops application software systems for jails. In addition, the Company provides probation services to misdemeanant probationers and day reporting services to felony probationers. These products and services are for use by corrections agencies as an integral part of their community correction programs. These consolidated financial statements include the accounts of BI Incorporated and its majority owned subsidiaries (together the "Company"). All intercompany transactions have been eliminated in consolidation. Cash Equivalents and Short-Term Investments The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. Investments with original maturities greater than three months are recorded as short-term investments at cost, which approximates market value. Inventories Inventories are stated at the lower-of-cost-or-market. Cost is determined using the first-in, first-out ("FIFO") method. Intangibles, Property and Equipment Property and equipment are stated at cost and depreciated on a straight- line basis over their estimated useful lives of three to seven years. Rental and monitoring equipment are stated at cost and depreciated on a straight-line basis over two to three years. Repair and maintenance expenses which do not extend the useful lives of the related assets are expensed as incurred. Goodwill represents the excess of purchase price over fair value of net assets acquired and is amortized on a straight-line basis over periods of 10-20 years. The recoverability of goodwill is assessed at least annually, based on undiscounted projected related revenue less undiscounted related costs. Any impairment loss will be recorded to the extent such profits do not exceed the net carrying value of the goodwill. Patents are amortized on a straight-line basis over 14 years. Acquired manufacturing technology is amortized over the greater of the units of production method or five years, on a straight-line basis. Amortization related to goodwill, patents and the manufacturing technology was $1,484,000, $1,364,000, and $1,082,000 in fiscal 1998, 1997, and 1996, respectively. Accumulated amortization of goodwill, patents and the manufacturing technology was $6,884,000 and $5,400,000 at June 30, 1998 and 1997, respectively. F-6 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Research and Development and Capitalized Software The Company capitalizes internally developed software costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of development costs of software products begins once the technological feasibility of the product is established. Based on the Company's product development process, technological feasibility is established upon completion of a detailed program design. Capitalization ceases when such software is ready for general release, at which time amortization of the capitalized costs begins. Capitalized software costs are net of accumulated amortization of $2,647,000 and $2,333,000 as of 1998 and 1997, respectively. Amortization of capitalized internally developed software costs is computed as the greater of: (a) the amount determined by ratio of the product's current revenue to its total expected future revenue or (b) the straight-line method over the product's estimated useful life of five years. During all periods presented herein, the Company has used the straight-line method to amortize such capitalized costs. Amortization of software costs was $531,000, $756,000 and $794,000 in 1998, 1997 and 1996, respectively. Research and development costs relating principally to the design and development of products (exclusive of costs capitalized under SFAS No. 86) are expensed as incurred. The cost of developing routine enhancements are expensed as research and development costs as incurred because of the short time between the determination of technological feasibility and the date of general release of related products. Supplemental Disclosures of Cash Flow Information:
1998 1997 1996 ---------- -------- ---------- Interest received $ 601,000 $711,000 $ 718,000 Interest paid 602,000 393,000 4,000 Income taxes paid 2,230,000 644,000 1,177,000
Interest received from STLs is presented on a constructive receipt basis. Supplemental Schedule of Noncash Investing and Financing Activities:
1998 1997 1996 ----- ---------- ----- Stock issued for acquired companies $ 0 $2,681,000 $ 0 Obligation under capital lease 0 7,140,000 0
F-7 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition Service and monitoring income is recognized monthly over the term of the contract with any prepaid amounts being deferred. Product sales and sales-type leases are generally recorded upon shipment. Rental income associated with operating leases is recorded monthly over the rental period. Revenue from software system sales is recognized using the percentage of completion method. Probation and day reporting service income is recognized as the services are provided. Where extended warranties are sold together with other products in a sales-type lease transaction, related revenues are deferred and recognized ratably over the term of the extended warranty. Costs associated with standard one-year warranties are estimated and accrued at the time of sale. Net Income Per Share Earnings Per Share ("EPS") is computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which specifies the computation, presentation, and disclosure requirements for EPS. SFAS 128 replaces the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution and is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. Common equivalent shares are excluded in periods in which they have an anti- dilutive effect. The Company has adopted SFAS 128 for 1998 and has restated all previously reported per share amounts to conform to the new presentation. For the periods presented the primary difference between weighted average shares outstanding - basic and weighted average shares outstanding - diluted is attributable to outstanding options to purchase common stock. Use of Estimates The Company has prepared these financial statements in conformity with generally accepted accounting principles which require the use of management's estimates. Actual results could differ from the estimates used. Recent Accounting Pronouncements The Company has determined that the adoption of recently issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," No. 131, "Disclosures about Segments of an Enterprise and Related Information" and SOP 97-2, "Software Revenue Recognition," will not have a material impact on its financial condition or results of operations. SOP 97-2 and SFAS Nos. 130 and 131 are effective for fiscal 1999. F-8 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - RELATED PARTY TRANSACTIONS The Company sold products to JEMTEC, Inc. for $75,000, $551,000 and $435,000 during 1998, 1997 and 1996, respectively. The Chairman of the Company is Chairman of JEMTEC, Inc. NOTE 3 - RECEIVABLES, NET INVESTMENT IN SALES-TYPE LEASES, AND OPERATING LEASES - AS LESSOR A significant portion of the Company's receivables and net investment in sales-type leases is due from governmental agencies or divisions thereof. One of these customers accounted for 10% of total revenue in 1998, 12% of total revenue in 1997, and 12% of total revenue in 1996. Receivables Receivables consist of the following (in thousands):
June 30, 1998 1997 -------------------------- Trade, net of allowance for doubtful accounts of $1,316 in 1998 and $1,760 in 1997 $12,145 $8,624 Due from officers and employees 43 23 -------------------------- $12,188 $8,647 ==========================
Net investment in sales-type leases The components of net investment in sales-type leases are as follows (in thousands):
June 30, 1998 1997 ---------------------------- Total minimum lease payments $ 8,530 $ 7,335 Less: Unearned income (664) (577) Less: Allowance for doubtful accounts 0 (1) ---------------------------- Net investment 7,866 6,757 Less: Current portion (4,337) (3,993) ---------------------------- Long-term portion $ 3,529 $ 2,764 ============================
Future minimum lease payments to be received under sales-type leases at June 30, 1998 are $4,772,000, $2,616,000, $1,107,000 and $35,503 in fiscal 1999, 2000, 2001 and 2002, respectively. F-9 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Operating leases - as lessor The Company offers short-term leases to its customers as an alternative to buying its products. The lease term for operating leases is generally up to one year, with payments due monthly, and the Company retains title to the equipment. NOTE 4 - INVENTORIES Inventories consist of the following (in thousands):
June 30, 1998 1997 ------------------------- Raw materials $2,223 $1,682 Work-in-process 588 1,363 Finished goods 902 1,058 ------------------------- 3,713 4,103 Less: allowance for obsolescence (320) (242) ------------------------- $3,393 $3,861 =========================
NOTE 5 - EQUIPMENT AND INTANGIBLES Rental and Monitoring Equipment Rental and monitoring equipment consist of the following (in thousands):
June 30, 1998 1997 --------------------------- Rental equipment $ 1,376 $ 1,173 Monitoring equipment 16,257 13,359 --------------------------- 17,633 14,532 Less: accumulated depreciation (12,761) (10,166) --------------------------- $ 4,872 $ 4,366 ===========================
F-10 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and Equipment Property and equipment consist of the following (in thousands):
June 30, 1998 1997 ---------------------- Property and equipment $22,565 $17,683 Less: accumulated depreciation and amortization (9,315) (7,016) ---------------------- $13,250 $10,667 ======================
Intangibles Intangibles consist of the following (in thousands):
June 30, 1998 1997 ----------------------- Goodwill $14,258 $13,945 Patents 1,673 1,363 Manufacturing technology 3,000 3,000 ----------------------- 18,931 18,308 Less: accumulated amortization (6,884) (5,400) ----------------------- $12,047 $12,908 =======================
NOTE 6 - ACQUISITIONS On October 10, 1996, the Company acquired, in a single transaction, 100% of Community Corrections Corporation ("CCC"), Justice Alternatives Inc. ("JAI") and Tennessee Probation Services Inc. ("TPS"). These companies, collectively referred to as CCC, provide probation services to the corrections industry. The consideration given was 400,000 shares of common stock and $3,000,000 cash. The fair value of assets acquired was $1,160,000 and liabilities assumed were $828,000. The acquisition of CCC was accounted for as a purchase and the assets acquired and liabilities assumed were recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill to be amortized on a straight- line basis over its estimated useful life of 15 years. The operating results of CCC have been included in the results of operations since October 1, 1996. On January 31, 1997, the Company acquired 100% of Peregrine Corrections Incorporated ("PCI"). PCI provides day reporting services to the corrections industry. The consideration given was 157,895 shares of common stock and $1,251,000 cash. The fair value of assets acquired was $403,000 and liabilities assumed were $330,000. F-11 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The acquisition of PCI was accounted for as a purchase and the assets acquired and liabilities assumed were recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill to be amortized on a straight- line basis over its estimated useful life of 15 years. The operating results of PCI have been included in the results of operations since February 1, 1997. NOTE 7 - AVAILABLE FINANCING AND LEASE COMMITMENTS The Company has an available bank line of credit for $5,000,000 bearing interest at the bank's prime rate, (8.5% at June 30, 1998) expiring in October 1999. At June 30, 1998, no borrowings were outstanding against the line. Borrowings under the line of credit are secured by inventory, equipment and accounts receivable. The line of credit sets forth certain financial and other covenants, including prior written consent to the payment of any dividends, that must be met by the Company if indebted to the bank. The Company leases office space under a capital lease. The following is a schedule by years of future minimum lease payments under this capital lease together with the present value of the net minimum lease payments as of June 30, 1998:
Year ending June 30 (in thousands): 1999 $ 726 2000 762 2001 800 2002 840 2003 882 Thereafter 7,963 ------- Total minimum lease payments 11,973 Less amount representing interest (4,945) ------- Present value of net minimum lease payments $ 7,028 =======
The Company leases office space and certain equipment under operating leases. Rental expense was $933,000, $683,000 and $476,000 for fiscal 1998, 1997 and 1996, respectively. Minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 1998 are as follows:
Year ending June 30 (in thousands): 1999 $1,272 2000 989 2001 672 2002 321 2003 142 ------ Total minimum payments required $3,396 ======
F-12 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - INCOME TAXES The provision for income taxes is comprised of the following (in thousands):
1998 1997 1996 --------------------------------------- Current provision Federal $2,065 $1,574 $1,342 State 434 300 296 Foreign 218 0 0 Deferred provision/ (benefit) Federal (522) (349) 262 State (53) (65) 49 --------------------------------------- $ 2,142 $ 1,460 $1,949 =======================================
A reconciliation of the effective tax rate to the statutory rate is as follows:
1998 1997 1996 --------------------------------- Expected statutory rate 34% 34% 34% State taxes 5% 5% 5% Goodwill amortization 6% 7% 3% Tax exempt interest on STL's (2)% (4)% (2)% Increase of valuation allowance 4% 0% 0% Other (2)% 2% 1% --------------------------------- 45% 44% 41% =================================
F-13 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant components of the Company's deferred income tax assets and liabilities for fiscal 1998 and 1997 were as follows (in thousands):
1998 1997 ------------------------ Deferred tax assets: Tax credit carryforwards $ 208 $ 0 Accrued liabilities 189 89 Depreciation and amortization 1,513 1,352 Bad debt 431 710 Accrued rent 239 96 Maintenance - unearned revenue 120 0 Other 353 114 ------------------------ Total deferred tax asset 3,053 2,361 Less: valuation allowance (178) 0 ------------------------ Net deferred tax asset 2,875 2,361 Deferred tax liabilities: Deferred revenue (224) (119) Capitalized software (662) (580) Other (35) (283) ------------------------ Gross deferred tax liabilities (921) (982) ------------------------ Net deferred tax asset $1,954 $1,379 ========================
NOTE 9 - EMPLOYEE BENEFIT PLANS AND OPTIONS At June 30, 1998, the Company has two stock-based compensation plans, which are described below. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plans. Had compensation cost for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates for award under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ----------------------------------- Net income: As reported $2,671 $1,833 $2,863 Pro forma 1,696 1,099 2,646 Net income per share - basic: As reported .36 .25 .42 Pro forma .23 .15 .36 Net income per share - diluted: As reported .34 .25 .40 Proforma .22 .15 .36
F-14 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Option Plans The Company has five stock option plans, the Director and Key Employee Non- qualified Stock Option Plan ("Director and Key Employee Plan"), the Employee Non-qualified Stock Option Plan (the "Employee Plan"), the Director Non- qualified Stock Option Plan (the "Director Plan"), the 1991 Stock Option Plan ("1991 Plan") and the 1996 Stock Option Plan ("1996 Plan"). The Director and Key Employee Plan, Employee Plan, Director Plan and 1991 Plan have expired. Under the 1996 Plan, the Company may grant options to its employees and directors for up to one million shares of common stock. Under the Plan, options are granted at an exercise price equal to the fair market value of the Company's common stock on the grant date. The options vest over periods not to exceed 48 months and expire in 10 years or less. On July 30, 1998, the Board of Directors approved, subject to shareholder approval on November 5, 1998, an amendment of the 1996 Stock Option Plan to increase the number of shares available for issuance by 400,000. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1998, 1997 and 1996, respectively: No estimated dividends for all three years; expected volatility of 56.9% for 1998, 57.5% for 1997, and 46.4% for 1996; risk-free interest rates between 5.44% and 5.95% for 1998, 6.20% and 6.86% for 1997, and 6.20% and 6.48% for 1996; and expected option terms between seven and ten years for both 1998 and 1997, and seven years for 1996. The following table summarizes option transactions under all five plans during each of the three years in the period ended June 30, 1998 (in thousands):
Number of Weighted Average Shares Exercise Price --------------------------------------------------------------------- Outstanding, June 30, 1995 936 $5.05 Granted 249 6.55 Exercised (379) 5.21 Canceled (21) 5.50 --------------------------------------------------------------------- Outstanding, June 30, 1996 785 5.50 Granted 813 6.98 Exercised (171) 5.56 Canceled (68) 6.15
F-15 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------- Outstanding, June 30, 1997 1,359 6.34 Granted 278 8.29 Exercised (202) 5.94 Canceled (58) 6.70 --------------------------------------------------------------------- Outstanding, June 30, 1998 1,377 $6.78 =====================================================================
Options exercisable and the weighted average exercise price of these options as of the end of the year were 716,000 and $6.17, 591,000 and $5.61, and 465,000 and $5.05, in 1998, 1997 and 1996, respectively. The weighted average fair value of options granted during 1998, 1997 and 1996 were $5.41, $5.11 and $3.77, respectively. The following table summarizes information about fixed stock options outstanding at June 30, 1998 (in thousands):
Options Outstanding Options Exercisable ------------------------------------------------ ------------------------------ Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 6/30/98 Contractual Life Exercise Price at 6/30/98 Exercise Price - --------------- ----------- ---------------- ---------------- ----------- ---------------- $4.19-4.88 83 2.8 years $4.26 73 $4.27 $5.13 186 1.0 years $5.13 186 $5.13 $5.50-6.88 240 4.6 years $6.60 121 $6.54 $7.00-7.50 760 7.5 years $7.02 336 $7.00 $10.13-10.69 108 6.6 years $10.29 0 $0.00 ----- --- $4.19-10.69 1,377 716
Employee Stock Purchase Plan In July 1990, the Board of Directors adopted an Employee Stock Purchase Plan ("Purchase Plan") offering employees the right to collectively purchase a maximum of 200,000 shares of the Company's common stock through a minimum of six-month offering periods of 50,000 shares each commencing January 1, 1991. Eligible employees may contribute up to 10% of their base pay towards the purchase of the Company's common stock at 85% of the lower of the average market price on the first or the last day of the offering period. Proceeds received from the issuance of shares under the Purchase Plan are credited to stockholder's equity in the fiscal year shares are issued. Under the Purchase Plan, the Company sold 21,000, 15,000 and 24,000 shares to employees in 1998, 1997 and 1996, respectively. The fair value of each stock purchase grant is estimated on the date of grant using the Black-Scholes model with the following assumptions for 1998, 1997 and 1996: no estimated dividends; expected volatility of 28.6% and 29.2%, 27.3% and 72.0%, and 23.0% and 39.9%, respectively; risk free interest rates between F-16 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5.23% and 5.44% for 1998, 6.20% and 6.66% for 1997 and 5.63% and 6.83% for 1996; and an expected life of six months for all three years. Employee Savings Plan The Company has a 401(k) savings plan whereby the Company matches, subject to certain limits, $.15 for each $1.00 employees contribute. Total Company contributions during fiscal 1998, 1997 and 1996 were $80,000, $66,000 and $79,000, respectively. NOTE 10 - LEGAL PROCEEDINGS On August 27, 1997, CB Partners, Michael Connor and Michael Connor, IRA, filed a Class Action Complaint in District Court, County of Boulder, State of Colorado, against the Company and certain of its officers and directors, being David J. Hunter, Mckinley C. Edwards, Jr., Richard Willmarth, Jacqueline A. Chamberlin, Frank N. Randall, Jr., and Jeremy N. Kendall. The complaint includes various claims under the Colorado Securities Act as well as for common law fraud. The complaint alleges, among other things, that various public filings and press releases made by the Company in 1996 contained material misstatements and omissions, including that the Company's revenues and earnings were inflated as a result of allegedly shipping products to customers with the understanding that the customer had no obligation to pay for the products and could return them at any time. The Complaint also alleges that the Company failed to disclose (a) the nature of the competition in its monitoring services line of business and (b) that one of the Company's products in the in-home alcohol testing area did not work properly and was therefore unmarketable. The complaint seeks rescission, damages in an unspecified amount and attorneys' fees on behalf of all persons who purchased the Company's common stock between April 24, 1996 and September 12, 1996. The Company believes the complaint is without merit but is currently unable to (a) determine the ultimate outcome of resolution of the complaint, (b) determine whether resolution of this matter will have a material adverse impact on the Company's financial position or results of operations, or (c) estimate reasonably the amount of loss, if any, which may result from resolution of this matter. The Company intends to defend against this action vigorously. The matter is presently in discovery. The Company is involved in five additional legal proceedings, one alleging negligence in manufacturing, one alleging general negligence and misrepresentation, one alleges misrepresentation, breech of warranty and general negligence, another suit alleges negligence under product liability, and the last suit alleges wrongful death from general negligence. One seeks damages of $3,000,000, another seeks damages of $3,977,500, the third seeks $250 million in damages, the fourth seeks damages in excess of $150,000, and the last seeks damages in excess of $100,000. Management believes the Company has adequate legal defenses and/or insurance coverage against all claims and intends to defend them vigorously. There can be no assurances however, that any individual case will result in an outcome favorable to the Company. In the event of any adverse outcome, neither the amount nor the likelihood of any potential loss which might result is reasonably estimable. The Company currently believes that the amount of the ultimate potential loss would not be material to the Company's financial F-17 BI INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS position or results of operations. However, an adverse future outcome in any individual case, including legal defense costs, could have a material effect on the Company's reported results of operations in a particular quarter. NOTE 11 - SUBSEQUENT EVENT (UNAUDITED) On August 25, 1998, the Company announced that it has engaged an investment banker to attempt to sell its CIS business unit. NOTE 12 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following interim financial information presents the 1998 and 1997 results of operations on a quarterly basis (in thousands, except per share amounts):
Fiscal quarters ended 9/30/97 12/31/97 3/31/98 6/30/98 ---------------------------------------------- Total revenue $14,867 $14,942 $15,125 $17,067 ---------------------------------------------- Gross profit 7,405 7,433 7,688 8,537 ---------------------------------------------- Net income $428 $534 $731 $978 ============================================== Diluted earnings per share $0.06 $0.07 $0.09 $0.12 ============================================== Fiscal quarters ended 9/30/96 12/31/96 3/31/97 6/30/97 ---------------------------------------------- Total revenue $8,723 $11,782 $13,289 $14,607 ---------------------------------------------- Gross profit 4,329 6,048 7,037 7,526 ---------------------------------------------- Net income $157 $358 $569 $749 ============================================== Diluted earnings per share $0.02 $0.05 $0.08 $0.10 ==============================================
F-18 BI INCORPORATED CONSOLIDATED FINANCIAL STATEMENT SCHEDULES SCHEDULE II Allowance for losses on Sales-Type Leases:
- -------------------------------------------------------------------------------------- Balance Charged to beginning of cost and Charged to Balance at end period expenses other accounts Write-offs of period - -------------------------------------------------------------------------------------- 7-1-95-6-30-96 $9,000 $0 $0 $0 $9,000 - -------------------------------------------------------------------------------------- 7-1-96-6-30-97 $9,000 $0 $0 $(8,000) $1,000 - -------------------------------------------------------------------------------------- 7-1-97-6-30-98 $1,000 $0 $(1,000) $0 $0 - --------------------------------------------------------------------------------------
Allowance for losses on Accounts Receivable:
- -------------------------------------------------------------------------------------- Balance Charged to Beginning beginning of cost and Balance at Balance at end period expenses Acquisition Write-offs of period - -------------------------------------------------------------------------------------- 7-1-95-6-30-96 $220,000 $228,000 $0 $(182,000) $266,000 - -------------------------------------------------------------------------------------- 7-1-96-6-30-97 $266,000 $1,732,000 $1,418,000 $(1,656,000) $1,760,000 - -------------------------------------------------------------------------------------- 7-1-97-6-30-98 $1,760,000 $1,806,000 $0 $(2,250,000) $1,316,000 - --------------------------------------------------------------------------------------
F-19 EX-4.7 2 PROPERTY LEASE COMPANY & TERANCE O'CONNOR EXHIBIT 4.7 Page 1 of 4 BI, INCORPORATED, TERRENCE J. O'CONNOR, POINT I, LLC AND POINT II, LLC AGREEMENT OF UNDERSTANDING OCTOBER 10, 1996 This is a written memorandum of the agreement by which BI, INCORPORATED, a Colorado corporation ("BI"), TERRENCE J. O'CONNOR ("O'Connor"), POINT I, LLC ("Point I") and POINT II, LLC ("Point II") agree as follows: I. Establish Maintenance Control Committee (per paragraph 1 of attached Exhibit A). II. BI to receive a 25% of O'Connor membership free and clear of all liens and encumbrances in the Point I, LLC on or before November 1, 1996. A. After the merging of the Point I, LLC into the Point II, LLC, BI's 25 % membership in the Point I, LLC will be converted to a 15 % membership in the Point II, LLC. B. BI's membership and participation and the cash flow will be after all debt service, excluding the outstanding tenant improvement loan from BI to O'Connor, which shall remain a personal obligation of O'Connor per paragraph 10 of attached Exhibit A. C. It is understood and agreed that prior to BI occupying all of Point II in the year 2001, BI will receive a preferred return of cash flow after all debt service ("Net Cash Flow") equal to 25 % of the Net Cash Flow from the Point I building. It is also understood that at such time, if 15 % of the Point II, LLC Net Cash Flow exceeds 25 % of the Point I Net Cash Flow, such preferred participation will be terminated. III. At such time as BI occupies all of Point II building, they will receive a 15 % interest in the Point II building, which increases their membership in the Point II, LLC from 15 % to 21.5 %. A. The operating agreement will be amended to give O'Connor a priority distribution of cash available from refinancing or sale of the asset, sufficient to reimburse him for his unreimbursed investment in the Point II building. IV. Effective with signing of this agreement, any significant decisions, as defined in paragraph 9(a) of attached Exhibit A will require 100% membership approval. V. Appropriate language that specifies criteria and timing for acquisition of land and obtaining approvals needed for development of campus in accordance with paragraph 11 of Exhibit A. BI, INCORPORATED and TERRENCE J. O'CONNOR Pg 2 of 4 AGREEMENT OF UNDERSTANDING OCTOBER 10, 1996 VI. Appropriate language detailing timing, for approval process and development of breezeway between buildings in accordance with paragraph 12- of Exhibit A. VII. November 15 occupancy date for Point II with $5,000/day liquidating damages in accordance with paragraph 3 of Exhibit A. VIII. Within ten days, BI will pay POINT I, LLC $5,000 for the relocation of SportStar and, when incurred, up to $3,000, as determined and paid to the moving company by BI, in moving expenses to move SportStar from Point I to Point II. IX. Within ten days, O'Connor will pay up to $5,000 of BI's attorney's fees incurred in the documentation of this outline and subsequent agreement. X. Starting in December of 1997, BI or its assigns will have the option to purchase a 10% membership in the Point II LLC (as merged, including Point I LLC and Point II LLC), and this annual option will last for six (6) years. BI's or its assigns' option to purchase membership units will cap at a cumulative 60% inclusive of the 21.5% referred to in POINT II above. BI's or its assigns' options will be cumulative; that is, if they do not exercise the year one option, it will carry forward and be included in the next year's option. (E.G. 10% not exercised in 1997, would give them the option to exercise 20 % in 1998 and so on). In addition, it is understood that BI or its assigns will give O'Connor a 6-month notification of its intent to exercise such option. XI. Addendum to Lease dated April 1, 1996 and May 18, 1990 are hereby terminated. XII. BI will sign future building leases (i.e., commencing on the option dates) for spaces currently under option in the Point II building, which options BI hereby exercises. Note, the option lease spaces must be contiguous to BI's current space in the Point II building. XIII. O'Connor's outstanding obligation for selling membership units in accordance with paragraph X above and for the tenant improvements will be secured by a pledge of 35 membership units in Point I (and/or 45 membership units in Point II following the merger). O'Connor will immediately cause unencumbered membership units representing 60% of Point I and Point II to be placed in escrow for the benefit of BI. Said membership units may not be pledged, sold or otherwise encumbered for any purpose. O'Connor also agrees to execute such additional security agreements as BI may reasonably require to assure security of the additional membership units for BI's benefit. XIV. BI's option to acquire additional membership units (paragraph X) and its preferred distribution rights under paragraph II.C. are conditioned upon the leases to BI not having been terminated as a result of default by BI thereunder. BI, INCORPORATED and TERRENCE J. O'CONNOR Pg 3 of 4 AGREEMENT OF UNDERSTANDING OCTOBER 10, 1996 XV. The parties agree to execute additional documents as reasonably required to effectuate the terms of this Agreement. XVI. The representations and warranties of O'Connor as set forth in paragraph 4 of Exhibit A are specifically incorporated herein. XVII. Arbitration. Except as provided below, any and all disputes arising under or related to this Agreement which cannot be resolved through negotiations between the parties shall be submitted to binding arbitration. If the parties fail to reach a settlement of their dispute within fifteen (15) days after the earliest date upon which one of the parties notified the other(s) of its desire to attempt to resolve the dispute, then the dispute shall be promptly submitted to arbitration by a single arbiter through the Judicial Arbiter Group ("JAG"), any successor of the Judicial Arbiter Group, or any similar arbitration provider who can provide a former judge to conduct such arbitration if JAG is no longer in existence, or an arbiter appointed by the court. The arbiter shall be selected by JAG or the court on the basis, if possible, of his or her expertise in the subject matter(s) of the dispute. The decision of the arbiter shall be final, nonappealable and binding, upon the parties, and it may be entered in any court of competent jurisdiction. The arbitration shall take place in Boulder, Colorado. The arbitrator shall be bound by the laws of the State of Colorado applicable to the issues involved in the arbitration and all Colorado rules relating to the admissibility of evidence, including, without limitation, all relevant privileges and the attorney work product doctrine. All such discovery shall be completed in accordance with the time limitations prescribed in the Colorado Rules of Civil Procedure, unless otherwise agreed by the parties or ordered by the arbitrator on the basis of strict necessity adequately demonstrated by the party requesting an extension or reduction of time. The arbitrator shall have the power to grant equitable relief where applicable under Colorado law. The arbitrator shall issue a written opinion setting forth her or his decision and the reasons therefor within thirty (30) days after the arbitration proceeding is concluded. The obligation of the parties to submit any dispute arising under or related to this Agreement to arbitration as provided in this Section shall survive the expiration or earlier termination of this Agreement. Notwithstanding the foregoing, either party may seek and obtain an injunction or other appropriate relief from a court to preserve or protect the status quo with respect to any matter pending conclusion of the arbitration proceeding, but no such application to a court shall in any way be permitted to stay or otherwise impede the progress of the arbitration proceeding. BI, INCORPORATED and TERRENCE J. O'CONNOR Pg 4 of 4 AGREEMENT OF UNDERSTANDING OCTOBER 10, 1996 XVII. Attorneys' Fees and Costs. In the event of any arbitration or litigation ------------------------- being, filed or instituted between the parties concerning- this Agreement, the prevailing party will be entitled to receive from the other party or parties its attorneys' fees, experts' fees, costs and expenses, whether or not such controversy, claim or action is prosecuted to judgment or other form of relief. The "prevailing party" is that party which is awarded judgement or other legal or equitable relief as a result of trial or arbitration, or who receives a payment of money from the other party in settlement of claims asserted by such party. If both par- ties receive a judgment or other award of relief, the court or the arbitrator shall determine which party is the prevailing party, taking into consideration the merits of the claims asserted by each party, the relative values of the judgments or other forms of relief received by each party, and the relative equities between the parties. BI, INCORPORATED TERRENCE J. O'CONNOR By:_____________________________ ________________________________________ Robert Clevenger, Director Terrence J. Connor, Personally and as Internal Operations Manager of Point I LLC and Point II LLC ADDENDUM TO LEASE AGREEMENT Addendum Agreement is made and entered into on February 9th, 1996, between Terrence J. O'Connor (Landlord) and BI Incorporated, a Colorado Corporation whose address is 6400 Lookout Road, Boulder, CO 80301 hereinafter referred to as Tenant. This Addendum amends the Lease entered into between the aforementioned pates on the 15th day of May 1990 for the rental of the premises described in said Lease Addendum at. the Point as follows: 1 - Primary Term: The term of the Lease shall be extended to September 30, 2O1O. 2 - Premises: As of April 1, 1996 Tenant will occupy the entire building. Tenant agrees to add an additional Nine Thousand fourteen square feet to the Fifty-One Thousand One Hundred Twenty -Six Thousand square feet currently leased. The total square footage leased shall be Sixty Thousand One Hundred Forty square feet. 3 - Base Rent: The addition of 9014 square feet at Nine dollars and Twenty- Nine cents ($9.29) shall result in a base monthly rent of Forty-Two Thousand Six Hundred Fifty-Eight dollars per month. The additional space will result in the following allocation: 36,510 square feet at $300,842/yr. and 23,630 at $219,581/yr. 4 - Annual Rate Increases: On the anniversary date of the Lease (October 1) each year the Lease Rate shall be increased by Five (5) percent for the entire term of the lease, 5 - Condition of Premises: Tenant has agreed to take possession of space in the condition it is in at the time of possession. 6 - Tenant agrees to contribute toward the cost to move McCrea Advertising and SportStar to another premises. Tenant's share of said expense shall not exceed $8,000 and Tenant agrees to move the moving parties' furniture and equipment on a Saturday and Sunday. 7 - O'Connor Development is presently the Manager of the Premises. Tenant may replace O'Connor Development as Manager with another third party management company acceptable to Landlord and Tenant if Tenant is unsatisfied with O'Connor. Tenant must give O'Connor notice of unsatisfaction in writing and allow 90 days to correct whatever was unsatisfactory to Tenant. 8 - In the event Premises is not available for occupancy on May 1, 1996, Landlord agrees to pay the difference between what Tenant would pay to Land lord and what Tenant has to pay for temporary space in another Premises. 9 - Except as supplemental hereto all provisions of the Lease Agreement between the parties shall remain the same and in full force and effect. In Witness whereof., parities have executed this agreement the day and month fast written above. Landlord Tenant ________________________ _________________________________ Terrence J. O'Connor David J. Hunter, President and Chief Executive Officer _________________________________ Jacqueline A. Chamberlin. Chief Financial Officer May 14, 1990 Mr. Jeffrey Hiller Vice President of Finance BI Incorporated 6175 Longbow Dr. Boulder, CO 80301 Dear Jeffrey: This letter is confirmation of our agreement today, and will become a part of our Lease agreement dated May 15, 1990. We should both attach this letter to our copies of the Lease. Landlord and Tenant have agreed that: 1. Tenant has agreed that if the need arises for additional cash to fund the construction costs of the project it will lend up to $100,000 to Landlord. Landlord shall pay twelve percent interest on this loan and sign a note for the total amount which shall be paid prior to January 1, 1991. If Landlord has not repaid said note by January 1, 1991, Tenant may collect on note as written or choose to convert said loan to equity in a Limited Partnership Ownership interest in project. This ownership shall be proportionate to their debt in that for every ten thousand dollars in debt, Landlord will award one percent ownership to tenant. 2. Landlord and Tenant have agreed that Landlord will not make any significant changes in the design of the building without first consulting with Tenant and getting approval. 3. Landlord agrees to design common areas in the remainder of the building similar to tenant's common area. There are no additional changes to the Lease as if May 15, 1990. LANDLORD: ________________________________________ Terrence J. O'Connor TENANT: BI INCORPORATED By:_____________________________________ Jeffrey J. Hiller Vice President of Finance By:_____________________________________ David J. Hunter, President LEASE THIS LEASE made this 15th day of May 1990, between BI INCORPORATED, a Colorado corporation ("Tenant"), and TERRENCE J. O'CONNOR ("Landlord"). W I T N E S S E T H: DEMISE ------ Landlord does hereby lease to Tenant and Tenant hereby hires from Landlord an approximately 30,000 square feet (the "Premises," or, alternatively, the "Leased Premises") in a building (the "Building") to be constructed as depicted on the maps attached to and incorporated in this Lease as Exhibit "A," which Building is situated on land described as 6400 Lookout Road, Boulder, Colorado 80301 (the "Property"), together with a non-exclusive right, subject to the provisions of this Lease, to use all appurtenances thereto, including, but not limited to, any plazas, common areas, walks, ways or other areas in the Building or on the Property designated by Landlord for the exclusive or non-exclusive use of the tenants of the Building. This Lease is upon and subject to the terms, conditions, and covenants set forth below, and Landlord and Tenant covenant as a material part of the consideration for this Lease to keep and perform each and all of the terms, conditions, and covenants by each of them to be kept and performed and that this Lease is made upon the condition of such performance. SECTION 1 PURPOSE ------- 1.01 Use of Premises. The Premises are to be used for light --------------- manufacturing, warehousing, and related office functions, provided that such uses comply with all zoning and use restrictions, and for no other purpose without the prior written consent of Landlord, which consent shall not be unreasonably withheld. SECTION 2 TERM ---- 2.01 Primary Term. Except as provided to the contrary in Appendix C, the ------------ "Work Agreement" (also referred to as the "Work 1 Letter") and the plans developed and approved pursuant to the Work Letter, the Term of this Lease shall be for a period of eighty-four (84) months, commencing at 12:01 a.m. on the Commencement Date, October 1, 1990 or another date acceptable to Landlord and Tenant, agreed upon in writing, and ending at 12:00 a.m., Denver time, September 30, 1009 (the "Primary Lease Term"). Changes in the Commencement Date due to construction variables are specifically provided for in the Work Letter. SECTION 3 COMPLETION OF THE PREMISES -------------------------- 3.01 Landlord's Work. Landlord, subject to delays beyond its control, --------------- agrees to perform its obligations with respect to the Premises as provided for in this Lease and the Work Letter. SECTION 4 RENT ---- 4.01 Ease Rent. Tenant agrees to pay Landlord during the full Primary --------- Lease Term the sum of $1,574,048.oo payable in advance in equal monthly installments as follows, (the "Base Rent") for the Premises: Year 1 $17,133.00 Year 2 17,990.00 Year 3 18,890.00 Year 4 19,835.00 Year 5 20,827.00 Year 6 21,868.00 Year 7 22,962.00 The first full monthly installment of Base Rent shall be payable on the Commencement Date and each succeeding monthly installment shall be due and payable on or before the first day of each and every successive calendar month thereafter during the Primary Lease Term. (See appendix C respecting partial payments of Base Rent). 4.02 No Offsets. The Base Rent and all other sums or charges required by ---------- this Lease to be paid by Tenant to Landlord, (all of which are sometimes collectively referred to as "Rent") shall be paid to Landlord without deduction or offset, in lawful money of the United States of America, in care of Terry O'Connor, 1600 38th Street, Boulder, CO 80301, or to such other person or at such other place as Landlord may from time to time designate in writing, provided Landlord is not in default hereunder. 2 4.03 Interest on Late Payments. Any Rent or other amount due from Tenant ------------------------- to Landlord under this Lease not paid within ten (10) days of when due shall bear interest from the date due, computed on a daily basis, until the date paid, at the rate of one and one-half percent (1-1/2%) per month until paid, but the payment of the interest shall not excuse nor cure any default by Tenant under this Lease. 4.04 Late Payment Charge. Further, and notwithstanding the interest ------------------- charges provided for in the preceding subsection 4.03, if any Rent or other amounts owing hereunder are not paid within five (5) days of when due, Landlord and Tenant agree that Landlord will incur additional administrative and financial expenses and inconveniences the amount of which will be difficult if not impossible to determine. Accordingly, Tenant shall pay to Landlord an additional one-time late charge for any late monthly payment in the amount of five percent (5%) of the amount of the late payment. SECTION 5 TAXES AND OPERATING COST ADJUSTMENT FORMULA ------------------------------------------- 5.01 Additional Rent. In addition to Base Rent, Tenant shall reimburse --------------- Landlord for the Taxes and Operating Costs of the Building in the manner, at the times, and in the amounts set forth in this Section 5. 5.02(a) Taxes. The Rent payable by Tenant shall be increased by the ----- amount of "Tenant's Proportional Share" of the Taxes on the Property. Tenant's Proportional Share shall be ____% based upon Tenant's occupancy of 30,000 square feet out of a total building rental space of _______ square feet. In determining the amount of Taxes for any calendar year, the amount of special assessments to be included shall be limited to the amount of the installment (excluding any interest payable thereon) of such special assessment which would have been required to have been paid during such calendar year if Landlord had elected to have the special assessment paid over the maximum period of time permitted by law, if the election is available to Landlord. Landlord shall make all payments in such fashion to keep Tenant costs to the minimum. All reference to Taxes "for" and "billed for" a particular calendar year shall be deemed to refer to Taxes levied, assessed, billed or otherwise imposed for such calendar year, without regard to the dates when any such Taxes are due and payable. (b) Definition. As used in this Lease, the term "Taxes" means any and all ---------- general and special taxes and impositions of every kind and nature whatsoever levied, assessed, or imposed upon, or with respect to, the Premises, any leasehold improvements, 3 fixtures, installations, additions, and equipment, whether owned by Landlord or Tenant, or either because of or in connection with Landlord's ownership, leasing, and operation of the Building and the Property, including, without limitation, real estate taxes, personal property taxes, general or special assessments, and duties or levies charged or levied upon or assessed against the Building and the Property and personal property, or any tax or excise on rent or any other tax (however described) on account of rental received for use and occupancy of any or all of the Building and the Property, whether any such taxes are imposed by the United States, the State of Colorado, the County of Boulder, or any local governmental municipality, authority, agency or any political subdivision. Taxes shall not include taxes on any net income, capital stock, succession, transfer, franchise, gift, estate, or inheritance taxes. (c) Payment. Commencing with the first calendar month of this Lease, ------- Tenant shall pay to Landlord on the first day of each calendar month until the next upward adjustment date (which period between adjustment dates is herein called a "Tax Deposit Year") one-twelfth of the estimated amount of the Taxes. Amounts paid under this subsection 5.02(c) in any Tax Deposit Year shall be reconciled with amounts actually billed to Landlord for the same Tax Deposit Year, and provided there is any surplus remaining after the credit to Tenant and provided Tenant shall not then be in default under any of the provisions of this Lease, Landlord shall either refund the amount of the surplus to Tenant within thirty (30) days following the end of the Tax Deposit Year or apply the surplus amount against any other amounts then due from Tenant to Landlord. If upon the reconciliation there is any deficiency in the amount of Taxes paid by Tenant, Landlord shall bill Tenant and Tenant shall pay the additional amount within thirty (30) days. Tenant shall pay escrow monthly if it is a requirement of Lender to do so, or will pay within 30 days of notification by Landlord of payment amount. 5.03(a) Inclusion in Operating Costs. Tenant shall pay its Proportional ---------------------------- Share of the Operating Costs for the Property. As used in this Lease, the term "Operating Costs" means any and all reasonable expenses, costs, and disbursements (other than Taxes) of every kind and nature whatsoever, which are paid or accrued by Landlord in connection with the leasing, management, maintenance, operation, or repair of the Building, including, without limitation: (i) Costs of supplies; (ii) Costs incurred in connection with obtaining and providing energy for the Building, including, but not limited to, costs of propane, butane, natural gas, steam, electricity, fuel 4 oils, coal or any other energy sources, except if separately metered to the Leased Premises, in which case Tenant shall pay 100% of its metered amount; (iii) Costs of water and sanitary sewer and storm drainage services; (iv) Costs of general maintenance and repairs, including costs of heating, ventilation and air conditioning systems and the cost of exterior building and roof maintenance and repairs; (v) Cost of insurance; (vi) Costs of maintenance and replacement of landscaping; (vii) Labor costs associated with operation and maintenance of the Building and management fees. (b) Exclusion from Operating Costs. "Operating Costs" shall not include: ------------------------------ (i) Costs of repairs or other work occasioned by fire, windstorm or other insured casualty to the extent of insurance proceeds received; (ii) Leasing commissions, advertising expenses, and other costs incurred in leasing space in the Building; (iii) Costs of repairs or rebuilding necessitated by condemnation; (iv) Any interest on borrowed money or debt amortization, except as specifically set forth above; (v) Depreciation on the Building; (vi) Any settlement, payment or judgment incurred by Landlord or the Building manager due to their willful misconduct or gross negligence, as established by a court of law, which is not covered by insurance proceeds; (vii) Cost of any damage to the Building caused directly by Landlord's willful misconduct or gross negligence, as established by a court of law, which is not covered by insurance proceeds. (viii) Cost of structural repairs or reconstruction of any portion of the Building. 5 (ix) Costs of providing utility lines to the Building or repairing such lines if they break (but not if they are plugged by Tenant's usage). (c) Warranties. Tenant shall be entitled to a reimbursement for any ---------- amounts collected by Landlord under any manufacturer's warranty on any systems or machinery used in the Building; provided that Tenant has previously paid to Landlord the repair expense relating to Landlord's warranty claim. (d) Payment. Beginning on the Commencement Date, Landlord shall supply ------- Tenant with written notice of Landlord's estimate of the Operating Expenses that will be incurred or accrued during the current calendar year (the "Deposit Year"). On or before the first day of each month during such Deposit Year, Tenant shall pay to Landlord one-twelfth of Tenant's Proportionate share of the estimated amount. If the monthly deposit amount is not determined in time for Tenant to make the first payment on January 1 of the Deposit Year, then the first monthly payment shall be due on the first day of the month immediately following the date Landlord supplies Tenant with notice of the amount and the first monthly payment(s) shall also include a payment equal to one-twelfth of such additional sum multiplied by the number of calendar months which have elapsed during the Deposit Year prior to the date Tenant makes its first payment. If the total of the estimated payments made by Tenant during the Deposit Year are less than Tenant's obligation under this Lease for Operating Costs for the Deposit Year, then Tenant, within thirty (30) days of the billing therefor, shall pay the deficiency to Landlord. If the total of the Tenant's estimated payments for the Deposit Year exceed Tenant's obligation for excess Operating Costs for such year, then the surplus shall be handled in the manner provided in the last sentence of Section 5.02(c). 5.04 Audit and Adjustment Procedures. ------------------------------- (a) The annual determination and statement of Taxes and Operating Costs shall be prepared in accordance with generally accepted accounting principles. In the event of any dispute as to any Rent due under this Lease, Tenant shall have the right to inspect Landlord's accounting records relative to Taxes and Operating Costs at the office in which Landlord maintains its records during normal business hours at any time. Any errors shall be adjusted accordingly. (b) If the Term of this Lease commences on any day other than the first day of January, or if the Term of this Lease ends on any day other than the last day of December, any payment due to Landlord by reason of an increase in Taxes or Operating Costs shall 6 be prorated on the basis by which the number of days in such partial year bears to 365. (c) All sums which Tenant is required to pay or discharge pursuant to Section 5 of this Lease in addition to Base Rent, together with any interest or other sums which may be added for late payment, shall constitute "Rent." SECTION 6 HOLDING OVER ------------ 6.01 Rent Increase. Should Tenant hold over after the termination of this ------------- Lease, whether the termination occurs by lapse of time or otherwise, Tenant shall become a tenant from day-to-day upon each and all of the terms herein provided as may be applicable to such a tenancy, and any such tenancy shall not constitute an extension of this Lease; provided, however, during the period as a tenant from day-to-day, Tenant shall pay its pro rata Base Rent at 140% the rate payable for the month immediately preceding the date termination of this Lease and, in addition, Tenant shall reimburse Landlord for all direct damages sustained by it by reason of Tenant's occupying the Premises past the termination date. Alternatively, at the election of Landlord and expressed in a written notice to Tenant and not otherwise, the retention of possession past the termination date shall constitute a month-to-month tenancy upon each and all of the terms of this Lease as may be applicable to a month-to-month tenancy. The provisions of this paragraph shall not exclude nor waive Landlord's right of re- entry or any other right hereunder. SECTION 7 BUILDING SERVICES ----------------- 7.01 Interruption of Standard Services. Tenant agrees that Landlord shall --------------------------------- not be liable for failure to supply any heating, air conditioning, janitorial services, electric current, or any other utility during any period when Landlord uses reasonable diligence to restore or to supply such services or utility. Landlord reserves the right to temporarily discontinue such services at times as may be necessary by reason of accident, repairs, alterations, or improvements, or whenever by reason of strikes, lockouts, riots, acts of God, or any other happening or occurrence beyond the reasonable control of Landlord, provided such discontinuance does not substantially interfere with Tenant's business operations. 7 7.02 Telephone. Tenant shall separately arrange with the applicable local --------- public authorities or utilities, as the case may be, for the furnishing of and payment for all telephone services as may be required by Tenant in the use of the Premises. Tenant shall directly pay for such telephone services, including the establishment and connection thereof, at the rates charged for the services by the authority or utility, and the failure of Tenant to obtain or to continue to receive the services for any reason whatsoever shall not relieve Tenant of any of its obligations under this Lease. Landlord shall supply sufficient telephone lines to the Building for Tenant's connection. 7.03 Above-Standard Service Requirements. If heat-generating machines or ----------------------------------- any equipment cause the temperature in the Premises, or any part, to exceed the temperatures that the Building's air conditioning and other cooling systems would be able to maintain in the Premises were it not for the heat generating equipment then Landlord reserves the right to install supplementary air conditioning units in the Premises, and the cost, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. If Tenant requires electric current, water, or any other energy in excess of that which is reasonably obtainable from existing electrical outlets or water pipes, and which is, in Landlord's reasonable opinion, above normal for use of the Premises, Tenant shall first procure the consent of Landlord, which Landlord may not unreasonably refuse. If Landlord consents to such excess electric, water, or other energy requirements, Tenant shall, on demand, pay all costs of meter service and installation of facilities necessary to measure and/or furnish such excess capacity. Tenant shall also pay the entire cost of such additional electricity, water, or other energy used. If this occurs and Tenant subsequently vacates the Premises, Tenant may remove excess equipment, but must also remove all additional gas, water and electrical lines serving this equipment and return Premises to its original condition. SECTION 8 CONDITION OF PREMISES --------------------- 8.01 Acceptance Upon Possession. Subject to the provisions of Appendix C -------------------------- respecting Landlord's obligation to complete "punch list" items, Tenant, by taking possession of the Premises, shall be deemed to have agreed that the Premises were, as of the date of taking possession, in good order, repair, and condition and satisfactorily completed in accordance with Landlord's obligations under this Lease, except for hidden defects that would not be identified upon reasonable inspection. No promise of Landlord to 8 alter, remodel, decorate, clean, or improve the Premises, the Building, or the Property and no representation or warranty, express or implied, respecting the condition of the Premises, the Building, or the Property has been made by Landlord to Tenant, unless the same is contained in this Lease, the Work Agreement, the Plans or some other written agreement. This Lease does not grant any rights to light or air over the Premises or the Property. 8.02 Landlord's Warranty. Landlord represents and warrants that the ------------------- structural integrity of the building is in good and tenantable structural condition and meets the requirements of all applicable building and safety codes and of any and all other governmental agencies having jurisdiction thereof, and Landlord hereby assumes full responsibility for and shall make or have made any repairs or reconstruction which may be required on account of any structural defect or defective workmanship for the entire term of the lease. SECTION 9 USE OF LEASED PREMISES ---------------------- 9.01 Use. The Leased Premises shall not be used other than for the purpose --- set forth in Section 1 of this Lease. Tenant's use shall at all times comply with all applicable laws, ordinances, regulations, or other governmental ordinances in existence. 9.02 Hazardous Use. Tenant agrees that it will not keep, use, sell, or ------------- offer for sale in or upon the Leased Premises any article which may be prohibited by any insurance policy in force from time to time covering the Building. In the event Tenant's occupancy or conduct of business in or on the Leased Premises, whether or not Landlord has consented to the same, results in any increase in premiums for the insurance carried from time to time by Landlord with respect to the Building, Tenant shall pay any such increase in premiums as Rent within ten (10) days after bills for such additional premiums shall be rendered by Landlord. Tenant shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Leased Premises. 9.03 No Waste. Tenant shall not commit, suffer, nor permit any waste, -------- damage, disfiguration, or injury to the Leased Premises or the Building's common areas or the fixtures and equipment located in or on the Building, or permit or suffer any overloading of the floors and shall not place any safes, -heavy business machinery, or other heavy things in the Premises other than as specifically provided for in the Work Agreement and Plans, without first obtaining the written consent of Landlord and, if required by 9 Landlord, of Landlord's architect, and shall not use or permit to be used by any part of the Leased Premises for any dangerous, noxious, or offensive trade or business, and shall not cause or permit any nuisance, noise, or action in, at, or on the Leased Premises. 9.04 Protection Against Insurance Cancellation. If any insurance policy ----------------------------------------- on the Building or any part thereof shall be cancelled or if cancellation shall be threatened, or if the coverage shall be reduced or be threatened to be reduced, in any way by reason of the use or occupation of the Leased Premises or any part thereof by Tenant, any assignee or subtenant of Tenant, or by anyone permitted by Tenant to be upon the Leased Premises, and if Tenant fails to take reasonable efforts to remedy the condition giving rise to the cancellation, threatened cancellation, reduction, or threatened reduction of coverage within forty-eight (48) hours after notice or to complete the remedy within ten (10) days after notice, Landlord may, at its option, enter upon the Leased Premises and attempt to remedy the condition, and Tenant shall forthwith pay the cost to Landlord as additional Rent. SECTION 10 COMPLIANCE WITH LAW ------------------- 10.01 Compliance. Tenant shall not use the Premises or permit anything to ---------- be done in or about the Premises which will in any way conflict with any law, statute, ordinance, or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances, and governmental rules, regulations, or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use, or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. SECTION 11 ALTERATIONS AND REPAIRS ----------------------- 11.01 Tenant to Maintain. Tenant shall, at its sole expense, keep the ------------------ Premises in good repair and tenantable condition during the Term of this Lease. Tenant shall not, without the prior written consent of Landlord which shall not be unreasonably withheld so long as Tenant demonstrates financial assurance of its ability to restore the Premises to original condition, make any 10 alterations, improvements, or additions to the Premises, including, but not limited to, partitions, wall coverings, floor coverings, and special lighting or equipment installations. If Tenant desires to make any alterations, improvements, or additions, Tenant shall first submit to Landlord plans and specifications and obtain Landlord's written approval prior to commencing any work at which time Landlord will advise tenant how it will leave said improvements or additions upon termination of Lease. All alterations, improvements, or additions, whether temporary or permanent in character, made by Landlord or Tenant in or upon the Premises shall become Landlord's property and shall remain upon the Premises at the termination of this Lease by lapse of time or otherwise, without compensation to Tenant (excepting only Tenant's movable office furniture, trade fixtures, and office and professional equipment). Landlord shall have the right to require Tenant to remove the alterations, improvements, or additions at Tenant's cost upon the termination of this Lease, and the repair of any damage caused to the Premises or the Building as a result of any removal shall be paid for by Tenant. Tenant shall promptly pay to Tenant's contractors, when due ' the cost of all work and of all decorating, and upon completion, deliver to Landlord, if payment is made directly to Tenant's contractors, evidence of payment and waivers of all liens for labor, services, or materials. Tenant shall defend and hold Landlord, the Premises, the Building, and the Property harmless from all costs, damages, liens for labor, services, or materials relating to the work, and shall defend and hold Landlord harmless from all costs, damages, liens, and expenses related to the work. If Landlord incurs any expenses in the removal of trash or cleaning as a result of Tenant's contractors' work then Tenant agrees it shall reimburse Landlord within seven (7) days of billing. 11.02 Protection Against Liens. At least five (5) days prior to the ------------------------ commencement of any material work on the Leased Premises Tenant shall notify Landlord of the names and addresses of the persons supplying labor and materials for the proposed work so that Landlord may avail itself of the provisions of statutes such as Section 38-22-105(2) of the Colorado Revised Statutes (1973). During the progress of any work on the Leased Premises, Landlord or its representatives shall have the right to go upon and inspect the Leased Premises at all reasonable times, and shall have the right to post and keep posted thereon notices such as those provided for by Section 38-22-105(2) (C.R.S. 1973) or to take any further action, which Landlord may deem to be proper for the protection of Landlord's interest in the Leased Premises. 11 11.03 Condition on Surrender. Tenant shall, at the termination of this ---------------------- Lease, surrender the Premises to Landlord in as good condition and repair as reasonable and proper use will permit, loss by ordinary wear and tear, fire, and other insured against casualty excepted, and in the state of broom cleanliness. 11.04 Damage by Tenant. If any part of the Building or other improvements ---------------- become damaged or are destroyed through the negligence, carelessness, or misuse of Tenant, its servants, agents, employees, or anyone permitted by Tenant to be in the Building, or through Tenant or such parties, then the cost of necessary repairs, replacements, or alterations shall be borne by Tenant, who shall, on demand, forthwith pay the same to Landlord as Rent. SECTION 12 ABANDONMENT ----------- 12.01 Disposition of Personal Property. Tenant shall not vacate or -------------------------------- abandon the Premises at any time during the Lease Term, and if Tenant shall abandon, vacate, or surrender (whether at the end of the stated Term or otherwise) the Premises, or shall be dispossessed by process of law or otherwise, then any personal property belonging to Tenant left on the Premises shall be deemed abandoned and may be sold or otherwise disposed of by Landlord without any liability to Tenant whatsoever. Tenant shall not at any time remove Landlord's property or any fixtures constituting property of Landlord from the premises. Any removal of Landlord's property from the Premises by Tenant shall constitute a material breach of this Lease and Landlord shall have the right to take all reasonable steps to stop or prevent such breach without such actions constituting a constructive eviction of Tenant. SECTION 13 ASSIGNMENT AND SUBLETTING ------------------------- 13.01 Limitation on Assignment or Subletting. Tenant shall not assign -------------------------------------- this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or shall not suffer any other person to occupy or use the Premises or any portion thereof, without the written consent of Landlord, which consent may not be unreasonably withheld. Neither this Lease nor any interest therein shall be assignable as to the interest of Tenant by operation of law without the written consent of Landlord, which consent may not be unreasonably withheld. 12 13.02 Acceptance of Performance; No Waiver. If this Lease is assigned, or ------------------------------------ if the Premises or any part are sublet or occupied by anybody other than Tenant, Landlord may, upon default by Tenant, collect the rent from the assignee, subtenant, or occupant and apply the net amount collected to the Rent. Upon assignment pursuant to the terms of this section, Tenant shall be relieved of further liability under this Lease as to the assigned premises. Consent by Landlord to any one assignment or subletting shall not in any way be construed as relieving Tenant from obtaining the Landlord's express written consent to any further assignment or subletting. 13.03 Landlord to Approve Documents. All documents utilized by Tenant to ----------------------------- evidence any subletting or assignment to which Landlord has consented shall be subject to prior approval by Landlord or its attorney. Tenant shall pay on demand all Landlord's costs and expenses, including reasonable attorneys' fees, incurred in determining whether or not to consent to any requested subletting or assignment and in reviewing and approving such documentation. SECTION 14 SIGNS AND ADVERTISING --------------------- Tenant shall not install, paint, display, inscribe, place, or affix any sign, picture, advertisement, notice, lettering, or direction in the interior of the Leased Premises which is visible from the outside of the Building or on the exterior of the Building without the prior written consent of Landlord unless provided for in the Plans. SECTION 15 DAMAGE TO PROPERTY, INJURY TO PERSONS ------------------------------------- 15.01 Damage by Tenant. Tenant agrees to pay for all damage to the ---------------- Building or the Premises, as well as all damage to tenants or occupants thereof caused by Tenant's misuse or neglect of the Premises, its apparatus or appurtenances, or caused by any licensee, contractor, agent, or employee of Tenant. Notwithstanding the foregoing provisions, neither Landlord nor Tenant shall be liable to one another for any loss, damage, or injury caused by its act or neglect to the extent that the other party has recovered the amount of such loss, damage, or injury from an insurer and the insurance company is bound by this waiver of liability. 13 15.02 Tenant's Property. Particularly, but not in limitation of the ----------------- foregoing paragraph, all property belonging to Tenant, or any occupant of the Premises, that is in the Building or the Premises, shall be there at the risk of Tenant or other person only, and Landlord or its agents or employees (except in the case of negligence or willful misconduct of Landlord or its agents or employees) shall not be liable for: (i) damage to or theft or misappropriation of such property; (ii) any damage to property entrusted to Landlord, its agents, or employees, if any; (iii) loss of or damage to any property by theft or otherwise, by any means whatsoever; (iv) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, snow, water, or rain which may leak from any part of the Building or from the pipes, appliances, or plumbing works therein or from the roof, street, subsurface, or from any other place, or resulting from dampness or any other cause whatsoever; or (v) interference with the light, air, or other incorporeal hereditaments. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Building or of observed defects in the Building, its fixtures or equipment. SECTION 16 TENANT'S INSURANCE ------------------ 16.01 Insurance. Tenant shall, during the entire Term of this Lease, at --------- its sole cost and expense, obtain, maintain, and keep in full force and effect the following types of insurance: (a) Fire and extended coverage insurance, including endorsements for vandalism, malicious mischief, theft, sprinkler leakage, covering all of --------------- Tenant's property, including, but not limited to, furniture, fittings, - ----------------- equipment, installations, alterations, additions, partitions, fixtures, and anything in the nature of a leasehold improvement in an amount equal to the full replacement cost of such property without deduction for depreciation. If there is a dispute as to the amount which comprises full replacement cost, the decision of Landlord shall be conclusive; (b) Public liability insurance, including bodily injury and property damage, personal injury, contractual liability with respect to all claims, demands, or actions by any person, firm, or corporation, in any way arising from, related to, or connected with the conduct and operation of Tenant's business in the Premises or Tenant's use of the Premises. Such policies shall be written on a comprehensive basis, with limits not less than $1,000,000.00, and such higher limits as Landlord or the mortgagees of Landlord may require from time to time; 14 (c) Any other form or forms of insurance as the mortgagees of Landlord may reasonably require from time to time in form, in amounts and for insurance risks against which a prudent tenant would protect itself; and (d) Business interruption insurance in such amounts as will reimburse the Tenant for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises or to the Building as a result of such perils. 16.02 Evidence. All policies shall be taken out with insurers acceptable -------- to Landlord and in form satisfactory from time to time to Landlord. Tenant agrees that certificates of insurance or, if required by Landlord or the mortgagees of Landlord, copies of each such insurance policy will be delivered to Landlord as soon as practicable after the placing of the required insurance, but in no event later than five (5) days after Tenant takes possession of all or any part of the Leased Premises. All policies shall require that at least thirty (30) days' prior written notice be delivered to Landlord by the insurer prior to termination, cancellation, or material change in such insurance. 16.03 Proceeds. Tenant agrees that in the event of damage or destruction to the leasehold improvements in the Leased Premises covered by insurance required to be taken out by Tenant pursuant to this Section, Tenant shall use the proceeds of the insurance for the purpose of building leasehold improvements as mutually agreed upon between Landlord and Tenant. If Landlord and Tenant cannot agree as to the new improvements within thirty (30) days, then Tenant shall replace the identical improvements that were destroyed. In the event of damage or destruction of the Building entitling the Landlord to terminate this Lease pursuant to Section 17, then, if the Leased Premises have also been damaged, Tenant will pay to Landlord all of its insurance proceeds relating to the leasehold improvements in the Leased Premises, and if the Leased Premises have not been damaged, Tenant will deliver to Landlord, in accordance with the provisions of this Lease, the leasehold improvements and the Leased Premises. SECTION 17 DAMAGE OR DESTRUCTION --------------------- 17.01 Right to Terminate. If the Premises or the Building are damaged by ------------------ fire or other insured casualty, and the insurance proceeds have been made available by the holder or holders of any mortgages or deeds of trust covering the Building, the damage shall be repaired by and at the expense of Landlord to the extent of such 15 insurance proceeds available, provided such repairs can, in Landlord's reasonable discretion, be completed within one hundred twenty (120) days after ---------------------------------------------- the occurrence of such damage, without the payment of overtime or other premiums. Until the repairs are completed, the Rent shall be abated in proportion to the part of the Premises which is unusable by Tenant in the conduct of its business; provided, however, if the damage is due to the fault or neglect of Tenant or its employees, agents, or invitees, there shall be no abatement of Rent. If repairs cannot, in Landlord's reasonable discretion, be made within said one hundred twenty (120) day period, Landlord shall notify Tenant within sixty (60) days of the date of occurrence of the damage as to ---------------------- whether or no an- or elects to make the repairs. If Landlord elects not to make the repairs, then either party may, by written notice to the other, cancel this Lease as of the date of the occurrence of the damage. Except as provided in this Section 17, there shall be no abatement of Rent and no liability of Landlord by reason of any inconvenience, temporary limitation of access or interference to or with Tenant's business or property arising from the making of any necessary repairs, or any alterations or improvements in or to any portion of the Building or the Premises, or in or to fixtures, appurtenances, and equipment therein necessitated by the damage. Tenant understands that Landlord will not carry insurance of any kind on Tenant's furniture and furnishings or on any fixtures or equipment removable by Tenant under the provisions of this Lease, and that Landlord shall not be required to repair any injury or damage caused by fire or other cause, or to make any repairs or replacements to or of improvements installed in the Premises by or for Tenant at Tenant's cost. 17.02 Landlord's Insurance. Landlord covenants and agrees that, -------------------- throughout the Lease Term, it will insure the Building (excluding foundations, excavations and other non-insurable items) and the machinery, boilers, and equipment contained therein owned by Landlord (excluding any property with respect to which Tenant is obliged to insure pursuant to the provisions of Section 16 hereof) against damage by fire and extended perils coverage in such reasonable amounts as would be carried by a prudent owner of a similar property in the same locale. Landlord will also, throughout the Term, carry public liability, property damage and loss of rent insurance with respect to the operation of the Premises in reasonable amounts as would be carried by a prudent owner of a similar property in the same locale. Landlord may, but shall not be obligated to, take out and carry any other form or forms of insurance as it or the mortgagees of Landlord may reasonably determine to be advisable. Tenant shall pay its pro rata costs for all such insurance carried by Landlord as an Operating Cost, provided that such insurance is not duplicative of the insurance obtained pursuant to Section 16.01. Notwithstanding any contribution by Tenant to the cost of insurance premiums, 16 Tenant acknowledges that it has no right to receive any proceeds from the insurance policies carried by Landlord, and that the insurance will be for the sole benefit of Landlord, with no coverage for Tenant for any risk insured against. SECTION 18 ENTRY BY LANDLORD ----------------- Landlord and its agents, upon giving 24 hours notice, shall have the right -------------------- to enter the Premises during normal business hours for the purpose of examining or inspecting the same, to supply any services to be provided by Landlord to Tenant hereunder, to show same to prospective purchasers or tenants of the Premises, and to make such alterations, repairs, improvements, or additions, whether structural or otherwise, to the Premises or to the Building as Landlord may deem necessary or desirable. Landlord may enter the Premises at any time in the case of an emergency by means of a master key, without liability to Tenant except for any failure to exercise due care for Tenant's property, and without affecting this Lease. Landlord shall use reasonable efforts on any such entry not to unreasonably interrupt or interfere with Tenant's use and occupancy of the Premises. SECTION 19 DEFAULT BY TENANT ----------------- 19.01 Events of Default. Each one of the following events if referred to ----------------- as an "Event of Default": (a) Tenant shall fail to make due and punctual payment of Rent or an other amounts payable hereunder, and such failure shall continue for fifteen (15) days after receipt of written notice from Landlord. (b) Tenant shall vacate or abandon the Premises, or remove leasehold improvements or fixtures constituting property of Landlord; (c) This Lease shall be transferred to or shall pass to or devolve upon any other person or party except in the manner set forth in Section 13; (d) This Lease or the Premises or any part thereof shall be taken upon execution or by other process of law directed against Tenant, or shall be taken upon or subject to any attachment at the instance of any creditor of or claimant against Tenant, and said 17 attachment shall not be discharged or disposed of within thirty (30) days after the levy; (e) The filing of any petition or the commencement of any case or proceeding by the Tenant under any provision or chapter of the Federal Bankruptcy Act, the Federal Bankruptcy Code or any other federal or state law relating to insolvency, bankruptcy or reorganization; or the adjudication that the Tenant is insolvent or bankrupt, or the entry of an order for relief under the Federal Bankruptcy Code with respect to Tenant; (f) The filing of any petition or the commencement of any case or proceeding described in Subsection (e) above against the Tenant, unless the petition and all proceedings initiated thereby are dismissed within sixty (60) days from the date of the filing; the filing of an answer by Tenant admitting the allegations of any such petition; or the appointment of or taking possession by a custodian, trustee or receiver for all or any assets of the Tenant, unless such appointment is vacated or dismissed within sixty (60) days from the date of such appointment or taking of such possession. (g) Tenant shall fail to take possession of the Premises thirty (30) days following the earlier of the date the Premises are Ready for Occupancy or the Commencement date; or (h) Tenant shall fail to perform any of the other agreements, terms, covenants or conditions of this Lease on Tenant's part to be performed, and such non-performance shall continue for a period of thirty (30) days after written notice by Landlord to Tenant, or if such performance cannot be reasonably had within such thirty (30) day period, Tenant shall not in good faith have commenced such performance within such thirty (30) day period and shall not thereafter diligently proceed to completion. 19.02 Remedies of Landlord. If any one or more events of default shall -------------------- happen, then Landlord shall have the right at Landlord's election, then or at any time thereafter while in default, upon ten days notice, to reenter and take possession of the Premises or any part thereof and repossess the same as Landlord's former estate and expel Tenant and those claiming through or under Tenant, and remove the effects of both or either, without being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of rent or breach of covenants or prior conditions and without terminating this Lease. Should Landlord elect to reenter as provided in this Subsection, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided for by law including a proceeding for possession pursuant to Colorado's Forcible Entry and unlawful Detainer Statutes, Landlord may, from time to time, without terminating this Lease either; 18 (a) (i) Relet the Premises or any part thereof in Landlord's or Tenant's name, but for the account of Tenant, for a term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term of this Lease) and on conditions and upon other terms (which may include concessions of free rent and alteration and repair of the Premises) as Landlord, in its sole discretion, may determine, and Landlord may collect and receive the rents. Landlord shall use reasonable efforts to relet the Premises and maximize the income generated by the Premises. No reentry or taking possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention be given to Tenant. No notice from Landlord hereunder or under a forcible entry and unlawful detainer statute or similar law shall constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right following any reentry and/or reletting to exercise its right to terminate this Lease by giving Tenant written notice, in which event the Lease will terminate as specific in the notice. (ii) If Landlord elects to take possession of the Premises as provided in this Subsection (a) without terminating the Lease, Tenant shall pay to Landlord (1) the Rent and other sums due under this Lease which would be payable if repossession had not occurred, less (2) the net proceeds, if any, of any reletting of the Premises after deducting all Landlord's expenses in connection with the reletting, including, but without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, expenses of employees, alteration, remodeling and repair costs and expenses of preparation of the reletting. If, in connection with any reletting, the new lease term extends beyond the existing term, or the premises covered include other premises not part of the Premises, a fair apportionment of the rent received from the reletting and the expenses incurred in connection with the reletting will be made in determining the net proceeds received from reletting. In addition, in determining the net proceeds from reletting, any rent concession will be apportioned over the term of the new Lease; or (b) To give Tenant written notice of intention to terminate this Lease on the date of the notice, or on any later date specified in the notice. Tenant's right to possession of the Premises shall cease and the Lease shall thereupon be terminated, except as to Tenant's liability under this Lease, as if the expiration of the term fixed in the notice were the end of the term originally demised, including as extended by the exercise of any options granted to Tenant. If this Lease is terminated pursuant to the provisions of this Subsection (b), or terminated pursuant to a proceeding for possession under the Colorado Forcible Entry and Unlawful Detainer Statutes, Tenant shall remain liable to Landlord 19 for damages in an amount equal to the Rent and other sums which would have been owing by Tenant under this Lease for the balance of the Term had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to the termination, after deducting all Landlord's expenses in connection with such reletting, including, but without limitation, the expenses enumerated in Subsection (a) above. Landlord shall be entitled to collect damages from Tenant monthly on the days on which the Rent and other amounts would have been payable if this Lease had not been terminated. 19.03 Cumulative Remedies. Suit or suits for the recovery of the Rent and ------------------- other amounts and damages may be brought by Landlord, from time to time, at Landlord's election, and nothing in this Lease shall be deemed to require Landlord to await the date when this Lease or its Term would have expired by limitation had there been no default by Tenant, or no termination, as the case may be. Each right and remedy provided for in this Lease shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise including but not limited to suits for injunctive relief and specific performance. The exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise. All such rights and remedies shall be considered cumulative and non-exclusive. All costs incurred by Landlord in connection with collecting any Rent or other amounts and damages owing by Tenant pursuant to the provisions of this Lease, or to enforce any provision of this Lease, including reasonable attorney's fees from the date such matter is turned over to an attorney, whether or not one or more actions are commenced by Landlord, shall also be paid by Tenant to Landlord. 19.04 No Waiver. No failure by Landlord to insist upon the strict --------- performance of any agreement, term, covenant or condition of this Lease or to exercise any right or remedy consequent upon a breach, and no acceptance of full or partial payment of Rent during the continuance of any breach, shall constitute a waiver of any breach or of the agreement to be performed or complied with by Tenant, and no breach shall be waived, altered or modified except by written instrument executed by Landlord. No waiver of any breach shall affect or alter this Lease, but each and every agreement, term, covenant and condition shall continue in full force and effect with respect to any other then existing or subsequent breach. Notwithstanding any termination of this Lease, the same shall continue in force and effect as to any provisions 20 which require observance or performance by Landlord or Tenant subsequent to such termination. 19.05 Bankruptcy. Nothing contained in this Section 19 shall limit or ---------- prejudice the right of Landlord to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding, an amount equal to the maximum allowed by any statute or rule of law governing such a proceeding, and in effect at the time when such damages are to be proved, whether or not the amount is greater, equal to or less than the amounts recoverable, either as damages or Rent, referred to in any of the preceding provisions of this Section. Notwithstanding anything contained in this Section to the contrary, any such proceeding or action involving bankruptcy, insolvency, reorganization, arrangement, assignment for the benefit of creditors, or appointment of a receiver or trustee, as set forth above, shall be considered to be an event of default only when the proceeding, action or remedy shall be taken or brought by or against the then holder of the leasehold estate under this Lease. SECTION 20 TAXES ----- During the Term hereof, Tenant shall pay, prior to delinquency, all business and other taxes, charges, notes, duties and assessments levied, and rates or fees imposed, charged, or assessed against or in respect of Tenant's occupancy of the Leased Premises or in respect of the personal property, trade fixtures, furnishings, equipment, and all other personal property of Tenant contained in the Premises, and shall hold Landlord harmless from and against all payment of such taxes, charges, notes, duties, assessments, rates, and fees, and against all loss, costs, charges, and expenses occasioned by or arising from any and all such taxes, charges, notes, duties, assessments, rates, and fees, any and all taxes. Tenant shall cause the fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the real and personal property of Landlord. If any or all of Tenant's fixtures, furnishings, equipment, and other personal property shall be assessed and taxes with Landlord's real property, Tenant shall pay to Landlord Tenant's share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's property. Tenant will allow Landlord to audit their records, upon written request, of all personal property, self-employment, sales, use and unemployment tax returns within thirty (30) days after they are filed with the appropriate government offices, together with any correspondence or tax bill pertaining to any tax that is not paid when due according to the taxing 21 authority, and if reasonably related to Tenant's occupation of the Premises. All of the above documents shall be considered confidential and only disclosed or used for Landlord's appropriate business purposes. Tenant's shall provide Landlord access to records of payment. SECTION 21 EMINENT DOMAIN -------------- If the Building, or a substantial part thereof, or a substantial part of the Premises, shall be lawfully taken or condemned (or conveyed under threat of such taking or condemnation) for any public or quasi-public use or purpose, the Term of this Lease shall end upon, and not before, the date of the taking of possession by the condemning authority. Tenant hereby assigns to Landlord Tenant's interest if any, in the award. Current Rent shall be apportioned as of the date of termination. If any part of the Building, other than the Premises or not constituting a substantial part of the Premises, shall be so taken or condemned (or conveyed under threat of such taking or condemnation), or if the grade of any street adjacent to the Building is changed by any competent authority and such taking or change of grade makes it necessary or desirable to substantially remodel or restore the Building, Landlord shall have the right to cancel this Lease upon not less than sixty (60) days' notice prior to the date of cancellation designated in the notice. No money or other consideration shall be payable by Landlord to Tenant for the right of cancellation, and Tenant shall have no right to share in any condemnation award, or in any judgment for damages, or in any proceeds of any sale made under any threat of condemnation of taking. @Nothing in this Section shall prevent Tenant from making and pursuing a claim against the condemning authority in its own right for termination of its leasehold interest. If this Lease is not cancelled, the Lease shall continue in full force and effect, without abatement or reduction of Rent. SECTION 22 SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST --------------------------------------------- 22.01 Lease Subordinate to Mortgages. ------------------------------ (a) This Lease and the rights of Tenant shall be and are hereby made subject and subordinate to the lien of any mortgages or deeds of trust now or hereafter existing against the Building, the Property or both, and to all renewals, modifications, consolidations, replacements and extensions thereof and to all advances made now or in the future. Although the subordination shall be self-operating, Tenant, or its successors in interest, 22 shall upon Landlord's request, execute and deliver upon the demand of Landlord any and all instruments desired by landlord, subordinating, in the manner reasonably requested by Landlord, this Lease to any mortgage or deed of trust. Landlord is hereby irrevocably appointed and authorized as agent and attorney-in-fact of Tenant to execute all subordination instruments if Tenant fails to execute the instruments within ten (10) days after notice from Landlord demanding their execution. The notice may be given in the manner provided for giving notice below. (b) Should any mortgage or deed of trust affecting the Building, the Property or both be foreclosed, then; (i) the liability of the mortgagee, beneficiary or purchaser at the foreclosure sale to Tenant shall exist only so long as the mortgagee, beneficiary, or purchaser is the owner of the Building and/or Property and the liability shall not continue or survive after further transfer of ownership; and (ii) Tenant shall be deemed to have attorned, as Tenant under this Lease, to the purchaser at any foreclosure sale and this Lease shall continue in force and effect as a direct lease between and binding upon Tenant and the purchaser at any foreclosure sale. As used in this Section 22, "mortgagee" and "beneficiary" shall include successors and assigns of any such party, whether immediate or remote, the purchaser of any mortgage or deed of trust, whether at foreclosure or otherwise, and the successors, assigns and mortgagees and beneficiaries of such purchaser, whether immediate or remote. 22.02 Tenant's Notices. In the event of any act or omission by Landlord ---------------- under this Lease which would give Tenant the right to terminate this Lease or to claim a partial or total eviction, Tenant will not exercise any such right until: (a) it has given thirty days written notice (by United States certified or registered mail, postage prepaid or by delivery) of such act or omission to the holder of any mortgage or deed of trust on the Property (whose names and addresses Landlord agrees will be furnished to Tenant on request) with a copy to Joel C. Davis, Dietze & Davis and Porter, P.C., P.O. Box 1530, Boulder, Colorado 80306; and (b) any holder of any mortgage or deed of trust on the Property shall, following the giving of such notice, have failed with reasonable diligence to commence and to pursue reasonable action to remedy the act or omission. 23 SECTION 23 WAIVER ------ The waiver by Landlord of any breach of any term, covenant, or condition in this Lease shall not be deemed to be a waiver of the term, covenant, or condition, or any subsequent breach of the same or any other term, covenant or conditions. The acceptance of Rent hereunder shall not be construed to be a waiver of any breach by Tenant of any term, covenant, or condition of this Lease, it being understood and agreed that the remedies given to Landlord shall be cumulative, and the exercise of any one remedy by Landlord shall not be to the exclusion of any other remedy. SECTION 24 SUBROGATION ----------- The parties to this Lease agree that any and all fire and extended coverage insurance which is required to be carried by either shall be endorsed with a subrogation clause, substantially as follows: "This insurance shall not be invalidated should the insured waive, in writing, prior to a loss, any and all right of recovery against any party for loss occurring to the property described herein." Each party waives all claims for recovery from the other party, its officers, agents or employees for any loss or damage (whether or not such loss or damage is caused by negligence of the other party, and notwithstanding any provisions contained in this Lease to the contrary) to any of its real or personal property insured under valid and collectible insurance policies to the extent of the collectible recovery under the insurance. SECTION 25 PLATS AND RIDERS ---------------- Appendices, clauses, plats, and riders, if any, referred to in this Lease and signed or initialed by Landlord and Tenant and are fixed to this Lease are hereby incorporated in and made a part of this Lease. SECTION 26 SALE BY LANDLORD ---------------- In the event of a sale or conveyance or transfer by Landlord of its interest in the Property and/or in the Building containing the Premises, and/or in this Lease, the same shall operate to 24 release Landlord from any future liability upon any of the covenants or conditions, expressed or implied, contained in favor of Tenant, and in that event, Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease. This Lease shall not be affected by any such conveyance or transfer, and Tenant agrees to attorn to such purchaser or transferee. SECTION 27 RIGHT OF LANDLORD TO PERFORM ---------------------------- All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense, and without any abatement of Rent. If Tenant shall fail to pay any sum of money, other than Rent, required to be paid by it, or shall fail to perform any other act on its part to be performed, and the failure shall continue for thirty (30) days after written notice by Landlord, Landlord may, but shall not be obligated to do so, and without waiving or releasing Tenant from any obligations of Tenant, make any payment or perform any other act on Tenant's part to be made or performed as in this Lease provided. All sums so paid by Landlord and all necessary incidental costs, together with interest at the rate of one and one-half percent (1-1/2%) per month from the date of a payment by Landlord, shall be payable to Landlord on demand, and Tenant covenants to pay any such sums, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the non-payment thereof by Tenant, as in the case of default by Tenant in the payment of Rent. SECTION 28 ATTORNEY'S FEES --------------- In the event of any litigation or arbitration between Tenant and Landlord to enforce any provision of this Lease or any right of either party, the unsuccessful party to such litigation or arbitration shall pay to the successful party all costs and expenses, including reasonable attorney's fees, incurred. SECTION 29 ESTOPPEL CERTIFICATE -------------------- Tenant shall, at any time and from time to time, upon not less than ten (10) days prior written notice from Landlord, execute, 25 acknowledge, and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the dates to which the Rent and other charges are paid, and acknowledging that Tenant is paying Rent on a current basis with no offsets or claims, and there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder (or specifying the offsets, claims, or defaults, if any are claimed). It is expressly understood and agreed that any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Building or by any other person to whom it is delivered. Tenant's failure to deliver the statement within the required time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord's performance, and that not more than two (2) months rental has been paid in advance. SECTION 30 NOTICE ------ Any notice from Landlord to Tenant or from Tenant to Landlord shall be in writing and may be served personally or by mail. If served by mail, it shall be mailed by registered or certified mail, return receipt requested, addressed to Tenant at the Premises or to Landlord at the place from time to time established for the payment of Rent. Notices shall be effective when delivered, if served personally, or three (3) days after mailing, if mailed. If no one at the Premises is available to accept the notice, then it shall be deemed effective upon the second refusal or uncompleted mail delivery attempt. SECTION 31 RIGHTS RESERVED --------------- Landlord reserves the following rights, exercisable with approval of Tenant, which will not be unreasonably withheld and without liability to Tenant for damage or injury to property, person, or business, and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession, or giving rise to any claim for set-off or abatement of rent: (a) To change the Building's name or street address; 26 (b) To install, affix, and maintain any and all signs on the exterior and interior of the Building; (c) To retain at all times, and to use in appropriate instances, keys to all doors within and into the Premises. No locks or bolts shall be altered, changed, or added without the prior written consent of Landlord; (d) To have and retain a paramount title to the Premises, free and clear of any act of Tenant; subject to rights of Tenant hereunder. SECTION 32 REAL ESTATE BROKER ------------------ Tenant represents that Tenant has dealt directly with Landlord in connection with this Lease, and that insofar as Tenant knows, no other broker negotiated or participated in the negotiations of this Lease, or submitted or showed the Premises, or is entitled to any commission in connection herewith. SECTION 33 N/A --- SECTION 34 MISCELLANEOUS PROVISIONS ------------------------ (a) The words "re-enter", or "re-entry", as used in this Lease, are not restricted to their technical legal meaning. The term "Landlord", as used in this Lease, means only the landlord from time to time, and upon conveying or transferring its interest, Landlord shall be relieved from any further obligation or liability pursuant to Section 27. (b) Time is of the essence of this Lease and of each and all of its provisions. (c) Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution by both Landlord and Tenant. (d) The invalidity or unenforceability of any provision in this Lease shall not affect or impair any other provisions. 27 (e) This Lease shall be governed by and construed pursuant to the laws of the State of Colorado. (f) Should any mortgagee or beneficiary under a deed of trust require a modification of this Lease, which modification will not bring about any increased cost or expense to Tenant or will not in any other way substantially change the rights and obligations or Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified with Tenant's written approval; such approval shall not be unreasonably withheld. (g) All rights and remedies of Landlord under this Lease, or those which may be provided by law, may be exercised by Landlord in its own name individually, or in its name by its agent, and all legal proceedings for the enforcement of any rights or remedies, including distress for rent, unlawful detainer, and any other legal or equitable proceedings, may be commenced and prosecuted to final judgment and be executed by Landlord in its own name individually or in its name by its agent. Landlord and Tenant each represent to the other that each has full power and authority to execute this Lease and to make and perform the agreements herein contained, and Tenant expressly stipulates that any rights or remedies available to Landlord, either by the provisions of this Lease or otherwise, may be enforced by Landlord in its own name individually or in its name by its agent or principal. (h) The marginal headings and titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (i) Tenant acknowledges that there are no covenants, representations, warranties, agreements, or conditions, expressed or implied, collateral or otherwise, forming part of or in any way effecting or relating to this Lease except as expressly set out in this Lease and the attachments and exhibits to this Lease, and that the terms and provisions of this Lease may not be modified or amended except by written instrument signed by both Landlord and Tenant. SECTION 35 SUCCESSORS AND ASSIGNS ---------------------- Subject to the terms and provisions of Section 28, the covenants and conditions contained in this Lease shall apply to and bind the respective heirs, successors, executors, administrators, and assigns of the parties hereto, and the terms "Landlord" and "Tenant" shall include the successors and assigns of either such party, whether immediate or remote. 28 SECTION 36 QUIET ENJOYMENT --------------- Subject to the terms and provisions of this Lease, Landlord covenants and agrees that Tenant, upon complying with all of the obligations of Tenant under this Lease shall peaceably and quietly enjoy the Premises and Tenant's rights under this Lease during its Term, without hindrance by Landlord or any persons claiming under Landlord. SECTION 37 RECORDING --------- This Lease shall not be recorded by Landlord or Tenant. SECTION 38 RIGHT OF FIRST REFUSAL AND OPTION --------------------------------- 39.01 Any time that additional space in the Building becomes available for rent, Landlord shall provide Tenant with a written notice stating the terms and conditions upon which Landlord is willing to lease the additional space. Tenant shall then have forty-five (45) days to exercise this option to lease the space identified in the notice pursuant to the terms and conditions set forth in the notice. If Tenant does not notify Landlord within the 45 day period of its intention to exercise this option and lease ,the available space, Landlord may freely market the Property on those terms and conditions and lease the available space at those terms and conditions for a period of six months following the expiration of Tenant's option. If the terms and conditions change during the course of Landlord's attempts to lease the space, Landlord shall reoffer the available space to Tenant for an additional thirty (30) day option period based upon the changed terms and conditions. Tenant shall then have thirty (30) days after receipt of the revised terms and conditions to lease the available space pursuant to the terms set forth in the notice. The intent of this paragraph is that Landlord shall offer to Tenant the most favorable terms and conditions that he is willing to accept from any tenant to occupy any available space in the Building. 39.02 Tenant shall have an option to lease an additional contiguous ten thousand square feet two years from commencement of this Lease and still another ten thousand contiguous square feet 29 four years from commencement of this Lease, with the same terms and conditions contained herein. The lease rate will be that which is in effect at the time of exercise of this option. Upon commencement of Lease, tenant finish mix is 40 percent office, 40 percent manufacturing and 20 percent warehouse, and Lease Rate was determined using this mix. It is agreed that costs of tenant finish will differ from original costs and Landlord and Tenant shall agree at the time of expansion to the affect of the costs upon the Lease Rate. SECTION 40 RELIANCE BY LANDLORD -------------------- As of the date of executing this Lease, the Premises consist of unimproved real property. Landlord intends to proceed with construction of the Premises in reliance upon Tenant's covenants, obligations and representations contained in this Lease. Tenant hereby acknowledges and accepts Landlord's reliance in this regard. As additional consideration from Tenant to Landlord, Tenant hereby agrees to provide updated business financial statements and tax returns not less frequently than annually. LANDLORD: __________________________ Terrence J. O'Connor TENANT: B I INCORPORATED By: __________________________ Jeffrey J. Hiller Vice President of Finance By: __________________________ David J. Hunter, President 30 EX-4.8 3 PROPERTY LEASE COMPANY & POINT II LLC EXHIBIT 4.8 LEASE BETWEEN BI. INCORPORATED AND POINT II, LLC TABLE OF CONTENTS SECTION 1 PURPOSE SECTION 2 TERM SECTION 3 COMPLETION OF THE PREMISES SECTION 4 RENT SECTION 5 TAXES AND OPERA TING COST ADJUSTMENT FORMULA SECTION 6 HOLDING OVER SECTION 7 BUILDING SERVICES SECTION 8 CONDITION OF PREMISES SECTION 9 USE OF LEASED PREMISES SECTION 10 COMPLIANCE WITH LAW SECTION 11 ALTERATIONS AND REPAIRS SECTION 12 ABANDONMENT SECTION 13 ASSIGNMENT AND SUBLETTING SECTION 14 SIGNS AND ADVERTISING SECTION 15 DAMAGE TO PROPERTY, INJURY TO PERSONS SECTION 16 TENANT'S INSURANCE SECTION 17 DAMAGE OR DESTRUCTION SECTION 18 ENTRY BY LANDLORD SECTION 19 DEFAULT BY TENANT 2 TABLE OF CONTENTS CON'T SECTION 20 TAXES SECTION 21 EMINENT DOMAIN SECTION 22 SUBORDINATION TO MORTGAGES AND DEEDS SECTION 23 WAIVER SECTION 24 SUBROGATION SECTION 25 PLATS AND RIDERS SECTION 26 SALE BY LANDLORD SECTION 27 RIGHT OF LANDLORD TO PERFORM SECTION 28 ATTORNEY'S FEES SECTION 29 ESTOPPEL CERTIFICATE SECTION 30 NOTICE SECTION 31 RIGHTS RESERVED SECTION 32 REAL ESTATE BROKER SECTION 33 MISCELLANEOUS PROVISIONS SECTION 34 SUCCESSORS AND ASSIGNS SECTION 35 QUIET ENJOYMENT SECTION 36 RECORDING SECTION 37 RELIANCE BY LANDLORD SECTION 38 OPTION TO EXTEND SECTION 39 SECURITY DEPOSIT 3 LEASE THIS LEASE made this 2lst day of February, 1997, between BI Incorporated ---- -------- ---------------- ("Tenant"), and-Point II, LLC ("Landlord"). ------------- WITNESSETH: DEMISE ------ Landlord does hereby lease to Tenant and Tenant hereby hires from Landlord an approximate 5504 - square feet (the "Premises," or, alternatively, the ---- "Leased Premises") Point II (the "Building"), which Building is situated on land -------- described as 6325 Gunpark Drive (the "Property"), together with a non-exclusive ------------------ right, subject to the provisions of this Lease, to use all appurtenances thereto, including, but not limited to, any plazas, common areas, walks, ways or other areas in the Building or on the Property designated by Landlord for the exclusive or non-exclusive use of the tenants of the Building. The leased premises is calculated by taking 4909 useable square feet and applying an ---- allocation of the common area ("load factor") which for the building is approximately 12 percent. --- The Lease is upon and subject to the terms, conditions, and covenants set forth below and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of the terms, conditions, and covenants by it to be kept and performed and that this Lease is made upon the condition of such performance. SECTION 1 PURPOSE ------- 1.01 Use of Premises. The Premises are to be used for office --------------- /warehouse/research & development and related functions, provided that such uses comply with all zoning and use restrictions, and for no other purpose without the prior written consent of Landlord. 4 SECTION 2 TERM ---- 2.01 Primary Term. The term of this lease shall be for a period of ------------ Thirty-one months and Twenty days, commence on Wednesday, March 26th, 1997 and end at 5:00 p.m. Denver time November 14th, 1999 (the 'Primary Lease Term'). SECTION 3 COMPLETION OF THE PREMISES -------------------------- (See Space Plan. Addendum "A") Tenant shall have a Build Out Allowance of 0 -- or 0 per useable square foot. The Build out Allowance includes all costs -- incurred in designing, permitting, construction, and installation of Tenant Improvements. All costs in excess of allowance are to be paid by Tenant. SECTION 4 RENT ---- 4.01 Base Rent. Tenant agrees to pay Landlord during the full Primary --------- Lease Term the sum of $ 52,288.00, payable in advance in equal monthly --------- installments of $ 1,651.20 for the Premises: The first full monthly installment ---------- of Base Rent shall be payable on the Commencement Date and each succeeding monthly installment shall be due and payable on or before the first day of each and every successive calendar month thereafter during the Primary Lease Term. 4.02 No Offsets. The Base Rent and all other sums or changes required by ---------- this Lease to be paid by Tenant to Landlord, (all of which are sometimes collectively referred to as "Rent") shall be paid to Landlord without deduction or offset, in lawful money of the United States of America, at the office of Terrence O'Connor, 1600 38th Street, Suite 203, Boulder, Colorado, 80301, or to such other person or at such other place as Landlord may from time to time designate in writing. 4.03 Interest on Late Payments. Any Rent or other amount due from Tenant ------------------------- to Landlord under this Lease not paid within five (5) days of when due shall bear interest from the date due, computed on a daily basis, until the date paid, at the rate of one and one-half 5 percent (1 -1/2%) per month until paid, but the payment of the interest shall not excuse nor cure any default by Tenant under this Lease. 4.04 Late Payment Charge. Further, and notwithstanding the interest ------------------- charges provided for in the preceding subsection 4.03, if any Rent or other amounts owing hereunder are not paid within five (5) days of when due, Landlord and Tenant agree that Landlord will incur additional administrative and financial expenses and inconveniences the amount of which will be difficult if not impossible to determine. Accordingly, Tenant shall pay to Landlord an additional one-time late charge for any late monthly payment in the amount of five percent (5%) of the amount of the payment. 4.05 Inflation Index. The Base Rent shall be further increased annually --------------- on each March lst commencing on March l, 1998, by an amount determined as --------- ------------- follows: (a) As promptly as practical after February of every year beginning March -------- ----- 1. 1998, the lease rate shall increase by five (5) percent. - ------- SECTION 5 TAXES AND OPERATING COST ADJUSTMENT FORMULA ------------------------------------------- 5.01 Additional Rent. In addition to Base Rent, Tenant shall reimburse --------------- Landlord for the Taxes and Operating Costs of the Building in the manner, at the times, and in the amounts set forth in this Section 5. 5.02(a) Taxes. The Rent payable by Tenant shall be increased by the amount ----- of "Tenant's Proportional Share" of the Taxes on the Property. Tenant's Proportional Share shall be approximately 13.17% based upon Tenant's occupancy ------ of approximately 5504 square feet out of a total building rental space of ----- approximately 41,798 square feet. In determining the amount of Taxes for any ------ calendar year, the amount of special assessments to be included shall be limited to the amount of the installment (plus any interest payable thereon) of such special assessment which would have been required to have been paid during such calendar year if Landlord had elected to have the special assessment paid over the maximum period of time permitted by law, if the election is available to Landlord. All reference to Taxes "for' and "billed for' a particular calendar year shall be deemed to refer to Taxes levied, assessed, billed or otherwise imposed for such calendar year, without regard to the dates when any such Taxes are due and payable. (b) Definition. As used in this Lease, the term 'Taxes" means any and all ---------- general and special taxes and impositions of every kind and nature whatsoever levied, assessed, or imposed upon, or with respect to, the Premises, any leasehold improvements, fixtures, installations, additions and equipment, whether owned by Landlord or Tenant, or either because of or in connection with Landlord's ownership, leasing and operation of the Building and the Property, including, without limitation, real estate taxes, personal property taxes, 6 general or special assessments, and duties or levies charged or levied upon or assessed against the Building and the Property and personal property, or any tax or excise on rent or any other tax (however described) on account of rental received for use and occupancy of any or all of the Building and the Property, whether any such taxes are imposed by the United States, the State of Colorado, the County of Boulder, or any local governmental municipality, authority, or agency or any political subdivision. Taxes shall not included any net income, capital stock, succession, transfer, franchise, gift, estate or inheritance taxes. (c) Payment. Commencing with the first calendar month of this Lease, ------- Tenant shall pay to Landlord on the first day of each calendar month until the next upward adjustment date (which period between adjustment dates is herein called a "Tax Deposit Year') one-twelfth of the estimated amount of the Taxes. Amounts paid under this Subsection 5.02(c) in any Tax Deposit Year shall be reconciled with amounts actually billed to Landlord for the same Tax Deposit Year, and provided there is any surplus remaining after the credit to Tenant and provided Tenant shall not then be in default under any of the provisions of this Lease, Landlord shall, at Landlord's option, either refund the amount of the surplus to Tenant within thirty (30) days following the end of the Tax Deposit Year or apply the surplus amount against any other amounts then due from Tenant to Landlord. If upon the reconciliation there is any deficiency in the amount of Taxes paid by Tenant, Landlord shall bill Tenant and Tenant shall pay the additional amount on the first day of the next month. 5.03(a) Inclusion in Operating Costs. Tenant shall pay its Proportional ---------------------- Share of the Operating Costs for the Property. As used in this Lease, the term "Operating Costs" means any and all expenses, costs and disbursements (other than Taxes) of every kind and nature whatsoever, which are paid or accrued by Landlord in connection with the management, maintenance, operation or repair of the Building, including, without limitation; (I) Costs of supplies; (ii) Costs incurred in connection with obtaining and providing energy for the Building, including but not limited to, costs of propane, butane, natural gas, steam, electricity, fuel oils, coal or any other energy sources, except if separately metered to the Leased Premises, in which case Tenant shall pay 100% of its metered amount; (iii) Costs of water and sanitary sewer and storm drainage services; (iv) Costs of general maintenance and repairs, including costs of heating, ventilation and air conditioning systems and the cost of exterior building and roof maintenance and repairs; (v) Cost of insurance; (vi) Costs of maintenance and replacement of landscaping; 7 (vii) Labor costs associated with operation and maintenance of the Building; and management fees. Management fees are currently at 5.5% of Rental Revenue. (b) Exclusion from Operating Costs. "Operating Costs" shall not include: ------------------------------ (i) Costs of repairs or other work occasioned by fire, windstorm or other insured casualty to the extent of insurance proceeds received; (ii) Leasing commissions, advertising, advertising expenses, and other costs incurred in leasing space in the Building; (iii) Costs of repairs or building necessitated by condemnation; (iv) Any interest on borrowed money or debt amortization, except as specifically set forth above; (v) Depreciation on the Building; (vi) Any settlement, payment or judgment incurred by Landlord or the Building manager due to their willful misconduct or gross negligence, as established by a court of law, which is not covered by insurance proceeds; (vii) Cost of any damage to the building caused directly by Landlord's willful misconduct or gross negligence, as established by a court law, which is not covered by insurance proceeds. (viii) Cost of structural repairs or reconstruction of any portion of the Building. (ix) Costs of providing utility lines to the Building or repairing such lines if they break (but not if they are plugged by Tenant's usage). (c) Warranties. Tenant shall be entitled to a reimbursed for any amounts ---------- collected by Landlord under any manufacturer's warranty on any systems or machinery used in the Building; provided that Tenant has previously paid to Landlord the repair expense relating to Landlord's warranty claim. (d) Payment. Beginning on the Commencement Date, Landlord shall supply ------- Tenant with written notice of Landlord's estimate of the Operating Expenses that will be incurred or accrued during the current calendar year (the "Deposit Year"). On or before the first day of each month during such Deposit Year, Tenant shall pay to Landlord one-twelfth of Tenant's Proportionate share of the estimated amount. If the monthly deposit amount is not determined in time for Tenant to make the first payment on January 1 of the Deposit Year, then the first monthly payment shall be due on the first day of the month immediately following the date Landlord supplies Tenant with notice of the amount and the first monthly payment(s) shall also include a payment equal to one-twelfth of such additional sum 8 multiplied by the number of calendar months which have elapsed during the Deposit Year prior to the date Tenant makes its first payment. If the total of the estimated payments made by Tenant during the Deposit Year are less than Tenant's obligation under this Lease for Operating Costs for the Deposit Year, then Tenant, within thirty (30) days of the billing therefor, shall pay the deficiency to Landlord. If the total of the Tenant's estimated payments for the Deposit Year exceed Tenant's obligation for excess Operating Costs for such year, then the surplus shall be handled in the manner provided in the last sentence of Section 5.02(c). 5.04 Audit and Adjustment Procedures. ------------------------------- (a) The annual determination and statement of Taxes and Operating Costs shall be prepared in accordance with generally accepted accounting principles. In the event of any dispute as to any Rent due under this Lease, Tenant shall have the right to inspect Landlord's accounting records relative to Taxes and Operating Costs at the office in which Landlord maintains its records during normal business hours at any time following the furnishing by Landlord to Tenant of the statement. Any errors shall be adjusted accordingly. (b) If the Term of this Lease commences on any day other than the first day of March 26, 1997, or if the Term of this Lease ends on any day other than -------------- the last day of November 14, 1999, any payment due to Landlord by reason of an ----------------- increase in Taxes or Operating Costs shall be prorated on the basis by which the number of days in such partial year bears to 365. (c) All sums which Tenant is required to pay or discharge pursuant to Section 5 of this Lease in addition to Base Rent, together with any interest or other sums which may be added for late payment, shall constitute "Rent". SECTION 6 HOLDING OVER ------------ 6.01 Rent Increase. Should Tenant hold over after the termination of this ------------- Lease , whether the termination occurs by lapse of time or otherwise, Tenant shall become a tenant from day-to-day upon each and all of the terms herein provided as may be applicable to such a tenancy, and any such tenancy shall not constitute an extension of this Lease; provided, however, during the period as a tenant from day-to-day, Tenant shall pay Base Rent at 140% the rate payable for the month immediately preceding the date of termination of this Lease and, in addition, Tenant shall reimburse Landlord for all damages (consequential, as well as direct) sustained by it by reason of Tenant's occupying the Premises past the termination date. Alternatively, at the election of Landlord and expressed in a written notice to Tenant and not otherwise, the retention of possession past the termination date shall constitute a 9 month-to-month tenancy upon each and all of the terms of this Lease as may be applicable to a month-to-month tenancy. The provisions of this paragraph shall not exclude nor waive Landlord's right of re-entry or any other right hereunder. SECTION 7 --------- BUILDING SERVICES ----------------- 7.01 Interruption of Standard Services. Tenant agrees that Landlord shall --------------------------------- not be liable for failure to supply any heating, air conditioning, janitorial services, electric current, or any other utility during any period when Landlord uses reasonable diligence to restore or to supply such services or utility. Landlord reserves the right to temporarily discontinue such services at times as may be necessary by reason of accident, repairs, alterations, or improvements, or whatever by reason of strikes, lockouts, riots, acts of God, or any other happening or occurrence beyond the reasonable control of Landlord, provided such discontinuance does not substantially interfere with Tenant's business operations. 7.02 Telephone. Tenant shall separately arrange with the applicable local --------- public authorities or utilities, as the case may be, for the furnishing of and payment for all telephone services as may be required by Tenant in the use of the Premises. Tenant shall directly pay for such telephone services, including the establishment and connection thereof, at the rates charged for the services by the authority or utility, and the failure of Tenant to obtain or to continue to receive the services for any reason whatsoever shall not relieve Tenant of any of its obligations under this Lease. Landlord shall supply sufficient telephone lines into the Building for Tenant's connection. 7.03 Above-Standard Service Requirements. If heat-generating machines or ----------------------------------- any equipment cause the temperature in the Premises, or any part, to exceed the temperatures that the Building's air conditioning and other cooling systems would be able to maintain in the Premises were it not for the heat-generating equipment then Landlord reserves the right to install supplementary air conditioning units in the Premises, and the cost, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. If Tenant requires electric current, water, or any other energy in excess of that which is reasonably obtainable from existing electrical outlets or water pipes, and which is, in Landlord's opinion, above normal for use of the Premises, Tenant shall first procure the consent of Landlord, which Landlord may not unreasonably refuse. If Landlord consents to such excess electric, water, or other energy requirements, Tenant shall, on demand, pay all costs of meter service and installation of facilities necessary to measure and/or furnish such excess capacity. Tenant shall also pay the entire cost of such additional electricity, water, or other energy used. SECTION 8 10 CONDITION OF PREMISES --------------------- 8.01 Acceptance Upon Possession. Tenant, by taking possession of the -------------------------- Premises, shall be deemed to have agreed that the Premises were, as of the date of taking possession, in good order, repair, and condition and satisfactorily completed in accordance with Landlord's obligations under this Lease. No promise of Landlord to alter, remodel, decorate, clean or improve the Premises, the Building, or the Property and no representation or warranty, express or implied, respecting the condition of the Premises, the Building, or the Property has been made by Landlord to Tenant, unless the same is contained in this Lease, the Work Agreement, the Plans or some other written agreement. This Lease does not grant any rights to light or air over the Premises or the property. SECTION 9 USE OF LEASED PREMISES ---------------------- 9.01 Use. The Leased Premises shall not be used other than for the --- purpose set forth in Section 1 of this Lease. Tenant's use shall at all times comply with all applicable laws, ordinances, regulations, or other governmental ordinances in existence. 9.02 Hazardous Use. Tenant agrees that it will not keep, use, sell or ------------- offer for sale in or upon the Leased Premises any article which may be prohibited by any insurance policy in force from time to time covering the Building. In the event Tenant's occupancy or conduct of business in or on the Leased Premises, whether or not Landlord has consented to the same, results in any increase in premiums for the insurance carried from time to time by Landlord with respect to the Building, Tenant shall pay any such increase in premiums as Rent within ten (10) days after bills for such additional premiums shall be rendered by Landlord. Tenant shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Leased Premises. 9.03 No Waste. Tenant shall not commit, suffer, nor permit any waste, -------- damage, disfiguration, or injury to the Leased Premises or the Building's common areas or the fixtures and equipment located in or on the Building, or permit or suffer any overloading of the floors and shall not place any safes, heavy business machinery, or other heavy things in the Premises other than as specifically provided for in the Work Agreement and Plans, without first obtaining the written consent of Landlord and, if required by Landlord, of Landlord's architect, and shall not use or permit to be used by any part of the Leased Premises for any dangerous, noxious, or offensive trade or business, and shall not cause or permit any nuisance, noise, or action in, at, or on the Leased Premises. 9.04 Protection Against Insurance Cancellation. If any insurance policy ----------------------------------------- on the Building or any part thereof shall be canceled or if cancellation shall be threatened, or if the 11 coverage shall be reduced or be threatened to be reduced, in any way by reason of the use of occupation of the Leased Premises or any part thereof by Tenant, any assignee or subtenant of Tenant, or by anyone permitted by Tenant to be upon the Leased Premises, and if Tenant fails to take reasonable efforts to remedy the condition giving rise to the cancellation, threatened cancellation, reduction, or threatened reduction of coverage within forty-eight (48) hours after notice or to complete the remedy within ten (10) days after notice, Landlord may, at its option, enter upon the Leased Premises and attempt to remedy the condition, and Tenant shall forthwith pay the cost to Landlord as additional Rent. Landlord shall not be liable for any damage or injury caused to any property of Tenant or of others located on the Leased Premises as a result of such entry unless such damage or injury is a result of Landlord's gross negligence. SECTION 10 COMPLIANCE WITH LAW ------------------- 10.1 Compliance. Tenant shall not use the Premises or permit anything to ---------- be done in or about the Premises which will in any way conflict with any law, statute, ordinance, or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statues, ordinances, and governmental rules, regulations, or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use, or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. SECTION 11 ALTERATIONS AND REPAIRS ----------------------- 11.01 Tenant to Maintain. Tenant shall, at its sole expense, keep the ------------------ Premises in good repair and tenantable condition during the Term of this Lease (Excluding roof & exterior walls which if repaired by Landlord will be recovered from tenant through common area expenses). Tenant shall not, without the prior written consent of the Landlord which shall not be unreasonably withheld so long as Tenant demonstrates financial assurance of its ability to restore the Premises to original condition, make any alterations, improvements, or additions to the Premises, including, but not limited to, partitions, wall coverings, floor coverings, and special lighting or equipment installations. If Tenant desires to make any alterations, improvements, or additions, Tenant shall first submit to Landlord plans and specifications and obtain Landlord's written approval prior to commencing any work. All alterations, improvements, or additions, whether temporary or permanent in character, made 12 by Landlord or Tenant in or upon the Premises shall become Landlord's property and shall remain upon the Premises at the termination of this Lease by lapse of time or otherwise, without compensation to Tenant (excepting only Tenant's movable office furniture, trade fixtures, and office and professional equipment or other personal property). Landlord shall have the right to require Tenant to remove the alterations, improvements, or additions at Tenant's cost upon the termination of this Lease, and the repair of any damage caused to the Premises or the Building as a result of any removal shall be paid for by Tenant. Tenant shall promptly pay to Tenant's contractors, when due, the cost of all work and of all decorating, and upon completion, deliver to Landlord, if payment is made directly to Tenant's contractors, evidence of payment and waivers of all liens for labor, services, or materials. Tenant shall defend and hold Landlord, the Premises, the Building, and the Property harmless from all costs, damages, liens for labor, services, or materials relating to the work, and shall defend and hold Landlord harmless from all costs, damages, liens, and expenses related to the work. If Landlord incurs any expenses in the removal of trash or cleaning as a result of Tenant's contractor's work then Tenant agrees it shall reimburse Landlord within seven (7) days of billing. 11.02 Protection Against Liens. At least five (5) days prior to the ------------------------ commencement of any work on the Leases Premises, Tenant shall notify Landlord of the names and addresses of the persons supplying labor and materials for the proposed work so that Landlord may avail itself of the provisions of statutes such as Section 38-22-105(2) of the Colorado Revised Statutes (1973). During the progress of any work on the Leased Premises, Landlord or its representatives shall have the right to post and keep posted thereon notices such as those provided for by Sections 38-22-105(2) (C.R.S. 1973) or to take any further action which Landlord may deem to be proper for the protection of Landlord's interest in the Leased Premises. Landlord may also as a condition to his consent to work being performed on the Premises require Tenant to post a performance and completion bond for the benefit of Landlord in an amount equal to one and one-half times the cost of the work to be performed, provided that the total cost of the work exceeds $5,000.00. 11.03 Condition on Surrender. Tenant shall, at the termination of this ---------------------- Lease, surrender the Premises to Landlord in as good condition and repair as reasonable and proper use will permit, loss by ordinary wear and tear, fire, and other insured again casualty excepted, and in the state of broom cleanliness. 11.04 Damage by Tenant. If any part of the Building or other improvements ---------------- become damaged or are destroyed through the negligence, carelessness, or misuse of Tenant, its servants, agents, employees, or anyone permitted by Tenant to be in the Building, or through Tenant or such parties, then the cost of necessary repairs, replacements, or alterations shall be borne by Tenant, who shall, on demand, forthwith pay the same to Landlord as Rent. SECTION 12 13 ABANDONMENT ----------- 12.01 Disposition of Personal Property". Tenant shall not vacate or --------------------------------- abandon the Premises at any time during the Lease Term, and if Tenant shall abandon, vacate, or surrender (whether at the end of the stated Term or otherwise) the Premises, or shall be dispossessed by process of law or otherwise, then any personal property belonging to Tenant left on the Premises shall be deemed abandoned and may be sold or otherwise disposed of by Landlord without any liability to Tenant whatsoever. Tenant shall not at any time remove Landlord's property or any fixtures constituting property of Landlord from the Premises. Any removal of Landlord's property from the Premises by Tenant shall constitute a material breach of this Lease and Landlord shall have the right to take all reasonable steps to stop or prevent such breach without such actions constituting a constructive eviction of Tenant. SECTION 13 ASSIGNMENT AND SUBLETTING ------------------------- 13.01 Limitation on Assignment or Subletting. Tenant shall not assign -------------------------------------- this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or shall not suffer any other person to occupy or use the Premises or any portion thereof, without the written consent of Landlord first had and obtained, which consent may not be unreasonably withheld. Neither this Lease nor any interest there in shall be assignable as to the interest of Tenant by operation of law without the written consent of Landlord, which consent may not be unreasonably withheld. 13.02 Acceptance of Performance No Waiver. If this Lease is assigned, or ----------------------------------- if the Premises or any part are sublet or occupied by anybody other than Tenant, Landlord may, upon default by Tenant, collect the rent from the assignee, subtenant, or occupant and apply the net amount collected to the Rent. Upon assignment pursuant to the terms of this section, Tenant shall be relieved of further liability under this Lease as to the assigned premises. Consent by Landlord to any one assignment or subletting shall not in any way be construed as relieving Tenant from obtaining the Landlord's express written consent to any further assignment or subletting. 13.03 Landlord to Approve Documents. All documents utilized by Tenant to ----------------------------- evidence any subletting or assignment to which Landlord has consented shall be subject to prior approval by Landlord or its attorney. Tenant shall pay on demand all Landlord's costs and expenses, including reasonable attorneys' fees, incurred in determining whether or not to consent to any requested subletting or assignment and in reviewing and approving such documentation which shall not exceed $500. SECTION 14 SIGNS AND ADVERTISING --------------------- 14 Tenant shall not install, paint, display, inscribe, place, or affix any sign, picture, advertisement, notice, lettering, or direction in the interior of the Leased Premises which is visible from the outside of the Building or on the exterior of the Building without the prior written consent of Landlord unless provided for in the Plans. SECTION 15 DAMAGE TO PROPERTY, INJURY TO PERSONS ------------------------------------- 15.01 Damage by Tenant. Tenant agrees to pay for all damage to the ---------------- Building or the Premises, as well as all damage to tenants or occupants thereof caused by Tenant's misuse or neglect of the Premises, its apparatus or appurtenances, or caused by any licensee, contractor, agent, or employee of Tenant. Notwithstanding the foregoing provisions, neither Landlord nor Tenant shall be liable to one another for any loss, damage, or injury caused by its act or neglect to the extent that the other party has recovered the amount of such loss, damage, or injury from an insurer and the insurance company is bound by this waiver of liability. 15.02 Tenant's Property. Particularly, but not in limitation of the ----------------- foregoing paragraph, all property belonging to Tenant, or any occupant of the Premises, that is in the Building or the Premises, shall be there at the risk of Tenant or other person only, and Landlord or its agents or employees (except in the case of gross negligence of Landlord or its agents or employees) shall not be liable for: (I) damage to or theft or misappropriation of such property; (ii) any damage to property entrusted to Landlord, its agents, or employees, if any; (iii) loss of or damage to any property by theft or otherwise, by any means whatsoever; (iv) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, snow, water, or rain which may leak from any part of the Building or from the pipes, appliances, or plumbing works therein or from the roof, street, subsurface, or from any other place, or resulting from dampness or any other cause whatsoever; or (v) interference with the light, air, or other incorporeal hereditament. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Building or of observed defects in the Building, its fixtures or equipment. SECTION 16 TENANT'S INSURANCE ------------------ 15 16.01 Insurance. Tenant shall, during the entire Term of this Lease, at --------- its sole cost and expense, obtain, maintain, and keep in full force and effect the following types of insurance: (a) Fire and extended coverage insurance, including endorsements for vandalism, malicious mischief, theft, sprinkler leakage, covering all of Tenant's property, including, but not limited to, furniture, fittings, equipment, installations, alterations, additions, partitions, fixtures, and anything in the nature of a leasehold improvement in an amount equal to the full replacement cost of such property without deduction for depreciation. If there is a dispute as to the amount which comprises full replacement cost, the decision of Landlord shall be conclusive; (b) Public liability insurance, including bodily injury and property damage, personal injury, contractual liability with respect to all claims, demands, or actions by any person, firm, or corporation, in any way arising from, related to, or connected with the conduct and operation of Tenant's business in the Premises or Tenant's use of the Premises. Such policies shall be written on a comprehensive basis, with limits not less than $1,000,000.00, and such higher limits as Landlord or the mortgagees of Landlord may require from time to time, but may not be unreasonably required; (c) Any other form or forms of insurance as the mortgagees of Landlord may reasonably require from time to time in form, in amounts and for insurance risks against which a prudent tenant would protect itself; (d) Business interruption insurance in such amounts as will reimburse the Tenant for direct or indirect loss of earning attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises or to the Building as a result of such perils. 16.02 Evidence. All policies shall be taken out with insurers acceptable -------- to Landlord and in form satisfactory from time to time to Landlord. Tenant agrees that certificates of insurance or, if required by Landlord or the mortgagees of Landlord, copies of each such insurance policy will be delivered to Landlord as soon as practicable after the placing of the required insurance, but in no event later than five (5) days after Tenant takes possession of all or any part of the Leased Premises. All policies shall require that at least thirty (30) days' prior written notice be delivered to Landlord s by the insurer prior to termination, cancellation, or material change in such insurance. 16.03 Proceeds. Tenant agrees that in the event of damage or destruction -------- to the leasehold improvements in the Leased Premises covered by insurance required to be taken out by Tenant pursuant to this Section, Tenant shall use the proceeds of the insurance for the purpose of building leasehold improvements as mutually agreed upon between Landlord and Tenant. If Landlord and Tenant cannot agrees as to the new improvements within thirty (30) days, then Tenant shall replace the identical improvements that were destroyed. In the event of damage or destruction of the Building entitling the Landlord to terminate this Lease 16 pursuant to Section 17, then, if the Leased Premises have also been damaged, Tenant will pay to Landlord al of its insurance proceeds relating to the leasehold improvements in the Leased Premises, and if the Leased Premises have not been damaged, Tenant will deliver to Landlord, in accordance with the provisions of this Lease, the leasehold improvements and the Leased Premises. SECTION 17 DAMAGE OR DESTRUCTION --------------------- 17.01 Right to Terminate. If the Premises or the Building are damaged by ------------------ fire or other insured casualty, and the insurance proceeds have been made available by the holder of holders of any mortgages or deeds of trust covering the Building, the damage shall be repaired by and at the expense of Landlord to the extent of such insurance proceeds available, provided such repairs can, in Landlord's reasonable discretion, be completed within one hundred twenty (120) days after the occurrence of such damage, without the payment of overtime or other premiums. Until the repairs are completed, the Rent shall be abated in proportion to the part of the Premises which is unusable by Tenant in the conduct of its business; provided, however, if the damage is due to the fault or neglect of tenant or its employees, agents, or invitees, there shall be no abatement of Rent. If repairs cannot, in Landlord's reasonable discretion, be made within said one hundred twenty (120) day period, Landlord shall notify Tenant within sixty (60) days of the date of occurrence of the damage as to whether or not Landlord elects to make the repairs. If Landlord elects not to make the repairs, then either party may, by written notice to the other cancel this lease as of the date of the occurrence of the damage. Except as provided in this Section 17, there shall be no abatement of Rent and no liability of Landlord by reason of any injury, inconvenience, temporary limitation of access or interference to or with Tenant's business or property arising from the making of any necessary repairs, or any alterations or improvements in or to any portion of the Building or the Premises, or in or to fixtures, appurtenances, and equipment therein necessitated by the damage. Tenant understands that Landlord will not carry insurance of any kind on Tenant's furniture and furnishings or on any fixtures or equipment removable by Tenant under the provision of this Lease, and that Landlord shall not be required to repair any injury or damage caused by fire or other cause, or to make any repairs or replacements to or of improvement installed in the Premises by or for Tenant at Tenant's cost. 17.02 Landlord's Insurance. Landlord covenants and agrees that, -------------------- throughout the Lease Term, it will insure the Building (excluding foundations, excavations and other noninsurable items) and the machinery, boilers, and equipment contained therein owned by Landlord (excluding any property with respect to which Tenant is obliged to insure pursuant 17 to the provisions of Section 16 thereof) against damage by fire and extended perils coverage in such reasonable amounts as would be carried by a prudent owner of a similar property in the same locale. Landlord will also, throughout the Term, carry public liability, property damage and loss of rent insurance with respect to the operation of the Premises in reasonable amounts as would be carried by a prudent owner of a similar property in the same locale. Landlord may, but shall not be obligated to, take out and carry any other form and forms of insurance as it or the mortgagees of Landlord may reasonably determine to be advisable. Tenant shall pay for all such insurance carried by Landlord as an Operating Cost, provided that such insurance is not duplicative of the insurance obtained pursuant to Section 16.01. Notwithstanding any contribution by Tenant to the cost of insurance premiums, Tenant acknowledges that it has no right to receive any proceeds from the insurance policies carried by Landlord, and that the insurance will be for the sole benefit of Landlord, with no coverage for Tenant for any risk insured against. SECTION 18 ENTRY BY LANDLORD ----------------- Landlord and its agents, upon giving 24 hours notice, shall have the right to enter the Premises during normal business hours for the purpose of examining or inspecting the same, to supply any services to be provided by Landlord to Tenant hereunder, to show same to prospective purchasers or tenants of the Premises, and to make such alterations, repairs, improvements, or additions, whether structural or otherwise, to the Premises or to the Building as Landlord may deem necessary or desirable. Landlord may enter by means of a master key, without liability to Tenant except for any failure to exercise due care for Tenant's property, and without affecting this Lease. Landlord shall use reasonable efforts on any such entry not to unreasonably interrupt or interfere with Tenant's use and occupancy of the Premises. Landlord may enter the Premises at any time in the case of an emergency. SECTION 19 DEFAULT BY TENANT ----------------- 18 19.01 Events of Default. Each one of the following events if referred to ----------------- as an "Event of Default": (a) Tenant shall fail to make due and punctual payment of Rent or an other amounts payable hereunder, and such failure shall continue for fifteen (15) days after receipt of written notice from Landlord. (b) Tenant shall vacate or abandon the Premises, or remove leasehold improvements or fixtures constituting property of Landlord; (c) This Lease shall be transferred to or shall pass to or devolve upon any other person or party except in the manner set forth in Section 13; (d) This Lease or the Premises or any part thereof shall be taken upon execution or by other process of law directed against Tenant, or shall be taken upon or subject to any attachment at the instance of any creditor of or claimant against Tenant, and said attachment shall not be discharged or disposed of within thirty (30) days after the levy; (e) The filing of any petition or the commencement of any case or proceeding by the Tenant under any provision or chapter of the Federal Bankruptcy Act, the Federal Bankruptcy Code or any other federal or state law relating to insolvency, bankruptcy or reorganization; or the adjudication that the Tenant is insolvent or bankrupt, or the entry of an order for relief under the Federal Bankruptcy Code with respect to Tenant; (f) The filing of any petition or the commencement of any case or proceeding described in Subsection (e) above against the Tenant, unless the petition and all proceedings initiated thereby are dismissed within sixty (60) days from the date of the filing; the filing of an answer by Tenant admitting the allegations of any such petition; or the appointment of or taking possession by a custodian, trustee or receiver for all or any assets of the Tenant, unless such appointment is vacated or dismissed within sixty (60) days from the date of such appointment or taking of such possession. (g) Tenant shall fail to take possession of the Premises thirty (30) days following the earlier of the date the Premises are Ready for Occupancy or the Commencement date; or (h) Tenant shall fail to perform any of the other agreements, terms, covenants or conditions of this Lease on Tenant's part to be performed, and such non-performance shall continue for a period of thirty (30) days after written notice by Landlord to Tenant, or if such performance cannot be reasonably had within such thirty (30) day period, Tenant shall not in good faith have commenced such performance within such thirty (30) day period and shall not thereafter diligently proceed to completion. 19.02 Remedies of Landlord. If any one or more events of default shall -------------------- happen, then Landlord shall have the right at Landlord's election, then or at any time thereafter without demand or notice, to reenter and take possession of the Premises or any part thereof and 19 repossess the same as Landlord's former estate and expel Tenant and those claiming through or under Tenant, and remove the effects of both or either, without being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of rent or breach of covenants or prior conditions and without terminating this Lease. Should Landlord elect to reenter as provided in this Subsection, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided for by law including a proceeding for possession pursuant to Colorado's Forcible Entry and unlawful Detainer Statutes, Landlord may, from time to time, without terminating this Lease either; (a) (i) Relet the Premises or any part thereof in Landlord's or Tenant's name, but for the account of Tenant, for a term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term of this Lease) and on conditions and upon other terms (which may include concessions of free rent and alteration and repair of the Premises) as Landlord, in its sole discretion, may determine, and Landlord may collect and receive the rents. Landlord shall use reasonable efforts to relet the Premises and maximize the income generated by the Premises. No reentry or taking possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention be given to Tenant. No notice from Landlord hereunder or under a forcible entry and unlawful detainer statute or similar law shall constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right following any reentry and/or reletting to exercise its right to terminate this Lease by giving Tenant written notice, in which event the Lease will terminate as specific in the notice. (ii) If Landlord elects to take possession of the Premises as provided in this Subsection (a) without terminating the Lease, Tenant shall pay to Landlord (1) the Rent and other sums due under this Lease which would be payable if repossession had not occurred, less (2) the net proceeds, if any, of any reletting of the Premises after deducting all Landlord's expenses in connection with the reletting, including, but without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, expenses of employees, alteration, remodeling and repair costs and expenses of preparation of the reletting. If, in connection with any reletting, the new lease terms extends beyond the existing term, or the premises covered include other premises not part of the Premises, a fair apportionment of the rent received from the reletting and the expenses incurred in connection with the reletting will be made in determining the net proceeds received from reletting. In addition, in determining the net proceeds from reletting, any rent concession will be apportioned over the term of the new Lease;or (b) To give Tenant written notice of intention to terminate this Lease on the date of the notice, or on any later date specified in the notice. Tenant's right to possession of the Premises shall cease and the Lease shall thereupon be terminated, except as to Tenant's liability under this Lease, as if the expiration of the term fixed in the notice were the end of the term originally demised, including as extended by the exercise of any options granted to Tenant. If this Lease is terminated pursuant to the provisions of this Subsection (b), or terminated pursuant to a proceeding for possession under the Colorado Forcible Entry and 20 Unlawful Detainer Statutes, Tenant shall remain liable to Landlord for damages in an amount equal to the Rent and other sums which would have been owing by Tenant under this Lease for the balance of the Term had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to the termination, after deducting all Landlord's expenses in connection with such reletting, including, but without limitation, the expenses enumerated in Subsection (a) above. Landlord shall be entitled to collect damages from Tenant monthly on the days on which the Rent and other amounts would have been payable if this Lease had not been terminated. 19.03 Cumulative Remedies. Suit or suits for the recovery of the Rent and ------------------- other amounts and damages may be brought by Landlord, from time to time, at Landlord's election, and nothing in this Lease shall be deemed to require Landlord to await the date when this Lease or its Term would have expired by limitation had there been no default by Tenant, or no termination, as the case may be. Each right and remedy provided for in this Lease shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise including but not limited to suits for injunctive relief and specific performance. The exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease or now or hereafter existing at law or in equity by statute or otherwise shall not preclude the simultaneous or later exercise by Landlord of any or all rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise. All such rights and remedies shall be considered cumulative and non-exclusive. All costs incurred by Landlord in connection with collecting any Rent or other amounts and damages owing by Tenant pursuant to the provisions of this Lease, or to enforce any provision of this Lease, including reasonable attorney's fees from the date such matter is turned over to an attorney, whether or not one or more actions are commenced by Landlord, shall also be paid by Tenant to Landlord. 19.04 No Waiver. No failure by Landlord to insist upon the strict --------- performance of any agreement, term, covenant or condition of this Lease or to exercise any right or remedy consequent upon a breach, and no acceptance of full or partial payment of Rent during the continuance of any breach, shall constitute a waiver of any breach or of the agreement to be performed or complied with by Tenant, and no breach shall be waived, altered or modified except by written instrument executed by Landlord. No waiver of any breach shall affect or alter this Lease, but each and every agreement, term, covenant and condition shall continue in full force and effect with respect to any other then existing or subsequent breach. Notwithstanding any termination of this Lease, the same shall continue in force and effect as to any provisions which require observance or performance by Landlord or Tenant subsequent to such termination. 19.05 Bankruptcy. Nothing contained in this Section 19 shall limit or ---------- prejudice the right of Landlord to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding, an amount equal to the maximum allowed by any statute or rule of law governing such a proceeding, and in effect at the time 21 when such damages are to be proved, whether or not the amount is greater, equal to or less than the amounts recoverable, either as damages or Rent, referred to in any of the preceding provisions of this Section. Notwithstanding anything contained in this Section to the contrary, any such proceeding or action involving bankruptcy, insolvency, reorganization, arrangement, assignment for the benefit of creditors, or appointment of a receiver or trustee, as set forth above, shall be considered to be an event of default only when the proceeding, action or remedy shall be taken or brought by or against the then holder of the leasehold estate under this Lease. SECTION 20 TAXES ----- During the Term hereof, Tenant shall pay, prior to delinquency, all business and other taxes, charges, notes, duties and assessments levied, and rates or fees imposed, charged, or assessed against or in respect of Tenant's occupancy of the Leased Premises or in respect of the personal property, trade fixtures, furnishings, equipment, and all other personal property of Tenant contained in the Premises, and shall hold Landlord harmless from and against all payment of such taxes, charges, notes, duties, assessments, rates, and fees, and against all loss, costs, charges, and expenses occasioned by or arising from any and all such taxes, charges, notes, duties, assessments, rates, and fees, any and all taxes. Tenant shall cause the fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the real and personal property of Landlord. If any or all of Tenant's fixtures, furnishing, equipment, and other personal property shall be assessed and taxes with Landlord's real property, Tenant shall pay to Landlord Tenant's share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's property. Tenant shall also timely provide Landlord with copies of all personal property, self-employment, sales, use and unemployment tax returns within thirty (30) days after they are filed with the appropriate government offices, together with any correspondence or tax bill pertaining to any tax that is not paid when due according to the taxing authority. Tenant agrees to provide personal financial statements at regular intervals if so requested by any lender holding a security interest in the Property or the Building. All of the above documents shall be considered confidential and only disclosed or used for Landlord's appropriate business purposes. SECTION 21 EMINENT DOMAIN -------------- 22 If the Building, or a substantial part thereof, or a substantial part of the Premises, shall be lawfully taken or condemned (or conveyed under threat of such taking or condemnation) for any public or quasi-public use or purpose, the Term of this Lease shall end upon, and not before, the date of the taking of possession by the condemning authority. Tenant hereby assigns to Landlord Tenant's interest if any, in the award. Current Rent shall be apportioned as of the date of termination. If any part of the Building, other than the Premises or not constituting a substantial part of the Premises, shall be so taken or condemned (or conveyed under threat of such taking or condemnation), or if the grade of any street adjacent to the Building is changed by any competent authority and such taking or change of grade makes it necessary or desirable to substantially remodel or restore the Building, Landlord shall have the right to cancel this Lease upon not less than sixty (60) days' notice prior to the date of cancellation designated in the notice. No money or other consideration shall be payable by Landlord to Tenant for the right of cancellation, and Tenant shall have no right to share in any condemnation award, or in any judgment for damages, or in any proceeds of any sale made under any threat of condemnation of taking. Nothing in this Section shall prevent Tenant from making and pursuing a claim against the condemning authority in its own right for termination of its leasehold interest. If this Lease is not canceled, the Lease shall continue in full force and effect, without abatement or reduction of Rent. SECTION 22 SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST --------------------------------------------- 22.01 Lease Subordinate to Mortgages. ------------------------------ (a) This Lease and the rights of Tenant shall be and are hereby made subject and subordinate to the lien of any mortgages or deeds of trust now or hereafter existing against the Building, the Property or both, and to all renewals, modifications, consolidations, replacements and extensions thereof and to all advances made now or in the future. Although the subordination shall be self-operating, Tenant, or its successors in interest, shall upon Landlord's request, execute and deliver upon the demand of Landlord any and all instruments desired by landlord, subordinating, in the manner reasonable requested by Landlord, this Lease to any mortgage or deed of trust. Landlord is hereby irrevocably appointed and authorized as agent and attorney-in-fact of Tenant to execute all subordination instruments if Tenant fails to execute the instruments within ten (10) days after notice from Landlord demanding their execution. The notice may be given in the manner provided for giving notice below. (b) Should any mortgage or deed of trust affecting the Building, the Property or both be foreclosed, then; (I) the liability of the mortgagee, beneficiary or purchaser at the foreclosure sale to Tenant shall exist only so long as the mortgagee, beneficiary, or purchaser is the owner of the Building and/or Property and the liability shall not continue or survive after further transfer of ownership; and (ii) Tenant shall be deemed to have attorned, as Tenant 23 under this Lease, to the purchaser at any foreclosure sale and this Lease shall continue in force and effect as a direct lease between and binding upon Tenant and the purchaser at any foreclosure sale. As used in this Section 22, "mortgagee" and "beneficiary" shall include successors and assigns of any such party, whether immediate or remote, the purchaser of any mortgage or deed of trust, whether at foreclosure or otherwise, and the successors, assigns and mortgagees and beneficiaries of such purchaser, whether immediate or remote. 22.02 Tenant's Notices. In the event of any act or omission by Landlord ---------------- under this Lease which would give Tenant the right to terminate this Lease or to claim a partial or total eviction, Tenant will not exercise any such right until: (a) it has given thirty days written notice (by United States certified or registered mail, postage prepaid) of such act or omission to the holder of any mortgage or deed of trust on the Property (whose names and addresses Landlord agrees will be furnished to Tenant on request) with a copy to Joel C. Davis, Dietze & Davis, P.C., P.O. Box 1530, Boulder, Colorado 80306; and (b) any holder of any mortgage or deed of trust on the Property shall, following the giving of such notice, have failed with reasonable diligence to commence and to pursue reasonable action to remedy the act or omission. SECTION 23 WAIVER ------ The waiver by Landlord of any breach of any term, covenant, or condition in this Lease shall not be deemed to be a waiver of the term, covenant, or condition, or any subsequent breach of the same or any other term, covenant or conditions. The acceptance of Rent hereunder shall not be construed to be a waiver of any breach by Tenant of any term, covenant, or condition of this Lease, it being understood and agreed that the remedies given to Landlord shall be cumulative, and the exercise of any one remedy by Landlord shall not be to the exclusion of any other remedy. SECTION 24 SUBROGATION ----------- The parties to this Lease agree that any and all fire and extended coverage insurance which is required to be carried by either shall be endorsed with a subrogation clause, 24 substantially as follows: "This insurance shall not be invalidated should the insured waive, in writing, prior to a loss, any and all right of recovery against any party for loss occurring to the property described herein." Each party waives all claims for recovery from the other party, its officers, agents or employees for any loss or damage (whether or not such loss or damage is caused by negligence of the other party, and notwithstanding any provisions contained in this Lease to the contrary) to any of its real or personal property insured under valid and collectible insurance policies to the extent of the collectible recovery under the insurance. SECTION 25 PLATS AND RIDERS ---------------- Appendices, clauses, plats, and riders, if any, referred to in this Lease and signed or initialed by Landlord and Tenant and affixed to this Lease are hereby incorporated in any made a part of this Lease. SECTION 26 SALE BY LANDLORD ---------------- In the event of a sale or conveyance or transfer by Landlord of its interest in the Property and/or in the Building containing the Premises, and/or in this Lease, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions, expressed or implied, contained in favor of Tenant, and in that event, Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease. This Lease shall not be affected by any such conveyance or transfer, and Tenant agrees to attorn to such purchaser or transferee. SECTION 27 RIGHT OF LANDLORD TO PERFORM ---------------------------- All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense, and without any abatement of Rent. If Tenant shall fail to pay any sum of money, other than Rent, required 25 to be paid by it, or shall fail to perform any other act on its part to be performed, and the failure shall continue for thirty (30) days after written notice by Landlord, Landlord may, but shall not be obligated to do so, and without waiving or releasing Tenant from any obligations of Tenant, make any payment or perform any other act on Tenant's part to be made or performed as in this Lease provided. All sums so paid by Landlord and all necessary incidental costs, together with interest at the rate of one and one-half percent (1-1/2%) per month from the date of a payment by Landlord, shall be payable to Landlord on demand, and Tenant covenants to pay any such sums, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the non-payment thereof by Tenant, as in the case of default by Tenant in the payment of Rent. SECTION 28 ATTORNEY'S FEES --------------- In the event of any litigation or arbitration between Tenant and Landlord to enforce any provision of this Lease or any right of either party, the unsuccessful party to such litigation or arbitration shall pay to the successful party al costs and expenses, including reasonable attorney's fees, incurred. Moreover, if Landlord, without fault, is made a party to any litigation instituted by or against Tenant, Tenant shall indemnify Landlord against, and protect, defend, and save it harmless from, all costs and expenses, including attorney's fees, incurred by Landlord. To the extent permitted by law, Landlord and Tenant hereby waived the right to a jury trial in any legal action or proceeding relating to this Lease. SECTION 29 ESTOPPEL CERTIFICATE -------------------- Tenant shall, at any time and from time to time, upon not less than ten (10) days prior written notice from Landlord, execute, acknowledge, and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the dates to which the Rent and other charges are paid, and acknowledging that Tenant is paying Rent on a current basis with no offsets or claims, and there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder (or specifying the offsets, claims, or defaults, if any are claimed). It is expressly understood and agreed that any such statement may be relied upon by any prospective purchaser or encumbrance of all or any portion of the Building or by any other person to whom it is delivered. Tenant's failure to deliver the statement within the required time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord's performance, and that not more than two (2) months' rental has been paid in advance. 26 SECTION 30 NOTICE ------ Any notice from Landlord to Tenant or from Tenant to Landlord shall be in writing and may be served personally or by mail. If served by mail, it shall be mailed by registered or certified mail, return receipt requested, addressed to Tenant at the Premises or to Landlord at the place from time to time established for the payment of Rent. Notices shall be effective when delivered, if served personally, or three (3) days after mailing, if mailed. If no one at the premises is available to accept the notice, then it shall be deemed effective upon the second refusal or uncompleted mail delivery attempt. SECTION 31 RIGHTS RESERVED --------------- Landlord reserves the following rights, exercisable without notice and without liability to Tenant for damage or injury to property, person, or business, and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession, or giving rise to any claim for set- off or abatement of rent: (a) To change the Building's name or street address; (b) To install, affix, and maintain any and all signs on the exterior and interior of the Building; (c) To retain at all times, and to use in appropriate instances, keys to all doors within and into the Premises. No locks or bolts shall be altered, changed, or added without the prior written consent of Landlord; (d) To have and retain a paramount title to the Premises, free and clear of any act of Tenant. SECTION 32 REAL ESTATE BROKER ------------------ Tenant represents that Tenant has dealt directly with Landlord in connection with this Lease, and that insofar as Tenant knows, no broker negotiated or participated in the negotiations of this Lease, or submitted or showed the Premises, or is entitled to any 27 commission in connection herewith. Any payment for services relative to this Lease shall be the responsibility of the Tenant. SECTION 33 MISCELLANEOUS PROVISIONS ------------------------ (a) The words "re-enter", or "re-entry", as used in this Lease, are not restricted to their technical legal meaning. The term "Landlord", as used in this Lease, means only the landlord from time to time, and upon conveying or transferring its interest, Landlord shall be relieved from any further obligation or liability pursuant to Section 27. (b) Time is of the essence of this Lease and of each and all of its provisions. (c) Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution by both Landlord and Tenant. (d) The invalidity or unenforceability of any provision in this Lease shall not affect or impair any other provisions. (e) This Lease shall be governed by and construed pursuant to the laws of the State of Colorado. (f) Should any mortgagee or beneficiary under a deed of trust require a modification of this Lease, which modification will not bring about any increased cost or expense to Tenant or will not in any other way substantially change the rights and obligations or Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified. (g) All rights and remedies of Landlord under this Lease, or those which may be provided by law, may be exercised by Landlord in its own name individually, or in its name by its agent, and all legal proceedings for the enforcement of any rights or remedies, including distress for rent, unlawful detainer, and any other legal or equitable proceedings, may be commenced and prosecuted to final judgment and be executed by Landlord in its own name individually or in its name by its agent. Landlord and Tenant each represent to the other that each has full power and authority to execute this Lease and to make and perform the agreements herein contained, and Tenant expressly stipulates that any rights or remedies available to Landlord, either by the provisions of this Lease or otherwise, may be enforced by Landlord in its own name individually or in its name by its agent or principal. 28 (h) The marginal headings and titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (i) Tenant acknowledges that there are no covenants, representations, warranties, agreements, or conditions, expressed or implied, collateral or otherwise, forming part of or in any way effecting or relating to this Lease except as expressly set out in this Lease and the attachments and exhibits to this Lease, and that the terms and provisions of this Lease may not be modified or amended except by written instrument by both Landlord and Tenant. SECTION 34 SUCCESSORS AND ASSIGNS ---------------------- Subject to the terms and provisions of Section 28, the covenants and conditions contained in this Lease shall apply to and bind the respective heirs, successors, executors, administrators, and assigns of the parties hereto, and the terms "Landlord" and "Tenant" shall include the successors and assigns of either such party, whether immediate or remote. SECTION 35 QUIET ENJOYMENT --------------- Subject to the terms and provision of this Lease, Landlord covenants and agrees that Tenant, upon complying with all of the obligations of Tenant under this Lease shall peaceably and quietly enjoy the Premises and Tenant's rights under this Lease during its Term, without hindrance by Landlord or any persons claiming under Landlord. SECTION 36 RECORDING --------- This Lease shall not be recorded by Landlord or Tenant. 29 SECTION 37 RELIANCE BY LANDLORD -------------------- As of the date of executing this Lease, the Premises consist of unimproved real property. Landlord intends to proceed with construction of the Premises in reliance upon Tenant's covenants, obligations and representations contained in this Lease. Tenant hereby acknowledges and accepts Landlord's reliance in this regard. As additional consideration from Tenant to Landlord, Tenant hereby agrees to provide updated business financial statements and tax returns not less frequently than annually. SECTION 38 OPTION TO EXTEND ---------------- N/A SECTION 39 SECURITY DEPOST --------------- N/A LANDLORD: By: _______________________________ Terrence J. O'Connor TENANT: BI, Inc. ------------------------------- By: _______________________________ _______________________________ McKinley C. Edwards, Jr. Chief Operating Officer 30 LEASE THIS LEASE made this 9th day of February, 1996, between BI, Inc., ("Tenant"), --- -------- and TERRENCE O'CONNOR ("Landlord"). ----------------- WITNESSETH: DEMISE ------ Landlord does hereby lease to Tenant and Tenant hereby hires from Landlord an approximate 15,000 square feet (the "Premises," or, alternatively, the "Leased Premises") in The Point II (the "Building"), which Building is situated on land described as 6325 Gunpark Drive (the "Property"), together with a non- exclusive right, subject to the provisions of this Lease, to use all appurtenances thereto, including, but not limited to, any plazas ,common areas, walks, ways or other areas in the Building or on the Property designated by Landlord for the exclusive or nonexclusive use of the tenants of the Building. Lease shall commence on April 1, 1996 for Three Thousand square feet (3,000) and April 1, 1997 for Twelve Thousand square feet (12,000). The Lease is upon and subject to the terms, conditions, and covenants set forth below and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of the terms, conditions, and covenants by it to be kept and performed and that this Lease is made upon the condition of such performance. SECTION 1 PURPOSE ------- 1.01 Use of Premises. The Premises are to be used for light --------------- manufacturing, warehousing, and related office functions, provided that such uses comply with all zoning and use restrictions, and for no other purpose without the prior written consent of Landlord. SECTION 2 TERM ---- 2.01 Primary Term. The Term of this Lease shall be for a period of One ------------ --- hundred seventy-three-three(173) months, commencing at 12:01 a.m. on the - --------------------------- Commencement Date, May 1. 1996, and ending at 5:00 p.m., Denver time, September ----------- --------- 30, 2010 (the "Primary Lease Term"). - -------- SECTION 3 COMPLETION OF THE PREMISES -------------------------- N/A 1 SECTION 4 RENT ---- 4.01 Base Rent. Tenant agrees to pay Landlord during the full Primary --------- Lease Term the sum of $ 2,506,752, payable in advance in equal monthly --------- installments of as follows (the "Base Rent") for the Premises: 1996 May - Sept. $ 2060 Oct. - Dec. $2163 1997 Jan. - Mar. $ 2163 April - Sept.$10,813 Oct. - Dec. $11,354 1998 Jan. - Sept. $11,354 Oct. - Dec. $11,922 1999 Jan. - Sept. $11,922 Oct. - Dec. $12,518 2000 Jan. - Sept. $12,518 Oct. - Dec. $13,144 2001 Jan. - Sept. $13,144 Oct. - Dec. $13,801 2002 Jan. - Sept. $13,801 Oct. - Dec. $14,491 2003 Jan. - Sept. $14,491 Oct. - Dec. $15,216 2004 Jan. - Sept. $15,216 Oct. - Dec. $15,977 2005 Jan. - Sept. $15,977 Oct. - Dec. $16,775 2006 Jan. - Sept. $16,775 Oct. - Dec. $17,614 2007 Jan. - Sept. $17,614 Oct. - Dec. $18,495 2008 Jan. - Sept. $18,495 Oct. - Dec. $19,420 2009 Jan. - Sept. $19,420 Oct. - Dec. $20,391 2010 Jan. - Sept. $20,391
The first full monthly installment of Base Rent shall be payable on the Commencement Date and each succeeding monthly installment shall be due and payable on or before the first day of each and every successive calendar month thereafter during the Primary Lease Term. On October lst of each year of the Lease, starting October 1, 1996 the Lease Rate shall increase by five (5) percent. 4.02 No Offsets. The Base Rent and all other sums or changes required by ---------- this Lease to be paid by Tenant to Landlord, (all of which are sometimes collectively referred to as "Rent") shall be paid to Landlord without deduction or offset, in lawful money of the United States of America, at the office of Terrence O'Connor, 1600 38th Street, Suite 203, Boulder, Colorado, 80301, or to such other person or at such other place as Landlord may from time to time designate in writing. 4.03 Interest on Late Payments. Any Rent or other amount due from Tenant ------------------------- to Landlord under this Lease not paid within five (5) days of when due shall bear interest from the date due, computed on a daily basis, until the date paid, at the rate of one and one-half percent (1-1/2%) per month until paid, but the payment of the interest shall not excuse nor cure any default by Tenant under this Lease. 4.04 Late Payment Charge. Further, and notwithstanding the interest ------------------- charges provided for in the preceding subsection 4.03, if any Rent or other amounts owing hereunder are not paid within five (5) days of when due, Landlord and Tenant agree that Landlord will incur additional 2 administrative and financial expenses and inconveniences the amount of which will be difficult if not impossible to determine. Accordingly, Tenant shall pay to Landlord an additional one-time late charge for any late monthly payment in the amount of five percent (5%) of the amount of the payment. SECTION 5 TAXES AND OPERATING COST ADJUSTMENT FORMULA ------------------------------------------- 5.01 Additional Rent. In addition to Base Rent, Tenant shall reimburse --------------- Landlord for the Taxes and Operating Costs of the Building in the manner, at the times, and in the amounts set forth in this Section 5. 5.02(a) Taxes. The Rent payable by Tenant shall be increased by the amount ----- of "Tenant's Proportional Share" of the Taxes on the Property. Tenant's Proportional Share shall be 7.4% based upon Tenant's occupancy of 3000 square ----- ---- feet out of a total building rental space of 40,628 square feet as percentage of ------- occupancy increases, proportion shall increase by an equivalent amount. In determining the amount of Taxes for any calendar year, the amount of special assessments to be included shall be limited to the amount of the installment (plus any interest payable thereon) of such special assessment which would have been required to have been paid during such calendar year if Landlord had elected to have the special assessment paid over the maximum period of time permitted by law, if the election is available to Landlord. All reference to Taxes "for' and "billed for" a particular calendar year shall be deemed to refer to Taxes levied, assessed, billed or otherwise imposed for such calendar year, without regard to the dates when any such Taxes are due and payable. Tenant shall not be responsible for payment of taxes for prior years except that taxes are paid one year in arrears. (b) Definition. As used in this Lease, the term "Taxes" means any and ---------- all general and special taxes and impositions of every kind and nature whatsoever levied, assessed, or imposed upon, or with respect to, the Premises, any leasehold improvements, fixtures, installations, additions and equipment, whether owned by Landlord or Tenant, or either because of or in connection with Landlord's ownership, leasing and operation of the Building and the Property, including, without limitation, real estate taxes, personal property taxes, general or special assessments, and duties or levies charged or levied upon or assessed against the Building and the Property and personal property, or any tax or excise on rent or any other tax (however described) on account of rental received for use and occupancy of any or all of the Building and the Property, whether any such taxes are imposed by the United States, the State of Colorado, the County of Boulder, or any local governmental municipality, authority, or agency or any political subdivision. Taxes shall not included any net income, capital stock, succession, transfer, franchise, gift, estate or inheritance taxes. (c) Payment. Commencing with the first calendar month of this Lease, ------- Tenant shall pay to Landlord on the first day of each calendar month until the next upward adjustment date (which period between adjustment dates is herein called a "Tax Deposit Year') one-twelfth of the estimated amount of the Taxes. Amounts paid under this Subsection 5.02(c) in any Tax Deposit Year shall be reconciled with amounts actually billed to Landlord for the same Tax Deposit Year, 3 and provided there is any surplus remaining after the credit to Tenant and provided Tenant shall not then be in default under any of the provisions of this Lease, Landlord shall, at Landlord's option, either refund the amount of the surplus to Tenant within thirty (30) days following the end of the Tax Deposit Year or apply the surplus amount against any other amounts then due from Tenant to Landlord. If upon the reconciliation there is any deficiency in the amount of Taxes paid by Tenant, Landlord shall bill Tenant and Tenant shall pay the additional amount on the first day of the next month. 5.03(a) Inclusion in Operating Costs. Tenant shall pay its Proportional ---------------------------- Share of the Operating Costs for the Property. As used in this Lease, the term "Operating Costs" means any and all expenses, costs and disbursements (other than Taxes) of every kind and nature whatsoever, which are paid or accrued by Landlord in connection with the management, maintenance, operation or repair of the Building, including, without limitation; (I) Costs of supplies; (ii) Costs incurred in connection with obtaining and providing energy for the Building, including, but not limited to, costs of propane, butane, natural gas, steam, electricity, fuel oils, coal or any other energy sources, except if separately metered to the Leased Premises, in which case Tenant shall pay 100% of its metered amount; (iii) Costs of water and sanitary sewer and storm drainage services; (iv) Costs of general maintenance and repairs, including costs of heating, ventilation and air conditioning systems and the cost of exterior building and roof maintenance and repairs; (v) Cost of insurance; (vi) Costs of maintenance and replacement of landscaping; (vii) Labor costs associated with operation and maintenance of the Building; and management fees. (b) Exclusion from Operating Costs. "Operating Costs" shall not ------------------------------ include: (i) Costs of repairs or other work occasioned by fire, windstorm or other insured casualty to the extent of insurance proceeds received; (ii) Leasing commissions, advertising, advertising expenses, and other costs incurred in leasing space in the Building; (iii) Costs of repairs or building necessitated by condemnation; (iv) Any interest on borrowed money or debt amortization, except as specifically set forth above; 4 (v) Depreciation on the Building; (vi) Any settlement, payment or judgment incurred by Landlord or the Building manager due to their willful misconduct or gross negligence, as established by a court of law, which is not covered by insurance proceeds; (vii) Cost of any damage to the building caused directly by Landlord's willful misconduct or gross negligence, as established by a court law, which is not covered by insurance proceeds. (viii) Cost of structural repairs or reconstruction of any portion of the Building. (ix) Costs of providing utility lines to the Building or repairing such lines if they break (but not if they are plugged by Tenant's usage). (c) Warranties. Tenant shall be entitled to a reimbursed for any amounts collected by Landlord under any manufacturers warranty on any systems or machinery used in the Building; provided that Tenant has previously paid to Landlord the repair expense relating to Landlord's warranty claim. (d) Payment. Beginning on the Commencement Date, Landlord shall supply Tenant with written notice of Landlord's estimate of the Operating Expenses that will be incurred or accrued during the current calendar year (the "Deposit Year"). On or before the first day of each month during such Deposit Year, Tenant shall pay to Landlord one-twelfth of Tenant's Proportionate share of the estimated amount. If the monthly deposit amount is not determined in time for Tenant to make the first payment on January 1 of the Deposit Year, then the first monthly payment shall be due on the first day of the month immediately following the date Landlord supplies Tenant with notice of the amount and the first monthly payment(s) shall also include a payment equal to one twelfth of such additional sum multiplied by the number of calendar months which have elapsed during the Deposit Year prior to the date Tenant makes its first payment. If the total of the estimated payments made by Tenant during the Deposit Year are less than Tenant's obligation under this Lease for Operating Costs for the Deposit Year, then Tenant, within thirty (30) days of the billing therefor, shall pay the deficiency to Landlord. If the total of the Tenant's estimated payments for the Deposit Year exceed Tenant's obligation for excess Operating Costs for such year, then the surplus shall be handled in the manner provided in the last sentence of Section 5.02(c). 5.04 Audit and Adjustment Procedures. ------------------------------- (a) The annual determination and statement of Taxes and Operating Costs shall be prepared in accordance with generally accepted accounting principles. In the event of any dispute as to any Rent due under this Lease, Tenant shall have the right to inspect Landlord's accounting records relative to Taxes and Operating Costs at the office in which Landlord maintains its records during normal business hours at any time following the furnishing by Landlord to Tenant of the statement. Any errors shall be adjusted accordingly. 5 (b) If the Term of this Lease commences on any day other than the first day of April or if the Term of this Lease ends on any day other than the ----- last day of September, any payment due to Landlord by reason of an increase in --------- Taxes or Operating Costs shall be prorate on the basis by which the number of days in such partial year bears to 365. (c) All sums which Tenant is required to pay or discharge pursuant to Section 5 of this Lease in addition to Base Rent, together with any interest or other sums which may be added for late payment, shall constitute "Rent". SECTION 6 HOLDING OVER ------------ 6.01 Rent Increase. Should Tenant hold over after the termination of this ------------- Lease , whether the termination occurs by lapse of time or otherwise, Tenant shall become a tenant from day-to-day upon each and all of the terms herein provided as may be applicable to such a tenancy, and any such tenancy shall not constitute an extension of this Lease; provided, however, during the period as a tenant from day-to-day, Tenant shall pay Base Rent at 140% the rate payable for the month immediately preceding the date of termination of this Lease and, in addition, Tenant shall reimburse Landlord for all damages (consequential, as well as direct) sustained by it by reason of Tenant's occupying the Premises past the termination date. Alternatively, at the election of Landlord and expressed in a written notice to Tenant and not otherwise, the retention of possession past the termination date shall constitute a month-to-month tenancy upon each and all of the terms of this Lease as may be applicable to a month-to- month tenancy. The provisions of this paragraph shall not exclude nor waive Landlord's right of re-entry or any other right hereunder. SECTION 7 BUILDING SERVICES ----------------- 7.01 Interruption of Standard Services . Tenant agrees that Landlord shall --------------------------------- not be liable for failure to supply any heating, air conditioning, janitorial services, electric current, or any other utility during any period when Landlord uses reasonable diligence to restore or to supply such services or utility. Landlord reserves the right to temporarily discontinue such services at times as may be necessary by reason of accident, repairs, alterations, or improvements, or whatever by reason of strikes, lockouts, dots, acts of God, or any other happening or occurrence beyond the reasonable control of Landlord, provided such discontinuance does not substantially interfere with Tenant's business operations. Reasonable notice must be given by Landlord to Tenant if a temporary discontinuance is anticipated by Landlord. 7.02 Telephone. Tenant shall separately arrange with the applicable local --------- public authorities or utilities, as the case may be, for the furnishing of and payment for all telephone services as may be required by Tenant in the use of the Premises. Tenant shall directly pay for such telephone services, including the establishment and connection thereof, at the rates charged for the services by the authority or utility, and the failure of Tenant to obtain or to continue to 6 receive the services for any reason whatsoever shall not relieve Tenant of any of its obligations under this Lease. Landlord shall supply sufficient telephone lines into the Building for Tenant's connection. 7.03 Above-Standard Service Requirements. If heat-generating machines or ----------------------------------- any equipment cause the temperature in the Premises, or any part, to exceed the temperatures that the Building's air conditioning and other cooling systems would be able to maintain in the Premises were it not for the heat-generating equipment then Landlord reserves the right to install supplementary air conditioning units in the Premises, and the cost, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. If Tenant requires electric current, water, or any other energy in excess of that which is reasonably obtainable from existing electrical outlets or water pipes, and which is, in Landlord's opinion, above normal for use of the Premises, Tenant shall first procure the consent of Landlord, which Landlord may not unreasonably refuse. If Landlord consents to such excess electric, water, or other energy requirements, Tenant shall, on demand, pay all costs of meter service and installation of facilities necessary to measure and/or furnish such excess capacity. Tenant shall also pay the entire cost of such additional electricity, water, or other energy used. SECTION 8 CONDITION OF PREMISES --------------------- 8.01 Acceptance Upon Possession. Tenant, by taking possession of the -------------------------- Premises, shall be deemed to have agreed that the Premises were, as of the date of taking possession, in good order, repair, and condition and satisfactorily completed in accordance with Landlord's obligations under this Lease. No promise of Landlord to alter, remodel, decorate, clean or improve the Premises, the Building, or the Property and no representation or warranty, express or implied, respecting the condition of the Premises, the Building, or the Property has been made by Landlord to Tenant, unless the same is contained in this Lease, the Work Agreement, the Plans or some other written agreement. This Lease does not grant any rights to light or air over the Premises or the property. SECTION 9 USE OF LEASED PREMISES ---------------------- 9.01 Use. The Leased Premises shall not be used other than for the --- purpose set forth in Section 1 of this Lease. Tenant's use shall at all times comply with all applicable laws, ordinances, regulations, or other governmental ordinances in existence. 9.02 Hazardous Use. Tenant agrees that it will not keep, use, sell or ------------- offer for sale in or upon the Leased Premises any article which may be prohibited by any insurance policy in force from time to time covering the Building. In the event Tenant's occupancy or conduct of business in or on the Leased Premises, whether or not Landlord has consented to the same, results in any increase in premiums for the insurance carried from time to time by Landlord with respect to the Building, Tenant shall pay any such increase in premiums as Rent within ten (10) days after bills 7 for such additional premiums shall be rendered by Landlord. Tenant shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Leased Premises. 9.03 No Waste. Tenant shall not commit, suffer, nor permit any waste, -------- damage, disfiguration, or injury to the Leased Premises or the Building's common areas or the fixtures and equipment located in or on the Building, or permit or suffer any overloading of the floors and shall not place any safes, heavy business machinery, or other heavy things in the Premises other than as specifically provided for in the Work Agreement and Plans, without first obtaining the written consent of Landlord and, if required by Landlord, of Landlords architect, and shall not use or permit to be used by any part of the Leased Premises for any dangerous, noxious, or offensive trade or business, and shall not cause or permit any nuisance, noise, or action in, at, or on the Leased Premises. 9.04 Protection Against Insurance Cancellation. If any insurance policy ----------------------------------------- on the Building or any part thereof shall be cancelled or if cancellation shall be threatened, or if the coverage shall be reduced or be threatened to be reduced, in any way by reason of the use of occupation of the Leased Premises or any part thereof by Tenant, any assignee or subtenant of Tenant, or by anyone permitted by Tenant to be upon the Leased Premises, and if Tenant fails to take reasonable efforts to remedy the condition giving rise to the cancellation, threatened cancellation, reduction, or threatened reduction of coverage within forty-eight (48) hours after notice or to complete the remedy within ten (10) days after notice, Landlord may, at its option, enter upon the Leased Premises and attempt to remedy the condition, and Tenant shall forthwith pay the cost to Landlord as additional Rent. Landlord shall not be liable for any damage or injury caused to any property of Tenant or of others located on the Leased Premises as a result of such entry unless such damage or injury is a result of Landlord's gross negligence. SECTION 10 COMPLIANCE WITH LAW ------------------- 10.1 Compliance. Tenant shall not use the Premises or permit anything to ---------- be done in or about the Premises which will in any way conflict with any law, statute, ordinance, or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statues, ordinances, and governmental rules, regulations, or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use, or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. SECTION 11 8 ALTERATIONS AND REPAIR ---------------------- 11.01 Tenant to Maintain. Tenant shall, at its sole expense, keep the ------------------ Premises in good repair and tenantable condition during the Term of this Lease. Tenant shall not, without the prior written consent of the Landlord which shall not be unreasonably withheld so long as Tenant demonstrates financial assurance of its ability to restore the Premises to original condition, make any alterations, improvements, or additions to the Premises, including, but not limited to, partitions, wall coverings, floor coverings, and special lighting or equipment installations. If Tenant desires to make any alterations, improvements, or additions, Tenant shall first submit to Landlord plans and specifications and obtain Landlord's written approval prior to commencing any work. All alterations, improvements, or additions, whether temporary or permanent in character, made by Landlord or Tenant in or upon the Premises shall become Landlord's property and shall remain upon the Premises at the termination of this Lease by lapse of time or otherwise, without compensation to Tenant (excepting only Tenant's movable office furniture, trade fixtures, and office and professional equipment or other personal property). Landlord shall have the right to require Tenant to remove the alterations, improvements, or additions at Tenant's cost upon the termination of this Lease, and the repair of any damage caused to the Premises or the Building as a result of any removal shall be paid for by Tenant. Tenant shall promptly pay to Tenant's contractors, when due, the cost of all work and of all decorating, and upon completion, deliver to Landlord, if payment is made directly to Tenant's contractors, evidence of payment and waivers of all liens for labor, services, or materials. Tenant shall defend and hold Landlord, the Premises, the Building, and the Property harmless from all costs, damages, liens for labor, services, or materials relating to the work, and shall defend and hold Landlord harmless from all costs, damages, liens, and expenses related to the work. If Landlord incurs any expenses in the removal of trash or cleaning as a result of Tenant's contractors work then Tenant agrees it shall reimburse Landlord within seven (7) days of billing. 11.02 Protection Against Liens. At least five (5) days prior to the ------------------------ commencement of any work on the Leases Premises, Tenant shall notify Landlord of the names and addresses of the persons supplying labor and materials for the proposed work so that Landlord may avail itself of the provisions of statutes such as Section 38-22-105(2) of the Colorado Revised Statutes (1973). During the progress of any work on the Leased Premises, Landlord or its representatives shall have the right to post and keep posted thereon notices such as those provided for by Sections 3822-105(2) (C.R.S. 1973) or to take any further action which Landlord may deem to be proper for the protection of Landlord's interest in the Leased Premises. Landlord may also as a condition to his consent to work being performed on the Premises require Tenant to post a performance and completion bond for the benefit of Landlord in an amount equal to one and one- half times the cost of the work to be performed, provided that the total cost of the work exceeds $5,000.00. 11.03 Condition-on Surrender. Tenant shall, at the termination of this ---------------------- Lease, surrender the Premises to Landlord in as good condition and repair as reasonable and proper use will permit, loss by ordinary wear and tear, fire, and other insured again casualty excepted, and in the state of broom cleanliness. 11.04 Damage by Tenant. If any part of the Building or other improvements ---------------- become damaged or are destroyed through the negligence, carelessness, or misuse of Tenant, its 9 servants, agents, employees, or anyone permitted by Tenant to be in the Building, or through Tenant or such parties, then the cost of necessary repairs, replacements, or alterations shall be done by Tenant, who shall, on demand, forthwith pay the same to Landlord as Rent. SECTION 12 ABANDONMENT ----------- 12.01 Disposition of Personal Property. Tenant shall not vacate or -------------------------------- abandon the Premises at any time during the Lease Term, and if Tenant shall abandon, vacate, or surrender (whether at the end of the stated Term or otherwise) the Premises, or shall be dispossessed by process of law or otherwise, then any personal property belonging to Tenant left on the Premises shall be deemed abandoned and may be sold or otherwise disposed of by Landlord without any liability to Tenant whatsoever. Tenant shall not at any time remove Landlord's property or any fixtures constituting property of Landlord from the Premises. Any removal of Landlord's property from the Premises by Tenant shall constitute a material breach of this Lease and Landlord shall have the right to take all reasonable steps to stop or prevent such breach without such actions constituting a constructive eviction of Tenant. SECTION 13 ASSIGNMENT AND SUBLETTING ------------------------- 13.01 Limitation on Assignment or Subletting. Tenant shall not assign this -------------------------------------- Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or shall not suffer any other person to occupy or use the Premises or any portion thereof, without the written consent of Landlord first had and obtained, which consent may not be unreasonably withheld. Neither this Lease nor any interest there in shall be assignable as to the interest of Tenant by operation of law without the written consent of Landlord, which consent may not be unreasonably withheld. 13.02 Acceptance of Performance; No Waiver. If this Lease is assigned, or ------------------------------------ if the Premises or any part are sublet or occupied by anybody other than Tenant, Landlord may, upon default by Tenant, collect the rent from the assignee, subtenant, or occupant and apply the net amount collected to the Rent. Upon assignment pursuant to the terms of this section, Tenant shall be relieved of further liability under this Lease as to the assigned premises. Consent by Landlord to any one assignment or subletting shall not in any way be construed as relieving Tenant from obtaining the Landlord's express written consent to any further assignment or subletting. 13.03 Landlord to Approve Documents. All documents utilized by Tenant to ----------------------------- evidence any subletting or assignment to which Landlord has consented shall be subject to prior approval by Landlord or its attorney. Tenant shall pay on demand all Landlord's costs and expenses, including reasonable attorneys' fees, incurred in determining whether or not to consent to any requested 10 subletting or assignment and in reviewing and approving such documentation which shall not exceed $500. SECTION 14 SIGNS AND ADVERTISING --------------------- Tenant shall not install, paint, display, inscribe, place, or affix any sign, picture, advertisement, notice, lettering, or direction in the interior of the Leased Premises which is visible from the outside of the Building or on the exterior of the Building without the prior written consent of Landlord unless provided for in the Plans. SECTION 15 DAMAGE TO PROPERTY, INJURY TO PERSONS ------------------------------------- 15.01 Damage by Tenant. Tenant agrees to pay for all damage to the ---------------- Building or the Premises, as well as all damage to tenants or occupants thereof caused by Tenant's misuse or neglect of the Premises, its apparatus or appurtenances, or caused by any licensee, contractor, agent, or employee of Tenant. Notwithstanding the foregoing provisions, neither Landlord nor Tenant shall be liable to one another for any loss, damage, or injury caused by its act or neglect to the extent that the other party has recovered the amount of such loss, damage, or injury from an insurer and the insurance company is bound by this waiver of liability. 15.02 Tenant's Property. Particularly, but not in limitation of the ----------------- foregoing paragraph, all property belonging to Tenant, or any occupant of the Premises, that is in the Building or the Premises, shall be there at the risk of Tenant or other person only, and Landlord or its agents or employees (except in the case of gross negligence of Landlord or its agents or employees) shall not be liable for: (I) damage to or theft or misappropriation of such property; (ii) any damage to property entrusted to Landlord, its agents, or employees, if any; (iii) loss of or damage to any property by theft or otherwise, by any means whatsoever; (iv) any injury or damage to persons or property resulting from fire, explosion, failing plaster, steam, gas, electricity, snow, water, or rain which may leak from any part of the Building or from the pipes, appliances, or plumbing works therein or from the roof, street, subsurface, or from any other place, or resulting from dampness or any other cause whatsoever; or (v) interference with the light, air, or other incorporeal hereditament. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Building or of observed defects in the Building, its fixtures or equipment. SECTION 16 TENANT'S INSURANCE ------------------ 16.01 Insurance. Tenant shall, during the entire Term of this Lease, at --------- its sole cost and expense, obtain, maintain, and keep in full force and effect the following types of insurance: 11 (a) Fire and extended coverage insurance, including endorsements for vandalism, malicious mischief, theft, sprinkler leakage, covering all of Tenant's property, including, but not limited to, furniture, fittings, equipment, installations, alterations, additions, partitions, fixtures, and anything in the nature of a leasehold improvement in an amount equal to the full replacement cost of such property without deduction for depreciation. If there is a dispute as to the amount which comprises full replacement cost, the decision of Landlord shall be conclusive; (b) Public liability insurance, including bodily injury and property damage, personal injury, contractual liability with respect to all claims, demands, or actions by any person, firm, or corporation, in any way arising from, related to, or connected with the conduct and operation of Tenant's business in the Premises or Tenant's use of the Premises. Such policies shall be written on a comprehensive basis, with limits not less than $1,000,000.00, and such higher limits as Landlord or the mortgagees of Landlord may require from time to time, but may not be unreasonably required; (c) Any other form or forms of insurance as the mortgagees of Landlord may reasonably require from time to time in form, in amounts and for insurance risks against which a prudent tenant would protect itself; (d) Business interruption insurance in such amounts as will reimburse the Tenant for direct or indirect loss of earning attributable to all penis commonly insured against by prudent tenants or attributable to prevention of access to the Premises or to the Building as a result of such perils. 16.02 Evidence. All policies shall be taken out with insurers acceptable -------- to Landlord and in form satisfactory from time to time to Landlord. Tenant agrees that certificates of insurance or, if required by Landlord or the mortgagees of Landlord, copies of each such insurance policy will be delivered to Landlord as soon as practicable after the placing of the required insurance, but in no event later than five (5) days after Tenant takes possession of all or any part of the Leased Premises. All policies shall require that at least thirty (30) days' prior written notice be delivered to Landlord's by the insurer prior to termination, cancellation, or material change in such insurance. 16.03 Proceeds. Tenant agrees that in the event of damage or destruction -------- to the leasehold improvements in the Leased Premises covered by insurance required to be taken out by Tenant pursuant to this Section, Tenant shall use the proceeds of the insurance for the purpose of building leasehold improvements as mutually agreed upon between Landlord and Tenant. If Landlord and Tenant cannot agrees as to the new improvements within thirty (30) days, then Tenant shall replace the identical improvements that were destroyed. In the event of damage or destruction of the Building entitling the Landlord to terminate this Lease pursuant to Section 17, then, if the Leased Premises have also been damaged, Tenant will pay to Landlord al of its insurance proceeds relating to the leasehold improvements in the Leased Premises, and if the Leased Premises have not been damaged, Tenant will deliver to Landlord, in accordance with the provisions of this Lease, the leasehold improvements and the Leased Premises. SECTION 17 12 DAMAGE OR DESTRUCTION --------------------- 17.01 Right to Terminate. If the Premises or the Building are damaged by ------------------ fire or other insured casualty, and the insurance proceeds have been made available by the holder of holders of any mortgages or deeds of trust covering the Building, the damage shall be repaired by and at the expense of Landlord to the extent of such insurance proceeds available, provided such repairs can, in Landlord's reasonable discretion, be completed within one hundred twenty (120) days after the occurrence of such damage, without the payment of overtime or other premiums. Until the repairs are completed, the Rent shall be abated in proportion to the part of the Premises which is unusable by Tenant in the conduct of its business; provided, however, if the damage is due to the fault or neglect of tenant or its employees, agents, or invitees, there shall be no abatement of Rent. If repairs cannot, in Landlord's reasonable discretion, be made within said one hundred twenty (120) day period, Landlord shall notify Tenant within sixty (60) days of the date of occurrence of the damage as to whether or not Landlord elects to make the repairs. If Landlord elects not to make the repairs, then either party may, by written notice to the other cancel this lease as of the date of the occurrence of the damage. Except as provided in this Section 17, there shall be no abatement of Rent and no liability of Landlord by reason of any injury, inconvenience, temporary limitation of access or interference to or with Tenant's business or property arising from the making of any necessary repairs, or any alterations or improvements in or to any portion of the Building or the Premises, or in or to fixtures, appurtenances, and equipment therein necessitated by the damage. Tenant understands that Landlord will not carry insurance of any kind on Tenant's furniture and furnishings or on any fixtures or equipment removable by Tenant under the provision of this Lease, and that Landlord shall not be required to repair any injury or damage caused by fire or other cause, or to make any repairs or replacements to or of improvement installed in the Premises by or for Tenant at Tenant's cost. 17.02 Landlord's Insurance. Landlord covenants and agrees that, -------------------- throughout the Lease Term, it will insure the Building (excluding foundations, excavations and other noninsurable items) and the machinery, boilers, and equipment contained therein owned by Landlord (excluding any property with respect to which Tenant is obliged to insure pursuant to the provisions of Section 16 thereof) against damage by fire and extended perils coverage in such reasonable amounts as would be carried by a prudent owner of a similar property in the same locale. Landlord will also, throughout the Term, carry public liability, property damage and loss of rent insurance with respect to the operation of the Premises in reasonable amounts as would be carried by a prudent owner of a similar property in the same locale. Landlord may, but shall not be obligated to, take out and carry any other form and forms of insurance as it or the mortgagees of Landlord may reasonably determine to be advisable. Tenant shall pay for all such insurance carried by Landlord as an Operating Cost, provided that such insurance is not duplicative of the insurance obtained pursuant to Section 16.01. Notwithstanding any contribution by Tenant to the cost of insurance premiums, Tenant acknowledges that it has no right to receive any proceeds from the insurance policies carried by Landlord, and that the insurance will be for the sole benefit of Landlord, with no coverage for Tenant for any risk insured against. SECTION 18 13 ENTRY BY LANDLORD ----------------- Landlord and its agents, upon giving 24 hours notice, shall have the right to enter the Premises during normal business hours for the purpose of examining or inspecting the same, to supply any services to be provided by Landlord to Tenant hereunder, to show same to prospective purchasers or tenants of the Premises, and to make such alterations, repairs, improvements, or additions, whether structural or otherwise, to the Premises or to the Building as Landlord may deem necessary or desirable. Landlord may enter by means of a master key, without liability to Tenant except for any failure to exercise due care for Tenant's property, and without affecting this Lease. Landlord shall use reasonable efforts on any such entry not to unreasonably interrupt or interfere with Tenant's use and occupancy of the Premises. Landlord may enter the Premises at any time in the case of an emergency. SECTION 19 DEFAULT BY TENANT ----------------- 19.01 Events of Default. Each one of the following events if referred to ----------------- as an "Event of Default": (a) Tenant shall fail to make due and punctual payment of Rent or an other amounts payable hereunder, and such failure shall continue for fifteen (15) days after receipt of written notice from Landlord. (b) Tenant shall vacate or abandon the Premises, or remove leasehold improvements or fixtures constituting property of Landlord; (c) This Lease shall be transferred to or shall pass to or devolve upon any other person or party except in the manner set forth in Section 13; (d) This Lease or the Premises or any part thereof shall be taken upon execution or by other process of law directed against Tenant, or shall be taken upon or subject to any attachment at the instance of any creditor of or claimant against Tenant, and said attachment shall not be discharged or disposed of within thirty (30) days after the levy; (e) The filing of any petition or the commencement of any case or proceeding by the Tenant under any provision or chapter of the Federal Bankruptcy Act, the Federal Bankruptcy Code or any other federal or state law relating to insolvency, bankruptcy or reorganization; or the adjudication that the Tenant is insolvent or bankrupt, or the entry of an order for relief under the Federal Bankruptcy Code with respect to Tenant; (f) The filing of any petition or the commencement of any case or proceeding described in Subsection (e) above against the Tenant, unless the petition and all proceedings initiated thereby are dismissed within sixty (60) days from the date of the filing; the filing of an answer by Tenant admitting the allegations of any such petition; or the appointment of or taking 14 possession by a custodian, trustee or receiver for all or any assets of the Tenant, unless such appointment is vacated or dismissed within sixty (60) days from the date of such appointment or taking of such possession. (g) Tenant shall fail to take possession of the Premises thirty (30) days following the earlier of the date the Premises are Ready for Occupancy or the Commencement date; or (h) Tenant shall fail to perform any of the other agreements, terms, covenants or conditions of this Lease on Tenant's part to be performed, and such non-performance shall continue for a period of thirty (30) days after written notice by Landlord to Tenant, or if such performance cannot be reasonably had within such thirty (30) day period, Tenant shall not in good faith have commenced such performance within such thirty (30) day period and shall not thereafter diligently proceed to completion. 19.02 Remedies of Landlord. If any one or more events of default shall -------------------- happen, then Landlord shall have the right at Landlord's election, then or at any time thereafter without demand or notice, to reenter and take possession of the Premises or any part thereof and repossess the same as Landlord's former estate and expel Tenant and those claiming through or under Tenant, and remove the effects of both or either, without being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of rent or breach of covenants or prior conditions and without terminating this Lease. Should Landlord elect to reenter as provided in this Subsection, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided for by law including a proceeding for possession pursuant to Colorado's Forcible Entry and unlawful Detainer Statutes, Landlord may, from time to time, without terminating this Lease either; (a) (i) Relet the Premises or any part thereof in Landlord's or Tenant's name, but for the account of Tenant, for a term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term of this Lease) and on conditions and upon other terms (which may include concessions of free rent and alteration and repair of the Premises) as Landlord, in its sole discretion, may determine, and Landlord may collect and receive the rents. Landlord shall use reasonable efforts to relet the Premises and maximize the income generated by the Premises. No reentry or taking possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention be given to Tenant. No notice from Landlord hereunder or under a forcible entry and unlawful detainer statute or similar law shall constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right following any reentry and/or reletting to exercise its right to terminate this Lease by giving Tenant written notice, in which event the Lease will terminate as specific in the notice. (ii) If Landlord elects to take possession of the Premises as provided in this Subsection (a) without terminating the Lease, Tenant shall pay to Landlord (1) the Rent and other sums due under this Lease which would be payable if repossession had not occurred, less (2) the net proceeds, if any, of any reletting of the Premises after deducting all Landlord's expenses in connection with the reletting, including, but without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, expenses of employees, alteration, remodeling and 15 repair costs and expenses of preparation of the reletting. If, in connection with any reletting, the new lease terms extends beyond the existing term, or the premises covered include other premises not part of the Premises, a fair apportionment of the rent received from the reletting and the expenses incurred in connection with the reletting will be made in determining the net proceeds received from reletting. In addition, in determining the net proceeds from reletting, any rent concession will be apportioned over the term of the new Lease;or (b) To give Tenant written notice of intention to terminate this Lease on the date of the notice, or on any later date specified in the notice. Tenant's right to possession of the Premises shall cease and the Lease shall thereupon be terminated, except as to Tenant's liability under this Lease, as if the expiration of the term fixed in the notice were the end of the term originally demised, including as extended by the exercise of any options granted to Tenant. If this Lease is terminated pursuant to the provisions of this Subsection (b), or terminated pursuant to a proceeding for possession under the Colorado Forcible Entry and Unlawful Detainer Statutes, Tenant shall remain liable to Landlord for damages in an amount equal to the Rent and other sums which would have been owing by Tenant under this Lease for the balance of the Term had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to the termination, after deducting all Landlord's expenses in connection with such reletting, including, but without limitation, the expenses enumerated in Subsection (a) above. Landlord shall be entitled to collect damages from Tenant monthly on the days on which the Rent and other amounts would have been payable if this Lease had not been terminated. 19.03 Cumulative Remedies. Suit or suits for the recovery of the Rent and ------------------- other amounts and damages may be brought by Landlord, from time to time, at Landlord's election, and nothing in this Lease shall be deemed to require Landlord to await the date when this Lease or its Term would have expired by limitation had there been no default by Tenant, or no termination, as the case may be. Each right and remedy provided for in this Lease shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise including but not limited to suits for injunctive relief and specific performance. The exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease or now or hereafter existing at law or in equity by statute or otherwise shall not preclude the simultaneous or later exercise by Landlord of any or all rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise. All such rights and remedies shall be considered cumulative and non-exclusive. All costs incurred by Landlord in connection with collecting any Rent or other amounts and damages owing by Tenant pursuant to the provisions of this Lease, or to enforce any provision of this Lease, including reasonable attorney's fees from the date such matter is turned over to an attorney, whether or not one or more actions are commenced by Landlord, shall also be paid by Tenant to Landlord. 19.04 No Waiver. No failure by Landlord to insist upon the strict --------- performance of any agreement, term, covenant or condition of this Lease or to exercise any right or remedy consequent upon a breach, and no acceptance of full or partial payment of Rent during the continuance of any breach, shall constitute a waiver of any breach or of the agreement to be performed or complied with by Tenant, and no breach shall be waived, altered or modified except by written instrument executed by Landlord. No waiver of any breach shall affect or alter this 16 Lease, but each and every agreement, term, covenant and condition shall continue in full force and effect with respect to any other then existing or subsequent breach. Notwithstanding any termination of this Lease, the same shall continue in force and effect as to any provisions which require observance or performance by Landlord or Tenant subsequent to such termination. 19.05 Bankruptcy. Nothing contained in this Section 19 shall limit or ---------- prejudice the right of Landlord to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding, an amount equal to the maximum allowed by any statute or rule of law governing such a proceeding, and in effect at the time when such damages are to be proved, whether or not the amount is greater, equal to or less than the amounts recoverable, either as damages or Rent, referred to in any of the preceding provisions of this Section. Notwithstanding anything contained in this Section to the contrary, any such proceeding or action involving bankruptcy, insolvency, reorganization, arrangement, assignment for the benefit of creditors, or appointment of a receiver or trustee, as set forth above, shall be considered to be an event of default only when the proceeding, action or remedy shall be taken or brought by or against the then holder of the leasehold estate under this Lease. SECTION 20 TAXES ----- During the Term hereof, Tenant shall pay, prior to delinquency, all business and other taxes, charges, notes, duties and assessments levied, and rates or fees imposed, charged, or assessed against or in respect of Tenant's occupancy of the Leased Premises or in respect of the personal property, trade fixtures, furnishings, equipment, and all other personal property of Tenant contained in the Premises, and shall hold Landlord harmless from and against all payment of such taxes, charges, notes, duties, assessments, rates, and fees, and against all loss, costs, charges, and expenses occasioned by or arising from any and all such taxes, charges, notes, duties, assessments, rates, and fees, any and all taxes. Tenant shall cause the fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the real and personal property of Landlord. If any or all of Tenant's fixtures, furnishing, equipment, and other personal property shall be assessed and taxes with Landlord's real property, Tenant shall pay to Landlord Tenant's share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's property. Tenant shall also timely provide Landlord with copies of all personal property, self-employment, sales, use and unemployment tax returns within thirty (30) days after they are filed with the appropriate government offices, together with any correspondence or tax bill pertaining to any tax that is not paid when due according to the taxing authority. Tenant agrees to provide personal financial statements at regular intervals if so requested by any lender holding a security interest in the Property or the Building. All of the above documents shall be considered confidential and only disclosed or used for Landlord's appropriate business purposes. 17 SECTION 21 EMINENT DOMAIN -------------- If the Building, or a substantial part thereof, or a substantial part of the Premises, shall be lawfully taken or condemned (or conveyed under threat of such taking or condemnation) for any public or quasi-public use or purpose, the Term of this Lease shall end upon, and not before, the date of the taking of possession by the condemning authority. Tenant hereby assigns to Landlord Tenant's interest if any, in the award. Current Rent shall be apportioned as of the date of termination. If any part of the Building, other than the Premises or not constituting a substantial part of the Premises, shall be so taken or condemned (or conveyed under threat of such taking or condemnation), or if the grade of any street adjacent to the Building is changed by any competent authority and such taking or change of grade makes it necessary or desirable to substantially remodel or restore the Building, Landlord shall have the right to cancel this Lease upon not less than sixty (60) days' notice prior to the date of cancellation designated in the notice. No money or other consideration shall be payable by Landlord to Tenant for the right of cancellation, and Tenant shall have no right to share in any condemnation award, or in any judgment for damages, or in any proceeds of any sale made under any threat of condemnation of taking. Nothing in this Section shall prevent Tenant from making and pursuing a claim against the condemning authority in its own right for termination of its leasehold interest. If this Lease is not canceled, the Lease shall continue in full force and effect, without abatement or reduction of Rent. SECTION 22 SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST --------------------------------------------- 22.01 Lease Subordinate to Mortgages. ------------------------------ (a) This Lease and the rights of Tenant shall be and are hereby made subject and subordinate to the lien of any mortgages or deeds of trust now or hereafter existing against the Building, the Property or both, and to all renewals, modifications, consolidations, replacements and extensions thereof and to all advances made now or in the future. Although the subordination shall be self-operating, Tenant, or its successors in interest, shall upon Landlord's request, execute and deliver upon the demand of Landlord any and all instruments desired by landlord, subordinating, in the manner reasonable requested by Landlord, this Lease to any mortgage or deed of trust. Landlord is hereby irrevocably appointed and authorized as agent and attorney-in-fact of Tenant to execute all subordination instruments if Tenant fails to execute the instruments within ten (10) days after notice from Landlord demanding their execution. The notice may be given in the manner provided for giving notice below. (b) Should any mortgage or deed of trust affecting the Building, the Property or both be foreclosed, then; (I) the liability of the mortgagee, beneficiary or purchaser at the foreclosure sale to Tenant shall exist only so long as the mortgagee, beneficiary, or purchaser is the owner of the Building and/or Property and the liability shall not continue or survive after further transfer of ownership; and (ii) Tenant shall be deemed to have attorned, as Tenant under this Lease, to the purchaser at any foreclosure sale and this Lease shall continue in force and effect as 18 a direct lease between and binding upon Tenant and the purchaser at any foreclosure sale. As used in this Section 22, "mortgagee" and "beneficiary" shall include successors and assigns of any such party, whether immediate or remote, the purchaser of any mortgage or deed of trust, whether at foreclosure or otherwise, and the successors, assigns and mortgagees and beneficiaries of such purchaser, whether immediate or remote. 22.02 Tenant's Notices. In the event of any act or omission by Landlord ---------------- under this Lease which would give Tenant the right to terminate this Lease or to claim a partial or total eviction, Tenant will not exercise any such right until: (a) it has given thirty days written notice (by United States certified or registered mail, postage prepaid) of such act or omission to the holder of any mortgage or deed of trust on the Property (whose names and addresses Landlord agrees will be furnished to Tenant on request) with a copy to Joel C. Davis, Dietze & Davis, P.C., P.O. Box 1530, Boulder, Colorado 80306; and (b) any holder of any mortgage or deed of trust on the Property shall, following the giving of such notice, have failed with reasonable diligence to commence and to pursue reasonable action to remedy the act or omission. SECTION 23 WAIVER ------ The waiver by Landlord of any breach of any term, covenant, or condition in this Lease shall not be deemed to be a waiver of the term, covenant, or condition, or any subsequent breach of the same or any other term, covenant or conditions. The acceptance of Rent hereunder shall not be construed to be a waiver of any breach by Tenant of any term, covenant, or condition of this Lease, it being understood and agreed that the remedies given to Landlord shall be cumulative, and the exercise of any one remedy by Landlord shall not be to the exclusion of any other remedy. SECTION 24 SUBROGATION ----------- The parties to this Lease agree that any and all fire and extended coverage insurance which is required to be carried by either shall be endorsed with a subrogation clause, substantially as follows: "This insurance shall not be invalidated should the insured waive, in writing, prior to a loss, any and all right of recovery against any party for loss occurring to the property described herein." Each party waives all claims for recovery from the other party, its officers, agents or employees for any loss or damage (whether or not such loss or damage is caused by negligence of the other party, and notwithstanding any provisions contained in this Lease to the contrary) to any of its real or personal property insured under valid and collectible insurance policies to the extent of the collectible recovery under the insurance. 19 SECTION 25 PLATS AND RIDERS ---------------- Appendices, clauses, plats, and riders, if any, referred to in this Lease and signed or initialed by Landlord and Tenant and affixed to this Lease are hereby incorporated in any made a part of this Lease. SECTION 26 SALE BY LANDLORD ---------------- In the event of a sale or conveyance or transfer by Landlord of its interest in the Property and/or in the Building containing the Premises, and/or in this Lease, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions, expressed or implied, contained in favor of Tenant, and in that event, Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease. This Lease shall not be affected by any such conveyance or transfer, and Tenant agrees to attorn to such purchaser or transferee. SECTION 27 RIGHT OF LANDLORD TO PERFORM ---------------------------- All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense, and without any abatement of Rent. If Tenant shall fail to pay any sum of money, other than Rent, required to be paid by it, or shall fail to perform any other act on its part to be performed, and the failure shall continue for thirty (30) days after written notice by Landlord, Landlord may, but shall not be obligated to do so, and without waiving or releasing Tenant from any obligations of Tenant, make any payment or perform any other act on Tenant's part to be made or performed as in this Lease provided. All sums so paid by Landlord and all necessary incidental costs, together with interest at the rate of one and one-half percent (1-1/2%) per month from the date of a payment by Landlord, shall be payable to Landlord on demand, and Tenant covenants to pay any such sums, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the non-payment thereof by Tenant, as in the case of default by Tenant in the payment of Rent. SECTION 28 ATTORNEY'S FEES --------------- In the event of any litigation or arbitration between Tenant and Landlord to enforce any provision of this Lease or any right of either party, the unsuccessful party to such litigation or arbitration shall pay to the successful party al costs and expenses, including reasonable attorney's fees, incurred. Moreover, if Landlord, without fault, is made a party to any litigation instituted by or 20 against Tenant, Tenant shall indemnify Landlord against, and protect, defend, and save it harmless from, all costs and expenses, including attorney's fees, incurred by Landlord. To the extent permitted by law, Landlord and Tenant hereby waived the right to a jury trial in any legal action or proceeding relating to this Lease. SECTION 29 ESTOPPEL CERTIFICATE -------------------- Tenant shall, at any time and from time to time, upon not less than ten (10) days prior written notice from Landlord, execute, acknowledge, and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the dates to which the Rent and other charges are paid, and acknowledging that Tenant is paying Rent on a current basis with no offsets or claims, and there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder (or specifying the offsets, claims, or defaults, if any are claimed). It is expressly understood and agreed that any such statement may be relied upon by any prospective purchaser or encumbrance of all or any portion of the Building or by any other person to whom it is delivered. Tenant's failure to deliver the statement within the required time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord's performance, and that not more than two (2) months' rental has been paid in advance. SECTION 30 NOTICE ------ Any notice from Landlord to Tenant or from Tenant to Landlord shall be in writing and may be served personally or by mail. If served by mail, it shall be mailed by registered or certified mail, return receipt requested, addressed to Tenant at the Premises or to Landlord at the place from time to time established for the payment of Rent. Notices shall be effective when delivered, if served personally, or three (3) days after mailing, if mailed. If no one at the premises is available to accept the notice, then it shall be deemed effective upon the second refusal or uncompleted mail delivery attempt. SECTION 31 RIGHTS RESERVED --------------- Landlord reserves the following rights, exercisable without notice and without liability to Tenant for damage or injury to property, person, or business, and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession, or giving rise to any claim for set- off or abatement of rent: (a) To change the Building's name or street address; 21 (b) To install, affix, and maintain any and all signs on the exterior and interior of the Building; (c) To retain at all times, and to use in appropriate instances, keys to all doors within and into the Premises. No locks or bolts shall be altered, changed, or added without the prior written consent of Landlord; (d) To have and retain a paramount title to the Premises, free and clear of any act of Tenant. SECTION 32 REAL ESTATE BROKER ------------------ Tenant represents that Tenant has dealt directly with Landlord in connection with this Lease, and that insofar as Tenant knows, no broker negotiated or participated in the negotiations of this Lease, or submitted or showed the Premises, or is entitled to any commission in connection herewith. Any payment for services relative to this Lease shall be the responsibility of the Tenant. SECTION 33 MISCELLANEOUS PROVISIONS ------------------------ (a) The words "re-enter", or "re-entry", as used in this Lease, are not restricted to their technical legal meaning. The term "Landlord", as used in this Lease, means only the landlord from time to time, and upon conveying or transferring its interest, Landlord shall be relieved from any further obligation or liability pursuant to Section 27. (b) Time is of the essence of this Lease and of each and all of its provisions. (c) Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution by both Landlord and Tenant. (d) The invalidity or unenforceability of any provision in this Lease shall not affect or impair any other provisions. (e) This Lease shall be governed by and construed pursuant to the laws of the State of Colorado. (f) Should any mortgagee or beneficiary under a deed of trust require a modification of this Lease, which modification will not bring about any increased cost or expense to Tenant or will not in any other way substantially change the rights and obligations or Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified. 22 (g) All rights and remedies of Landlord under this Lease, or those which may be provided by law, may be exercised by Landlord in its own name individually, or in its name by its agent, and all legal proceedings for the enforcement of any rights or remedies, including distress for rent, unlawful detainer, and any other legal or equitable proceedings, may be commenced and prosecuted to final judgment and be executed by Landlord in its own name individually or in its name by its agent. Landlord and Tenant each represent to the other that each has full power and authority to execute this Lease and to make and perform the agreements herein contained, and Tenant expressly stipulates that any rights or remedies available to Landlord, either by the provisions of this Lease or otherwise, may be enforced by Landlord in its own name individually or in its name by its agent or principal. (h) The marginal headings and titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (i) Tenant acknowledges that there are no covenants, representations, warranties, agreements, or conditions, expressed or implied, collateral or otherwise, forming part of or in any way effecting or relating to this Lease except as expressly set out in this Lease and the attachments and exhibits to this Lease, and that the terms and provisions of this Lease may not be modified or amended except by written instrument by both Landlord and Tenant. SECTION 34 SUCCESSORS AND ASSIGNS ---------------------- Subject to the terms and provisions of Section 28, the covenants and conditions contained in this Lease shall apply to and bind the respective heirs, successors, executors, administrators, and assigns of the parties hereto, and the terms "Landlord" and "Tenant" shall include the successors and assigns of either such party, whether immediate or remote. SECTION 35 QUIET ENJOYMENT --------------- Subject to the terms and provision of this Lease, Landlord covenants and agrees that Tenant, upon complying with all of the obligations of Tenant under this Lease shall peaceably and quietly enjoy the Premises and Tenant's rights under this Lease during its Term, without hindrance by Landlord or any persons claiming under Landlord. SECTION 36 RECORDING --------- This Lease shall not be recorded by Landlord or Tenant. 23 SECTION 37 RIGHT OF FIRST REFUSAL ---------------------- 37.01 Any time that additional space in the building becomes available for rent Landlord shall provide Tenant with a written notice stating the terms and conditions upon which Landlord is willing to lease the additional space. Tenant shall then have forty-five (45) days to exercise this option to lease the space identified in the notice pursuant to the terms and conditions set forth in the notice. If Tenant does not notify Landlord within the 45 day period of its intention to exercise this option and lease the available space, Landlord may freely market the Property on those terms and conditions for a period of six months following the expiration of Tenant's option. If the terms and conditions change during the course of Landlord's attempts to lease the space, Landlord shall reoffer the available space to Tenant for an additional thirty (30) days after receipt of the revised terms and conditions to lease the available space pursuant to the terms set forth in the notice. The intent of this paragraph is that Landlord shall offer to Tenant the most favorable terms and conditions that he is willing to accept from any tenant to occupy any available space in the Building. 37.02 Tenant shall have an option to lease an additional sixteen thousand square feet three years from commencement of this Lease and still another ten thousand square feet four years from commencement of this Lease. SECTION 38 RELIANCE BY LANDLORD -------------------- As of the date of executing this Lease, the Premises consist of unimproved real property. Landlord intends to proceed with construction of the Premises in reliance upon Tenant's covenants, obligations and representations contained in this Lease. Tenant hereby acknowledges and accepts Landlord's reliance in this regard. As additional consideration from Tenant to Landlord, Tenant hereby agrees to provide updated business financial statements and tax returns not less frequently than annually. 24 LANDLORD: By: _______________________________ Terrence J. O'Connor TENANT: _______________________________ B.I., Incorporated By: _______________________________ Jacqueline A. Chamberlin Chief Financial Officer By: _______________________________ David J. Hunter President 25 ADDENDUM TO LEASE AGREEMENT This Addendum Agreement is made and entered into on June 13, 1996 between Point II, LLC (Landlord) and BI, Inc. (Tenant). This Addendum amends the Lease entered into between the aforementioned parties on February 9, 1996 for the rental of 15,000 square feet in Point II whose address is 6325 Gunpark Drive, Boulder, Colorado 80301. 1. Amend full lease payment to read: $2,543,318.00 2. Amend Section 2.01 Commencement Date is changed from May 1, 1996 to September 1, 1996. 3. Amend Section 4.01 1996 - September - October $ 9,560 October - December $ 9,663 1997 - January - March $ 9,663 April - September $10,813 October - December $11.354 In Witness whereof, parties have executed this agreement the day and month first written above. LANDLORD: TENANT: BI, Inc. By: ____________________________ By: _________________________________ Terrence J. O'Connor Jacqueline A. Chamberlin Chief Financial Officer By: _________________________________ David Hunter President SECOND ADDENDUM TO LEASE AGREEMENT This Second Addendum to Lease Agreement (the "Second Addendum") is entered into this 26 day of February, 1997, by and between BI Incorporated, a Colorado -- -------- corporation ("Tenant") and Point II, LLC, a Colorado limited liability company, successor to Terrence J. O'Connor ("Landlord"). Landlord and Tenant entered into that certain lease dated February 9, 1996, amended by that Addendum to Lease Agreement (the "Addendum"), dated June 13, 1996 (collectively, the "Lease"), pertaining to that certain Premises of approximately 15,000 square feet located in the building known as Point II, 6325 Gunpark Drive, Boulder, Colorado, more particularly described in the Lease; WHEREAS, Landlord and Tenant desire to reaffirm certain terms and conditions of the Lease as set forth hereinafter, NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree to enter into this Second Addendum to Lease as follows: 1. TERM. Landlord and Tenant hereby agree that the commencement date is ---- September 1, 1996, continuing for 170 months and terminating on September 30, 2010. 2. PREMISES. The area constituting the Premises shall be 15,078 usable square -------- feet and 16,906 rentable square feet. For purposes of calculating Taxes and Operating Costs of the Building, the numerator shall be 16,906. Page 2 of 3 Second Addendum to Lease BI Incorporated 3. BASE RENT. Monthly base rend shall be amended to account for the actual --------- square footage as follows:
BEGINNING ENDING MONTHLY BASE RENT ANNUAL BASE RENT PSF - ----------- -------- ----------------- -------------------- 9/l/96 10/31/96 $10,777.58 $ 7.65 11/1/96 3/31/97 $10,890.28 $ 7.73 4/l/97 9/3O/97 $12,186.41 $ 8.65 10/l/97 9/30/98 $12,792.21 $ 9.08 10/1/98 9/30/99 $13,440.27 $ 9.54 10/1/99 9/30/00 $14,102.42 $10.01 10/1/00 9/30/01 $14,820.93 $10.52 10/1/01 9/30/02 $15,553.52 $11.04 10/l/02 9/30/03 $16,328.38 $11.59 10/1/03 9/30/04 $17,145.50 $12.17 10/l/04 9/30/05 $18,004.99 $12.78 10/1/05 9/30/06 $18,906.54 $13.42 10/1/06 9/30/07 $19,850.46 $14.09 10/l/07 9/30/08 $20,850.73 $14.80 10/1/08 9/30/09 $21,893.27 $15.54 10/1/09 9/30/10 $22,978.07 $16.31
4. FIRST EXPANSION. Tenant shall add 11,858 rentable square feet on the first --------------- floor at additional minimum base rent of $10.01 per square foot commencing on November 15, 1999. Base rent is calculated as an average rate based upon type of space occupied (Office, Warehouse, or Research and Development). For purposes of calculating Taxes and Operating Expenses of the Building, the numerator shall be 28, 764 commencing on that same date. Base rent shall increase annually on the schedule noted in #3 above. 5. SECOND EXPANSION. Tenant shall add 14,560 rentable square feet on the ---------------- second floor at additional minimum base rent of $10.52 per rentable square foot commencing on November 15, 2000. Base rent is calculated as an average rate based upon type of space occupied (Office, Warehouse, or Research and Development). For purposes of calculating Taxes and Operating Expenses of the Building, the numerator shall be 43,324 commencing on that same date. Base rent shall increase annually on the same schedule noted in #3 above. Page 3 of 3 Second Addendum to Lease BI Incorporated 6. This Second Addendum shall be governed by and construed in accordance with the laws of the State of Colorado, and shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 7. Except as specifically set forth herein, all other terms and conditions of the Lease shall remain in full force and effect. It is the intent of the parties that, where applicable, these provisions be construed together, however, in the event that there is a direct conflict, the provisions of this Second Addendum shall prevail. IN WITNESS WHEREOF the parties hereto have entered into this Second Addendum to Lease as of the date first above written. LANDLORD: POINT II, LLC, a Colorado limited liability company BY: ____________________________ NAME: Terrence J. O'Connor TITLE: Manager TENANT: BI INCORPORATED, Colorado corporation -------- BY: ____________________________ NAME: McKinley C. Edwards TITLE: Chief Operating Officer EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 Subsidiaries of the Registrant Community Corrections Corporation Georgia Peregrine Corrections Incorporated Colorado EX-23.1 5 CONSENT OF PRICE WATERHOUSE COOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-20843 and 33-38428 and 333-24073) of BI Incorporated of our report dated August 14, 1998, appearing on page F1 of this Annual Report on Form 10-K. /s/PricewaterhouseCoopers LLP Broomfield, Colorado September 21, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 1,146 0 16,525 0 3,393 22,681 13,250 0 61,989 7,856 0 0 0 34,076 0 61,989 61,475 62,001 30,938 57,188 0 0 0 4,813 2,142 0 0 0 0 2,671 .36 .34
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