-----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, KX6VVp5nuj2cQiuFK5vMYuLtQnGcioRCfxwsQOVXxgYtfT4cZBL/HBkfZ9HvfaUK jABKwyZ+y16NkfmUYJRF7Q== 0000936392-97-000016.txt : 19970108 0000936392-97-000016.hdr.sgml : 19970108 ACCESSION NUMBER: 0000936392-97-000016 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19970107 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOSITE DIAGNOSTICS INC CENTRAL INDEX KEY: 0000834306 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 330288606 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-17657 FILM NUMBER: 97502192 BUSINESS ADDRESS: STREET 1: 11030 ROSELLE ST CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194554808 MAIL ADDRESS: STREET 1: 11030 ROSELLE ST CITY: SAN DIEGO STATE: CA ZIP: 92121 S-1/A 1 FORM S-1 AMEND. #2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 1997 REGISTRATION NO. 333-17657 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BIOSITE DIAGNOSTICS INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3826 33-0288606 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
11030 ROSELLE STREET SAN DIEGO, CALIFORNIA 92121 (619) 455-4808 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ KIM D. BLICKENSTAFF PRESIDENT AND CHIEF EXECUTIVE OFFICER BIOSITE DIAGNOSTICS INCORPORATED 11030 ROSELLE STREET SAN DIEGO, CALIFORNIA 92121 (619) 455-4808 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE OF PROCESS) ------------------------ COPIES TO: THOMAS E. SPARKS, JR., ESQ. ALAN C. MENDELSON, ESQ. JOHN L. DONAHUE, ESQ. D. BRADLEY PECK, ESQ. GEORGE A. GUCKER, ESQ. NANCY E. DENYES, ESQ. PILLSBURY MADISON & SUTRO LLP COOLEY GODWARD LLP P.O. BOX 7880 4365 EXECUTIVE DRIVE, SUITE 1100 SAN FRANCISCO, CA 94120-7880 SAN DIEGO, CA 92121-2128
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Dated January 7, 1997 2,000,000 SHARES LOGO COMMON STOCK ------------------------ All of the 2,000,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), offered hereby are being sold by Biosite Diagnostics Incorporated ("Biosite" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "BSTE." ------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================= Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) - ------------------------------------------------------------------------------------------------- Per Share......................... $ $ $ Total (3)......................... $ $ $ =================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company, estimated to be $700,000. (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase an aggregate of up to 300,000 additional shares at the Price to Public less Underwriting Discounts and Commissions to cover over-allotments, if any. If all such additional shares are purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The Common Stock is offered by the several Underwriters named herein when, as and if received and accepted by them, subject to their right to reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of certificates for the shares will be made at the offices of Cowen & Company, New York, New York on or about , 1997. ------------------------ COWEN & COMPANY ALEX. BROWN & SONS INCORPORATED , 1997 3 LOGO IMMEDIATE RESPONSE DIAGNOSTICS(TM) TRIAGE(R) PANEL FOR DRUGS OF ABUSE EMERGENCY ROOM SCREENING TRIAGE(R) TRIAGE(R) PLUS TCA PANEL FOR EMERGENCY ROOM SCREENING DRUGS OF ABUSE TRIAGE(R) INTERVENTION WORKPLACE SCREENING MERCK TRIAGE(R) INTERNATIONAL MARKETS [PHOTOGRAPHS SHOWING TRIAGE DOA TEST DEVICE AND VARIOUS TRIAGE DOA PRODUCT CONFIGURATIONS] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Biosite(R) and Triage(R) are registered trademarks of the Company. Immediate Response Diagnostics(TM), ExpressTest(SM), Triage CareLink(TM) and the Company's logo are servicemarks or trademarks of the Company. This Prospectus also includes trade names and trademarks of companies other than Biosite. 4 IMMEDIATE RESPONSE DIAGNOSTICS(TM) BIOSITE'S TRIAGE PANELS AND TRIAGE CARELINK SYSTEM PRODUCT ATTRIBUTES TRIAGE(R) PANEL FOR DRUGS OF ABUSE IS USED IN A VARIETY OF SETTINGS FOR RAPID DRUG SCREENING RAPID RESULTS EASE OF USE HIGH ANALYTICAL ACCURACY MULTIPLE ANALYTE DETECTION RELIABILITY COST EFFECTIVENESS [PHOTOGRAPHS OF CERTAIN SETTINGS IN WHICH TRIAGE DOA IS USED (HOSPITAL LABORATORIES, EMERGENCY ROOMS AND WORKPLACE SCREENING)] 5 PRODUCTS UNDER DEVELOPMENT TRIAGE(R) PANELS TRIAGE(R) O & P (PARASITE SCREENING) TRIAGE(R) C.DIFF (PATHOGEN DETECTION) TRIAGE(R) ENTERIC (PATHOGEN SCREENING) TRIAGE(R) CARELINK SYSTEM TRIAGE(R) CARDIAC (ACUTE MYOCARDIAL INFARCTION DETECTION) TRIAGE(R) TRANSPLANT (CYCLOSPORIN MONITORING) [PHOTOGRAPHS SHOWING THE COMPANY'S PRODUCTS UNDER DEVELOPMENT] THE COMPANY'S PRODUCTS IN DEVELOPMENT ARE IN VARIOUS STAGES OF RESEARCH OR DEVELOPMENT AND HAVE NOT BEEN APPROVED BY THE UNITED STATES FOOD AND DRUG ADMINISTRATION FOR COMMERCIAL SALE. THERE CAN BE NO ASSURANCE THAT THE COMPANY'S PRODUCTS IN DEVELOPMENT WILL BE SUCCESSFULLY DEVELOPED OR APPROVED BY REGULATORY AUTHORITIES FOR COMMERCIAL SALE. 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes appearing elsewhere in this Prospectus. Except as set forth in the financial statements and notes thereto or otherwise as specified herein, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) reflects the conversion of all outstanding shares of Preferred Stock of the Company into shares of Common Stock upon the closing of this offering and (iii) includes 92,222 shares which will be issued upon conversion of a $1.0 million debenture into shares of Common Stock upon the closing of this offering, assuming an initial public offering price of $12.00 per share and accrued interest on the debenture through January 31, 1997. See "Description of Capital Stock," "Underwriting" and Notes 1, 6 and 7 of Notes to Financial Statements. THE COMPANY Biosite Diagnostics Incorporated ("Biosite" or the "Company") develops, manufactures and markets rapid, accurate and cost-effective diagnostic products that improve the quality of patient care and simplify the practice of laboratory medicine. The Company believes that its Immediate Response Diagnostics can have an important impact on medical decisions, patient care and the cost of medical treatment. The Company's first product, Triage Panel for Drugs of Abuse ("Triage DOA"), a small self-contained test capable of detecting a broad spectrum of commonly overdosed prescription and illicit drugs in approximately 10 minutes, is used by over 2,600 hospitals and emergency departments. Since its introduction in 1992, over 4.2 million Triage DOA panels have been sold worldwide for use in hospital emergency department screening and workplace testing. The Company is developing several additional products for applications where the Company believes its Immediate Response Diagnostics can play an important role in improving patient care. Products under development include tests that are intended to aid in the diagnosis of heart attacks, the dosing of certain therapeutic drugs, the management of certain chronic diseases and the detection of certain bacterial and parasitic infections. In 1995, the worldwide market for immunoassay tests exceeded $5.1 billion. Although early manual immunoassay tests provided high levels of sensitivity for analyte detection, these tests suffered from short shelf lives, long reaction times, a need for radioactive labels and inconsistent results. In response to these limitations, automated immunoassay analyzers have been developed to simplify the performance of antibody-based tests. However, these machines are large and complex, have lengthy turnaround times and require high volumes of sample throughput to justify the significant investment in equipment and technical staff. In recent years, there has been a continuing shift from the use of such analyzers to more technologically advanced point-of-care tests that can be performed in a matter of minutes. Although certain simple single analyte diagnostic tests have been developed, such tests have remained incapable of precise, multi-analyte detection or highly sensitive quantitative measurements. As a result, medical tests that require multiple analytes or precise quantitation of the target analyte have remained the domain of immunoassay analyzers. The Company believes that there is significant market potential for advanced point-of-care diagnostic products that provide quick and accurate diagnosis during a patient visit, shortening the decision time to medical intervention and minimizing the need for additional patient follow-up, thereby reducing overall health care delivery costs. Biosite's Immediate Response Diagnostics technology is based on proprietary advances in several core scientific and engineering disciplines, including antibody development and engineering, analyte cloning and synthesis, signaling chemistry and micro capillary fluidics, which make possible the development and manufacture of rapid, accurate and cost-effective point-of-care diagnostics. The Company has utilized its core technologies to develop two distinct product platforms: the Triage Panel for qualitative visual readings and the Triage CareLink System for quantitative measurements. The Company's products are designed to measure either a single analyte or multiple analytes simultaneously and to allow for the qualitative or quantitative analysis of various samples, including urine, serum, plasma, whole blood and stool. Both of the Company's product platforms are designed to provide rapid results, ease of use, high analytical accuracy and the capability of performing multiple analyses in a reliable and cost-effective testing device. 3 7 Triage DOA, based on the Company's Triage Panel platform, is a qualitative, single sample urine screen that identifies eight commonly abused prescription and illicit drugs or drug classes and provides results in approximately 10 minutes. Emergency physicians have estimated that drug abuse is implicated in 5% to 10% of the emergency department visits in the United States each year. The Company believes that it is a leading provider of immunoassays for drug screening in hospitals. In 1995, sales of Triage DOA product lines exceeded $25.1 million. The Company has additional Triage Panel products under development for the qualitative detection of bacterial and parasitic infections. The Triage CareLink System under development is designed to provide rapid, quantitative results for immunoassay tests. The Triage CareLink System consists of two parts: a small single-use test cartridge and a proprietary portable fluorescent meter designed to read the sample at the point-of-care. The Company currently is developing two applications using this technology: Triage Cardiac, to quantify a panel of cardiac markers implicated in acute myocardial infarction ("AMI"), and Triage Transplant, to monitor the concentration of cyclosporine, an immunosuppressant drug prescribed for organ transplant recipients to prevent organ rejection. The Company has entered into several strategic arrangements with major pharmaceutical and diagnostic companies, including Novartis Pharma Inc. ("Novartis," formerly Sandoz Pharma Ltd.) for the development of Triage Transplant; LRE Relais + Electronik GmbH ("LRE") for the development of the fluorescent meter used in the Triage CareLink System; and Merck KGaA ("Merck") and ARKRAY KDK Corporation, formerly known as Kyoto Dai-ichi Kagaku Co., Ltd. ("KDK"), for the development of Triage Cardiac. In addition, the Company uses Curtin Matheson Scientific, Inc., a subsidiary of Fisher International Inc. ("CMS"), to distribute Triage DOA to U.S. hospital-based laboratories and emergency departments and has built a small direct sales force to address the workplace testing segment of the market for Triage DOA. Merck is the exclusive distributor of Triage DOA in certain countries in Europe, Latin America, the Middle East, Asia and Africa. The Company was incorporated in Delaware in 1988. The Company's executive offices are located at 11030 Roselle Street, San Diego, California 92121, and its telephone number is (619) 455-4808. THE OFFERING Common Stock offered by the Company.......... 2,000,000 shares Common Stock to be outstanding after the offering................................... 11,885,168 shares(1) Use of proceeds.............................. For expansion of sales and marketing activities, research and development, expansion and development of manufacturing capabilities, working capital and general corporate purposes. Proposed Nasdaq symbol....................... BSTE
- --------------- (1) Excludes 1,180,204 shares reserved for issuance upon exercise of stock options outstanding at November 30, 1996. See "Capitalization," "Management -- Executive Compensation" and Note 7 of Notes to Financial Statements. 4 8 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ----------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- STATEMENT OF INCOME DATA: Net sales............................... $ -- $ 2,920 $ 9,866 $16,320 $25,147 $18,236 $20,225 Cost of sales........................... -- 1,612 3,268 4,416 5,649 3,781 4,318 ------- ------- ------- ------- ------- ------- ------- Gross profit............................ -- 1,308 6,598 11,904 19,498 14,455 15,907 Research and development................ 2,793 2,593 2,796 3,836 6,553 4,602 6,515 Selling, general and administrative..... 1,771 3,622 4,841 5,960 7,134 5,203 6,116 ------- ------- ------- ------- ------- ------- ------- Total operating expenses................ 4,564 6,215 7,637 9,796 13,687 9,805 12,631 Income (loss) from operations........... (4,564) (4,907) (1,039) 2,108 5,811 4,650 3,276 Interest and other income, net.......... 260 630 613 649 1,647 1,253 1,441 Settlement of patent matters............ -- -- -- (338) (1,217) (743) (2,368) ------- ------- ------- ------- ------- ------- ------- Income (loss) before benefit (provision) for income taxes...................... (4,304) (4,277) (426) 2,419 6,241 5,160 2,349 Benefit (provision) for income taxes.... -- -- -- (63) 1,667 (132) 264 ------- ------- ------- ------- ------- ------- ------- Net income (loss)....................... $(4,304) $(4,277) $ (426) $ 2,356 $ 7,908 $ 5,028 $ 2,613 ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share............. $ (0.61) $ (0.49) $ (0.04) $ 0.22 $ 0.74 $ 0.47 $ 0.24 ======= ======= ======= ======= ======= ======= ======= Common and common equivalent shares used in computing per share amounts(1)..... 7,058 8,754 10,098 10,553 10,766 10,721 10,832
SEPTEMBER 30, 1996 -------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.............................. $10,169 $ 31,789 Working capital................................................................ 13,967 35,667 Total assets................................................................... 28,968 50,588 Notes payable and capital lease obligations, less current portion.............. 3,234 2,234 Stockholders' equity........................................................... 21,181 43,881
- --------------- (1) Computed on the basis described in Note 1 of Notes to Financial Statements. (2) Adjusted to reflect the sale by the Company of 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 5 9 The discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. RISK FACTORS In evaluating the Company's business, prospective investors should consider carefully the following risk factors in addition to the other information presented in this Prospectus. DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS Except for Triage DOA, all of the Company's products are still under development, and there can be no assurance that such products will be successfully developed or commercialized on a timely basis, if at all. The Company believes that its revenue growth and profitability will substantially depend upon its ability to complete development of and successfully introduce these new products. In addition, the successful development of some of these new products will depend on the development of new technologies, including the Triage CareLink System's fluorescent meter and assay devices. The Company will be required to undertake time-consuming and costly development activities and seek regulatory approval for these new products. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products, that regulatory clearance or approval of any new products will be granted by the U.S. Food and Drug Administration ("FDA") or foreign regulatory authorities on a timely basis, if at all, or that the new products will be successfully commercialized. The Company has limited resources to devote to the development of all its products and consequently a delay in the development of one product may delay the development of other products. In order to successfully commercialize any new products, the Company will be required to establish and maintain reliable, cost-efficient, high-volume manufacturing capacity for such products. If the Company is unable, for technological or other reasons, to complete the development, introduction or scale-up of manufacturing of any new product or if any new product is not approved for marketing or does not achieve a significant level of market acceptance, the Company's business, financial condition and results of operations would be materially and adversely affected. See "Business -- Products and Products Under Development," "-- Manufacturing" and "-- Government Regulation." FUTURE OPERATING RESULTS AND QUARTERLY FLUCTUATIONS The Company first achieved profitability in fiscal 1994 and prior to that time incurred significant operating losses. There can be no assurance that the Company will remain profitable on a quarterly or annual basis in the future. The Company believes that future operating results will be subject to quarterly fluctuations due to a variety of factors, including whether and when new products are successfully developed and introduced by the Company, market acceptance of current or new products, regulatory delays, product recalls, manufacturing delays, shipment problems, seasonal customer demand, the timing of significant orders, changes in reimbursement policies, competitive pressures on average selling prices, changes in the mix of products sold and patent conflicts. Operating results would also be adversely affected by a downturn in the market for the Company's current and future products, if any, order cancelations or order rescheduling. Because the Company is continuing to increase its operating expenses for personnel and new product development, the Company's operating results would be adversely affected if its sales did not correspondingly increase or if its product development efforts are unsuccessful or subject to delays. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." NEAR-TERM DEPENDENCE ON TRIAGE DOA; RISK OF OBSOLESCENCE; CONCENTRATION OF PRODUCT SALES Sales of Triage DOA have to date accounted for all of the Company's sales. The Company expects its revenue and profitability will substantially depend on the sale of Triage DOA for the foreseeable future. A 6 10 reduction in demand for Triage DOA would have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that growth in sales of Triage DOA will slow as the available U.S. market becomes saturated. Competitive pressures could also erode the Company's profit margins for Triage DOA. The Company's continued growth will depend on its ability to successfully develop and commercialize other products and to gain additional acceptance of Triage DOA. There can be no assurance that the Company will be able to successfully develop and commercialize new products or that the Company will be able to maintain or expand its share of the drug testing market. Technological change or the development of new or improved diagnostic technologies could result in the Company's products becoming obsolete or noncompetitive. See "Business -- Products and Products Under Development." DEPENDENCE ON OTHERS Biosite's strategy for the research, development, commercialization and distribution of certain of its products entails entering into various arrangements with corporate partners, licensors, licensees and others, and is dependent upon the success of these parties in performing their responsibilities. There can be no assurance that such parties will perform their obligations as expected or that any revenue will be derived from such arrangements. The Company relies upon distributors and its own sales force to distribute Triage DOA and may rely upon distributors to distribute products under development. Triage DOA is currently marketed pursuant to exclusive distribution agreements in the U.S. medical market by CMS (which accounted for 80% of product sales in the first nine months of 1996) and in certain countries in Europe, Latin America, the Middle East, Asia and Africa by Merck. The CMS distribution agreement has minimum quarterly sales milestones which, if the milestones are not met, allows the Company to terminate the agreement, obligates CMS to pay Biosite a penalty and allows the Company to appoint a new distributor or to sell Triage DOA directly in the U.S. medical market. The Company anticipates that it may enter into additional distribution agreements with respect to its products currently under development and products that it develops in the future, if any of such products receive the requisite regulatory clearance or approvals. There can be no assurance that the Company will be able to enter into such agreements on acceptable terms, if at all. Biosite has also entered into agreements with, among others, Merck, Novartis and KDK for the development and marketing of products. The agreements are subject to certain rights of termination, and there can be no assurance that any such agreement will not be terminated. There also can be no assurance that the Company's collaborators will abide by their contractual obligations or will not discontinue or sell their current lines of business. As part of its decision to refocus away from certain aspects of the human diagnostics business, Merck has informed the Company that Merck is considering assigning its rights concerning the marketing of Triage Cardiac either to a third party or back to the Company. There also can be no assurance that any of the research for which the Company receives or provides funding will lead to the development of products. The Company intends to enter into additional development and marketing agreements. However, there can be no assurance that the Company will be able to enter into such agreements on acceptable terms, if at all. If any of the Company's distribution or marketing agreements are terminated and the Company is unable to enter into replacement agreements or if the Company elects to distribute new products directly, the Company would have to invest in additional sales and marketing resources, including additional field sales personnel, which would significantly increase future sales and marketing expenses. The Company currently has limited experience in direct sales, marketing and distribution of its products. There can be no assurance that the Company's direct sales, marketing and distribution efforts would be successful or that revenue from such efforts would exceed expenses. Further, there can be no assurance that Biosite would be able to enter into new distribution or marketing agreements on satisfactory terms, if at all. The Company is developing with LRE a hand-held point-of-care fluorescent meter for use in Triage CareLink System products. The meter will be programmed to run a specific test through the use of changeable proprietary software which is also under development by LRE. There can be no assurance that LRE will develop the hardware or software on schedule, if at all, or that new software will be developed to permit the meter to be used for another Triage CareLink System product. See "Business -- Strategic and Distribution Arrangements." 7 11 INTENSELY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE The market in which the Company competes is intensely competitive. Biosite's competitors include health care companies that manufacture laboratory-based tests and analyzers, as well as clinical and hospital-based laboratories. Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical and hospital-based laboratories. The Company expects that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for its products, the Company will be required to demonstrate that its products are an attractive alternative to testing performed by clinical and hospital-based laboratories. This will require physicians to change their established means of having such tests performed. There can be no assurance that the Company's products will be able to compete with the testing services provided by these laboratories. In addition, companies with a significant presence in the diagnostic market, such as Abbott Laboratories, Boehringer Mannheim GmbH ("Boehringer Mannheim"), Chiron Diagnostics, Clinical Diagnostic Systems, a division of Johnson & Johnson, DADE International, and Roche Biosciences, Inc., have developed or are developing diagnostic products that do or will compete with the Company's products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than the Company. Moreover, such competitors offer broader product lines and have greater name recognition than the Company, and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete with or will compete with those of the Company. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than the Company's current or future products, or that would render the Company's technologies and products obsolete. Moreover, there can be no assurance that the Company will have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. In addition, there can be no assurance that competitors, many of which have made substantial investments in competing technologies that may be more effective than the Company's technologies, will not prevent, limit or interfere with the Company's ability to make, use or sell its products either in the United States or in international markets. See "Business -- Products and Products Under Development," "-- Technology" and "-- Competition." UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; LICENSE OF TECHNOLOGY OF THIRD PARTIES The Company's ability to compete effectively will depend in part on its ability to develop and maintain proprietary aspects of its technology, and to operate without infringing the proprietary rights of others or to obtain rights to such proprietary rights. Biosite has U.S. and foreign issued patents and is currently prosecuting patent applications in the United States and with certain foreign patent offices. There can be no assurance that any of the Company's pending patent applications will result in the issuance of any patents, that the Company's patent applications will have priority over others' applications, or that, if issued, any of the Company's patents will offer protection against competitors with similar technologies. There can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented in the future or that the rights created thereunder will provide a competitive advantage. Litigation may be necessary to enforce any patents issued to the Company, to protect trade secrets or know-how owned by the Company or to determine the enforceability, scope and validity of the proprietary rights of others. In March 1996, the Company settled a potential patent infringement claim by obtaining a license to the contested patent in return for a one-time payment of $2.2 million. In September 1996, the Company settled a patent infringement lawsuit filed by Abbott Laboratories and obtained a license to the contested patent in return for the payment of $5.5 million and the agreement to pay certain royalties. There can be no assurance that the Company will not in the future become subject to patent infringement claims and litigation or interference proceedings conducted in the U.S. Patent and Trademark Office ("USPTO") to determine the priority of inventions. The defense and prosecution of intellectual property suits, USPTO interference proceedings, and related legal and administrative proceedings will result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. An adverse determination in litigation or interference proceedings to which the Company may become a party 8 12 could subject the Company to significant liabilities to third parties. Further, either as the result of such litigation or proceedings or otherwise, the Company may be required to seek licenses from third parties which may not be available on commercially reasonable terms, if at all. Triage DOA and products under development may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. The Company has obtained licenses for certain technologies. However, there can be no assurance that the Company will be able to obtain licenses for technology patented by others on commercially reasonable terms, if at all, that it will be able to develop alternative approaches if unable to obtain licenses or that the Company's current and future licenses will be adequate for the operation of Biosite's business. The failure to obtain necessary licenses or to identify and implement alternative approaches would prevent the Company from commercializing certain of its products under development and would have a material adverse effect on the Company's business, financial condition and results of operations. Biosite is aware of a U.S. patent owned by Celltech Limited ("Celltech") relating to the manufacture of antibodies, such as those developed or being developed by Biosite for several products, including Triage Cardiac. Biosite is also aware that this patent is the subject of an interference proceeding in the USPTO which was initiated in February 1991 with a patent application filed by Genentech, Inc. ("Genentech"). In June 1996, the European Patent Office ("EPO") invalidated, following an opposition, certain claims under Celltech's corresponding EPO-granted patent which may be relevant to Biosite's products and products under development. Celltech has indicated that it will appeal such decision. If it is determined that aspects of the manufacturing of Biosite's antibodies are covered by patent claims stemming from the interference or if Celltech were to have such claims upheld on appeal, Biosite may be required to obtain a license under such patents and corresponding patents in other countries. There can be no assurance that a license would be made available to Biosite on commercially reasonable terms, if at all. If such license is required and not obtained the Company might be prevented from using certain of its manufacturing technologies. The Company's failure to obtain any required licenses could have a material adverse effect on the Company's business, financial condition and results of operations. The Company also relies upon trade secrets, technical know-how and continuing invention to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, that the Company can meaningfully protect its trade secrets, or that the Company will be capable of protecting its rights to its trade secrets. Others may have filed and in the future are likely to file patent applications that are similar or identical to those of the Company. To determine the priority of inventions, the Company may have to participate in interference proceedings declared by the USPTO that could result in substantial cost to the Company. No assurance can be given that any patent application of another will not have priority over patent applications filed by the Company. The commercial success of the Company also depends in part on the Company neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to the Company's technologies and products. The Company is aware of several third-party patents that may relate to the Company's technology. There can be no assurance that the Company does not or will not infringe these patents, or other patents or proprietary rights of third parties. In addition, the Company has received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. Any legal action against the Company or its collaborative partners claiming damages and seeking to enjoin commercial activities relating to the Company's products and processes affected by third party rights, in addition to subjecting the Company to potential liability for damages may require the Company or its collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that the Company or its collaborative partners would prevail in any such action or that any license (including licenses proposed by third parties) required under any such patent would be made available on commercially acceptable terms, if at all. There are a significant number of U.S. and foreign patents and patent applications in the Company's areas of interest, and the Company believes that 9 13 there may be significant litigation in the industry regarding patent and other intellectual property rights. If the Company becomes involved in such litigation, it could consume a substantial portion of the Company's managerial and financial resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Proprietary Technology and Patents." GOVERNMENT REGULATION The testing, manufacture and sale of the Company's products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. The Company will not be able to commence marketing or commercial sales in the United States of new products under development until it receives clearance or approval from the FDA, which can be a lengthy, expensive and uncertain process. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. Any devices manufactured or distributed by the Company pursuant to FDA clearance or approvals are subject to pervasive and continuing regulation by the FDA and certain state agencies. Before a new device can be introduced in the market, the manufacturer must generally obtain FDA clearance of a 510(k) notification or FDA approval of a pre-market approval ("PMA") application. The PMA approval process is more expensive, uncertain and lengthy than the 510(k) clearance process. The Company is uncertain of the regulatory path to market that the FDA will ultimately apply to the Company's products currently in development. Although Triage DOA received 510(k) clearance, a PMA may be required for Triage Cardiac and Triage Transplant products now in development. There can be no assurance that with respect to any of the Company's products in development, the FDA will not determine that the Company must adhere to the more costly, lengthy and uncertain PMA approval process. Modifications to a device that is the subject of an approved PMA application, its labeling or manufacturing process may require approval by the FDA of a PMA supplement or a new PMA application. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions. There can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances for its products on a timely basis, if at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. Before the manufacturer of a device can submit the device for FDA clearance or approval, it generally must conduct a clinical investigation of the device. Although clinical investigations of most devices are subject to the investigational device exemption ("IDE") requirements, clinical investigations of in vitro diagnostic ("IVD") tests, such as all of the Company's products and products under development, are exempt from the IDE requirements, including the need to obtain the FDA's prior approval, provided the testing is noninvasive, does not require an invasive sampling procedure that presents a significant risk, does not intentionally introduce energy into the subject, and is not used as a diagnostic procedure without confirmation by another medically established test or procedure. In addition, the IVD must be labeled for research use only ("RUO") or investigational use only ("IUO"), and distribution controls must be established to assure that IVDs distributed for research or clinical investigation are used only for those purposes. The Company intends to conduct clinical investigations of its products under development, which will entail distributing them in the United States on an IUO basis. There can be no assurance that the FDA would agree that the Company's IUO distribution of its IVD products under development will meet the requirements 10 14 for IDE exemption. Furthermore, failure by the Company or the recipients of its products under development to maintain compliance with the IDE exemption requirements could result in enforcement action by the FDA, including, among other things, the loss of the IDE exemption or the imposition of other restrictions on the Company's distribution of its products under development, which would adversely affect the Company's ability to conduct the clinical investigations necessary to support marketing clearance or approval. Manufacturers of medical devices for marketing in the United States are required to adhere to applicable regulations setting forth detailed current Good Manufacturing Practices ("cGMP") requirements, which include testing, control and documentation requirements. Manufacturers must also comply with Medical Device Reporting ("MDR") requirements that a manufacturer report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and would be likely to cause or contribute to a death or serious injury upon recurrence. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The Company is subject to routine inspection by the FDA and certain state agencies for compliance with cGMP requirements, MDR requirements and other applicable regulations. The FDA has recently finalized changes to the cGMP requirements, including the addition of design controls, that will likely increase the cost of compliance. There can be no assurance that the Company will not incur significant costs to comply with laws and regulations in the future or that such laws and regulations will not have a material adverse effect upon the Company's business, financial condition and results of operation. The use of Biosite's products is also affected by the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") and related federal and state regulations which provide for regulation of laboratory testing. The scope of these regulations includes quality control, proficiency testing, personnel standards and federal inspections. CLIA categorizes tests as "waived," "moderately complex" or "highly complex," on the basis of specific criteria. There can be no assurance that any future amendment of CLIA or the promulgation of additional regulations impacting laboratory testing would not have a material adverse effect on the Company's ability to market its products or on its business, financial condition and results of operations. DEPENDENCE ON SOLE-SOURCE SUPPLIERS Certain key components and raw materials used in the manufacture of Triage DOA are currently provided by single-source vendors. Although the Company believes that alternative sources for such components and raw materials are available, any supply interruption in a sole-sourced component of raw material would have a material adverse effect on the Company's ability to manufacture Triage DOA until a new source of supply is qualified and, as a result, would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, an uncorrected impurity or supplier's variation in a raw material, either unknown to the Company or incompatible with the Company's Triage DOA manufacturing process, could have a material adverse effect on the Company's ability to manufacture products. The Company currently has under development products other than Triage DOA which, if developed, may require that the Company enter into additional supplier arrangements. There can be no assurance that the Company will be able to enter into additional supplier arrangements on commercially reasonable terms, if at all. Failure to obtain a supplier for the manufacture of its future products, if any, would have a material adverse effect on the Company's business, financial condition and results of operations. If successfully developed, the Company expects to rely upon LRE for production of the fluorescent meter to be used in connection with its Triage CareLink System platform of products currently under development. The Company's dependence upon LRE for the manufacture of such a meter may adversely affect the Company's profit margins, its ability to develop and manufacture products on a timely and competitive basis, the timing of market introductions and subsequent sales of products incorporating the LRE meter. See "Business -- Strategic and Distribution Arrangements." 11 15 LIMITED MANUFACTURING EXPERIENCE; RISK OF MANUFACTURING SCALE-UP To be successful, the Company must manufacture its current and future products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. The Company has limited experience manufacturing products other than Triage DOA. To achieve the level of production necessary for commercialization of Biosite's products under development, the Company will need to scale-up current manufacturing capabilities. Significant additional work will be required for the scaling-up of each potential Biosite product prior to commercialization, and there can be no assurance that such work can be completed successfully. In addition, although the Company expects that certain of its products under development will share certain production attributes with Triage DOA, production of such products may require the development of new manufacturing technologies and expertise. There can be no assurance that such products can be manufactured by the Company or any other party at a cost or in quantities to make such products commercially viable. If the Company is unable to develop or contract for manufacturing capabilities on acceptable terms for its products under development, the Company's ability to conduct preclinical and clinical testing will be adversely affected, resulting in the delay of submission of products for regulatory clearance or approval and initiation of new development programs, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." The Company anticipates making significant expenditures to develop high volume manufacturing capabilities required for each of its products currently under development, if such products are successfully developed. There can be no assurance that manufacturing and quality control problems will not arise as the Company attempts to scale-up its manufacturing or that such scale-up can be achieved in a timely manner or at a commercially reasonable cost, if at all. The Company's manufacturing facilities and those of its contract manufacturers are or will be subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies and such facilities are subject to cGMP requirements of the FDA. There can be no assurance that the Company or its contractors will satisfy such regulatory requirements, and any failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT AND POTENTIAL COST CONSTRAINTS In the United States, health care providers that purchase Triage DOA and other diagnostic products, such as hospitals and physicians, generally rely on third party payors, principally private health insurance plans, federal Medicare and state Medicaid, to reimburse all or part of the cost of the procedure. Such third party payors can affect the pricing or the relative attractiveness of the Company's products by regulating the maximum amount of reimbursement provided by such payors for testing services. In addition, the tests performed by public health departments, corporate wellness programs and other large volume users in the drug screening market are generally not subject to reimbursement. Further, certain health care providers are moving towards a managed care system in which such providers contract to provide comprehensive health care for a fixed cost per patient. The Company is unable to predict what changes will be made in the reimbursement methods utilized by third party payors. The Company could be adversely affected by changes in reimbursement policies of governmental or private health care payors, particularly to the extent any such changes affect reimbursement for procedures in which the Company's products are used. Third party payors are increasingly scrutinizing and challenging the prices charged for medical products and services. Decreases in reimbursement amounts for tests performed using the Company's products may decrease amounts physicians and other practitioners are able to charge patients, which in turn may adversely affect the Company's ability to sell its products on a profitable basis. Failure by physicians and other users to obtain reimbursement from third party payors, or changes in government and private third party payors' policies toward reimbursement of tests utilizing the Company's products could have a material adverse effect on the Company's business, financial condition or results of operation. Given the efforts to control and reduce health care costs in the United States in recent years, there can be no assurance that currently available levels of reimbursement will continue to be available in the future for the Company's existing products or products under development. 12 16 In addition, market acceptance of the Company's products in international markets is dependent, in part, upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance. The Company believes that the overall escalating cost of medical products and services has led to and will continue to lead to increased pressures on the health care industry, both foreign and domestic, to reduce the cost of products and services, including products offered by the Company. There can be no assurance that third party reimbursement and coverage will be available or adequate in either U.S. or foreign markets, that current reimbursement amounts will not be decreased in the future or that future legislation, regulation or reimbursement policies of third party payors will not otherwise adversely affect the demand for the Company's products or its ability to sell its products on a profitable basis. POSSIBLE FUTURE CAPITAL REQUIREMENTS While the Company believes that its available cash, cash from operations and funds from existing credit arrangements, together with the proceeds of this offering, will be sufficient to satisfy its funding needs for at least the next 24 months, there can be no assurance the Company will not require additional capital. The Company's future liquidity and capital funding requirements will depend on numerous factors, including the extent to which the Company's products under development are successfully developed and gain market acceptance, the timing of regulatory actions regarding the Company's potential products, the costs and timing of expansion of sales, marketing and manufacturing activities, procurement and enforcement of patents important to the Company's business, results of clinical investigations and competition. There can be no assurance that such additional capital, if needed, will be available on terms acceptable to the Company, if at all. Certain funding arrangements may require the Company to relinquish its rights to certain of its technologies, products or marketing territories. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. The failure by the Company to raise capital on acceptable terms when needed could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL The Company anticipates increased growth in the number of its employees, the scope of its operating and financial systems and the geographic area of its operations as new products are developed and commercialized. This growth will result in an increase in responsibilities for both existing and new management personnel. The Company's ability to manage growth effectively will require it to continue to implement and improve its operational, financial and management information systems and to train, motivate and manage its employees. There can be no assurance that the Company will be able to manage its expansion, and a failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success depends in part on the continued service of its key technical, sales, marketing and executive personnel, and its ability to identify and hire additional qualified personnel. Competition for such personnel is intense and there can be no assurance that the Company can retain existing personnel or identify or hire additional personnel. PRODUCT LIABILITY The testing, manufacturing and marketing of medical diagnostic devices such as Triage DOA, as well as the Company's products currently under development, entail an inherent risk of product liability claims. To date, the Company has not experienced any material product liability claims, but any such claims arising in the future could have a material adverse effect on the Company's business, financial condition and results of operations. Potential product liability claims may exceed the amount of the Company's insurance coverage or may be excluded from coverage under the terms of the policy. There can be no assurance that the Company's 13 17 existing insurance can be renewed at a cost and level of coverage comparable to that presently in effect, if at all. In the event that the Company is held liable for a claim against which it is not indemnified or for damages exceeding the limits of its insurance coverage, such claim could have a material adverse effect on the Company's business, financial condition and result of operations. LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock and there can be no assurance that an active public market for the Common Stock will develop or be sustained after this offering. The initial public offering price will be determined through negotiations between the Company and the Underwriters. See "Underwriting." In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market prices of the common stock of many publicly held medical device companies have in the past been, and can in the future be expected to be, especially volatile. Announcements of technological innovations or new products by the Company or its competitors, clinical investigation results, release of reports by securities analysts, developments or disputes concerning patents or proprietary rights, regulatory developments, changes in regulatory or medical reimbursement policies, economic and other external factors, as well as period-to-period fluctuations in the Company's financial results, may have a significant impact on the market price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Future sales of Common Stock by existing stockholders under Rules 144 and 701 of the Securities Act of 1933, as amended (the "Securities Act") or through the exercise of outstanding registration rights or otherwise could have an adverse effect on the price of the Common Stock. The 2,000,000 shares offered hereby will be eligible for resale in the public market immediately following this offering. Upon the commencement of this offering, an additional 418,030 shares will be eligible for resale in the public market, in reliance upon Rule 144(k) under the Securities Act. In addition, 225,525 shares of Common Stock will be eligible for resale in the public market 90 days from the effective date of the Registration Statement of which this Prospectus is a part (the "Effective Date"), in reliance upon Rule 701 under the Securities Act. Additionally, 1,400,212 and 7,749,179 shares of Common Stock will be eligible for sale in the public market 120 days and 180 days, respectively, from the Effective Date, upon expiration of lockup agreements, in reliance on Rule 144 or Rule 701 under the Securities Act. The Company intends to register approximately 2,215,960 shares of Common Stock reserved for issuance under its stock plans as soon as practicable following the date of this Prospectus. Stockholders who, after consummation of this offering, will hold over 8,400,000 shares of Common Stock have rights to require the Company to register their shares for future sale. See "Description of Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale." BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS The Company anticipates that the proceeds of this offering will be used to fund expansion of sales and marketing activities, to fund research and development activities, to expand and develop manufacturing capabilities, and to finance working capital and general corporate requirements. The amounts identified for the foregoing uses under "Use of Proceeds" in this Prospectus are estimates, and the amounts actually expended for each such purpose and the timing of such expenditures may vary depending upon numerous factors. The Company's management will have broad discretion in determining the amount and timing of expenditures and in allocating the proceeds of this offering. Such discretion will be particularly broad with respect to that portion of the proceeds available for working capital and general corporate purposes. See "Use of Proceeds." CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND AFFILIATED ENTITIES The Company's directors, executive officers, principal stockholders and entities affiliated with them will, in the aggregate, beneficially own approximately 63.0% of the Company's outstanding Common Stock following the completion of this offering. These stockholders, if acting together, would be able to control substantially all matters requiring approval by the stockholders of the Company, including the election of 14 18 directors and the approval of mergers or other business combination transactions. See "Principal Stockholders." EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW Certain provisions of the Company's Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions allow the Company to issue Preferred Stock without any vote or further action by the stockholders, provide for a classified board of directors, eliminate the right of stockholders to call special meetings of stockholders or to act by written consent without a meeting. These provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. See "Management" and "Description of Capital Stock." DILUTION; ABSENCE OF DIVIDENDS Purchasers of shares of Common Stock in this offering will incur immediate, substantial dilution in net tangible book value per share. The Company has never paid cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. See "Dilution" and "Dividend Policy." 15 19 USE OF PROCEEDS The proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby are estimated to be approximately $21,620,000 ($24,968,000 if the Underwriters' over-allotment option is exercised in full), at an assumed initial public offering price of $12.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. The Company anticipates that it will use approximately $7.0 million of the net proceeds of this offering to expand sales and marketing activities (which are expected to include the development of direct sales capabilities in selected markets), approximately $2.0 million to fund the Company's research and development efforts, and approximately $4.0 million for expansion and development of manufacturing capabilities in connection with the launch of the Company's products currently under development. The Company anticipates using the remaining net proceeds for working capital and general corporate purposes. The Company also may use a portion of the net proceeds to acquire businesses, technologies or products complementary to the Company's business, although the Company currently has no specific plans or commitments in this regard. The amounts actually expended for each purpose may vary significantly depending upon numerous factors, including the progress of the Company's research and development, and the costs and timing of expansion of marketing, sales and manufacturing activities, and hence the Company's management will retain broad discretion in the allocation of a substantial portion of the net proceeds. Pending such uses, the Company intends to invest the net proceeds of this offering in interest-bearing, investment grade securities. The Company believes that its available cash, cash from operations and funds from existing credit arrangements, together with the proceeds of this offering, will be sufficient to satisfy its funding needs for at least the next 24 months. DIVIDEND POLICY The Company has never declared or paid dividends on its capital stock and does not anticipate paying any dividends in the foreseeable future. The Company currently intends to retain its earnings, if any, for the operation of its business. 16 20 CAPITALIZATION The following table sets forth as of September 30, 1996 (i) the capitalization of the Company, (ii) the pro forma capitalization of the Company, after giving effect to the conversion of all series of Preferred Stock into Common Stock and the conversion of a $1.0 million debenture and related interest thereon through January 31, 1997 into 92,222 shares of Common Stock at the assumed initial public offering price of $12.00 per share upon the closing of this offering, and (iii) the pro forma capitalization of the Company, as adjusted to give effect to the receipt of the net proceeds from the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share and the application of the estimated net proceeds therefrom.
SEPTEMBER 30, 1996 --------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Notes payable, less current portion(1)......................... $ 3,234 $ 2,234 $ 2,234 ------- ------- ------- Stockholders' equity: Preferred Stock, $.01 par value; 8,328,847 shares authorized and 8,328,847 shares outstanding actual; 5,000,000 shares authorized and no shares outstanding, pro forma and pro forma as adjusted......................................... 83 -- -- Common Stock, $.01 par value; 12,000,000 shares authorized and 1,460,093 outstanding actual; 25,000,000 shares authorized and 9,881,162 shares outstanding pro forma; 25,000,000 shares authorized and 11,881,162 shares outstanding pro forma as adjusted(2)...................... 15 99 119 Additional paid-in capital................................... 21,686 22,792 44,392 Unrealized net loss on marketable securities, net of related tax....................................................... (10) (10) (10) Deferred compensation........................................ (48) (48) (48) Accumulated deficit.......................................... (545) (572) (572) ------- ------- ------- Total stockholders' equity........................... $21,181 $22,261 $43,881 ------- ------- ------- Total capitalization................................. $24,415 $24,495 $46,115 ======= ======= =======
- --------------- (1) See Note 6 of Notes to Financial Statements for a description of the Company's long-term commitments. (2) Excludes 1,180,204 shares of Common Stock reserved for issuance upon exercise of stock options outstanding at November 30, 1996. See "Management -- Executive Compensation" and Note 7 of Notes to Financial Statements. 17 21 DILUTION The pro forma net tangible book value of the Company's Common Stock as of September 30, 1996 was approximately $17,803,000, or $1.80 per share. Pro forma net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding, after giving effect to the conversion of all series of Preferred Stock into Common Stock and the conversion of a $1.0 million debenture and related interest through January 31, 1997 into 92,222 shares of Common Stock at the assumed initial public offering price of $12.00 per share upon the closing of this offering. After giving effect to the sale of the 2,000,000 shares of Common Stock offered hereby by the Company at an assumed initial public offering price of $12.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, the pro forma net tangible book value of the Company at September 30, 1996 would have been approximately $39,423,000 or $3.32 per share. This represents an immediate increase in pro forma net tangible book value of $1.52 per share to existing stockholders and an immediate dilution of $8.68 per share to new investors purchasing shares of Common Stock in this offering, as illustrated in the following table: Assumed initial public offering price per share...................... $12.00 Pro forma net tangible book value per share at September 30, 1996............................................................ $ 1.80 Increase per share attributable to investors in the offering....... 1.52 ----- Pro forma net tangible book value per share after the offering....... 3.32 ------ Dilution per share to new investors.................................. $ 8.68 ======
The following table summarizes, on a pro forma basis as of September 30, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid, and the average price per share by existing stockholders and by purchasers of shares offered by the Company hereby, based upon an assumed initial public offering price of $12.00 per share (before deducting the estimated underwriting discounts and commissions and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders................ 9,881,162 83.2% $22,956,884 48.9% $ 2.32 New investors........................ 2,000,000 16.8 24,000,000 51.1 12.00 ---------- ------ ---------- ------ Total.............................. 11,881,162 100.0% $46,956,884 100.0% ========== ====== ========== ======
The foregoing calculations assume no exercise of outstanding options. As of November 30, 1996, there were outstanding options to purchase an aggregate of 1,180,204 shares of Common Stock at a weighted average exercise price of $3.24 per share. To the extent such options are exercised, there will be further dilution to investors in this offering. See "Management -- Executive Compensation" and Note 7 of Notes to Financial Statements. 18 22 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statement of income data for each of the three years in the period ended December 31, 1995 and the nine months ended September 30, 1996 and the balance sheet data at December 31, 1994 and 1995 and September 30, 1996 are derived from the financial statements audited by Ernst & Young LLP, independent auditors, which are included elsewhere in this Prospectus and are qualified by reference to such financial statements. The selected financial data with respect to the statement of income data for the two years ended December 31, 1992 and the balance sheet data at December 31, 1991, 1992 and 1993 are derived from the financial statements audited by Ernst & Young LLP which are not included in this Prospectus. The selected financial data with respect to the statement of income for the nine months ended September 30, 1995 are derived from unaudited financial statements included elsewhere in this Prospectus. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and results of operations for these periods. Operating results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and notes thereto included elsewhere in this Prospectus. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, ------------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- -------- -------- STATEMENT OF INCOME DATA: Net sales........................................... $ -- $ 2,920 $ 9,866 $ 16,320 $ 25,147 $ 18,236 $ 20,225 Cost of sales....................................... -- 1,612 3,268 4,416 5,649 3,781 4,318 -------- -------- -------- --------- --------- --------- --------- Gross profit........................................ -- 1,308 6,598 11,904 19,498 14,455 15,907 Research and development............................ 2,793 2,593 2,796 3,836 6,553 4,602 6,515 Selling, general and administrative................. 1,771 3,622 4,841 5,960 7,134 5,203 6,116 -------- -------- -------- --------- --------- --------- --------- Total operating expenses............................ 4,564 6,215 7,637 9,796 13,687 9,805 12,631 Income (loss) from operations....................... (4,564) (4,907) (1,039) 2,108 5,811 4,650 3,276 Interest and other income, net...................... 260 630 613 649 1,647 1,253 1,441 Settlement of patent matters........................ -- -- -- (338) (1,217) (743) (2,368) -------- -------- -------- --------- --------- --------- --------- Income (loss) before benefit (provision) for income taxes............................................. (4,304) (4,277) (426) 2,419 6,241 5,160 2,349 Benefit (provision) for income taxes................ -- -- -- (63) 1,667 (132) 264 -------- -------- -------- --------- --------- --------- --------- Net income (loss)................................... $(4,304) $(4,277) $ (426) $ 2,356 $ 7,908 $ 5,028 $ 2,613 ======== ======== ======== ========= ========= ========= ========= Net income (loss) per share......................... $ (0.61) $ (0.49) $ (0.04) $ 0.22 $ 0.74 $ 0.47 $ 0.24 ======== ======== ======== ========= ========= ========= ========= Common and common equivalent shares used in computing per share amounts(1).................... 7,058 8,754 10,098 10,553 10,766 10,721 10,832
DECEMBER 31, ---------------------------------------------- SEPTEMBER 30, 1991 1992 1993 1994 1995 1996 ------ ------- ------- ------- ------- ------------- BALANCE SHEET DATA: Cash, cash equivalents and marketable securities................. $4,869 $ 6,435 $ 5,129 $ 5,916 $13,979 $10,169 Working capital.................................................. 4,746 7,049 6,407 7,974 14,428 13,967 Total assets..................................................... 6,725 10,287 10,269 14,364 27,935 28,968 Long-term obligations............................................ 237 668 634 772 2,739 3,234 Stockholders' equity............................................. 5,887 8,573 8,155 10,512 18,526 21,181
- --------------- (1) Computed on the basis described in Note 1 of Notes to Financial Statements. 19 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Risk Factors" and "Business," as well as those discussed elsewhere in this Prospectus. OVERVIEW Since the Company's inception in 1988, the Company has been primarily involved in the research, development, manufacturing and marketing of point-of-care diagnostic tests. The Company began commercial sales of Triage DOA in February 1992 and currently markets the product worldwide primarily through distributors supported by a small direct sales force. The Company is engaged in research and development of additional point-of-care diagnostic products in the microbiology, cardiology and therapeutic drug monitoring fields. See "Business." Funding for operations was provided primarily from equity financings from the Company's inception through launch of Triage DOA in 1992. Additional funding has come from corporate partners in the form of debt and equity financing, license fees and other corporate funding. The Company has a limited history of operations and first achieved profitability in fiscal 1994. All of the Company's sales to date have been due to sales of the Triage DOA product line. Triage DOA is currently marketed pursuant to exclusive distribution agreements in the U.S. medical market by CMS (which accounted for 80% of product sales in the first nine months of 1996) and in certain countries in Europe, Latin America, the Middle East, Asia and Africa by Merck. The CMS distribution agreement has minimum quarterly sales milestones which, if the milestones are not met, allows the Company to terminate the agreement, obligates CMS to pay Biosite a penalty and allows the Company to appoint a new distributor or to sell Triage DOA directly in the U.S. medical market. If the Company chooses to terminate the CMS distribution agreement, the Company may appoint a new distributor or it may have to invest in additional sales and marketing resources including additional field sales personnel which could significantly increase future sales and marketing expenses and may adversely affect sales of Triage DOA. Since the launch of Triage DOA in fiscal 1992, the Company has experienced significant revenue growth primarily as a result of greater demand and more recently, the introduction of Triage Plus TCA Panel for Drugs of Abuse ("Triage DOA Plus TCA"). In order to support increased levels of sales in the future and to augment its long-term competitive position, the Company anticipates that it will be required to make significant additional expenditures in manufacturing, research and development, sales and marketing and administration, both in absolute dollars and as a percentage of sales. In addition, the Company anticipates higher administrative expenses resulting from its obligations as a public reporting company upon completion of this offering. The Company anticipates that its results of operations may fluctuate for the foreseeable future due to several factors, including whether and when new products are successfully developed and introduced by the Company, market acceptance of current or new products, regulatory delays, product recalls, manufacturing delays, shipment problems, seasonal customer demand, the timing of significant orders, changes in reimbursement policies, competitive pressures on average selling prices, changes in the mix of products sold and patent conflicts. Operating results would also be adversely affected by a downturn in the market for the Company's current and future products, if any, order cancelations or order rescheduling. Because the Company is continuing to increase its operating expenses for personnel and new product development, the Company's operating results would be adversely affected if its sales did not correspondingly increase or if its product development efforts are unsuccessful or are subject to delays. The Company's limited operating history makes accurate prediction of future operating results difficult or impossible. Although the Company has experienced growth in recent years, there can be no assurance that, in the future, the Company will sustain revenue growth 20 24 or remain profitable on a quarterly or annual basis or that its growth will be consistent with predictions made by securities analysts. The Company currently manufactures and ships product shortly after receipt of orders and anticipates that it will do so in the future. Accordingly, the Company has not developed a significant backlog and does not anticipate it will develop a material backlog in the future. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of net sales:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- ---------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ----------- ---- Net sales.............................. 100% 100% 100% 100% 100% Cost of sales.......................... 33 27 22 21 21 ---- ---- ---- ---- ---- Gross profit........................... 67 73 78 79 79 Operating expenses: Research and development............... 28 24 26 25 32 Selling, general and administrative.... 49 37 29 29 30 ---- ---- ---- ---- ---- Total operating expenses............... 77 61 55 54 62 Income (loss) from operations.......... (10) 12 23 25 17 Other income, net...................... 6 4 7 7 7 Settlement of patent matters........... -- (2) (5) (4) (12) ---- ---- ---- ---- ---- Income (loss) before benefit (provision) for income taxes......... (4) 14 25 28 12 Benefit (provision) for income taxes... -- -- 7 -- 1 ---- ---- ---- ---- ---- Net income (loss)...................... (4)% 14% 32% 28% 13% ==== ==== ==== ==== ====
Nine months ended September 30, 1996 and 1995 Revenues. Revenues increased 11% to $20.2 million in the first nine months of 1996 from $18.2 million in the first nine months of 1995. The increase was primarily attributable to the Company's expansion of its Triage DOA product line to include Triage DOA Plus TCA, which was launched in February 1995, and continued growth of the Company's overall market share of abused drug testing worldwide. Gross Profit. Gross profit increased 10% to $15.9 million in the first nine months of 1996 as a result of increased sales of the Triage DOA product line. Gross margin was constant at 79% in the first nine months of 1996 and 1995. Research and Development Expenses. Research and development expenses increased 42% to $6.5 million in the first nine months of 1996 from $4.6 million in the first nine months of 1995. This increase resulted from the expansion of the Company's research and development and manufacturing scale-up efforts on its microbiology, cardiac and therapeutic drug monitoring assays under development. The Company expects its research and development expenses to increase significantly in 1996 and 1997, reflecting increased expenditures primarily related to hiring additional personnel. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 18% to $6.1 million in the first nine months of 1996. This increase was a result of the cost of expanding the Company's direct sales force and in-house marketing and administrative functions to support the Company's expanded operations. The Company expects selling, general and administrative costs to increase in absolute dollars as the Company's level of sales and manufacturing operations increase and as the Company increases its finance and administrative expenditures to meet its obligations as a public reporting entity. 21 25 Other Income. Contract revenues from a related party increased $469,000 in the first nine months of 1996 as compared to the first nine months of 1995. This increase was primarily due to higher expenditures relating to the Triage Cardiac development program with Merck which resulted in higher revenues to the Company. Contract revenues from an unrelated party decreased $300,000 in the first nine months of 1996. The decrease was attributable to the timing of the achievement of milestones under the Company's development agreement with KDK. Settlement of Patent Matters. In September 1996, the Company reached a settlement with Abbott Laboratories, with respect to all claims set forth in a lawsuit filed by Abbott Laboratories in May 1994. The lawsuit alleged that Triage DOA infringed a patent licensed to Abbott Laboratories. The Company vigorously defended the lawsuit. However, to avoid protracted litigation, the Company settled the patent matter in September 1996, paid $2.0 million as a settlement of the litigation and, for an additional $3.5 million and the agreement to pay certain royalties, obtained a license to certain technology. Future amortization of the license fee will be charged to cost of sales over the life of the license. The $2.0 million litigation settlement payment, as well as the amortization related to prior fiscal years and related legal defense costs were charged to Settlement of Patent Matters in the nine months ended September 30, 1996. Settlement of Patent Matters expenses for the first nine months of 1995 consisted solely of legal expenses associated with the defense of the patent litigation. Benefit (Provision) for Income Taxes. The Company's benefit for income taxes increased to $264,000 for the nine months ended September 30, 1996 from a provision for income taxes of $132,000 for the nine months ended September 30, 1995. The increase in the benefit for income taxes resulted primarily from a reduction in the valuation allowance for deferred taxes of $1.1 million in the nine months ended September 30, 1996, as the realization of such assets became probable. Years ended December 31, 1995 and 1994 Revenues. Revenues increased 54% to $25.1 million for the year ended December 31, 1995 from $16.3 million in 1994. The increase was primarily attributable to the Company's commercialization of Triage DOA Plus TCA which was launched in February 1995, and continued acceptance and expansion of Triage DOA. Gross Profit. Gross profit increased $7.6 million to $19.5 million for the year ended December 31, 1995 as a result of increased sales of the Triage DOA product line. Gross margin increased to 78% for the year ended December 31, 1995 from 73% in 1994. The Company increased its manufacturing efficiency during 1995 and, with increased manufacturing volumes, covered its fixed overhead expenses more efficiently. The Company included in cost of sales $405,000 in license amortization for 1995 relating to the technology license agreement signed in March 1996. Research and Development Expenses. Research and development expenses increased 71% to $6.6 million for the year ended December 31, 1995 from $3.8 million in 1994. This increase resulted from the expansion of the Company's research and development and manufacturing scale-up efforts on the microbiology, cardiac and therapeutic drug monitoring assays. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 20% to $7.1 million for the year ended December 31, 1995 from $6.0 million in 1994. During the year ended December 31, 1995, the Company expanded its direct sales force and its in-house marketing and administrative functions to support the Company's higher level of operations as compared to 1994. Other Income. Contract revenues from related parties increased $217,000 as a result of progress in the development of Triage Cardiac. Contract revenues from unrelated parties increased by $300,000 for the year ended December 31, 1995 from 1994. The increase was attributable to the timing of the achievement of milestones under the Company's development agreement with KDK which was signed in February 1995. Interest income increased $366,000 as a result of income received on increased cash balances in 1995. Settlement of Patent Matters. Settlement of patent matters expenses increased primarily due to increased legal defense costs related to the patent litigation described above. Additionally, in December 1995, 22 26 the Company accrued a one-time payment of $2.2 million for a worldwide license to technology related to the Triage Panel products. Amortization of this license payment related to fiscal years prior to 1995 of $440,000 was charged to settlement of patent matters in 1995. Benefit (Provision) for Income Taxes. The Company's benefit for income taxes increased to $1.7 million for the year ended December 31, 1995 from a provision for income taxes of $63,000 in 1994. The increase in the benefit for income taxes resulted primarily from a reduction in the valuation allowance for deferred tax assets in 1995 of $1.8 million. The Company utilized $2.2 million in net operating loss carryforwards in fiscal 1995. As of December 31, 1995, the Company had net operating loss carryforwards of approximately $3.1 million for federal income tax purposes. The Company's ability to utilize its net operating loss carryforwards and tax credit carryforwards in future years will be subject to an annual limitation pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Code of 1986, as amended. However, any annual limitation is not expected to have a material adverse effect on the Company's ability to utilize its net operating loss and tax credit carryforwards. Years ended December 31, 1994 and 1993 Revenues. Revenues increased 65% to $16.3 million for the year ended December 31, 1994 from $9.9 million in 1993. The increase was primarily attributable to the continued acceptance of the Company's Triage DOA product line. Gross Profit. Gross profit increased $5.3 million to $11.9 million for the year ended December 31, 1994 from gross profit levels for the year ended December 31, 1993 as a result of increased sales of Triage DOA. Gross margin increased to 73% for the year ended December 31, 1994 from 67% in 1993. The Company increased its manufacturing efficiency during 1994 and, with increased manufacturing volumes, covered its fixed overhead expenses more efficiently. Research and Development Expenses. Research and development expenses increased 37% to $3.8 million for the year ended December 31, 1994 from $2.8 million in 1993. This increase resulted from the expansion of the Company's research and development and manufacturing scale-up efforts on Triage DOA Plus TCA and research and development on Triage Cardiac. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 23% to $6.0 million for the year ended December 31, 1994 from $4.8 million in 1993. During the year ended December 31, 1994, the Company's expanded the direct sales force and the in-house marketing and administrative functions to support the Company's higher level of operations as compared to 1993. Other Income. Contract revenues from related parties increased $344,000 in 1994 as compared to such revenues in 1993 as a result of entering into a collaborative agreement in June 1994 with Merck, which is sharing in the development expenses of Triage Cardiac. Decreases in licensing fee income in 1994 as compared to such income in 1993 resulted from the completion of a license agreement with a third party during 1994. Settlement of Patent Matters. Settlement of patent matters expense in 1994 consisted solely of legal defense costs related to the patent litigation described above. Benefit (Provision) for Income Taxes. The Company utilized $3.2 million in net operating loss carryforwards in fiscal 1994 which reduced the provision for income taxes to $63,000. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations through private placements of equity securities, revenues from operations, debt and capital lease financing and interest income earned on the net proceeds from the private placements. Since its inception, the Company has raised over $21.7 million in net cash proceeds from the private placement of equity securities and $1.0 million from the issuance of convertible debentures. 23 27 During the nine months ended September 30, 1996, the Company generated $1.1 million in cash from operating activities. Cash generated from sales were offset primarily by the payments totaling $6.2 million for licenses to certain technologies. In addition, the Company paid $2.0 million to settle patent litigation with Abbott Laboratories. During 1995 and 1994, the Company generated $7.9 million and $1.9 million of cash from operating activities, respectively. The Company financed through promissory notes and capital leases $2.3 million and $900,000 in equipment purchases in 1995 and 1994, respectively. At September 30, 1996, the Company had cash and cash equivalents totaling $1.4 million, marketable securities of $8.8 million and working capital of $14.0 million. The Company believes that its available cash, cash from operations and funds from existing credit arrangements, together with the proceeds of this offering, will be sufficient to satisfy its funding needs for at least the next 24 months. 24 28 BUSINESS BACKGROUND Biosite develops, manufactures and markets rapid, accurate and cost-effective diagnostic products that improve the quality of patient care and simplify the practice of laboratory medicine. The Company believes that its Immediate Response Diagnostics can have an important impact on medical decisions, patient care and the cost of medical treatment. The Company's first product, Triage DOA, a small self-contained test capable of detecting a broad spectrum of commonly overdosed prescription and illicit drugs in approximately 10 minutes, is used by over 2,600 hospitals and emergency departments. Since its introduction in 1992, over 4.2 million Triage DOA panels have been sold worldwide for use in hospital emergency department screening and workplace testing. The Company is developing several additional products for applications where the Company believes its Immediate Response Diagnostics can play an important role in improving patient care. Products under development include tests that are intended to aid in the diagnosis of heart attacks, the dosing of certain therapeutic drugs, the management of certain chronic diseases and the detection of certain bacterial and parasitic infections. The Company has two product platforms that are designed to provide rapid results through either qualitative visual readings or quantitative meter readings. These platforms are based upon the Company's proprietary technologies in the areas of reagent development, signaling chemistry and micro capillary fluidics. The Company's testing formats are designed to measure single or multiple analyte targets simultaneously, and to allow for the analysis of various sample sources, including urine, serum, plasma, whole blood and stool. The Company has entered into strategic arrangements with major pharmaceutical and diagnostic companies, including Novartis for the development of a product to monitor the concentrations of the immunosuppressant drug, cyclosporine; Merck and KDK for the development of a cardiac marker product used in the diagnosis of heart attacks; and LRE for the development of a fluorescent meter. In addition, the Company uses CMS to distribute Triage DOA to hospital-based laboratories and emergency departments in the United States and Merck to distribute Triage DOA in certain countries in Europe, Latin America, the Middle East, Asia and Africa. INDUSTRY OVERVIEW In 1995, the worldwide market for immunoassay tests exceeded $5.1 billion, consisting primarily of testing related to infectious disease, endocrinology, therapeutic drug monitoring, drugs of abuse testing, immunology/allergy, tumor markers and blood typing. The global market for immunoassay tests continues to expand as new disease states are identified, new therapies become available, and worldwide standards of living and access to health care improve. Such tests are performed primarily in hospital-based laboratories and commercial laboratories, which account for approximately 80% of all diagnostic tests performed annually. In recent years, diagnostic tests that can be performed nearer to the point of patient care have emerged as an important tool in disease diagnosis and management. It has been estimated that the market for point-of-care tests, primarily hospitals and physician office/satellite facilities, will grow at approximately 27% annually through the year 2000. Immunoassay tests were first developed based on technology developed in the 1960s. Although early immunoassay tests offered unprecedented levels of sensitivity for the detection of low concentration analytes, they suffered from relatively short shelf-lives, long reaction times, a need for radioactive labels to detect completed reactions and lack of consistent results among products from different suppliers. Over time, technological advancements such as the introduction of monoclonal antibodies, enzyme and fluorescent labels and various solid phase mechanisms shortened immunoassay test reaction times, provided higher specificity and allowed development of tests with longer shelf-lives and greater consistency. Such advancements also led to the development of immunoassay analyzers, testing systems utilizing automated liquid handling mechanisms and reagent-adding pipetting systems. Modern immunoassay analyzers are capable of storing and selecting multiple reagents for a variety of analytes, including drugs, hormones and cancer antigens. They also provide accurate and highly sensitive test results and help to simplify the 25 29 performance of antibody-based tests. However, immunoassay analyzers are large and complex, have lengthy turnaround times and require high volumes of sample throughput to justify the investment in equipment, training, staffing and the costs required to operate and support the system. In recent years, there has been a continuing shift from the use of such conventional analyzer systems to more technologically advanced point-of-care tests that can be performed in minutes by less highly trained personnel. Simple, rapid immunoassay tests are capable of detecting a single analyte target with a color change that can be visually interpreted. Formats such as dipsticks, test tubes and wicking membrane test cartridges have been used to provide fast non-instrument read results for conditions where a single analyte target is present in high concentrations and where a simple yes/no non-numeric answer is clinically relevant. Rapid color change test formats are widely available for pregnancy, strep throat and ovulation prediction. Until recently, simple test formats have remained incapable of precise, multi-analyte detection or highly sensitive, quantitative measurements. As a result, medical conditions where the detection of one or more analytes is required or where the precise quantitation of the target analyte is required have remained the domain of immunoassay analyzers. The Company believes that there is significant market potential for advanced point-of-care diagnostic products. Point-of-care testing helps to reduce overall health care delivery costs and can improve patient outcomes by providing diagnosis during the patient visit, thereby minimizing the time to medical intervention and reducing the need for additional patient follow-up. Patients undergoing emergency procedures can benefit from more timely and accurate testing results, both to ensure correct decision making and to avoid unnecessary use of costly inpatient care. Disease management programs such as therapeutic drug monitoring programs can benefit from real-time, point-of-care evaluations that enable care-givers to optimize drug dosing. Quicker diagnosis of infectious agents can also permit earlier prescription of appropriate medications, shortening the duration of illness. TECHNOLOGY Biosite's Immediate Response Diagnostics technology is based on several proprietary advances in the biological and physical sciences that make practical the development and manufacture of rapid, accurate and cost-effective point-of-care diagnostics. The Company's products integrate its expertise in several core scientific and engineering disciplines, including antibody development and engineering, analyte cloning and synthesis, signaling chemistry and micro capillary fluidics, each of which is described below. Biosite's research and development program is supported by 60 full time professionals, including 15 Ph.D.s with expertise in the Company's core technologies. By combining research capabilities in each of these areas, Biosite is able to create novel single and multi-analyte diagnostics which overcome the limitations of traditional rapid diagnostic technologies and seek to address the significant unmet need for effective point-of-care diagnostic information. Antibody Development and Engineering Biosite believes that its internal antibody development and engineering capabilities allow rapid identification and development of antibodies with optimal specificity, affinity and stability characteristics. The Company initially utilized hybridoma technology for the selection and production of its novel antibodies. Two disadvantages of hybridoma technology are the length of time required to develop antibody candidates and the need to restart the antibody development process when unwanted characteristics such as cross reactivities are discovered. The Company has developed a proprietary process that enables the selection and production of antibodies more rapidly and efficiently than is possible using hybridoma technology. In addition, Biosite has isolated the genes encoding the antibodies that permit the genetic engineering of antibodies. As a result, Biosite can alter or add specific amino acids or polypeptides in an antibody in order to improve the antibody's specificity and to facilitate purification of the antibody. This technology accelerates the antibody selection process by rapidly eliminating unwanted cross reactivities discovered in product development. 26 30 Analyte Cloning and Synthesis The Company has molecular biology capabilities that include the cloning and identification of specific proteins useful in the development of immunoassays. Biosite has developed proprietary expression vectors that enable the production and purification of these proteins for the development of antibodies and for use as calibrators and controls in its immunoassay products. In addition, the Company has considerable expertise in synthetic organic chemistry which allows the synthesis of targets and useful derivatives. The Company develops products for which the targeted analyte can be small (i.e., haptens, such as drugs) or large (i.e., proteins, such as cardiac enzymes). The Company believes that the ability to develop, stabilize and manufacture the target analyte or its analogues is key to the development of highly accurate immunoassays. Color/Photochemical Signaling Immunoassays require the attachment of a detectable label to an antibody or target analyte. The Company has developed a variety of labels for the development of its products. For yes/no tests, a visual label that produces color is attached to antibodies or analytes through either non-covalent or covalent chemical methods. For its quantitative products, the Company has developed novel fluorescent dyes which are attached to antibodies or analytes using both noncovalent and covalent chemical means. Although fluorescence is a potentially powerful label for use in immunoassays, its potential has been limited by the lack of available dyes that are stable and have no sample interference, and the requirement of a complex instrument for detection. The Company's novel fluorescent dyes are stable and exhibit properties that permit their use in complex biological samples such as serum, plasma and whole blood without interference from the sample. Furthermore, these novel dyes absorb light at wavelengths where a simple instrument can be used to excite and detect fluorescence for quantitative measurements. Micro Capillary Test Device Technology Biosite has developed proprietary technology to design, develop and manufacture devices containing micro capillaries to control the flow of fluids in immunoassay processes. The qualitative device format uses micro capillaries to draw fluids through a membrane that contains immobilized antibody zones for the detection of specific substances. The quantitative device format uses several different micro capillary designs to control the contact of sample with reagents and to control the flow of fluid throughout the device. When sample is added to the quantitative device, a filter contained within the device separates blood cells from plasma which is further directed by capillary forces into a chamber that contains dried immunoassay reagents. After an incubation time that is determined by another micro capillary element of the device, the volume of sample that contacted the reagents flows down a capillary path that brings it into contact with immobilized antibody zones. The binding of fluorescent reagents at these zones is detected by an instrument and is related to the concentration of the substance being tested for in the sample. The Company has also developed the engineering capability to design unique micro capillary structures in plastic parts and to fabricate them in commercial scale quantities using injection molding processes. Sample Handling The Company has developed proprietary technology relating to sample handling and preparation, including technology that allows whole blood to be passively separated into its plasma component or to be passively lysed to release the target analyte. The Company has also developed technologies for the handling of stool samples which concentrate and purify the target analytes or organisms from solid stool materials. In addition, the Triage Panel platform can be used to assay urine samples. PRODUCT PLATFORMS The Company has used its core technologies to develop two product platforms: the Triage Panel and the Triage CareLink System. Both of the Company's product platforms utilize the Company's expertise in antibody engineering, analyte cloning, signaling chemistry, micro capillary fluidics and sample handling technologies. 27 31 Triage Panel The Triage Panel platform is designed for rapid, qualitative screening of multiple analytes in a small single-use hand-held device. The Triage Panel has a visual (yes/no) display containing simultaneous tests for up to eight analytes and two control standards, can be performed in a simple multi-step process, and is capable of performing tests on both urine and stool. Triage DOA, the first product developed on this platform, tests for up to eight drugs of abuse in approximately 10 minutes. Triage Panel products under development include tests for the detection of microorganisms which cause severe gastrointestinal disease. Triage CareLink System The Triage CareLink System platform is designed to provide rapid quantitative results for immunoassay tests of whole blood, serum and plasma. The Triage CareLink System consists of two parts: a small single-use disposable test cartridge and a proprietary hand-held point-of-care fluorescent meter. After blood is applied to the cartridge, the cartridge is inserted into the meter, which is designed to automatically detect up to six analytes simultaneously and display the results on a numerical electronic read-out. The meter incorporates proprietary software in erasable programmable read-only memory ("EPROM") chips which are intended to be plugged into each meter to perform multiple types of tests and automatically determine which test is being run. In addition, the EPROM chips are designed to automatically calibrate the meter on a lot specific basis. The software may also provide important information regarding the analyte measured, such as normal or abnormal levels of a marker which could then be used to initiate therapy or manage patient disease. The Company believes that the analyte measuring sensitivity of the Triage CareLink System products under development will match or exceed the sensitivity levels of the conventional immunoassay analyzers. The Company is currently developing two applications for this platform, Triage Cardiac, a device for the quantification of three cardiac markers associated with AMI, and Triage Transplant, a product for the monitoring of the concentration of cyclosporine, an immunosuppressant drug prescribed for organ transplant recipients to prevent transplant rejection. PRODUCT ATTRIBUTES Although the current products and products under development are based upon the Triage Panel and Triage CareLink System platforms and utilize different technologies, they share common attributes which the Company believes make them superior to conventional immunoassay analyzers: - RAPID RESULTS: Triage DOA and the Company's products under development are designed to offer complete results in a STAT timeframe, and to have room temperature stability, making them immediately available for use. - EASE OF USE: Triage DOA and the Company's products under development are designed to be simple to use. Triage DOA has only three steps while Triage Cardiac and Triage Transplant are expected to require only one step. - HIGH ANALYTICAL ACCURACY: The Company develops and uses high quality biological and chemical reagents to yield highly specific, accurate and reproducible analytical results. - CAPABILITY OF PERFORMING MULTIPLE ANALYSES: Triage DOA and the Company's products under development are designed to measure one or more target analytes simultaneously, including reagent controls, without sacrificing the quality of the individual analysis. This simultaneous detection capability can provide significant time and cost savings compared to current technologies. - RELIABILITY: Biosite's use of internal thresholds, built-in controls, lockouts and other controlling mechanisms are intended to make its current and future products extremely reliable in any hospital or clinical laboratory setting. - COST EFFECTIVENESS: Triage DOA and the Company's products under development are designed to eliminate the need for highly trained technicians and significant outlays for testing equipment acquisition and maintenance, making them cost-effective alternatives to conventional immunoassay analyzers. 28 32 PRODUCTS AND PRODUCTS UNDER DEVELOPMENT Triage DOA was introduced in 1992 and has been used by hospital emergency departments to screen for up to eight commonly abused prescription and illicit drugs or drug classes. The Company is developing five additional products which apply the Company's Immediate Response Diagnostics technologies to a variety of other medical testing needs. Triage DOA and the Company's five products under development are described in the table below. The table also indicates the Company's corporate partners with respect to Triage DOA and products under development. The Company intends, where appropriate, to enter into additional collaborative arrangements to develop and commercialize future products. There can be no assurance that the Company will be able to negotiate collaborative arrangements on favorable terms, if at all, in the future, or that its current or future collaborative arrangements will be successful.
===================================================================================================================== STATUS/EXPECTED U.S. REGULATORY CORPORATE PRODUCTS APPLICATION ANALYTE TARGETS PATHWAY(1) PARTNER(2) ---------------------------------------------------------------------------------------------------------- Triage Panel Drug Screening Phencyclidine On the Market/ CMS, Merck for Drugs of Benzodiazepines 510(k) cleared Abuse Cocaine (Triage DOA) Amphetamine Tetrahydrocannabinol Opiates Barbiturates T Tricyclic R antidepressants I Methadone A ---------------------------------------------------------------------------------------------------------- G Triage Panel Parasite Giardia lamblia In Development/ -- E for Parasitology Screening Entamoeba 510(k) (Triage O&P) histolytica P Cryptosporidium A parvum N ---------------------------------------------------------------------------------------------------------- E Triage Panel for Pathogen C. difficile Antigen In Development/ -- L Clostridium Detection C. difficile Toxin A 510(k) S difficile (Triage C. diff) ---------------------------------------------------------------------------------------------------------- Triage Panel Pathogen Salmonella In Development/ -- for Enteric Screening Shigella 510(k) Pathogens Campylobacter (Triage Enteric) jejuni/coli - --------------------------------------------------------------------------------------------------------------------- T C S Triage Acute CK-MB In Development/ Merck(3), R A Y Cardiac Myocardial Troponin I 510(k) KDK, LRE I R S Infarction Myoglobin A E T Detection G L E ---------------------------------------------------------------------------------------------------------- E I M Triage Drug Monitoring Cyclosporine In Development/ Novartis, N S Transplant PMA LRE K =====================================================================================================================
(1) The FDA regulatory approval process requires many steps before a product can be approved for marketing. The terms "510(k)" and "PMA" indicate the regulatory approval pathway the Company believes will be applicable to a product, although there can be no assurance that the FDA will agree that the pathway noted is the appropriate pathway for the specific product. See "Risk Factors -- Government Regulation." For a description of the terms 510(k) and PMA see "-- Government Regulation." (2) For a description of the Company's collaboration arrangements, see "-- Strategic and Distribution Arrangements." (3) As part of its decision to refocus away from certain aspects of the human diagnostics business, Merck has informed the Company that Merck is considering assigning its rights under its agreements with the Company concerning the marketing of Triage Cardiac either to a third party or back to the Company. 33 Triage Panel for Drugs of Abuse The Company believes the worldwide market for abused drug testing is approximately $350 million annually, the majority of which is accounted for by testing performed in the United States. The U.S. market can be divided into three major categories: - MEDICAL TESTING: The medical testing segment represents testing typically performed in a hospital laboratory. Such tests have the highest need for rapid turnaround of results, and generally have the highest cost per result. The results are generally reported to emergency physicians and psychiatrists. - NON-MEDICAL TESTING: The non-medical testing market consists of testing performed for industry, as well as in the criminal justice setting and drug rehabilitation centers. Testing may be performed on-site but generally samples are sent to independent reference laboratories. Typically, the demands for a rapid result are not quite as great as in the medical segment. Additionally, the cost per result is slightly reduced. - REFERENCE LABORATORY TESTING: The reference laboratory testing market accounts for a sizable portion of the total drug testing market. The majority of samples come from the non-medical testing market, although some smaller hospitals in the medical testing market also send their samples to reference laboratories. In general, results are not available for at least 24 hours from the time the specimen is collected. Despite relatively long turnaround times, the reference laboratory market has remained substantial because of its ability to produce results on a low cost per panel basis. Emergency Department Screening A 1988 Substance Abuse and Mental Health Services Administration ("SAMHSA") survey concluded that over 14.5 million Americans had used an illicit drug at least once in the prior month. Emergency physicians have indicated that drug abuse plays a role in 5% to 10% of the emergency medicine cases occurring annually in the United States, either as a primary cause such as an overdose, or as a contributing factor such as in the case of an accident. A diagnostic dilemma confronts physicians when a patient is presented with symptoms that could either be drug related or non-drug related. A patient brought to a hospital emergency department in a coma may be under the influence of narcotics or sedatives, which may require one type of treatment or intervention. Conversely, the same patient may have had a stroke or suffered some form of trauma, requiring a completely different type of care. The ability to have a differential diagnosis in a timely manner greatly aids the course of treatment. Prior to the introduction of Triage DOA, drug or toxicology screening was accomplished by several technologies, primarily Gas Chromatography/Mass Spectroscopy ("GC/MS") and automated immunoassays. Although GC/MS is the most specific identification method commercially available, it is time consuming (requiring an average of approximately three hours per test), complex and expensive, and is generally reserved for final confirmation of specimens that have been screened positive by an immunoassay. Automated immunoassay tests, although less expensive than those performed by GC/MS, also require significant amounts of time (approximately one to two hours) because of the necessity of performing analyses of several drugs sequentially on each patient specimen. Additionally, in many cases the equipment required to perform an immunoassay is not accessible on an immediate or STAT basis. Triage DOA is a rapid qualitative urine screen that analyzes a single test sample for up to eight different illicit and prescription drugs or drug classes and provides results in approximately 10 minutes. Triage DOA is instrument independent, contains built-in controls for accuracy and is capable of a high degree of specificity. Illicit drugs tested for by Triage DOA include Amphetamines/Methamphetamines (speed, crystal), Cocaine (crack), Opiates (heroin), Phencyclidine (angel dust), Tetrahydrocannabinol (pot, marijuana), while prescription drugs tested by Triage DOA include Barbiturates (Phenobarbital), Benzodiazepines (Valium, Librium, Halcion), Tricyclic Antidepressants (Elavil, Tofranil) and Methadone. Triage DOA can be configured to test various combinations of the foregoing drugs. In February 1995, the Company launched Triage DOA Plus TCA, a configuration which includes a test for Tricyclic Antidepressants ("TCA") that otherwise requires a separate blood test. Since its introduction in February 1992, the Company has sold over 30 34 4.2 million Triage DOA panels worldwide, and over 2,600 hospitals and emergency departments in the United States are users of the product. The graphic below summarizes Triage DOA testing process: LOGO The Company distributes Triage DOA and Triage DOA Plus TCA to the U.S. medical market through CMS. Merck is the exclusive distributor of Triage DOA and Triage DOA Plus TCA in certain countries in Europe, Latin America, the Middle East, Asia and Africa. Workplace Screening It is estimated that in 1996 over 33% of new hires in the U.S. workforce will be screened for drug usage as part of pre-employment physicals. The majority of these test samples are sent to centralized reference laboratories that can provide both the initial immunoassay screening result and the confirmation of presumptive positive results by an alternate method, such as GC/MS. Testing of government and certain government regulated employees and contractors must be performed at SAMHSA certified reference laboratories. Employers that are not government contractors send their drug screens to their laboratory of choice or perform on-site testing. Non-SAMHSA testing is estimated to account for over eight million tests performed annually. The majority of employers with drug screening programs have chosen not to implement "on-site" testing in their facilities due to costly personnel and regulatory burdens on an employer's in-house testing laboratory. These industrial testers, however, still have a need for rapid results since many employment decisions hinge on an employee's ability to pass physical and other examinations that include a test for illegal drugs. Despite this need for rapid results, there is a 24 to 48 hour wait based on the sample transportation and testing process used by all major reference laboratories. Additionally, it is estimated that approximately 90% of all employee tests have negative results. Therefore, an immunoassay test that provides rapid results, such as Triage DOA, can get employees back to work quickly and save employers money. In January 1996, the Company established the ExpressTest One-Hour Drug Screen service, a marketing program in conjunction with regional suppliers of occupational health services, as a means of expanding the market for Triage DOA. The ExpressTest program incorporates the Company's "near-site" testing strategy of providing the benefits of rapid drug test results using Triage Intervention (a test for five illicit drugs or drug classes) without the burdens that would be imposed on employers setting up an on-site laboratory. Participating occupational health clinics provide rapid results to industrial clients that send prospective employees to them for pre-employment physicals and drug screens. Biosite's sales force actively supports these selected occupational health clinics in their marketing of the ExpressTest program to potential industrial 31 35 clients in their regional area. Biosite currently has six sales professionals actively establishing select providers to be a part of the ExpressTest program. Triage Cardiac In 1992, over 6.0 million people in the United States visited hospital emergency departments exhibiting symptoms of a heart attack. Of those, approximately 650,000 were diagnosed with AMI and approximately 800,000 were diagnosed with unstable angina. In total, approximately 1.9 million of the patients who presented with chest pain were admitted to coronary care units. Of these, approximately 30,000 to 60,000 patients were misdiagnosed as not having an AMI. Additionally, approximately 500,000 of these patients who had not had an AMI were admitted to hospitals and ultimately released within two days. The Company believes that rapid, quantitative results for multiple cardiac markers provided at the point-of-care may have a positive impact on misdiagnosed AMI, and may provide substantial benefits to patients and savings to the hospital. AMI is generally caused by the blocking or "occlusion" of an artery providing oxygen-carrying blood to the heart. Without oxygen, the heart muscle is destroyed, and a prolonged occlusion results in additional muscle damage. The destruction of such cells in the heart muscle results in the release of several markers into the bloodstream, including creatinine kinase ("CK-MB"), Troponin I and Myoglobin. In general, for early diagnosis of AMI clinicians rely on electrocardiograms and on the measurement, over time, of CK-MB. Troponin I and Myoglobin are also emerging as useful adjuncts to CK-MB in the detection of heart attacks. The Company believes that the concentrations of these three markers typically peak and fall over different time periods and that the simultaneous measurement of these markers is a more accurate diagnostic technique for AMI than the measurement of any one single marker. Studies have shown that serum concentrations of Myoglobin are elevated most quickly post-AMI. Additionally, serial quantitative measurement of Myoglobin has demonstrated a significantly higher sensitivity in diagnosing AMI than CK-MB in patients presenting within 12 hours of AMI symptom onset. Troponin I has been shown to maintain an elevated concentration for a longer period of time than CK-MB and Myoglobin. Several diagnostic tests have recently been developed to quantitatively measure the blood levels of such markers. Unfortunately, the measurement of multiple markers currently requires large, centralized immunoassay systems that cannot directly analyze whole blood and are not always available on a STAT basis. Additionally, these systems require multiple reagent packs, frequent standardization and quality control. Since turnaround time for such test results is critical, current immunoassay systems may not satisfy physician needs. The Company believes that a point-of-care test capable of quantitatively measuring multiple markers of an AMI would have a positive impact on patient care. Accordingly, the Company's Triage Cardiac product under development is being designed to quantitatively measure the level of CK-MB, Troponin I and Myoglobin in a single test device from a sample consisting of two drops of whole blood. The hand-held Triage CareLink meter under development is being designed to provide quantitative results of such measurements at or near the point-of-care. Triage Cardiac may aid in the detection of AMI by providing point-of-care quantitative results in approximately 10 minutes, providing physicians with the ability to make treatment decisions in a timely manner. Triage Cardiac is in the late stages of development with clinical investigations expected to begin in the first half of 1997. If successfully developed and cleared for marketing, the Company anticipates selling Triage Cardiac directly in the United States and through KDK in Japan. The Company currently has an agreement with Merck regarding distribution of Triage Cardiac in certain countries in Europe and Latin America and in South Africa. However, as part of its decision to refocus away from certain aspects of the human diagnostics business, Merck has informed the Company that Merck is considering assigning its rights concerning the marketing of Triage Cardiac either to a third party or back to the Company. Triage C. diff Clostridium difficile ("C. difficile") is an opportunistic pathogen of the intestinal tract that may thrive as a result of broad spectrum antibiotic treatment. The bacteria may be found in asymptomatic carriers or may 32 36 be spread among hospital patients that are immunocompromised or receiving antibiotics. Cytotoxins produced by the bacteria mediate C. difficile-associated disease ("CDAD"), which may include antibiotic-associated diarrhea and antibiotic-associated pseudo-membranous colitis. Due to the contagiousness of CDAD, patients identified as possibly having CDAD are usually placed in isolation until the infection is controlled. Symptoms of CDAD include diarrhea as well as fluid and weight loss. It has been estimated that in 1995, approximately 3.0 million rapid tests for C. difficile were performed in the United States. This number is expected to continue to rise due to the expected increase in the number of patients who are immunocompromised. Until recently, the use of a cytotoxic test, which takes 48 to 72 hours to produce diagnostic results, was the only means to identify the toxin associated with C. difficile. More recently, in response to the need for more rapid identification of the C. difficile toxin, several manufacturers have developed and marketed enzyme-linked immunosorbent assay ("ELISA") tests that can be performed in one to two hours. These ELISA test formats are used by the majority of the hospitals testing for the toxin. Although the ELISA technology has been a great improvement over the cytotoxic test, it still requires several precisely timed steps as well as multiple standards every time the test is performed, making it unlikely the testing will be done whenever an individual specimen is sent to the laboratory. The multiple standards and quality controls required with each run make the processing of individual specimens expensive. As a result, specimens are generally only processed in "batch" mode, delaying the time to a diagnostic result, and the time by which a physician receiving the information can take therapeutic measures. Triage C. diff is designed to simplify the laboratory procedure and improve time to result to the physician by enabling laboratories to complete testing for the bacteria and toxin in approximately 10 minutes. Because the test is being designed with built-in controls and standards, the test may be able to be performed individually or in batches, by any laboratory technician, without compromising the quality of the result. Triage C. diff may thus reduce time to initiate therapy and minimize time in isolation. Rapid, accurate diagnosis of the bacteria and toxin should enable earlier treatment, which may reduce length of stay in the hospital and reduce cost. Triage C. diff is in the late stages of development with clinical investigations expected to begin in the first half of 1997. If successfully developed and cleared for marketing, the Company expects to market this product directly in the United States. Triage O&P Parasitic infection is a common cause of gastrointestinal disease and diarrhea. Some of the more common parasites responsible for such infection are Giardia lamblia ("Giardia"), Cryptosporidium parvum ("C. parvum"), Entamoeba histolytica and Microsporidia species. According to the U.S. Centers for Disease Control and Prevention ("CDC"), more than 900,000 people in the United States become ill each year from waterborne parasites. Additionally, with the increase in world travel, it is probable that the number of cases diagnosed in the United States will rise. Further, parasites frequently infect immunocompromised patients, especially HIV infected patients, which has lead to an increase in the incidence of infection by Microsporidia species. The most commonly employed method of detecting parasites from stool samples is by manual ova and parasite ("O&P") microscopic examination, typically of three consecutive stool specimens from the patient. The preparation of the sample by a laboratory technologist involves stool specimen dilution and the preparation of multiple microscope slides. Each slide must then be observed via microscope by a technologist trained in the identification of parasites. The time to diagnose parasitic infection is prolonged due to the need for manual microscopic examination of multiple stool specimens per patient. The prolonged time to obtain results may delay the treatment of patients, and ultimately increase the cost of health care for such patients. It is estimated that in 1997 over six million O&P microscopic examinations will be performed in the United States. Because of the cumbersome procedure and limited test menu of the current ELISA test formats, these tests have had limited success in hospitals that perform larger volumes of tests in batches. Recently, several manufacturers have developed and marketed ELISA tests for the more rapid identification 33 37 of two of the more common parasites Giardia and C. parvum. Such tests are, however, subject to numerous limitations, including the requirement of multiple timed steps, two hour time to result, a need to run additional standards and controls with patient specimen and availability of tests for two parasites only. Triage O&P is designed to replace the standard O&P microscopic detection method for three of the most commonly encountered parasites: Giardia, C. parvum and Entamoeba histolytica in a single test device. Future versions of Triage O&P may include a test for Microsporidia species. Because each test device includes standards and controls, the product may be able to be used for any volume of tests. If successfully developed and approved for marketing, Triage O&P may make rapid results (approximately 10 minutes) available to hospitals of any size, including facilities that previously sent such testing to a reference lab. The Company expects that Triage O&P will have sensitivity comparable to the current O&P microscopic examination, but will require only a single patient specimen. This should greatly reduce the collection burden for the patient, and reduce the amount of labor for the laboratory technician, thereby reducing costs. Additionally, the length of time physicians wait for results may be reduced. Triage O&P is in the late stages of preclinical development. Triage Enteric Gastroenteritis, commonly described as "food poisoning," often occurs among individuals who have consumed contaminated foods or been exposed to stool contaminated with microorganisms such as Salmonella, Campylobacter jejuni/coli, Shigella and E. coli 0157. Eight to 24 hours after such exposure, individuals may experience abdominal pain, nausea and diarrhea. It is estimated that in the United States over 14 million stool cultures are performed annually for the diagnosis of food poisoning. Microorganisms are often implicated in such cases. According to the CDC, there are over six million cases of foodborne disease annually in the United States. Stool culture, currently the primary method of diagnosing food poisoning, involves the inoculation of multiple culture plates with stool specimen. After 24 to 48 hours, culture plates that exhibit bacterial growth are subjected to biochemical tests that typically take an additional 24 hours. As a result of such a prolonged testing procedure, physicians generally wait 48 to 72 hours for test results. Triage Enteric is being developed for identification of three of the most common enteric bacteria responsible for food poisoning, Salmonella, Campylobacter jejuni/coli and Shigella. Future versions of Triage Enteric may include a test for E. coli 0157. Triage Enteric would enable the laboratory technician to rapidly detect from a stool specimen the presence of such enteric bacteria. This should greatly reduce the amount of labor required of laboratory technicians, thereby reducing costs. Additionally, the length of time by which results can be returned to the physician would be improved. Triage Enteric is in the development stage. Triage Transplant Transplants of human organs generally require suppression of the immune system of the organ recipient. Cyclosporine is the most widely used pharmaceutical for such purposes, with annual worldwide sales in excess of $1.0 billion. Novartis is the developer and leading supplier of cyclosporine, and is involved in several collaborations in the organ transplant field that include health care management, xenotransplantation, and near-patient testing in an effort to support the use of organ transplantation. Cyclosporine is chronically administered to patients who have received an organ transplant. Over 18,000 patients undergo organ transplantation in the United States annually. In excess of 200,000 organ recipients worldwide take immunosuppressant drugs on a daily basis. The blood level of cyclosporine must be monitored to ensure that a patient receives the appropriate therapeutic dose while minimizing toxicity. Patients receiving cyclosporine must maintain a minimum concentration of the drug for it to be effective, yet maintain a level that is low enough not to be toxic. This range is often referred to as the therapeutic window. Physicians primarily rely on large, centralized laboratories to measure cyclosporine blood levels. The physician typically does not receive test results for at least 24 to 48 34 38 hours, requiring a call back to the patient if the dose of the drug needs to be adjusted. A smaller share of cyclosporine testing is performed by high performance liquid chromatography ("HPLC"). The current worldwide market for cyclosporine testing by immunoassay is estimated to be over 4.0 million tests per year. Patients are monitored frequently in the immediate post-transplant time-frame with reduced but continued testing, an average of four times per year, for the remainder of the patient's lifetime. Triage Transplant is designed to utilize the Triage CareLink meter to enable a physician to easily, rapidly and accurately measure cyclosporine levels. Triage Transplant is being developed to provide physicians with a cost-effective means of determining cyclosporine levels at the point-of-care which provides the physician with the ability to optimize drug therapy during the patient's visit. As part of its research and development collaboration with Novartis, Biosite has obtained licenses to certain technology that makes rapid analysis of cyclosporine levels possible. See "-- Strategic and Distribution Arrangements." Triage Transplant is in the preclinical development stage. If successfully developed and approved for marketing, the Company expects Sandoz to support the promotion of Triage Transplant worldwide. RESEARCH AND DEVELOPMENT As of November 30, 1996, the Company had 60 employees in research and development, of which 15 have Ph.D.s. The Company's research and development organization is dedicated to the discovery and development of new technologies which can be applied to future products and the development of new products in its existing platform technologies. The Company has research staff dedicated to the development and production of antibodies through a variety of techniques. Recombinant techniques are used to express proteins for use as diagnostic targets. The Company's staff of chemists and biochemists synthesize drug targets and compounds for use as diagnostic labels as well as seek to perfect techniques for coupling these compounds to biological reagents such as antibodies. The Company's development engineering staff is involved in the design and development of new diagnostic device technologies as well as processes for their fabrication and interface with biological and chemical reagents. The Company's product development group completes final optimization of assays and the Company's regulatory affairs group controls all in-house and external clinical trials of the Company's products and prepares applications to the FDA for pre-market clearance or approval. MANUFACTURING As of November 30, 1996, the Company had 42 employees in manufacturing involved in reagent production, device assembly, engineering, quality assurance/quality control and materials management. Biosite maintains worldwide manufacturing rights to all current and future products. A key strategy of the Company is to provide high quality analytical results in an efficient manner. To this end, the Company invests in the design and development of manufacturing systems and technologies that can produce a high quality product using controlled, cost-effective manufacturing processes and equipment. Triage C. diff, Triage O&P, and Triage Enteric are being developed to utilize the same or similar processes and equipment as Triage DOA. The Company believes that the experience it has acquired in manufacturing Triage DOA will provide benefits in product quality and cost in manufacturing for its products under development. The Company expects its manufacturing capacities will allow such potential products and Triage DOA to be manufactured concurrently in the same facility. All raw materials required to manufacture Triage DOA are obtained from outside suppliers. All antibodies used in the manufacture of Triage DOA were developed by Biosite and the cell lines are owned by Biosite. Production quantities of most of the antibodies are produced by two vendors. In addition, Biosite maintains its own in-house antibody production capability. The Company manufactures Triage DOA at its facility in San Diego, California. The facility has received its registration as a diagnostic product manufacturer from the FDA and from the California Department of Health Services. The Company has also been licensed and certified to manufacture products using controlled substances by the U.S. Drug Enforcement Agency. There can be no assurance that the Company can continue 35 39 to comply with all government requirements and regulations which may lead to the suspension or revocation of its right to manufacture. See "Risk Factors -- Government Regulation" and "-- Government Regulation." The Company is also developing novel and sophisticated processes and equipment for the future production of its Triage Cardiac and Triage Transplant products. LRE will manufacture and supply the meter used in conjunction with the Company's Triage CareLink System platform products. The Company is increasing its manufacturing space at its San Diego facility to accommodate production of Triage Cardiac. SALES AND MARKETING As of November 30, 1996, the Company has 31 employees in various sales and marketing functions. The Company markets its Triage DOA to hospital laboratories and emergency departments in the United States through CMS, a laboratory products distributor, and in certain countries in Europe, Latin America, the Middle East, Asia and Africa through Merck. The Company anticipates it may directly market in the United States its cardiac, microbiology and therapeutic drug monitoring products under development. In geographic markets outside the United States, the Company intends to establish relationships with marketing partners, where appropriate, for these potential products. The Company believes it has the management resources necessary to significantly expand its sales force for the promotion of its potential products. There can be no assurance that any of the Company's products under development will be successfully developed and approved for marketing. STRATEGIC AND DISTRIBUTION ARRANGEMENTS Biosite's strategy for the research, development, commercialization and distribution of certain of its products entails entering into various arrangements with corporate partners, licensors, licensees and others, and is dependent upon the success of these parties in performing their responsibilities. There can be no assurance that such parties will perform their obligations as expected or that any revenue will be derived from such arrangements. Curtin Matheson Scientific, Inc. In November 1991, the Company entered into a distribution agreement (the "CMS Agreement") with CMS pursuant to which the Company granted to CMS an exclusive right to distribute Triage DOA to hospitals, non-industrial laboratories and certain other health and medical organizations within the United States. In March 1996, the parties executed an amendment to the CMS Agreement, setting forth certain purchase and cumulative sales targets which if not met gives Biosite the option to terminate the CMS Agreement and further obligates CMS to pay to Biosite a penalty if it fails to meet such purchase and cumulative sales targets for 1996. Since the amendment of the CMS Agreement, CMS has missed certain of these purchase and cumulative sales targets. In August 1996, Biosite agreed to forgive a portion of the penalty each year that CMS meets additional sales milestones through 1999. There can be no assurance that the additional targets will be met. The CMS Agreement provides for a six-month transition period in the event of termination. If Biosite elects to terminate the CMS Agreement, it may appoint a new distributor or expand its own sales force to sell Triage DOA directly in the United States. Merck KGaA In July 1992, the Company entered into a distribution agreement with Merck, pursuant to which the Company granted to Merck an exclusive right to market and distribute Triage DOA in certain countries in Europe, Latin America, the Middle East, Asia and Africa. In June 1994, the Company entered into two additional agreements with Merck, a collaborative development agreement and a supply and distribution agreement, in connection with the Company's development of Triage Cardiac. Under the terms of such agreements, the Company and Merck agreed to jointly develop, perform clinical testing of, and obtain regulatory approval for Triage Cardiac. The agreement further provides that the Company is to be responsible for the design, development and manufacturing scale-up of Triage Cardiac and the reagents used in connection therewith, and for the clinical trials and regulatory approval of Triage Cardiac for use in the AMI diagnosis field in Japan and the United States. Merck is obligated to perform clinical trials and obtain regulatory approval for the product for use in the AMI diagnosis field in certain countries in Europe and Latin America and in South Africa. Additionally, Biosite is obligated to fund 60% and Merck is obligated to fund the remaining 40% of the costs incurred by both parties in developing, manufacturing and obtaining regulatory 36 40 approval for the product, subject to certain maximum aggregate expenditure limitations and subject further to a reduction in Merck's funding obligations of 40% of payments which Biosite receives from KDK in connection with the development and commercialization of Triage Cardiac in Japan. The agreements further specify that Merck is to be the exclusive distributor of Triage Cardiac for use in the AMI diagnosis field in certain countries in Europe and Latin America and in South Africa, while the Company is to retain distribution rights to the product in the remainder of the world and for uses other than the diagnosis of AMI. As part of its decision to refocus away from certain aspects of the human diagnostics business, Merck has informed the Company that Merck is considering assigning its rights under its agreements with the Company concerning the marketing of Triage Cardiac either to a third party or back to the Company. LRE Relais + Elektronik GmbH In September 1994, the Company entered into an agreement with LRE (the "LRE Agreement") for the development of a hand-held meter to be used in all Triage CareLink System products currently under development, including Triage Cardiac and Triage Transplant. Under the terms of the LRE Agreement, LRE is obligated to develop and produce the fluorescent meter according to specifications provided by Biosite. In return, the Company agreed to compensate LRE for certain development and tooling expenses incurred in connection therewith, based upon LRE's successful completion of certain feasibility, prototype and preproduction milestones. In addition, the agreement specifies that LRE is to be the Company's exclusive supplier of the Triage CareLink meter during the term of the LRE Agreement, unless LRE is incapable of satisfying Biosite's needs or is prohibited from producing such meters for a specific immunoassay application. ARKRAY KDK Corporation In February 1995, the Company entered into a development, supply and distribution agreement with KDK, pursuant to which the parties agreed to collaborate in the development and marketing of Triage Cardiac. Under the terms of the agreement, KDK is obligated to provide certain funding of up to $2.0 million for the Company's development of Triage Cardiac, $500,000 of which has been paid and the remainder of which is to be paid based upon the Company's achievement of certain milestones. In exchange for this funding, the Company has granted KDK the exclusive right to distribute Triage Cardiac in Japan and in certain countries of Asia, the Middle East and Pacific Island countries. The Company is responsible for costs associated with performing clinical trials on and obtaining regulatory approval of Triage Cardiac in the United States, while KDK is responsible for such costs in Japan and in certain countries of Asia, the Middle East and Pacific Island countries. KDK can terminate this agreement at any time. Novartis Pharma Inc. In September 1995, the Company entered into two license agreements with Novartis relating to the Company's development of Triage Transplant. The first license is for cyclosporine antibodies and the second license is for certain antibody-based assays. Under the terms of the agreements, and upon the Company's successful completion of certain feasibility requirements, the Company has the right to make, have made, use and sell Triage Transplant using the licensed Novartis antibodies and related technologies. Upon entering into the two licenses, the Company made certain initial payments to Novartis and is obligated to make payments to Novartis based upon the achievement of certain product development milestones, and to pay royalties on sales of products developed by the Company using such antibodies or related technologies. In connection with the agreement, Novartis purchased $1.0 million of five-year 8% convertible debentures which convert into 92,222 shares of Common Stock of the Company upon the closing of this offering (based upon interest through January 31, 1997 and an assumed initial public offering price of $12.00 per share). The Company is obligated to sell to Novartis up to $1.0 million additional five-year 8% convertible debentures upon the attainment of certain milestones. The debentures will be convertible, at the sole option of the Company, into shares of Biosite Common Stock at the initial offering price. PROPRIETARY TECHNOLOGY AND PATENTS The Company's ability to compete effectively will depend in part on its ability to develop and maintain proprietary aspects of its technology, and to operate without infringing the proprietary rights of others or to obtain rights to such proprietary rights. Biosite has U.S. and foreign issued patents and is currently prosecuting 37 41 patent applications in the United States and with certain foreign patent offices. There can be no assurance that any of the Company's pending patent applications will result in the issuance of any patents, that the Company's patent applications will have priority over others' applications, or that, if issued, any of the Company's patents will offer protection against competitors with similar technology. There can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented in the future or that the rights created thereunder will provide a competitive advantage. Litigation may be necessary to enforce any patents issued to the Company, to protect trade secrets or know-how owned by the Company or to determine the enforceability, scope and validity of the proprietary rights of others. In March 1996, the Company settled a potential patent infringement claim by obtaining a license to the contested patent in return for a one-time payment of $2.2 million. In September 1996, the Company settled a patent infringement lawsuit filed by Abbott Laboratories and obtained a license to the contested patent in return for the payment of $5.5 million and the agreement to pay certain royalties. There can be no assurance that the Company will not in the future become subject to patent infringement claims and litigation or interference proceedings conducted in the USPTO to determine the priority of inventions. The defense and prosecution of intellectual property suits, USPTO interference proceedings, and related legal and administrative proceedings will result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. An adverse determination in litigation or interference proceedings to which the Company may become a party could subject the Company to significant liabilities to third parties. Further, either as the result of such litigation or proceedings or otherwise, the Company may be required to seek licenses from third parties which may not be available on commercially reasonable terms, if at all. Triage DOA and products under development may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. The Company has obtained licenses for certain technologies. However, there can be no assurance that the Company will be able to obtain licenses for technology patented by others on commercially reasonable terms, if at all, that it will be able to develop alternative approaches if unable to obtain licenses or that the Company's current and future licenses will be adequate for the operation of Biosite's business. The failure to obtain necessary licenses or to identify and implement alternative approaches would prevent the Company from commercializing certain of its products under development and would have a material adverse effect on the Company's business, financial condition and results of operations. Biosite is aware of a U.S. patent owned by Celltech relating to the manufacture of antibodies, such as those developed or being developed by Biosite for Triage Cardiac, Triage O&P, Triage C. diff and Triage Enteric. Biosite is also aware that this patent is the subject of an interference proceeding in the USPTO which was initiated in February 1991 with a patent application filed by Genentech. In June 1996, the EPO invalidated, following an opposition, certain claims under Celltech's corresponding EPO-granted patent which may be relevant to Biosite's products and products under development. Celltech has indicated that it will appeal such decision. If it is determined that aspects of the manufacturing of Biosite's antibodies are covered by patent claims stemming from the interference or if Celltech were to have such claims upheld on appeal, Biosite may be required to obtain a license under such patents and corresponding patents in other countries. There can be no assurance that a license would be made available to Biosite on commercially reasonable terms, if at all. If such license is required and not obtained the Company might be prevented from using certain of its manufacturing technologies. The Company's failure to obtain any required licenses could have a material adverse effect on the Company's business, financial condition and results of operations. The Company also relies upon trade secrets, technical know-how and continuing invention to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its trade secrets, or that the Company will be capable of protecting its rights to its trade secrets. Others may have filed and in the future are likely to file patent applications that are similar or identical to those of the Company. To determine the priority of inventions, the Company may have to participate in interference proceedings declared by the USPTO that could result in substantial cost to the Company. No assurance can be given that any patent application of another will not have priority over patent applications filed by the Company. 38 42 The commercial success of the Company also depends in part on the Company neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to the Company's technologies and products. The Company is aware of several third-party patents that may relate to the Company's technology. There can be no assurance that the Company does not or will not infringe these patents, or other patents or proprietary rights of third parties. In addition, the Company has received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. Any legal action against the Company or its collaborative partners claiming damages and seeking to enjoin commercial activities relating to the Company's products and processes affected by third party rights, in addition to subjecting the Company to potential liability for damages, may require the Company or its collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that the Company or its collaborative partners would prevail in any such action or that any license (including licenses proposed by third parties) required under any such patent would be made available on commercially acceptable terms, if at all. There are a significant number of U.S. and foreign patents and patent applications in the Company's areas of interest, and the Company believes that there may be significant litigation in the industry regarding patent and other intellectual property rights. If the Company becomes involved in such litigation, it could consume a substantial portion of the Company's managerial and financial resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The market in which the Company competes is intensely competitive. Biosite's competitors include health care companies that manufacture laboratory-based tests and analyzers, as well as clinical and hospital-based laboratories. Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical and hospital-based laboratories. The Company expects that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for its products, the Company will be required to demonstrate that its products are an attractive alternative to testing performed by clinical and hospital-based laboratories. This will require physicians to change their established means of having such tests performed. There can be no assurance that the Company's products will be able to compete with the testing services provided by these laboratories. In addition, companies with a significant presence in the diagnostic market, such as Abbott Laboratories, Boehringer Mannheim, Chiron Diagnostics, Clinical Diagnostic Systems, a division of Johnson & Johnson, DADE International, and Roche Biosciences, Inc., have developed or are developing diagnostic products that do or will compete with the Company's products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than the Company. Moreover, such competitors offer broader product lines and have greater name recognition than the Company, and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete with or will compete with those of the Company. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than the Company's current or future products, or that would render the Company's technologies and products obsolete. Moreover, there can be no assurance that the Company will have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. In addition, there can be no assurance that competitors, many of which have made substantial investments in competing technologies that may be more effective than the Company's technologies will not prevent, limit or interfere with the Company's ability to make, use or sell its products either in the United States or in international markets. See "-- Products and Products under Development" and "-- Technology." GOVERNMENT REGULATION The testing, manufacture and sale of the Company's products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. The Company will not be able to commence marketing or commercial sales in the United States of 39 43 new products under development until it receives clearance or approval from the FDA, which can be a lengthy, expensive and uncertain process. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. In the United States, medical devices are classified into one of three classes (i.e., Class I, II or III) on the basis of the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls (e.g., labeling, premarket notification and adherence to cGMP) and Class II devices are subject to general and special controls (e.g., performance standards, postmarket surveillance, patient registries and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices or new devices which have been found not to be substantially equivalent to legally marketed devices). Before a new device can be introduced in the market, the manufacturer must generally obtain FDA clearance or approval through either clearance of a 510(k) notification or approval of a PMA application. A PMA application must be filed if a proposed device is a new device not substantially equivalent to a legally marketed Class I or Class II device, or if it is a preamendment Class III device for which the FDA has called for PMAs. A PMA application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical investigations, bench tests, laboratory and animal studies. The PMA application must also contain a complete description of the device and its components and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include the proposed labeling, advertising literature and any training materials. The PMA approval process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing. Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive review. If the FDA determines that the PMA application is complete, the FDA will accept the application for filing. Once the submission is accepted, the FDA begins an in-depth review of the PMA. The FDA review of a PMA application generally takes one to three years from the date the application is accepted, but may take significantly longer. The review time is often significantly extended by the FDA asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee, typically a panel of clinicians, will likely be convened to review and evaluate the application and provide recommendations to the FDA as to whether the device should be approved. The FDA is not bound by the recommendation of the advisory panel. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer's facilities to ensure that the facilities are in compliance with applicable cGMP requirements. If FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter, authorizing commercial marketing of the device for certain indications. If the FDA's evaluation of the PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA application or issue a non-approvable letter. The FDA may determine that additional clinical investigations are necessary, in which case the PMA may be delayed for one or more years while additional clinical investigations are conducted and submitted in an amendment to the PMA. Modifications to a device that is the subject of an approved PMA, its labeling or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. Supplements to an approved PMA often require the submission of the same type of information required for an initial PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA. A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or a preamendment Class 40 44 III medical device for which the FDA has not called for PMAs. The FDA recently has been requiring more rigorous demonstration of substantial equivalence than in the past, including in some cases requiring submission of clinical data. It generally takes from four to 12 months from submission to obtain 510(k) premarket clearance but may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device or that additional information is needed before a substantial equivalence determination can be made. A "not substantially equivalent" determination, or a request for additional information, could prevent or delay the market introduction of new products that fall into this category. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions. The Company has made modifications to Triage DOA since receipt of initial 510(k) clearance. With respect to several of these modifications, the Company has filed new 510(k) notices describing the modifications, and has received FDA clearance of those 510(k) notices. The Company has made other modifications to Triage DOA which the Company believes do not require the submission of new 510(k) notices. There can be no assurance, however, that the FDA would agree with any of the Company's determinations not to submit a new 510(k) notice for any of these modifications, or would not require the Company to submit a new 510(k) notice for any of these modifications made to Triage DOA. If the FDA requires the Company to submit a new 510(k) notice for any device modification, the Company may be prohibited from marketing the modified Triage DOA until the 510(k) notice is cleared by the FDA. The Company is uncertain of the regulatory path to market that the FDA will ultimately apply to the Company's products currently in development. Although Triage DOA received 510(k) clearance, a PMA may be required for Triage Transplant or other products now in development. There can be no assurance that the FDA will not determine that the Company must adhere to the more costly, lengthy and uncertain PMA approval process for any of the Company's products in development. There can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances for its products on a timely basis, if at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. Before the manufacturer of a device can submit the device for FDA approval or clearance, it generally must conduct a clinical investigation of the device. Although clinical investigations of most devices are subject to the IDE requirements, clinical investigations of IVD tests, such as all of the Company's products and products under development, are exempt from the IDE requirements, including the need to obtain the FDA's prior approval, provided the testing is noninvasive, does not require an invasive sampling procedure that presents a significant risk, does not intentionally introduce energy into the subject, and is not used as a diagnostic procedure without confirmation by another medically established test or procedure. In addition, the IVD must be labeled for RUO or IUO, and distribution controls must be established to assure that IVDs distributed for research or clinical investigation are used only for those purposes. The Company intends to conduct clinical investigations of its products under development, which will entail distributing them in the United States on an IUO basis. There can be no assurance that the FDA would agree that the Company's IUO distribution of its IVD products under development will meet the requirements for IDE exemption. Furthermore, failure by the Company or the recipients of its products under development to maintain compliance with the IDE exemption requirements could result in enforcement action by the FDA, including, among other things, the loss of the IDE exemption or the imposition of other restrictions on the Company's distribution of its products under development, which would adversely affect the Company's ability to conduct the clinical investigations necessary to support marketing clearance or approval. Any devices manufactured or distributed by the Company pursuant to FDA clearance or approvals are subject to pervasive and continuing regulation by FDA and certain state agencies. Manufacturers of medical devices for marketing in the United States are required to adhere to applicable regulations setting forth detailed cGMP requirements, which include testing, control and documentation requirements. Manufacturers 41 45 must also comply with MDR requirements that a manufacturer report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The Company is subject to routine inspection by the FDA and certain state agencies for compliance with cGMP requirements, MDR requirements and other applicable regulations. The FDA has recently finalized changes to the cGMP requirements, including the addition of design controls that will likely increase the cost of compliance. Changes in existing requirements or adoption of new requirements could have a material adverse effect on the Company's business, financial condition and results of operation. There can be no assurance that the Company will not incur significant costs to comply with laws and regulations in the future or that laws and regulations will not have a material adverse effect upon the Company's business, financial condition and results of operations. The Company also is subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that the Company will not incur significant costs to comply with laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon the Company's business, financial condition and results of operations. The use of Biosite's products is also affected by CLIA and related federal and state regulations which provide for regulation of laboratory testing. The scope of these regulations includes quality control, proficiency testing, personnel standards and federal inspections. CLIA categorizes tests as "waived," "moderately complex" or "highly complex," on the basis of specific criteria. There can be no assurance that any future amendment of CLIA or the promulgation of additional regulations impacting laboratory testing will not have a material adverse effect on the Company's ability to market its products or on its business, financial condition or results of operations. EMPLOYEES As of November 30, 1996, Biosite employed 162 individuals. Of these, 17 hold Ph.D.s and 13 hold other advanced degrees. None of the Company's employees is covered by collective bargaining agreement. The Company believes that it maintains good relations with its employees. FACILITIES The Company currently leases approximately 83,000 square feet of space in five buildings in the Sorrento Valley area in San Diego under leases that expire from September 1997 through September 1998 with renewal options through 2001. The Company believes these facilities are adequate for its current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. The Company's current facilities are used for its administrative offices, research and development facilities and manufacturing operations. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 42 46 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company, their positions with the Company and ages as of September 30, 1996 are as follows:
NAME AGE POSITION - ------------------------------------ --- --------------------------------------------------------- Kim D. Blickenstaff................. 44 President, Chief Executive Officer, Treasurer, Secretary and Director Gunars E. Valkirs, Ph.D. ........... 44 Vice President, Research and Development, Chief Technical Officer and Director Thomas M. Watlington................ 41 Senior Vice President Charles W. Patrick.................. 42 Vice President, Sales and Marketing Christopher J. Twomey............... 37 Vice President, Finance and Chief Financial Officer S. Nicholas Stiso, Ph.D. ........... 52 Vice President, Operations Kenneth F. Buechler, Ph.D. ......... 42 Vice President, Research Timothy J. Wollaeger(1)(2).......... 53 Chairman of the Board Thomas H. Adams, Ph.D. ............. 53 Director Frederick J. Dotzler(1)(2).......... 51 Director Howard E. Greene, Jr. .............. 53 Director Stephen K. Reidy.................... 46 Director Jesse I. Treu, Ph.D. ............... 49 Director
- --------------- (1) Member of Compensation Committee. (2) Member of Audit Committee. KIM D. BLICKENSTAFF, a founder of the Company, has been a director and the Company's President, Chief Executive Officer, Treasurer and Secretary since April 1988. He previously held various positions in finance, operations, research management, sales management, strategic planning, and marketing with Baxter Travenol, National Health Laboratories, and Hybritech Incorporated ("Hybritech"). Mr. Blickenstaff holds an M.B.A. from the Graduate School of Business, Loyola University, Chicago. GUNARS E. VALKIRS, PH.D., a founder of Biosite and a co-inventor of certain of its proprietary technology has been a director since April 1988 and Vice President, Research and Development and Chief Technical Officer since 1988. Prior to forming Biosite, he was a Scientific Investigator with the Diagnostics Research & Development Group at Hybritech, where he was the primary inventor of Hybritech's patented ICON technology. Dr. Valkirs holds a Ph.D. in Physics from the University of California at San Diego. THOMAS M. WATLINGTON joined the Company as Senior Vice President in December 1996. He was formerly Vice President, Marketing for the Diabetes Care Division for Boehringer Mannheim. From 1982 to December 1996, Mr. Watlington held various positions in marketing, strategic analysis and product development with Boehringer Mannheim. Mr. Watlington holds a B.S. degree from the University of Maryland. CHARLES W. PATRICK joined the Company in August 1990 as Vice President, Sales and Marketing. From 1978 to August 1990, Mr. Patrick held various positions in sales, sales management and product and marketing management with Abbott. From 1987 to August 1990, he was Group Marketing Manager for the Abused Drug Business Unit of Abbott where he managed the worldwide product launch of Abbott's TDx and ADx bench top testing systems. Mr. Patrick holds a B.A. from the University of Central Florida. CHRISTOPHER J. TWOMEY joined the Company as Director of Finance in March 1990 and was promoted to Vice President of Finance and Chief Financial Officer in 1993. From 1981 to March 1990, Mr. Twomey was employed by Ernst & Young LLP, where from October 1985 to March 1990, he served as Audit Manager. 43 47 Mr. Twomey holds a B.A. in Business Economics from the University of California at Santa Barbara. S. NICHOLAS STISO, PH.D. joined the Company as Vice President, Operations in November 1989. Prior to joining Biosite, he was with Syntex Medical Diagnostics, a division of SYVA Co., where from April 1980 to April 1989, he was Manufacturing Director for the AccuLevel line of quantitative, non-instrumented, therapeutic drug assays. Dr. Stiso holds a Ph.D. in Physical Chemistry from Michigan State University in East Lansing, Michigan. KENNETH F. BUECHLER, PH.D., a founder of Biosite and a co-inventor of certain of Biosite's proprietary technology, has been Vice President, Research since January 1994. From April 1988 to January 1994, he was Director of Chemistry. Prior to forming Biosite, he was a Senior Scientist in the Diagnostics Research and Development Group at Hybritech. Dr. Buechler holds a Ph.D. in Biochemistry from Indiana University. TIMOTHY J. WOLLAEGER has served as Chairman of the Board of Directors since the Company's inception. He is the general partner of Kingsbury Associates, L.P., a venture capital firm he founded in December 1993. From May 1990 until December 1993, he was Senior Vice President and a director of Columbia Hospital Corporation (now Columbia/HCA Healthcare Corporation). From October 1986 until July 1993, he was a general partner of the general partner of Biovest Partners, A California Limited Partnership ("Biovest"), a seed venture capital firm. From 1983 to 1986, Mr. Wollaeger served as Senior Vice President and Chief Financial Officer of Hybritech. He is a director of Amylin Pharmaceuticals, Inc. ("Amylin") and Phamis, Inc., and a founder and director of several privately held medical products companies. He received an M.B.A. from Stanford University. THOMAS H. ADAMS, PH.D. joined the Board of Directors in September 1988. Dr. Adams was a founder of Genta Incorporated, a biotechnology company, and has been Chairman of the Board and Chief Executive Officer of Genta since February 1989. He previously served as Chairman of the Board and Chief Executive Officer of Gen-Probe Incorporated ("Gen-Probe"), which he co-founded in 1984. Prior to joining Gen-Probe, he held the positions of Senior Vice President of Research & Development and Chief Technical Officer at Hybritech. He had previously held senior scientific management positions with Technicon Instruments Corp., the Hyland Laboratories Division of Baxter Travenol, and DuPont. Dr. Adams is a director of Genta Incorporated, Life Technologies, Inc., La Jolla Pharmaceutical Company and two private biotechnology companies. He received his Ph.D. in Biochemistry from the University of California at Riverside. FREDERICK J. DOTZLER joined the Board of Directors in July 1989. Mr. Dotzler is General Partner of Medicus Venture Partners, a venture capital firm he founded in 1989. Prior to founding Medicus, Mr. Dotzler was a general partner of Crosspoint Venture Partners. Previously he held management positions with Millipore Corporation, G.D. Searle & Co., and IBM. He is a director of several privately held companies. Mr. Dotzler received a B.S. in Industrial Engineering from Iowa State University, an M.B.A. from the University of Chicago, and a degree in Economics from the University of Louvain, Belgium. HOWARD E. GREENE, JR. joined the Board of Directors in June 1989. Mr. Greene is a founder and Chairman of the Board of Amylin, a biotechnology company in late stage development of a drug candidate for diabetes, and he was Chief Executive Officer of Amylin from inception in September 1987 to July 1996. From October 1986 until July 1993, Mr. Greene was a general partner of the general partner of Biovest. From March 1979 to March 1986, he was Chief Executive Officer of Hybritech, and he was a co-inventor of Hybritech's monoclonal antibody assay technology. Prior to joining Hybritech, he was an executive with the medical diagnostics division of Baxter Healthcare Corporation from 1974 to 1979 and a consultant with McKinsey & Company from 1967 to 1974. He is Chairman of the Board of Cytel Corporation, a director of Allergan, Inc., Neurex Corporation and The International Biotechnology Trust plc, a foreign biotechnology investment company. Mr. Greene received an M.B.A. from Harvard University. STEPHEN K. REIDY joined the Board of Directors in July 1989. Since 1987, Mr. Reidy has been affiliated with Euclid Partners Corporation, a company engaged in venture capital investments in the health care and information technology industries. Mr. Reidy is a general partner of the General Partner of Euclid Partners III, L.P. and Euclid Partners IV, L.P. He is a director of Zynaxis, Inc., a drug delivery company, 44 48 Chairman of the Board of a privately held neurological company and a director of a privately-held hospital software company. Mr. Reidy has an M.B.A. from Columbia University. JESSE I. TREU, PH.D. joined the Board of Directors in June 1990. He has been a general partner of Domain Associates, a venture capital firm specializing in life sciences, since 1986. Before joining Domain Associates in 1986, he was a principal of Channing, Weinberg and Company, Inc., and its venture capital spin-off CW Ventures, and was a director of Technicon Corporation responsible for marketing strategy and new product development in immunology and histopathology and previously held research and development, management and corporate staff positions at General Electric Company. Dr. Treu is a director of DNX Corporation, a pharmaceutical testing company, Geltex Pharmaceuticals, Inc., a developer of polymer based pharmaceuticals, and Lumisys, Inc., an electro-optical systems company. Dr. Treu received a Ph.D. in Physics from Princeton University. The Company currently has authorized eight directors. Upon the closing of this offering, the Company will have three classes of directors serving staggered three-year terms. All directors are elected to hold office until the next annual meeting of stockholders of the Company in which their three-year term expires and until their successors have been elected. The Company's officers are appointed by the directors and serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. BOARD COMMITTEES The Board of Directors has established an Audit Committee and a Compensation Committee. The Audit Committee, which consists of Mr. Dotzler and Mr. Wollaeger, reviews the results and scope of the annual audit and the services provided by the Company's independent accountants. The Compensation Committee, which consists of Mr. Dotzler and Mr. Wollaeger, makes recommendations to the Board of Directors with respect to general and specific compensation policies and practices of the Company and administers the Amended and Restated 1989 Stock Plan of Biosite (the "1989 Stock Plan"), the 1996 Stock Incentive Plan of Biosite (the "1996 Stock Plan") and the Biosite Employee Stock Purchase Plan (the "ESPP"). COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Company's Compensation Committee during 1995 were Mr. Dotzler and Mr. Wollaeger. There were no interlocks or other relationships among the Company's executive officers and directors that are required to be disclosed under applicable executive compensation disclosure regulations. COMPENSATION OF DIRECTORS Directors do not receive any fees for service on the Board of Directors. Directors are reimbursed for their expenses for each meeting attended. Directors are eligible to participate in the 1996 Stock Plan described below, although as of the date of this Prospectus, no options have been granted to non-employee directors. 45 49 EXECUTIVE COMPENSATION The following table sets forth compensation paid or awarded by the Company during the fiscal year ended December 31, 1995 to the Company's Chief Executive Officer and the Company's four most highly compensated executive officers other than the Chief Executive Officer whose salary and bonus exceeded $100,000 during the fiscal year. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS -------------------------------------------- SECURITIES OTHER UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) COMPENSATION ($) OPTIONS - --------------------------------------- ---- ------------- --------- ---------------- ------------ Kim D. Blickenstaff.................... 1995 $ 169,633 $78,462 $ 900 40,000 President and Chief Executive Officer Charles W. Patrick..................... 1995 151,000 27,002 59,290(2) 5,000 Vice President, Sales and Marketing Gunars E. Valkirs...................... 1995 139,208 36,244 793 25,000 Vice President, Research and Development Kenneth F. Buechler.................... 1995 125,823 36,244 709 25,000 Vice President, Research S. Nicholas Stiso...................... 1995 134,554 27,002 1,787 20,000 Vice President, Operations
- --------------- (1) Includes amounts deferred by each individual under the Company's 401(k) plan for the years in which earned. (2) Includes forgiveness of a $36,000 relocation loan made in August 1990 which was forgiven in August 1995 and $22,776 related to income taxes associated with the forgiveness of the loan. The following tables set forth certain information as of December 31, 1995 and for the fiscal year then ended with respect to stock options granted to and exercised by the individuals named in the Summary Compensation Table above. OPTION GRANTS IN FISCAL YEAR 1995 INDIVIDUAL GRANTS
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES PERCENTAGE OF OF STOCK PRICE TOTAL OPTIONS APPRECIATION GRANTED TO EXERCISE OR FOR OPTION TERM(3) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------- NAME GRANTED (1) FISCAL YEAR ($/SH)(2) DATE 5% ($) 10% ($) - -------------------------------- ----------- ------------- ----------- ---------- ----------- -------- Kim D. Blickenstaff............. 40,000 13.3% $3.00 4/19/05 $10,312 $ 87,499 Charles W. Patrick.............. 5,000 1.7 3.00 4/19/05 1,289 10,937 Gunars E. Valkirs............... 25,000 8.3 3.00 4/19/05 6,445 54,687 Kenneth F. Buechler............. 25,000 8.3 3.00 4/19/05 6,445 54,687 S. Nicholas Stiso............... 20,000 6.7 3.00 4/19/05 5,156 43,750
- --------------- (1) These options vest daily over a four-year period commencing on the date of grant, except that no options are exercisable for the first six months after grant. (2) The exercise price of each option was equal to 150% of the fair market value of the Common Stock on the date of grant, as determined by the Compensation Committee of the Board of Directors. (3) The potential realizable value of each grant of options has been calculated, pursuant to the regulations promulgated by the Securities and Exchange Commission, assuming that the market price of the Common Stock appreciates in value from the date of grant to the end of the option term at the annualized rates of 5% and 10%, respectively. These values do not represent the Company's estimate or projection of future Common Stock value. There can be no assurance that any of the value reflected in the table will be achieved. 46 50 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1995 AND OPTION VALUES AT END OF FISCAL 1995
NUMBER OF VALUE OF SECURITIES UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS AT OPTIONS AT FISCAL FISCAL YEAR-END(#) YEAR-END($) ------------------ ---------------- SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE - ------------------------------------ --------------- ----------- ------------------ ---------------- Kim D. Blickenstaff................. -- $ -- 60,755/42,445 $135,580/$30,620 Charles W. Patrick.................. 25,000 44,000 39,412/ 7,988 105,803/ 9,847 Gunars E. Valkirs................... 10,000 27,000 47,946/30,254 105,378/ 25,572 Kenneth F. Buechler................. 4,000 11,800 47,977/36,223 99,819/ 30,431 S. Nicholas Stiso................... 11,838 11,838 5,383/20,179 4,620/ 12,895
- --------------- (1) Calculated on the basis of the fair market value of the underlying securities at December 31, 1995, the fiscal year-end, minus the exercise price. Amended and Restated 1989 Stock Plan In July 1989, the Company's Board of Directors adopted the 1989 Stock Plan. The 1989 Stock Plan was amended at various times from its adoption to the date of this Prospectus to increase the number of shares available under the 1989 Stock Plan. A total of 1,692,000 shares of Common Stock is currently reserved for issuance under the 1989 Stock Plan pursuant to the direct award or sale of shares or the exercise of options granted under the 1989 Stock Plan. If any option granted under the 1989 Stock Plan expires or terminates for any reason without having been exercised in full, then the unpurchased shares subject to that option will once again be available for additional option grants. Unpurchased shares pursuant to options that expire or terminate under the 1989 Stock Plan shall be available for awards under the 1996 Stock Plan. Under the 1989 Stock Plan, all employees (including officers) and directors of the Company or any subsidiary and any independent contractor or advisor who performs services for the Company or a subsidiary are eligible to purchase shares of Common Stock and to receive awards of shares or grants of nonstatutory options. Employees are also eligible to receive grants of incentive stock options ("ISOs") intended to qualify under Section 422 of the Internal Revenue Code. The 1989 Stock Plan is administered by a committee of the Board of Directors of the Company, which selects the persons to whom shares will be sold or awarded or options will be granted, determines the number of shares to be made subject to each sale, award or grant, and prescribes other terms and conditions, including the type of consideration to be paid to the Company upon sale or exercise and vesting schedules, in connection with each sale, award or grant. The exercise price under the nonstatutory options generally must be at least 85% of the fair market value of the Common Stock on the date of grant. The exercise price under ISOs cannot be lower than 100% of the fair market value of the Common Stock on the date of grant and, in the case of ISOs granted to holders of more than 10% of the voting power of the Company, not less than 110% of such fair market value. The term of an option cannot exceed 10 years, and the term of an ISO granted to a holder of more than 10% of the voting power of the Company cannot exceed five years. Options generally expire not later than 90 days following a termination of employment or six months following the optionee's death or permanent disability. The purchase price of shares sold under the 1989 Stock Plan generally must be at least 85% of the fair market value of the Common Stock and, in the case of a holder of more than 10% of the voting power of the Company, not less than 110% of such fair market value. Under the 1989 Stock Plan, options granted pursuant to the 1989 Stock Plan will generally vest ratably over a period of four years. As of November 30, 1996, the Company had outstanding options to purchase an aggregate of 1,180,204 shares of Common Stock at exercise prices ranging from $0.24 to $8.25 per share, or a weighted average per share exercise price of $3.24. At November 30, 1996, a total of 35,756 shares of Common Stock was available for future issuance under the 1989 Stock Plan. 47 51 1996 Stock Incentive Plan The 1996 Stock Plan was adopted by the Board of Directors on December 5, 1996, to be effective December 1, 1996, and was approved by the stockholders in December 1996. The 1996 Stock Plan replaces the Company's 1989 Stock Plan. Although all future awards will be made under the 1996 Stock Plan, awards made under the 1989 Stock Plan will continue to be administered in accordance with the 1989 Stock Plan. However, except as otherwise noted, the outstanding options under the 1989 Plan contain substantially the same terms and conditions specified below for option grants under the 1996 Stock Plan. The 1996 Stock Plan is administered by the Board of Directors or its delegate. The Board, or its delegate, selects the employees of the Company who will receive awards, determines the size of any award and establishes any vesting or other conditions. Employees, directors, consultants and advisors of the Company (or any subsidiary of the Company) are eligible to participate in the 1996 Stock Plan, although incentive stock options may be granted only to employees. No individual may receive options or stock appreciation rights ("SARs") covering more than 250,000 shares in any calendar year. The participation of the outside directors of the Company is limited to 20% of shares available under the 1996 Stock Plan. The 1996 Stock Plan provides for awards in the form of restricted shares, stock units, options or SARs, or any combination thereof. No payment is required upon receipt of an award, except that a recipient of newly issued restricted shares must pay the par value of such restricted shares to the Company. Restricted shares are shares of Common Stock that are subject to repurchase by the Company at the employee's purchase price in the event that the applicable vesting conditions are not satisfied, and they are nontransferable prior to vesting (except for certain transfers to a trustee). Restricted shares have the same voting and dividend rights as other shares of Common Stock. A stock unit is an unfunded bookkeeping entry representing the equivalent of one share of Common Stock, and is nontransferable prior to the holder's death. A holder of a stock unit has no voting rights or other privileges as a stockholder but may be entitled to receive dividend equivalents equal to the amount of dividends paid on the same number of shares of Common Stock. Dividend equivalents may be converted into additional stock units or settled in the form of cash, Common Stock or a combination of both. Stock units, when vested, may be settled by distributing shares of Common Stock or by a cash payment corresponding to the fair market value of an equivalent number of shares of Common Stock, or a combination of both. Vested stock units will be settled at the time determined by the Compensation Committee. If the time of settlement is deferred, interest or additional dividend equivalents may be credited on the deferred payment. The recipient of restricted shares or stock units may pay all projected withholding taxes relating to the award with Common Stock rather than cash. Options may include nonstatutory stock options ("NSOs") as well as ISOs intended to qualify for special tax treatment. The term of an ISO cannot exceed 10 years (five years for 10% stockholders), and the exercise price of an ISO must be equal to or greater than the fair market value of the Common Stock on the date of grant (or 110% of fair market value at the date of grant for 10% stockholders). The exercise price of an NSO must be equal to or greater than the par value of the Common Stock on the date of grant. The exercise price of an option may be paid in any lawful form permitted by the Compensation Committee, including (without limitation) the surrender of shares of Common Stock or restricted shares already owned by the optionee. The Compensation Committee may likewise permit optionees to satisfy their withholding tax obligation upon exercise of an NSO by surrendering a portion of their option shares to the Company. The 1996 Stock Plan also allows the optionee to pay the exercise price of an option by giving "exercise/sale" or "exercise/pledge" directions. If exercise/sale directions are given, a number of option shares sufficient to pay the exercise price and any withholding taxes is issued directly to a securities broker selected by the Company who, in turn, sells these shares in the open market. The broker remits to the Company the proceeds from the sale of these shares, and the optionee receives the remaining option shares. If exercise/ pledge directions are given, the option shares are issued directly to a securities broker or other lender selected by the Company. The broker or other lender will hold the shares as security and will extend credit for up to 50% of their market value. The loan proceeds will be paid to the Company to the extent necessary to pay 48 52 the exercise price and any withholding taxes. Any excess loan proceeds may be paid to the optionee. If the loan proceeds are insufficient to cover the exercise price and withholding taxes, the optionee will be required to pay the deficiency to the Company at the time of exercise. An SAR permits the participant to elect to receive any appreciation in the value of the underlying stock from the Company, either in shares of Common Stock or in cash or a combination of the two, with the Compensation Committee having the discretion to determine the form in which such payment will be made. The amount payable on exercise of an SAR is measured by the difference between the market value of the underlying stock at exercise and the exercise price. SARs may, but need not, be granted in conjunction with options. Upon exercise of an SAR granted in tandem with an option, the corresponding portion of the related option must be surrendered and cannot thereafter be exercised. Conversely, upon exercise of an option to which an SAR is attached, the SAR may no longer be exercised to the extent that the corresponding option has been exercised. All options and SARs are nontransferable prior to the optionee's death. As noted above, the Compensation Committee determines the number of restricted shares, stock units, options or SARs to be included in the award as well as the vesting and other conditions. The vesting conditions may be based on the employee's service, his or her individual performance, the Company's performance or other appropriate criteria. In general, the vesting conditions will be based on the employee's service after the date of grant. Vesting may be accelerated in the event of the employee's death, disability or retirement or in the event of a change in control with respect to the Company. For purposes of the 1996 Stock Plan, the term "change in control" does not include this Offering or the consequences of this Offering but thereafter means that (i) any person is or becomes the beneficial owner, directly or indirectly, of at least 50% of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors (ii) approval by the stockholders of the Company of a merger or consolidation of the Company with or into another corporation or entity or any other corporate reorganization in which over 50% of the combined voting power of the continuing or surviving entity immediately after the merger, consolidation or reorganization is owned by persons who were not stockholders of the Company immediately prior to the merger, consolidation or reorganization; or (iii) a change in the composition of the Board of Directors in which fewer than half of the incumbent Directors had been Directors 24 months prior to the change or were elected or nominated with the affirmative votes of Directors 24 months prior to the change. Awards under the 1996 Stock Plan may provide that if any payment (or transfer) by the Company to a recipient would be nondeductible by the Company for federal income tax purposes, then the aggregate present value of all such payments (or transfers) will be reduced to an amount which maximizes such value without causing any such payment (or transfer) to be nondeductible. The Board is authorized, within the provisions of the 1996 Stock Plan, to amend the terms of outstanding restricted shares or stock units, to modify or extend outstanding options or SARs or to exchange new options for outstanding options, including outstanding options with a higher exercise price than the new options. Members of the Company's Board of Directors who are not employees of the Company are eligible for awards under the 1996 Stock Plan. However, such outside directors are not eligible for ISO grants. Total shares available to outside directors is limited to 20% of total shares available under the 1996 Stock Plan. As of December 1, 1996, no awards had been made under the 1996 Stock Plan. The total number of restricted shares, stock units, options and SARs available for grant under the 1996 Stock Plan is 900,000 (subject to anti-dilution provisions), increased by the amount of all remaining shares available for grant under the 1989 Stock Plan as of December 1, 1996. If any restricted shares, stock units, options or SARs are forfeited, or if options or SARs terminate for any other reason prior to exercise (other than the exercise of a related SAR or option, and including any forfeiture or termination under the 1989 Stock Plan), then they again become available for awards under the 1996 Stock Plan. 49 53 Employee Stock Purchase Plan The ESPP was adopted by the Board of Directors on December 5, 1996, effective upon the completion of this Offering. The ESPP provides employees of the Company with an opportunity to purchase Common Stock at a discount and pay for their purchases through payroll deductions. All expenses incurred in connection with the implementation and administration of the ESPP will be paid by the Company. A pool of 100,000 shares of Common Stock has been reserved for issuance under the ESPP (subject to anti-dilution provisions). Each regular full-time and part-time employee who works an average of over 20 hours per week will be eligible to participate in the ESPP at the beginning of the first participation period after the employee's date of hire. Eligible employees may elect to contribute up to 10% of their cash compensation under the ESPP. Each calendar year is divided into two six-month "purchase periods," except that the entire period from the date of this offering to June 30, 1997, will be a single purchase period. At the end of each purchase period, the Company will apply the amount contributed by the participant during that period to purchase shares of Common Stock for him or her. The purchase price will be equal to 85% of the lower of (a) the market price of Common Stock immediately before the beginning of the applicable "offering period" or (b) the market price of Common Stock on the last business day of the purchase period. In general each offering period is 24 months long, but a new offering period begins every six months. Thus up to four overlapping periods may be in effect at the same time. If the market price of Common Stock is lower when a subsequent offering period begins, the subsequent offering period automatically becomes the applicable offering period. No participant may purchase more than 2,500 shares per purchase period, and the value of the Common Stock purchased each year (measured at the beginning of the purchase periods) may not exceed $25,000 per participant. Participants may withdraw their contributions at any time before the close of the purchase period. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Certificate of Incorporation that limit the liability of its directors for monetary damages for breach of their fiduciary duty as directors, except for liability that cannot be eliminated under the Delaware General Corporation Law (the "Delaware Law"). The Delaware Law provides that directors of a company will not be personally liable for monetary damages for breach of their fiduciary duty as directors, except for liability (i) for any breach of their duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payment of dividend or unlawful stock repurchase or redemption, as provided in Section 174 of the Delaware Law, or (iv) for any transaction from which the director derived an improper personal benefit. The Company's By-Laws also provide that the Company shall indemnify its directors and officers to the fullest extent permitted by the Delaware Law. The Company intends to enter into separate indemnification agreements with its directors and officers that could require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company believes that the limitation of liability provision in its Certificate of Incorporation and the indemnification agreements will facilitate the Company's ability to continue to attract and retain qualified individuals to serve as directors and officers of the Company. 50 54 CERTAIN TRANSACTIONS In June 1994, the Company entered into two agreements with Merck, a collaborative development agreement and a supply and distribution agreement, in connection with the Company's development of Triage Cardiac. Merck beneficially owns more than 5% of the Company's Common Stock and distributes the Triage DOA in certain counties in Europe, Latin America, the Middle East, Asia and Africa. See "Business -- Strategic and Distribution Arrangements" and Note 1 and 3 of Notes to Financial Statements. The Company believes that the foregoing transaction was in its best interests. As a matter of policy this transaction was, and all future transactions between the Company and its officers, directors or principal shareholders will be, approved by a majority of the independent and disinterested members of the Board of Directors, on terms no less favorable to the Company than could be obtained from unaffiliated third parties and in connection with bona fide business purposes of the Company. 51 55 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of December 1, 1996 and as adjusted to reflect the sale by the Company of the shares offered hereby, by: (i) each person who is known by the Company to beneficially own more than 5% of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the Company's officers named under "Management -- Summary Compensation Table," and (iv) all directors and executive officers of the Company as a group.
PERCENT BENEFICIALLY OWNED(1) SHARES ----------------------- NAME AND ADDRESS BENEFICIALLY BEFORE AFTER OF BENEFICIAL OWNER OWNED OFFERING OFFERING - ---------------------------------------------------------- ------------ -------- -------- Medicus Venture Partners(2)............................... 1,662,559 16.8% 14.0% 2180 Sand Hill Road Suite 400 Menlo Park, CA 94025 Kleiner, Perkins, Caufield & Byers V(3)................... 1,485,476 15.0 12.3 2750 Sand Hill Road Menlo Park, CA 94025 Merck KGaA................................................ 1,041,667 10.5 8.8 Frankfurter Strasse 250 D-6100 Darmstadt 1 Federal Republic of Germany Euclid Partners III, L.P. ................................ 1,005,869 10.2 8.5 50 Rockefeller Plaza New York, NY 10020 Kingsbury Capital Partners, L.P. ......................... 635,417 6.4 5.4 3655 Nobel Drive, Suite 490 San Diego, CA 92122 Frederick J. Dotzler(2)................................... 1,662,559 16.8 14.0 Stephen K. Reidy(4)....................................... 1,005,869 10.2 8.5 Timothy J. Wollaeger(5)................................... 707,015 7.2 6.0 Jesse I. Treu, Ph.D.(6)................................... 329,167 3.3 2.8 Howard E. Greene, Jr.(7).................................. 297,927 3.0 2.5 Thomas H. Adams, Ph.D. ................................... 53,833 * * Gunars E. Valkirs(8)(9)................................... 290,512 2.9 2.4 Kim D. Blickenstaff(8).................................... 288,232 2.9 2.4 Kenneth F. Buechler(8).................................... 280,478 2.8 2.4 S. Nicholas Stiso(8)...................................... 81,582 * * Charles W. Patrick(8)..................................... 73,030 * * All directors and executive officers as a group (12 persons)(8)(10)......................................... 5,120,557 50.5% 42.2%
- --------------- * Less than 1%. (1) To the Company's knowledge, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table. (2) Includes (i) 704,225 shares held by Medicus Venture Partners 1989, (ii) 520,833 shares held by Medicus Venture Partners 1990, (iii) 333,334 shares held by Medicus Venture Partners 1991 and 52 56 (iv) 104,167 shares held by Medicus Venture Partners 1992 (collectively, the "Medicus Entities"). A limited partnership affiliated with The Hillman Company and a limited partnership with general partners Frederick J. Dotzler and John Reher are each general partners of each of the Medicus Entities, and therefore may be deemed to be the beneficial owner of these shares because they share the power to vote and dispose of these shares. The Hillman Company is controlled by Henry L. Hillman, Elsie Hilliard Hillman and C.G. Grefenstette, trustees (the "HLH Trustees") of the Henry L. Hillman Trust U/A dated November 18, 1985 (the "HLH Trust"), which three trustees share the power to vote and dispose of shares representing a majority of the voting shares of The Hillman Company. Does not include 50,409 shares held directly by the HLH Trust or 134,423 shares held directly by Wilmington Interstate Corporation, an indirect, wholly-owned subsidiary of The Hillman Company. Also does not include an aggregate of 20,164 shares held by four irrevocable trusts for the benefit of members of the Hillman family (the "Family Trusts"), as to which shares the HLH Trustees (other than Mr. Grefenstette) disclaim beneficial ownership. C.G. Grefenstette and Thomas G. Bigley are trustees of the Family Trusts and share voting and dispositive power over the assets of the Family Trusts. (3) Includes 56,044 shares held by KPCB Zaibatsu Fund I. (4) Includes 1,005,869 shares held by Euclid Partners III, L.P. Mr. Reidy is a general partner of the general partner of Euclid Partners III, L.P., and as such, may be deemed to share voting and investment power with respect to such shares. Mr. Reidy disclaims beneficial ownership of such shares except to the extent of his pecuniary interest in such partnership. (5) Includes 635,417 shares held by Kingsbury Capital Partners I, L.P. Mr. Wollaeger is a general partner of the general partner of Kingsbury Capital Partners I, L.P., and as such, may be deemed to share voting and investment power with respect the shares held by the partnership. Mr. Wollaeger disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest in such partnership. Includes 6,722 shares held in a trust for the benefit of Mr. Wollaeger's family as to which Mr. Wollaeger has shared voting and investment power. (6) Includes 329,167 shares held by Domain Partners, L.P. Dr. Treu is a general partner of the general partner of Domain Partners, L.P., and as such, may be deemed to share voting and investment power with respect to such shares. Dr. Treu disclaims beneficial ownership except to the extent of his pecuniary interest in such partnership. Excludes 429,167 shares beneficially held by Biotechnology Investments Ltd. ("BIL"). Dr. Treu is a general partner of Domain Associates, the United States venture capital advisor to BIL pursuant to a contractual arrangement. Domain Associates has no voting or investment power over BIL. Dr. Treu disclaims beneficial ownership of the shares held by BIL. (7) Includes 297,927 shares held in a trust for the benefit of Mr. Greene's family as to which Mr. Greene has shared voting and investment power. (8) Includes shares which may be acquired pursuant to the exercise of options within 60 days of December 1, 1996 as follows: Mr. Blickenstaff, 61,565, Dr. Valkirs, 54,678, Dr. Buechler, 65,644, Dr. Stiso, 14,744, Mr. Patrick, 44,696 and all directors and executive officers as a group (12 persons), 263,105. (9) Includes 235,834 shares held of record by the Valkirs Family Trust. (10) Includes shares held by entities referenced in footnotes 2, 3, 5, 6, 7 and 8 which are affiliated with certain directors, except for shares excluded in footnote 6. 53 57 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, the authorized capital stock of the Company, after giving effect to the conversion of all outstanding Preferred Stock into Common Stock, and the amendment of the Company's Certificate of Incorporation, will consist of 25,000,000 shares of Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, $.01 par value. COMMON STOCK As of November 30, 1996 there were 9,885,168 shares of Common Stock outstanding held by approximately 165 stockholders of record. Such figures assume the conversion of each outstanding share of Preferred Stock and the conversion of convertible debt issued to Novartis (at the assumed offering price of $12.00 per share) upon the closing of this offering. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of the Common Stock and the Preferred Stock are entitled to share ratably on an as-converted basis in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. The Common Stock has no preemptive or conversion rights or other subscription rights and there are no redemptive or sinking funds provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of Preferred Stock will be converted into Common Stock. See Note 7 of Notes to Financial Statements for a description of the currently outstanding Preferred Stock. Following the conversion, the Company's Certificate of Incorporation will be restated to delete all references to the prior series of Preferred Stock, and 5,000,000 shares of undesignated Preferred Stock will be authorized. The Board of Directors has the authority, without further action by the stockholders, to issue from time to time the Preferred Stock in one or more series and to fix the number of shares, designations, preferences, powers, and relative, participating, optional or other special rights and the qualifications or restrictions thereof. The preferences, powers, rights and restrictions of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions, and purchase funds and other matters. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to holders of Common Stock or affect adversely the rights and powers, including voting rights, of the holders of Common Stock, and may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. REGISTRATION RIGHTS After this offering, the holders of 6,870,513 shares of Common Stock issued upon conversion of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock (collectively, "Registrable Shares") or their permitted transferees, are entitled to certain rights with respect to the registration of such shares under the Securities Act of 1933, as amended (the "Securities Act"). If the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders, holders of Registrable Shares are entitled to notice of such registration and are entitled to include Registrable Shares therein, provided, among other conditions, that the underwriters of any such offering have the right to limit the number of shares included in such registration. Holders of the 1,458,334 shares of Common Stock issued upon conversion of the Company's Series E Preferred Stock and holders of shares of Common Stock issued upon conversion of the convertible debt issued to Novartis are entitled to similar "piggyback" rights, on no more than two occasions, commencing 54 58 two years after the effective date of this offering. In addition, commencing 180 days after the effective date of this offering, holders of at least 30% of the Registrable Shares may require the Company to prepare and file a registration statement under the Securities Act, at the Company's expense covering at least 30% of the shares entitled to registration rights and with an offering price (net of underwriting discounts and commissions) of more than $7,500,000, and the Company is required to use its best efforts to effect such registration, subject to certain conditions and limitations. The Company is not obligated to effect more than two of these stockholder-initiated registrations. Further, holders of Registrable Shares may require the Company to file additional registration statements on Form S-3, subject to certain conditions and limitations. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS The Company is subject to the provisions of Section 203 of the Delaware Law, an anti-takeover law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a business combination with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes a merger, asset sale or other transaction resulting in financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. Upon the closing of this offering, the Company's Certification of Incorporation will be amended to require that any action permitted to be taken by stockholders of the Company must be effected at a duly-called annual or special meeting of stockholders and will not be able to be effected by a consent in writing. The Board of Directors will be composed of a classified board where only one-third of the directors are eligible for election in any given year. The Company's Certificate of Incorporation will also be amended to require the approval of at least two-thirds of the total number of authorized directors in order to adopt, amend or repeal the Company's Bylaws. In addition, the Company's Certificate of Incorporation will similarly be amended to permit the stockholders to adopt, amend or repeal the Company's Bylaws only upon the affirmative vote of the holders of at least two-thirds of the voting power of all then outstanding shares of stock entitled to vote. Lastly, the foregoing provisions of the Certificate of Incorporation and certain other provisions pertaining to the limitation of liability and indemnification of directors will be able to be amended or repealed only with the affirmative vote of the holders of at least two-thirds of the voting power of all then outstanding shares of stock entitled to vote. These provisions may have the effect to deterring hostile takeovers or delaying changes in control or management of the Company. Upon the closing of this offering, the Company's Bylaws will also be amended to contain certain of the above provisions found in the Company's Certificate of Incorporation. The Company's Bylaws, as amended (the "Restated Bylaws"), will not permit stockholders to call a special meeting. In addition, the Company's Restated Bylaws will establish an advance notice procedure with regard to the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors and with regard to certain matters to be brought before an annual meeting of stockholders of the Company. Also, a director will be removable only for cause. In addition, the Restated Bylaws will provide that the business permitted to be conducted in any annual meeting or special meeting of stockholders will be limited to business properly brought before the meeting. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is The First National Bank of Boston. 55 59 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering there has been no public market for the Common Stock of the Company, and no predictions can be made regarding the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, a limited number of shares will be available for sale shortly after this offering due to certain contractual and legal restrictions on resale. Nevertheless, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price. Upon completion of this offering, the Company will have outstanding 11,885,168 shares of Common Stock. The 2,000,000 shares of Common Stock being sold hereby will be freely tradable (other than by an "affiliate" of the Company as such term is defined in the Securities Act) without restriction or registration under the Securities Act. All remaining shares were issued and sold by the Company in private transactions ("Restricted Shares") and are eligible for public sale if registered under the Securities Act or sold in accordance with Rule 144 or Rule 701 thereunder. Upon the commencement of this offering, an additional 418,030 shares will be eligible for immediate sale without restriction under Rule 144(k). In addition, approximately 225,525 shares will be eligible for resale under Rule 701, beginning 90 days from the Effective Date. Certain stockholders, who collectively hold an aggregate of 1,400,212 shares of Common Stock, have agreed pursuant to certain agreements with the Company that they will not sell such Common Stock for a period of 120 days from the Effective Date. Following the expiration of such 120-day lockup period, all such shares will be available for resale without restriction under Rule 144(k). The Company's directors, executive officers and certain other stockholders, who collectively hold an aggregate of 7,749,179 shares of Common Stock, have agreed pursuant to certain agreements that they will not sell any Common Stock owned by them without the prior written consent of the Representatives of the Underwriters for a period of 180 days from the Effective Date. Following the expiration of such lockup period, all such shares will be available for sale in the public market subject to compliance with Rule 144 or Rule 701, including approximately 2,891,727 shares eligible for the sale under Rule 144(k). See "Underwriting." In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, an affiliate of the Company, or a holder of Restricted Shares who owns beneficially shares that were not acquired from the Company or an affiliate of the Company within the previous two years, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 118,851 shares immediately after this offering, assuming no exercise of the Underwriters' over-allotment option) or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. However, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who owns beneficially Restricted Shares is entitled to sell such shares under Rule 144(k) without regard to the limitations described above; provided that at least three years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company. The foregoing is a summary of Rule 144 and is not intended to be a complete description of it. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisers prior to the closing of this offering, pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Commission has indicated that Rule 701 will apply to stock options granted by the Company before this offering, along with the shares acquired upon exercise of such options. Securities issued in reliance on Rule 701 are deemed to be Restricted Shares and, beginning 90 days after the Effective Date (unless subject to the contractual restrictions described above), may be sold by persons other than affiliates subject only to the 56 60 manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its two-year minimum holding period requirements. The Company intends to file a registration statement under the Securities Act covering approximately 2,215,960 shares of Common Stock reserved for issuance under the stock plans. Such registration statement is expected to be filed soon after the date of this Prospectus and will automatically become effective upon filing. Accordingly, shares registered under such registration statement will be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the contractual restrictions described above. In addition, after this offering, the holders of approximately 6,870,513 shares of Common Stock will be entitled to certain rights to demand that the Company to register the sale of such shares under the Securities Act. Such holders and holders of 1,458,334 shares of Common Stock and 92,222 shares issued upon conversion of convertible debt issued to Novartis (at the assumed offering price of $12.00 per share) are also entitled to be included in certain Company registrations. Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act (except for shares purchased by affiliates of the Company) immediately upon the effectiveness of such registration. See "Description of Capital Stock -- Registration Rights." 57 61 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their representatives, Cowen & Company and Alex. Brown & Sons Incorporated, have severally agreed to purchase from the Company the following respective number of shares at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER NAME OF SHARES ------------------------------------------------------------------ --------- Cowen & Company................................................... Alex. Brown & Sons Incorporated................................... -------- Total................................................... 2,000,000 ========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent auditors. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may re-allow a concession not in excess of $ per share to certain other dealers. The Underwriters have informed the Company that they do not intend to confirm sales to any accounts over which they exercise discretionary authority. After the initial public offering of the shares, the offering price and other selling terms may from time to time be varied by the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the Effective Date, to purchase up to 300,000 additional shares of Common Stock at the initial public offering price, less the underwriting discounts and commissions, set forth on the cover page of this Prospectus, to cover over-allotments, if any. If the Underwriters exercise such over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by each of them shown in the foregoing table bears to the total number of shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. The Company's officers and directors and certain other stockholders of the Company holding in the aggregate approximately 7,749,179 shares of Common Stock have agreed that they will not, without the prior written consent of Cowen & Company, offer, sell or otherwise dispose of any shares of Common Stock, options, rights or warrants to acquire shares of Common Stock, or securities exchangeable for or convertible into shares of Common Stock owned by them during the 180-day period commencing on the Effective Date. Other stockholders of the Company holding in the aggregate approximately 1,400,212 shares of Common Stock have agreed that they will not sell or otherwise transfer or dispose of any such shares of Common Stock owned by them during the 120-day period commencing on the Effective Date. In addition, the Company has agreed that it will not, without the prior written consent of Cowen & Company, offer, sell or otherwise dispose of any shares of Common Stock options, rights or warrants to acquire shares of Common Stock, or securities exchangeable for or convertible into shares of Common Stock during such 180-day period except in certain limited circumstances. 58 62 The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors considered in determining the initial public offering price will be prevailing market and economic conditions, market valuations of other companies engaged in activities similar to the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this Prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS Certain legal matters with respect to the validity of the Common Stock offered hereby will be passed upon for the Company by Pillsbury Madison & Sutro LLP, San Francisco, California. A member of Pillsbury Madison & Sutro LLP owns 18,360 shares of Common Stock. Cooley Godward LLP, San Diego, California, is acting as counsel for the Underwriters in connection with certain legal matters relating to the sale of the Common Stock offered hereby. EXPERTS The financial statements of Biosite at December 31, 1994 and 1995, and September 30, 1996 and for each of the three years in the period ended December 31, 1995 and the nine months ending September 30, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement, exhibits and schedules. Statements contained in this Prospectus regarding the contents of any contract or other document are not necessarily complete; with respect to each such contract or document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. A copy of the Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material may be obtained from such office upon payment of the fees prescribed by the Commission. In addition, the Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent certified public accountants and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. 59 63 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors..................................... F-2 Balance Sheets at December 31, 1994 and 1995 and September 30, 1996................... F-3 Statements of Income for each of the three years in the period ended December 31, 1995 and the nine months ended September 30, 1995 (unaudited) and 1996................... F-4 Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1995 and the nine months ended September 30, 1996...................... F-5 Statements of Cash Flows for each of the three years in the period ended December 31, 1995 and the nine months ended September 30, 1995 (unaudited) and 1996.............. F-6 Notes to Financial Statements......................................................... F-7
F-1 64 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Biosite Diagnostics Incorporated We have audited the accompanying balance sheets of Biosite Diagnostics Incorporated as of December 31, 1994 and 1995 and September 30, 1996, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and the nine months ended September 30, 1996. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Biosite Diagnostics Incorporated at December 31, 1994 and 1995 and September 30, 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and the nine months ended September 30, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Diego, California November 12, 1996, except for Note 7, as to which the date is December 5, 1996 F-2 65 BIOSITE DIAGNOSTICS INCORPORATED BALANCE SHEETS
PRO FORMA DECEMBER 31, LIABILITIES AND -------------------------- SEPTEMBER 30, STOCKHOLDERS' 1994 1995 1996 EQUITY AT ------------ ----------- ------------------ SEPTEMBER 30, 1996 ------------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents......................... $ 392,433 $ 2,276,403 $ 1,410,620 Marketable securities, available-for-sale......... 5,523,160 11,702,607 8,758,654 Accounts receivable............................... 3,175,899 3,801,755 4,153,326 Receivable from stockholder....................... 471,000 141,000 620,000 Inventory......................................... 1,137,830 1,689,124 1,709,016 Deferred income taxes............................. -- 1,073,000 1,279,000 Prepaid expenses and other current assets......... 353,302 413,917 589,675 ------------ ----------- ----------- Total current assets........................ 11,053,624 21,097,806 18,520,291 Property, equipment and leasehold improvements, net............................................... 1,859,573 3,599,969 3,941,520 Deferred income taxes............................... -- 754,000 884,000 Patents and license rights, net..................... 472,060 1,759,809 4,458,074 Deposits and other assets........................... 978,347 723,349 1,164,199 ------------ ----------- ----------- $ 14,363,604 $27,934,933 $ 28,968,084 ============ =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 608,085 $ 776,393 $ 1,345,799 $ 1,345,799 Accrued salaries and other........................ 591,393 912,259 898,320 818,320 Accrued contract payable.......................... 423,807 1,053,052 1,281,276 1,281,276 Accrued settlement of patent matters.............. -- 2,200,000 -- -- Contract advance.................................. 500,000 -- -- -- Deferred revenue from stockholder................. 316,330 615,282 -- -- Current portion of long-term obligations.......... 640,453 1,112,712 1,027,579 1,027,579 ------------ ----------- ----------- ----------- Total current liabilities................... 3,080,068 6,669,698 4,552,974 4,472,974 Long-term obligations............................... 771,563 2,739,473 3,233,643 2,233,643 Commitments and contingencies Stockholders' equity: Convertible preferred stock, $.01 par value, 8,328,847 shares authorized (5,000,000 pro forma); 8,328,847 shares issued and outstanding (no shares pro forma), liquidation value, $21,662,030..................................... 83,288 83,288 83,288 -- Common stock, $.01 par value, 12,000,000 shares authorized (25,000,000 shares pro forma); 1,154,066, 1,369,595, and 1,460,093 shares issued and outstanding at December 31, 1994, 1995, and September 30, 1996, respectively (9,881,162 shares pro forma).................... 11,541 13,696 14,601 98,812 Additional paid-in capital........................ 21,483,800 21,570,516 21,686,698 22,792,442 Unrealized net gain (loss) on marketable securities, net of related tax effect of $11,058 and $(6,754) at December 31, 1995 and September 30, 1996, respectively.......................... -- 16,588 (10,131) (10,131) Deferred compensation............................. -- -- (48,023) (48,023) Accumulated deficit............................... (11,066,656) (3,158,326) (544,966) (571,633) ------------ ----------- ----------- ----------- Total stockholders' equity.................. 10,511,973 18,525,762 21,181,467 22,261,467 ------------ ----------- ----------- ----------- $ 14,363,604 $27,934,933 $ 28,968,084 $ 28,968,084 ============ =========== =========== ===========
See accompanying notes. F-3 66 BIOSITE DIAGNOSTICS INCORPORATED STATEMENTS OF INCOME
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------- ------------------------- 1993 1994 1995 1996 ----------- ----------- ----------- 1995 ----------- ----------- (UNAUDITED) Net sales....................... $ 9,866,297 $16,319,752 $25,146,540 $18,235,729 $20,224,976 Cost of sales................... 3,268,030 4,415,344 5,648,786 3,781,316 4,317,648 ----------- ----------- ----------- ----------- ----------- Gross profit.................... 6,598,267 11,904,408 19,497,754 14,454,413 15,907,328 Operating expenses: Research and development...... 2,796,248 3,835,649 6,553,454 4,601,467 6,515,097 Sales and marketing........... 3,390,201 3,851,933 4,943,392 3,625,541 3,894,885 General and administrative.... 1,450,755 2,109,150 2,190,246 1,577,951 2,221,599 ----------- ----------- ----------- ----------- ----------- 7,637,204 9,796,732 13,687,092 9,804,959 12,631,581 ----------- ----------- ----------- ----------- ----------- Operating income (loss)......... (1,038,937) 2,107,676 5,810,662 4,649,454 3,275,747 Other income (expense): Interest income............... 217,610 238,990 605,002 380,851 579,073 Contract revenue-related party...................... -- 343,678 561,048 388,261 856,880 Contract revenue.............. -- -- 300,000 300,000 -- Licensing and other income.... 395,201 66,207 181,683 184,057 5,942 Settlement of patent matters.................... -- (338,004) (1,217,065) (743,173) (2,368,282) ----------- ----------- ----------- ----------- ----------- 612,811 310,871 430,668 509,996 (926,387) Income (loss) before benefit (provision) for income taxes......................... (426,126) 2,418,547 6,241,330 5,159,450 2,349,360 Benefit (provision) for income taxes......................... -- (63,000) 1,667,000 (132,000) 264,000 ----------- ----------- ----------- ----------- ----------- Net income (loss)............... $ (426,126) $ 2,355,547 $ 7,908,330 $ 5,027,450 $ 2,613,360 =========== =========== =========== =========== =========== Net income (loss) per share..... $ (.04) $ .22 $ .74 $ .47 $ .24 =========== =========== =========== =========== =========== Shares used in calculating per share amounts................. 10,098,000 10,553,000 10,766,000 10,721,000 10,832,000 =========== =========== =========== =========== ===========
See accompanying notes. F-4 67 BIOSITE DIAGNOSTICS INCORPORATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNREALIZED PREFERRED STOCK COMMON STOCK ADDITIONAL NET GAIN (LOSS) ------------------- --------------------- PAID-IN ON MARKETABLE SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES --------- ------- --------- ------- ----------- --------------- Balance at January 1, 1993....... 8,328,847 $83,288 1,138,069 $11,381 $21,474,142 $ -- Issuance of common stock........ -- -- 14,298 143 8,146 -- Net loss........................ -- -- -- -- -- -- ---------- ------- ---------- ------- ----------- --------- Balance at December 31, 1993...... 8,328,847 83,288 1,152,367 11,524 21,482,288 -- Issuance of common stock........ -- -- 1,699 17 1,512 -- Net income...................... -- -- -- -- -- -- ---------- ------- ---------- ------- ----------- --------- Balance at December 31, 1994..... 8,328,847 83,288 1,154,066 11,541 21,483,800 -- Issuance of common stock........ -- -- 215,529 2,155 86,716 -- Change in unrealized net gain (loss) on marketable securities, net of income taxes of $11,058.............. -- -- -- -- -- 16,588 Net income...................... -- -- -- -- -- -- ---------- ------- ---------- ------- ----------- --------- Balance at December 31, 1995...... 8,328,847 83,288 1,369,595 13,696 21,570,516 16,588 Issuance of common stock........ -- -- 90,498 905 67,397 -- Change in unrealized net gain (loss) on marketable securities, net of income taxes of $6,754............... -- -- -- -- -- (26,719) Deferred compensation related to issuance of stock options.. -- -- -- -- 48,785 -- Amortization of deferred compensation.................. -- -- -- -- -- -- Net income...................... -- -- -- -- -- -- ---------- ------- ---------- ------- ----------- --------- Balance at September 30, 1996..... 8,328,847 $83,288 1,460,093 $14,601 $21,686,698 $ (10,131) ========== ======= ========== ======= =========== ========= TOTAL DEFERRED ACCUMULATED STOCKHOLDERS' COMPENSATION DEFICIT EQUITY ------------ ------------ ------------- Balance at January 1, 1993....... $ -- $(12,996,077) $ 8,572,734 Issuance of common stock........ -- -- 8,289 Net loss........................ -- (426,126 ) (426,126) ---------- ------------- ----------- Balance at December 31, 1993...... -- (13,422,203 ) 8,154,897 Issuance of common stock........ -- -- 1,529 Net income...................... -- 2,355,547 2,355,547 ---------- ------------- ----------- Balance at December 31, 1994..... -- (11,066,656 ) 10,511,973 Issuance of common stock........ -- -- 88,871 Change in unrealized net gain (loss) on marketable securities, net of income taxes of $11,058.............. -- -- 16,588 Net income...................... -- 7,908,330 7,908,330 ---------- ------------- ----------- Balance at December 31, 1995...... -- (3,158,326 ) 18,525,762 Issuance of common stock........ -- -- 68,302 Change in unrealized net gain (loss) on marketable securities, net of income taxes of $6,754............... -- -- (26,719) Deferred compensation related to issuance of stock options.. (48,785) -- -- Amortization of deferred compensation.................. 762 -- 762 Net income...................... -- 2,613,360 2,613,360 ---------- ------------- ----------- Balance at September 30, 1996..... $ (48,023) $ (544,966 ) $21,181,467 ========== ============= ===========
See accompanying notes. F-5 68 BIOSITE DIAGNOSTICS INCORPORATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------- ---------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ------------ (UNAUDITED) OPERATING ACTIVITIES Net income (loss)............................ $ (426,126) $ 2,355,547 $ 7,908,330 $ 5,027,450 $ 2,613,360 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.............. 524,984 544,332 1,787,386 658,468 1,861,614 Amortization of deferred compensation...... -- -- -- -- 762 Deferred income taxes...................... -- -- (1,827,000) -- (336,000) Changes in operating assets and liabilities: Accounts receivable...................... (535,453) (1,712,708) (625,856) (644,571) (351,571) Receivable from stockholder.............. (59,000) (412,000) 330,000 211,660 (479,000) Inventory................................ (161,701) (402,193) (551,294) (526,981) (19,892) Prepaid expenses and other current assets................................. (340,948) 147,309 (71,673) (19,764) (157,946) Accounts payable......................... 216,486 50,979 168,308 (31,849) 569,406 Accrued liabilities...................... 282,026 487,385 950,111 853,692 (1,985,715) Contract advance......................... -- 500,000 (500,000) (500,000) -- Deferred revenue from a stockholder...... -- 316,330 298,952 471,739 (615,282) ----------- ----------- ----------- ----------- ------------ Net cash provided by (used in) operating activities................................. (499,732) 1,874,981 7,867,264 5,499,844 1,099,736 INVESTING ACTIVITIES Proceeds from sales and maturities of marketable securities...................... 4,373,730 4,531,676 8,189,035 6,041,413 11,605,384 Purchase of marketable securities............ (7,731,313) (5,712,424) (14,340,836) (8,968,435) (8,705,962) Purchase of property, equipment and leasehold improvements............................... (142,972) (1,063,418) (2,682,315) (2,061,707) (1,378,923) Patents, license rights, deposits and other assets..................................... (155,232) (409,423) 321,782 254,752 (3,963,357) ----------- ----------- ----------- ----------- ------------ Net cash used in investing activities........ (3,655,787) (2,653,589) (8,512,334) (4,733,977) (2,442,858) FINANCING ACTIVITIES Proceeds from issuance of convertible debentures................................. -- -- 1,000,000 1,000,000 -- Proceeds from issuance of equipment loans payable.................................... -- 919,988 2,290,561 1,832,653 1,364,137 Principal payments under long-term obligations................................ (516,684) (536,769) (850,392) (596,714) (955,100) Proceeds from issuance of stock, net......... 8,289 1,529 88,871 69,170 68,302 ----------- ----------- ----------- ----------- ------------ Net cash provided by (used in) financing activities................................. (508,395) 384,748 2,529,040 2,305,109 477,339 ----------- ----------- ----------- ----------- ------------ Increase (decrease) in cash and cash equivalents................................ (4,663,914) (393,860) 1,883,970 3,070,976 (865,783) Cash and cash equivalents at beginning of period..................................... 5,450,207 786,293 392,433 392,433 2,276,403 ----------- ----------- ----------- ----------- ------------ Cash and cash equivalents at end of period... $ 786,293 $ 392,433 $ 2,276,403 $ 3,463,409 $ 1,410,620 ========== ========== ========== ========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid.............................. $ 139,022 $ 172,512 $ 208,623 $ 145,593 $ 212,329 ========== ========== ========== ========== =========== Income taxes paid.......................... $ 987 $ 38,800 $ 171,243 $ 176,412 $ 103,874 ========== ========== ========== ========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued liability for license rights acquired................................. $ -- $ -- $ 2,200,000 $ -- $ -- ========== ========== ========== ========== =========== Capital lease obligations entered into for equipment................................ $ 417,260 $ -- $ -- $ -- $ -- ========== ========== ========== ========== ===========
See accompanying notes. F-6 69 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT POLICIES ORGANIZATION AND BUSINESS ACTIVITY Biosite Diagnostics Incorporated (the "Company") was established in 1988. The Company has been primarily involved in the research, development, manufacturing and marketing of point-of-care assays. The Company's first product is Triage DOA, a urine test for the rapid detection of common drugs of abuse. The Company began commercial sales of Triage DOA in February 1992 and currently markets the product worldwide primarily through distributors supported by a small direct sales force. The principal markets of the Company are hospital laboratories and emergency departments. The Company is also engaged in research and development of several additional point-of-care diagnostic products in the microbiology, cardiology and therapeutic drug monitoring fields. REVENUE RECOGNITION AND SIGNIFICANT CUSTOMERS The Company recognizes sales upon shipment. The Company's U.S. distributor accounted for 87%, 85% and 88% of the product sales in 1993, 1994 and 1995, respectively, and 88% and 80% for the nine months ended September 30, 1995 and 1996, respectively. The Company's agreement with its U.S. distributor contains sales milestones based on the U.S. distributor's sales performance that allows the Company, if the milestones are not met by the U.S. distributor, to terminate the agreement, collect a penalty payment based on sales levels actually achieved in 1996, and appoint a new distributor or sell the product directly in the U.S. medical market. Export sales to international customers amounted to $943,000, $1,457,000 and $1,944,000 in 1993, 1994 and 1995, respectively, and $1,362,000 and $2,248,000 for the nine months ended September 30, 1995 and 1996, respectively. Sales to a stockholder amounted to approximately $838,000, $1,242,000 and $1,345,000 in 1993, 1994 and 1995, respectively, and $978,000 and $1,652,000 for the nine months ended September 30, 1995 and 1996, respectively. Accounts receivable from a stockholder were approximately $471,000, $141,000, and $378,000 at December 31, 1994 and 1995, and September 30, 1996, respectively. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid debt investments with maturities of 90 days or less when purchased. MARKETABLE SECURITIES Effective January 1, 1994 the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires that investments in equity securities that have readily determinable fair values and investments in debt securities be classified in three categories: held-to-maturity, trading and available-for-sale. Based on the nature of the assets held by the Company and management's investment strategy, the Company's investments have been classified as available-for-sale. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Securities classified as available-for-sale are carried at estimated fair value, as determined by quoted market prices, with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. At September 30, 1996, the Company had no investments that were classified as trading or held-to-maturity as defined by the Statement. The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized F-7 70 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) gains and losses are included in interest income. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in interest income. INVENTORY Inventories are carried at the lower of cost (first-in, first-out) or market. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are stated at cost. DEPRECIATION AND AMORTIZATION Depreciation of property and equipment is computed using the straight-line method over five years. Amortization of leased equipment is computed using the straight-line method over the estimated useful lives of the assets or the lease term. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining lease term. PATENTS AND LICENSE RIGHTS The Company has been issued patents covering its threshold immunoassay and other related technologies. Capitalized patent costs associated with issued patents are amortized over five to seventeen years. License rights related to products for sale are amortized to cost of sales over the life of the license using a systematic method based on the estimated revenues generated from products during such license period. STOCK OPTIONS In October 1995, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," effective for fiscal years beginning after December 15, 1995. SFAS No. 123 establishes the fair value-based method of accounting for stock-based compensation arrangements, under which compensation is determined using the fair value of the stock option at the grant date and the number of options vested, and is recognized over the periods in which the related services are rendered. The Company has made the decision to continue with the current intrinsic value-based method, as allowed by SFAS No. 123, and will be required to disclose the pro forma effect of adopting the fair value-based method in future fiscal years beginning with the fiscal year ending December 31, 1996. CONCENTRATION OF CREDIT RISK The Company sells its products primarily to its U.S. distributor. Credit is extended based on an evaluation of the customer's financial condition, and generally collateral is not required. Credit losses have been minimal and within management's expectations. The Company invests its excess cash in debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any realized losses on its marketable securities. ASSET IMPAIRMENT In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires impairment losses to be recorded on long-lived F-8 71 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) assets used in operations when indicators of impairment are present and the estimated undiscounted cash flows to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted the provisions of SFAS No. 121 effective January 1, 1996. There was no effect of such adoption on the Company's financial position or results of operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts in the 1993, 1994 and 1995 financial statements have been reclassified to conform to the September 30, 1996 presentation. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of common shares and common equivalent shares outstanding during each period. Common equivalent shares are computed using the treasury stock method and consist of common stock which may be issuable upon exercise of outstanding common stock options, when dilutive. Pursuant to the requirements of the Securities and Exchange Commission, common stock issued by the Company during the twelve months immediately preceding the initial public offering, plus the number of common equivalent shares which became issuable during the same period pursuant to the grant of stock options, have been included in the calculation of the shares used in computing net income (loss) per share as if these shares were outstanding for all periods presented using the treasury stock method. In addition, the calculation of the shares used in computing net income (loss) per share also includes the convertible preferred stock which will convert into 8,328,847 shares of common stock and an outstanding $1.0 million convertible debenture and related accrued interest through January 31, 1997 which will convert into 92,222 common shares (based on the assumed initial public offering price of $12.00 per share) upon the completion of the initial public offering contemplated by this Prospectus, as if they were converted into common stock as of the original dates of issuance. INTERIM FINANCIAL INFORMATION The accompanying financial statements for the nine months ended September 30, 1995 are unaudited but include all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair statement of the financial position at such dates and the operating results and cash flows for those periods. Results for the interim periods are not necessarily indicative of results for the entire year or future periods. PRO FORMA LIABILITIES AND STOCKHOLDERS' EQUITY In December 1996, the Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission for the Company to sell shares of its common stock in an initial public offering. If the initial public offering contemplated by this Prospectus is consummated under the terms presently anticipated, all outstanding shares of convertible preferred stock at September 30, 1996 will automatically convert into 8,328,847 common shares and an outstanding $1.0 million convertible F-9 72 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) debenture and related interest through January 31, 1997 will convert into 92,222 common shares. Unaudited pro forma stockholders' equity as of September 30, 1996, as adjusted for the assumed conversion of the preferred stock and the convertible debenture, is disclosed in the accompanying balance sheet. 2. LICENSING AGREEMENTS The Company has entered into licensing agreements to utilize certain antibodies and/or technologies in exchange for up-front, annual milestone, or royalty payments or a combination thereof. Certain of the upfront and annual payments are creditable towards future royalties payable. Royalties may be payable at rates up to 5% of product sales derived from the licensed technologies. The Company purchased license rights for technologies utilized in products for sale of $2.2 million and $3.5 million during the year ended December 31, 1995 and the nine months ended September 30, 1996, respectively. Accumulated amortization of license rights at December 31, 1995, and September 30, 1996, was $845,467 and $1,666,488 respectively. 3. COLLABORATIVE AGREEMENTS In September 1994, the Company entered into a collaborative development and distribution agreement with a preferred stockholder for the development and marketing of a new diagnostic product (the "European development and distribution agreement"). In exchange for distribution rights to the product in Europe, the stockholder has agreed to fund 40% of the Company's product development costs, subject to certain maximum limits, plus certain clinical trial costs. The total cost of the project is estimated to be approximately $10.0 million. The stockholder's obligation to fund its share of the development costs of the product is reduced by 40% of the consideration received from other parties for the development of the new product and marketing rights in Japan. The stockholder paid $660,000 in 1994 and paid an additional $660,000 in 1995. At September 30, 1996, the Company has a receivable from the stockholder of $242,000 under the agreement. Additionally, the stockholder will directly incur certain of the clinical trial costs. The Company recognizes revenue under this agreement on the percentage of completion basis as costs are incurred. For the years ended December 31, 1994 and 1995, the Company incurred $962,000 and $2,453,000, respectively, in expenses under this agreement and recognized $344,000 and $561,000, respectively, as contract revenue. For the nine months ended September 30, 1995 and 1996, the Company incurred $1,781,000 and $1,940,000, respectively, in expenses under the agreement and recognized $388,000 and $857,000, respectively, as contract revenue. In February 1995, the Company entered into a collaborative development and distribution agreement that included the Asian marketing rights to a new diagnostic product being developed. Under this agreement, the Company will receive up to $2,000,000 upon the completion of certain milestones. Recognition of revenue under this agreement will occur as the milestones are attained. As of September 30 1996, the Company has received $500,000, of which $300,000 was recognized as contract revenue in 1995 and in accordance with the European development and distribution agreement, the remaining $200,000 was applied against the stockholder's obligation to fund its share of the development costs. F-10 73 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) 4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES The following is a summary of cash, cash equivalents and available-for-sale securities by balance sheet classification at December 31, 1994:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ---------- ---------- ----------- Cash and cash equivalents: Cash..................................... $ 119,646 $ -- $ -- $ 119,646 Money market fund........................ 22,729 -- -- 22,729 Corporate debt securities................ 250,058 -- -- 250,058 ----------- ------- -------- ----------- 392,433 -- -- 392,433 Marketable securities: Commercial paper......................... 493,669 -- -- 493,669 Corporate debt securities................ 5,029,491 -- -- 5,029,491 ----------- ------- -------- ----------- 5,523,160 -- -- 5,523,160 ----------- ------- -------- ----------- Total cash, cash equivalents and marketable securities.......... $ 5,915,593 $ -- $ -- $ 5,915,593 =========== ======= ======== ===========
The following is a summary of cash, cash equivalents and available-for-sale securities by balance sheet classification at December 31, 1995:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ---------- ---------- ----------- Cash and cash equivalents: Cash..................................... $ 964,854 $ -- $ -- $ 964,854 Money market fund........................ 915,359 -- -- 915,359 Commercial paper......................... 396,190 -- -- 396,190 ----------- ------- -------- ----------- 2,276,403 -- -- 2,276,403 Marketable securities: Commercial paper......................... 1,662,383 -- (1,337) 1,661,046 Corporate debt securities................ 10,012,578 52,109 (23,126) 10,041,561 ----------- ------- -------- ----------- 11,674,961 52,109 (24,463) 11,702,607 ----------- ------- -------- ----------- Total cash, cash equivalents and marketable securities.......... $13,951,364 $ 52,109 $ (24,463) $13,979,010 =========== ======= ======== ===========
F-11 74 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) The following is a summary of cash, cash equivalents and available-for-sale securities by balance sheet classification at September 30, 1996:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ---------- ---------- ----------- Cash and cash equivalents: Cash..................................... $ 341,948 $ -- $ -- $ 341,948 Money market fund........................ 1,068,672 -- -- 1,068,672 ----------- ------ -------- ----------- 1,410,620 -- -- 1,410,620 Marketable securities: Certificates of deposit.................. 898,503 1,497 -- 900,000 Commercial paper......................... 386,683 -- (1,603) 385,080 Corporate debt securities................ 7,490,353 -- (16,779) 7,473,574 ----------- ------ -------- ----------- 8,775,539 1,497 (18,382) 8,758,654 ----------- ------ -------- ----------- Total cash, cash equivalents and marketable securities............................... $10,186,159 $1,497 $ (18,382) $10,169,274 =========== ====== ======== ===========
The amortized cost and estimated fair value of available-for-sale securities at September 30, 1996, by contractual maturity, are as follows:
ESTIMATED COST FAIR VALUE ---------- ---------- Marketable securities: Due in one year or less................................... $7,581,858 $7,569,462 Due after one year through two years...................... 1,193,681 1,189,192 ---------- ---------- $8,775,539 $8,758,654 ========== ==========
5. BALANCE SHEET INFORMATION Inventories consist of the following:
DECEMBER 31, ------------------------- SEPTEMBER 30, 1994 1995 1996 ---------- ---------- ------------- Raw materials................................. $ 521,889 $ 645,097 $ 417,302 Work in process............................... 526,787 965,925 1,102,610 Finished goods................................ 89,154 78,102 189,104 ---------- ---------- ---------- $1,137,830 $1,689,124 $ 1,709,016 ========== ========== ==========
F-12 75 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) Property, equipment and leasehold improvements consist of the following:
DECEMBER 31, SEPTEMBER --------------------------- 30, 1994 1995 1996 ----------- ----------- ----------- Machinery and equipment..................... $ 3,623,954 $ 5,666,978 $ 6,868,726 Furniture and fixtures...................... 376,084 548,824 631,570 Leasehold improvements...................... 185,784 652,335 746,764 ----------- ----------- ----------- 4,185,822 6,868,137 8,247,060 Less accumulated depreciation and amortization.............................. (2,326,249) (3,268,168) (4,305,540) ----------- ----------- ----------- $ 1,859,573 $ 3,599,969 $ 3,941,520 =========== =========== ===========
6. DEBT AND LEASE COMMITMENTS Debt and capital lease obligations consist of the following:
DECEMBER 31, SEPTEMBER ------------------------- 30, 1994 1995 1996 ---------- ---------- ---------- Convertible debenture, payable on September 29, 2000, including interest at 8% per annum..... $ -- $1,000,000 $1,000,000 Equipment financing notes, payable $122,687 monthly including interest at 8.1% to 11.8%, due October 1996 to November 2001 secured by equipment.................................... 963,538 2,648,272 3,261,222 Capital lease obligations...................... 448,478 203,913 -- ---------- ---------- ---------- 1,412,016 3,852,185 4,261,222 Less current portion........................... 640,453 1,112,712 1,027,579 ---------- ---------- ---------- $ 771,563 $2,739,473 $3,233,643 ========== ========== ==========
At the sole option of the Company, the debenture is convertible into shares of common stock of the Company upon consummation of a public offering of common stock with aggregate proceeds in excess of $7,500,000 and at a price of not less than $9.00 per share. The debenture is convertible at the public offering price. In the event a public offering is not consummated on or before December 31, 1996, the debenture is convertible, at the sole option of the Company, into shares of the Company's preferred stock, at the initial issue price for such shares in connection with a private placement of the Company's preferred stock. Under a licensing agreement, the Company is obligated to issue up to a maximum of $1,000,000 of additional convertible debentures with five-year terms upon the attainment of certain milestones. The debentures are convertible, at the option of the Company, into shares of common stock at the initial public offering price. As of September 30, 1996, approximate future principal payments of the equipment financing notes are due as follows: 1996 - $275,000; 1997 - $957,000; 1998 - $740,000; 1999 - $635,000; 2000 - $506,000 and 2001 - $148,000. The Company leases its office and research facilities and certain equipment under operating and capital leases. The minimum annual rent on the facilities is subject to increases based on changes in the Consumer Price Index, taxes, insurance and operating costs, subject to certain minimum and maximum annual increases. The Company has options to renew certain of the facilities leases for a period of two years. Included in deposits and other assets in the accompanying balance sheets is approximately $728,000, $367,000 and $271,000 of security deposits in conjunction with operating lease and equipment financing agreements at December 31, 1994, 1995 and September 30, 1996, respectively. F-13 76 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) Approximate annual future minimum lease payments as of September 30, 1996 are as follows:
OPERATING YEAR LEASES ---- ---------- 1996............................................................. $ 247,000 1997............................................................. 949,000 1998............................................................. 105,000 ---------- Total minimum lease payments........................... $1,301,000 ==========
Rent expense for the years ended December 31, 1993, 1994 and 1995 was approximately $392,000, $550,000 and $734,000, respectively. Rent expense for the nine months ended September 30, 1995 and 1996 was $527,000 and $628,000, respectively. Equipment under equipment financing notes and capital leases was approximately $2,443,000, $4,407,000 and $4,832,000 at December 31, 1994 and 1995, and September 30, 1996, respectively. Accumulated depreciation of equipment under equipment loans and capital leases at December 31, 1994 and 1995 and September 30, 1996 was approximately $945,000, $1,465,000 and $1,643,000, respectively. 7. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK A summary of the convertible preferred stock issued and outstanding is as follows:
SHARES PREFERENCE ISSUED AND IN OUTSTANDING PAR VALUE LIQUIDATION ---------- --------- ----------- Series A......................................... 610,000 $ 6,100 $ 610,000 Series B......................................... 2,156,336 21,563 3,061,997 Series C......................................... 2,204,167 22,042 5,290,000 Series D......................................... 1,900,010 19,000 5,700,030 Series E......................................... 1,458,334 14,583 7,000,003 --------- ------- ------------ 8,328,847 $ 83,288 $21,662,030 ========= ======= ============
The Series A, Series B, Series C, Series D and Series E preferred stock is convertible on a one to one basis into a total of 8,328,847 shares of the Company's common stock, respectively, subject to certain antidilution adjustments. Additionally, outstanding preferred stock will automatically convert into common stock immediately upon the closing of an underwritten public offering of the common stock of the Company at an offering price of at least $9.00 per share and having an aggregate offering price to the public of at least $7.5 million. The holder of each share of preferred stock is entitled to one vote for each share of common stock into which it would convert. On or after September 7, 1997, upon consent of at least two thirds of the existing Series A, Series B, Series C, Series D and Series E preferred stockholders, the preferred stock may be redeemed, at the option of the Board of Directors, for $1.10, $1.56, $2.64, $3.30 and $5.28 per share for the Series A, Series B, Series C, Series D and Series E preferred stock, respectively, plus any accrued and unpaid dividends. Annual dividends of $.08, $.1278, $.216, $.27 and $.432 per share of Series A, Series B, Series C, Series D and Series E preferred stock, respectively, are payable whenever funds are legally available when and as declared by the Board of Directors. No dividends have been declared to date. F-14 77 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) COMMON STOCK 1989 Stock Plan The Company has adopted a stock plan which provides for both the direct sale of common stock and for the grant of options to purchase common stock to employees, directors, consultants and advisors of the Company. A total of 1,692,000 shares have been reserved for issuance under the plan. As of September 30, 1996, 144,476 shares have been sold directly under the plan. Information with respect to the Company's option activity is as follows:
SHARES PRICE --------- ------------- Balance at December 31, 1992............................. 413,300 $0.24 -- 1.00 Granted................................................ 252,800 $1.00 -- 2.00 Exercised.............................................. (15,514) $0.24 -- 1.00 Cancelled.............................................. (37,686) $0.24 -- 1.00 --------- ------------ Balance at December 31, 1993............................. 612,900 $0.24 -- 2.00 Granted................................................ 109,150 $2.00 Exercised.............................................. (1,699) $0.50 -- 2.00 Cancelled.............................................. (5,701) $0.50 -- 2.00 --------- ------------ Balance at December 31, 1994............................. 714,650 $0.24 -- 2.00 Granted................................................ 300,750 $2.00 -- 3.25 Exercised.............................................. (215,529) $0.07 -- 2.00 Cancelled.............................................. (11,616) $0.24 -- 2.00 --------- ------------ Balance at December 31, 1995............................. 788,255 $0.24 -- 3.25 Granted................................................ 819,700 $3.25 -- 9.00 Exercised.............................................. (90,498) $0.24 -- 3.25 Cancelled.............................................. (353,590) $0.50 -- 9.00 --------- ------------ Balance at September 30, 1996............................ 1,163,867 $0.24 -- 8.25 ========= ============
The options are generally subject to four year vesting and expire ten years from the date of grant. At September 30, 1996, 454,411 shares were exercisable and 56,099 shares were available for future issuance of common stock or grant of options to purchase common stock under the 1989 Stock Plan. During the period of May 17, 1996 to September 6, 1996, the Company granted options to purchase 331,950 shares of common stock at $8.25 to $9.00 per share. On September 6, 1996, these stock options were repriced to $5.50 per share. 1996 Stock Incentive Plan In December 1996, the Company adopted the 1996 Stock Incentive Plan (the "1996 Stock Plan") effective as of December 1, 1996. The 1996 Stock Plan replaces the Company's 1989 Stock Plan. Although all future awards will be made under the 1996 Stock Plan, awards made under the 1989 Stock Plan will continue to be administered in accordance with the 1989 Stock Plan. The 1996 Stock Plan provides for awards in the form of restricted shares, stock units, options or stock appreciation rights or any combination thereof. A pool of 900,000 shares, increased by the amount of all unpurchased shares of common stock pursuant to expired or terminated options, as of November 30, 1996, under the 1989 Stock Plan, has been reserved for issuance under the 1996 Stock Plan. F-15 78 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) Deferred Compensation The Company records and amortizes over the related vesting periods deferred compensation representing the excess of the deemed value for accounting purposes of the options granted over their aggregate exercise price. In October, November and December 1996, the Company granted additional options to purchase 128,350 shares of Common Stock at the exercise price of $5.50 per share. The Company will record compensation expense of approximately $390,225 over the vesting period of these options. Employee Stock Purchase Plan In December 1996, the Company adopted an Employee Stock Purchase Plan ("ESPP") which provides employees the opportunity to purchase common stock at a discount and pay for such purchases through payroll deductions. A pool of 100,000 shares of common stock has been reserved for issuance under the ESPP (subject to anti-dilution provisions). 8. INCOME TAXES Significant components of the income tax benefit (provision) are as follows:
YEARS ENDED DECEMBER 31, ------------------------------------ NINE MONTHS ENDED 1993 1994 1995 SEPTEMBER 30, 1996 -------- -------- ---------- ------------------ Current: Federal....................... $ -- $(63,000) $ (150,000) $ (69,000) State......................... -- -- (10,000) (3,000) -------- -------- ---------- --------- -- (63,000) (160,000) (72,000) Deferred: Federal....................... -- -- 1,668,000 454,000 State......................... -- -- 159,000 (118,000) -------- -------- ---------- --------- -- -- 1,827,000 336,000 -------- -------- ---------- --------- $ -- $(63,000) $1,667,000 $ 264,000 ======== ======== ========== =========
The provision for income taxes for the nine months ended September 30, 1996 was determined utilizing an effective tax rate based on the estimated operating results for 1996, expected utilization of net operating loss carryforwards and other tax credits and changes in deferred tax assets including a reduction of the valuation allowance for deferred tax assets of $1,119,000. As of December 31, 1995, the Company had a federal net operating loss carryforward of approximately $3,058,000 and no tax loss carryforward for California. The Company also had federal and California research and development credit carryforwards of approximately $906,000 and $92,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California tax purposes and the fifty percent limitation on California loss carryforwards. The federal tax loss and research credit carryforwards will begin expiring in 2003 unless previously utilized. In 1995, the Company utilized federal and state net operating loss carryforwards of approximately $7,108,000 and $4,473,000, respectively, to offset taxable income. F-16 79 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) Significant components of the Company's deferred tax assets as of December 31, 1994 and 1995 are shown below. For the year ended December 31, 1995, and the nine months ended September 30, 1996, the Company decreased the valuation allowance for deferred tax assets $1,827,000 and $1,119,000, respectively, as the realization of such assets became probable.
DECEMBER 31, --------------------------- 1994 1995 ----------- ----------- Deferred tax assets: Capitalized research expenses........................... $ 247,000 $ 154,000 Net operating loss carryforwards........................ 3,275,000 1,070,000 Research and development credits........................ 1,258,000 998,000 Other................................................... 338,000 854,000 ---------- ---------- Total deferred tax assets....................... 5,118,000 3,076,000 Deferred tax liability: Tax over book depreciation.............................. (80,000) (130,000) ---------- ---------- 5,038,000 2,946,000 Valuation allowance for deferred tax assets............... (5,038,000) (1,119,000) ---------- ---------- Net deferred tax assets................................... $ -- $ 1,827,000 ========== ==========
The reconciliation of income tax computed at the federal statutory tax rate to the (provision) benefit for income taxes is as follows:
NINE MONTHS ENDED SEPTEMBER 30, 1993 1994 1995 1996 ---- ---- ---- ------------- Tax at federal statutory rate..................... (35 )% 35 % 35 % 35% Permanent tax differences......................... -- 5 1 1 Increase (decrease) of the valuation allowance for deferred tax assets............... 35 % (36 ) (63 ) (25) Other............................................. -- (1 ) -- -- ---- ---- ---- --- Effective rate.................................... -- 3 % (27 )% 11% ==== ==== ==== ==========
Pursuant to Internal Revenue Code Section 382, use of the Company's net operating loss and tax credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within any three year period. However, any annual limitation is not expected to have a material adverse effect on the Company's ability to utilize its net operating loss and tax credit carryforwards. 9. EMPLOYEE SAVINGS PLAN In 1991, the Company implemented a 401(k) program which allows all qualifying employees to contribute up to a maximum of 20% of their annual salary, subject to annual limits. The Board of Directors may, at its sole discretion, approve Company contributions. No such contributions have been approved or made. 10. SETTLEMENT OF PATENT MATTERS In September 1996, the Company reached a settlement with a competitor with respect to all claims in a lawsuit filed by the competitor in May 1994. The complaint alleged that the Company's Triage Panel for F-17 80 BIOSITE DIAGNOSTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED) Drugs of Abuse product infringed a patent licensed to the competitor. The Company vigorously defended the lawsuit. However, to avoid protracted litigation, the Company settled the patent matter in September 1996, and paid $2 million as a settlement of the litigation and, for an additional $3.5 million and the agreement to pay certain royalties, obtained a license to certain technology. The Company has charged to settlement of patent matters in the accompanying statements of income the $2 million litigation settlement, applicable license costs related to prior years and the related legal defense costs. Legal defense costs totaled $338,004 and $777,070 for the years ended December 31, 1994 and 1995, respectively, and $743,173 and $17,119 for the nine months ended September 30, 1995 and 1996, respectively. Additionally, in December 1995, the Company was notified that it should evaluate whether its current products infringe upon certain patent claims held by another company. In March 1996, the Company settled this matter by obtaining a world-wide license to the technology. The Company accrued the one-time license fee of $2.2 million in December 1995. Amortization of this license related to fiscal years prior to 1995 was charged to Settlement of Patent Matters in 1995. F-18 81 IMMEDIATE RESPONSE DIAGNOSTICS(TM) BIOSITE(R) DIAGNOSTICS DEVELOPS, MANUFACTURES AND MARKETS IMMEDIATE RESPONSE DIAGNOSTICS(TM). [PHOTOGRAPHS SHOWING TRIAGE DOA AND PERSONS PERFORMING TRIAGE DOA TESTING PROCEDURE] 82 ================================================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY A SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 3 Risk Factors........................... 6 Use of Proceeds........................ 16 Dividend Policy........................ 16 Capitalization......................... 17 Dilution............................... 18 Selected Financial Data................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 20 Business............................... 25 Management............................. 43 Certain Transactions................... 51 Principal Stockholders................. 52 Description of Capital Stock........... 54 Shares Eligible for Future Sale........ 56 Underwriting........................... 58 Legal Matters.......................... 59 Experts................................ 59 Additional Information................. 59 Index to Financial Statements.......... F-1
------------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ================================================================================ ================================================================================ 2,000,000 SHARES LOGO COMMON STOCK ------------------------------ PROSPECTUS ------------------------------ COWEN & COMPANY ALEX. BROWN & SONS INCORPORATED , 1997 ================================================================================ 83 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee, the Nasdaq listing fee and the National Association of Securities Dealers, Inc. ("NASD") filing fee. SEC registration fee...................................................... $ 9,061 NASD filing fee........................................................... 3,490 Nasdaq listing fee........................................................ 47,963 NASD expenses............................................................. 2,000 Accounting fees and expenses.............................................. 150,000 Legal fees and expenses................................................... 250,000 Printing and engraving expenses........................................... 150,000 Registrar and Transfer Agent's fees....................................... 25,000 Miscellaneous fees and expenses........................................... 62,486 -------- Total........................................................... $700,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides for the indemnification of officers, directors, and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). Article VII of the Registrant's Restated Certificate of Incorporation (Exhibit 3.(i)3 hereto) and Article V of the Registrant's Bylaws (Exhibit 3.(ii)2 hereto) provide for indemnification of the Registrant's directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. The Registrant has also entered into agreements with its directors and officers that will require the Registrant, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent not prohibited by law. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant of the Underwriters, for certain liabilities, including liabilities arising under the Act, and affords certain rights of contribution with respect thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since December 1, 1993, the Registrant has sold and issued the following unregistered securities: (a) On various dates through December 1, 1996, the Registrant issued 323,240 shares of its Common Stock to employees pursuant to the exercise of options granted under its 1989 Stock Plan. The exercise prices per share ranged from $0.24 to $3.25, for an aggregate consideration of $167,076. The Registrant relied on the exemption provided by Rule 701 under the Act. (b) In September 1995, the Company issued a $1,000,000 convertible debenture to Novartis Pharma Inc. (formerly Sandoz Pharma Ltd.) relying on the exemption provided by Section 4(2) under the Act. The recipients of the above-described securities represented their intention to acquire the securities for investment only and not with a view to distribution thereof. Appropriate legends were affixed to the stock certificates and debenture issued in such transactions. All recipients had adequate access, through employment or other relationships, to information about the Registrant. II-1 84 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 1.1* Form of Underwriting Agreement. 3.(i)1* Restated Certificate of Incorporation. 3.(i)2* Form of Certificate of Amendment of Restated Certificate of Incorporation to be filed prior to the effective date of this Registration Statement. 3.(i)3* Form of Restated Certificate of Incorporation, to be filed upon closing of the offering to which this Registration Statement relates. 3.(ii)1* Bylaws of the Registrant, as amended. 3.(ii)2* Proposed Amended and Restated Bylaws of the Registrant. 4.1 Form of Common Stock Certificate. 5.1* Legal opinion of Pillsbury Madison & Sutro LLP. 10.1* Amended and Restated 1989 Stock Plan of Biosite Diagnostics Incorporated. 10.2* 1996 Stock Incentive Plan of Biosite Diagnostics Incorporated ("1996 Stock Plan"). 10.3* Form of Incentive Stock Option Agreement under the 1996 Stock Plan. 10.4* Form of Nonstatutory Stock Option Agreement under the 1996 Stock Plan. 10.5* Biosite Diagnostics Incorporated Employee Stock Purchase Plan. 10.6* Form of Indemnity Agreement between the Registrant and its officers and directors. 10.7 Sublease Agreement between the Registrant and General Atomics, dated February 17, 1992, as amended on August 10, 1992, January 21, 1993, October 29, 1993, March 1, 1995 and October 1, 1996. 10.8*(+) Antibody License Agreement between the Registrant and Sandoz Pharma Ltd. (currently known as Novartis Pharma Inc.), dated September 22, 1995, as amended on July 26, 1996. 10.9*(+) Easy Assay License Agreement between the Registrant and Sandoz Pharma Ltd. (currently known as Novartis Pharma Inc.), dated September 22, 1995. 10.10*(+) Distribution Agreement between the Registrant and Curtin Matheson Scientific, Inc., dated November 11, 1991, as amended on March 7, 1994, March 12, 1996 and August 9, 1996. 10.11*(+) Development, Supply and Distribution Agreement between the Registrant and Kyoto Dai-Ichi Kagaku Co., Ltd., dated as of February 14, 1995. 10.12*(+) Development and Supply Agreement between the Registrant and LRE Relais + Elektronik GmbH -- Medical Technology, dated September 23, 1994. 10.13*(+) Distributorship Agreement between the Registrant and E. Merck KGaA, dated July 27, 1992, as amended on November 10, 1993, January 13, 1994 and December 11, 1995. 10.14*(+) Collaborative Development Agreement between the Registrant and Merck KGaA, dated July 1, 1994. 10.15*(+) Supply and Distribution Agreement between the Registrant and E. Merck KGaA, dated as of June 28, 1994. 10.16*(+) Research and Development Agreement between the Registrant and Ixsys, Inc., dated July 1, 1992. 10.17* Stock Purchase Agreement dated as of October 30, 1991 between the Registrant and certain purchasers of Series D Preferred Stock. 10.18* Stock Purchase Agreement dated as of November 25, 1992 between the Registrant and Merck KGaA concerning Series E Preferred Stock. 10.19*(+) Debenture Purchase Agreement between the Registrant and Sandoz Pharma Ltd. (currently known as Novartis Pharma Inc.), dated as of September 22, 1995. 10.20(+) Settlement and License Agreement & Agreement of Dismissal with Prejudice, dated as of September 6, 1996, by and between the Registrant and Abbott Laboratories. 10.21* Lease Agreement between the Registrant and TCEP II Properties Limited Partnership dated July 26, 1996. 10.22 Lease Agreement between the Registrant and Sorrento West Limited dated September 21, 1994.
II-2 85
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ---------------------------------------------------------------------------------- 11.1* Statement of computation of earnings per share. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2* Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1). 24.1* Power of Attorney. 27.1* Financial Data Schedule.
- --------------- * Previously filed. (+) Confidential treatment requested. (B) FINANCIAL STATEMENT SCHEDULES Schedules other than those referred to above have been omitted because they are not applicable or not required or because the information is included elsewhere in the Financial Statements or the notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) It will provide to the underwriters at the closing(s) specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-3 86 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 7th day of January, 1997. BIOSITE DIAGNOSTICS INCORPORATED By /s/ KIM D. BLICKENSTAFF ------------------------------------ Kim D. Blickenstaff President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------------------ ------------------------------ ------------------ /s/ KIM D. BLICKENSTAFF President, Chief Executive January 7, 1997 - ------------------------------------------ Officer (Principal Executive Kim D. Blickenstaff Officer) and Director /s/ CHRISTOPHER J. TWOMEY Vice President and Chief January 7, 1997 - ------------------------------------------ Financial Officer (Principal Christopher J. Twomey Financial Officer and Accounting Officer) * Chairman of the Board January 7, 1997 - ------------------------------------------ Timothy J. Wollaeger * Director January 7, 1997 - ------------------------------------------ Gunars E. Valkirs, Ph.D. * Director January 7, 1997 - ------------------------------------------ Thomas H. Adams, Ph.D. * Director January 7, 1997 - ------------------------------------------ Howard E. Greene, Jr. * Director January 7, 1997 - ------------------------------------------ Frederick J. Dotzler * Director January 7, 1997 - ------------------------------------------ Stephen K. Reidy * Director January 7, 1997 - ------------------------------------------ Jesse I. Treu, Ph.D. *By /s/ KIM D. BLICKENSTAFF ---------------------------- Kim D. Blickenstaff Attorney-in-Fact
II-4 87 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF DOCUMENT PAGE - -------- ----------------------- ------------ 1.1* Form of Underwriting Agreement. 3.(i)1* Restated Certificate of Incorporation. 3.(i)2* Form of Certificate of Amendment of Restated Certificate of Incorporation to be filed prior to the effective date of this Registration Statement. 3.(i)3* Form of Restated Certificate of Incorporation, to be filed upon closing of the offering to which this Registration Statement relates. 3.(ii)1* Bylaws of the Registrant, as amended. 3.(ii)2* Proposed Amended and Restated Bylaws of the Registrant. 4.1 Form of Common Stock Certificate. 5.1* Legal opinion of Pillsbury Madison & Sutro LLP. 10.1* Amended and Restated 1989 Stock Plan of Biosite Diagnostics Incorporated. 10.2* 1996 Stock Incentive Plan of Biosite Diagnostics Incorporated ("1996 Stock Plan"). 10.3* Form of Incentive Stock Option Agreement under the 1996 Stock Plan. 10.4* Form of Nonstatutory Stock Option Agreement under the 1996 Stock Plan. 10.5* Biosite Diagnostics Incorporated Employee Stock Purchase Plan. 10.6* Form of Indemnity Agreement between the Registrant and its officers and directors. 10.7 Sublease Agreement between the Registrant and General Atomics, dated February 17, 1992 as amended on August 10, 1992, January 21, 1993, October 29, 1993, March 1, 1995 and October 1, 1996. 10.8*(+) Antibody License Agreement between the Registrant and Sandoz Pharma Ltd. (currently known as Novartis Pharma Inc.), dated September 22, 1995, as amended on July 26, 1996. 10.9*(+) Easy Assay License Agreement between the Registrant and Sandoz Pharma Ltd. (currently known as Novartis Pharma Inc.), dated September 22, 1995. 10.10*(+) Distribution Agreement between the Registrant and Curtin Matheson Scientific, Inc., dated November 11, 1991, as amended on March 7, 1994, March 12, 1996 and August 9, 1996. 10.11*(+) Development, Supply and Distribution Agreement between the Registrant and Kyoto Dai-Ichi Kagaku Co., Ltd., dated as of February 14, 1995. 10.12*(+) Development and Supply Agreement between the Registrant and LRE Relais + Elektronik GmbH -- Medical Technology, dated September 23, 1994. 10.13*(+) Distributorship Agreement between the Registrant and E. Merck KGaA, dated July 27, 1992, as amended on November 10, 1993, January 13, 1994 and December 11, 1995. 10.14*(+) Collaborative Development Agreement between the Registrant and E. Merck KGaA, dated as of June 28, 1994. 10.15*(+) Supply and Distribution Agreement between the Registrant and E. Merck KGaA, dated as of June 28, 1994. 10.16*(+) Research and Development Agreement between the Registrant and Ixsys, Inc., dated July 1, 1992. 10.17* Stock Purchase Agreement dated as of October 30, 1991 between the Registrant and certain purchasers of Series D Preferred Stock.
88
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF DOCUMENT PAGE - ------- ----------------------- ------------- 10.18* Stock Purchase Agreement dated as of November 25, 1992 between the Registrant and Merck KGaA concerning Series E Preferred Stock. 10.19*(+) Debenture Purchase Agreement between the Registrant and Sandoz Pharma Ltd. (currently known as Novartis Pharma Inc.), dated as of September 22, 1995. 10.20(+) Settlement and License Agreement & Agreement of Dismissal with Prejudice, dated as of September 6, 1996, by and between the Registrant and Abbott Laboratories. 10.21* Lease Agreement between the Registrant and TCEP II Properties Limited Partnership dated July 26, 1996. 10.22 Lease Agreement between the Registrant and Sorrento West Limited dated September 21, 1994. 11.1* Statement of computation of earnings per share. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2* Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1). 24.1* Power of Attorney. 27.1* Financial Data Schedule.
- --------------- * Previously filed. (+) Confidential treatment requested. EX-4.1 2 EXHIBIT 4.1 1 EXHIBIT 4.1 NUMBER SHARES [Logo] INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS AND A IN THE CITY OF BOSTON, MA STATEMENT AS TO THE RIGHTS, PREFERENCES, OR NEW YORK, NY PRIVILEGES AND RESTRICTIONS ON SHARES CUSIP 090945 10 6 This Certifies That is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF BIOSITE DIAGNOSTICS INCORPORATED transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. DATED: /s/ Christopher J. Twomey [SEAL] /s/ Kim D. Blickenstaff VICE PRESIDENT, FINANCE PRESIDENT AND CHIEF AND CHIEF FINANCIAL OFFICER EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: THE FIRST NATIONAL BANK OF BOSTON TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE 2 A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - ........................Custodian......................... (Cust) (Minor) under Uniform Gifts to Minors Act...................................................... (State) UNIF TRF MIN ACT - ....................Custodian (until age..................) (Cust) ..........................under Uniform Transfers (Minor) to Minors Act.............................................. (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ......................................... ......................................... ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated________________________________________ X__________________________________ X__________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: By___________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.7 3 EXHIBIT 10.7 1 EXHIBIT 10.7 SUBLEASE BY AND BETWEEN GENERAL ATOMICS AND BIOSITE DIAGNOSTICS, INC. 1. PARTIES, RECITALS, AND GENERAL AGREEMENT. This Sublease, dated, for reference purposes only, February 17, 1992, is made by and between General Atomics, a California Corporation (herein called "Lessor") and Biosite Diagnostics, Inc. (herein called "Lessee"). RECITALS: Under terms of a Sublease dated December 1, 1988, Lessor subleased to Lessee Suite D (5920 SF). Under terms of a Sublease dated November 30, 1989, Lessor subleased to Lessee Suite C (6520 SF); Lessor agreed to install and finance certain improvements identified as Phase 1 - Suite D and Phase 2 - Suite C to be paid by the Lessee as additional rent. Under terms of Amendment 2 of the Sublease dated November 30, 1989, Lessor subleased to Lessee Suite E (3880 SF) and agreed to finance Phase 3 improvements to be paid by the Lessee as additional rent. Under terms of a Sublease dated March 29, 1991, Lessor subleased to Lessee, Suites A and B (3160 SF) and agreed to finance Phase 4 improvements to be paid by the Lessee as additional rent. Under terms of the Sublease dated November 30, 1989, and Amendment 3 dated November 16, 1990, the rental period for Suites C, D, and E ends October 31, 1995. Under terms of the Sublease dated March 29, 1991, the rental period for Suites A and B ends June 30, 1992. Lessee desires to add Suite G to its premises starting March 1, 1992. Parties desire that all space blocks (Suites A, B, C, D, E, and G) covered under this agreement have a concurrent term and blended base rental rate. Lessee desires to have Lessor install and finance certain improvements (identified as Phase 5 improvements) to Suites A, B, and G. Lessee desires to extend the term of all space covered under this Sublease for a period of five (5) years commencing with completion of Phase 5 improvements. -1- 2 PARTIES THEREFORE AGREE AS FOLLOWS: All previous Subleases including the Sublease dated November 30, 1989, it. Amendments 1 through 3, and the Sublease dated March 29, 1991, are replaced by this restated Sublease dated February 17, 1992. Space covered herein includes: Suites A & B 3160 SF Suite C 6520 SF Suite D 5920 SF Suite E 3880 SF Suite G 4420 SF Total 23,900 SF The term for all space blocks, Suites A, B, C, D, E, and G shall end concurrently with a five year term commencing with substantial completion of Phase 5 improvements. Unamortized costs for improvements under terms of the superseded Subleases for Suites A, B, C, D, and E shall be combined with cost of new improvements to Suites A, B, and G, all to be amortized over a five year period. Lessee shall take possession of Suite G, assume responsibility for security, obtain appropriate insurance coverage, and transfer Suite G utility service accounts to Lessee, all effective March 1, 1992. 2. PREMISES, PARKING AND COMMON AREAS. 2.1 PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, real property situated in the County of San Diego, State of California commonly known as Building 4, Sorrento West, 11030 Roselle Street, Suites A, B, C, D, E and G, or approximately 23,900 square feet of office/industrial space more specifically described on Exhibits A-1 and A-2 herein referred to as "the Premises", including rights to the Common Areas as hereinafter specified but not including any rights to the roof of the Premises or to any Building in the Industrial Center. The Premises are a portion of the building herein referred to as the "Building." The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." Rider #1 2.2 VEHICLE PARKING. Lessee shall be entitled to 72 vehicle parking spaces of which a maximum of 4 spaces may be reserved, unreserved and unassigned, on those porions of the Common Areas designated by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used only for Parking by vehicles no larger than full size passenger automobiles or pick-up trucks, herein called -2- 3 "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2.2.1 Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other then those designated by Lessor for such activities. 2.2.2 If Lessee permits or allows any of the prohibited activities described In paragraph 2.2 of this Lease, then Lessor shall have the right, without notice. In addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved end charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.3 COMMON AREAS--DEFINITION. The term "Common Areas" is defined as all erects end facilities outside the Premises and within the exterior boundary line of the Industrial Center that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor. Lessee and of other lessees of the Industrial Center end their respective employees, suppliers, shippers, customers and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveway, and landscaped areas. 2.4 COMMON AREAS--LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, customers and invitees, during the term of this Lease, the non-exclusive right to use. In common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.5 COMMON AREAS--RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations with respect thereto. Lessee agrees to abide by and conform to all such rules and regulations and to cause its employees suppliers, shippers, customers, and invitees to so abide and conform Lessor shell not -3- 4 be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.6 COMMON AREAS--CHANGES. Lessor shall have the right in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas including without limitation, changes in the location size shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of The Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas white engaged in making additional improvements, repair or alterations to The Industrial Center, or any portion thereof; (f) To do and perform such other acts end make such other changes in to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 2.6.1 Lessor shall at all times provide the parking facilities required by applicable law and in no event shall the number of parking spaces that Lessee is entitled to under paragraph 2.2 be reduced. 3. TERM. 3.1 TERM. The term of this Lease shall be for approximately five years commencing on Refer to Paragraph 47 and ending on Refer to Paragraph 47 unless sooner terminated pursuant to any provision hereof. 3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof. 3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said commencement date, such occupancy shell be subject to all provisions of this Lease, such occupancy shall not advance the termination date, and Lessee shall pay rent for such period at the initial monthly rates set forth below. 4. RENT. 4.1 BASE RENT. Lessee shall pay to Lessor, as Base Rent for the Premises, without any offset or deduction, except as may be otherwise expressly provided in this Lease, on the 1st day of each month of the term hereof, monthly payments in advance of -4- 5 $15,820. Refer to Paragraph 48. Lessee shall pay Lessor upon execution hereof $15,820 as Base Rent for March 1992. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the Base Rent. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 OPERATING EXPENSES. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as 84.29 percent of building, 20.15% of industrial center. (b) "Operating Expenses" is defined, for purposes of this Lease, as all costs incurred by Lessor, if any for: (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities and fences and gates; (bb) Trash disposal services; (cc) Tenant directories; (dd) Fire detection systems including sprinkler system maintenance and repair; (ee) Security services; (ff) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense;" (ii) Any deductible portion of an insured loss concerning any of the items or matters described in this paragraph 4.2; (iii) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor under paragraph 8 hereof; (iv) The amount of the real property tax to be paid by Lessor under paragraph 10.1 hereof; -5- 6 (v) The cost of water, gas and electricity to service the Common Areas. Rider #3 (c) The inclusion of the improvements, facilities and services set forth in paragraph 4.2(b)(i) of the definition of Operating Expenses shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Shares of annual Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each twelve-month period of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid, Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses incurred during the preceding year. If Lessee's payments under this paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expenses next falling due. If Lessee's payments under this paragraph during said preceding year were less than Lessee's Share as indicted on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof $33,000 as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or pertain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial -6- 7 security deposit bears to the initial Base Rent set forth in paragraph 4. Lessor shall not be required to keep said security deposit separate from its general accounts if Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for office, R&D, and manufacturing for biomedical products, in compliance with M1A zoning under the San Diego Municipal Code or any other use which is reasonably comparable and for no other purposes. 6.2 COMPLIANCE WITH LAW. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term commencement date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such volition. In the event Lessee does not give to Lessor written notice of the violation of this warranty within six months from the date that the Lease term commences, the correction of same shall be the obligation of the Lessee at Lessee's sole cost. The warrant contained in this paragraph 6.2(a) shall be of no force or effect if, prior to the date of this Lease, Lessee was an owner or occupant of the Premises and, in such event, Lessee shall correct any such violation at Lessee's sole cost. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises and of the Common Areas. Lessee shall not use nor permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Industrial Center. Refer to Paragraph 51. -7- 8 6.3 CONDITION OF PREMISES. (a) Lessor shall deliver the Premises to Lessee clean and free of debris on the Lease commencement date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, heating, and loading doors that existed prior to installing tenant improvements and remain after improvements in the Premises shall be in good operating condition on the Lease commencement date. In the event that its determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. Lessee's failure to give such written notice to Lessor within six months after the Lease commencement date shall cause the conclusive presumption that Lessor has complied with all of Lessor's obligations hereunder. The warranty contained in this paragraph 6.3(a) shall be of no force or effect if prior to the date of this Lease, Lessee was an owner or occupant of the Premises. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises in their condition existing as of the Lease commencement date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. Refer to Paragraph 49. 7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. 7.1 LESSOR'S OBLIGATIONS. Subject to the provisions of paragraphs 4.2 (Operating Expenses), 6 (Use), 7.2 (Lessee's Obligations) and 9 (Damage or Destruction) and except for damage caused by any negligent or intentional act or omission of Lessee, Lessee;s employees, suppliers, shippers, customers, or invitees, in which event Lessee shall repair the damage, Lessor, at Lessor's expense, subject to reimbursement pursuant to paragraph 4.2, shall keep in good condition and repair the foundations, exterior walls, structural condition of interior bearing walls, and roof of the Premises, as well as the parking lots, walkways, driveways, landscaping, fences, signs and utility installations of the Common Areas and all parts thereof, as well as providing the services for which there is an Operating Expense pursuant to paragraph 4.2. Lessor shall not, however, be obligated to paint the exterior or interior surface of exterior walls, nor shall Lessor be required to maintain, repair or replace windows, doors or plate glass of the Premises. -8- 9 Lessor shall have no obligation to make repairs under this paragraph 7.1 until a reasonable time after receipt of written notice from Lessee of the need for such repairs. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. Lessor shall not be liable for damages or loss of any kind or nature by reason of Lessor's failure to furnish any Common Area Services when such failure is caused by accident, breakage, repairs, strikes, lockout, or other labor disturbances or disputes of any character, or by any other cause beyond the reasonable control of Lessor. 7.2 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of paragraphs 6 (Use), 7.1 (Lessor's Obligations), and 9 (Damage or Destruction), Lessee, at Lessee's expense, shall keep in good order, condition and repair the Premises and every part thereof (whether or not the damaged portion of the Premises or the means of repairing the same are reasonably or readily accessible to Lessee) including, without limited the generality of the foregoing, all plumbing, heating, ventilating and air conditioning systems (Lessee shall procure and maintain, at Lessee's expense, a ventilating and air conditioning system maintenance contract), electrical and lighting facilities and equipment within the Premises, fixtures, interior walls and interior surfaces of exterior walls, ceilings, windows, doors, plate glass, and skylights located within the Premises. Lessor reserves the right to procure and maintain the ventilating and air conditioning system maintenance contract and if Lessor so elects, Lessee shall reimburse, upon demand, for the cost thereof. (b) If Lessee fails to perform Lessee's obligations under this paragraph 7.2 or under any other paragraph of this Lease, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of emergency, in which no notice shall be required), perform such obligations on Lessee's behalf and put the Premises in good order, condition and repair, and the cost thereof together with interest thereon at the maximum rate then allowable by law shall be due and payable as additional rent to Lessor together with Lessee's next Base Rent Installment. (c) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade -9- 10 fixtures, alterations, furnishings and equipment. Notwithstanding anything to the contract otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the Premises in good operating condition. 7.3 ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, or Utility installations in, on or about the Premises, or the Industrial Center, except for nonstructural alterations to the Premises not exceeding $2,500 in cumulative costs, during the term of this Lease. In any event, whether or not in excess of $2,5000 in cumulative cost, Lessee shall make no change or alteration to the exterior of the Premises nor the exterior of the Building nor the Industrial Center without lessor's prior written consent. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window coverings, airlines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or Utility Installations at the expiration of the term, and restore the Premises and the Industrial Center to their prior condition. Lessor may require Lessee to provide Lessor, at lessor's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor. Lessor may, at any time during the term of this Lease, require that Lessee remove any or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Industrial Center that Lessee shall desire to make and which requires the consent of the lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, or the Industrial Center, or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises, and -10- 11 Lessor shall have the right to post notices of non-responsibil- ity in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises or the Industrial Center, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien, claim or demand indemnifying Lessor against liability for the same and holding the Premises and the Industrial Center free from the effect of such lien or claim. In addition, lessor may require lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to lessor's best interest to do so. (d) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall be the property of Lessor and shall remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Notwithstanding the provisions of this paragraph 7.3(d), Lessee's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. 7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or additional utility facilities throughout the Building and the Common Areas for the benefit of Lessor or Lessee, or any other lessee of the Industrial Center, including, but not by way of limitation, such utilities as plumbing, electrical systems, security systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. INSURANCE; INDEMNITY. 8.1 LIABILITY INSURANCE--LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage insurance insuring Lessee and Lessor against any liability arising out of the use, occupancy or maintenance of the Premises and the Industrial Center. Such insurance shall be in an amount not less than $1,000,000 per occurrence. The policy shall insure performance by lessee of the indemnity provisions of this paragraph 8. The limits of said insurance shall not, however, limit the liability of Lessee hereunder. -11- 12 8.2 LIABILITY INSURANCE--LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage insurance, insuring Lessor, but not Lessee, against any liability arising out of the ownership, use, occupancy or maintenance of the Industrial Center in an amount not less than $1,000,000 per occurrence. 8.3 PROPERTY INSURANCE. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Industrial Center improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in an amount not to exceed the full replacement value thereof, as the same may exist from time to time, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, flood (in the event same is required by a lender having a lien on the Premises), special extended perils ("all risk," as such term is used in the insurance industry), plate glass insurance and such other insurance as Lessor deems advisable. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(g) hereof, the deductible amounts under the casualty insurance policies relating to the Premises shall be paid by lessee. 8.4 PAYMENT OF PREMIUM INCREASE. (a) After the term of this Lease has commenced, Lessee shall not be responsible for paying Lessee's Share of any increase in the property insurance premium for the Industrial Center specified by Lessor's insurance carrier as being caused by the use, acts or omissions of any other lessee of the Industrial Center, or by the nature of such other lessee's occupancy which create an extraordinary or unusual risk. (b) Lessee, however, shall pay the entirety of any increase in the property insurance premium for the Industrial Center over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies holding a "General Policyholders Rating" of at least B plus, or such other rating as may be required by a lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by lessor. Lessee shall deliver to Lessor copies of liability insurance policies required under -12- 13 paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the commencement date of this Lease. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days' prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals or "binders" thereof. Lessee's insurance policies shall name Lessor as additional insured. 8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other for loss or damage arising out of or incident to the perils insured against which perils occur in, on or about the Premises, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. Lessee and lessor shall, upon obtaining the policies of insurance required give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 8.7 INDEMNITY. (a) Lessee shall indemnify and hold harmless Lessor from and against any and all claims arising from Lessee's use of the Industrial Center, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any such claim or any action or proceeding brought thereon, and in case any action or proceeding be brought against Lessor by reason of any such claim, Lessee upon notice from lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and lessor shall cooperate with Lessee in such defense. Lessee, as a material part of the consideration to lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Industrial Center arising from any cause and lessee hereby waives all claims in respect thereof against Lessor. (b) Rider #4. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except as provided in Section 8.7 hereof, Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business of any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Industrial Center, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents -13- 14 or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Industrial Center, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Industrial Center, nor from the failure of Lessor to enforce the provisions of any other lease of the Industrial Center. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Partial Damage" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is less than fifty percent of the then replacement cost of the Premises. (b) "Premises Total Destruction" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is fifty percent or more of the then replacement cost of the Premises. (c) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent of the then replacement cost of the Building. (d) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent or more of the then replacement cost of the Building. (e) "Industrial Center Buildings" shall mean all of the buildings on the Industrial Center site. (f) "Industrial Center Buildings Total Destruction" shall mean if the Industrial Center Buildings are damaged or destroyed to the extent that the cost to repair is fifty percent or more of the then replacement cost of the Industrial Center Buildings. (g) "Insured Loss" shall mean damage or destruction which was covered by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an unsecured loss. -14- 15 (h) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring excluding all improvements made by lessees. 9.2 PREMISES PARTIAL DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Partial Damage or Premises Building Partial Damage, then lessor shall, at Lessor's expense, repair such damage to the Premises, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from using the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage. In the event lessor elects to give such notice of Lessor's intention to cancel and terminate this Lease, Lessee shall have the right within ten 910) days after the receipt of such notice to give written notice to Lessor of lessee's intention to repair such damage at Lessee's expense, without reimbursement from lessor, in which event this Lease shall continue in full force and effect, and lessee shall proceed to make such repairs as soon as reasonably possible. If Lessee does not give such notice within such 10-day period this Lease shall be canceled and terminated as of the date of the occurrence of such damage. 9.3 PREMISES TOTAL DESTRUCTION; PREMISES BUILDING TOTAL DESTRUCTION; INDUSTRIAL CENTER BUILDINGS TOTAL DESTRUCTION. (a) Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this lease there is damage, whether or not it is an Insured Loss, and which falls into the classifications of either (i) Premises Total Destruction, or (ii) Premises Building Total destruction, or (iii) Industrial Center Buildings Total Destruction, then Lessor may at lessor's option either (i) repair such damage or destruction, but not Lessee's fixtures, equipment or tenant -15- 16 improvements, as soon as reasonably possible at Lessor's expense, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall be canceled and terminated as of the date of the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. (a) Subject to paragraph 9.4(b), if at any time during the last six months of the term of this Lease there is substantial damage, whether or not an Insured Loss, which falls within the classification of Premises Partial Damage, Lessor or Lessee may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of the other party of the first party's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty 920) days after the occurrence of an Insured Loss falling within the classification of Premises Partial Damage during the last six months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event Lessor repairs or restores the Premises pursuant to the provisions of this paragraph 9, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of rent, if any, Lessee shall have no claim against lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this paragraph 9 and shall not commence such repair or restoration within ninety (0) days -16- 17 after such obligation shall accrue, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. 9.6 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Industrial Center subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 ADDITIONAL IMPROVEMENTS. Less shall not be responsible for paying Lessee's Share of any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Industrial Center or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of lessor in the Industrial Center or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Industrial Center. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, -17- 18 fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the Industrial Center or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such transfer, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfer hereof. 10.4 JOINT ASSESSMENT. If the Industrial Center is not separately assessed, Lessee's share of the real property tax liability shall be an equitable proportion of the real property taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. Rider #5. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not -18- 19 unreasonably withhold. Lessor shall respond to lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a breach of this lease without the need for notice to Lessee under paragraph 13.1. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate," provided that before such assignment shall be effect said assignee shall assume, in full, the obligations of Lessee under this Lease. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 TERMS AND CONDITIONS OF ASSIGNMENT. Regardless of Lessor's consent, no assignment shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the Base Rent and Lessee's Shares of Operating Expenses, and to perform all other obligations to be performed by Lessee hereunder. Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of rental shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 or this Lease. Consent to one assignment shall not be deemed consent to any subsequent assignment. In the event of default by any assignee of Lessee or any successor of Lessee, in the performance of any of the terms hereof, Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said assignee. Lessor may consent to subsequent assignments of this Lease or amendments or modifications to this Lease with assignees of Lessee, without notifying Lessee, or any successor of Lessee, and without obtaining its or their consent thereto and such action shall not relieve Lessee of liability under this Lease. 12.4 TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be included in subleases: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any -19- 20 sublease heretofore or hereafter made by lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublease as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublessee shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) If Lessee's obligations under this Lease have been guaranteed by third parties, then a sublease, and lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (d) The consent by Lessor to any subletting shall not release Lessee from its obligations or alter the primary liability of lessee to pay the rent and perform and comply with all of the obligations of Lessee to be performed under this Lease. (e) The consent by lessor to any subletting shall not constitute a consent to any subsequent subletting by lessee or to any assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without -20- 21 notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) In the event lessee shall default in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to lessor, in which event lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to lessee or for any other prior defaults of Lessee under such sublease. (h) Each and every consent required of lessee under a sublease shall also require the consent of Lessor. (i) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (j) Lessor's written consent to any subletting of the Premises by Lessee shall not constitute an acknowledgment that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (k) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within ten (10) days after service of such notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if lessee shall request the consent of Lessor for any act Lessee proposes to do then lessee shall pay Lessor's reasonable attorney's fees incurred in connection therewith, such attorney's fees not to exceed $350.00 for each such request. -21- 22 13. DEFAULT; REMEDIES. 13.1 DEFAULT. the occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacating or abandonment of the Premises by Lessee. (b) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (c) Except as otherwise provided in this Lease, the failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, other than described in paragraph (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if lessee commenced such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. to the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (d) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(d) is contrary to any applicable law, such provision shall be of no force or effect. (e) The discovery by Lessor that any financial statement given to lessor by Lessee was materially false. 13.2 REMEDIES. In the event of any such material default by Lessee, Lessor may at any time thereafter, with or without -22- 23 notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after the written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided,however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs -23- 24 include, but are not limited to, processing and accounting charges, and late charges which may be imposed on lessor by the terms of any mortgage or trust deed covering the Property. Accordingly, if any installment of Base Rent, Operating Expenses, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of any of the aforesaid monetary obligations of Lessee, then Base Rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding paragraph 4.1 or any other provision of this Lease to the contrary. 14. CONDEMNATION. If the Premises or any portion thereof or the Industrial Center are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent of the floor area of the Premises, or more than twenty-five percent of that portion of the Common Areas designated as parking for the Industrial Center is taken by condemnation. Lessee may, at Lessee's option, to be exercised in writing only within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the premises remaining, except that the rent shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. No reduction of rent shall occur if the only area taken is that which does not have the Premises located thereon. Any award for the taking of all or any part of the Premises under the Power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages -24- 25 received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. 15. BROKER'S FEE. (a) Upon execution of this Lease by both parties, Lessor shall pay to [N/A See Paragraph 50] Licensed real estate broker(s), a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is no separate agreement between Lessor and said broker(s), the sum of $[none] for brokerage services rendered by said broker(s) to Lessor in this transaction. 16. ESTOPPEL CERTIFICATE. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) 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 date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises or of the business of the requesting party. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Property, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. -25- 26 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean ***Rider 6***. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expenses and insurance and tax expenses payable shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Property and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this lease except as otherwise specifically stated in this Lease. Refer to Paragraph 52. 23. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified mail, and if given personally or by mail, shall be deemed sufficiently given if addressed to Lessee or to Lessor at the address noted below the signature of the respective parties, as the case may be. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to -26- 27 be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. [INTENTIONALLY OMITTED]. 26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any party thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, but all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. Such continued occupancy shall be at a rate of 125% of the amount being paid by the lessee the last month of the term hereof. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Industrial Center is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Industrial Center is located. 30. SUBORDINATION. (a) This Lease, and any Option granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Industrial Center and to any and all advances made on the security thereof and to all renewals, -27- 28 modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). Refer to Paragraph 53. 31. ATTORNEY'S FEES. If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are part as lessor may deem necessary or desirable. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained -28- 29 Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises or the Industrial Center without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Industrial Center. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Property. 39. OPTIONS. 39.1 DEFINITION. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option or right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Industrial Center or other property of Lessor or the right of first offer to lease other space within the Industrial Center or other property of Lessor; (3) the right or option to purchase the Premises or the Industrial Center, or the right of first refusal to purchase the Premises or the Industrial Center, or the right of first offer to purchase the Premises or the Industrial Center, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase -29- 30 other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this lease is personal to the original lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to extend or renew this lease or later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the date after a monetary obligation to Lessor is due from Lessee and unpaid (following written notice thereof to Lessee) and continuing until the obligation is paid, or (iii) at any time after an event of default described in paragraphs 13.1(a), 13.1(d) or 13.1(e) (without any necessity of Lessor to give notice of such default to Lessee), nor (iv) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(b), or paragraph 13.1(c), whether or not the defaults are cured, during the 12-month period of time immediately prior to the time that Lessee attempts to exercise the subject Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice -30- 31 thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(c) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessee commits a default described in paragraph 13.1(a), 13.1(d) or 13.1(e) (following written notice of such default to Lessee), or (iv) Lessor gives to Lessee three or more notices of default under paragraph 13.1(b), or paragraph 13.1(c), whether or not the defaults are cured. 40. SECURITY MEASURES. Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Industrial Center. Lessee assumes all responsibility for the protection of Lessee, its agents and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at lessor's sole option, from providing security protection for the Industrial Center or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 41. EASEMENTS. Lessor reserves to itself the right, from tie to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. AUTHORITY. If lessee is a corporation, trust or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership. Lessee shall, within thirty (30) days after execution of this -31- 32 Lease, deliver to lessor evidence of such authority satisfactory to Lessor. 44. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by lessor and lessee. 46. ADDENDUM. Attached hereto is an addendum or addenda containing paragraphs 47 through 55 which constitute a part of this Lease plus Exhibits A-1, A-2, A-3, and an Addendum to the Sublease containing Riders 1 through 6 which constitutes a part of the Sublease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL. NO REPRE- SENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO. THE PARTIES SHALL RELY SOLELY UPON THE -32- 33 ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE GENERAL ATOMICS BIOSITE DIAGNOSTICS By /s/ R.H. Dalry By /s/ Kim D. Blickenstaff ----------------------------- ------------------------------ R.H. Dalry, Director, Facilities By By ------------------------------ ----------------------------- Executed on ---------------------- (Corporate Seal) Executed on ---------------------- (Corporate Seal) ADDRESS FOR NOTICES AND RENT ADDRESS - --------------------------------- ---------------------------------- - --------------------------------- ---------------------------------- - --------------------------------- ---------------------------------- -33- 34 47. TERM AND COMMENCEMENT DATE. The term for space Suite G shall commence March 1, 1992 and end concurrently with that for Suites A, B, C, D, and E. The rental period for all space, Suites A, B, C, D, E, and G, shall end concurrently, five years subsequent to the first day of the month following substantial completion of tenant improvements in Suites A, B, and G. Substantial completion shall be deemed to mean that Suites A, B, and G have been improved in accordance with approved plans and specifications and final inspection and approval have been obtained from the City of San Diego Building Inspection Department. The five year term shall start no later than November 1, 1992. Parties agree to establish the actual commencement date by executing Paragraph 54(g) once substantial completion is established. 48. RENT SCHEDULE. The following rent schedule shall apply:
SPACE BLOCK BASE RENT TENANT IMPROVEMENTS ----------- --------- ------------------- (Suites) (Monthly) (Monthly) A & B $ 2,136 (Note 3) $ 380.70 (Note 1) C, D, & E $11,032 (Note 3) $9,415.76 (Note 2) G $ 2,652 (Note 4) None (Note 2)
Note 1. Recovery for tenant improvements ends 6/30/92. Note 2. The unamortized cost of improvements for Suites C, D, and E will be added to cost for improvements in Suites A, B, and G. Total cost will be amortized over a five year period at 12% per annum. Note 3. Rent will be adjusted at the start of the new five year ten using the Consumer Price Index of the Bureau of Labor Statistics of the U. S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles, Long Beach-Anaheim, California, "All Items." New rent shall be calculated by multiplying the current base rent ($11,032 and $2136) by a fraction, the numerator being the most recent available data published immediately prior to start of the five year term and the denominator of which shall be the C.P.I. for the month of March 1991. Note 4. Rent ($2652) will be adjusted the same as in Note 3 except the C.P.I. for the denominator shall be for the month of February 1992. 49. TENANT IMPROVEMENTS. The Parties agree that Lessor shall install certain tenant improvements in Suites A, B, and G and make minor modifications in Suites C, D, and E, all at a cost not to exceed $350,000. Lessee agrees to pay for said improvements as added rent, amortized over the five year period at 12 percent per annum. Parties further agree that unamortized costs for improvements, previously installed in Suites C, D, and -1- 35 E, shall be amortized over the same five year period at 12 percent per annum. The combined amortized amount, shall be paid as added monthly rent, starting with the new five year Sublease term as determined by date of substantial completion of Suites A, B, and G. Added rent for tenant improvements shall continue for five years until paid in full and shall be payable under the same terms and conditions as the base rent. (a) Design and Construction. Lessor shall cause the construction of tenant improvements to the premises including the working drawings, permits, construction, and final city inspection. Effective March 9, 1992, Lessee shall deliver to Lessor preliminary drawings to be used by Lessor in the preparation of working drawings and specifications. Within 30 business days after the March 9, 1992 date, Lessor shall return preliminary programming drawings prepared by a licensed architect selected by the Lessor. Promptly following receipt of comments from Lessee (not to exceed five business days), Lessor shall have prepared the final working drawings and specifications for submittal to the City Building Department. Lessor will use best effort to obtain approval an building permits. Promptly after obtaining permits, Lessor shall cause the construction of tenant improvements based on competitive bids and selection of qualified contractors. (b) Allowance. Lessor agrees to provide Lessee a tenant improvement, allowance in the amount of Three Hundred Fifty Thousand Dollar ($350,000) for design and construction applied toward expenditures against any and all costs incurred in the construction of the tenant improvements, including without limitation any and all fees, charges, costs, or expenses of any kind incurred by the Lessor in connection with design, engineering, governmental processing and approval, cost of equipment, materials, labor, construction overhead and fees, utility hookup, equipment installation, testing, inspection, or any costs directly related to the tenant improvements that improve the realty as reflected on the approved drawings and specifications. Excluded from the allowance are Lessor's direct applied proJect management costs, and cost of design, purchase, relocation or setup of Lessee's fixtures, or excess costs incurred by Lessee as covered below. If the amount of the estimated costs for the tenant improvements exceeds the allowance ("excess costs"), then not later than ten business days after delivery of estimated costs to Lessee, Lessee shall deliver to Lessor funds in the amount of the excess costs, which Lessor shall apply towards the cost of completing the tenant improvements. In addition, if at any time during the construction of the tenant improvements, the costs thereof incurred by Lessor equals the amounts of the allowance plus any excess costs previously paid by Lessee to Lessor, Lessor shall immediately prepare an estimate of the amounts -2- 36 reasonably required to complete the construction of the tenant improvements, and Lessor shall not be obligated to incur any additional expenses or continue construction of the tenant improvements until Lessee has deposited with Lessor funds in the amount of the estimate so prepared by Lessor. (c) Lessee Delays. In no event shall the substantial completion dates of this Sublease be extended due to a delay or fault of Lessee. Delays "due to the fault of Lessee" shall include, without limitation, delays caused by: (i) Lessee's failure to timely prepare the preliminary plans or review preliminary plans, or to timely approve the working plans or the estimated costs, or to furnish information and cooperation to Lessor for the preparation by the Lessor and approval by governmental agencies of the final plans; (ii) Lessee's request for or use of special materials, finishes or installations which are different than specified on Lessee approved drawings and specifications; (iii) Lessee's failure to timely deposit with Lessor any funds required for any excess costs or costs in excess of the allowance for the completion of the tenant improvements; (iv) Change orders requested by Lessee which actually result in a delay; or (v) Interference with Lessor's construction activities caused by Lessee or Lessee's agents, employees, servants or independent contractors. (vi) Lessee's failure to surrender appropriate areas for construction so Lessor can diligently complete said improvements without undue delays. Lessor shall give Lessee written notice of any delays due to the fault of Lessee hereunder promptly (within five (5) business days) after Lessor obtains knowledge of any such delays. (d) Change Orders. Lessee may from time to time have need to obtain change orders during the course of construction of the tenant improvements, provided that: (i) Each such request shall be in writing and signed by Lessee; (ii) Each such request shall not result in any major or structural change in the building or tenant improvements as reasonably determined by Lessor; and -3- 37 (iii) All additional charges and costs, including without limitation architectural and engineering costs, construction costs, material costs, and governmental processing costs, shall be the sole and exclusive obligation of Lessee. Upon Lessee's written request for a change order, Lessor shall as soon as reasonably possible submit to Lessee a written estimate of the increased cost attributable to the requested change. Within five business days of the date such estimated cost adjustment is delivered to the Lessee, Lessee shall advise Lessor whether or not it wishes to proceed with the change order. Unless Lessee includes in its initial change order request that work in process at the time of the request be halted pending approval and execution of a change order, Lessor shall not stop construction of the tenant improvement, whether or not the change order relates to work then in process or about to be started. (e) Completion of Premises. Within five business days after substantial completion, Lessee shall conduct a walk-through inspection of the Premises with Lessor and complete a punch-list of items needing correction or additional work, which punch-list shall be approved in writing by Lessor and Lessee. Lessee shall submit to the Lessor a final punch-list within 60 days after substantial completion, which shall include all items requiring correction or additional work and which shall be approved in writing by Lessor and Lessee. Neither punch-list shall include any damage to the Premises caused by Lessee or by Lessee's agents, employees, servants, or independent contractors, which damage shall be repaired or corrected by Lessee at its expense. If Lessee fails to submit any punch-list to Lessor within such 60 day period, it shall be deemed that there are no items needing additional work or repair (excluding latent defects). Lessor's contractor shall complete all Lessor-approved punch-list items within 30 days after submission of the final punch-list or as soon as practicable thereafter. Upon completion of such punch-list items, Lessee shall approve such corrected or completed items in writing to Lessor. If Lessee fails to notify Lessor of its approval or disapproval of such items within ten business days of completion, such items shall be deemed approved by Lessee. 50. BROKER'S FEE. Lessee represents and warrants to Lessor that it has not engaged any broker, finder, or other person who would be entitled to any commission or fees in respect of the negotiation, execution or delivery of this Sublease and shall indemnify and hold harmless Lessor against any loss, cost, liability, or expense incurred by Lessor as a result of any claim asserted by any broker, finder, or other person on the basis of any arrangements made or alleged to have been made by or on behalf of Lessee. -4- 38 51. Lessee agrees that use of Hazardous Materials is incidental to its operations on the premises and is not the primary or substantial purpose of its Tenancy. (a) Lessee shall coordinate any permit application for use, storage, handling, and disposal of Hazardous Substances with the Lessor and shall submit updated copies of such permits, applications, and licenses to Lessor for Lessor's files. At the request of the Lessor, Lessee shall submit a list and material data sheet for all Hazardous Materials maintained in the Premises. (b) Lessor, the Master Lessor, and their respective agents and Lenders shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same for "Hazardous Materials" as defined in any Federal, State, or local law or regulation, showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements, or additions to the Premises as Lessor or Master Lessor may deem necessary or desirable. (c) Hazardous Substances used, produced, stored, processed, treated, refined, generated, and disposed of by Lessee shall be the responsibility of Lessee, and Lessee shall undertake and perform all such activities in accordance with all applicable laws and regulations and in accordance with Lessor's standard practices and in a safe and reasonable manner, during the term of the Sublease, when required or appropriate, but in no event later than the date that the Sublease is terminated. 52. This Sublease contains all agreements of the parties with respect to any matter mentioned herein. All prior Subleases and Amendments, listed below, are hereby replaced in their entirety and no prior agreement or understanding pertaining to this matter, other than the agreements contained herein, shall be effective. Sublease dated November 30, 1989 (Suites C & D). Sublease Amendment #1 dated December 1, 1989. Sublease Amendment #2 dated May 30, 1990 (Suite E). Sublease Amendment #3 dated November 16, 1990. Sublease dated March 29, 1991 (Suites A & B). 53. Lessee shall execute the attached "Agreement of Subordination and Attornment," Exhibit A-3, which constitutes part of this Sublease. -5- 39 ADDENDUM TO STANDARD LEASE DATED February 17, 1992 ------------------------ BY AND BETWEEN General Atomics --------------- Biosite Diagnostics, Inc. ------------------------------ 54 RENT ESCALATIONS (a) On each anniversary of this Sublease base 48 the monthly base rent payable under paragraph 4 of the attached Lease shall be adjusted by the increase, if any, from the date this Lease commenced, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles-Long Beach- Anaheim, California (1967=100), "All Items", herein referred to as "C.P I." (b) The monthly rent payable in accordance with paragraph (a) of this Addendum shall be calculated as follows: the rent payable for the first month of the term of this Lease, as set forth in paragraph 4 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. for the calendar month in which the original Lease term commences. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) Pending receipt of the required C.P.I. and determination of the actual adjustment, Lessee shall pay an estimated adjusted rental, as reasonably determined by Lessor by reference to the then available C.P.I. information. Upon notification of the actual adjustment after publication of the required C.P.I., any overpayment shall be credited against the next installment of rent due, and any underpayment shall be immediately due and payable by Lessee. Lessor's failure to request payment of an estimated or actual rent adjustment shall not constitute a waiver of the right to any adjustment provided for in the Lease or this addendum. (d) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree -6- 40 on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. (e) Annual rent adjustment determined under (a) shall be 4% minimum and 8% maximum. (f) The base rent under (a) shall be calculated by indexing the current base rent for 1 space blocks, Suites A, B, C, D, E, and G as covered in Paragraph 48. This shall be identified as the "blended base rent" to be used as the base rent payable the first month in Paragraph (b) above. -7- 41 ADDENDUM TO STANDARD INDUSTRIAL LEASE DATED February 12, 1992 ------------------------- BY AND BETWEEN General Atomics ---------------- Biosite Diagnostics, Inc. ------------------------------ 55 OPTION TO EXTEND A. Lessor hereby grants to Lessee the option to extend the term of this Lease for a two year period commencing when the prior term expires upon each and all of the following terms and conditions: (i) Lessee gives to Lessor and Lessor receives written notice of the exercise of the option to extend this Lease for said additional term * prior to the time that the option period would commence if the option were exercised, time being of the essence. If said notification of the exercise of said option is not so given and received, this option shall automatically expire; * one year (ii) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (iii) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; (iv) The monthly rent for each month of the option period shall be calculated as follows: (a) As used herein, the term "C.P.I." shall mean the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles-Long Beach-Anaheim, California (1967=100), "All Items", herein referred to as "C.P.I." (b) The rent payable for the first month of the Initial term of this Lease, as set forth in paragraph 4 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the month immediately preceding the commencement date of the option period and the denominator of which shall be the C.P.I. for the month in which the attached Lease was executed. The sum so calculated shall constitute the new monthly rent during the option period, but, in no event, shall such new monthly rent be less than the rent payable for -8- 42 the month immediately preceding the commencement of the option period. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the Index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. -9- 43 ADDENDUM TO SUBLEASE General Atomics a California Corporation ("Lessor") and BIOSITE DIAGNOSTICS, INC. a California Corporation ("Lease") dated as of February 17, 1992 (the "Lease") The following modifications and insertions numbered Riders #1 through 6, are hereby made and incorporated into the Sublease and Exhibits thereto and shall be deemed made at the respective places indicated in the Sublease and Exhibits. In addition to the following Riders, certain deletions or insertions of language have been made at the places indicated throughout the Lease. In the event of any conflict between the Addendum and the printed provisions of the Sublease or the Exhibits, the provisions of this Addendum are intended to govern and control, and the Sublease and the Exhibits shall be construed accordingly. Any reference to the Sublease in the following provisions of this Addendum shall be deemed to include this Addendum, unless otherwise specified in such reference. Terms used in this Addendum which are defined in the Sublease or the Exhibits shall have the meaning given to them in the Sublease or the Exhibits. RIDER 1: Insert to section 2.1. Lessor is the tenant under a certain lease (the "Master Lease") with Sorrento West Properties Inc. ("Master Lessor") of the Industrial Center. Lessor covenants, represents, and warrants that Lessor is not in default under the Master Lease, has not received any notice of termination by Master Lessor, of the Master Lease, that the execution and performance by Lessor of the terms and conditions of this Sublease will not violate any of the terms of the Master Lease, and that Lessor will not willfully commit any act or omission which would violate any term or condition of the Master Lease or cause the termination of the Master Lease during the term of this Sublease. RIDER 2: Delete in its entirety. RIDER 3: Insert to section 4.2 (b). Notwithstanding the foregoing, the term Operating Expenses shall not include any cost or expense incurred with respect to any of the following: -1- 44 (i) Except for improvements as agreed to under this Sublease, any capital improvements or replacements incurred from and after the date of this Sublease for any alteration, addition or improvement to the Building or the Industrial Center which would otherwise be considered an Operating Expense; (ii) Interest or debt or amortization payments on any mortgages or deeds of trust or any other borrowings of Lessor; (iii) The cost of wages, salaries, and other labor costs for the operation, repair and maintenance of the Industrial Center which are in excess of normally acceptable industry standards. RIDER 4: Insert to section 8.7. (b) Lessor shall indemnify and hold harmless Lessee from and against any and all claims arising from any work or things done, permitted or suffered by Lessor in or about the Premises or arising from any act or omission of Lessor or any of Lessor's agents, contractors, or employees, or arising from any breach or default by Lessor under any of its obligations under this Sublease, and from and against all costs, attorneys' fees, expenses, liabilities incurred in the defense of any such claim or any action or RIDER 5: Insert to section 11. Lessor shall supply the Premises as an item of Operating Expense with city water and sewer as a building service. Lessee shall be responsible for the prorata share of water and sewage, cost of extraordinary water and sewage usage, and its own janitorial, gas, electric, telephone, and security services for the Premises. RIDER 6: Insert to section 17. ***General Atomics, a California Corporation. Lessor herein named (and in case of any subsequent transfer, then the grantor) shall be relieved from and after the date of any transfer of Lessor's interest in the Industrial Center. As used herein, -2- 45 "Lease" means "Sublease", "Lessor" means "Sublessor" and "Lessee" means "Sublessee."*** IN WITNESS WHEREOF, Lessor and Lessee have executed this Addendum to Lease concurrent with the execution of the Lease. GENERAL ATOMICS, a California Corporation By /s/ R.H. Dalry ------------------------------------ Its Director, Facilities ------------------------------------ BIOSITE DIAGNOSTICS, INC., a California Corporation By /s/ Kim D. Blickenstaff ------------------------------------ Its President ------------------------------------ -3- 46 The ideal location Sorrento West is strategically located just off U.S. Interstate 5 at 805, the major North/South highways that provide easy access to the West's major markets. All major delivery firms provide regular service. San Diego's port facilities and international airport are only 15 minutes away. GRAPHIC OMITTED DIRECTIONS [Graphic omitted] FROM SAN DIEGO: Take the Sorrento Valley Exit off Interstate 5 (north). Turn left on Roselle Street. Pass under Interstate 5 and follow Roselle to Sorrento West site. OR Take the Sorrento Valley Exit off Interstate 805 (north). Turn left on Sorrento Valley Road. Follow Sorrento Valley Road to Intersection with Sorrento Valley Blvd. Turn left over railroad tracks and bridge spanning flood control channel. Turn right onto Roselle Street and follow Roselle north to Sorrento West site. Approximately 1 block. FROM LOS ANGELES: Take Carmel Valley Road Exit off Interstate 5 (south). Turn right onto Carmel Valley Road and then left onto Sorrento Valley Road. Follow Sorrento Valley Road to intersection with Sorrento Valley Boulevard. Turn right over railroad tracks and bridge spanning flood control channel. Turn right onto Roselle Street and follow Roselle to Sorrento West site. For information contact: -4- 47 EXHIBIT A-2 GRAPHIC OF OUTLINE OF BUILDING [OMITTED] -1- 48 SUBLEASE AMENDMENT #1 The Sublease between General Atomics "Sublessor" and Biosite Diagnostics, Inc. "Sublessee" dated February 17, 1992, is amended effective this 10th day of August, 1992. Except as hereby amended, all terms and conditions of said Sublease shall remain unchanged and in full force and effect. 0.1 PREMISES. Add 1550 SF of Suite F, identified as Suite F (temporary storage), to the premises for a new total of 25,450 SF. Refer to Exhibit A-2, Sublease Amendment #1. 0.2 TERM. Space added in Suite F is leased on a month-to-month basis with 30 days written notice from either party required for termination. 0.3 BASE RENT. Starting August 17, 1992, Sublessee will pay $0.55 per square foot for added 1550 square feet in Suite F or $853 (Eight Hundred Fifty-Three Dollars) per month. Increase total monthly rent from $15,820 (Fifteen Thousand Eight Hundred Twenty Dollars) to $16,673 (Sixteen Thousand Six Hundred Seventy-Three Dollars). 0.4 OPERATING EXPENSES. (a) "Lessee's Share" is defined for purposes of this lease as 89.76% of building, 21.45% of industrial center. 0.5 SECURITY MEASURES. Add the following: Until Sublessor completely vacates Suite F, Sublessor will control access. Sublessee will place its own security access on fenced area Sublessee occupies in Suite F. SUBLESSOR SUBLESSEE GENERAL ATOMICS BIOSITE DIAGNOSTICS, INC. By: /s/ R. H. Dalry By: /s/ Kim Blickenstaff ------------------------------- -------------------------------- R. H. Dalry, Director, President - ---------------------- -------------------------------- Facilities - ---------- -1- 49 EXHIBIT A-2 GRAPHIC OF OUTLINE OF BUILDING [OMITTED] -1- 50 SUBLEASE AMENDMENT #2 The Sublease between General Atomics "Sublessor" and Biosite Diagnostics, Inc. "Sublessee" dated February 17, 1992, is amended effective this 21st day of January, 1993. Except as hereby amended, all terms and conditions of said Sublease shall remain unchanged and in full force and effect. 2.1 PREMISES. This Sublease Amendment shall apply to the following space:
Suites A & B 3,160 SF Suite C 6,520 SF Suite D 5,920 SF Suite E 3,880 SF Suite G 4,420 SF ------ Total 23,900 SF Note
Note: Suite F is not included in this Amendment since it is leased on a month-to-month basis. 3.1 & 47 TERM. Pursuant to the agreement made under "Term" of the above referenced Sublease, change Sublease term for the premises to a period of five (5) years starting January 1, 1993 and ending December 31, 1997. 48 RENT SCHEDULE. Pursuant to Note 2 of the Rent Schedule of the above referenced Sublease, the unamortized balance of payments for leasehold improvements for Suites C, D, and E in the amount of $272,960.34 (Exhibit A), added to the cost of leasehold improvements for Suites A, B, and G in the amount of $352,836.55 or a total of $625,796.89, shall be amortized over the new five year term. Accordingly, the monthly rent attributable to leasehold improvements is changed from $9,415.76 to $13,782.68 (Exhibit B). Pursuant to Notes 3 and 4 of the Rent Schedule of the above referenced Sublease, the base rent effective January 1, 1993 shall be changed by an adjustment as follows: Suites A, B, C, D & E - Adjusted Base Rent Current Base Rent x CPI-UWE&CW LA Anaheim-Riverside Nov 1992 ---------------------------------------- " " " " " Mar 1991 $13,168 x 424.2 = $13,971.65 ----- 399.8 -1- 51 Suite G - Adjusted Base Rent Current Base Rent x CPI-UWE&CW LA Anaheim-Riverside Nov 1992 ---------------------------------------- " " " " " Feb 1992 $2,652 x 424.2 = $2,712.75 ----- 414.7
LEASEHOLD SPACE BLOCK BASE RENT (1/1/93) IMPROVEMENTS ----------- --------- ------------ (Suites) (Monthly) (Monthly) A, B, C, D & E $13,971.65 ---- G 2,712.75 ---- All ----- $13,782.68 Total $16,684.40 $13,782.68
49 TENANT IMPROVEMENTS. Change the Tenant Improvement (leasehold improvement) allowance from $350,000 to $352,836.55. SUBLESSOR SUBLESSEE GENERAL ATOMICS BIOSITE DIAGNOSTICS, INC. By: /s/ R.H. Dalry By: /s/ Kim D. Blickenstaff --------------------------- --------------------------- R. H. Dalry, Director, Facilities -2- 52 Exhibit A BIOSITE LEASEHOLD IMPROVEMENTS November 1, 1990 - December 31, 1992
Principal $427,519.00 Interest Rate 12.0% Term (in months) 60 Monthly payment $9,415.77
Payment Date Payment Interest Balance - ------------ ------- -------- ------- $427,519.00 11/1/90 $9,415.76 0 418,103.24 12/1/90 9,415.76 4,181.03 412,868.51 1/1/91 9,415.76 4,128.69 407,581.44 2/1191 9,415.76 4,075.81 402,241.49 3/1/91 9,415.76 4,022.41 396,848 14 4/1/91 9,415.76 3,968.48 391,400.86 5/1/91 9,415.76 3,914.01 385,899.11 6/1/91 9,415.76 3,858.99 380,342.34 7/1/91 9,415.76 3,803.42 374,730.00 8/1/91 9,415.76 3,747.30 369,061.54 9/1/91 9,415.76 3,690.62 363,336.40 10/1/91 9,415.76 3,633.36 357,554.00 11/1/91 9,415.76 3,575.54 351,713.78 12/1/91 9,415.76 3,517.14 345,815.16 1/1/92 9,415.76 3,458.15 339,857.55 2/1/92 9,415.76 3,398.58 333,840.37 3/1/92 9,415.76 3,338.40 327,763.01 4/1/92 9,415.76 3,277.63 321,624.88 5/1/92 9,415.76 3,216.25 315,425.37 6/1/92 9,415.76 3,154.25 309,163.86 7/1/92 9,415.76 3,091.64 302,839.74 8/1/92 9,415.76 3,028.40 296,452.38 9/1/92 9,415.76 2,964.52 290,001.14 10/1/92 9,415.76 2,900.01 283,485.39 11/1/92 9,415.76 2,834.85 276,904.48 1/1/92 9,415.76 2,769.04 270,257.76 1/31/92 (Interest for month of December) 2,702.58 272,960.34 1/1/93 9,415.76 263,544.58 2/1/93 9,415.76 2,635.45 256,764.27 3/1/93 9,415.76 2,567.64 249,916.15 4/1/93 9,415.76 2,499.16 242,999.55 5/1/93 9,415.76 2,430.00 236,013.79 6/1/93 9,415.76 2,360.14 228,958.17 7/1/93 9,415.76 2,289.58 221,831.99 8/1/93 9,415.76 2,218.32 214,634.55 9/1/93 9,415.76 2,146.35 207,365.14 10/1/93 9,415.76 2,073.65 200,023.03 11/1/93 9,415.76 2,000.23 192,607.50 1/1/93 9,415.76 1,926.08 185,117.82 1/1/94 9,415.76 1,851.18 177,553.24 2/1/94 9,415.76 1,775.53 169,913.01 3/1/94 9,415.76 1,699.13 162,196.38
-3- 53
Payment Date Payment Interest Balance - ------------ ------- -------- ------- 4/1/94 9,415.76 1,621.96 154,402.58 5/1/94 9,415.76 1,544.03 146,530.85 6/1/94 9,415.76 1,465.31 138,580.40 7/1/94 9,415.76 1,385.80 130,550.44 8/1/94 9,415.76 1,305.50 122,440.18 9/1/94 9,415.76 1,224.40 114,248.82 10/1/94 9,415.76 1,142.49 105,975.55 11/1/94 9,415.76 1,059.76 97,619.55 12/1/94 9,415.76 976.20 89,179.99 1/1/95 9,415.76 891.80 80,656.03 2/1/95 9,415.76 806.56 72,046.83 3/1/95 9,415.76 720.47 63,351.54 4/1/95 9,415.76 633.52 54,569.30 5/1/95 9,415.76 545.69 45,699.23 6/1/95 9,415.76 456.99 36,740.46 7/1/95 9,415.76 367.40 27,692.10 8/1/95 9,415.76 276.92 18,553.26 9/1195 9,415.76 185.53 9,323.03 10/1/95 9,416.26 93.23 0.00
Amor_Bio -4- 54 Exhibit B BIOSITE LEASEHOLD IMPROVEMENTS January 1, 1993
Phase 5 Tls - ----------- Design Fees 41,747.57 Permit Fees 11,048.98 Base Construction Contract 280,000.00 Construction Change Orders 41,519.00 ----------- Subtotal 374,315.55 Less Biosite Direct Payment (9,288.00) Less Suite F Fire Protection (12,191.00) ----------- Total Phase 5 Leasehold Improvements 352,836.55 Remaining Balance - Old Note 272,960.34 ----------- Total - New Note $625,796.89 Principal Amount - New Note $625,796.89 Interest Rate 12.0% Term (in months) 60 Monthly payment $ 13,782.68
Payment Date Payment Interest Balance - ------------ ------- -------- ------- Jan 1, 1993 $13,782.68 0 $625,014.21 Feb 1, 1993 13,782.68 6,120.14 604,351.67 Mar 1, 1993 13,782.68 6,043.52 596,612.51 Apr 1, 1993 13,782.68 5,966.13 588,795.96 May 1, 1993 13,782.68 5,887.96 580,901.24 Jun 1, 1993 13,782.68 5,809.01 572,927.57 Jul 1, 1993 13,782.68 5,729.28 564,874.17 Aug 1, 1993 13,782.68 5,648.74 556,740.23 Sep 1, 1893 13,782.68 5,567.40 548,524.95 Oct 1, 1993 13,782.68 5,485.25 540,227.52 Nov 1, 1993 13,782.68 5,402.28 531,847.12 Dec 1, 1993 13,782.68 5,318.47 523,382.91 Jan 1, 1994 13,782.68 5,233.83 514,834.06 Feb 1, 1994 13,782.68 5,148.34 506,199.72 Mar 1, 1994 13,782.68 5,062.00 497,479.04 Apr 1, 1994 13,782.68 4,974.79 488,671.15 May 1, 1994 13,782.68 4,886.71 479,775.18 Jun 1, 1994 13,782.68 4,797.75 470,790.25 Jul 1, 1994 13,782.68 4,707.90 461,715.47 Aug 1, 1994 13,782.68 4,617.15 452,549.94 Sep 1, 1994 13,782.68 4,525.50 443,292.76 Oct 1, 1994 13,782.68 4,432.93 433,943.01 Nov 1, 1994 13,782.68 4,339.43 424,499.76 Dec 1, 1994 13,782.68 4,245.00 414,962.08 Jan 1, 1995 13,782.68 4,149.62 405,329.02 Feb 1, 1995 13,782.68 4,053.29 395,599.63 Mar 1, 1995 13,782.68 3,956.00 385,772.95 Apr 1, 1995 13,782.68 3,857.73 375,848.00 May 1, 1995 13,782.68 3,758.48 365,823.80 Jun 1, 1995 13,782.68 3,658.24 355,699.36 Jul 1, 1995 13,782.68 3,556.99 345,473.67
-5- 55
Payment Date Payment Interest Balance - ------------ ------- -------- ------- Aug 1, 1995 13,782.68 3,454.74 335,145.73 Sep 1, 1995 13,782.68 3,351.46 324,714.51 Oct 1, 1995 13,782.68 3,247.15 314,178.98 Nov 1, 1995 13,782.68 3,141.79 303,538.09 Dec 1, 1995 13,782.68 3,035.38 292,790.79 Jan 1, 1996 13,782.68 2,927.91 281,936.02 Feb 1, 1996 13,782.68 2,819.36 270,972.70 Mar 1, 1996 13,782.68 2,709.73 259,899.75 Apr 1, 1996 13,782.68 2,599.00 248,716.07 May 1, 1996 13,782.68 2,487.16 237,420.55 Jun 1, 1996 13,782.68 2,374.21 226,012.08 Jul 1, 1996 13,782.68 2,260.12 214,489.52 Aug 1, 1996 13,782.68 2,144.90 202,851.74 Sep 1, 1996 13,782.68 2,028.52 191,097.58 Oct 1, 1996 13,782.68 1,910.98 179,225.88 Nov 1, 1996 13,782.68 1,792.26 167,235.46 Dec 1, 1996 13,782.68 1,672 35 155,125.13 Jan 1, 1997 13,782.68 1,551.25 142,893.70 Feb 1, 1997 13,782.68 1,428.94 130,539.96 Mar 1, 1997 13,782.68 1,305.40 118,062.68 Apr 1, 1997 13,782.68 1,180.63 105,460.63 May 1, 1997 13,782.68 1,054.61 92,732.56 Jun 1, 1997 13,782.68 927.33 79.877.21 Jul 1, 1997 13,782.68 798.77 66,893.30 Aug 1, 1997 13,782.68 668.93 53,779.55 Sep 1, 1997 13,782.68 537.80 40,534.67 Oct 1, 1997 13,782.68 405.35 27,157.34 Nov 1, 1997 13,782.68 271.57 13,646.23 Dec 1, 1997 13,782.68 136.46 (00.0)
Amor2Bio -6- 56 SUBLEASE AMENDMENT #3 BY AND BETWEEN GENERAL ATOMICS AND BIOSITE DIAGNOSTICS INC. 1. PARTIES, RECITALS, AND GENERAL AGREEMENT. This Sublease between General Atomics "Sublessor" and Biosite Diagnostics, Inc. "Sublessee" dated February 17, 1992 is amended effective this 29th day of October, 1993. Except as hereby amended, all terms and conditions of said Sublease shall remain unchanged and in full force and effect. RECITALS: Lessee desires to expand its premises at the Sorrento West Industrial Park through lease of approximately 9817sf ("added premises") of Lessor's building at 3550 Dunhill Street (Building 3) which is located adjacent to Lessee's "current premises" at Lessor's Building 4 located in the same commercial park. Refer to Amendment #3, Exhibit A-1. Lessee desires to have the lease for the added premises in Building 3 be co-terminus with its current premises in Building 4. Lessee desires to have Lessor finance certain leasehold improvements, part in the added premises in Building 3 and the remainder in its existing premises in Building 4. Lessee desires to manage its own design, permitting, construction and installation of Lessor financed leasehold improvements in the added and current premises. Lessee desires to obtain Right of First Offer (ROFO) for space in Lessor's Buildings 3, 4, 5, and 6, when and if Lessor offers said space for lease to others excluding Lessor's affiliates. Lessor desires to accommodate Lessee's current expansion and finance said leasehold improvements. Lessor desires to accommodate Lessee's future expansion to the extent practical and reasonable. NOW, THEREFORE, in consideration of the foregoing, and in consideration of the mutual covenants and agreements of the parties hereto, the parties mutually covenant and agree as follows: Immediately upon payment of the security deposit by the Lessee, Lessor shall make available to Lessee, the added premises comprised of approximately 9817sf of improved office space in Building 3. -7- 57 Lessee shall take possession of the premises in "as-is" condition and pay rent and operating expenses starting November 1, 1993. Lessor agrees to finance certain leasehold improvements in the amount not to exceed a total of $300,000. Lessee agrees to pay the $300,000 or actual cost of the leasehold improvements whichever is less, as added rent over the remaining term of the base lease, which terminates December 31, 1997. 2.1 PREMISES. This Sublease Amendment shall apply to the following space: Current Premises - Building 4 (Refer to Exhibit A-2) ---------------------------------------------------- Suites A & B 3,160 SF Suite C 6,520 SF Suite D 5,920 SF Suite E 3,880 SF Suite G 4,420 SF Subtotal 23,900 SF Note Note: Suite F space is not included in this amendment. A portion of Suite F space is leased on a month-to-month basis under separate lease. Added Premises - Building 3 (Refer to Exhibit A-3) -------------------------------------------------- Suite B 9,817 SF Total (Bldgs 3 & 4) 33,717 SF 6.0 USE. The added premises shall be used only for office and administrative purposes in support of R&D and Manufacturing of biomedical products. 54. RENT ESCALATIONS Refer to Paragraph (f) of original lease. Change to read as follows: The base rent under (a) shall be calculated by using the "blended rental rate" comprised of the rent for current space after adjustment (January 1, 1994) according to the lease agreement in place prior to this amendment, plus the starting rent for the added space included by this amendment. 56. RENT AND SECURITY DEPOSIT For the purpose of avoiding confusion caused by tracking base rents for different space blocks leased at different times, including space covered under earlier leases that have been -8- 58 superseded as well as amendments to the subject lease, parties agree that a blend rental rate shall be used to calculate base rent increases as follows: 56.1 Base Rent. The starting base rent for the added premises shall be $0.65 per gross square foot per month, net of all operating expenses. 56.2 Rent Increases. On the next anniversary date of this Lease, January 1, 1994, the base rent for the current premises shall be increased as described in Paragraph 54 "Rent Escalations." On each anniversary of the lease thereafter, the rent for current and added premises shall be increased as described in Paragraph 54 as amended, using the blended rental rate effective after the January 1, 1994 increase. 56.3 Leasehold Improvement Cost Recovery. Upon completion of leasehold improvements and accumulation of cost, a new leasehold improvement payment balance shall be determined. The new balance shall be comprised of the unpaid principal remaining for leasehold improvements that were in effect prior to completing leasehold improvements plus the leasehold improvement amount financed on behalf of this lease amendment. Lessee shall make equal monthly payments as added rent to amortize the new principal balance over the remaining term of the lease at an interest rate of 12% per annum. 56.4 Lessee shall pay Lessor a security deposit in the amount equivalent to one month's rent (9817 SF @ $0.65) plus two months' operating expenses (2 x 9817 SF @ $0.15) or a total of $9326. The security deposit for all space covered under this agreement, current plus added, shall be adjusted by a lease amendment executed at the time the new leasehold improvement cost recovery amortization schedule is determined. The adjusted security deposit shall be comprised of the equivalent of one month's rent, two month's average operating expense and one month's payment to amortize the new leasehold improvement principal balance calculated as covered in Paragraph 56.3. 57. COMMENCEMENT DATE. TERM AND OPTIONS (a) The term for the added premises shall commence on November 1, 1993. (b) The term for added and current premises shall end concurrently on December 31, 1997. (c) Assuming the Lease is in full force and effect and Lessee is not in default of terms of the Lease, as can be verified by Lessee via written notice from Lessor, the two year option to extend the lease term for the current premises shall likewise apply to the added premises. -9- 59 58. LEASEHOLD IMPROVEMENTS (TENANT IMPROVEMENTS) Financing provided by the Lessor shall be applied only toward expenditures against costs incurred in the construction of the leasehold improvements, including any and all reasonable fees, charges, costs, or expenses incurred by the Lessee in connection with design, engineering, governmental processing and approval, cost of equipment, materials, labor, construction overhead and fees, utility hookup, equipment installation, testing, inspection, or any costs directly related to the leasehold improvements that improve value of the realty as reflected on the approved drawings and specifications. Excluded from the allowance is the cost of design, purchase, relocation or setup of Lessee's fixtures, Lessee's project management costs, or excess costs incurred by Lessee beyond the approved financing as covered in Paragraphs (a) and (b) below: (a) Building 4 Funding Allowance: Parties agree that cost of leasehold improvements to be financed by the Lessor, for laboratory space in Building 4, shall not exceed $100,000 and shall be expended for interior improvements that enhance utility of the space. (b) Building 3 Funding Allowance: Parties agree that cost of leasehold improvements to be financed by the Lessor, for administrative space in Building 3, shall not exceed $200,000 and shall be expended for interior improvements that enhance utility of the space. (c) Design, Construction Management and Contractor Payment: Lessee shall be responsible for the design, permitting and construction of the leasehold improvements and shall make direct payment for all services authorized by the Lessee to cause the leasehold improvements to be installed. Lessor may at its own discretion, file a "notice of nonresponsibility" giving notice to all contractors that Lessor is not obligated for payment for cost of construction, alterations or repairs needed to cause the leasehold improvements to be installed. (d) Design Review and Concurrence: Lessee shall submit to the Lessor, for Lessor's review and concurrence, all appropriate design documents at the schematic and detailed design stage of completion, all in advance of initiating any leasehold improvements for which Lessor financing is to be used. (e) Collaboration in Selection of Contractors: Lessee shall obtain Lessor's concurrence on selection of architects, engineers, contractors and others for which leasehold improvement funding will be used toward reimbursement of labor, materials and services rendered for the purpose of installing said improvements. (f) Leasehold Improvement Cost Reimbursement: Reimbursement by the Lessor to the Lessee for payment of fees, -10- 60 labor, material and services shall occur only after the Lessee has provided Lessor sufficient backup information supporting request for payment. Verification shall include a summary of the cost to complete, verification of payment by Lessee and mechanics lien releases executed by the performing contractor. In the event Lessee requests progress payments prior to completion of all leasehold improvements, then Lessor shall be provided a schedule for completion showing percentage complete as supporting data for reimbursement. The summary shall be in the form of Construction Specification Institute (CSI) breakdown identifying scope of work, performing contractor(s) and services rendered. (g) Lessor Delays: In no event shall the substantial completion dates of the leasehold improvements be extended due to a delay or fault of Lessor. Delays "due to the fault of Lessor" may include, without limitation, delays caused by: (i) Lessor's failure to timely respond to the schematic design review, or to timely concur with the working plans or information requested by permitting agencies, all to be submitted to the Lessor by written transmittal. Lessee shall provide Lessor reasonable time to respond or five business days. If response is not obtained from Lessor within the five business day period, Lessee shall proceed on assumption that Lessor concurs with the submittal. (ii) Lessor's failure to timely reimburse Lessee those funds required for partial or full completion of the leasehold improvements. Lessor shall have a minimum of forty five (45) days to reimburse Lessee, assuming adequate supporting data is included with the request for reimbursement. (e) Inspection of Premises: Lessor and Lessee representatives shall make routine inspections of the Premises to verify workmanship, check general compliance with design documents and to judge completion in support of request for progress payments. Within five business days after substantial completion, Lessee shall conduct a walk-through inspection of the premises with Lessor and complete a punch-list of items needing correction or additional work to complete the leasehold improvements. Lessor's contractor(s) shall complete all punch- list items within 30 days after submission of the final punch-list or as soon as practicable thereafter. Upon completion of such punch-list items, Lessee shall notify Lessor in writing that the leasehold improvements have been completed and forward to the Lessor verification of final City Building Department inspection approval. At the option of the Lessor, Lessee shall file a notice of completion and record said notice with the recorder's office. -11- 61 59. INSPECTION AND WARRANTY Lessor's warranty under Paragraph 6.3(a) shall apply to "base building improvements" only. For the purpose of interpreting obligations under this paragraph of the lease, "base building improvements" are differentiated from "leasehold improvements" as being those improvements that pre-existed the installation of all "leasehold improvements" installed in the premises on behalf of the Lessee. To allay the Lessee's concerns regarding status of warranty items in the added premises, Lessee shall perform its own inspection of building structure, plumbing, electrical, heating and air conditioning systems and notify Lessor in writing by December 1, 1993 of any needed repairs. Lessor shall take action to repair said deficiencies which Lessor considers valid under terms of the warranty, Paragraph 6.3(a), prior to Lessee's occupancy about January 1, 1993. This inspection and repair shall not supersede the six month warranty covered in section 6.3(a) of the lease taking effect starting the date of lease commencement (November 1, 1993) for the added premises. Lessor shall not be required to make major structural, plumbing, mechanical or electrical upgrades that may be required to meet codes as a result of Lessee installing its planned leasehold improvements. 60. RIGHT OF FIRST OFFER TO EXPAND Provided that this lease continues in full force and effect without default by Lessee, Lessee shall have the right to lease other space in Lessor's buildings in Sorrento West Park designated as Buildings 3, 4, 5 and 6, Exhibit A-1. Other space is classified as space which the Lessor may from time to time determine as surplus to its needs or to the needs of its affiliates, or space that other existing tenants occupy and surrender, for whatever reason, during the base term of this lease. The right granted by this section is subject to the following terms and conditions: (a) If Lessor desires to offer such space for lease, Lessor shall deliver to Lessee a written notice specifying terms of such offer. (b) Lessee shall then have a period of thirty (30) days to accept the offer and thereby lease such space pursuant to the terms of such offer. (c) If Lessee fails to accept or reject such offer within the thirty (30) day period, Lessor shall be entitled to lease such space on equivalent or better terms and conditions to the Lessor than contained in the notice sent to the Lessee with regard to such space. If the Lessee rejects the offer, the response shall be in writing stating the reason for rejection. -12- 62 (d) The Right of First Offer shall terminate for the offered space for a period of one year unless the Lessor decides to offer said space to a third party under less favorable terms and conditions to the Lessor than previously offered to the Lessee. If Lessor forwards a new offer to the Lessee as a result of negotiations with a third party, then Lessee shall have five (5) business days to accept or reject said offer. If the Lessee rejects the offer, the response shall be in writing stating the reason for rejection. (e) If the Lessee fails to respond in writing within the allowed time period, after receiving an offer, Lessor shall assume Lessee has rejected the offer and the Right of First Offer for the subject space shall terminate for the entire term of the lease, including option periods. (f) The Right of First Offer shall be granted only during the base term of the lease and not during the option period. (g) The Right of First Offer shall not apply to expansion space for which rights have been granted to other tenants in the designated space. (h) The Right of First Offer shall be granted only after Lessor's review of Lessee's financial statement to establish Lessor's satisfaction that Lessee has the ability to pay for leasing the offered space. (i) The Right of First Offer shall be granted only upon consent of property owner's lender relative to terms and conditions of the offered space as it relates to use of the property, subordination, lease term and financial consideration. Lessor will make best effort to inform Lessee of available space in Sorrento West whether or not it is included in Lessor's Right of First Offer designated space. SUBLESSOR SUBLESSEE GENERAL ATOMICS BIOSITE DIAGNOSTICS, INC. By /s/ Robert H. Dalry By /s/ Kim D. Blickenstaff ------------------------------ ------------------------------ Robert H. Dalry, Kim Blickenstaff, Director, Facilities President -13- 63 THE IDEAL LOCATION Sorrento West is strategically located just off U.S. Interstate 5 at 805, the major North/South highways that provide easy access to the West's major markets. All major delivery firms provide regular service. San Diego's port facilities and international airport are only 15 minutes away. GRAPHIC OMITTED DIRECTIONS FROM SAN DIEGO: Take the Sorrento Valley Exit off Interstate 5 (north). Turn left on Roselle Street. Pass under Interstate 5 and follow Roselle to Sorrento West site. OR Take the Sorrento Valley Exit off Interstate 805 (north). Turn left on Sorrento Valley Road. Follow Sorrento Valley Road to intersection with Sorrento Valley Blvd. Turn left over railroad tracks and bridge spanning flood control channel. Turn right onto Roselle Street and follow Roselle north to Sorrento West site. Approximately 1 block. FROM LOS ANGELES: Take Carmel Valley Road Exit off Interstate 5 (south). Turn right onto Carmel Valley Road and then left onto Sorrento Valley Road and then left onto Sorrento Valley Road. Follow Sorrento Valley Road to intersection with Sorrento Valley Boulevard. Turn right over railroad tracks and bridge spanning flood control channel. Turn right onto Roselle Street and follow Roselle to Sorrento West site. For Information contact: GRAPHIC OMITTED. -14- 64 EXHIBIT A-2 [GRAPHIC OF BUILDING 4 OMITTED] -15- 65 EXHIBIT A-3 [GRAPHIC OF BUILDING 3 OMITTED] -16- 66 AMENDMENT #4 TO THE SUBLEASE BY AND BETWEEN GENERAL ATOMICS AND BIOSITE DIAGNOSTICS, INC. PARTIES, RECITALS AND GENERAL AGREEMENT This Sublease Amendment #4, dated for reference purposes only, March 1, 1995 is made by and between General Atomics (herein called "Lessor") and Biosite Diagnostics, Inc. (herein called "Lessee"). RECITALS A. WHEREAS, Parties to this Agreement entered into a Sublease dated February 17, 1992, and Amendments #1, #2 and #3 dated August 10, 1992, January 21, 1993 and October 29, 1993 respectively: B. WHEREAS, Parties executed Sublease Amendment #1 for the express purpose of leasing to the Lessee, on a month-to-month basis, 1,550sf of 4,454sf in Building 4, Suite F; (Refer to Exhibit A, Site Map and Exhibit B, Floor Plans C. WHEREAS, Lessee desires to sublease all of Suite F, that 1,550sf portion currently being leased month-to-month and the 2,904sf portion currently retained by the Lessor (herein called "ADDED" space), for the same period as Lessee's current Premises; D. WHEREAS, Lessee has the "Right-of-First-Offer for Lessor's Sorrento West Building 5 Premises at 11040 Roselle Street and a proposal for "Right-of-First-Offer" to lease a portion of said Building was directed to the Lessee; E. WHEREAS, Lessee has requested that Lessor finance leasehold improvements for Suite F and for certain existing laboratories of its current Premises; F. WHEREAS, parties desire to modify the Sublease in certain respects; NOW THEREFORE, in consideration of the foregoing, and in consideration of mutual covenants and agreements of the parties hereto, the parties mutually covenant and agree as follows: 2.1. PREMISES. Add to the Lessee's Premises approximately 4,454gsf of space, more specifically identified as "ADDED" space, which is comprised of that portion of Suite F in Building 4 previously retained by the Lessor (2,904gsf) and that portion currently leased month-to-month by the Lessee (1,550gsf). Following is a summary of the Lessee's space blocks, date of possession, approximate sizes and the leasehold improvement phase for all space blocks covered under Terms of the Sublease. -17- 67
POSSESSION IMPROVEMENT LOCATION SPACE SIZE (GSF) DATE PHASE(S) - -------- ----- ---------- ---- -------- Bldg. 4 Suite D 5,920 03/10/90 #1 & 6 Suite C 6,520 07/01/90 #2 & 6 Suite E 3,880 10/01/90 #3 Suites A&B 3,160 05/01/91 #4 & 5 Suite G 4,420 03/01/92 #5 Bldg. 3 Suite A 9,817 11/01/93 #6 Bldg. 4 Suite F 4,454 03/01/95 #7 BLDGS. 3 & 4 TOTAL: 38,171
3.0 TERM. The Term for the "ADDED" space shall start March 1, 1995 and end on the same date as for "CURRENT" space, December 31, 1997. End of Term for all space blocks shall be coterminous. 4.2(a) OPERATING EXPENSES. Lessee shall pay its pro rata share of operating expenses for all space including the "ADDED" space. This Sublease Amendment changes the Lessee's pro rata share of operating expenses for "CURRENT" and "ADDED" Premises to: Building 3 - 47.16%; Building 4 - 100%; Park - 32.18%. 50. BROKER'S FEE. Applies to all space covered by the Sublease including that added under this Amendment. 51. HAZARDOUS MATERIALS. Applies to all space covered by the Sublease including that added under this Amendment. 52. PREVIOUS AGREEMENTS. Applies to all space covered by the Sublease including that added under this Amendment. 53. AGREEMENT OF SUBORDINATION AND ATTORNMENT. Applies to all space covered by the Sublease including that added under this Amendment. 54. RENT ESCALATIONS. Paragraph 54 is replaced in its entirety with the Amendment #4 Paragraph 54, ADDENDUM TO STANDARD SUBLEASE attached herein. ADDENDUM TO PRIOR AMENDMENT #3 The following paragraphs were deleted from Sublease Amendment #3 without incorporating the word "DELETE." 47. TERM AND COMMENCEMENT DATE 48. RENT SCHEDULE 49. TENANT IMPROVEMENTS -18- 68 The following paragraphs were added to Sublease Amendment #3 without incorporating the word "ADD": 56. RENT AND SECURITY DEPOSIT 57. COMMENCEMENT DATE, TERM AND OPTIONS 58. LEASEHOLD IMPROVEMENTS (TENANT IMPROVEMENTS) 59. INSPECTION AND WARRANTY 60. RIGHT OF FIRST OFFER TO EXPAND Parties agree that these omissions are hereby corrected by Sublease Amendment #4. 55. OPTION TO EXTEND. This option applies to all space including that added under Terms of this Sublease Amendment. Refer to ADDENDUM TO STANDARD INDUSTRIAL LEASE of Base Lease. 56. RENT AND SECURITY DEPOSIT. Delete Amendment #3 Paragraph 56 in its entirety and replace with the following: 56.1 Base Rent. The Base Rent for Building 4 "ADDED" space, net of all operating expenses, shall be the rental rate the Lessee now pays on a month-to-month basis ($0.55/gsf per month) adjusted as stipulated in Paragraph 56.2. 56.2 Rent Increases. Effective March 1, 1995, current rent, including the month-to-month rent for Suite F, shall be adjusted by the latest available CPI index for Urban Wage Earners and Clerical Workers, LA-Anaheim-Riverside. Rent adjustment for the designated space blocks, using indices for December 1993 (146.7) and December 1994 (148.1), is as shown in the table below. Future rent adjustments shall be as stipulated in Paragraph 54 included herein. New total rent ($25,759), comprised of the current rent plus rent for the "ADDED" space (adjusted for actual 1994 CPI), shall be used as the base rent for calculating future rent increases under Paragraph 54:
Building Space Block Rent - -------- ----------- ---------------------------------------- CPI Current Adjustment New ---------- ---------- ---------- 3 Suite A $ 6,381.00 $ 60.90 $ 6,441.90 4 Suites A,B,C,D&E $13,971.65 $133.34 $14,104.99 4 Suite G $ 2,712.75 $ 25.89 $ 2,738.64 4 Suite F(1,550sf) $ 853.00 $ 8.14 $ 861.14 4 Suite F(2,904sf) $ 0.00 $ 0.00 $ 1,612.44 ---------- ------- ---------- $23,918.40 $228.27 $25,759.11
56.3 Leasehold Improvement Cost Recovery. Lessor has previously financed six separate improvement projects over a period starting with the Lessee's possession of the first space block, Building 4, Suite D. Lessor has paid all the leasehold improvement costs for Phase 4. Costs for Phases 1, 2, 3, and 5 -19- 69 are being paid on a payment schedule dated January 1, 1993 (Exhibit C). Payment for Improvement Phase 6, which was comprised of improvements to Building 3, Suite A, and certain rework of Building 4, Suites C & D, is being paid to the Lessor by the Lessee, on a separate payment schedule dated April 1, 1994 (Exhibit D). As part of this Sublease Amendment, Lessee requested and Lessor agrees to finance, additional leasehold improvements to "ADDED" space, and to certain upgrades for existing laboratories in "CURRENT" space. This financing shall be identified as improvement Phase 7, with a total cost not to exceed $125k, the final actual sum to be amortized over the remaining period of the base sublease term, at 12% per annum. Parties agree that upon completion of Phase 7 funding, Lessor has the option to combine the three financing schedules into one, the principal amount of the new schedule to be determined by adding to the unamortized balance of the two current payment schedules (Exhibits C and D) the actual Phase 7 "debt" as determined below. Lessee's requests for reimbursement of leasehold improvement expenditures shall be limited to one request per month. Lessor's Project funding shall be completed within four months from the first disbursement payment. In the event the leasehold improvement cost reimbursement period exceeds three months, Lessor has the option to accrue interest on the reimbursement amount, at 1% per month, to be added to the total amount funded to the Phase 7 improvements, the sum to be termed Phase 7 "debt." This debt shall be used as the starting balance for the Phase 7 leasehold payment schedule for which collection shall start no later than six months after the first reimbursement payment. 56.4 Security Deposit. Lessee shall increase its Security Deposit to an amount equivalent to one month's rent, two months' average operating expenses and one month's payment for leasehold improvements. The following summarizes the Security Deposit required upon execution of Sublease Amendment #4.
One Month's Rent (Paragraph 56.2) $25,579 One Month's Operating Expenses 38,171sf x $0.15/sf x 2mos. $11,451 Monthly Leasehold Payment - January 1, 1993 Schedule $13,783 Monthly Leasehold Payment - April 1, 1994 Schedule $ 8,208 Security Deposit on Record $42,326 SECURITY DEPOSIT DUE UPON EXECUTION OF THIS AMENDMENT: $16,695
57. COMMENCEMENT DATE, TERM AND OPTIONS. Delete in its entirety. Information is contained in other Paragraphs of the Sublease Amendment. -20- 70 58. LEASEHOLD IMPROVEMENTS. Delete Amendment #3, Paragraph 58 in its entirety and replace with the following: Parties agree that Lessee shall cause to be installed certain leasehold improvements in the "ADDED" space and in certain "CURRENT" space, Phase 7 improvements to be identified on working drawings and specifications prepared by qualified design firms registered to practice in the State of California. Design for said improvements shall be processed through the City of San Diego Building Department and work shall be performed under valid permits with the City. (a) Financing: Financing provided by the Lessor shall be applied only toward expenses incurred in the preparation of design; for engineering, governmental processing and approval; for construction of the leasehold improvements, including any and all reasonable fees, charges, costs, or expenses incurred by the Lessee in connection with cost of equipment, materials, labor, construction, overhead and fees, utility hookup, equipment installation, testing, inspections, or any costs directly related to the leasehold improvements that improve the value of the realty as reflected on the approved working drawings and specifications. Excluded from the financing is the cost of design, purchase, relocation, installation and testing of Lessee's fixtures; costs of Lessee's project management, overhead and fees, or excess costs incurred by Lessee beyond the amount of approved financing stipulated in Paragraph 56.3. (b) Design, Construction Management and Contractor Payment: Lessee shall be responsible for coordinating design, permitting and construction management of the leasehold improvements. Lessee shall make direct payment for all services authorized by the Lessee to cause the leasehold improvements to be installed. Lessor may at its own discretion, file a "notice of non responsibility" giving notice to all contractors that Lessor is not obligated for payment of construction material, labor or services, or repairs needed to cause the leasehold improvements to be installed. (c) Design Review and Concurrence: Lessee shall submit to the Lessor, for Lessor's review and concurrence, working drawings and specifications at the schematic and detailed design stage of completion, all in advance of initiating any leasehold improvements for which Lessor financing is to be used. (d) Collaboration in Selection of Contractors: Lessee shall obtain Lessor's concurrence on selection of architects, engineers, contractors and others for which leasehold improvement funding will be used toward reimbursement for payment of labor, materials and services rendered for the purpose of having installed said improvements. (e) Leasehold Improvement Cost Reimbursement: Reimbursement by Lessor to the Lessee for payment of fees, -21- 71 labor, material and services shall occur only after the Lessee has provided Lessor sufficient backup information showing verification of payment with supporting information. Supporting information shall include a summary of the cost to complete and verification of payment by Lessee accompanied by conditional or unconditional mechanics lien releases executed by the performing contractor(s). Any request for reimbursement for progress payments (payments for less than 100% completion) shall be supported with a schedule for project completion showing percentage complete for those services for which reimbursement is being requested. Cost summaries, supported by a project schedule, shall be in the Construction Specification Institute (CSI) format, identifying scope of work, respective performing contractor(s) and services rendered. (f) Lessor Delays: In no event shall the substantial completion dates of the leasehold improvements be extended due to a delay or fault of Lessor. Delays "due to the fault of Lessor" may include, without limitation, delays caused by: (i) Lessor's failure to timely respond to the schematic design review, or to timely concur with the working plans or information requested by permitting agencies, all to be submitted to the Lessor by written transmittal. Lessee shall provide Lessor reasonable time to respond or a minimum of five (5) business days. If response is not obtained from Lessor within the five (5) business day period, Lessee shall proceed on assumption that Lessor concurs with the submittal. (ii) Lessor's failure to timely reimburse Lessee those funds required for partial or full completion of the leasehold improvements. Lessor shall have a minimum of thirty (30) days to reimburse Lessee, assuming adequate supporting data is included in the request for reimbursement. (g) Inspection of Premises: Lessor and Lessee representatives shall make routine inspections of the Premises to verify workmanship, check general compliance with design documents and to judge completion in support of request for reimbursement for progress payments. Within five (5) business days after substantial completion, Lessee shall conduct a walkthrough inspection of the Premises with Lessor and complete a punch-list of items needing correction or additional work to complete the leasehold improvements. Lessee's contractor(s) shall complete all punch-list items within thirty (30) days after submission of the final punch-list or as soon as practicable thereafter. Upon completion of such punch-list items, Lessee shall notify Lessor in writing that the leasehold improvements have been completed and forward to the Lessor. verification of final City Building Department inspection approval. At the option of the Lessor, Lessee shall file a notice of completion and record said notice with the recorder's office. -22- 72 59. INSPECTION AND WARRANTY. Delete Amendment #3, Paragraph 59 in its entirety and replace with the following: Lessor's warranty under Paragraph 6.3(a) shall apply to "base building improvements" only. For the purpose of interpreting obligations under this paragraph of the Sublease, "base building improvements" are differentiated from "leasehold improvements" as being those improvements that pre-existed the installation of "leasehold improvements" installed in the "ADDED" space block by the Lessee. Lessee shall perform its own inspection of building structure, plumbing, electrical, heating and air conditioning systems and notify Lessor in writing by April 1, 1995 of any needed repairs. Lessor shall take action to repair said deficiencies which Lessor considers valid under terms of the warranty, Paragraph 6.3(a). This inspection and repair shall not supersede the six month warranty covered in section 6.3(a) of the Sublease taking effect starting the date of possession, March 1, 1995 for the "ADDED" Premises. Lessor shall not be required to make major structural, plumbing, mechanical or electrical upgrades that may be required to meet codes as a result of Lessee installing its planned leasehold improvements. 60. RIGHT OF FIRST OFFER TO EXPAND. Delete Amendment #3, Paragraph 60 in its entirety and replace with the following: Provided that this Sublease continues in full force and effect without default by Lessee, Lessee shall have the "Right-of-First-Offer" ("ROFO") to lease other space in Lessor's buildings in Sorrento West Park designated as Buildings 3, 4, and 6 (Refer to Exhibit A, Site Map). "ROFO" space is classified as space which the Lessor may from time to time determine as surplus to its needs or to the needs of its affiliates, or space that other existing tenants occupy and surrender, for whatever reason, during the base term of this Sublease. The right granted to the Lessee by this section is subject to the following terms and conditions: (a) If Lessor desires to offer such space for lease, Lessor shall deliver to Lessee a written notice specifying terms of such offer. (b) Lessee shall then have a period of thirty (30) days to accept the offer and thereby lease such space pursuant to the terms of such offer. (c) If Lessee fails to accept or reject such offer within the thirty (30) day period, Lessor shall be entitled to lease such space to other third party. If the Lessee rejects the offer, the response shall be in writing stating the reason for rejection. -23- 73 (d) If the Lessee fails to respond in writing within the allowed time period, after receiving an offer, Lessor shall assume Lessee has rejected the offer and the "ROFO" for the subject space shall terminate for the entire term of the Sublease, including the option periods. (e) "ROFO" shall be granted only during the base term of the Sublease and not during the option period. (f) "ROFO" shall not apply to expansion space for which rights have been granted to other tenants in the designated space. (g) "ROFO" shall be granted only after Lessor's review of Lessee's financial statement to establish Lessor's satisfaction that Lessee has the ability to pay for leasing the offered space. (h) "ROFO" shall be granted only upon consent of Property Owner and its lender relative to terms and conditions of the offered space and as it relates specifically to use of the property, subordination, sublease term and financial consideration. By letter dated, May 6, 1994, Lessor submitted a proposal to Lessee extending to Lessee "ROFO" option for its expansion into a portion of Building 5 at 11040 Roselle Street, more specifically the 11,905gsf space block occupied by Microelectronics Packaging America. Through lack of response from the Lessee, said offer expired June 6, 1994. Parties acknowledge they have since discussed Lessee's expansion needs relative to possible availability about the end of first quarter 1995, of approximately 17,99Ogsf in Building 5, currently occupied by "A" Company. Lessee informally notified Lessor that it would not execute a "ROFO" option for the "A" Company space and by execution of this Sublease Amendment, Lessee affirms its position of disinterest in said "ROFO" option. Parties agree the Lessor's Building 5 is therefore removed for "ROFO" consideration under this Sublease Agreement. ADDENDUM TO SUBLEASE. Addendum attached to the base Sublease applies to all space covered under terms of this Sublease Amendment. EXCEPT AS HEREBY AMENDED, ALL OTHER TERMS AND CONDITIONS OF SAID LEASE SHALL REMAIN UNCHANGED AND IN FULL FORCE AND EFFECT. LESSOR: LESSEE: GENERAL ATOMICS BIOSITE DIAGNOSTICS, INC. By /s/ Robert H. Dalry By /s/ Kim D. Blickenstaff ---------------------------- ---------------------------- Robert H. Dalry Kim Blickenstaff Director Facilities President -24- 74 ADDENDUM TO STANDARD SUBLEASE AMENDMENT #40 Dated: March 1, 1995 By and Between: General Atomics Biosite Diagnostics, Inc. 54 RENT ESCALATIONS (a) On January 1, 1996, 1997 and the same month and day of the option period years, the monthly rent payable under paragraph (e) shall be adjusted by the increase, if any, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles-Long Beach-Anaheim, California (1967=100), "All Items," herein referred to as "C.P.I." (b) The monthly rent payable in accordance with paragraph (a) of this Addendum shall be calculated as follows: the rent payable (See paragraph (e) below), shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month prior to the month the adjustment is to take effect, and the denominator of which shall be the C.P.I. for December 1994 (148.1). The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) Pending receipt of the required C.P.I. and determination of the actual adjustment, Lessee shall pay an estimated adjusted rental, as reasonably determined by Lessor by reference to the then available C.P.I. information. Upon notification of the actual adjustment after publication of the required C.P.I., any overpayment shall be credited against the next installment of rent due, and any underpayment shall be immediately due and payable by Lessee. Lessor's failure to request payment of an estimated or actual rent adjustment shall not constitute a waiver of the right to any adjustment provided for in the Lease or this addendum. (d) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. -25- 75 The cost of said Arbitrators shall be paid equally by Lessor and Lessee. (e) The monthly rent under (a) shall be calculated by indexing the March 1, 1995 rent or $25,579 as shown in paragraph 56.2 Rent Increases, of the Sublease Amendment #4. (f) Annual rent determined under (a) shall be increased 3% minimum and 8% maximum. -26- 76 THE IDEAL LOCATION Sorrento West is strategically located just off U.S. Interstate 5 at 805, the major North/South highways that provide easy access to the West's major markets. All major delivery firms provide regular service. San Diego's port facilities and international airport are only 15 minutes away. GRAPHICS OMITTED. DIRECTIONS FROM SAN DIEGO: Take the Sorrento Valley exit off Interstate 5 (north). Turn left on Roselle Street. Pass under Interstate 5 and follow Roselle to Sorrento West site. OR Take the Sorrento Valley Exit off Interstate 805 (north). Turn left on Sorrento Valley Road. Follow Sorrento Valley Road to intersection with Sorrento Valley Blvd., turn left over railroad tracks and bridge spanning flood control channel. Turn right onto Roselle Street and follow Roselle north to Sorrento West site. Approximately 1 block. FROM LOS ANGELES: Take Carmel Valley Road exit off Interstate 5 (south). Turn right onto Carmel Valley Road and then left onto Sorrento Valley Road. Follow Sorrento Valley Road to intersection with Sorrento Valley Boulevard, turn right over railroad tracks and bridge spanning flood control channel, turn right onto Roselle Street and follow Roselle to Sorrento West site. GRAPHICS OMITTED. Exhibit A -27- 77 BIOSITE LEASEHOLD IMPROVEMENTS January 1, 1993 Phase 5 Tls Design Fees 41,747.50 Permit Fees 11,048.98 Base Construction Contract 280,000.00 Construction Change Orders 41,519.00 ----------- Subtotal 374,315.55 Less Biosite Direct Payment (9,288.00) Less Suite F Fire Protection (12,191.00) ----------- Total Phase 5 Leasehold Improvements 352,836.55 Remaining Balance - Old Note 272,960.34 ----------- Total - New Note $625,796.89 Principal Amount - New Note $625,796.89 Interest Rate 12.0% Term (in months) 60 Monthly payment $ 13,782.68
Payment Date Payment Interest Balance - ------------ ----------- -------- ----------- $625,796.89 Jan 1, 1993 $ 13,782.68 0 612,014.21 Feb 1, 1993 13,782.68 6,120.14 604,351.67 Mar 1, 1993 13,782.68 6,043.52 596,612.51 Apr 1, 1993 13,782.68 5,966.13 588,795.96 May 1, 1993 13,782.68 5,887.96 580,901.24 Jun 1, 1993 13,782.68 5,809.01 572,927.57 Jul 1, 1993 13,782.68 5,729.28 564,874.17 Aug 1, 1993 13,782.68 5,648.74 556,740.23 Sep 1, 1993 13,782.68 5,567.40 548,524.95 Oct 1, 1993 13,782.68 5,485.25 540,227.52 Nov 1, 1993 13,782.68 5,402.28 531,847.12 Dec 1, 1993 13,782.68 5,318.47 523,382.91 Jan 1, 1994 13,782.68 5,233.83 514,834.06 Feb 1, 1994 13,782.68 5,148.34 506,199.72 Mar 1, 1994 13,782.68 5,062.00 497,479.04 Apr 1, 1994 13,782.68 4,974.79 488,671.15 May 1, 1994 13,782.68 4,886.71 479,775.18 Jun 1, 1994 13,782.68 4,797.75 470,790.25 Jul 1, 1994 13,782.68 4,707.90 461,715.47 Aug 1, 1994 13,782.68 4,617.15 452,549.94 Sep 1, 1994 13,782.68 4,525.50 443,292.76 Oct 1, 1994 13,782.68 4,432.93 433,943.01 Nov 1, 1994 13,782.68 4,339.43 424,499.76 Dec 1, 1994 13,782.68 4,245.00 414,962.08 Jan 1, 1995 13,782.68 4,149.62 405,329.02 Feb 1, 1995 13,782.68 4,053.29 395,599.63 Mar 1, 1995 13,782.68 3,956.00 385,772.95 Apr 1, 1995 13,782.68 3,857.73 375,848.00 May 1, 1995 13,782.68 3,758.48 365,823.80 Jun 1, 1995 13,782.68 3,658.24 355,699.36 Jul 1, 1995 13,782.68 3,556.99 345,473.67 Aug 1, 1995 13,782.68 3,454.74 335,145.73 Sep 1, 1995 13,782.68 3,351.46 324,714.51 Oct 1, 1995 13,782.68 3,247.15 314,178.98 Nov 1, 1995 13,782.68 3,141.79 303,538.09 Dec 1, 1995 13,782.68 3,035.38 292,790.79 Jan 1, 1996 13,782.68 2,927.91 281,936.02 Feb 1, 1996 13,782.68 2,819.36 270,972.70 Mar 1, 1996 13,782.68 2,709.73 259,899.75
Exhibit C -28- 78
Payment Date Payment Interest Balance - ------------ ----------- -------- ----------- Apr 1, 1996 13,782.68 2,599.00 248,716.07 May 1, 1996 13,782.68 2,487.16 237,420.55 Jun 1, 1996 13,782.68 2,374.21 226,012.08 Jul 1, 1996 13,782.68 2,260.12 214,489.52 Aug 1. 1996 13,782.68 2,144.90 202,851.74 Sep 1, 1996 13,782.68 2,028.52 191,097.58 Oct 1, 1996 13,782.68 1,910.98 179,225.88 Nov 1, 1996 13,782.68 1,792.26 167,235.46 Dec 1, 1996 13,782.68 1,672.35 155,125.13 Jan 1, 1997 13,782.68 1,551.25 142,893.70 Feb 1, 1997 13,782.68 1,428.94 130,539.96 Mar 1, 1997 13,782.68 1,305.40 118,062.68 Apr 1, 1997 13,782.68 1,180.63 105,460.63 May 1, 1997 13,782.68 1,054.61 92,732.56 Jun 1, 1997 13,782.68 927.33 79,877.21 Jul 1, 1997 13,782.68 798.77 66,893.30 Aug 1, 1997 13,782.68 668.93 53,779.55 Sep 1, 1997 13,782.68 537.80 40,534.67 Oct 1, 1997 13,782.68 405.35 27,157.34 Nov 1, 1997 13,782.68 271.57 13,646.23 Dec 1, 1997 13,782.69 136.46 (0.00)
Exhibit C -29- 79 BIOSITE LEASEHOLD IMPROVEMENT - PHASE 6 (1993-1994 PERIOD)
GA Allowance Reimbursement # Building Amount --------------- -------- ------ 1 3 $ 79,348.83 2 3 $116,970.62 3 4 $ 60,030.54 4 4 $ 42,876.69 ----------- $299,226.57
Loan Amount $299,226.57 Interest Rate 12.0% Term (in months) 45 Monthly payment $ 8,208.01
Payment Date Payment Interest Balance - ------------ ----------- -------- ----------- $299,226.57 April 1, 1994 $8,208.01 $ 0.00 $291,018.56 May 1, 1994 $8,208.01 2,910.19 285,720.74 June 1, 1994 $8,208.01 2,857.21 280,369.93 July 1, 1994 $8,208.01 2,803.70 274,965.62 August 1, 1994 $8,208.01 2,749.66 269,507.27 September 1, 1994 $8,208.01 2,695.07 263,994.33 October 1, 1994 $8,208.01 2,639.94 258,426.26 November 1, 1994 $8,208.01 2,584.26 252,802.52 December 1, 1994 $8,208.01 2,528.03 247,122.53 January 1, 1995 $8,208.01 2,471.23 241,385.75 February 1, 1995 $8,208.01 2,413.86 235,591.60 March 1, 1995 $8,208.01 2,355.92 229,739.50 April 1, 1995 $8,208.01 2,297.40 223,828.89 May 1, 1995 $8,208.01 2,238.29 217,859.16 June 1, 1995 $8,208.01 2,178.59 211,829.75 July 1, 1995 $8,208.01 2,118.30 205,740.03 August 1, 1995 $8,208.01 2,057.40 199,589.42 September 1, 1995 $8,208.01 1,995.89 193,377.31 October 1, 1995 $8,208.01 1,933.77 187,103.07 November 1, 1995 $8,208.01 1,871.03 180,766.09 December 1, 1995 $8,208.01 1,807.66 174,365.74 January 1, 1996 $8,208.01 1,743.66 167,901.39 February 1, 1996 $8,208.01 1,679.01 161,372.39 March 1, 1996 $8,208.01 1,613.72 154,778.11 April 1, 1996 $8,208.01 1,547.78 148,117.88 May 1, 1996 $8,208.01 1,481.18 141,391.05 June 1, 1996 $8,208.01 1,413.91 134,596.95 July 1, 1996 $8,208.01 1,345.97 127,734.91 August 1, 1996 $8,208.01 1,277.35 120,804.25 September 1, 1996 $8,208.01 1,208.04 113,804.28 October 1, 1996 $8,208.01 1,138.04 106,734.31 November 1, 1996 $8,208.01 1,067.34 99,593.65 December 1, 1996 $8,208.01 995.94 92,381.57 January 1, 1997 $8,208.01 923.82 85,097.38 February 1, 1997 $8,208.01 850.97 77,740.34 March 1, 1997 $8,208.01 777.40 70,309.74 April 1, 1997 $8,208.01 703.10 62,804.82 May 1, 1997 $8,208.01 628.05 55,224.86 June 1, 1997 $8,208.01 552.25 47,569.10 July 1, 1997 $8,208.01 475.69 39,836.78 August 1, 1997 $8,208.01 398.37 32,027.14 September 1, 1997 $8,208.01 320.27 24,139.40
Exhibit D -30- 80
Payment Date Payment Interest Balance - ------------ ----------- -------- ----------- October 1, 1997 $8,208.01 241.39 16,172.78 November 1, 1997 $8,208.01 161.73 8,126.50 December 1, 1997 $8,208.01 81.27 (0.24)
Exhibit D -31- 81 AMENDMENT #5 TO THE SUBLEASE BY AND BETWEEN GENERAL ATOMICS AND BIOSITE DIAGNOSTICS, INC. THIS SUBLEASE AMENDMENT #5 ("Amendment #5") dated for reference purposes only, October 1, 1996 is made by and between GENERAL ATOMICS, ("Lessor") and BIOSITE DIAGNOSTICS, INC. ("Lessee"). RECITALS Parties entered into a Sublease Agreement dated February 17, 1992, and Amendments #1, #2, #3 and #4 dated August 10, 1992, January 21, 1993, October 29, 1993 and March 1, 1995 respectively for certain Building 3 and 4 Premises at Lessor's Sorrento West Commercial Park; Lessee has requested that the Option to Extend the Lease Term be changed to provide for four one-year extension terms in lieu of the one two-year extension term currently in the Sublease Agreement; In acknowledgment by the Lessor of the Lessee's excellent rent payment history and commendable performance under terms of the Sublease Agreement, Lessor desires to accommodate Lessee's requested change; NOW THEREFORE, in consideration of the foregoing, and in consideration of mutual covenants and agreements of the Parties hereto, the Parties mutually covenant and agree as follows: Delete Paragraph 55, Option to Extend, in its entirety and replace with a new Paragraph 55 attached herein: Except as hereby amended, all other terms and conditions of said sublease shall remain unchanged and in full force and effect. LESSOR: LESSEE: GENERAL ATOMICS BIOSITE DIAGNOSTICS, INC. By: /s/ Robert H. Dalry By: /s/ Chris Twomey --------------------------- --------------------------- Name: Robert H. Dalry Name: Chris Twomey ------------------------- ------------------------- Title: Director Facilities Title: V. P. Finance ------------------------ --------------------------- Date: 11/4/96 Date: 10/4/96 ------------------------- ------------------------- -32- 82 ADDENDUM TO STANDARD INDUSTRIAL LEASE Dated October 1, 1996 By and Between General Atomics and Biosite Diagnostics, Inc. 55 OPTION TO EXTEND - -- A. Lessor hereby grants to Lessee the option to extend the term of this Lease for four one year periods commencing when the prior term expires upon each and all of the following terms and conditions: (i) Lessee gives to Lessor and Lessor receives written notice of the exercise of the option to extend this Lease for said additional term no earlier than nine months and no later than six months prior to the time that the option period would commence if the option were exercised, time being of the essence. If said notification of the exercise of said option is not so given and received, this option shall automatically expire; (ii) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (iii) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; (iv) The monthly rent for each month of the option period shall be calculated as follows: In accordance with Paragraph 54, Rent Escalations, of Sublease Amendment #4. -33- EX-10.20 4 EXHIBIT 10.20 1 EXHIBIT 10.20 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] SETTLEMENT AND LICENSE AGREEMENT & AGREEMENT OF DISMISSAL WITH PREJUDICE THIS SETTLEMENT AND LICENSE AGREEMENT & AGREEMENT OF DISMISSAL WITH PREJUDICE ("Agreement") is made as of September 6, 1996 ("Effective Date"), by and between Biosite Diagnostics, Inc., a Delaware corporation, having an office and principal place of business at 11030 Roselle Street, San Diego, California 92121 ("Biosite") and Abbott Laboratories, an Illinois corporation, having an office and principal place of business at 100 Abbott Park Road, Abbott Park, Illinois 60064 ("Abbott"). WHEREAS, on May 5, 1994, Abbott filed a patent infringement suit against Biosite in the United States District Court for the Northern District of Illinois, with respect to United States Patent No. 5,073,484 (Case No. 94 C 2808); WHEREAS, Biosite and Abbott wish to resolve the issues relating to such action. NOW, THEREFORE, in consideration of the mutual promises and obligations set forth herein, Abbott and Biosite agree as follows; ARTICLE I - DEFINITIONS For purposes of this Agreement, the following definitions shall apply: 1.01 The term "Action" means the action presently pending in the United States District Court for the Northern District of Illinois, Abbott Laboratories v. Biosite Diagnostics, Inc., bearing the Case Number 94 C 2808. 1.02 The term "Affiliate" means with respect to a party, any other business entity which directly or indirectly controls, is controlled by, or is under common control with, such party. A business entity or party shall be regarded as in control of another business entity if it owns, or directly or indirectly controls, more than fifty percent (50%) of the voting stock or other ownership interest of the other business entity. 1.03 The term "Combination Product" means a Product that is sold in combination with one or more other products which have commercial utility other than use in combination with a Product. 1.04 The term "DOA Diagnostics Field" means the following field: [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] 1 2 1.05 The term "[CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field" means the following field: [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] 1.06 The term "[CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field" means the following field: [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] 1.07 The term "Net Sales" means: (A) the gross invoiced price for all Products sold or otherwise transferred for tangible value by Biosite or its Affiliates or its sublicensees (to the extent authorized under this Agreement) in arm's length transactions to unrelated third parties for monetary or other valuable consideration, less deductions for: (i) quantity, trade and cash discounts or rebates, credits or allowances and adjustments separately and actually credited to customers for rejections and returns of Products; (ii) charges for freight, postage, transportation, import or export taxes, excise taxes and other similar taxes, insurance and other delivery costs not otherwise charged to the customer; and (iii) any tax or other government charges imposed on the sale or use of Products (other than income tax) levied on its sale, transportation or delivery and borne by Biosite or its Affiliates or its sublicensees (to the extent authorized under this Agreement). (B) With respect to Combination Products, the gross invoiced price of such Combination Products billed to customers by Biosite or its Affiliates or its sublicensees (to the extent authorized under this Agreement), less: the allowances and adjustment referred to in subparagraph (A) above, multiplied by a fraction the numerator of which shall be the gross selling price of the Product as sold separately and the denominator of which shall be the sum of the gross selling price(s) of each of the other products having commercial utility in the Combination Product including the Product. If there is no established current gross selling price for the Product or for other products having commercial utility, then for purposes of calculating Net Sales the standard costs in accordance with Generally Accepted Accounting Principles ("GAAP") of manufacturing of the Product with the other products having commercial utility shall be used to determine the percentage of sales attributable to Product. (C) In the event that a Product sold by Biosite or its Affiliates or its sublicensees (to the extent authorized under this Agreement) is increased in price to include an amount to cover the amortized cost of an instrument system and/or other equipment supplied to a customer by Biosite or its Affiliates under a Reagent Agreement Plan, Reagent Rental Plan, or other successor or similar plan (collectively referred to herein as "RAP"), the 2 3 Net Sales for such Product on which royalty shall be calculated shall be determined by reducing the total Net Sales of such Product (including the total of sale of Product and instrument system RAP) by the amount of the price increase attributable to RAP, in accordance with accounting procedures consistent with GAAP, provided the minimum amount attributable to the Net Sales of the Product shall be no less than the per unit current retail selling price of the Product as sold alone to non-RAP customers. 1.08 The term "[CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field" means the following field: [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION], excluding the DOA Diagnostics Field. 1.09 The term "Patents" means (A) U.S. Patent No. 5,073,484 and equivalent foreign patents or patent applications, as set forth in the attached Exhibit A, and (B) all divisions, continuations, continuations-in-part, reexaminations, reissues, additions, renewals and extensions of such patents. 1.10 The term "Product" means any rapid immunoassay devices (including but not limited to those using the Triage(R) platform) which are manufactured and sold by Biosite or its Affiliates or its sublicensees (to the extent authorized under this Agreement) on the Effective Date or thereafter, and which fall within the scope of the claims of any of the Patents or would infringe the claims of any of the Patents but for the licenses granted under Section 3.01. 1.11 The term "Valid Claim" shall mean a claim of an issued and unexpired Patent which neither has been held unenforceable or invalid by a decision of a court or governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, nor has been admitted by the holder of the Patent to be invalid or unenforceable through reissue, reexamination, disclaimer, abandonment or otherwise. 1.12 The term "[CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field" means the following field: [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] ARTICLE II - RELEASE AND CONCLUSION OF CONTROVERSIES 2.01 As of the Effective Date, Abbott releases and forever discharges Biosite and its Affiliates, and their respective agents, attorneys, directors, officers and employees, from any and all claims and demands whatsoever in law and equity, whether now known or unknown, arising from any infringement or alleged infringement of one or more claim of any Patents by Biosite or its Affiliates occurring prior to the Effective Date or arising out of or relating to the Action or any claims or allegations asserted in the Action, except to the extent any such claims and demands relate to the manufacture, sale or use of Products in the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field after the Effective Date. 3 4 2.02 As of the Effective Date, Biosite releases and forever discharges Abbott and its Affiliates, and their respective agents, attorneys, directors, officers and employees, from any and all claims and demands whatsoever in law and equity, whether now known or unknown, arising out of or relating to the Action or any claims or allegations asserted in the Action. 2.03 The parties shall enter into and promptly submit to the United States District Court for the Northern District of Illinois ("Court") a Joint Stipulation and Order of Dismissal in the form attached as Exhibit B. The parties shall take all necessary steps to secure the entry of the Joint Stipulation and Order of Dismissal. The Action will be finally terminated by the entry of the Joint Stipulation and Order of Dismissal and no appeal shall be taken by any party from such Order. This Agreement shall not be filed with the Court. 2.04 Abbott and Biosite each expressly waives any right or claim it may have to recover from the other party court costs or attorneys' fees arising from or in connection with the Action. 2.05 The Protective Order entered in the Action, a copy of which is attached as Exhibit C, shall remain in full force and effect indefinitely, and Biosite and Abbott each shall continue to comply with its terms upon the termination of the Action. ARTICLE III - LICENSE GRANT 3.01 (A) Upon the date of receipt by Abbott of the sum set forth in Section 4.01 hereof, Abbott, as of the Effective Date, grants to Biosite and its Affiliates a fully paid-up, worldwide, non-exclusive license under the Patents, to make, have made, use, import, offer to sell, sell and have sold Products in the DOA Diagnostics Field, subject to the terms of Articles VI and VII hereof. (B) As of the Effective Date, Abbott also grants to Biosite and its Affiliates a royalty-bearing (at the rate specified in Section 4.03), worldwide, non-exclusive license under the Patents to make, have made, use, import, offer to sell, sell and have sold Products in the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field, subject to the terms of Articles VI and VII hereof, (C) As of the Effective Date, Abbott also grants to Biosite and its Affiliates a royalty-bearing (at the rate specified in Section 4.04), worldwide, non-exclusive license under the Patents to make, have made, use, import, offer to sell, sell and have sold Products in the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field and the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field, subject to the terms of Articles VI and VII hereof. (D) Biosite and its Affiliates [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] under the licenses granted pursuant to Section 3.01(A), (B) or (C), except as provided in Section 3.01(E) and (F) below. 4 5 (E) Biosite and its Affiliates shall have the right to grant sublicenses [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] to one or more third parties under the licenses granted pursuant to Section 3.01(A), (B) and (C), only if all of the following requirements are met for each such sublicense: (i) Such sublicense shall be granted [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] (ii) Such sublicense shall be [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] (iii) Such sublicense shall be royalty-bearing in all fields, with the following royalties being payable to Abbott based on the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] at the following rates: (a) [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] of Net Sales in the DOA Diagnostics Field and the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field, and (b) [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] of Net Sales in the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field and the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field. Such royalty shall be payable in such countries in the world in which a Valid Claim exists for as long as a Valid Claim exists in such countries. (F) Under the scope of the licenses granted pursuant to Section 3.01 (A), (B) and (C) (and without the necessity of granting sublicenses to any third party), Biosite, its Affiliates and its sublicensees (to the extent authorized under this Agreement) [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION]. 3.02 Biosite and its Affiliates shall not, except as may be required by law or an order of a court or governmental agency, file, permit to be filed on their behalf, cooperate with or assist any other party in the filing or taking of any action before any court or governmental agency to [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] 3.03 Abbott hereby covenants that it will not, and it will cause its Affiliates not to, file, permit to be filed on their behalf, or take any action to [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] 3.04 No license or any other right is granted by implication or otherwise with respect to any patent application or patent except as specifically set forth herein. For the avoidance of doubt, no license is being granted hereunder in the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field. 5 6 ARTICLE IV - PAYMENTS RECORD KEEPING AND REPORTS 4.01 Biosite shall pay to Abbott the amount of Five Million Five Hundred Thousand U.S. Dollars ($5,500,000) within three (3) business days following the date of the entry of the Dismissal With Prejudice, by electronically transferring such funds to the following Abbott bank account: City Bank of New York (for Abbott Laboratories) ABA #[CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Account #[CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Such payment shall be allocated as follows: (A) Two Million U.S. Dollars ($2,000,000) shall be a payment for Abbott's settlement of the Action and (B) Three Million Five Hundred Thousand U.S. Dollars ($3,500,000) shall be a payment for Abbott's license grant pursuant to Section 3.01(A). 4.02 If any of the Patents are held invalid or unenforceable by a court of competent jurisdiction or any other governmental agency, bureau, commission, authority or body, [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] 4.03 In consideration of Abbott's license grant pursuant to Section 3.01(B), Biosite shall pay Abbott a royalty of [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] of Biosite's Net Sales of Products in the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field. Such royalty shall be payable in such countries in the world in which a Valid Claim exists for as long as a Valid Claim exists in such countries. 4.04 In consideration of Abbott's license grant pursuant to Section 3.01(C), Biosite shall pay Abbott a royalty of [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] of Biosite's Net Sales of Products in the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field and [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field. Such royalty shall be payable in such countries in the world in which a Valid Claim exists for as long as a Valid Claim exists in such countries. 4.05 Royalty shall be payable only once with respect to the same unit of Product irrespective of the number of Valid Claims covering such unit of Product. 4.06 All royalties due to Abbott hereunder shall be paid in United States Dollars. Biosite shall be responsible for making the payment to Abbott which payment shall be made by check or wire transfer, at Biosite's discretion. In the event that any Product is sold in a 6 7 currency other than United States Dollars, the Net Sales of such Product for the reporting period shall be converted (for the purpose of calculation of such royalty) into its equivalent dollar value using standard Biosite financial report procedures and conversion methodology, which shall be consistent with GAAP. The royalty shall be paid in United States Dollars based on local sales converted to United States Dollars. The Biosite conversion methodology for sales shall be based on monthly averages (end of prior month spot rate plus end of current month spot rate divided by two) using central bank fixing rates (such as that in effect at the Chase Manhattan Bank) in countries where available and open market rates otherwise. 4.07 Biosite shall keep and maintain full, true and accurate books of account containing all particulars that may be necessary, for the purpose of showing the amounts payable hereunder to Abbott. The books of account shall be kept at Biosite's principal place of business. The books of account and the supporting data shall be open once per year during the term of this Agreement at reasonable times during normal business hours, for two (2) years following the end of the calendar year to which they pertain, to the inspection of Abbott or its representatives for the sole purpose of verifying Biosite royalty statement or compliance in other respects with this Agreement. The costs and expenses relating to such inspection shall be borne by Abbott. In the event that Biosite royalties calculated for any semi-annual period are in error by greater than [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] for the period of time covered by the inspection, Biosite shall bear the reasonable costs of any audit and review initiated by Abbott. 4.08 Biosite, [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION], shall deliver to Abbott true and accurate reports, giving such particulars of the business conducted by Biosite during the preceding six-month period under this Agreement as shall be pertinent to a royalty accounting hereunder. These shall include at least the following: (A) number of Products manufactured and sold; (B) total billings for Products manufactured, used and sold; (C) deductions applicable as provided in Section 1.07 (Net Sales); and (D) total royalty due. 4.09 With each such report set forth in Section 4.08 submitted to Abbott, Biosite shall pay to Abbott royalty due and payable under this Agreement. If no royalty shall be due, Biosite shall so report. 4.10 The royalty payments set forth in this Agreement shall, if overdue, bear interest until payment at a per annum rate of One Percent (1%) above the prime rate in effect at Chase Manhattan Bank (N.A.) from the due date. 7 8 ARTICLE V - ALTERNATE DISPUTE RESOLUTION The parties recognize that a bona fide dispute as to certain matters relating to either party's or their Affiliates' rights and obligations under this Agreement may from time to time arise. In the event of the occurrence of such a dispute, either party may, by written notice to the other party, have such dispute referred to their respective officers designated below or their successors, for attempted resolution by good faith negotiations within twenty-eight (28) days after such notice is made as provided under Article X of this Agreement. Said designated officers are as follows: FOR ABBOTT: President, Diagnostics Division, or his designee. FOR BIOSITE: President and Chief Executive Officer, or his designee. In the event the designated officers are not able to resolve such dispute within such twenty-eight (28) day period, or any agreed extension thereof, either party may invoke binding Alterative Dispute Resolution (ADR) in accordance with the attached Exhibit D. ARTICLE VI - TERMINATION 6.01 This Agreement, unless earlier terminated as hereinafter provided, shall expire upon [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] 6.02 In the event Biosite fails to pay the amount due Abbott under Section 4.01 within the period of time provided therein, Abbott may terminate this Agreement if such amount is not paid within ten (10) days following written notice thereof to Biosite. 6.03 In the event Biosite breaches its obligations under Section 3.02, Abbott may terminate this Agreement immediately upon written notice to Biosite. 6.04 In the event either party files or otherwise becomes subject to bankruptcy or insolvency proceedings, the other party may terminate this Agreement immediately upon written notice to the party filing or otherwise becoming subject to bankruptcy or insolvency proceedings. 6.05 In the event Biosite has not made at least one commercial sale to an unaffiliated third party of a Product in the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field and/or the [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] Field on or before [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION], Biosite's license under Section 3.01(C) in any such fields shall automatically terminate. 8 9 6.06 The following provisions shall survive termination or expiration of this Agreement: Sections 2.01, 2.02, 2.03, 2.04, 2.05, 3.04, 14.01 and 14.02. ARTICLE VII - ASSIGNABILITY Neither this Agreement nor the license herein granted to Biosite shall be assignable or otherwise transferable by Biosite [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] (A) [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] (B) [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] (i) [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION]; and (ii) [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION]. ARTICLE VIII - WARRANTIES 8.01 Abbott represents and warrants to Biosite that: (A) Abbott has the full right, power and authority to grant the licenses to Biosite as set forth in Section 3.01 of this Agreement; (B) this Agreement has been duly authorized, executed and delivered by Abbott and constitutes a valid, binding and legally enforceable agreement of Abbott; (C) the execution and delivery of this Agreement and the performance by Abbott of its covenants and agreements herein contained, including the grant of the license to Biosite, are not restricted by and are not in conflict with, any agreement binding on Abbott or any of its Affiliates; (D) to the best of Abbott's knowledge, no claim in the Patents has been held invalid; and (E) other than the Action and the proceedings referenced in the attached Exhibit E, to the best of Abbott's knowledge, there are not any legal proceedings pending challenging the validity or enforceability of any Patents. 8.02 Biosite represents and warrants to Abbott that: 9 10 (A) this Agreement has been duly authorized, executed and delivered by Biosite and constitutes a valid, binding and legally enforceable agreement of Biosite; and (B) the execution and delivery of this Agreement and the performance by Biosite of its covenants and agreements herein contained are not restricted by and are not in conflict with, any agreement binding on Biosite or any of its Affiliates. ARTICLE IX - APPLICABLE LAW This Agreement is acknowledged to have been made in and shall be construed in accordance with the laws of the State of New York, U.S.A.; provided that all questions concerning the construction or effect of the Patents shall be decided in accordance with the laws of the country in which the particular Patents have been filed or granted, as the case may be. ARTICLE X - NOTICES Services of all notices hereunder shall be in writing and shall be made by courier, U.S. Mail, or by facsimile transmission (followed by courier or U.S. Mail delivery), to the addresses below, and the effective date of giving of such notices shall be the date on which such notice is actually received by the recipient. Notices shall be addressed as follows: If to Abbott: Director, Technology Acquisition Abbott Laboratories D-9RK, AP6C 100 Abbott Park Road Abbott Park, Illinois 60064-3500 With a copy to: General Counsel Abbott Laboratories D-364, AP6D 100 Abbott Park Road Abbott Park, Illinois 60064-3500 10 11 If to Biosite: Mr. Kim Blickenstaff President and CEO Biosite Diagnostics, Inc. 11030 Roselle Street San Diego, California 92121 With a copy to: Thomas E. Sparks, Jr., Esq. Pillsbury Madison & Sutro LLP 235 Montgomery Street San Francisco, California 94104 or to any other such address as may from time to time be designated by the receiving party. ARTICLE XI - ENTIRE AGREEMENT This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes any written or oral prior agreements or understandings with respect thereto. ARTICLE XII - WAIVER AND MODIFICATION No variation or modifications of any of the terms or provisions of this Agreement shall be valid unless in writing and signed by an authorized representative of both parties hereto. Failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of such rights nor shall a waiver by either party in one or more instances be construed as constituting a continuing waiver or as a waiver in other instances. ARTICLE XIII - HEADINGS The headings contained in this Agreement are for convenience and reference purposes only and shall not affect the meaning or interpretation of this Agreement ARTICLE XIV - CONFIDENTIALITY AND PUBLICITY 14.01 The existence of this Agreement and the terms thereof shall remain confidential. None of the parties shall disclose to or discuss in any manner with any third party the terms of this Agreement, or any other aspect of the Action or their respective claims therein, except as provided in Section 14.02. 14.02 Unless mutually agreed upon by the parties, no party, including its agents, attorneys, directors, officers, employees and Affiliates, shall originate nor participate in any publicity, news release or other public statement or announcement, written or oral, whether to 11 12 the public, press, to stockholders or otherwise, relating to the subject matter of this Action or issues raised during the Action or this Agreement, to any amendment hereto or to performance hereunder, save only such announcement as in the opinion of legal counsel to the party making such announcement is required by applicable laws or regulations to be made. At least fifteen (15) business days prior to such announcement, to the maximum extent practicable, the party making such announcement shall give the other party an opportunity to review and comment on the form of the announcement, and the party making such announcement shall give due consideration to the other party's comments. To the extent giving fifteen (15) business days notice is not practicable, the party making such announcement shall use its best efforts to give the other party as much time as possible in advance of such announcement to review and comment on the form of the announcement. ARTICLE XV - SEVERABILITY If any provision of this Agreement shall hereafter be held to be invalid or unenforceable for any reason, that provision shall be reformed to the maximum extent permitted to preserve the parties' original intent, failing which, it shall be severed from this Agreement with the balance of the Agreement continuing in full force and effect, unless a party would thereby be deprived of a substantial portion of its consideration. Such occurrence shall not have the effect of rendering the provision in question invalid in any other jurisdiction or in any other case or circumstance, or of rendering invalid any other provisions contained herein to the extent that such other provisions are not themselves actually in conflict with any applicable law. ARTICLE XVI - COUNTERPARTS This Agreement may be executed in counterparts, each of which shall be deemed an original. IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the Effective Date. ABBOTT LABORATORIES BIOSITE DIAGNOSTICS, INC. By: /s/ Miles D. White By: /s/ Kim D. Blickenstaff ---------------------------------- ----------------------------------- Title: SVP - President ADD Title: President & CEO ------------------------------- -------------------------------- Date: 9/6/96 Date: September 6, 1996 -------------------------------- --------------------------------- 12 13 EXHIBIT A [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION]PATENTS
COUNTRY PATENT/APPLICATION STATUS NUMBER Australia 560,552 Issued 4/9/87 Brazil 8,301,191 Issued 11/22/83 Canada 1,206,878 Issued 7/1/86 EPO Pub. No. 088,636 Granted 8/28/91 (Nationalized in: Belgium, Germany, France, United Kingdom, Italy, Luxembourg, Netherlands, Sweden) India 157,435 Issued 3/29/86 Israel 68,082 Issued 12/31/86 [CONFIDENTIAL [CONFIDENTIAL [CONFIDENTIAL MATERIAL REDACTED MATERIAL REDACTED MATERIAL REDACTED AND FILED AND FILED AND FILED SEPARATELY WITH THE SEPARATELY WITH SEPARATELY WITH THE COMMISSION] THE COMMISSION] COMMISSION] South Africa 83/1617 Issued 3/28/84 United States 5,073,484 Issued 12/17/91
14 EXHIBIT E PENDING LEGAL PROCEEDINGS INVOLVING PATENT NO. 5,073,484 1. [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] is involved in an interference with [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] assigned to [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION]. 2. [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION] has been opposed by two parties. At this time, Abbott has not received any documents relating to the opposition. EX-10.22 5 EXHIBIT 10.22 1 EXHIBIT 10.22 STANDARD INDUSTRIAL LEASE - MULTI-TENANT AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. PARTIES. This Lease, dated, for reference purposes only, September 21, 1994, is made by and between Sorrento West Limited (herein called "Lessor") and Biosite Diagnostics (herein called "Lessee"). 2. PREMISES, PARKING AND COMMON AREAS. 2.1 PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, real property situated in the County of San Diego, State of California commonly known as 11010 Roselle Street and described as a single story R&D building approximating 13,849 square feet, herein referred to as the "Premises", as may be outlined on an Exhibit attached hereto, including rights to the Common Areas as hereinafter specified but not including any rights to the roof of the Premises or to any Building in the Industrial Center. The Premises are a portion of a building, herein referred to as the "Building". The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center". 2.2 VEHICLE PARKING. Lessee shall be entitled to vehicle parking spaces, unreserved and unassigned, on those portions of the Common Areas designated by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used only for parking by vehicles no larger than full size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles". Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles". 2.2.1 Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 2.2.2 If Lessee permits or allows any of the prohibited activities described in paragraph 2.2 of this Lease, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.3 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers and invitees, including parking -1- 2 areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.4 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.5 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from to time, to establish, modify, amend and enforce reasonable rules and regulations with respect thereto. Lessee agrees to abide by and conform to all such rules and regulations, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.6 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveway, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and available; (b) To close temporarily any of the Common Areas for maintenance purposes, so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Area; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 2.6.1 Lessor shall at all times provide the parking facilities required by applicable law and in no event shall the number of parking spaces that Lessee is entitled to under paragraph 2.2 be reduced. 3. TERM. -2- 3 3.1 TERM. The term of this Lease shall be for three (3) years and zero (0) months commencing on October 1, 1994 and ending on September 30, 1997 unless sooner terminated pursuant to any provision hereof. 3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days from said commencement date, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. 3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said commencement date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not advance the termination date, and Lessee shall pay rent for such period at the initial monthly rates set forth below. 4. RENT. 4.1 BASE RENT. Lessee shall pay to Lessor, as Base Rent for the Premises, without any offset or deduction, except as may be otherwise expressly provided in this Lease, on the 1st day of each month of the term hereof, monthly payments in advance of $8,032.42. Lessee shall pay Lessor upon execution hereof $8,032.42 as Base Rent for October 1994. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the Base Rent. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 OPERATING EXPENSES. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as 49.5% (13,849 s.f./27,955 s.f.) percent. (b) "Operating Expenses" is defined, for purposes of this Lease, as all costs incurred by Lessor, if any, for: -3- 4 (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities and fences and gates; (bb) Trash disposal services; (cc) Tenant directories; (dd) Fire detection systems including sprinkler system maintenance and repair; (ee) Security services; (ff) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense". (ii) Any deductible portion of an insured loss concerning any of the items or matters described in this paragraph 4.2. (iii) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor under paragraph 8 hereof. (iv) The amount of the real property tax to be paid by Lessor under paragraph 10.1 hereof. (v) The cost of water, gas and electricity to service the Common Areas. (c) The inclusion of the improvements, facilities and services set forth in paragraph 4.2(b)(i) of the definition of Operating Expenses shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in the Lease to provide the same or some of them. (d) Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each twelve-month period of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid, Lessor shall deliver to -4- 5 Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses incurred during the preceding year. If Lessee's payments under this paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expenses next falling due. If Lessee's payments under this paragraph during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. If estimated operating expenses are due Lessee at the end of the lease term, then this refund shall be paid to Lessee within sixty (60) days. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof $8,032.42 as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount than required of Lessee. If the monthly rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the initial Base Rent set forth in paragraph 4. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for general office and R&D use for medical products or any other use which is reasonably comparable and for no other purposes. 6.2 COMPLIANCE WITH LAW. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term -5- 6 commencement date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to rectify promptly, at Lessor's sole cost and expense, any such violation. In the event Lessee does not give to Lessor written notice of the violation of this warranty within six months from the date that the Lease term commences, the correction of same shall be the obligation of the Lessee at Lessee's sole cost. The warranty contained in this paragraph 6.2(a) shall be of no force or effect if, prior to the date of this Lease, Lessee was an owner or occupant of the Premises and, in such event, Lessor shall correct any such violation at Lessee's sole cost. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises and of the Common Areas. Lessee shall not use nor permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Industrial Center. 6.3 CONDITION OF PREMISES. (a) Lessor shall deliver the Premises to Lessee clean and free of debris on the Lease commencement date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, heating, and loading doors in the Premises shall be in good operating condition on the Lease commencement date. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. Lessee's failure to give such written notice to Lessor within thirty (30) days after the Lease commencement date shall cause the conclusive presumption that Lessor has complied with all of Lessor's obligations hereunder. The warranty contained in this paragraph 6.3(a) shall be of no force or effect if prior to the date of this Lease, Lessee was an owner or occupant of the Premises. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises in their condition existing as of the Lease commencement date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. 7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. -6- 7 7.1 LESSOR'S OBLIGATIONS. Subject to the provisions of paragraphs 4.2 (Operating Expenses), 6 (Use), 7.2 (Lessee's Obligations) and 9 (Damage or Destruction) and except for damage caused by any negligent or intentional act or omission of Lessee, Lessee's employees, suppliers, shippers, customers, or invitees, in which event Lessee shall repair the damage. Lessor, at Lessor's expense, subject to reimbursement pursuant to paragraph 4.2, shall keep in good condition and repair the foundations, exterior walls, structural condition of interior bearing walls, and roof of the Premises, as well as the parking lots, walkways, driveways, landscaping, fences, signs and utility installations of the Common Areas and all parts thereof, as well as providing the services for which there is an Operating Expense pursuant to paragraph 4.2. Lessor shall not, however, be obligated to paint the exterior or interior surface of exterior walls, nor shall Lessor be required to maintain, repair or replace windows, doors or plate glass of the Premises. Lessor shall have no obligation to make repairs under this paragraph 7.1 until a reasonable time after receipt of written notice from Lessee of the need for such repairs. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. Lessor shall not be liable for damages or loss of any kind or nature by reason of Lessor's failure to furnish any Common Area Services when such failure is caused by accident, breakage, repairs, strikes, lockout, or other labor disturbances or disputes of any character, or by any other cause beyond the reasonable control of Lessor. 7.2 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of paragraphs 6 (Use), 7.1 (Lessor's Obligations), and 9 (Damage or Destruction), Lessee, at Lessee's expense, shall keep in good order, condition and repair the Premises and every part thereof (whether or not the damaged portion of the Premises or the means of repairing the same are reasonably or readily accessible to Lessee) including, without limiting the generality of the foregoing, all plumbing, heating, ventilating and air conditioning systems (Lessee shall procure and maintain, at Lessee's expense, a ventilating and air conditioning system maintenance contract), electrical and lighting facilities and equipment within the Premises, fixtures, interior walls and interior surfaces of exterior walls, ceilings, windows, doors, plate glass, and skylights located within the Premises. Lessee to provide a copy of Maintenance Agreement to Lessor. (b) If Lessee fails to perform Lessee's obligations under this paragraph 7.2 or under any other paragraph of this Lease, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of emergency, in which no notice shall be required), perform such obligations on Lessee's behalf and put the Premises in good order, condition and repair, and the cost thereof together with interest thereon at the maximum rate then allowable by law shall be due and payable as additional rent to Lessor together with Lessee's next Base Rent installment. -7- 8 (c) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the Premises in good operating condition. Lessor will allow Lessee to remove equipment outlined on Attachment A subject to the provisions of this section. 7.3 ALTERNATIONS AND ADDITIONS. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, or Utility Installations in, on or about the Premises, or the Industrial Center, except for nonstructural alterations to the Premises not exceeding $10,000 in cumulative costs, during the term of this Lease. In any event, whether or not in excess of $10,000 in cumulative cost, Lessee shall make no change or alteration to the exterior of the Premises nor the exterior of the Building nor the Industrial Center without Lessor's prior written consent. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing, and fencing. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or Utility Installations at the expiration of the term, and restore the Premises and the Industrial Center to their prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Industrial Center that Lessee shall desire to make and which requires the consent of the Lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, -8- 9 or the Industrial Center, or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises, and Lessor shall have the right to post notices of nonresponsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises or the Industrial Center, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises and the Industrial Center free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest to do so. (d) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall be the property of Lessor and shall remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Notwithstanding the provisions of this paragraph 7.3(d), Lessee's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2 7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or additional utility facilities throughout the Building and the Common Areas for the benefit of Lessor or Lessee, or any other lessee of the Industrial Center, including, but not by way of limitation, such utilities as plumbing, electrical systems, security systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. INSURANCE; INDEMNITY. 8.1 LIABILITY INSURANCE -- LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage insurance insuring Lessee and Lessor against any liability arising out of the use, occupancy or maintenance of the Premises and the Industrial Center. Such insurance shall be in an amount not less than $500,000.00 per occurrence. The policy shall insure performance by Lessee of the indemnity provisions of this paragraph 8. The limits of said insurance shall not, however, limit the liability of Lessee hereunder. 8.2 LIABILITY INSURANCE -- LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage Insurance, insuring Lessor, but not Lessee, against any liability arising out of the -9- 10 ownership, use, occupancy or maintenance of the Industrial Center in an amount not less than $500,000 per occurrence. 8.3 PROPERTY INSURANCE. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Industrial Center improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in an amount not to exceed the full replacement value thereof, as the same may exist from time to time, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, flood (in the event the same is required by a lender having a lien on the Premises) special extended perils ("all risk," as such term is used in the insurance industry), plate glass insurance and such other insurance as Lessor deems advisable. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(g) hereof, the deductible amounts under the casualty insurance policies relating to the Premises shall be paid by Lessee. 8.4 PAYMENT OF PREMIUM INCREASE. (a) After the term of this Lease has commenced, Lessee shall not be responsible for paying Lessee's Share of any increase in the property insurance premium for the Industrial Center specified by Lessor's insurance carrier as being caused by the use, acts or omissions of any other lessee of the Industrial Center, or by the nature of such other lessee's occupancy which create an extraordinary or unusual risk. (b) Lessee, however, shall pay the entirety of any increase in the property insurance premium for the Industrial Center over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies holding a "General Policyholders Rating" of at least B plus, or such other rating as may be required by a lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the commencement date of this Lease. No such policy shall be cancellable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals or "binders" thereof. -10- 11 8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other for loss or damage arising out of or incident to the perils insured against which perils occur in, on or about the Premises, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. Lessee and Lessor shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and against any and all claims arising from Lessee's use of the Industrial Center, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon; and in case any action or proceeding be brought against Lessor by reason of any such claim. Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Industrial Center arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for damages to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Industrial Center, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Industrial Center, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Industrial Center, nor from the failure of Lessor to enforce the provisions of any other lease of the Industrial Center. -11- 12 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Partial Damage" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is less than fifty percent of the then replacement cost of the Premises. (b) "Premises Total Destruction" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is fifty percent or more of the then replacement cost of the Premises. (c) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent of the then replacement cost of the Building. (d) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent or more of the then replacement cost of the Building. (e) "Industrial Center Buildings" shall mean all of the buildings on the Industrial Center site. (f) "Industrial Center Buildings Total Destruction" shall mean if the Industrial Center Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent or more of the then replacement cost of the Industrial Center Buildings. (g) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (h) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring excluding all improvements made by Lessees. 9.2 PREMISES PARTIAL DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. (a) INSURED LOSS: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Partial Damage or Premises Building Partial Damage, then Lessor shall, at Lessor's expense, repair such damage to the Premises, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonable possible and this Lease shall continue in full force and effect. -12- 13 (b) UNINSURED LOSS: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from using the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage. In the event Lessor elects to give such notice of Lessor's intention to cancel and terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's intention to repair such damage at Lessee's expense, without reimbursement from Lessor, in which event this Lease shall continue in full force and effect, and Lessee shall proceed to make such repairs as soon as reasonably possible. If Lessee does not give such notice within such 10-day period this Lease shall be cancelled and terminated as of the date of the occurrence of such damage. 9.3 PREMISES TOTAL DESTRUCTION; PREMISES BUILDING TOTAL DESTRUCTION; INDUSTRIAL CENTER BUILDINGS TOTAL DESTRUCTION. (a) Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, and which falls into the classifications of either (i) Premises Total Destruction, or (ii) Premises Building Total Destruction, or (iii) Industrial Center Buildings Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible at Lessor's expense, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall be cancelled and terminated as of the date of the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. (a) Subject to paragraph 9.4(b), if at any time during the last six months of the term of this Lease there is substantial damage, whether or not an Insured Loss, which falls within the classification of Premises Partial Damage, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the -13- 14 classification of Premises Partial Damage during the last six months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event Lessor repairs or restores the Premises pursuant to the provisions of this paragraph 9, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. 9.6 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Industrial Center subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2 10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying Lessee's Share of any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial -14- 15 Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Industrial Center or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Industrial Center or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Industrial Center. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax", or (ii) the nature of which was hereinbefore included within the definition of "real property tax", or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978 or (iv) which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the Industrial Center or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such transfer, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 JOINT ASSESSMENT. If the Industrial Center is not separately assessed, Lessee's Share of the real property tax liability shall be an equitable proportion of real property taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. -15- 16 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a breach of this Lease without the need for notice to Lessee under paragraph 13.1. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate", provided that before such assignment shall be effective said assignee shall assume, in full, the obligations of Lessee under this Lease. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 TERMS AND CONDITIONS OF ASSIGNMENT. Regardless of Lessor's consent, no assignment shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the Base Rent and Lessee's Share of Operating Expenses, and to perform all other obligations to be performed by Lessee hereunder. Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of rent shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 or this Lease. Consent to one assignment shall not be deemed consent to any subsequent assignment. In the event of default by any assignee of Lessee or any successor of Lessee, in the performance of any of the terms hereof, Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said assignee. Lessor may consent to subsequent assignments of this Lease or amendments or modifications to this Lease with assignees of Lessee, without notifying Lessee, or any successor of Lessee, and without obtaining its or their consent thereto and such action shall not relieve Lessee of liability under this Lease. -16- 17 12.4 TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be included in subleases: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublease as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublessee shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) If Lessee's obligations under this Lease have been guaranteed by third parties, then a sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (d) The consent by Lessor to any subletting shall not release Lessee from its obligations or alter the primary liability of Lessee to pay the rent and perform and comply with all of the obligations of Lessee to be performed under this Lease. (e) The consent by Lessor to any subletting shall not constitute a consent to any subsequent subletting by Lessee or to any assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereof without notifying Lessee or anyone else liable on -17- 18 the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or anyone else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor or Lessee. (g) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (h) Each and every consent of Lessee under a sublease shall also require the consent of Lessor. (i) No sublessees shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (j) Lessor's written consent to any subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (k) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within ten (10) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 ATTORNEYS' FEES. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable attorneys' fees incurred in connection therewith, such attorneys' fees not to exceed $350 for each such request. 13. DEFAULT; REMEDIES. 13.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: -18- 19 (a) The vacating or abandonment of the Premises by Lessee. (b) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that lessor serves lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (c) Except as otherwise provided in this lease, the failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed over performed by lessee, other than described in paragraph (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (d) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined by 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee with thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(d) is contrary to any applicable law, such provision shall be of no force or effect. (e) The discovery by Lessor that any financial statement given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor in interest of Lessee or any guarantor of Lessee's obligation hereunder, was materially false. 13.2 REMEDIES. In the event of any such material default by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recovery from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the commission -19- 20 actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy nor or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any firth mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Shares of operating Expenses or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Property. Accordingly, if any installment of Base Rent, Operating Expenses, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 5% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of any of the aforesaid monetary obligations of Lessee, then Base Rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding paragraph 4.1 or any other provision of this Lease to the contrary. -20- 21 14. CONDEMNATION. If the Premises or any portion thereof or the Industrial Center are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more then twenty-five (25%) of that portion of the Common Areas designated as parking for the Industrial Center is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing only within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the premises remaining, except that the rent shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. No reduction of rent shall occur if the only area taken is that which does not have the Premises located thereon. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority, Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. BROKER'S FEE. (a) Upon execution of this Lease by both parties, Lessor shall pay to per agreement __________, licensed real estate broker(s), a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is no separate agreement between Lessor and said broker(s), the sum of $ per agreement , for brokerage services rendered by said broker(s) to Lessor in this transaction. (b) Lessor further agrees that if Lessee exercises any Option, as defined in paragraph 40.1 of this Lease, which is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, than as to any of said transactions, Lessor shall pay said broker(s) a fee in -21- 22 accordance with the schedule of said broker(s) in effect at the time of execution of this Lease. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interests in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Said broker shall be a third party beneficiary of the provisions of this paragraph 15. 16. ESTOPPEL CERTIFICATE. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) 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 date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises or of the business of the requesting party. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Property, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Industrial Center, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest. Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the than grantor at the time of such transfer, in which lessee has an interest,s hall be delivered to the grantee. The obligations contained in this Lease to be -22- 23 performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law form the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expenses and insurance and tax expenses payable shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made an oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Property and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease except as otherwise specifically stated in this Lease. 23.NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified mail, and if given personally or by mail, shall be deemed sufficiently given if addressed to Lessee or to Lessor at the address noted below the signature of the respective parties, as the case may be. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other -23- 24 provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent to accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, but all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Industrial Center is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Industrial Center is located. 30. SUBORDINATION. (a) This Lease, and any Option granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Industrial Center and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. -24- 25 (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (1) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. ATTORNEY'S FEES. If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. The provisions of this paragraph shall insure to the benefit of the broker named herein who seeks to enforce a right hereunder. 32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purposes of inspecting the same, showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are part as Lessor may deem necessary or desirable. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises or the Industrial Center without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Industrial Center. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, r a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraph 33 hereof, wherever in this lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. -25- 26 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Property. 39. OPTIONS. 39.1 DEFINITION. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease to extend or renew any lease that Lessee has on other property of Lessor; (2) the option or right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Industrial Center or other property of Lessor or the right of first offer to lease other space within the Industrial Center or other property of Lessor; (3) the right or option to purchase the Premises or the Industrial Center, or the right of first refusal to purchase the Premises or the Industrial Center, or the right of first offer to purchase the Premises or the Industrial Center, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is personal to the original lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily, or involuntarily, by or to any person or entity other than Lessee, provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercise unless the prior option to extend or renew this Lease has been so exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the noncompliance alleged in said notice of default is cured, or (iii) during the period -26- 27 of time commencing on the date after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) at any time after an event of default described in paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to give notice of such default to Lessee), or (iv) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(b), or paragraph 13.1(c), whether or not the defaults are cured, during the 12 months period of time immediately prior to the time that Lessee attempts to exercise the subject option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails t pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(c), within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessee commits a default described in paragraphs 13.1(a), 13.1(d) or 13.1(e) (without any necessity of Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee three or more notices of default under paragraph 13.1(b), or paragraph 13.1(c), whether or not the defaults are cured. 40. SECURITY MEASURES. Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Industrial Center. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Industrial Center or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 41. EASEMENTS. Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interface with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make -27- 28 payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right ont he part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. AUTHORITY. If Lessee is a corporation, trust or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, delivery to Lessor evidence of such authority satisfactory to Lessor. 44. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by Lessor and Lessee. 46. ADDENDUM. Attached hereto is an addendum or addends containing paragraph 47 through 51 which constitute a part of this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO. THE PARTIES SHALL RELY SOLELY UPON THE -28- 29 ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE Sorrento West Limited Biosite Diagnostics - ------------------------------ ------------------------- By: John Burnham & Co. Manager By: Nancy Green, Sr. Real Estate By: Kim D. Blickenstaff ---------------------------- -------------------- Mgr. ----- Executed on October 4, 1994 Executed on --------------- ------------------- ADDRESS FOR NOTICES AND RENT ADDRESS - ------------------------------ ------------------------- - ------------------------------ ------------------------- - ------------------------------ ------------------------- -29- 30 ADDENDUM TO LEASE - -------------------------------------------------------------------------------- THIS ADDENDUM TO LEASE AGREEMENT DATED SEPTEMBER 21, 1994, BY AND BETWEEN SORRENTO WEST LIMITED ("LESSOR") AND BIOSITE DIAGNOSTICS ("LESSEE") - -------------------------------------------------------------------------------- 47. RENTAL. Pursuant to all the provisions of Paragraph 4 of this Lease, the minimum base monthly rental shall be paid as follows: October 1, 1994 through September 30, 1996, the base monthly rental shall be $8,032.42, NNN. October 1, 1996 through September 30, 1997, the base monthly rental shall be $8,586.38, NNN. 48. TENANT IMPROVEMENTS. Landlord shall provide up to $20,000 towards any ADA (Americans with Disability Act) modifications that may be needed. All tenant improvement work shall be done in a workmanlike manner in conformance with all applicable codes, rules, ordinances and other governmental regulations and done by a licensed general contractor approved by the Landlord. Any dollars spent in excess of the $20,000 for ADA modifications shall be paid for by the Tenant. Additionally, the existing Tenant, Conner Peripherals, shall provide an amount of $4,000 directly to the Tenant for general building repairs and an amount of $5,000 directly to the Owner as their part of the $20,000 ADA cost. 49. COMMON AREA MAINTENANCE/COMMON AREA EXPENSE. Notwithstanding anything to the contrary contained in Paragraph 7 of this Lease, Lessor shall repair and maintain the Common Area (as hereinafter defined) of the Premises and Lessee shall reimburse Lessor for all expenses in connection with said Common Area ("Common Area Expenses"). The term 'Common Area' means the exterior of the building (including the roof) and all exterior portions of the Premises lying outside the building, including without limitation, automobile parking areas, driveways, sidewalks and landscaped and planted areas. The term 'Common Area Expenses' shall include, without limitation, all sums expended in connection with said Common Area for the following items: all general maintenance and repairs; resurfacing; painting; restriping; cleaning; trash removal; sweeping services; maintenance and repair of sidewalks, curbs and signs; sprinkler system; planting and landscaping; lighting and other utilities; directional signs, markers and bumpers; maintenance and repair of any fire protection, lighting, storm drainage and other utility systems; personnel to implement such services; Real Property Taxes; premiums for the insurance required to be maintained by Lessor pursuant to Paragraph 8 and an amount payable to Lessor for accounting, bookkeeping and collection of expenses of the Common Area. Lessee shall reimburse Lessor for all Common Area Expenses related to the Premises. Said amounts shall be due -30- 31 and payable by Lessee as additional rent within ten (10) days from the date Lessor delivers an invoice therefor to Lessee." Lessor will maintain the building in a manner consistent with similar R&D buildings in the Sorrento Valley area. 50. CONNER'S EXISTING LEASE. This lease document with Biosite is subject to Landlords finalizing a lease buy out with Conner Peripherals. Landlord and Conner are in agreement on the buy out amount and must now document and finalize this agreement. 51. ACCESS FROM BIOSITE'S EXISTING BUILDING. Lessor will allow Lessee at Lessee's expense to create an access from their parking lot to this lot. This access will not be utilized by automobiles. Lessee shall provide Lessor more details on this access prior to final approval. Lessee, if necessary, must also have approval from Lessee's current Lessor. -31- 32 Attachment "A " 1. With respect to the tenant improvements that are to be completed at 11010 Roselle Street, Biosite Diagnostics reserves the right to remove all equipment installed during their tenancy at the aforementioned address. These improvements will include, but are not limited to: A. All equipment associated with the dehumidification of the assembly area. B. Compressed air system C. All cabinets that do not contain plumbing fixtures. D. Fume hoods. E. Any equipment related to the assembly of product. F. Walk-in Cold Room All duct work and piping will remain, which will allow future tenants the ability to have a functional system by attaching equipment to the points of connection that remain. 2. Further, with respect to Tenant Improvements to be completed at 11010 Roselle Street, Sorrento West, Limited hereby approves of the plan and provides its authorization for Biosite Diagnostics to install the Tenant Improvements as generally outlined on the plans submitted to Sorrento West, Limited. Any significant changes to the plan should be disclosed to Sorrento West, Limited, but barring any major changes to the concept, Biosite Diagnostics is allowed to proceed with the installation of Tenant Improvements in conformance with Paragraph 48 of this lease document. -32- EX-23.1 6 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Financial Data" and to the use of our report dated November 12, 1996, except for Note 7, as to which the date is December 5, 1996, in Amendment No. 2 to Registration Statement (Form S-1 No. 333-17657) and related Prospectus of Biosite Diagnostics Incorporated for the registration of 2,300,000 shares of its common stock. ERNST & YOUNG LLP San Diego, California January 7, 1997 -----END PRIVACY-ENHANCED MESSAGE-----