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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to ______________
Commission File Number: 0-15324
STAR SCIENTIFIC, INC.
(Exact Name of Registrant as Specified in its charter)
DELAWARE
(State of incorporation)
52-1402131
(IRS Employer Identification No.)
801 LIBERTY WAY
CHESTER, VA 23836
(Address of Principal Executive Offices)
(804) 530-0535
(Registrant's telephone number, including area code)
Securities Registered under Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of March 14, 2000 is approximately
$78,000,000. Shares of voting stock held by each executive officer and director
and by each person who owns 5% or more of the any voting stock have been
excluded in that such persons may be deemed affiliates of the Registrant. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Number of shares outstanding of each class of common equity as of March 14,
2000: 58,749,201 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: (To the Extent Indicated Herein)
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Note on Forward-Looking Statements
CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K, UNDER THE SECTIONS
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," "BUSINESS" AND ELSEWHERE RELATE TO FUTURE EVENTS AND EXPECTATIONS
AND AS SUCH CONSTITUTE "FORWARD-LOOKING STATEMENTS," WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE WORDS "BELIEVES,"
"ANTICIPATES," "PLANS," "EXPECTS," AND SIMILAR EXPRESSIONS IN THIS REPORT ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS AND TO VARY
SIGNIFICANTLY FROM REPORTING PERIOD TO REPORTING PERIOD. SUCH FACTORS INCLUDE,
AMONG OTHERS, THOSE LISTED IN "FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER
ITEM 1 BELOW AND OTHER FACTORS DETAILED FROM TIME TO TIME IN THE COMPANY'S OTHER
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
PART I
Item 1. Business
GENERAL
We are engaged in: (1) the development of proprietary scientific
technology for the curing of tobacco so as to prevent, retard or significantly
reduce the formation of carcinogenic toxins present in tobacco and tobacco
smoke, primarily, the tobacco specific nitrosamines ("TSNAs"); (2) the
development of less harmful smoked tobacco products utilizing tobacco with very
low levels of TSNAs (measured in parts per billion) which has been cured using
the Company's proprietary StarCure(TM) process; (3) the manufacture and sale of
discount cigarettes, with activated charcoal filters; (4) the research and
development of tobacco cessation products; and (5) the development of smokeless
tobacco products utilizing tobacco with very low levels of TSNAs (measured in
parts per billion) which has been cured using the Company's proprietary
StarCure(TM) process.
Star Scientific Inc.'s ("Star" or the "Company") central focus is the
reduction of the range of serious health hazards associated with the use of
tobacco products. Accordingly, Star's primary corporate mission is to
demonstrate the commercial viability of less harmful tobacco products and to
encourage other tobacco manufacturers to utilize and/or license Star's
proprietary curing technology. (When used in this Report, Star Scientific, Inc.
and its wholly-owned subsidiary, Star Tobacco & Pharmaceuticals, Inc. are
sometimes individually and/or collectively referred to as "Star" or the
"Company".)
The Company has an exclusive worldwide license under patents and patents
pending relating to methods to prevent the formation of TSNAs in tobacco.
Certain TSNAs are generally regarded by cancer researchers as the most abundant
and potent carcinogens in tobacco and tobacco smoke.
The Company has pioneered the development of an economically feasible
curing (StarCure(TM)) process for preventing the formation of virtually all of
the carcinogenic TSNAs in tobacco. This, in turn, reduces these carcinogens in
secondhand smoke. Star's non-chemical StarCure(TM) curing process does not
affect the taste, color or nicotine content of tobacco.
Today, the Company's revenue generation is principally through its
wholly-owned subsidiary, Star Tobacco & Pharmaceuticals, Inc. ("ST&P"). ST&P's
predecessor, a closely held private company, was organized in 1990 and, until
1994, primarily was engaged in the business of manufacturing cigars and
cigarettes for others as a contract manufacturer. By late 1994, ST&P had
commenced development and commercialization of its own brands of discount
cigarettes using primarily Virginia flue-cured tobacco and competed principally
on the basis of price. At about that same time, ST&P commenced a program of
research and development relating to a range of potentially less harmful tobacco
products and tobacco cessation products wherein ST&P secured certain
Investigatory New Drug applications ("INDs") from the U. S. Food and Drug
Administration ("FDA") to commence human clinical testing. Shortly thereafter,
ST&P shifted its near-term research focus to a technological development phase
focused upon reducing
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the carcinogenic TSNAs in the tobacco leaf and tobacco smoke. In
February 1998, ST&P merged with Eye Technology, Inc., a publicly-held OTC
Bulletin Board company based in Minneapolis, Minnesota. While Eye Technology
technically was the surviving corporation, in effect, control of the surviving
corporation shifted to the former stockholders of ST&P and the management of
ST&P became the control management of the survivor in the merger. By December
30, 1998, the assets and liabilities that comprised the pre-merger business of
Eye Technology, Inc. had been sold or liquidated, and the stockholders of Eye
Technology voted to change its name to Star Scientific, Inc. The Company's
primary corporate focus from that time forward has centered upon the development
of reduced toxin, and potentially reduced risk, tobacco products, plus continued
focus upon the long term development of smoking cessation products either with a
joint venture partner or a corporate pharmaceutical partner.
Thereafter, in pursuance of the Company's focus to reduce the
carcinogenic TSNAs in the tobacco leaf and tobacco smoke, the Company obtained
the exclusive right to patents and patent applications which are now pending,
pertaining to various aspects of the tobacco leaf curing process which has been
named StarCure(TM). The proprietary StarCure(TM) process, to which the Company
has an exclusive license from Regent Court Technologies LLC (as discussed
herein), involves the use of specially designed curing barns and a microwave
curing process using specially designed industrial size microwave ovens
(operated presently from its Chase City, Virginia processing center). This
proprietary StarCure(TM) process virtually precludes and/or substantially
reduces the formation in the tobacco leaf of the carcinogenic TSNAs, which are
widely believed by medical and scientific experts to be among the most potent
and powerful cancer-causing toxins present in tobacco and in side stream tobacco
smoke. In 1999, the Company processed over 3.5 million pounds of very low-TSNA
flue-cured tobacco using the StarCure (TM) process, and believes that
this process is applicable to burley and other varieties of tobacco on a
broad-scale commercial basis.
The Company's long-term strategy is to aggressively increase and expand
its production capacity for its proprietary StarCure(TM) process to produce very
low-TSNA tobacco (carcinogenic NNKs and NNNs at less than 400 parts per
billion). Further, the Company is committed to continue to explore the
development of potentially less harmful smoked and smokeless tobacco products,
as well as the development of tobacco cessation products. The Company has
started the process of integrating its very low-TSNA StarCure(TM) tobacco into
its present discount cigarette brands. Star presently markets four brands,
namely, SPORT(R), MAINSTREET(R), VEGAS(R) and G-SMOKE(R) all of which now have
activated charcoal filters and contain approximately 3% of very low-TSNA
flue-cured tobacco because of limited availability of very low-TSNA tobacco at
this time. It is anticipated that in light of Star's projected increased
StarCure(TM) production during the year 2000, in excess of 20 million pounds of
very low-TSNA tobacco will be processed during this year's growing season. With
such increased production, Star expects to be able to totally phase into its
four brands all very low-TSNA flue-cured tobacco over the next 24 months,to
launch a new very low-TSNA cigarette brand that also will have activated
charcoal filters, and contemporaneously to fulfill its tobacco supply
commitments to Brown & Williamson Tobacco Corporation ("B&W"), the third largest
tobacco company in the United States. (See "Relationship with B&W".)
The Company has announced plans to launch before the end of the third
quarter of 2000, the first very low-TSNA cigarette. This cigarette, which will
have a new name chosen by late Spring 2000, will have an activated charcoal
filter. The Company's central focus will continue to be to be aimed at reducing
the health hazards associated with the use of smoked and smokeless tobacco
products. The Company fully accepts the evidence showing links between tobacco
smoking and a variety of diseases and premature death and believes that it is
unlikely that the health risks of smoked tobacco can be completely eliminated.
Nevertheless, in a world where 1.1 billion people smoke and use other tobacco
products, there is an urgent need to reduce the toxicity of tobacco products
to the maximum extent possible using available technology. The Company
believes that it has a corporate responsibility to continue to expand its
research and development efforts to manufacture tobacco products that are as
safe as technologically possible. The Company has now demonstrated that the
method it has developed for curing tobacco using its proprietary StarCure(TM)
process, can be scaled up to meet broad commercial needs in the United States
and abroad. The Company's new brand will be the first cigarette to be launched
in the United States which utilizes StarCure(TM) very low-TSNA flue-cured
tobacco, as well as burley tobacco selected for its low-TSNA content, and a
small portion of sun dried oriental tobacco. The Company's new brand will also
use an activated charcoal filter aimed at reducing the levels of certain vapor
phase toxins.
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PRODUCTS
Discount Cigarettes
Star currently manufactures and sells four brands of discount
cigarettes, MAINSTREET(R), SPORT(R), VEGAS(R) and G-SMOKE(R) (formerly
GUNSMOKE(TM)), through approximately 325 tobacco distributors throughout the
United States. The cigarettes are sold as discount brands. Star does not engage
in extensive advertising or marketing programs for its cigarette products, but
relies primarily upon price communications with distributors and, to a lesser
extent, on product appearance and taste in order to compete in the marketplace.
There were no export sales by the Company in 1999.
In an effort to implement Star's corporate mission to develop
potentially less harmful tobacco products, Star intends to phase its very
low-TSNA tobacco which has been cured through its proprietary StarCure(TM)
process into its discount cigarettes within the next 24 months. As of July 1,
1999, Star changed all of its filters to activated charcoal because of
recommendations from leading health advocates and respected research scientists
to the effect that activated charcoal filters reduce certain vapor phase toxins
in tobacco smoke. Star intends to continue to use activated charcoal filters in
all of its discount cigarettes, as well as in its new brand.
Processed Tobacco
In 1999, Star processed and sold over 3.5 million pounds of low-TSNA
flue-cured tobacco that had been cured using its proprietary StarCure(TM)
process. All of these sales were made to B&W, pursuant to Star's contractual
arrangements with B&W described elsewhere in this Report. These sales accounted
for approximately 10% of the Company's net sales in 1999. During 2000, Star
expects to process, sell and/or use for its own brands in excess of 20 million
pounds of very low-TSNA tobacco cured using the StarCure(TM) process. Star
expects that a minimum of 8 million pounds will be sold to B&W pursuant to its
Supply Agreement. The remaining portion will be integrated into Star's own
discount cigarette brands over the next 24 months and/or will be available for
sale to B&W or other cigarette manufacturers. The Company's long-term goal is to
derive an increasingly larger percentage of its revenues from sub-licensing its
StarCure(TM) process to major cigarette manufacturers.
Smokeless Tobacco Products Containing Very Low-TSNA Tobacco
Scientific research has shown that TSNAs may be the most significant
carcinogens in smokeless tobacco products commonly known as "chew", "dip" and
"snuff". Accordingly, in the year 2000 Star intends to devote substantial
resources toward the development of very low-TSNA smokeless tobacco products.
Star expects to undertake those projects in concert with a major tobacco company
as a strategic partner or licensee. No assurance can be given at this time that
such a product will be developed and successfully commercialized.
Tobacco-Flavored Chewing Gum and Lozenges and Chewing Gum Containing
Tobacco Extract
The Company is in current discussions with a major pharmaceutical
company to joint venture, partner and/or license its technology to produce
tobacco cessation products. Star has produced for pilot Phase I testing both a
chewing gum and a tobacco lozenge, each containing very low-TSNA tobacco, as
potential smoking cessation products. The gum/lozenge products contain nicotine,
as well as the MAO-inhibitor known to be present in tobacco. In anticipation of
a then pending legislative proposal to provide the FDA with new legislative
authority to regulate tobacco products, Star submitted and received approval of
an IND for the gum product from the FDA. Star commenced a Phase I Human Clinical
Trial in the second quarter of 1998 in order to demonstrate the safety of the
product for smoking cessation purposes. Star has developed lozenges which
contain tobacco extract. Star has not yet filed an IND application with the FDA
covering lozenges, and in the current regulatory environment it is unlikely to
do
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so. Neither the gum nor the lozenge may be sold in the United States as
pharmaceutical products unless and until the FDA has approved a New Drug
Application for such products. No assurances can be given when or if Star might
obtain such approvals or that, even if such approvals are obtained, whether
there will be significant revenues from the sale of either. Given the present
uncertain status of the FDA's authority to regulate tobacco products, it now
appears that to be sold as pharmaceutical products these tobacco-containing
cessation products would be required to undergo all of the preclinical and
clinical testing required of a new drug product. It seems unlikely at the
present time that undertaking such testing would produce an adequate return on
investment. Star continues to investigate and explore opportunities for these
products in Western and Eastern Europe, and in other countries where regulating
authorities appear to be more receptive to the development of reduced risk and
less hazardous tobacco products. Star has taken a public position, unanimously
supported by its Board of Directors, that it is in favor of comprehensive FDA
regulation of all tobacco products.
SALES AND MARKETING
Star's four brands of discount cigarettes are each sold in a variety of
sizes and styles, i.e., king size and 100s, soft pack and hinged box, regular
flavor and menthol, and full flavor, lights and ultra lights. Star utilizes its
own specified blend of tobaccos in each brand. The blend consists of Virginia
flue-cured, burley and oriental varieties of tobacco, which is typical of
American-style cigarettes.
Star uses stylized packaging designs for its four brands of discount
cigarettes. As is typical in the cigarette industry, Star utilizes different
colors, e.g., green for menthol and similar designs on its packaging to denote
different product styles. Star primarily conducts trade journal and direct mail
advertising to the industry and not advertising directed to consumers. Star does
provide to its distributor customers, for redistribution to retailers,
point-of-sale materials such as posters, pull signs, display racks as well as
counter top and floor displays. Also, Star produces marketing materials for use
by distributors and their direct sales force to promote Star cigarettes to their
retail customers.
It is Star's strategy to rely to a large degree upon distributors to
promote and sell Star's brands to retail customers. In 1999 Star sold its
discount cigarettes to a total of approximately 325 distributors located in 48
states. The distributors maintain state and, where applicable, municipal
government tobacco product licenses, apply state and/or local cigarette tax
stamps when needed, and resell the cigarettes to retailers. Star delivers its
products directly to distributors mainly by common carrier trucks. Star's
distributor customers primarily serve convenience stores, gas stations and other
outlets and stores. No one distributor accounted for more than 10% of Star's
revenues in 1999.
During 1999, Star experienced substantial sales growth. Star believes
that the price increases imposed upon the major cigarette manufacturers created
an increased demand for low-price cigarettes. In late 1999, Star initiated an
aggressive expansion of its marketing and sales organization to respond to its
anticipated increase in demand, not only for its present products, but for what
the Company believes will be a demand by knowledgeable smokers for products
which deliver less toxins, i.e. Star's new brand expected to be launched in the
third quarter. This growth began under the leadership of its Chief Executive
Officer, Mr. Jonnie R. Williams, and then under the leadership of its Vice
President of Sales and Marketing, Mr. David M. Dean and Mr. Sheldon Bogaz, Vice
President of Trade Operations. Mr. Dean, who came to Star with extensive health
care oriented marketing expertise, supervises a staff of eleven regional sales
representatives who direct a field sales force. By the end of 2000, Star plans
to increase its sales force to cover a greater number of distributors located
throughout the 48 contiguous states.
PURCHASING
During 1999, the majority of tobacco used in Star's cigarettes was
purchased from a recognized leaf dealer in "cut rag" form, meaning that the
tobacco has been cut, processed and flavored to Star's specifications, and is
ready when delivered to Star for the manufacturing process. The Company expects
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during 2000 and thereafter to purchase increasing amounts of the tobacco needed
for its business directly from tobacco farmers.
MANUFACTURING
All of the tobacco planned to be used by the Company in 2000 in the
production of its very low-TSNA tobacco either for sale to B&W and potentially
other parties, or for incorporation into Star's own cigarettes, or in the
development by Star of smokeless tobacco products, will be cured using Star's
proprietary StarCure(TM) process. The StarCure(TM) process utilizes specially
equipped curing barns and microwave technology. The specially designed curing
barns, which incorporate the StarCure(TM) processing technology, are
manufactured exclusively for Star by Powell Manufacturing Company of
Bennettsville, South Carolina ("Powell"). Powell is the largest manufacturer of
curing barns in the U.S. These specially designed barns are erected on site at
the tobacco farms which provide Star with its tobacco. Approximately 550 of
these barns have already been manufactured and delivered and contracts with
tobacco farmers for approximately 350 additional curing barns have either been
executed or are being finalized. Star anticipates that Powell will have provided
Star with over 1,000 such barns by the end of 2000. Financing for a majority of
these barns is provided by B&W (see "Relationship With B&W"). The Company's
StarCure(TM) very low-TSNA tobacco is also processed in specially designed
microwaves at its StarCure(TM) processing facility, a leased facility in Chase
City, Virginia. Star's processing facility in Chase City is presently undergoing
construction to substantially expand its capacity to process larger amounts of
very low-TSNA tobacco. Star anticipates that it will be able to produce in
excess of 20 million pounds of StarCure(TM) tobacco (both flue-cured and burley)
during the year 2000 growing season.
Star's cigarettes are manufactured at its facility in Petersburg,
Virginia and under contract. The tobacco is combined with filters and paper in a
"maker" which produces finished cigarettes, which in turn are placed in a
"packer" which provides packaging into standard 20-cigarette packs and ten-pack
cartons. Star believes its manufacturing facilities, plus the additional
manufacturing contract relationship now in place with B&W, will allow Star to
respond to its growing demand for the foreseeable future.
RELATIONSHIP WITH B&W
On October 12, 1999, the Company and B&W entered into the Supply
Agreement under which B&W agreed to purchase Star Cure(TM) tobacco. During the
third quarter and early fourth quarter of 1999, the Company produced and
delivered to B&W approximately 3.5 million pounds of very low-TSNA Star Cure(TM)
processed tobacco. This tobacco will be used to explore the production
feasibility and commercial acceptance of very low-TSNA cigarettes. In each of
the years 2000 and 2001, B&W is obligated to purchase from Star five million
pounds of Virginia flue-cured tobacco that has been cured using the Star
Cure(TM) process; and B&W has an option to purchase three million pounds of
burley tobacco cured using the same process. B&W also has the option to become
the exclusive purchaser of tobacco cured using the Star Cure(TM) process in each
of the years 2002 through 2004, if it purchases from the Company at least 30
million pounds of tobacco in each of those years. During the same period and
beyond that period if certain conditions are met, the Company has agreed to
provide sufficient quantities of tobacco cured using the Star Cure(TM) process
to meet the demands of B&W and all participating B&W affiliates, including
British American Tobacco PLC, the second largest tobacco company in the world.
Further, B&W has agreed to finance the Company's purchase of 600 of the
specially designed curing barns and, subject to certain preconditions, an
additional 400 such barns. In addition, B&W has agreed to collaborate with the
Company in the development of a new very low-TSNA cigarette and the possible
licensing of trademark rights to B&W in connection with the sale of this new
product.
Star in 1999 entered into a manufacturing agreement under which B&W has
agreed to manufacture cigarettes for Star. Also, Star has entered into an
agreement under which B&W is supplying leaf tobacco to Star for use in its
tobacco products.
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COMPETITION
Star's primary competition for conventional cigarettes is from the four
"majors," that is, Philip Morris, the brands of which accounted for
approximately 50% of all cigarette sales in the United States in 1999, R.J.
Reynolds, B&W and Lorillard, each of which has substantially greater financial
and operating resources than Star. Star also encounters significant competition
from several other smaller U.S. manufacturers of cigarettes, as well as
importers of cigarettes manufactured in foreign countries. Many of these
manufacturers and importers have substantially greater financial, manufacturing,
marketing and other resources than Star.
Star's current conventional smoked products compete principally on the
basis of price and possibly quality of product. Generally speaking, there are
three price categories of cigarettes in the United States, "premium," which
includes such brands as Marlboro(R) and Camel(R), "full-price," which includes
such brands as Doral(R) and GPC(R), and "discount," which as a group account for
only a small percentage (approximately 3%) of the U.S. cigarette market. Each of
Star's brands is priced in the discount category. Other competitive factors
include package design, taste and the amount of marketing support provided to
distributors and retailers. At the consumer level, brand loyalty also is a
significant factor.
Star is not aware of any other company which currently produces very
low-TSNA tobacco on a commercial basis, although one Swedish company, Swedish
Match, has worked with various varieties of tobacco under crop management
environments and other methods in an effort to maintain low-TSNAs in its
smokeless products. Star is not aware of any other company that now incorporates
very low-TSNA tobacco into their cigarettes or other tobacco products. B&W now
has in its possession approximately 3.5 million pounds of very low-TSNA tobacco,
but has not made a public announcement of when it will start using that tobacco
in its current products or in a new product. However, recent announcements by
several of the major tobacco companies indicate that certain of these companies
either have commenced exploration or intend to explore the production of
low-TSNA tobacco in the next few years and the incorporation of low-TSNA tobacco
into their cigarettes. Star believes that if it is successful in commercializing
its unique very low-TSNA cigarettes and/or in developing and commercializing
very low-TSNA smokeless tobacco, it is inevitable that many of the major tobacco
companies will follow its lead.
If the Company is successful in developing and commercializing smoking
reduction or cessation products, it will encounter stiff competition. Smoking
cessation products that are approved for sale in the United States by the FDA
are primarily nicotine delivery products (nicotine only) designed to wean the
patient from nicotine addiction over a period of time ranging from 30 days to
six weeks. Three products, Nicorette(R), a nicotine chewing gum, and Nicotrol(R)
and NicoDerm(R), both transdermal nicotine patches, constituted substantially
all of the U.S. pharmaceutical nicotine market in 1999. All of these products
are sold over-the-counter. Zyban(R), (bupropion), a prescription drug which
originally was developed and is still sold under another proprietary name as an
antidepressant was introduced to the market in 1997 and has been demonstrated to
be useful as a cessation product. Star understands that sales of Zyban(R) to
date have been substantial and that Zyban(R) is often prescribed by physicians
to be used in conjunction with nicotine delivery products.
Star's principal competitors in the cessation and reduction market
include Smith Kline Beecham, the McNeil Consumer Division of Johnson & Johnson,
Glaxo-Wellcome and Pharmacia-Upjohn, all of which have capital resources,
research and development staffs, facilities, experience in conducting clinical
trials and obtaining regulatory approvals, and experience in manufacturing and
marketing their products which are significantly greater than those of Star. In
addition, there are several companies developing new technologies aimed at
smoking cessation therapies. There also are a number of consumer products which
do not require FDA approval as therapeutic drug products but which nevertheless
are advertised as alternatives to smoking or as help in the reduction of
smoking. For example, at least one of
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the leading United States confectionery chewing gum manufacturers has advertised
its gum products as an alternative to cigarettes. There are also non-tobacco
cigarettes produced with fillers such as lettuce and herbs. In addition to the
use of consumable products for smoking cessation or reduction purposes, medical
practitioners and others have developed a variety of programs intended to assist
a person in withdrawing from nicotine dependence. Treatments used include
psychological counseling, hypnosis, group therapy and behavior modification
techniques. There can be no assurance that Star can overcome regulatory barriers
to marketing its tobacco-containing cessation products or that Star's
competitors will not succeed in developing technologies and products that are
more effective than Star's product candidates, that are less toxic than Star's
products or that would render Star's products obsolete or non-competitive.
GOVERNMENT REGULATION
The manufacture and sale of cigarettes and other tobacco products and of
pharmaceutical products are subject to extensive federal and state governmental
regulation in the United States and by comparable authorities in many foreign
countries. These national agencies and other federal, state and local entities
regulate, among other things, research and development activities and the
testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising and promotion of Star's products.
There are multiple bills pending before the 106th Congress and in
several state legislatures which, if enacted, would significantly change the
United States tobacco industry. Some of these federal bills contain provisions
which would provide substantial federal government funds for smoking cessation
programs and products, as well as incentives to tobacco companies and others to
produce less harmful or reduced-risk tobacco products. Star is unable to predict
what effect, if any, these provisions, if enacted, would have on Star's
technology for very low-TSNA tobacco or the sale of Star's smoking cessation
products and/or reduced-risk tobacco products. The Company believes, however,
that any bill that requires manufacturers to reduce or disclose levels of TSNAs
in tobacco or tobacco smoke would be beneficial. Star announced on February 29,
at a press conference held at the Dirksen Senate Office Building, its support of
a bi-partisan tobacco labeling Bill (S. 2125) introduced by Senators Frank
Lautenberg (D. N.J.), Richard Lugar (R. IND.), Richard J. Durbin, (D. ILL.), and
Lincoln D. Chafee (R. R.I.). The Senate Bill, entitled the "Smoker's Right to
Know and Truth in Tobacco Labeling Act", would, if enacted, significantly
enhance the current tobacco package warning labels and require disclosure of
toxic ingredients and health affects. The Bill would require all manufacturers
to disclose cancer-causing agents, including carcinogenic TSNAs, as well as the
percentage of such carcinogens "relative to the average of such concentration of
such carcinogen in the sales weighted average of all cigarettes marketed in the
United States." If enacted, Star believes such mandated disclosure would be
beneficial to informed adult smokers, as well as the Company.
FDA Regulation
The FDA has promulgated regulations governing the sale and advertising
of tobacco products designed primarily to discourage the sale to, and
consumption by, adolescents and children. The authority of the FDA to promulgate
such regulations was challenged in the federal courts. A federal District Court
upheld the FDA's authority to promulgate such regulations but ruled that certain
of the regulations restricting advertising were invalid as violative of the
constitutional right of free speech. On appeal, the United States Court of
Appeals for the Fourth Circuit affirmed portions of the District Court opinion
that held the FDA could not regulate tobacco advertising and ruled that the
executive branch of the United States government, in particular the FDA, does
not have any authority to regulate tobacco products generally. The federal
government appealed the Appeals Court's ruling and the matter was heard by the
United States Supreme Court in late 1999.
On March 21, 2000, the Supreme Court in a five to four decision held
that the Congress has not given the FDA authority to regulate tobacco products
as customarily marketed. Given the decision by the
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Supreme Court it is unclear whether the 106th or 107th Congress will act to
grant such authority to the FDA, although legislation that would create such
authority has already been introduced in Congress.
Star believes that in the future reasoned FDA regulation will better
enable the Company to compete in its particular market niche. Accordingly, the
Company has publicly announced its support for comprehensive FDA regulation of
tobacco products. The Company has shared the results of its proprietary curing
process with the FDA. The Company believes that the commercial value of its
proprietary StarCure(TM) tobacco curing process will depend in part upon its
validation by the scientific, health care and public health communities. The
Company believes that well designed and carefully executed tests and clinical
trials with resulting data shared with the scientific and public health
communities would further its objective of attaining more general acceptance for
its unique proprietary StarCure(TM) technology.
Federal Trade Commission
The requirements for health warnings on cigarettes is governed by
the Federal Cigarette Labeling and Advertising Act ("Labeling Act"). The
Labeling Act imposes labeling and advertising requirements on the manufacturers,
packagers, and importers of cigarettes and requires any company wishing to sell
cigarettes within the United States to submit a plan to the Federal Trade
Commission explaining how it will comply with the warning label display
requirements. Star has submitted such plans in the past, and the Federal Trade
Commission has approved its labeling plans.
Bureau of Alcohol, Tobacco and Firearms
Manufacturers and importers of tobacco products are taxed pursuant
to regulations promulgated by the federal Bureau of Alcohol, Tobacco and
Firearms under authority of the Internal Revenue Code of 1986, as amended. The
Company's tobacco products are subject to tax under such regulations.
State and Municipal Laws
The sale of tobacco products is subject to taxation in all fifty
states. In addition, some states permit municipalities to impose an additional
sales tax, and many municipalities do so. The state and municipal taxes are
imposed upon wholesalers and/or retailers but not manufacturers, and therefore
Star has no liability for such taxes. Star is required by many states, however,
to report its shipments of cigarettes to distributors/retailers located within
their jurisdiction. Star is aware of at least two states, Massachusetts and
Minnesota, which have recently adopted laws and regulations regarding the
disclosure by manufacturers of certain chemical constituents in their products.
Star intends to fully comply with such laws and believes it will benefit from
such disclosure.
Master Tobacco Settlement Agreement
In November 1998, 46 states and several U.S. territories entered
into a settlement agreement (the "Master Settlement Agreement") to resolve
litigation that had been instituted by them against the major tobacco
manufacturers. The Company was not named as a defendant in any of the litigation
matters and chose not to become a participating manufacturer under the terms of
the Master Settlement Agreement. As a nonparticipating manufacturer, the Company
is required to satisfy certain escrow obligations under statutes which the
Master Settlement Agreement required participating states to pass, if they were
to receive the full benefits of the settlement. The so-called "level playing
field" statutes require nonparticipating manufacturers to fund escrow accounts
that could be used to satisfy judgments or settlements in lawsuits that may at
some future date be filed by the participating states against such
nonparticipating tobacco manufacturers. Absent a legal challenge to the state
specific statutes or an agreement with respect to the funding of the required
escrow accounts, the Company is obligated to place an amount equal to $1.88 per
carton for 1999, and increased amounts per carton for subsequent years ($2.09 in
2000, $2.72 in 2001-2002, $3.35 in 2003-2006 and $3.77 thereafter), in escrow
accounts,
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beginning April 2000 and annually thereafter, for sales of cigarettes occurring
in the prior year in each such state after the effective date of each state
specific statute. Such escrowed funds will be available to satisfy
tobacco-related judgments or settlements, if any, in some states. If not used to
satisfy judgments or settlements, the funds will be returned to the Company
25 years after the applicable date of deposit. Also, absent a challenge to the
state specific statutes or some accommodation as to the payment of the escrow
amounts, the failure to pay the required escrow could result in penalties to the
Company and potential restrictions on its ability to sell tobacco products
within particular states. The Company is continuing to assess its options with
respect to the state specific statutes, including a range of potential legal
challenges to the statutes and/or the Master Settlement Agreement under a
variety of legal theories, including unconstitutional taking of property.
As of January 1, 2000, thirty-seven states had adopted model "level
playing field" statutes and Star's purported obligations under those statutes is
approximately $10.6 million with respect to 1999 sales. The Company's Board of
Directors has authorized the Company to fund the escrow obligations for 1999
under protest and to prepare a draft complaint for consideration by the
Company's Board of Directors.
Virginia Incentive Rebates
In 1999, the Commonwealth of Virginia enacted legislation that
explicitly encourages the manufacture and sale of "products that reduce the
carcinogenic TSNA levels in tobacco products." That legislation, pursuant to
House Bill 2635 and Senate Bill 1165 (1999), provides that $2,000,000 shall be
made available to the Virginia Economic Development Partnership to provide for
economic development incentive rebates to assist Virginia companies that reduce
carcinogenic TSNA levels in tobacco products and pass a portion of that rebate
on to tobacco farmers. The Company believes that it is the only company in
Virginia that produced any very low-TSNA tobacco in Virginia during the 1999
growing season and, thus, the only company that could qualify for these rebates.
Canadian Proposed Regulations for Tobacco Packaging
The Canadian government in 1999 proposed new labeling regulations
that would require disclosure of the amount of selected toxic emissions and
constituents, including TSNAs, in tobacco products sold in Canada, as well as an
explanatory phrase regarding each such toxic substance. The proposed phrase
regarding TSNAs would require a warning, that "NITROSAMINES CAUSE CANCER. THEY
ARE THE MOST ACTIVE CANCER-CAUSING AGENTS IN TOBACCO." Star believes that, if
adopted, the proposed regulations, which would require such disclosure on
cigarette labels covering 60% of the top of the principal display panel, could
benefit the Company to the extent that Star or any future Star licensee markets
tobacco in Canada. Star is currently exploring opportunities for the use of its
very low-TSNA tobacco in Canada, either directly or through a license granted by
Star to one or more tobacco companies which market cigarettes in Canada.
RESEARCH AND DEVELOPMENT
In the mid-1990's, Star commenced research and development
activities based upon newly-conceived technology for the processing of tobacco
so as to preclude, eliminate or substantially reduce TSNAs to very low levels.
This technology is under exclusive license from a company in which the
technology's inventor and the Company's founder and current Chief Executive
Officer, Jonnie R. Williams, is part owner. (See "Patents, Trademarks and
Licenses.") TSNAs are generally recognized by health researchers to be among
the most potent and abundant carcinogens in tobacco and tobacco smoke. Star's
research and development activities have focused on: (1) perfecting and testing
its proprietary methods for processing tobacco: (2) developing products which
incorporate Star's specially-processed tobacco, including products for the
smoked and smokeless tobacco markets: (3) establishing a patent position; and
(4) developing relationships with tobacco farmers, as well as the tobacco
industry, with a view to the commercialization of Star's processes. Star's
research and development efforts culminated in the development of various
aspects of the StarCure(TM) process, with respect to which Star has exclusive
rights to patents as well as patent applications which are pending (see
"Patents, Trademarks and Licenses").
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Star has convened a Scientific Advisory Board of highly regarded physicians,
scientists, and public health experts to provide it with counsel on how best to
proceed forward in a variety of scientific and research oriented areas. The
Scientific Advisory Board is chaired ex officio by Dr. Jerome H. Jaffe, Star's
Medical and Scientific Director.
Proprietary Technology
The process of curing or drying tobacco so that it is suitable for
production into tobacco products begins immediately upon harvesting of the
tobacco leaf. The two principal varieties of tobacco leaf in the United States
are Virginia flue-cured tobacco and burley tobacco, both of which are typically
used in American-made cigarettes to produce what is referred to as an American
blend. Under conventional curing methods with Virginia flue-cured tobacco, the
leaves are hung in enclosed barns and are then exposed to gas-fired heat, while
with burley tobacco the leaves are hung in sheds to dry naturally. The curing
process for Virginia flue-cured tobacco takes approximately 5 to 7 days and for
burley tobacco a month, or more.
The Company's StarCure(TM) proprietary curing technology is
applicable to Virginia flue-cured tobacco and, the Company believes, to burley
tobacco, and most likely to other varieties widely used throughout the world
on a broad-scale commercial basis. Star's curing process essentially arrests
or eliminates microbial activity that normally occurs during curing, thereby
preventing the production of TSNAs. Star's curing technology does not, however,
alter or affect taste, color or the nicotine content of tobacco. The Company
makes no claim or representation that its StarCure(TM) proprietary curing
process reduces any harmful chemical constituents in tobacco and/or tobacco
smoke other than TSNAs. Additionally, the Company makes no claim that the
elimination of TSNAs reduces the risk of disease from smoking. Star has been
careful not to make any health claims, directly or indirectly, since there is
not yet clinical evidence to show that a reduction in these specific
carcinogens in tobacco will translate into a reduced health risk.
Star's proprietary curing technology has been licensed to Star in an
agreement which grants to Star certain exclusive worldwide rights with a right
of sublicense. See "Patents, Trademarks and Licenses" below. It is Star's
objective to achieve widespread acceptance of its proprietary tobacco curing
technology as a standard for the manufacture of potentially less harmful tobacco
products and as a basis for the use of low-TSNA tobacco in the production of
smoking cessation products.
Star conducted a pilot program during the 1998 U.S. tobacco harvest
season (July through October). The purposes of this program were: (1) to
continue to test and perfect Star's curing processes in quantities and under
conditions which would serve as a model for future operations; (2) to test
custom designed equipment; (3) to provide processed tobacco to major
manufacturers in quantities for testing and test market purposes; and (4) to
demonstrate the commercial feasibility of adoption of Star's processes for
widespread use in the production of tobacco products. The program was operated
from the Company's facility in Chase City, Virginia. The Company completed the
pilot program and believes it achieved the objectives described above. In 1999,
Star processed over 3.5 million pounds of very low-TSNA tobacco using the
StarCure(TM) process. As discussed above, Star expects to process over 20
million pounds of very low-TSNA tobacco during the 2000 growing season.
Development of Very Low-TSNA Cigarette
Star plans to market the first very low-TSNA cigarette to be sold in
the United States before the end of the third quarter of 2000. This cigarette
will use Virginia flue cured tobacco processed using the proprietary
StarCure(TM) process, as well as other tobaccos (burley and oriental) selected
for low-TSNA levels. It is anticipated that, compared to leading brands, their
cigarette will achieve up to a 90% reduction of the carcinogenic TSNAs in the
tobacco and more than an 80% reduction of TSNAs in tobacco smoke (measured by
the FTC method) with comparable tar and nicotine yields. Also, the product will
have an activated charcoal filter that, it is anticipated, will reduce certain
gas and vapor phase toxic substances.
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Prior Development of CigRx(TM)
In 1997 Star submitted a cigarette product that it called
"CigRx(TM)" to the FDA as a pharmaceutical product. The objective was to offer a
product to help patients who relapse after a trial of smoking cessation to
prepare for another cessation attempt while reducing exposure to TSNAs. Star is
not aware of any other company submitting a tobacco product for FDA clearance.
Star's strategy has since changed, and it will not seek FDA approval for
CigRx(TM) A Phase I study, under an FDA-reviewed protocol, was completed at the
Virginia Commonwealth University under the direction of Professor William Barr,
Director of the Center for Drug Studies. The study, involving male and female
subjects, was a cross-over study designed to test in vivo elimination or
reduction of TSNAs following the smoking of CigRx(TM) cigarettes compared to the
subjects' normally used cigarettes. These test cigarettes were made entirely
from flue-cured Virginia tobacco with no added flavorings. The average total
TSNA levels in the tobacco itself at the time of testing were about 100 parts
per billion, as compared to more than 3,000 parts per billion in popular brands.
As measured by the current Federal Trade Commission method, the CigRx(TM)
cigarettes used in the study delivered substantially less carbon monoxide (4.8
milligrams versus 12.2 milligrams) and about half as much tar (7.0 milligrams
versus 14.0 milligrams) compared to an average of the best selling full-flavored
cigarettes. The study contrasted Star's product with conventional brands in
terms of breath levels of carbon monoxide, blood levels of nicotine, and urinary
levels of TSNAs. On the CigRx(TM) product, blood nicotine levels were somewhat
higher and carbon monoxide was substantially lower. Urinary levels of TSNA (as
measured by NNAL) were analyzed by the American Health Foundation. The average
levels of NNAL and its metabolite after 9 days on the CigRx(TM) product were
reduced substantially, consistent with published data showing that TSNAs leave
the body slowly over 90 to 120 days.
PRODUCT LIABILITY
In the United States, there have been numerous and well-publicized
lawsuits against the largest manufacturers of cigarettes and other tobacco
products initiated by state and municipal governmental units, health care
providers and insurers, individuals (for themselves and on a class-action basis)
and by others. The legal theories underlying such lawsuits are varied, but are
generally based upon one or more of the following: (1) manufacturer defendants
have deceived consumers about the health risks associated with tobacco product
consumption; (2) such defendants knew or should have known about various harmful
ingredients of their products and failed to adequately warn consumers about the
potential harmful effects of those ingredients; and (3) such defendants knew of
the addictive attributes of nicotine and have purposefully manipulated their
product ingredients so as to enhance the delivery of nicotine.
Star believes that the risk of being named a defendant in a lawsuit
of the type described above is relatively low, and therefore the risk of
liability in any such lawsuit is relatively low, because Star: (1) has not at
any time advertised its tobacco products to consumers except for
point-of-purchase materials; (2) has conducted research on the chemical or other
constituents of its products only in the course of trying to reduce the delivery
of toxic materials; (3) has not "manipulated" the nicotine content or delivery
of its tobacco products; and (4) has stated unequivocally that smoking involves
a range of serious health risks, is addictive, and that smoked cigarettes
products can never be produced in a "safe" fashion. Moreover, Star's brands have
been sold for only a relatively short period of time, i.e., since 1994, and the
volume of sales has not been substantial in relation to the volume generated by
the larger manufacturers.
Star maintains product liability insurance which is limited to any
claims that tobacco products manufactured by or for Star contain any foreign
object. Such insurance does not cover health-related claims such as those that
have been made against the major manufacturers of tobacco products. Star does
not believe that such insurance currently can be obtained. A lawsuit against the
Company based upon claims not covered by its product liability insurance could
have a materially adverse effect upon the Company.
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PATENTS, TRADEMARKS AND LICENSES
License Agreement with Regent Court Technologies
Star is the licensee under a license agreement (the "License
Agreement") with the licensor, Regent Court Technologies LLC ("Regent Court"), a
limited liability company of which Jonnie R. Williams, the Company's founder and
Chief Executive Officer and Francis E. O'Donnell, Jr., M.D. are the sole
members. The License Agreement provides, among other things, for the grant of an
exclusive, worldwide, irrevocable license to Star, with the right to grant
sublicenses, to make, use and sell tobacco and products containing tobacco under
the licensor's patent rights and know-how relating to the processes for curing
tobacco so as to eliminate TSNAs or reduce them to insignificant levels, and to
develop products containing such tobacco, whether such patent rights and
know-how are now in existence or hereinafter developed. This license includes
inventions of Regent Court and its affiliates during the term of the License
Agreement relating to the production, treatment or curing of tobacco, or a
method of manufacturing a product containing tobacco, and of extracting one or
more substances from tobacco for the purpose of incorporating such substance or
substances in a product or products.
Star is obligated to pay to Regent Court a royalty of 2% on all net
sales of products by it and any affiliated sublicensees, and 6% on all fees and
royalties received by it from unaffiliated sublicensees, less any related
research and development costs incurred by Star. The License Agreement expires
with the expiration of the last of any applicable patents. Two U.S. patents have
been issued, and additional patent applications are pending in the United States
and in approximately 80 foreign jurisdictions. Star paid no royalties to the
licensor in 1999.
The License Agreement may be terminated by Star upon 30 days written
notice. The License Agreement may also be terminated by Regent Court (a) upon a
default in the payment of royalties or a failure to submit a correct accounting
continuing for at least 30 days after written notice, or (b) upon a material
breach of any other obligation of Star under the License Agreement continuing
for at least 60 days after written notice. A material breach may include a
sublicense of the Patent Rights (as defined in the License Agreement) without
obtaining a written agreement of the sublicensee to be obligated to Regent Court
under the License Agreement. Star is also obligated to provide Regent Court with
copies of all patent applications by it relating to the Patent Rights. For
purposes of determining materiality, a breach shall be deemed material if such
breach results in a loss of royalties exceeding $100,000.
The License Agreement obligates Star to prosecute and pay for U.S.
and foreign patent rights. The License Agreement contains other provisions
typically found in a patent license agreement, such as provisions governing
patent enforcement and the defense of any infringement claims against Star and
its sublicensees. The License Agreement further provides that any obligation or
liability related to patent infringement matters brought against Star will be
borne by Star. Star has agreed to indemnify and defend the licensor and its
affiliates against losses incurred in connection with Star's use, sale or other
disposition of any licensed product or the exercise of any rights under the
License Agreement. Regent Court has made no representations to Star in any
documents regarding the efficacy of the licensed technology.
Patents and Proprietary Rights
Under the License Agreement, Star has exclusive rights to two issued
patents and pending patent applications. The issued and pending patents cover
the current technology for reducing the level of TSNAs in tobacco. Corresponding
patent filings have been initiated in numerous foreign countries. There can be
no assurance that patents will issue from any of the pending applications, that
claims which may be allowed thereunder will be sufficient to protect the
intellectual property owned or licensed by Star, or that Star or Regent Court
has or will develop or obtain the rights to any additional products or processes
that are patentable. In addition, no assurance can be given that any patents
issued to or licensed by Star will not be challenged, invalidated, infringed or
circumvented, or that the rights granted thereunder will provide competitive
advantages to Star.
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SALE OF OPHTHALMIC BUSINESS
By the end of 1998, the Company sold its ophthalmic business. This
sale was viewed as necessary due to the poor results of such business and to
enable the Company to focus on its core business strengths. The purchaser
assumed most of the liabilities of the ophthalmic business. The purchaser
deposited into escrow 250,000 shares of the Company's common stock to secure the
payment of these liabilities.
EMPLOYEES
As of December 31, 1999, the Company had approximately 140 full-time
employees. From time to time, the Company engages temporary personnel to augment
its regular employee staff. The Company utilizes from time to time the services
of consultants, experts and independent contractors to provide key functions in
the scientific, medical, health care, legal, communications, financial and
related areas. The use of such outside consultants enables the Company to secure
expertise in a wide variety of areas that it might otherwise not be in a
position to secure or which it would otherwise be required to secure through
the hiring of additional Company-employed personnel at potentially greater cost
to the Company. Substantially all of the Company's research and development
efforts have been, and are expected to continue to be, conducted pursuant to
contractual arrangements with universities and scientific, medical and public
health consultants and investigators under the leadership of Dr. Jerome H.
Jaffe, the Company's Medical and Scientific Director, an internationally
recognized and respected neuropsychopharmacologist and addiction specialist. The
Company's success depends in large part on its ability to attract and retain
highly qualified scientific, technical, management, financial and marketing
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to attract and retain the personnel
necessary for the development and operation of its business. The loss of the
services of its key personnel or the termination of its contracts with
independent scientific and medical investigators could have a material and
adverse effect on the Company's business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We Are Dependent on the Domestic Tobacco Business
Substantially all of our revenues in 1999 were derived from sales in
the United States of our four brands of discount cigarettes, and sales of our
very low-TSNA tobacco . If the U.S. cigarette market continues to contract, we
may not have significant tobacco sales abroad or sales of other products to
offset these effects. This trend could adversely affect our sales volumes,
operating income and cash flows.
Competition From Other Cigarette Makers Could Adversely Affect Us
The cigarette industry is highly competitive. The majority of our
competitors have substantially greater financial, marketing, personnel and other
resources than we have. While we are not aware of any other company which
produces very low-TSNA tobacco for commercial use or incorporates very low-TSNA
tobacco into their cigarettes or other tobacco products, other major tobacco
companies will undoubtedly follow Star's lead. Additionally, our competitors may
also develop other less toxic tobacco products that can compete with our very
low-TSNA products.
Very Low-TSNA Tobacco May Not Be Accepted by the Marketplace
While we have produced and test marketed limited quantities of our
very low-TSNA cigarette and have been encouraged by the initial results, very
low-TSNA tobacco may not be accepted ultimately by adult smokers. Adult smokers
may decide not to purchase tobacco products made with very low-TSNA tobacco due
to taste or other preferences, particularly in light of Star's decision to
introduce its new very low-TSNA cigarette product with an activated charcoal
filter.
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The Cigarette Industry is Subject to Substantial and Increasing
Regulation and Taxation
Various federal, state and local laws limit the advertising, sale and
use of cigarettes, and these laws have proliferated in recent years. If this
trend continues, it may have material and adverse effects on our sales volumes,
operating income and cash flows. In addition, cigarettes are subject to
substantial and increasing excise taxes. The federal excise tax on cigarettes
will rise from $.24 per pack in 1999 to $.34 in 2000, and to $.39 in 2002.
President Clinton has proposed a further increase of $.55 per pack.
Additionally, state excise taxes range from $.025 per pack in Virginia to $.87
per pack in California. Increased excise taxes may result in declines in overall
sales volume. This result could adversely affect our operating income and cash
flows.
The FDA has promulgated regulations governing the sale and advertising
of tobacco products designed primarily to discourage the sale to, and
consumption by, adolescents and children. The authority of the FDA to promulgate
such regulations was challenged in the federal courts. On March 21, 2000, the
United States Supreme Court in a five to four decision held that the Congress
has not given the FDA authority to regulate tobacco products as customarily
marketed. Given the decision by the Supreme Court it is unclear whether the
106th or 107th Congress will act to grant such authority to the FDA, although
legislation that would create such authority has already been introduced in
Congress.
We Have Substantial Obligations Under State Laws Adopted Under the
Master Settlement Agreement
Absent a successful legal challenge to the statutes passed by various
states in connection with the Master Settlement Agreement, or an agreement with
the National Association of Attorneys General ("NAAG") with respect to the
funding of the required escrow accounts, in April of each year we would be
obligated to place an amount equal to $1.88 per carton for 1999, and increased
amounts per carton for subsequent years ($2.09 in 2000, $2.72 in 2001-2002,
$3.35 in 2003-2006 and $3.77 thereafter), in escrow accounts beginning April
2000 for sales of cigarettes occurring in the prior year in each such state
after the effective date of each state specific statute. The failure to pay such
required escrow amounts could result in penalties to us and potential
restrictions on our ability to sell tobacco products within particular states.
Because of the escrow payment requirement, a substantial portion of our net
income from operations will be unavailable for our use and the escrow amount
payable for each carton sold may exceed the cash flow generated by each carton
sold. This will adversely affect our ability to apply the capital generated from
our present cigarette sales toward the further scientific development of less
hazardous tobacco products and growth of our business. In addition, the escrow
obligations will impede our ability to distribute dividends to our stockholders.
Our Current Supply Contracts and Other Contracts with B&W May Not Be
Extended
We have entered into a Supply Agreement with B&W under which B&W agreed
to purchase StarCure(TM) tobacco in the period 2000-2001, with the right to
purchase tobacco from us on a long-term basis in later years. If B&W were to
stop purchasing our tobacco that has been cured using the StarCure(TM) process,
it could adversely affect our sales volumes, operating income and cash flows.
Additionally, we currently have other business relationships with B&W. B&W has
agreed to: (1) loan us the capital necessary to finance the purchase of up to
600 specially manufactured curing barns and potentially up to 1,000 curing
barns, (2) manufacture cigarettes for us and (3) supply tobacco to us. The
termination of any of these agreements could negatively affect our business
operations.
Lawsuits May Affect Our Profitability
We are not named as a defendant in any legal actions affecting the
tobacco industry, including proceedings and claims arising out of the sale,
distribution, manufacture, development, advertising, marketing and claimed
health effects of cigarettes. While we believe that the risk of being named a
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<PAGE> 16
defendant in such a lawsuit is relatively low, we may be named as a defendant in
the future as there has been a noteworthy increase in the number of these cases
pending. Punitive damages, often in amounts ranging into the hundreds of
millions, or even billions of dollars, are specifically pleaded in a number of
these cases in addition to compensatory and other damages. Our inclusion in any
of these actions or any future action could have a material and adverse effect
on our financial condition.
We May Not Properly Manage Our Growth
If we are successful in maintaining and increasing market acceptance
for our products, we will be required to manage substantial volume from our
customers. To accommodate any such growth and compete effectively, we will be
required to attract, integrate, motivate and retain additional highly skilled
sales, technical and other employees. We face competition for these people. Our
ability to successfully manage such volume also will be dependent on our ability
to scale up our tobacco processing and production operations. There can be no
assurance that we can overcome the challenge of scaling our processing and
production operations or that our personnel, systems, procedures and controls
will be adequate to support our future operations. Any failure to implement and
improve our operational, financial and management systems or to attract,
integrate, motivate and retain additional employees required by future growth,
if any, could have a material and adverse effect on our business and prospects,
financial condition and results of operations.
We May Not Be Successful in Protecting Our Proprietary Rights
Our success in commercially exploiting our licensed tobacco curing
technology depends in large part on our ability to defend issued patents, to
obtain further patent protection for the technology in the United States and
other jurisdictions, and to operate without infringing upon the patents and
proprietary rights of others. Additionally, we must be able to obtain
appropriate licenses to patents or proprietary rights held by third parties if
infringement would otherwise occur, both in the United States and in foreign
countries.
Patent positions, including our patent positions (owned or licensed)
are uncertain and involve complex legal and factual questions for which
important legal principles are unresolved. Any conflicts resulting from third
party patent applications and patents could significantly reduce the coverage of
our patents and limit our ability to obtain meaningful patent protection. If
patents are issued to other companies that contain competitive or conflicting
claims, we may be required to obtain licenses to these patents or to develop or
obtain alternative technology. Such licensing agreements, if required, may be
unavailable on acceptable terms or at all. If such licenses are not obtained, we
could be delayed in or prevented from pursuing the development or
commercialization of our products.
Litigation which could result in substantial cost may also be
necessary to enforce any patents to which we have rights, or to determine the
scope, validity and unenforceability of other parties' proprietary rights which
may affect our rights. U.S. patents carry a presumption of validity and
generally can be invalidated only through clear and convincing evidence. We may
also have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office to determine the priority of an invention, which could
result in substantial cost. There can be no assurance that our licensed patents
would be held valid by a court or administrative body or that an alleged
infringer would be found to be infringing. The mere uncertainty resulting from
the institution and continuation of any technology-related litigation or
interference proceeding could have a material and adverse effect on our business
and prospects.
We may also rely on unpatented trade secrets and know-how to
maintain our competitive position, which we seek to protect, in part, by
confidentiality agreements with employees, consultants, suppliers and others.
There can be no assurance that these agreements will not be breached or
terminated, that we will have adequate remedies for any breach, or that our
trade secrets will not otherwise become known or be independently discovered by
competitors.
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We Depend On Key Personnel
We depend upon the continued services of our senior management for our
continued success. The loss of either of the Company's Chief Executive Officer,
Mr. Jonnie R. Williams, or the Company's President and Chief Operating Officer,
Paul L. Perito, Esquire, could have a serious negative impact upon our business
and operating results. To minimize the present risk of the loss of either one of
these two senior executives, the Company has initiated a search for another
senior executive who would share some of the present responsibilities now
assumed by either Mr. Williams and/or Mr. Perito.
Management and Significant Stockholders Can Exercise Influence over the
Company
Based upon stock ownership as of March 14, 2000, our executive officers,
directors and their associates, own an aggregate of approximately 70% of our
outstanding shares. As a result, these persons acting together may have the
ability to control matters submitted to our shareholders for approval and to
control the management and affairs of the Company. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company, impede a merger, consolidation, or takeover or other business
combination, or discourage a potential acquiror from attempting to obtain
control. This concentration of control could also have a negative effect on the
market price of our shares.
Pursuant to our Certificate of Incorporation and Bylaws, the Board of
Directors is divided into three classes. Members of each class serve for a
three-year term and until the election and qualification of their successors, or
their earlier resignation or removal. Because the Board is divided into classes,
only those directors in a single class may be changed in any one year.
Consequently, changing a majority of the Board generally would require two
years. A classified Board, which may be regarded as an "anti-takeover"
provision, may make it more difficult for our stockholders to change the
majority of directors and thus have the effect of maintaining continuity of
management.
Item 2. Properties
The Company's executive offices and manufacturing facilities have been
located in Petersburg, Virginia. The Company recently relocated its executive
offices to its Chester, Virginia facility and anticipates establishing an
additional executive/scientific office in Washington, D.C. within the next two
months. The Company owns the Petersburg facilities, which consist of a 50,000
square foot, four-story manufacturing building and an adjacent 6,000 square
foot, single-story office building. The Company leases a 10,000 square foot
warehouse in Petersburg, Virginia, about one mile from its manufacturing
facilities, pursuant to a month-to-month lease. The Company recently entered
into a five-year lease for a 45,000 square foot warehouse facility, including
7,000 square feet of office space in Chester, Virginia. The warehouse space is
used for storing and shipping cigarette products. The Company also leases a
single office at the Biotechnology Office Park of the Medical College of
Virginia in Richmond, Virginia, on a tenancy-at-will basis.
The Company leases seven acres of land and an approximately 50,000
square foot building thereon in Chase City, Virginia, that is used in processing
tobacco utilizing the Company's proprietary StarCure(TM) method to prevent the
formation of TSNAs. The existing facility is currently being expanded from
50,000 square feet to 100,000 square feet. The Company has recently entered into
a new ten-year lease for the Chase City property, which covers the expanded
facility and it has an option to purchase the property at any time during the
term of the lease.
The Company considers its facilities adequate for the purposes for which
they are used.
-16-
<PAGE> 18
Item 3. Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 annual meeting of stockholders of the Company (the "Meeting")
was held on December 10, 1999. At the Meeting, the stockholders voted upon a
number of proposals, each of which is summarized below, along with the votes
cast for and against each such proposal, votes withheld or abstaining therefrom
and broker non-votes.
ELECTION OF DIRECTORS. At the Meeting, the stockholders elected the
following persons to the Board of Directors of the Company until the date of the
annual stockholders meeting in the calendar year set forth opposite the name of
each such person:
<TABLE>
<CAPTION>
NAME TERM VOTES FOR VOTES AGAINST ABSTAINING BROKER NON-VOTES
---- ---- --------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Malcolm L. "Mac" Bailey 2002 49,599,919 0 203,315 0
Paul L. Perito, Esquire 2002 49,598,119 0 205,115 0
Elliott D. Prager, M.D. 2002 49,589,919 0 213,315 0
</TABLE>
RATIFICATION OF ACCOUNTANTS. At the Meeting, the stockholders of the
Company voted on and ratified the appointment of Aidman, Piser & Company, P.A.
as independent accountants for 1999. 49,603,115 votes were cast for such
proposal, 7,405 votes were cast against or withheld, with 192,714 votes
abstaining and no broker non-votes.
-17-
<PAGE> 19
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock of the Company was traded in the over-the-counter market and
was quoted on the OTC Bulletin Board under the symbol "STSI." On March
21, 2000, the Common Stock of the Company commenced trading on the NASDAQ
National Market under the symbol "STSI." Set forth below are the high and low
bid prices (which reflect prices between dealers and do not include retail
markup, markdown or commission and may not represent actual transactions) for
each full quarterly period during 1998 and 1999, as reported by the National
Quotation Bureau. From time to time, during the periods indicated, trading
activity in the Company's stock was infrequent. No dividends have ever been
declared by the Company. As of December 31, 1999, there were approximately 649
record holders of the Company's Common Stock.
<TABLE>
<CAPTION>
1999 High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $2.1250 $1.6250
Second Quarter $3.6250 $1.5625
Third Quarter $5.1875 $3.1250
Fourth Quarter $8.5625 $5.0625
1998 High Bid Low Bid
-------- -------
First Quarter $5.9375 $0.0100
Second Quarter $5.6250 $3.0000
Third Quarter $3.5000 $1.4375
Fourth Quarter $3.5000 $1.3750
</TABLE>
The closing price on March 21, 2000 was $6.625.
Item 6. Selected Financial Data
In thousands of dollars, except share and per share data for the Year
Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(In Thousands except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net Sales $ 99,325 $ 19,445 $ 20,764 34,260 33,158
Cost of goods sold 31,878 7,669 10,033 16,150 16,340
Gross Profit 33,624 2,938 2,920 4,639 4,295
Operating income (loss) 17,078 (3,475) (1,986) (753) 10
Net income (loss) 11,515 (4,196) (1,986) (753) 10
Basic income (loss) per share 0.32 (0.42) (0.58) (0.22) 0.00
Diluted income (loss) per share 0.30 (0.42) (0.58) (0.22) 0.00
Weighted average shares outstanding 36,207 8,327 3,435 3,437 3,437
Balance Sheet Data:
Cash and cash equivalents 17,205 103 11 11 4
Property, Plant & equipment 10,974 1,704 2,416 2,767 3,187
Total assets 38,709 4,435 4,120 6,644 8,050
Long-term obligations 7,505 612 1,099 2,655 2,625
Stockholders' equity (deficit) 12,319 (639) (1,742) (838) 57
</TABLE>
-18-
<PAGE> 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion and analysis of operating results of the
Company and of the liquidity and capital resources of the Company at December
31, 1999 should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto.
RESULTS OF OPERATIONS - FISCAL 1999 COMPARED TO FISCAL 1998
The following discussion and analysis of operating results of the
Company and of the liquidity and capital resources of the Company at December
31, 1999 should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto.
During 1999, the Company's net sales increased to $99.3 million,
reflecting an increase of $79.9 million, or 411% over 1998 net sales. Net sales
in 1999 included $9.3 million in very low-TSNA tobacco sold to B&W, delivered
primarily in the third and fourth quarters of 1999. There were no such sales in
1998, except for minor leaf deliveries to major tobacco companies during the
development stage of the Company's very low-TSNA program.
Other than very low-TSNA tobacco sales made to B&W, substantially all of
the Company's revenues in 1999 have been derived from sales of its four brands
of "discount" cigarettes. The Company's shipment volume during 1999 increased
approximately 276% over 1998 to 2.6 billion units, reflecting a continued
upswing in sales of the Company's cigarettes as a result of growing the customer
base across the country, including the addition of several major retail chains.
Slight increases in product pricing also contributed to higher net sales.
During 1999, the Company's gross profit increased to $33.6 million,
reflecting an increase of $30.7 million over 1998, as increases in net sales of
$79.9 million were partially offset by increased costs of goods sold ($24.2
million) and increased excise taxes ($25.0 million). Increased costs of goods
sold were related to volume increases, and were partially offset by a decrease
in the average cost of tobacco purchased by the Company.
Marketing and distribution expenses totaled $6.3 million for 1999, an
increase of $5.1 million over 1998 which is in line with the increased sales
volume and reflects salary and incentive compensation payments to sales
personnel. The Company's marketing and distribution expenses are expected to
grow significantly during 2000 as the Company expands its commercialization
capabilities.
General and administrative expenses for 1999 totaled $9.9 million for
1999, an increase of $6.7 million partially attributable to operating costs for
the Company's Chase City facility. This facility processes the very low-TSNA
tobacco during the months of June through November. Chase City facility costs in
1998 were significantly lower, due to the experimental nature of the operation
at the time, and were classified in 1998 as research and development costs, in
keeping with the Company's mission at the time to develop the StarCure(TM)
process to a commercially feasible production level, which was accomplished in
1999. Other general and administrative costs are relatively flat when compared
to the comparable periods in 1998; however, there are some cost increases
associated with the higher sales volume, as well as increased legal and
consulting costs associated with the Company's fulfillment of its compliance
obligations as a publicly-held company, its legal and public health strategies
in the legislative, regulatory and executive agency arenas, its technical
recruitment efforts, expansion of its Scientific Advisory Board as well as the
costs of scientific consulting.
Research and development expenses were significantly higher in 1998
primarily as a result of costs incurred in this period specifically related to
the development of the Company's TSNA reduction technology. Research and
development expenses in 1999 consist primarily of costs incurred by the Company
for consulting services, professional fees and expenses in connection with the
Company's continuing research and development associated with scientific,
medical and health related matters.
-19-
<PAGE> 21
Net interest income in 1999 reflects positively against net interest
expense in 1998, reflecting interest on higher 1999 cash balances generated by
the improved operating results.
Income tax expense reflects use of the Company's net operating loss
carryover from 1998, the benefit of which was previously reserved.
In 1998, the Company recorded charges to earnings for the discontinued
operations of the ophthalmic business and a loss on the disposal (sale) of such
business totaling $972,000. These charges resulted in a loss from discontinued
operations equal to ($0.12) per share. As a result of various settlements with
the Company's creditors, reached prior to the merger with Eye Technology in
February 1998, the Company also recorded an extraordinary gain of $252,000 in
1998 or $0.03 per share.
Net income of $11.5 million for 1999 compared favorably with a net loss
of ($4.2) million for 1998. In 1999, the Company had basic and diluted earnings
per share from continuing operations equal to $0.32 per share and $0.30,
respectively versus basic and diluted losses per share from continuing
operations of ($0.42) per share for 1998. In 1999, weighted average shares
outstanding were 36,207,390 versus 8,327,345 for 1998.
RESULTS OF OPERATIONS - FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for 1998 of $19,445,000, consisting almost entirely of the
sale of branded cigarettes, were approximately equal to 1997 sales of
$20,763,000. Sales in 1997 included sales to Swisher (a long-time private brand
customer) of $3,872,000. There were no sales to Swisher in 1998. However, fourth
quarter 1998 sales of $8,666,000 compared favorably with the prior year's fourth
quarter sales of $3,613,553. In 1998, sales from contract manufacturing, i.e.
the manufacturing of products under brand names owned and marketed by others,
was $1,251,000, compared to $3,872,000 in 1997.
Cost of goods sold, as a percentage of net sales volume, was 39% in 1998
versus 48% in 1997. Profit margins on contract manufacturing are slightly higher
than the margins on branded cigarettes. In 1998, profit margins increased
because of December 1998 price increases on branded cigarettes, a factor that
affected positively the sales of the entire cigarette manufacturing industry.
Marketing and distribution expenses increased slightly from $1,111,000
in 1997 to $1,199,000 in 1998. Star did not incur any significant expense in
this category with respect to contract manufacturing customers; almost all of
such expense was incurred with respect to branded cigarettes
General and administrative expenses increased from $1,425,000 in 1997 to
$3,174,000 in 1998, primarily as a result of the legal, consulting and
accounting costs associated with the merger with Eye Technology and resulting
status as a publicly-held company, including the hiring of additional personnel.
Research and development expense represents primarily expenditures
related to the development of Star's proprietary StarCure(TM) technology for the
processing of tobacco so as to prevent, reduce an/or significantly decrease the
formation of carcinogenic TSNAs, as well as expenses for the development of the
tobacco-flavored, non-nicotine chewing gum which Star is no longer developing.
Star does not maintain its own research laboratories or other physical assets
for research and development; it is dependent upon the services of third parties
for these services. Similarly, it did not employ a scientific staff in 1997 or
1998 and instead relied upon scientific and medical consultants and third-party
service providers. Expenditures in this category include payments for such
consultants, contract research organizations, laboratory testing, research
grants, raw materials, equipment, legal and regulatory fees, including expenses
for the filing and prosecution of patents, and allocations of management
personnel and general and administrative expenses. This category includes
payments of $400,000 in 1998 and $565,000 in 1997, respectively, to Jonnie R.
Williams, the inventor of Star's proprietary technology for the processing of
tobacco.
-20-
<PAGE> 22
Net interest expense was $238,000 in 1998 and $235,000 in 1997,
consisting primarily of interest incurred in connection with a bank revolving
line of credit, the borrowing levels of which were determined by levels of
accounts receivable and inventory. The Company had several injections of capital
during 1998, thereby reducing costs associated with borrowing.
The increased loss in 1998 can be attributed to several factors,
including the expenses associated with the public Company, and research and
development costs incurred. The Company has emphasized throughout the last
several years its commitment to develop less harmful tobacco products, and the
resources needed to continue that effort, while lower in 1998 than 1997,
resulted in the issuance of the first patent ever for the production of very
low-TSNA tobacco.
LIQUIDITY AND CAPITAL RESOURCES
Accounts receivable and accounts payable throughout 1999 were current
and the Company has normal industry terms with all of its suppliers, a situation
that did not exist in 1998. This favorable situation is primarily due to cash
generated by operating activities resulting primarily from higher net income in
1999 and a $6,000,000 non-refundable deposit from B&W in connection with the
Supply Agreement, which is to be applied toward B&W's year 2000 StarCure(TM)
tobacco purchase orders. In 1999, $20.8 million of cash was provided by
operating activities compared to $2.7 million of cash used in operating
activities in 1998.
During 1999, the Company incurred $10.0 million in capital expenditures,
virtually all of it as part of the StarCure(TM) barn production program with
Powell Manufacturing. B&W has agreed to loan the Company capital necessary to
finance the purchase of curing barns designed by the Company and specially
manufactured for the Company by Powell Manufacturing. Approximately 550 of these
barns have already been manufactured and delivered and contracts with tobacco
farmers for approximately 350 additional curing barns have either been executed
or are being finalized. At December 31, 1999, the Company has borrowed $7.2
million under the credit facility with B&W.
During January 2000, the Company negotiated a line of credit with a new
working capital lender, which is to be collateralized by accounts receivable
from its cigarette business, in the amount of $3 million.
In October 1999, the Company also received approximately $1.0 million in
proceeds from the exercise of a warrant to purchase 522,920 shares of the
Company's common stock. The Company currently has warrants outstanding to
purchase a total of 977,080 shares of common stock that are exercisable until
September 2000. All of such warrants have exercise prices of $2.00 per share. In
1998, the Company sold common and preferred stock in several private placements,
which generated net proceeds of approximately $4.7 million.
Under the Master Settlement Agreement, absent a successful legal
challenge to the state specific statutes or an agreement with the National
Association of Attorneys General with respect to the funding of the required
escrow accounts, the Company will be obligated to place an amount equal to $1.88
per carton for 1999, and increased amounts per carton for subsequent years, in
escrow accounts for sales of cigarettes occurring in each such state after the
effective date of each state specific statute. Such escrowed funds will be used
to fund tobacco-related litigation or settlements and if not so used, returned
to the Company after 25 years. The Company will be obligated to put into escrow
approximately $10.6 million in April 2000 for sales made in 1999. The funds
placed in escrow will continue to be an asset of the Company and the Company
will receive the interest income generated by the escrow deposit. However, these
escrow obligations will significantly impede the Company's ability to apply the
capital generated from its cigarette sales as it sees fit and the escrow amount
payable for each carton sold may exceed the cash flow generated by each carton
sold. Based on Star's projected increase in sales for future years, the Company
will have to pay significant sums into these escrow accounts to meet the Master
Settlement Agreement requirements.
-21-
<PAGE> 23
The Company believes that its existing working capital, together with
anticipated earnings from its operations, will be sufficient to meet its
liquidity and capital requirements in the foreseeable future. The Company's
need, if any, to raise additional funds to meet its working capital and capital
requirements will depend upon numerous factors, including the results of its
marketing and sales activities, any escrow obligations it may be required to
comply with under the Master Settlement Agreement, the success of the Company's
new product development efforts and the other factors described under "Risk
Factors That May Affect Future Results."
YEAR 2000 ISSUES
The Company undertook an assessment of its information technology
systems relating to year 2000 issues at its Virginia facilities and contacted
major customers and vendors to assess their status. The assessment resulted in
the development of a plan to prepare Star for year 2000 readiness. The costs for
implementation of Star's plan were not material. Such costs were capitalized or
expensed as appropriate. No additional Year 2000 costs are anticipated. As of
the date of this filing, the Company has not experienced any disruption of its
operations due to Year 2000 issues.
Item 8. Financial Statements
This information is contained on Pages F-1 through F-24 hereof and is
incorporated into Part I of this report by reference.
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure
The information required by this item with respect to the change in the
Company's principal independent accountants (1) from Price Waterhouse LLP to
Olsen, Thielen & Co., Ltd., effective March 5, 1998, has been previously
reported in the Company's Current Report on Form 8-K dated March 30, 1998, (2)
from Olsen, Thielen & Co., Ltd. to Keiter, Stephens, Hurst, Gary & Shreaves,
P.C., effective September 4, 1998, has been previously reported in the Company's
Current Report on Form 8-K/A dated September 16, 1998, and (3) from Keiter,
Stephens, Hurst, Gary & Shreaves, P.C. to Aidman, Piser & Company, P.A.,
effective January 15, 1999, has been previously reported in the Company's
Current Report on Form 8-K dated January 15, 1999.
PART III
Item 10. Directors and Executive Officers Compliance With Section 16(a) of the
Exchange Act
Information concerning directors and executive officers of the Company
and compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is included under the caption "Election of Directors" of the Proxy
Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
Item 11. Executive Compensation
Information concerning executive compensation is included under the
caption "Executive Compensation" of the Proxy Statement for the 2000 Annual
Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is included under the captions "Principal Stockholders" and
"Election of Directors" of the Proxy Statement for the 2000 Annual Meeting of
Stockholders and is incorporated herein by reference.
-22-
<PAGE> 24
Item 13. Certain Relationships and Related Transactions
Information concerning transactions and other relationships, if any,
between the Company and its directors, officers or principal stockholders is
included under the caption "Certain Transactions" of the Proxy Statement for the
2000 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------- ------------
<S> <C>
2.01 Asset Purchase Agreement between Star Scientific, Inc., a
Delaware Corporation and Eyetech, LLC, a Minnesota Limited
Liability Company, by Robert J. Fitzsimmons, an individual
residing in St. Paul, Minnesota, dated December 30, 1998 (Form
8-K dated March 2, 1999)*
2.02 Escrow Agreement between Star Scientific, Inc., a Delaware
Corporation, Eyetech, LLC, a Minnesota Limited Liability
Company and Robert J. Fitzsimmons, an individual residing in
St. Paul, Minnesota, and Jonnie R. Williams and Vincent Ellis
as Escrow Agents, dated February 16, 1999, and effective
December 30, 1998 (Form 8-K dated March 2, 1999)*
3.01 Restated Certificate of Incorporation (Form 10-KSB for fiscal year
ended December 31, 1992)*
3.02 Certificate of Amendment of Restated Certificate of Incorporation,
dated March 25, 1993, and effective April 2, 1993 (Form 10-KSB for
fiscal year ended December 31, 1996)*
3.03 Certificate of Amendment of Restated Certificate of Incorporation,
dated March 25, 1993, and effective April 2, 1993 (Form 10-KSB for
fiscal year ended December 31, 1996)*
3.04 Certificate of Amendment of Certificate of Incorporation, dated
December 15, 1998 (Form 8-K dated January 15, 1999)*
3.05 Bylaws of the Company as Amended to Date (Form 10-KSB for fiscal
year ended December 31, 1992)*
10.18 Stock Exchange Agreement between the Company and the stockholders of
Star Tobacco and Pharmaceuticals, Inc., dated February 6, 1998 (Form
8-K dated February 19, 1998)*
10.19 License Agreement between Star Tobacco and Pharmaceuticals, Inc., as
Licensee and Regent Technologies, Jonnie R. Williams, and Francis
E. O'Donnell, J.R. , M.D., as Licensor, dated January 5, 1998 (Form
10-QSB for quarterly period ended March 31, 1998)*
10.21 Exclusive Supply Agreement between Star Tobacco and Pharmaceuticals,
Inc. and Amana Company, L.P., dated August 18, 1998 (Form 10-QSB for
quarterly period ended September 30, 1998)*
10.22 Purchase and Sale Agreement between Prometheus Pacific Growth Fund
LDC, a Cayman Island Limited Duration Company, and Eye Technology,
Inc., a Delaware Corporation, dated July 10, 1998 (Form 8-K dated
July 15, 1998)*
10.23 Amendment No. 1 to License Agreement between Regent Court
Technologies, Jonnie R. Williams, Francis E. O'Donnell, J.R., M.D.
and Star Tobacco and Pharmaceuticals, Inc., dated August 3, 1998
(Form 8-K dated September 11, 1998)*
10.24 1998 Stock Option Plan, as amended @
</TABLE>
-23-
<PAGE> 25
<TABLE>
<S> <C>
10.26 Executive Employment Agreement dated as of April 27, 1999 entered
into by the Company, Jonnie R. Williams and Paul L. Perito (Form
10-QSB for quarterly period ended June 30, 1999)* @
10.27 Qualified Stock Option Agreement dated as of April 27, 1999 between
the Company and Paul L. Perito (Form 10-QSB for quarterly period
ended June 30, 1999)* @
10.28 Executive Employment Agreement dated as of April 12, 1999 entered
into by the Company and James A. McNulty (Form 10-QSB for quarterly
period ended September 30, 1999)* @
10.29 Stock Option Agreement dated as of April 12, 1999 entered into by
the Company and James A. McNulty (Form 10-QSB for quarterly period
ended September 30, 1999)* @
10.30 Restricted Stock Award Agreement dated as of April 12, 1999 entered
into by the Company and James A. McNulty (Form 10-QSB for quarterly
period ended September 30, 1999)* @
10.31 Amended and Restated Manufacture and License Agreement between the
Company and Powell Manufacturing Company, Inc., dated October 12, 1999 #
10.32 Agreement between the Company and Brown & Williamson Tobacco
Corporation, dated October 12, 1999 #
10.33 Loan Agreement between the Company and Brown & Williamson Tobacco
Corporation, dated October 12, 1999 #
10.34 Security Agreement between the Company and Brown & Williamson
Tobacco Corporation, dated December 16, 1999 #
10.35 Supply Agreement between Star Tobacco & Pharmaceuticals, Inc. and
Brown & Williamson Tobacco Corporation, dated January 1, 2000 #
10.36 Cigarette Manufacturing Agreement between Star Tobacco &
Pharmaceuticals, Inc. and Brown & Williamson Tobacco Corporation,
dated January 1, 2000 #
10.37 Loan and Security Agreement between Star Tobacco & Pharmaceuticals,
Inc. and Finova Capital Corporation, dated January 20, 2000
10.38 Lease and Purchase Option Contract between the Company and the
Industrial Development Authority of the Town of Chase City,
Virginia, dated March 10, 2000.
10.39 Form of Director Indemnification Agreement
10.40 Form of Officer Indemnification Agreement
16.01 Response Letter from Price Waterhouse LLP, dated April 10, 1998
(Form 8-K/A dated April 10, 1998)*
16.02 Response Letter from Olsen, Thielen & Co., Ltd, dated September 15,
1998 (Form 8-K/A dated September 16, 1998)*
16.03 Response Letter from Keiter, Stephens, Hurst, Gary & Shreaves, dated
January 20, 1999 (Form 8-K dated January 15, 1999)*
21 Subsidiaries of the Company (Form 10-KSB for the fiscal year ended
December 31, 1998)*
23 Consent of Independent Public Accountants
24 Powers of Attorney, executed by certain officers of the
Registrant and the individual members of the Board of
Directors, authorizing such officers of the Registrant to file
amendments to this Report, are located on the signature page of
this Report
</TABLE>
-24-
<PAGE> 26
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
*These items are hereby incorporated by reference from the exhibits of
the filing or report indicated (Commission File No. 0-15324) and are hereby made
a part of this Report
# Confidential treatment requested as to certain portions.
@ This exhibit is a management contract or compensatory plan required to
be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
(b) REPORTS ON FORM 8-K
None
-25-
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in Virginia on the ___
day of March, 2000.
<TABLE>
<CAPTION>
<S> <C>
STAR SCIENTIFIC, INC.
By: /s/ JONNIE R. WILLIAMS
---------------------------------------------
Jonnie R. Williams
Chief Executive Officer
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jonnie R. Williams and Paul L. Perito, Esquire,
or either of them, his attorney-in-fact, each with the power of substitution,
for him in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JONNIE R. WILLIAMS
- ---------------------------------------------- Chief Executive Officer and Director March __, 2000
Jonnie R. Williams (Principal Executive Officer)
/s/ PAUL L. PERITO, ESQUIRE
- ---------------------------------------------- Chief Operating Officer, President and Director March __, 2000
Paul L. Perito, Esquire
/s/ JAMES A. MCNULTY
- ---------------------------------------------- Chief Financial Officer March __, 2000
James A. McNulty (Principal Financial and Accounting Officer)
/s/ ROBERT J. DELORENZO, M.D. Ph.D., M.P.H.
- ---------------------------------------------- Chairman of the Board March __, 2000
Robert J. DeLorenzo, M.D.,
Ph.D., M.P.H.
/s/ MALCOLM L. BAILEY
- ---------------------------------------------- Director March __, 2000
Malcolm L. Bailey
/s/ MARK W. JOHNSON
- ---------------------------------------------- Director March __, 2000
Mark W. Johnson
/s/ ELLIOT D. PRAGER, M.D.
- ---------------------------------------------- Director March __, 2000
Elliot D. Prager, M.D.
/s/ LEO S. TONKIN, ESQUIRE
- ---------------------------------------------- Director March __, 2000
Leo S. Tonkin, Esquire
</TABLE>
-26-
<PAGE> 28
STAR SCIENTIFIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................................ F-2
Consolidated Balance Sheets............................................................. F-3
Consolidated Statements of Operations................................................... F-4
Consolidated Statements of Stockholders' Equity......................................... F-5
Consolidated Statements of Cash Flows................................................... F-7
Notes to Consolidated Financial Statements.............................................. F-9
</TABLE>
F-1
<PAGE> 29
Independent Auditors' Report
To the Board of Directors and Stockholders of
Star Scientific, Inc. and Subsidiaries
Petersburg, Virginia
We have audited the accompanying consolidated balance sheets of Star Scientific,
Inc. and Subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. 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. The financial statements of Star
Scientific, Inc. and Subsidiaries for the year ended December 31, 1997 were
audited by other auditors whose report dated March 24, 1998, expressed an
unqualified opinion on those statements.
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.
As discussed in Note 13, the Company elected not to join in the Master
Settlement Agreement ("MSA") among forty-six states, several U.S. territories
and a number of tobacco manufacturers, as a Subsequent Participating
Manufacturer. As a result thereof, the Company is required to annually
contribute funds into escrow under statutes which the MSA required participating
states to pass if they were to receive the full benefits of the settlement. Such
escrowed funds will be used to pay tobacco-related litigation and, if not used,
returned to the Company in twenty-five years. The Company's 1999 escrow
obligation must be funded by April 2000 and this escrow funding obligation is
expected to increase in future years.
In our opinion, the consolidated 1999 and 1998 financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Star Scientific, Inc. and Subsidiaries as of December 31, 1999 and
1998 and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Aidman, Piser & Company, P.A.
February 9, 2000
Tampa, Florida
F-2
<PAGE> 30
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,205,248 $ 102,695
Accounts receivable trade,
net of allowance for
doubtful accounts (1999,
$225,870; 1998, $95,636) 3,599,965 1,497,457
Inventories 3,570,609 636,456
Prepaid expenses and other current
assets 338,790 265,672
Deferred tax asset 2,303,000 -
--------------------- --------------------
Total current assets 27,017,612 2,502,280
Property, plant and equipment, net 10,974,029 1,704,569
Intangibles, net of accumulated
amortization, (1999, $205,217;
1998, $162,045) 338,043 135,928
Other assets 296,263 92,379
Deferred tax asset 83,000 -
--------------------- --------------------
$ 38,708,947 $ 4,435,156
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
--------------------- --------------------
Current liabilities:
Current maturities of notes payable $ 275,000 $ 379,082
Accounts payable, trade 3,492,755 2,516,658
Federal excise taxes payable 1,476,524 876,875
Accrued expenses 1,442,521 646,115
Income taxes payable 6,198,000 -
Customer deposit 6,000,000 -
--------------------- --------------------
Total current liabilities 18,884,800 4,418,730
Notes payable, less current
maturities 7,504,679 611,584
--------------------- --------------------
Total liabilities 26,389,479 5,030,314
--------------------- --------------------
Commitments and contingencies - -
Redeemable preferred stock
(Class A, convertible, 250
shares issued and outstanding in 1998,
at liquidation value) - 44,000
--------------------- --------------------
Stockholders' equity (deficit):
Common stock(A) 587,493 98,198
Preferred stock(B) - 143
Additional paid-in capital 10,631,875 6,668,392
Retained earnings (accumulated
deficit) 4,187,906 ( 7,326,724)
Unearned compensation - ( 79,167)
Notes receivable, officers ( 3,087,806) -
--------------------- ---------------------
Total stockholders' equity (deficit) 12,319,468 ( 639,158)
--------------------- ---------------------
$ 38,708,947 4,435,156
===================== =====================
</TABLE>
(A) ($.01 par value, 100,000,000 shares authorized, 58,749,200 and 9,819,740
shares issued and outstanding 1999 and 1998, respectively)
(B) (Series B, convertible; $.01 par value 15,000 shares authorized, 14,084
shares issued and outstanding in 1998)
See notes to consolidated financial statements.
F-3
<PAGE> 31
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------- -----------------
<S> <C> <C> <C>
Net sales $ 99,324,789 $ 19,445,491 $ 20,763,856
Less:
Cost of goods sold 31,878,879 7,669,428 10,033,330
Excise taxes on products 33,821,112 8,837,868 7,810,720
------------------ ------------------- -----------------
Gross profit 33,624,798 2,938,195 2,919,806
------------------ ------------------- -----------------
Operating expenses:
Marketing and distribution 6,253,265 1,198,757 1,111,420
General and administrative 9,899,165 3,173,991 1,425,299
Research and development 535,782 1,377,657 2,134,656
------------------ ------------------- -----------------
Total operating expenses 16,688,212 5,750,405 4,671,375
------------------ ------------------- -----------------
Operating income (loss) 16,936,586 ( 2,812,210) ( 1,751,569)
------------------ ------------------- -----------------
Other income (expenses):
Interest income 227,648 17,167 21,073
Interest expense ( 85,604) ( 255,113) ( 256,001)
Loss on disposal of assets - ( 425,316) -
------------------ ------------------- -----------------
142,044 ( 663,262) ( 234,928)
------------------ ------------------- -----------------
Income (loss) from continuing operations
before income taxes 17,078,630 ( 3,475,472) ( 1,986,497)
Income tax expense 5,564,000 - -
------------------ ------------------- -----------------
Income (loss) from continuing operations 11,514,630 ( 3,475,472) ( 1,986,497)
Discontinued operations:
Loss from discontinued operations
(no applicable income taxes) - ( 751,080) -
Loss on disposal of business segment
(no applicable income taxes) - ( 221,290) -
------------------ ------------------- -----------------
Income (loss) before extraordinary item 11,514,630 ( 4,447,842) ( 1,986,497)
Extraordinary gain from extinguishment
of debt (no applicable income taxes) - 251,767
------------------ ------------------- -----------------
Net income (loss) $ 11,514,630 ($ 4,196,075) ($ 1,986,497)
================== =================== ==================
Basic income (loss) per common share:
Continuing operations $ .32 ($ .42) ($ .58)
Discontinued operations - ( .12) -
Extraordinary gain - .03 -
------------------ ------------------- -----------------
Net income (loss) $ .32 ($ .51) ($ .58)
================== =================== ==================
Diluted income (loss) per share $ .30 ($ .51) ($ .58)
================== =================== ==================
Weighted average shares outstanding basic 36,207,390 8,327,345 3,435,190
================== =================== ==================
Weighted average shares outstanding diluted 38,765,251 8,327,345 3,435,190
================== =================== ==================
Pro forma presentation applicable to conversion
from S Corporation to C Corporation:
Net loss before pro forma income tax
expense ($ 1,986,497)
Pro forma income tax expense -
------------------
Pro forma net loss ($ 1,986,487)
==================
Pro forma basic loss per share ($ .58)
==================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 32
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock
---------------------
Series B Common Stock
--------------------- ----------------------- Additional
Paid-In
Shares Amount Shares Amount Capital
------------- -------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Balances, January 1997 - $ - 200 $ 383,557 $ 16,320
Collection of notes receivable
Conversion of debt to equity 923,499
Capital contribution 64,788
Net loss for the year
Distributions ------------- -------- ---------- ---------- ----------------
Balances,December 31, 1997 - - 200 383,557 1,004,607
Conversion of debt to equity 1,402,550 14,026 483,623
Reverse merger and reorganization 3,434,990 ( 349,205) ( 117,577)
Stock issued pursuant to merger 13,831 138 ( 138)
Mandatory redeemable preferred
stock converted to common 232,000 2,320 229,680
Increase of Series A Preferred
Stock to Redemption value ( 19,000)
Exchange of preferred stock for
common 305 3 ( 3)
Shares gifted to company and
retired ( 1,144) ( 11) 11
Issuance of common stock pursuant to
private placements 763 8 4,400,000 44,000 3,905,992
Issuance of preferred stock pursuant
to private placements 304 3 999,997
Stock issuance costs ( 220,000)
Stock issued for current and future
services 25 2 350,000 3,500 401,200
Net loss for the year
------------- -------- ---------- ---------- ----------------
Balances, December 31, 1998 14,084 143 9,819,740 98,198 6,668,392
------------- -------- ---------- ---------- ----------------
<CAPTION>
Retained Earnings Treasury Stock Unearned
(Accumulated ----------------------- Compen- Notes
Deficit) Shares Amount sation Receivable
----------------------- ------------ ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997 ($ 988,004) - $ - $ - ($ 250,000)
Collection of notes receivable 250,000
Conversion of debt to equity
Capital contribution
Net loss for the year ( 1,986,497)
Distributions ( 156,148)
--------------------- ------------ ---------- ------------- --------------
Balances,December 31, 1997 ( 3,130,649) - - - -
Conversion of debt to equity
Reverse merger and reorganization
Stock issued pursuant to merger
Mandatory redeemable preferred ( 1,000,000)
stock converted to common
Increase of Series A Preferred
Stock to Redemption value
Exchange of preferred stock for
common
Shares gifted to company and
retired
Issuance of common stock pursuant to
private placements 1,000,000
Issuance of preferred stock pursuant
to private placements
Stock issuance costs
Stock issued for current and future
services ( 79,167)
Net loss for the year ( 4,196,075)
--------------------- ------------ ---------- ------------- --------------
Balances, December 31, 1998 ( 7,326,724) - - ( 79,167) -
--------------------- ------------ ---------- ------------- --------------
<CAPTION>
Total
------------------
<S> <C>
Balances, January 1, 1997 ($ 838,127)
Collection of notes receivable 250,000
Conversion of debt to equity 923,499
Capital contribution 64,788
Net loss for the year ( 1,986,497)
Distributions ( 156,148)
--------------------
Balances,December 31, 1997 ( 1,742,485)
Conversion of debt to equity 497,649
Reverse merger and reorganization ( 466,782)
Stock issued pursuant to merger -
Mandatory redeemable preferred
stock converted to common 232,000
Increase of Series A Preferred
Stock to Redemption value ( 19,000)
Exchange of preferred stock for
common -
Shares gifted to company and
retired -
Issuance of common stock pursuant to
private placements 3,950,000
Issuance of preferred stock pursuant
to private placements 1,000,000
Stock issuance costs ( 220,000)
Stock issued for current and future
services 325,535
Net loss for the year ( 4,196,075)
--------------------
Balances, December 31, 1998 ( 639,168)
--------------------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 33
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock
----------------------
Series B Common Stock Additional
---------------------- -------------------------- Paid-In
Shares Amount Shares Amount Capital
--------- -------- ------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1998 -
carried forward 14,084 143 9,819,740 98,198 6,668,392
Conversion of preferred
stock to common ( 14,084) ( 143) 46,127,500 462,175 ( 462,032)
Amortization of unearned
stock - based compensation
Mandatory redeemable
preferred stock converted
to common 20,000 200 43,800
Issuance of stock 2,000,000 20,000 1,980,000
Stock issued for services 39,000 390 97,405
Issuance of common stock to
charitable organizations 130,000 1,300 767,342
Common stock options and
stock purchase rights issued 536,278
Warrants exercised 522,920 5,229 1,040,691
Stock issuance costs
associated with
warrants ( 40,000)
Note receivable issued
Net income
========= =========== ============= ================= ====================
Balances, December 31, 1999 - $ - 58,749,200 $ 587,493 $10,631,875
========= =========== ============= ================= ====================
</TABLE>
<TABLE>
<CAPTION>
Retained Earnings Treasury Stock Unearned
(Accumulated -------------------------- Compen- Notes
Deficit) Shares Amount sation Receivable Total
------------------ ------------- ------------ --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1998 -
carried forward ( 7,326,724) - - ( 79,167) - ( 639,158)
Conversion of preferred
stock to common -
Amortization of unearned
stock - based compensation 79,167 79,167
Mandatory redeemable
preferred stock converted
to common 44,000
Issuance of stock ( 2,000,000) -
Stock issued for services 97,795
Issuance of common stock to
charitable organizations 768,642
Common stock options and
stock purchase rights
issued 536,278
Warrants exercised 1,045,920
Stock issuance costs
associated with warrants ( 40,000)
Note receivable issued ( 1,087,806) ( 1,087,806)
Net income 11,514,630 11,514,630
Balances, December 31, 1999 4,187,906 - $ - $ - ($ 3,087,806) $ 12.319.468
================== ============= ============ =============== ============== =============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 34
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 11,514,630 ($ 4,196,075) ($ 1,986,497)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation 745,205 359,135 355,292
Amortization of intangibles and
other non-cash charges 38,546 637,478 68,385
Deferred income taxes ( 2,386,000) - -
Loss on fixed asset disposal - 425,316 -
Stock-based compensation expense 1,481,882 325,535 -
Extraordinary gain on
extinguishment of debt - ( 251,767) -
Increase (decrease) in cash resulting
from changes in:
Accounts receivable, trade ( 2,102,508) ( 722,289) 540,248
Accounts receivable, other 68,271 ( 68,271) -
Inventories ( 2,934,153) ( 31,064) 1,011,439
Prepaid expenses and other
current assets ( 168,786) ( 164,137) 24,324
Accounts payable 976,097 ( 57,582) 458,300
Federal excise taxes payable 599,649 517,092 ( 178,086)
Income taxes payable 6,198,000 - -
Accrued expenses 796,406 561,007 ( 52,093)
Customer deposit 6,000,000 - -
---------------- ---------------- --------------
Net cash provided by (used in) operating
activities 20,827,239 ( 2,665,622) 241,312
---------------- ---------------- --------------
Investing activities:
Collections of notes receivable 17,213 1,915 19,045
Purchases of property, plant and equipment ( 10,014,665) ( 454,888) (3,530)
Proceeds from disposal of property
and equipment - 175,000 -
Purchases of intangible assets ( 240,681) ( 48,815) -
Deposits on property and equipment (193,700) - -
Note receivable from stockholder (1,087,806) - -
Net cash provided by (used in)
investing activities ( 11,519,639) ( 326,788) 15,515
---------------- ---------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 35
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Financing activities:
Payments on line of credit, net - ( 1,095,801) (266,334)
Proceeds from notes payable 7,172,000 - 300,000
Payments on notes payable ( 382,967) ( 550,023) ( 198,788)
Proceeds from sale of stock 1,045,920 4,950,000 64,788
Stockholder distributions - - ( 156,148)
Stock offering costs paid ( 40,000) ( 220,000) -
------------- -------------- -------------
Net cash provided by (used in)
financing activities 7,794,953 3,084,176 ( 256,482)
------------- -------------- -------------
Increase in cash and cash
equivalents 17,102,553 91,766 345
Cash and cash equivalents,
beginning of year 102,695 10,929 10,584
------------- -------------- -------------
Cash and cash equivalents,
end of year $ 17,205,248 $ 102,695 $ 10,929
============= ============== =============
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest $ 123,119 $ 254,713 $ 230,370
============= ============== =============
Income taxes $ 1,752,000 $ - $ -
============= ============== =============
Supplemental schedule of non-cash
investing and financing activities:
Repayment of related party note
payable with related party
note receivable $ 759,489
=============
Conversion of debt to equity $ 497,649 $ 923,499
============== =============
Conversion of redeemable preferred
stock to equity $ 44,000 $ 232,000
============= ==============
Notes payable reduced by proceeds
from equipment sale $ 255,000
==============
Acquisition (reverse merger):
Fair value of assets acquired $ 1,237,238
Liabilities assumed ( 2,001,688)
--------------
Excess assigned to goodwill $ 764,450
==============
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 36
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and basis of presentation:
Star Scientific, Inc. and Subsidiaries was formerly known as Eye
Technology, Inc. and Subsidiaries (the "Company"). In December 1998,
the Company changed its name to Star Scientific, Inc.
On February 6, 1998, the Company and its subsidiaries, entered into a
stock exchange agreement with the stockholders of Star Tobacco and
Pharmaceuticals, Inc. ("Star"), a privately owned corporation. Under
the agreement, Star stockholders exchanged all of their common stock
for 13,831 shares of Series B Preferred Stock, par value $.01 per
share. When converted, this stock would equal 46,127,500 shares of
common stock, or approximately 90% of the outstanding common stock of
the Company and its subsidiaries as of the conversion date.
Accounting Principles Board Opinion No. 16 states that presumptive
evidence of the acquiring corporation in combinations effected by an
exchange of stock is obtained by identifying the former common
stockholder interest of a combining company which either retains or
receives the larger portion of the voting rights in the combined
corporation. That corporation should be treated as the acquirer unless
other evidence clearly indicates that another corporation is the
acquirer. As the former stockholders of Star hold the larger portion of
the voting rights of the combined corporation, the transaction has been
recorded as a reverse acquisition with Star as the accounting acquirer.
In a reverse acquisition, the accounting acquirer is treated as the
surviving entity, even though the registrant's legal existence does not
change. The accounting acquirer treats the merger as a purchase
acquisition. As a result, the merger has been recorded using the
historical cost basis for the assets and liabilities of Star, as
adjusted, and the estimated fair value of the Company's and its
subsidiaries assets and liabilities. The excess of the Company's and
its subsidiaries' liabilities assumed over assets acquired amounted to
$764,450 and was assigned to goodwill which was being amortized over
five years on a straight line basis (see Note 2 for disposal of this
business segment).
The accompanying consolidated financial statements include the accounts
of Star, and the Company and its Subsidiaries. All intercompany
accounts and transactions have been eliminated. The results of
operations of the Company are included in the accompanying consolidated
financial statements from the date of acquisition.
F-9
<PAGE> 37
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Organization and basis of presentation:
The following summarized pro forma information assumes the acquisition
had occurred as of January 1, 1997.
<TABLE>
<CAPTION>
1998 1997
------------ --------------
<S> <C> <C>
Net sales $ 20,134,099 $ 22,097,287
Operating loss ($ 3,299,669) ($ 2,252,324)
Net loss ($ 4,209,784) ($ 2,316,688)
Loss per share:
Basic and diluted ($ .51) ($ .67)
</TABLE>
Nature of business:
Star has been engaged since 1991 in the manufacture and sale of tobacco
products. Since 1994, Star has engaged in extensive research and
development activities relating to (1) the development of proprietary
scientific technology for the curing of tobacco so as to prevent or
retard the formation of certain toxic carcinogens present in tobacco
and tobacco smoke, namely, the tobacco specific nitrosamines, (2) the
development of less harmful tobacco products which have been cured
pursuant to licensed patented technology and (3) the development of
tobacco-smoking cessation products. The Company is also engaged in the
manufacture and sale of discount cigarettes, without additives, and
with activated charcoal filters. Through the year ended December 31,
1998, the Company had not yet marketed or received any revenues from
products developed from its research and development activities.
During 1997, Star had sales to one customer which represented
approximately 19% of net sales. There were no sales to this customer in
1999 or 1998. During 1999, Star had purchases from a major domestic
tobacco company which represented 21% of cost of sales. The Company
also borrowed $7,172,000 from this same company to finance property,
plant and equipment acquisitions in 1999. (See Notes 5 and 6)
Advertising Costs:
Advertising costs are expensed as incurred and are included in
marketing and distribution expenses. For the years ended December 31,
1999, 1998 and 1997, advertising costs were $36,000, $38,000 and
$60,000, respectively.
F-10
<PAGE> 38
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash equivalents:
For purposes of the statement of cash flows, the Company classifies all
highly liquid investments with an original maturity of three months or
less as cash equivalents.
Fair value of financial instruments:
Financial instruments consist of cash, cash equivalents, short-term
trade receivables and short-term trade payables for which the current
carrying amounts approximate fair value. Additionally, the borrowing
rates currently available to the Company approximate the rates for debt
agreements with similar terms and average maturities.
Inventories:
Inventories are valued at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) method.
Property, plant and equipment:
Property, plant and equipment are recorded at cost. Depreciation is
determined using the straight-line method over the estimated useful
lives of three to seven years for office equipment and machinery and
equipment and thirty-nine years for buildings and improvements.
Intangibles:
Intangibles consist primarily of licensing costs, trademarks and
packaging design costs. Intangibles are amortized by the straight-line
method over a period of 15 years for trademarks 17 years for licensing
costs and 5 years for packaging design costs.
F-11
<PAGE> 39
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income taxes:
Star was an S Corporation from August 1, 1991 through February 6, 1998
for federal income tax purposes. Accordingly, the taxable income or
loss of Star had been "passed-through" to its stockholders, and they
have been subject to the tax on any income earned by the Company. As a
result of the change in ownership discussed in Note 1, Star was no
longer eligible for S corporation status and became a C Corporation
effective February 6, 1998. As a C corporation, Star is responsible
for income taxes payable resulting from earnings subsequent to February
6, 1998. Additionally, under the provisions of Financial Accounting
Standards Board ("FASB") Statement No. 109, Accounting for Income
Taxes, deferred tax assets and liabilities are recorded based on the
difference between the financial statement and tax bases of assets and
liabilities using currently enacted tax rates.
Credit risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts receivable.
The Company maintains its cash and cash equivalents balances in 5
financial institutions, including approximately $64,000 in one foreign
bank. Each of the balances in the domestic banks are insured by the
Federal Deposit Insurance Corporation up to $100,000.
Trade accounts receivable result from sales of tobacco products to its
various customers throughout the United States. Credit is extended to
customers after an evaluation for credit worthiness; however, the
Company does not require collateral or other security from customers.
Employee stock-based compensation:
During 1999, the Company adopted the accounting and disclosure
provisions of Financial Accounting Standard No. 123 -- Accounting for
Stock-Based Compensation ("FAS 123"), which requires use of the
fair-value based method to determine compensation for all arrangements
under which employees and others receive shares of stock or equity
instruments (warrants and options). There were no stock-based
compensation transactions with employees in 1998 or 1997 that would
have been subject to the accounting or disclosure provisions of FAS
123.
F-12
<PAGE> 40
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Research and development costs:
Research and development costs are charged to expense when incurred.
Segment reporting:
During 1999, the Company commenced operations in a new business segment
and as a result, adopted the Statement of Financial Accounting
Standards Number 131, "Disclosures about Segments of an Enterprise and
Related Information". Statement No. 131 establishes standards for
reporting information about operating segments in annual financials
statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that
is evaluated on a regular basis by the chief operating decision maker
or decision making group, in deciding how to allocate resources to an
individual segment and in assessing performance of the segment. The
Company has identified these segments based on the nature of business
conducted by each. The identifiable segments at December 31, 1999 are
1) the manufacture and sale of discount cigarettes to wholesalers, and
2) the sale of tobacco cured utilizing its proprietary technology. This
second segment also includes costs incurred in the research and
development of methods of manufacturing a less harmful tobacco product.
Net income (loss) per common share:
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, Earnings Per Share. SFAS No. 128 replaced the previously
reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants
and convertible securities.
Basic earnings per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted-average number of common shares
and potential common shares outstanding during the period. Potential
common shares are excluded from the computation if their effect is
antidilutive.
Basic income (loss) per common share was computed using the
weighted-average number of common shares outstanding. Potential common
shares outstanding were excluded in 1998 and 1997, as their effect was
antidilutive.
Diluted earnings per share was computed assuming conversion of all
potentially dilutive stock options and warrants.
F-13
<PAGE> 41
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. DISCONTINUED OPERATIONS:
On December 30, 1998, the Company completed the sale of its ophthalmic
and intraocular business. As a result thereof, the Company has recorded
an after tax loss on the disposal of $221,290. Results of operations of
the discontinued business segment have been classified as discontinued
operations from the date of the Eye Technology, Inc. acquisition in
February 1998 through December 31, 1998.
Net sales and loss from discontinued operations are as follows for
1998:
<TABLE>
<S> <C>
Net sales $629,715
--------
Operating losses $751,080
--------
Income taxes -
--------
Loss from discontinued operations $751,080
--------
Loss on disposal $221,290
--------
</TABLE>
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Raw materials $ 623,692 $ 329,238
Packaging materials 781,448 262,467
Finished goods 2,165,469 44,751
---------- ----------
$3,570,609 $ 636,456
========== ==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
Property, plant and equipment consists of the
following: 1999 1998
----------- -----------
<S> <C> <C>
Land $ 172,572 $ 172,572
Buildings and improvements 340,139 269,484
Tobacco curing barns 8,661,312 -
Machinery and equipment 3,202,577 2,180,653
Office and sales equipment 586,087 312,649
----------- -----------
12,962,687 2,935,358
Less accumulated depreciation 1,988,658 1,230,789
----------- -----------
$10,974,029 $ 1,704,569
=========== ===========
</TABLE>
F-14
<PAGE> 42
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
5. CUSTOMER DEPOSIT AND LONG-TERM SUPPLY AGREEMENT:
During October 1999, the Company entered into an agreement with a major
domestic tobacco company ("customer"), whereby that customer will, subject
to certain conditions, purchase quantities of the Company's low
nitrosamine tobacco leaf (StarCure(TM) tobacco) and evaluate the potential
for that tobacco in the marketplace. In that regard, the customer has made
a $6,000,000 non-refundable deposit to the Company toward its purchase of
tobacco in 2000. Additionally, the customer has agreed to finance the
purchase/construction of tobacco curing barns which will assist the
Company in its production of low nitrosamine tobacco products to be
marketed by the Company, the customer and others in the industry (see Note
6 regarding financing provided through December 31, 1999). Tobacco leaf
sales under this agreement during 1999 were approximately $9,300,000. In
each of the years 2000 and 2001, the customer is obligated to purchase
five million pounds of Virginia flue-cured tobacco that has been cured
using the StarCure(TM) process, and the customer has an option to purchase
three million pounds of burley tobacco cured using the same process. The
customer also has the option to become the exclusive purchaser of tobacco
cured using the StarCure(TM) process in each of the years 2002 through
2004, if it purchases at least thirty million pounds of tobacco in each of
those years. If the customer were to stop purchasing flue-cured tobacco
that has been cured using the StarCure(TM) process after the year 2001,
the Company's sales volume, operating income and cash flows could be
negatively effected.
6. NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Note payable under a $13,200,000 credit facility restricted for the
purchase of tobacco curing barns; interest accrues at prime plus 1%
commencing December 2000-payable monthly thereafter; principal
payable in 60 equal monthly installments commencing September 2004;
collateralized by the Company's curing barns and leaf tobacco
inventory. $ 7,172,000 $ -
Note payable, bank, due in monthly installments of $3,111,
including interest at prime plus 1%, through 2001; secured by real
property and guaranteed by certain stockholders. 259,343 275,393
</TABLE>
F-15
<PAGE> 43
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. NOTES PAYABLE (CONTINUED):
<TABLE>
<S> <C> <C>
Term note payable, finance company, due in monthly installments of
$21,047, including interest at 10.15% through September 2001;
secured by manufacturing equipment. 172,469 362,247
Term note payable, finance company, due in monthly installments of
$7,262, including interest at 9.31% through October 2001; secured
by manufacturing equipment. 146,356 216,292
Other 29,514 136,734
----------- --------------
7,779,679 990,666
Less current maturities 275,000 379,082
----------- --------------
$ 7,504,679 $ 611,584
=========== ==============
</TABLE>
The annual maturities of notes payable are as follows:
<TABLE>
<CAPTION>
Year ending December 31
-------------------------
<S> <C>
2000 275,000
2001 332,679
2005 7,172,000
-----------
$ 7,779,679
===========
</TABLE>
7. STOCKHOLDERS' EQUITY:
Preferred stock:
Class A:
The Company has authorized 4,000 shares of $.01 par value Class A
Convertible Redeemable preferred stock. Each share of the Preferred
Stock is convertible into 80 shares of common stock of the Company at
the option of the holder and has voting rights equal to the number of
common shares issuable if converted. The Preferred Stock has the right
to share in dividends declared on the Company's common stock and has
certain liquidation preferences. The carrying value of the Preferred
Stock at December 31, 1998 reflected an additional acceleration premium
as the Company has raised funds in excess of defined amounts. At
December 31, 1999 all Class A preferred shares had been converted to
common.
F-16
<PAGE> 44
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. STOCKHOLDERS' EQUITY (CONTINUED):
Series B:
During the year ended December 31, 1998, the Company authorized 15,000
shares of $.01 par value Series B Preferred Stock. The stock is
convertible into common stock at the holders' option prior to December
31, 2002 at 3,280 shares of common for each share of Series B
Preferred. Holders of Series B Preferred Stock are entitled to 500
votes for each share held. During 1999, holders of all of the 14,084
shares of Series B Preferred Stock converted their shares to common.
Common stock warrants:
Common stock warrants issued, redeemed and outstanding during the year
ended December 31, 1999 and 1998 are as follows:
<TABLE>
<S> <C>
Issued in 1998 in connection with private placement of stock,
exercise price of $2 per share, expiring September 2000 1,500,000
----------------
Warrants issued and outstanding at December 31, 1998 1,500,000
Warrants exercised in 1999 ( 522,920)
----------------
Warrants issued and outstanding at
December 31, 1999, expiring September
2000 (remaining contractual life .75 years) 977,080
================
</TABLE>
Stock option plan:
In 1998, the Company adopted the 1998 Stock Option Plan (the "Plan")
which provides for grants of options to those officers, key employees,
directors and consultants whose substantial contributions are essential
to the continued growth and success of the Company. The Plan provides
for grants of both qualified and non-qualified stock options to
purchase up to 4,000,000 shares at a purchase price equal to the fair
market value on the date of grant in the case of qualified options
granted to employees. The Company amended the Plan on April 12, 1999.
There were no options outstanding as of December 31, 1998. During 1999,
3,258,406 options were granted with a weighted average exercise price
of $2.17 per share. No options were exercised or forfeited in 1999.
F-17
<PAGE> 45
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. STOCKHOLDERS' EQUITY (CONTINUED):
The following table summarizes information for options outstanding and
exercisable at December 31, 1999 all of which were granted in 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Range of Weighted Avg. Weighted Avg. Weighted Avg.
Prices Number Remaining Life Exercise Price Number Exercise Price
------------- --------- -------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$ 1.00-2.00 2,500,000 9.71 yrs. $ 1.79 2,000,000 $ 1.74
$ 2.01-3.00 500,000 9.79 yrs. $ 3.00 - $ -
$ 3.01-4.00 175,000 9.52 yrs. $ 3.34 175,000 $ 3.34
$ 4.01-5.00 50,000 9.33 yrs. $ 4.13 50,000 $ 4.13
$ 5.01-8.56 33,406 9.92 yrs. $ 8.56 33,406 $ 8.56
--------- -------------- --------------- ---------- ---------------
$ 1.00-8.56 3,258,406 9.71 yrs. $ 2.17 2,258,406 $ 2.02
========== ============== =============== ========== ===============
</TABLE>
The weighted average grant-date fair value of options granted during
1999 was $2.07 per share ($2.00 per share for those issued whose
exercise price was different from the market price of the stock at
date of grant).
In addition to stock options, the Company granted a stock purchase
right to acquire 2,000,000 shares of common stock at $1.00 per share.
This stock purchase right was accounted for as an option (see Note 13)
and had a grant-date fair value of $48,400.
The fair value of options and the stock purchase right granted in 1999
were estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<S> <C>
Expected life of options 1.25 years
Risk free interest rate 5.03%
Expected volatility 39%
Expected dividend yield 0%
</TABLE>
Total compensation cost recognized in 1999 for all stock-based employee
compensation awards was $265,618.
F-18
<PAGE> 46
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
Net income (loss)
$ 11,514,630 ($ 4,196,075) ($ 1,986,497)
=============== ============== ===============
Denominator for basic earnings per
share-weighted average shares 36,207,390 8,327,345 3,435,190
Effect of dilutive securities:
Warrants outstanding 729,621 - -
Stock options outstanding 1,828,240 - -
--------------- -------------- ---------------
Denominator for diluted earnings
per share- weighted average shares
adjusted for dilutive securities 38,765,251 8,327,345 3,435,190
=============== ============== ===============
Earnings (loss) per common share $ .32 ($ .51) ($ .58)
=============== ============== ===============
Earnings (loss) per common share-
diluted $ .30 ($ .51) ($ .58)
=============== ============== ===============
</TABLE>
9. INCOME TAXES:
Net deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------------------ --------------------
<S> <C> <C>
Deferred tax assets:
Non-refundable deposit taxable currently $ 2,280,000 -
Net operating loss carryforwards (subject
to annual limitation) 423,000 2,000,000
Other 43,000 -
------------------------ -------------------
2,746,000 2,000,000
------------------------ -------------------
Deferred tax liabilities:
Differing bases in property, plant and
equipment for tax and financial reporting
purposes ( 360,000) ( 200,000)
------------------------ --------------------
2,386,000 1,800,000
Less valuation allowance - ( 1,800,000)
------------------------ --------------------
$ 2,386,000 $ -
======================== ====================
</TABLE>
Net deferred tax assets are reflected in the accompanying 1999 balance
sheet as follows:
<TABLE>
<S> <C>
Current asset $ 2,303,000
Non-current asset 83,000
-------------------
$ 2,386,000
===================
</TABLE>
F-19
<PAGE> 47
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
9. INCOME TAXES (CONTINUED):
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- -------------
<S> <C> <C> <C>
Current:
Federal $ 6,114,000 $ - -
State 1,250,000 - -
------------------ ----------------- --------------
7,364,000 - -
Deferred ( 586,000) ( 1,325,000) -
Increase (decrease) in valuation
allowance(a) ( 1,800,000) 1,325,000 -
------------------ ----------------- --------------
$ 5,564,000 $ - -
=================== ================= ==============
</TABLE>
(a)During 1999, the Company reevaluated the deferred tax asset
valuation allowance based on the Company's current operations and
determined that it is more likely than not that these deferred tax
assets will be recoverable and, as such, has decreased the previously
recorded valuation allowance.
The provision for income tax expense (income tax benefit) varies from
that which would be expected based upon applying the statutory federal
rate to pre-tax accounting income (loss) as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- --------------
<S> <C> <C> <C>
Statutory federal rate 34% ( 34%) ( 34%)
Non-deductible compensation
for stock options and grants 4 -
Other 3 - -
Non-deductible officer
compensation 4 - -
Change in deferred tax
asset valuation allowance ( 12) 34 34
---------------- ---------------- --------------
33% - % - %
================ ================ =============
</TABLE>
At December 31, 1999 the Company had a net operating loss carryforward
of approximately $1,100,000, which expires from 2003 through 2009.
F-20
<PAGE> 48
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. RELATED PARTY TRANSACTIONS:
The Company has entered into certain transactions with companies and
trusts that are owned by members of management and stockholders. The
following is a summary of the significant related party transactions
for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ------------
<S> <C> <C> <C>
Management fee expense $ - $ - $ 565,000
Business travel - aircraft expense $ 442,238 185,544 238,750
Loan repayments $ - 200,000 -
Legal fees (d) $ 940,000 $ - $ -
Advance to officers (a) (b) $ 1,143,134 - -
Note receivable, officer
(See Note 13-Employment
Agreement) $ 2,000,000 $ - $ -
Interest receivable on stock note
receivable officer (c) $ 94,889 $ - $ -
Tobacco purchases from/commissions
paid to organization controlled by an
officer/director $ 627,577 $ 59,429 $ -
Tobacco sales to an organization
controlled by an officer/director $ 578,683 $ 165,347 $ -
</TABLE>
(a) $55,328 of which is unsecured and included in prepaid expenses
and other current assets in the accompanying 1999 balance sheet.
(b) Includes a $1,087,806 unsecured note receivable due from officer,
bearing interest at 5.66% due December 31, 2000.
(c) Included in prepaid expenses and other current assets in the
accompanying 1999 balance sheet.
(d) In 1999, the Company paid $940,000 to Paul, Hastings, Janofsky &
Walker LLP with respect to various legal matters. An executive
officer of the Company is senior counsel and a former partner of
this firm.
Effective January 1, 1998, Star entered into a license agreement with
the principal stockholder wherein Star has the exclusive world-wide
rights to produce and sell tobacco products with low-TSNA (tobacco
specific nitrosamines) tobacco. In connection with this agreement, Star
is obligated to pay royalties equal to 2% of all product sales (less
certain costs) and 6% of any royalty income earned from sublicensing
(less certain costs). There were no royalties due under this agreement
for 1999 or 1998.
F-21
<PAGE> 49
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
11. EMPLOYEE BENEFIT PLAN:
The Company is the sponsor of a defined contribution retirement plan
under Section 401(k) of the Internal Revenue Code. The plan covers all
employees who meet certain eligibility and participation requirements.
Participants may contribute up to 15% of their annual compensation. The
Company may make an annual discretionary contribution (approximately
$44,000 in 1999 and no contribution in 1998 or 1997).
12. SEGMENT REPORTING:
As discussed in Note 1, the Company adopted FAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The Company's
reportable segments are strategic business units that offer different
products and have separate management teams. These segments are 1) the
manufacture and sale of discount cigarettes and 2) the sale of tobacco
cured using licensed technology, which commenced in 1999. Financial
information by business segment is as follows:
<TABLE>
<CAPTION>
Leaf Discount
Tobacco Cigarettes Consolidated
---------------- ------------------- ---------------------
<S> <C> <C> <C>
Sales $ 9,845,516 $ 89,479,273 $ 99,324,789
---------------- ------------------- ---------------------
Cost of sales 6,565,901 25,312,978 31,878,879
---------------- ------------------- ---------------------
Depreciation 407,011 338,194 745,205
---------------- ------------------- ---------------------
Research and development 535,782 - 535,782
---------------- ------------------- ---------------------
Property and equipment 9,107,039 1,866,990 10,974,029
---------------- ------------------- ---------------------
Capital expenditures 9,150,000 864,665 10,014,665
---------------- ------------------- ---------------------
</TABLE>
F-22
<PAGE> 50
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. COMMITMENTS AND CONTINGENT LIABILITIES:
Obligations under master settlement agreement:
In November 1998, 46 states and several U.S. territories entered into a
settlement agreement to resolve litigation that had been instituted by
them against the major tobacco manufacturers. The Company was not named
as a defendant in any of the litigation matters and chose not to become
a participating manufacturer under the terms of the Master Settlement
Agreement ("MSA"). As a nonparticipating manufacturer, the Company
would be required to satisfy certain escrow obligations under statutes
which the MSA required participating states to pass, if they were to
receive the full benefits of the settlement. The so-called "level
playing field" statutes require nonparticipating manufacturers to fund
escrow accounts that could be used to satisfy judgements of settlements
in lawsuits filed by the participating states against such
nonparticipating tobacco manufacturers. Absent a legal challenge to the
state specific statutes or an agreement with respect to the funding of
the required escrow accounts, the Company is obligated to place an
amount equal to $1.88 per carton sold in 1999, and increased amounts
per carton for subsequent years, in escrow accounts beginning April
2000 for sales of cigarettes occurring in each such state after the
effective date of each state specific statute. The Company's escrow
funding requirement in April 2000 for 1999 sales is approximately
$10,600,000 and is expected to increase in future years. Such escrowed
funds will be used to fund tobacco-related litigation or settlements
and if not so used, returned to the Company after 25 years (the Company
will, however, receive interest earnings on the invested escrowed
amounts). Also, absent a challenge to the state-specific statutes or
some accommodation as to the payment of the escrow amounts, the failure
to pay the required escrow could result in penalties to the Company and
potential restrictions on its ability to sell tobacco products within
particular states. The Company has the resources to meet its April 2000
escrow funding obligation and expects it will be able to do so in
future years. However, the degree to which these escrow requirements
negatively impact the Company's liquidity position in future years is
not presently determinable. Notwithstanding, the Company is continuing
to assess its options with respect to the state specific statutes,
including a variety of legal challenges to the statutes and/or MSA.
F-23
<PAGE> 51
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
Leases:
The Company leases its office and warehouse facilities and various
vehicles and operating equipment under non-cancelable operating leases.
The following represents the future minimum rental payments required
under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 1999.
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ ---------------
<S> <C> <C>
2000 $ 99,024
2001 76,736
2002 74,948
2003 74,948
2004 74,948
Thereafter 256,073
---------------
$ 656,677
===============
</TABLE>
Rent expense for all operating leases amounted to approximately
$153,000, $107,000, and $170,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
Employment Agreement:
During April 1999, the Company entered into an employment agreement
with an Executive Officer (the "officer"), which expires June 15, 2002.
In addition to a $600,000 base salary as of December 31, 1999, the
agreement provides for a minimum annual performance bonus of $250,000.
Compensation expense pursuant to this agreement in 1999 was
approximately $860,000.
F-24
<PAGE> 52
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
Employment Agreement (continued):
The agreement also granted the officer the right to purchase 2,000,000
shares of the Company's common stock at $1 per share, and the Company
agreed to finance the purchase with interest due annually at 7% and all
principal due July 2005. The stock purchase occurred in 1999, and the
related $2,000,000 note receivable is presented as a reduction of
stockholders' equity in the accompanying 1999 balance sheet. Since the
note is non-recourse with respect to accrued unpaid interest and 85% of
the principal, this stock purchase right has been accounted for as an
option. The Company has recognized interest income of approximately
$90,000 during 1999 in connection with the note. In connection with the
aforementioned agreement, the officer was also granted qualified stock
options to purchase 1,000,000 shares of stock at $1 - 11/16 per share,
the price of the Company's common stock on the date of grant. Such
options vested immediately.
14. SUBSEQUENT EVENT:
During January 2000 the Company obtained a $3,000,000 revolving line of
credit. Borrowings under the line of credit are limited to 80% of
eligible accounts receivable, as defined, and bear interest at a rate
linked to the prime rate. The agreement places restrictions on new debt
and the Company's ability to further pledge its assets and stipulates a
minimum fixed charge coverage ratio, as defined. Borrowings under the
line of credit are secured by substantially all assets not otherwise
pledged.
During January 2000 the Company also entered into a long-term lease
arrangement for warehouse and office space. Future minimum rental
payments adjusted for amounts required under this agreement are as
follows:
<TABLE>
<CAPTION>
Year ending Amount
----------------- ------------------
<S> <C>
December 31, 2000 $ 293,887
2001 271,599
2002 269,811
2003 281,273
2004 281,273
Thereafter 897,973
------------------
$ 2,295,816
==================
</TABLE>
F-25
<PAGE> 53
STAR SCIENTIFIC, INC. AND SUBSIDIAIRIES
Schedule II
Valuation and qualifying accounts.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ----------------------------------------------------------------------------------------------------------------------------------
Description Balance at Additions Deductions - Balance at
December 31, Beginning of Describe End of Period
1999, 1998 Period
and 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(1) (2)
Charged Charged
to to
Costs Other
and Accounts-
Expenses Described
- ----------------------------------------------------------------------------------------------------------------------------------
For the year
ended
December 31,
1999:
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance
for cash
discounts
and returns $ 76,600 $ 102,770 $ - $ - $ 179,370
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance
for Recovery
uncollectible
accounts $ 46,436 $ 65,536 $ - $ 27,400 $ 46,500
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
For the year
ended
December 31,
1998:
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance Change in
for cash estimate
discounts
and returns $ 167,091 $ - $ - $ 90,491 $ 76,600
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance
for
uncollectible
accounts $ - $ 46,436 $ - $ - $ 46,436
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
For the year
ended
December 31,
1997:
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance
for cash
discounts
and returns $ 122,940 $ 44,151 $ - $ - $ 167,091
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance
for
uncollectible
accounts $ - $ - $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.24
STAR SCIENTIFIC, INC.
1998 STOCK OPTION PLAN
AS APPROVED BY THE BOARD OF DIRECTORS ON OCTOBER 2, 1998
AND BY THE STOCKHOLDERS ON DECEMBER 15, 1998.
AS AMENDED AND RESTATED BY THE BOARD OF DIRECTORS ON APRIL 12, 1999.
AS AMENDED BY THE BOARD OF DIRECTORS ON SEPTEMBER 24, 1999.
1. PURPOSE. The purposes of the Star Scientific, Inc. 1998 Stock
Option Plan (the "Plan") are to provide additional incentives to those officers,
key employees, nonemployee Directors and Consultants of the Star Scientific,
Inc. and its Subsidiaries (as hereinafter defined) whose substantial
contributions are essential to the continued growth and success of the Company's
business, to strengthen their commitment to the Company and its Subsidiaries, to
motivate those officers, key employees, nonemployee Directors and Consultants to
perform their assigned responsibilities faithfully and diligently, and to
attract and retain competent and dedicated individuals whose efforts will result
in the long-term growth and profitability of the Company. To accomplish these
purposes, the Plan provides that the Company may grant Stock Options and
Nonqualified Stock Options (as each term is hereinafter defined).
2. DEFINITIONS. For purposes of the Plan:
a. "ADJUSTED FAIR MARKET VALUE" means, in the event of a
Change in Control, the greater of (i) the highest price per Share paid to
holders of the Shares in any transaction (or series of transactions)
constituting or resulting in a Change in Control or (ii) the highest Fair
Market Value of a Share during the ninety (90) day period ending on the
date of a Change in Control.
b. "AGREEMENT" means the written agreement between the Company
and an Optionee evidencing the grant of an Option and setting forth the
terms and conditions thereof.
c. "APPLICABLE LAWS" means the legal requirements relating to
the administration of stock option plans, if any, under applicable
provisions of federal securities laws, state corporate and securities
laws, the Code, the rules of any applicable stock exchange or national
market system, and the rules of any foreign jurisdiction applicable to
Options granted to residents therein.
d. "BOARD" means the Board of Directors of the Company.
e. "CHANGE IN CAPITALIZATION" means any increase or reduction
in the number of Shares, or any change (including, but not limited to, a
change in value) or exchange of Shares for a different number or kind of
shares or other securities of the Company, by reason of a
reclassification, recapitalization, merger, consolidation,
<PAGE> 2
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split, or reverse stock split, cash
dividend, property dividend, combination or exchange of shares,
repurchase of shares, public offering, private placement, change in
corporate structure or otherwise, which in the judgment of the
Compensation Committee is material or significant.
f. "CHANGE IN CONTROL" means any of the following events:
(i) The acquisition (other than from the Company) by any
"Person" (as the term is used for purposes of Sections 13(d) or
14(d) of the Exchange Act) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of
twenty percent (20%) or more of the combined voting power of the
Company's then outstanding voting securities; or
(ii) The individuals who, immediately after the 1998
Annual Meeting of Stockholders of the Company are members of the
Board (the "Incumbent Board"), cease for any reason to constitute
at least a majority of the Board; provided, however, that if the
election, or nomination for election by the Company's
stockholders, of any new Director was approved by a vote of at
least two-thirds of the Incumbent Board, such new Director shall,
for purposes of this Agreement, be considered as a member of the
Incumbent Board; or
(iii) Approval by the stockholders of the Company of (a) a
merger or consolidation involving the Company if the Company's
stockholders, immediately before such merger or consolidation, do
not, as a result of such merger or consolidation, own, directly or
indirectly, more than seventy percent (70%) of the combined voting
power of the then outstanding voting securities of the corporation
resulting from such merger or consolidation in substantially the
same proportion as their ownership of the combined voting power of
the voting securities of the Company outstanding immediately
before such merger or consolidation or (b) a complete liquidation
or dissolution of the Company or an agreement for the sale or
other disposition of all or substantially all of the assets of the
Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
pursuant to clause (i) above solely because twenty percent (20%) or more of the
combined voting power of the Company's then outstanding securities is acquired
by (i) a trustee or other fiduciary holding securities under one or more
employee benefit plans maintained by the Company or any Subsidiary or (ii) any
corporation which, immediately prior to such acquisition, is owned directly or
indirectly by the stockholders of the Company in the same proportion as their
ownership of stock in the Company immediately prior to such acquisition.
g. "CODE" means the Internal Revenue Code of 1986, as amended.
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h. "COMMITTEE" means a committee consisting of at least two
(2) Disinterested Persons appointed by the Board to administer the Plan
and to perform the functions set forth herein and which committee shall
otherwise be constituted in such a manner as to satisfy the Applicable
Laws and to permit grants of options and related transactions under the
Plan to be exempt from Section 16(b) of the Exchange Act in accordance
with Rule 16b-3.
i. "COMPANY" means Star Scientific, Inc., a Delaware
corporation.
j. "CONSULTANT" means any person performing consulting or
advisory services for the Company or any Subsidiary, with or without
compensation, to whom the Company chooses to grant Nonqualified Stock
Options in accordance with the Plan, provided that bona fide services
must be rendered by such person and such services shall not be rendered
in connection with the offer or sale of securities in a capital-raising
transaction.
k. "DIRECTOR" means a member of the Board.
l. "DISINTERESTED PERSON" means a disinterested administrator
with respect to the Company or any Subsidiary as described in Rule
16b-3(b)(2) under the Exchange Act.
m. "DIVISION" means any of the operating units or Divisions of
the Company designated as a Division by the Board.
n. "ELIGIBLE EMPLOYEE" means any officer or other designated
employees of the Company or a Subsidiary designated by the Board as
eligible to receive Options subject to the conditions set forth herein.
o. "EMPLOYEE" means an employee of the Company or any
Subsidiary of the Company that adopts the Plan, as defined under Section
3401(c) of the Code and regulations thereunder.
p. "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
q. "FAIR MARKET VALUE" means, as of any date, the value of the
Shares.
(i) Where there exists a public market for the Shares,
the Fair Market Value shall be (A) the closing sales price for a
Share for the last market trading day prior to the time of the
determination (or, if no sales were reported on that date, on the
last trading date on which sales were reported) on the stock
exchange determined by the Board to be the primary market for the
Common Stock or the Nasdaq National Market, whichever is
applicable or (B) if the Common Stock is not traded on any such
exchange or national market system, the average of the closing bid
and asked
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prices of a Share on the Nasdaq SmallCap Market for the day prior
to the time of the determination (or, if no such prices were
reported on that date, on the last date on which such prices were
reported), in each case, as reported in The Wall Street Journal or
such other source as the Board deems reliable; or
(ii) In the absence of an established market of the type
described in (i), above, for the Shares, the Fair Market Value
thereof shall be determined by the Board in good faith.
r. "NONQUALIFIED STOCK OPTION" means an Option which is not a
Stock Option.
s. "OPTION" means a Stock Option, a Nonqualified Stock Option,
or either or both of them.
t. "OPTIONEE" means a person to whom an Option has been
granted under the Plan.
u. "SHARES" means the Common Stock, one cent ($.01) par value
per share, of the Company (including any new, additional or different
stock or securities resulting from a Change in Capitalization).
v. "STOCK OPTION" means an Option within the meaning of
Section 422 of the Code.
w. "SUBSIDIARY" means any corporation in an unbroken chain of
corporations, beginning with the Company, if each of the corporations,
other than the last corporation in the unbroken chain, owns stock
possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
x. "TEN PERCENT SHAREHOLDER" means an Eligible Employee, who,
at the time a Stock Option is to be granted to such Eligible Employee,
owns (within the meaning of Section 422(b)(6) of the Code) stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company, or of a parent or a Subsidiary
within the meaning of Section 422(b)(6) of the Code.
3. ADMINISTRATION
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a. The Plan shall be administered by the Board. The Board may,
to the fullest extent permitted by law, delegate any or all of its powers
under the Plan to a Committee of two or more Directors each of whom is a
Disinterested Person, and if a Committee is so appointed all references
to the Board in the Plan shall mean and relate to such Committee. No
member of the Board shall be personally liable for any action,
determination or interpretation made in good faith with respect to the
Plan, Agreements or Options, and all members of the Board shall be fully
indemnified by the Company with respect to any such action, determination
or interpretation.
b. Subject to the express terms and conditions set forth
herein, the Board shall have the power from time to time to determine
those Eligible Employees, nonemployee Directors or Consultants to whom
Options shall be granted under the Plan, the number of Stock Options
and/or Nonqualified Stock Options to be granted to each Eligible
Employee, the number of Nonqualified Stock Options to be granted to each
nonemployee Director or Consultant, and to prescribe the terms and
conditions (which need not be identical) of each Option, including the
purchase price per Share subject to each Option, and make any amendment
or modification to any Agreement consistent with the terms of the Plan.
c. Subject to the express terms and conditions set forth
herein, the Board shall have the power from time to time:
(i) to construe and interpret the Plan and the Options
granted thereunder and to establish, amend and revoke rules and
regulations for the administration of the Plan, including, without
limitation, correcting any defect or supplying any omission, or
reconciling any inconsistency in the Plan or in any Agreement, in
the manner and to the extent it shall deem necessary or advisable
to make the Plan fully effective, and all decisions and
determinations by the Board in the exercise of this power shall be
final, binding and conclusive upon the Company, a Subsidiary, and
the Optionees;
(ii) to determine the duration and purposes for leave of
absence which may be granted to an Optionee on an individual basis
without constituting a termination of employment or service for
purposes of the Plan;
(iii) to exercise its discretion with respect to the
powers and rights granted to it as set forth in the Plan; and
(iv) generally, to exercise such powers and to perform
such acts as are deemed necessary or advisable to promote the best
interests of the Company with respect to the Plan.
4. STOCK SUBJECT TO PLAN.
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a. The maximum number of Shares that may be issued or
transferred pursuant to Options under the Plan is 4,000,000 Shares (or
the number and kind of shares of stock or other securities to which such
Shares are adjusted upon a Change in Capitalization pursuant to Section
8) and the Company shall reserve for the purposes of the Plan, out of its
authorized but unissued Shares or out of Shares held in the Company's
treasury, or partly out of each, such number of Shares as shall be
determined by the Board.
b. Whenever any outstanding Option or portion thereof expires,
is canceled or is otherwise terminated for any reason (other than by
exercise of the Option), the Shares allocable to the canceled or
otherwise terminated portion of such Option may again be the subject of
Options hereunder.
c. Whenever any Shares subject to an Option are forfeited for
any reason pursuant to the terms of the Plan, such Shares may again be
the subject of Options hereunder.
5. ELIGIBILITY. Subject to the provisions of the Plan, the Board
shall have full and final authority to select those Eligible Employees who will
receive Options and those nonemployee Directors and Consultants who will receive
Nonqualified Stock Options; provided, however, that no Eligible Employee shall
receive any Stock Options, unless such Eligible Employee is an employee of the
Company or a Subsidiary (within the meaning of Section 422 of the Code) at the
time the Stock Option is granted. Stock Options may be granted only to persons
who are Eligible Employees.
6. OPTIONS. The Board may grant Options in accordance with the Plan,
and the terms and conditions of the Option shall be set forth in an Agreement;
provided, however, no Eligible Employee shall receive in any fiscal year of the
Company options to purchase in excess of 1,000,000 Shares. Each Option and
Agreement shall be subject to the following conditions:
a. DESIGNATION OF OPTIONS. Each Option shall be designated as
either a Stock Option or a Nonqualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of Shares subject to Options designated as Stock Options
which become exercisable for the first time by an Optionee during any
calendar year (under all plans of the Company or Subsidiary) exceeds one
hundred thousand dollars ($100,000), such excess Options, to the extent
of the Shares covered thereby in excess of the foregoing limitation,
shall be treated as Nonqualified Stock Options. For this purpose, Stock
Options shall be taken into account in the order in which they were
granted, and the Fair Market Value of the Shares shall be determined as
of the date the Option with respect to such Shares is granted.
b. PURCHASE PRICE. The purchase price or the manner in which
the purchase price is to be determined for Shares under each Option shall
be set forth in the Agreement, provided that the purchase price per Share
under each Stock Option shall not be less than (i) one hundred percent
(100%) of the Fair Market Value of a Share at the time the Stock Option
is granted, and (ii) one hundred ten percent (110%) in the case of a
Stock Option granted to a Ten Percent Shareholder.
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c. DURATION. Options granted hereunder shall be for such term
as the Board shall determine, provided that no Stock Option shall be
exercisable after the expiration of ten (10) years from the date it is
granted (five (5) years in the case of a Stock Option granted to a Ten
Percent Shareholder). The Board may, subsequent to the granting of any
Option, extend the term thereof but in no event shall the term as so
extended exceed the maximum term provided for in the preceding sentence.
d. NON-TRANSFERABILITY. Except as otherwise approved by the
Board, during the life of the holder thereof an Option shall be
exercisable only by or on behalf of such person and no Option granted
under the Plan shall be assignable or transferable by the person to whom
it is granted, either voluntarily or by operation of law, except by will
or the laws of descent and distribution. An Option may be exercised
during the lifetime of such Optionee only by the Optionee or, in the
event that the Optionee is disabled, by such Optionee's guardian or legal
representative. In addition, such Option may be exercised by the estate
of the Optionee. The terms of such Option shall be final, binding and
conclusive upon the beneficiaries, executors, administrators, heirs and
successors of the Optionee.
e. VESTING. Subject to Section 6(j) hereof, each Option shall
be exercisable in such installments (which need not be equal) and at such
times as may be designated by the Board and set forth in the Agreement.
To the extent not exercised, installments shall accumulate and be
exercisable, in whole or in part, at any time after becoming exercisable,
but not later than the date the Option expires. The Board may accelerate
the exercisability of any Option or portion thereof at any time.
f. METHOD OF EXERCISE. The exercise of any Option shall be
made only by a written notice delivered in person or by mail to the
Secretary of the Company at the Company's principal executive office,
specifying the number of Shares to be purchased and accompanied by
payment therefor and otherwise in accordance with the Agreement pursuant
to which the Option was granted. The purchase price for any Shares
purchased pursuant to the exercise of an Option shall be paid in full
upon such exercise, as determined by the Board. In addition to any other
types of consideration the Board may determine, the Board is authorized
to accept as consideration for Shares issued under the Plan the
following: (i) cash; (ii) check; (iii) delivery of Optionee's promissory
note with such recourse, interest, security, and redemption provisions as
the Board determines as appropriate; (iv) surrender of Shares (including,
withholding of Shares otherwise deliverable upon exercise of the Option)
which have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; or (v) any combinations of the foregoing. The written notice
pursuant to this Section 6(f) may also provide instructions from the
Optionee to the Company that upon receipt of the purchase price in cash
from the Optionee's broker or dealer, designated as such on the written
notice, in payment for any Shares purchased pursuant to the exercise of
an Option, the Company shall issue such Shares directly to the designated
broker or dealer. If requested by the Board, the Optionee shall deliver
the Agreement evidencing the Option to the Secretary of the Company, who
shall endorse thereon a notation of such exercise and return such
Agreement
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to the Optionee. No fractional Shares shall be issued upon exercise of an
Option, and the number of Shares that may be purchased upon exercise
shall be rounded to the nearest number of whole Shares.
g. RIGHTS OF OPTIONEES. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option unless and
until (i) the Option shall have been exercised pursuant to the terms
thereof, (ii) the Company shall have issued and delivered the Shares to
the Optionee, and (iii) the Optionee's name shall have been entered as a
shareholder of record on the books of the Company. Thereupon, the
Optionee shall have full voting, dividend and other ownership rights with
respect to such Shares.
h. TERMINATION OF EMPLOYMENT OR SERVICE.
(i) Termination of Employment or Service Other Than Upon
Retirement In Good Standing, Disability or Death of Optionee. Upon
termination of an Optionee's status as an Employee, Director or
Consultant, other than upon the Optionee's retirement in good
standing for reason of age, death or disability, the Optionee may
exercise his or her Option within such period of time as is
specified in the Agreement to the extent that the Option is vested
on the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the
Agreement). If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option
within the time specified in the Agreement, the Option shall
terminate, and the Shares covered by such Option shall revert to
the Plan.
(ii) Retirement in Good Standing of Optionee. Upon
termination of an Optionee's status as an Employee, Director or
Consultant, as a result of retirement in good standing for reason
of age but not due to disability, the Optionee may exercise his or
her Option within such period of time as is specified in the
Agreement, to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term
of such Option as set forth in Option Agreement). If on the date
of termination, the Optionee is not vested as to his or her entire
Option, the Shares covered by the unvested portion shall revert to
the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified in the Agreement, the
Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(iii) Disability of Optionee. If an Optionee's status as
an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option
within such period of time as is specified in the Agreement, to
the extent the Option is vested on the date of termination (but in
no event later than the expiration date of the term of such Option
as set forth in the Agreement). If such disability is not a
"disability" as such term is defined in Section
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22(e)(3) of the Code, in the case of a Stock Option, such Stock
Option shall automatically convert to a Nonqualified Stock Option
on the day three (3) months and one (1) day following such
termination. If, on the date of termination, the Optionee is not
vested as to her or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after
termination, the Option does not exercise his or her Option within
the time specified in the Agreement, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(iv) Death of Optionee. If an Optionee's status as an
Employee, Director or Consultant terminates as a result of the
death of the Optionee, the Option may be exercised at any time
within such period of time as is specified in the Agreement, to
the extent the Option is vested on the date of death (but in no
event later than the expiration of the term of such Option as set
forth in the Agreement). If, at the time of death, the Optionee is
not vested as to his or her entire Option, the Shares covered by
the unvested portion of the Option shall revert to the Plan. If
the Option is not exercised within the time specified in the
Agreement, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan. The Option may be exercised
by the executor or administrator of the Optionee's estate or, if
none, by the person(s) entitled to exercise the Option under the
Optionee's will or the laws of descent or distribution.
i. MODIFICATION OR SUBSTITUTION. Subject to the terms of the
Plan, the Board may, in its discretion, modify outstanding Options or
accept the surrender of outstanding Options (to the extent not exercised)
and grant new Options in substitution for them. Notwithstanding the
foregoing, no modification of an Option shall adversely alter or impair
any rights or obligations under any Agreement without the Optionee's
consent.
j. EFFECT OF CHANGE IN CONTROL. Notwithstanding anything
contained in the Plan or any Agreement to the contrary, in the event of a
Change in Control, all Options outstanding immediately prior to the
specified effective date of such Change in Control shall become
immediately and fully exercisable and all of the Shares at the time
represented by such Options shall be released from any restrictions on
transfer and repurchase or forfeiture rights and either (i) if and to the
extent such Options are, in connection with such Change of Control,
either to be assumed by the successor corporation or parent corporation
thereof or to be replaced with comparable Options (as solely determined
by the Board) with respect to shares of the capital stock of the
successor corporation or parent corporation thereof, such assumption or
replacement shall be binding on all Optionees, or (ii) in the event such
successor corporation or parent corporation thereof shall refuse to
assume or replace Options, an Optionee will be permitted to surrender for
cancellation within sixty (60) days after such Change in Control any
Option or portion of an Option to the extent not yet exercised, and the
Optionee will be entitled to receive a cash payment in an amount equal to
the excess, if any, of (x)(A) in the case of Nonqualified Stock Options,
the greater of (1) the Fair Market Value, on the date preceding the date
of surrender, of the Shares subject to the Option or
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<PAGE> 10
portion thereof surrendered or (2) the Adjusted Fair Market Value of the
Shares subject to the Option or portion thereof surrendered or (B) in the
case of a Stock Option, the Fair Market Value, at the time of surrender,
of the Shares subject to the Option or portion thereof surrendered, over
(y) the aggregate purchase price for such Shares under the Option;
provided, however, that in the case of an Option granted within six (6)
months prior to the Change in Control to any Optionee who may be subject
to liability under Section 16(b) of the Exchange Act, such Optionee shall
be entitled to surrender for cancellation such Optionee's Option during
the sixty (60) day period commencing upon the expiration of six (6)
months from the date of grant of any such Option.
k. BUYOUT PROVISIONS. The Board may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based
on such terms and conditions as the Board shall establish and communicate
to the Optionee at the time that such offer is made.
7. ANNUAL AUTOMATIC AWARDS TO OUTSIDE DIRECTORS.
a. ANNUAL AUTOMATIC AWARDS OF NONQUALIFIED STOCK OPTIONS TO
OUTSIDE DIRECTORS. Each non-employee director of the Company (each, an
"Outside Director") shall be granted, upon his or her election as an
Outside Director, Nonqualified Stock Options to purchase up to 50,000
Shares.
b. TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS TO
OUTSIDE DIRECTORS. Nonqualified Stock Options granted to Outside
Directors pursuant to this Section 7 shall be exercisable over a two year
period with respect to (i) 50% of the number of Shares originally
underlying such Nonqualified Stock Option (or 25,000 Shares) after the
first anniversary of the date of grant and (ii) the remaining 50% of the
number of Shares originally underlying such Nonqualified Stock Option (or
25,000 Shares) after the second anniversary of the date of grant, in each
case at a purchase price equal to the Fair Market Value of the Shares on
the date of grant. Each such Nonqualified Stock Option shall expire ten
(10) years after the date of grant and shall be subject to earlier
termination as provided in the Plan.
c. PLAN APPLICABLE. Except as modified by the preceding
provisions of this Section 7, Nonqualified Stock Options granted to
Outside Directors shall remain subject to all provisions of the Plan
applicable to Options generally.
d. OTHER OUTSIDE DIRECTOR COMPENSATION. Nothing in this
Section 7 shall preclude the payment by the Company to Outside Directors
of any other form of compensation, including the granting of Options
pursuant to other provisions of the Plan.
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8. ADJUSTMENT UPON CHANGE IN CAPITALIZATION.
a. In the event of a Change in Capitalization, the Board shall
conclusively determine the appropriate adjustments, if any, to the
maximum number and class of Shares or other stock or securities with
respect to which Options may be granted under the Plan, the number and
class of Shares or other stock or securities which are subject to
outstanding Options granted under the Plan, and the purchase price
therefor, if applicable.
b. Any such adjustment in the Shares or other stock or
securities subject to outstanding Stock Options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and
only to the extent otherwise permitted by Sections 422 and 424 of the
Code.
c. If, by reason of a Change in Capitalization, an Optionee
shall be entitled to exercise an Option with respect to, new, additional
or different shares of stock or securities (other than rights or warrants
to purchase securities), such new, additional or different shares shall
thereupon be subject to all of the conditions, restrictions and
performance criteria which were applicable to the Shares subject to the
Option prior to such Change in Capitalization.
9. EFFECT OF CERTAIN TRANSACTIONS. Subject to Section 6(j), in the
event of (i) the liquidation or dissolution of the Company or (ii) a merger or
consolidation of the Company (a "Transaction"), all Options issued hereunder
shall continue in effect in accordance with their respective terms and each
Optionee shall be entitled to receive in respect of each Share subject to any
outstanding Options, as the case may be, upon exercise of any Option, the same
number and kind of stock, securities, cash, property or other consideration that
each holder of a Share was otherwise entitled to receive in the Transaction in
respect of a Share.
10. RELEASE OF FINANCIAL INFORMATION. A copy of the Company's annual
report to stockholders shall be delivered to each Optionee at the time such
report is distributed to the Company's stockholders.
11. TERMINATION AND AMENDMENT OF THE PLAN.
a. The Plan shall terminate on September 1, 2008, and no
Option may be granted thereafter. The Board may sooner terminate or amend
the Plan (other than to reduce the rights of Optionees under Section
6(j), at any time and from time to time; provided, however, that to the
extent necessary under Section 16(b) of the Exchange Act and the rules
and regulations promulgated thereunder, no amendment shall be effective
unless approved by the stockholders of the Company in accordance with
applicable law and regulations at an annual or special meeting held
within twelve (12) months before or after the date of adoption of such
amendment.
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b. Except as provided in Sections 8 and 9 hereof, rights and
obligations under any Option granted before any amendment of the Plan
shall not be adversely altered or impaired by such amendment, except with
the consent of the Optionee.
12. NON-EXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board
shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem desirable.
13. LIMITATION OF LIABILITY. As illustrative of the limitations of
liability of the Company, but not intended to be exhaustive thereof, nothing in
the Plan shall be construed to:
a. give any person any right to be granted an Option other
than at the sole discretion of the Board;
b. give any person any rights whatsoever with respect to
Shares except as specifically provided in the Plan;
c. limit in any way the right of the Company to terminate the
employment of any person at any time; or
d. be evidence of any agreement or understanding, expressed or
implied, that the Company will employ any person in any particular
position at any particular rate of compensation or for any particular
period of time.
14. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW.
a. This Plan and the rights of all persons claiming hereunder
shall be construed and determined in accordance with the laws of the
State of Delaware without giving effect to the conflicts of laws
principles thereof, except to the extent that such law is preempted by
federal law.
b. The obligation of the Company to sell or deliver Shares
with respect to Options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal
and state securities laws, and the obtaining of all such approvals by
governmental agencies as may be deemed necessary or appropriate by the
Board.
c. The Plan is intended to comply with Rule 16b-3 promulgated
under the Exchange Act, and the Board shall interpret and administer the
provisions of the Plan or any Agreement in a manner consistent therewith.
Any provisions inconsistent with such Rule shall be inoperative and shall
not affect the validity of the Plan.
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d. The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority or to obtain for Eligible Employees granted Stock Options the
tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
e. Each Option is subject to the requirement that, if at any
time the Board determines, in its discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or
the consent or approval of any governmental regulatory body is necessary
or desirable as a condition of, or in connection with, the grant of an
Option or the issuance of Shares, no Options shall be granted or payment
made or Shares issued, in whole or in part, unless listing, registration,
qualification, consent or approval has been effected or obtained free of
any conditions as acceptable to the Board.
f. Notwithstanding anything contained in the Plan to the
contrary, in the event that the disposition of Shares acquired pursuant
to the Plan is not covered by a then current registration statement under
the Securities Act of 1933, as amended (the "Act"), and is not otherwise
exempt from such registration, such Shares shall be restricted against
transfer to the extent required by the Act and Rule 144 or other
regulations thereunder. The Board may require any individual receiving
Shares pursuant to the Plan, as a condition precedent to receipt of such
Shares (including upon exercise on an Option), to represent and warrant
to the Company in writing, in addition to other applicable
representations, that the Shares acquired by such individual are acquired
without a view to any distribution thereof and will not be sold or
transferred other than pursuant to an effective registration thereof
under the Act or pursuant to an exemption applicable under the Act or the
rules and regulations promulgated thereunder. The certificates evidencing
any of such Shares shall be appropriately legended to reflect their
status as restricted securities as aforesaid.
15. MISCELLANEOUS.
a. MULTIPLE AGREEMENTS. The terms of each Option may differ
from other Options granted under the Plan at the same time, or at some
other time. The Board may also grant more than one Option to a given
Eligible Employee, nonemployee Director or Consultant during the term of
the Plan, either in addition to, or in substitution for, one or more
Options previously granted to that Eligible Employee, nonemployee
Director or Consultant. The grant of multiple Options may be evidenced by
a single Agreement or multiple Agreements, as determined by the Board.
b. WITHHOLDING OF TAXES.
(i) The Company shall have the right to deduct from any
distribution of cash to any Optionee an amount equal to the
federal, state and local income taxes and other amounts as may be
required by law to be withheld (the "Withholding Taxes") with
respect to any Option. If an Optionee is entitled to receive
Shares upon exercise
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of an Option, the Optionee shall pay the Withholding Taxes to the
Company prior to the issuance or release from escrow of such
Shares. In satisfaction of the Withholding Taxes to the Company,
the Optionee may make a written election (the "Tax Election"),
which may be accepted or rejected in the discretion of the Board,
to have withheld a portion of the Shares issuable to such Optionee
upon exercise of the Option having an aggregate Fair Market Value
equal to the Withholding Taxes, provided that: (i) in respect of
an Optionee who may be subject to liability under Section 16(b) of
the Exchange Act (unless such Optionee's employment was terminated
due to disability or death), the Tax Election is made either at
least six (6) months prior to the date that the amount of the
Withholding Taxes are determined (the "Tax Date") or during the
ten (10) day period beginning on the third (3rd) business day and
ending on the twelfth (12th) business day following the release
for publication of the Company's quarterly or annual statements of
earnings, (ii) the Tax Election is made prior to the Tax Date, and
(iii) the Tax Election is irrevocable; provided, however, in the
event that the Tax Date occurs subsequent to the exercise of the
Option or issuance of Shares, the Optionee shall tender back to
the Company on the Tax Date that number of Shares having a Fair
Market Value on the date preceding the Tax Date at least equal to
the Withholding Taxes.
(ii) If an Optionee makes a disposition, within the
meaning of Section 424(c) of the Code and regulations promulgated
thereunder, of any Share or Shares issued to Optionee pursuant to
Optionee's exercise of an Option within the two (2) year period
commencing on the day after the date of the grant or within the
one (1) year period commencing on the day after the date of
transfer of such Share or Shares to the Optionee pursuant to such
exercise, the Optionee shall, within ten (10) days of such
disposition, notify the Company thereof, by delivery of written
notice to the Company at its principal executive office, and
immediately deliver to the Company the amount of Withholding
Taxes.
c. DESIGNATION OF BENEFICIARY. Each Optionee may designate a
person or persons to receive, in the event of such Optionee's death, any
Option or any amount payable pursuant thereto, to which such Optionee
would then be entitled. Such designation will be made upon forms supplied
by and delivered to the Company and may be revoked in writing. If an
Optionee fails effectively to designate a beneficiary, then such
Optionee's estate will be deemed to be the beneficiary.
16. EFFECTIVE DATE. The effective date of the Plan shall be June 29,
1998.
14
<PAGE> 1
EXHIBIT 10.31
AMENDED AND RESTATED
MANUFACTURING AND LICENSE AGREEMENT
THIS AMENDED AND RESTATED MANUFACTURING AND LICENSE AGREEMENT (this
"AGREEMENT") is entered into this 12th day of October, 1999 between POWELL
MANUFACTURING COMPANY, INC, a South Carolina corporation with its executive
offices at P.O. Box 707, Bennettsville, South Carolina 29512-707 ("POWELL") and
STAR SCIENTIFIC, INC., a Delaware corporation with its executive offices at 16
South Market Street, Petersburg, Virginia 23803 ("STAR"). This Agreement amends
and restates the terms of that certain Manufacturing and License Agreement dated
as of January 25, 1999, by and between Powell and Star, as amended prior to the
date hereof.
RECITALS
WHEREAS, Star holds certain exclusive licensing rights under United
States patents and patents pending for methods of curing tobacco and tobacco
products (the "STAR PATENT RIGHTS"); and
WHEREAS, Star desires to have tobacco curing barns manufactured for
it pursuant to its specifications to be used by Star and others for the curing
of tobacco pursuant to Star's licensing rights; and
WHEREAS, Powell is in the business of manufacturing tobacco curing
barns and is willing to manufacture barns for Star as described above;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
AGREEMENT
1. PURCHASE AND SALE REQUIREMENTS.
1.1 TERM; TERMINATION.
(a) The terms of this Agreement (as amended
hereby) shall become effective on the date hereof and expire on [***] (the
"EXPIRATION DATE"). Notwithstanding the foregoing, this Agreement will
automatically renew for three successive one year periods unless either party
provides written notice to the other on or before the date which is nine (9)
months prior to the expiration of the then current term of the Agreement of such
party's election to terminate the Agreement.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE> 2
(b) Either party (the "NONBREACHING PARTY")
shall have the right to terminate this Agreement upon [***] prior
written notice to the other party (the "BREACHING PARTY") upon the occurrence of
the breach of any material provision of this Agreement, unless the Breaching
Party cures or corrects such breach within the [***] after the
written notice by the Nonbreaching Party.
1.2 REQUIREMENTS; SPECIFICATIONS. Upon the terms and subject
to the conditions set forth in this Agreement, Star will order and purchase from
Powell, and Powell will sell to Star, Star Barns (as defined below) to be
delivered on or prior to the Expiration Date. Star shall purchase exclusively
from Powell up to [***] Star Barns per Production Period (as defined below).
Thereafter, Star may purchase additional Star Barns during such Production
Period [***] The Star Barn shall be manufactured to the specifications set forth
on Exhibit A attached hereto. Subject to the preceding sentence, and with the
prior written consent of Star, which shall not be withheld unreasonably, Powell
will have the right to make changes in the design, components and materials used
in the Star Barn so long as such alterations do not change the specifications
set forth on Exhibit A and, in Powell's reasonable judgment, negatively effect
the Star Barn's quality, performance or conformance to applicable warranties.
1.3 GOVERNING TERMS. All Star Barns purchased under the
terms and conditions of this Agreement shall be subject to the commercial terms
and conditions set forth on the Star purchase order attached hereto as Exhibit
B. Any attempt by the parties to alter such terms and conditions shall be null
and void, unless otherwise agreed by the parties in writing. In the event of any
conflict between the purchase order and this Agreement, the terms of this
Agreement will prevail.
2. ORDERS AND PRODUCTION.
2.1 PRIOR ORDER. The parties acknowledge that, on
July 16, 1999, Star submitted, and Powell accepted, Powell purchase order No. 4
for two hundred (200) Star Barns for delivery by January, 2000 (the "PRIOR
ORDER").
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE> 3
2.2 FUTURE ORDERS.
(a) The parties agree that, contemporaneously
with the execution of this Agreement, Star will: (i) resubmit the Prior Order to
reflect the [***] (the "REPLACEMENT ORDER"); (ii) submit a purchase
order for four hundred (400) Star Barns for delivery by June 30, 2000; and (iii)
submit a purchase order for four hundred (400) Star Barns for delivery by
December, 2000. All such purchases shall be subject to the terms and conditions
of this Agreement, including the pricing provisions of Section 3. [***]
(b) Star will submit all future orders for Star
Barns using the purchase order attached hereto as Exhibit B. Star agrees to use
commercially reasonable efforts to submit purchase orders for all Star Barns
that are to be delivered during any Production Period (as defined below) that
begins on or after July 1, 2000, prior to the commencement of such Production
Period. As used herein, "PRODUCTION PERIOD" shall mean (i) the period commencing
on the date hereof and ending June 30, 2000, or (ii) any subsequent twelve month
period commencing July 1 and ending June 30. All future orders must be
accompanied by a production schedule mutually agreed upon by the parties. [***]
2.3 PRODUCTION.
(a) Powell agrees to manufacture all Star Barns
to be delivered hereunder using new materials of good quality and good
manufacturing practices. Powell shall deliver the Star Barns on the dates set
forth in the purchase orders submitted by Star to they extent they are
consistent with the agreed upon production schedules; provided, that Powell will
not be required to manufacture and deliver, in any Production Period, more than
nine hundred and sixty (960) Star Barns unless it has received a binding
purchase order for such additional Star Barns at least four (4) months prior to
the commencement of such Production Period; provided, further, that Powell will
not be required to manufacture and deliver, in any Production Period, more than
[***]
(b) In the event Powell breaches its obligations
under Section 2.3(a) by failing to deliver Star Barns on the dates set forth in
Star's purchase orders, the Purchase Price of such delayed Star Barns shall be
subject to reduction as provided in this Section 2.3(b). [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
3
<PAGE> 4
[***]
3. PRICING; PAYMENT.
3.1 PURCHASE PRICE. The purchase price (the "PURCHASE
PRICE") for each of the Star Barns ordered and purchased pursuant to the terms
of this Agreement shall be [***] subject to the adjustments set forth in Section
4 below.
3.2 PAYMENT TERMS. The parties acknowledge that Powell's
standard payment terms for qualifying customers are net thirty (30) days. Under
the standard payment terms, any payments received after thirty days will incur a
late fee of [***]. Star will provide Powell with evidence of available credit
facilities, financial statements and such other information as Powell shall
reasonably request in order to determine whether Star qualifies for such terms.
[***] On the first Monday of each Payment period during the term of this
Agreement, Star shall make the Payments, in the amount of the applicable
Purchase Price multiplied by the weekly estimate (or by two or four times
the Weekly Estimate, as applicable, by wire transfer into Powell's account
pursuant to the wiring instructions set forth on Exhibit C attached hereto.
Powell will send invoices to Star with each shipment of Star Barns and the
Payments will be applied against such invoices in chronological order. Any
Payment which is not received by Powell within three (3) days of its due date
will incur a one and [***] late fee charge. Powell will apply a credit for the
Payments made under the Prior Order at the Standard Price toward the Payments to
be made pursuant to the Replacement Order at the Discount Price.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
4
<PAGE> 5
4. PRICE ADJUSTMENTS.
[***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
5
<PAGE> 6
[***]
5. DELIVERY.
All Star Barns will be delivered F.O.B. Powell's facility in
Bennettsville, South Carolina, unless otherwise agreed to in writing by the
parties. If requested by Star, Powell will use its reasonable best efforts to
assist in the delivery and setting of the Star Barns, however, Star shall be
solely responsible for all transport costs, setting charges, permit costs, taxes
and insurance costs for deliveries to customer sites. If Star contracts with
Powell for transport and setting, transport charges shall be based on [***].
Star shall have the responsibility to provide the hook-up of all utilities at
the customer site.
6. LIMITED WARRANTY.
Each Star Barn sold to Star hereunder shall be sold with the Limited
Warranty attached hereto as Exhibit E. [***] In addition to the limitations set
forth in said Exhibit E, it is further agreed that no warranty is granted or to
be implied that the Star Barn will cure tobacco to Star's specifications or
those of any other party. EXCEPT AS EXPRESSLY PROVIDED HEREIN, POWELL MAKES NO
EXPRESS OR IMPLIED WARRANTIES OF ANY KIND OR NATURE WITH RESPECT TO THE STAR
BARNS.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
6
<PAGE> 7
7. SPARE PARTS.
Attached hereto as Exhibit F is a list of spare parts for the Star
Barn recommended by Powell. Powell shall make such spare parts available to Star
and others directly and/or through normal dealer networks, for a period of [***]
following the delivery of the last Star Barn to be delivered hereunder.
8. TRAINING.
Powell will provide to Star and/or others, at Powell's expense,
three (3) annual training seminars on the mechanical and electrical operation of
a Star Barn. At least two of such seminars shall be at locations in Virginia,
North Carolina and/or Kentucky, as specified by Star.
9. LICENSE.
For so long as this Agreement remains in effect, Star hereby grants
to Powell a limited, non-transferable license under the Star Patent Rights for
the purpose of manufacturing and selling, exclusively to Star, the Star Barns
pursuant to purchase orders submitted by Star. [***]
10. TRADE SECRETS AND CONFIDENTIAL INFORMATION.
10.1 CONFIDENTIALITY. Powell acknowledges that it will be
entrusted with Trade Secrets and Confidential Information that Star has
developed and has a legitimate business interest in protecting. Pursuant
thereto, Powell agrees:
(a) to treat confidential information and not,
without the prior written approval of Star, to use (other than in the
performance of its duties hereunder), publish, disclose, copyright or authorize
anyone else to use, publish, disclose or copyright: any Trade Secrets during the
terms of this Agreement and subsequent thereto; or Confidential Information
either during the term hereof or for three (3) years following the expiration or
termination of this Agreement;
(b) to disclose the Confidential Information
only to those employees, consultants or other agents necessary for Powell to
perform this Agreement.
10.2 EXCEPTIONS. The restrictions in Section 10.1 shall not
apply to any information which:
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
7
<PAGE> 8
(a) is in the public domain by use and/or
publication at the time of its receipt by Powell or enters the public domain
thereafter through no fault of Powell;
(b) was validly in Powell's possession from a
source other than Star prior to receipt;
(c) was properly obtained by Powell from a third
party, provided Powell was not under any confidentiality obligation to such
third party; or
(d) was previously developed independently by
Powell, as shown by written documentation delivered to Star within thirty (30)
days of the receipt of such information.
10.3 BINDING ON OTHERS. Powell further agrees that it will
require each of its employees, consultants or other agents to be bound by the
restrictions stated herein and that, upon the request of Star, Powell will
provide evidence satisfactory to Star of having fulfilled such requirement to
Star.
10.4 DEFINITIONS.
(a) "CONFIDENTIAL INFORMATION" shall mean any
and all information, whether or not in tangible form, of a confidential,
proprietary or secret nature belonging to Star or licensed by it, other than
Trade Secrets, which is material to Star and not generally known by the public,
including but not limited to, all information annotated by a legend, stamp or
other written identification as "Confidential."
(b) "TRADE SECRET" shall mean any and all
information, whether or not in tangible form, belonging to Star or licensed by
it, which derives economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons
who can obtain economic value from its disclosure or use and which is the
subject of efforts that are reasonable under the circumstances to maintain its
secrecy. Without limiting the generality of the foregoing, Trade Secrets shall
include but are not limited to studies, results, reports, price lists, product
codes, product strategies, technical or nontechnical data, formulae, techniques,
drawings, designs, processes, financial data, financial plans, product plans,
marketing plans, advertising plans, lists of actual or potential customers or
suppliers, and related items.
11. MISCELLANEOUS.
11.1 ENTIRE AGREEMENT. This Agreement and the attached
exhibits constitute the entire agreement of the parties with respect to the
subject matter hereof, and supersede any prior agreement or understandings of
the parties. There are no other oral or written understandings or agreements
between Powell and Star relating to the subject matter hereof. This Agreement
may not be modified except by a writing signed by both parties. This Agreement
may be executed in multiple originals
8
<PAGE> 9
and counterparts. Both parties agree and acknowledge that the terms of any sales
orders, invoices, confirming memoranda, standard business form or other similar
writing issued after the date of this Agreement shall be governed by this
Agreement and shall not modify the terms hereof unless expressly agreed to in
writing by the parties hereto.
11.2 SEVERABILITY. All provisions of this Agreement are
severable, and any which are deemed invalid or unenforceable shall be
ineffective to the extent of such invalidity or unenforceability without
invalidating the remaining provisions hereof and this Agreement shall be
enforced and interpreted as if the invalid or unenforceable provisions were not
contained herein and any partially valid and enforceable provisions shall be
enforced to the extent valid or enforceable.
11.3 FORCE MAJEURE. Notwithstanding anything herein to the
contrary, any failure or delay in the performance by Powell or Star of its
obligations hereunder (other than performance of any obligations to make any
payment) shall not be a breach of this Agreement if such failure or delay arises
out of or results from fire, storm, flood, earthquake, or other acts of God,
explosions, wars, insurrections, government order or regulation, strikes, work
stoppages or slowdowns, unavailability of fuel or utilities, unforeseen
equipment failure, inability to obtain raw materials or components despite best
efforts to do so, or other causes beyond the control of such party. Any such
delay shall extend the time allowed for performance or excuse performance, in
whole or in part, as may be reasonable, provided that as soon as performance is
possible the non-performing party shall immediately resume performance and, in
no event shall performance be excused for more than sixty (60) days.
11.4 NOTICES. Any notices required by this Agreement shall be
deemed given if sent by certified or registered mail, return receipt requested,
by a recognized overnight delivery service, or by confirmed facsimile
transmission, to the address of the party as follows, unless and until otherwise
notified in writing, with receipt effective only on actual receipt:
9
<PAGE> 10
<TABLE>
<S> <C>
TO POWELL : TO STAR:
Powell Manufacturing , Inc. Star Scientific, Inc.
P.O. Box 707 16 South Market Street
Bennettsville, South Carolina 29512-707 Petersburg, Virginia 23803
Attn.: Richard Herskowitz Attn.: Jim McNulty
Fax : (843) 479-7739 Fax : (804) 861-6215
With a copy (which shall not constitute
Notice) to: Paul, Hastings, Janofsky & Walker LLP
1299 Pennsylvania Avenue, N.W.
Tenth Floor
Washington, D.C. 20004-2400
Attention: Paul L. Perito, Esq.
Telecopier No.: (202) 508-9700
and
Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street
Suite 2400
Atlanta, Georgia 30308
Attention: W. Andrew Scott, Esq.
Telecopier No.: (404) 815-2424
</TABLE>
11.5 GOVERNING LAW. This Agreement and the relationship
between the parties hereunder shall be governed by and construed in accordance
with the internal laws of the Commonwealth of Virginia. Any claim or action
under this Agreement shall be brought in the state or federal courts sitting in
the Commonwealth of Virginia, and the parties hereby consent to the personal
jurisdiction of such courts.
11.6 BINDING EFFECT. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns. Notwithstanding the foregoing neither this Agreement nor
the license granted hereunder may be assigned by Powell to any other party
without the prior written consent of Star.
(SIGNATURES ON FOLLOWING PAGE)
10
<PAGE> 11
IN WITNESS WHEREOF, the parties have cause this Agreement to be duly
executed as of the date first written above.
POWELL MANUFACTURING COMPANY, INC. STAR SCIENTIFIC, INC.
By:____________________________ By:___________________________
Name: A. Richard Herskowitz Name:
11
<PAGE> 1
EXHIBIT 10.32
THIS AGREEMENT is made as of this 12th day of October, 1999 by and
between STAR SCIENTIFIC, INC., a Delaware corporation ("Star") and BROWN &
WILLIAMSON TOBACCO CORPORATION, a Delaware corporation ("B&W") (individually, a
"Party" and collectively, the "Parties") and provides as follows:
FACTUAL BACKGROUND
Star, in conjunction with its Affiliates, has developed know-how for
the manufacture of low-nitrosamine processed tobacco for use in cigarettes, pipe
tobacco, cigars and smokeless tobacco products. Star is a distributor of such
low-nitrosamine tobacco and B&W has agreed to purchase low-nitrosamine Virginia
flue-cured tobacco and subject to the satisfaction of certain conditions, to
purchase low-nitrosamine Burley tobacco from Star. [***] B&W has agreed to
finance the purchase of curing barns to assist Star in the production of low
nitrosamine tobacco products which can be marketed by Star, B&W and others in
the industry on the terms and conditions provided for herein.
SECTION 1
DEFINITIONS
Barns means the specially fabricated mobile curing barns utilized by
Star as part of the Star Cure(TM) Process.
BAT means British American Tobacco, p.l.c., a public limited
company, incorporated under the laws of England and its successors and assigns.
[***]
B&W Affiliates means BAT, B&W and all other domestic and
international companies in which BAT owns, directly or indirectly, a thirty
percent (30%) or greater equity interest, and which agree in writing to be bound
by the terms and conditions of this Agreement at the time they purchase Star
Cure(TM) Tobacco (through B&W) pursuant to the provisions hereof.
B&W Brands means with respect to any B&W Affiliate the brand names
utilized by such B&W Affiliate for Tobacco Products whether by ownership of the
marks or by a license arrangement.
B&W Technologies means B&W's proprietary technologies and Trade
Secrets which it makes available to Star on a royalty-free basis pursuant to a
license as provided for herein.
Burley Incremental Cost Factor means the incremental cost per pound
(if any) of processing Burley tobacco with the Star Cure(TM) Process above the
cost per pound of processing flue-cured tobacco with the Star Cure(TM) Process.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE> 2
Business Day means any day or days other than a Saturday, Sunday or
United States federal holiday or a state holiday in the State of Georgia.
Claims means any statements or any assertions in any advertisement,
packaging, labeling, public statement or other communication, directly or
indirectly, relating to health or other relevant issues, and intended for public
dissemination by Star or any manufacturer of Tobacco Products manufactured with
Star Cure(TM) Tobacco that the product is a reduced risk or less hazardous
product.
Credit Facility means the secured credit facility to be provided by
B&W to Star for the acquisition of Barns by Star pursuant to the Loan and
Security Agreements substantially in the form of Exhibit A annexed hereto.
Green Weight means the weight of the Star Cure(TM) Tobacco at the
time it is shipped to B&W from Star's processing facility.
Index means the Bureau of Labor Statistics' Producer Price Index for
Intermediate Materials, Supplies and Components.
[***]
Limited License and Option Agreement means the Agreement in the form
of Exhibit B annexed hereto.
Low TSNA Cigarette means a cigarette developed and tested as
provided for in Sections 2.03, 2.04 and 2.05 of this Agreement manufactured with
any amount of Star Cure(TM) Tobacco.
Market Price means with respect to either flue-cured or Burley
tobacco (which has not been cured by the Star Cure(TM) Process) the average U.S.
Department of Agriculture market price per pound paid at the end of the selling
season, Green Weight, for such type of tobacco in the United States.
[***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
2
<PAGE> 3
Other Tobacco Products means roll-your-own tobacco products, cigars,
pipe tobacco and smokeless tobacco products or any other tobacco product as
defined by the United States Federal Trade Commission, excluding those products
that may be defined as tobacco cessation products.
Person means any natural person, general or limited partnership,
corporation, limited liability company, firm, association or other legal entity
other than B&W Affiliates.
Ppm means parts per million.
Premium means [***]
Purchase Credit means [***]
Purchase Price means [***]
Star Affiliates means: (i) Regent Court Technologies, a general
partnership ("Regent"), (ii) Jonnie R. Williams ("Williams") and Francis
O'Donnell, Jr., M.D. ("O'Donnell") (but only for as long as Williams or
O'Donnell, as the case may be, would be deemed to be an affiliate of Star under
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder), and (iii) all other domestic and international
companies in which Star, Regent, Williams or O'Donnell (but only for as long as
Williams or O'Donnell, as the case may be, would be deemed to be an affiliate of
Star under the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder), owns, directly or indirectly, a thirty percent (30%) or
greater equity interest.
Star Cure(TM) Burley Tobacco means Burley tobacco which has been
cured pursuant to the Star Cure(TM) Process.
Star Cure(TM) Burley Tobacco Acceptance Notice means a written
notice from B&W to Star the effect of which is to exercise B&W's option to
purchase 3,000,000 pounds Green Weights of Star Cure(TM) Burley Tobacco in each
of 2000 and 2001.
Star Cure(TM) F.C. Tobacco means Virginia flue-cured tobacco which
has been cured pursuant to the Star Cure(TM) Process.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
3
<PAGE> 4
Star Cure(TM) Inside means the trademark of Star which serves as a
designator that the Tobacco Product in the package includes Star Cure(TM)
Tobacco.
Star Cure(TM) Marks means the trademark Star Cure(TM) and the Star
Cure(TM) Inside designator associated with the Low TSNA Cigarette.
Star Cure(TM) Process means the proprietary Trade Secrets and
technology for a method or process of curing tobacco which significantly retards
the production of nitrosamines in the curing process.
Star Cure(TM) Tobacco means Star Cure(TM) F.C. Tobacco and/or Star
Cure(TM) Burley Tobacco as the context may require.
Star New Technologies means any technologies developed by Star or
Star Affiliates relating to Tobacco Products other than the Star Cure(TM)
Process.
Star New Technologies Products means Tobacco Products of Star or
Star Affiliates which contain tobacco manufactured or produced using Star New
Technologies.
Star's Intellectual Property means, with respect to Star and its
subsidiaries, the proprietary technologies, and all enhancements and
improvements thereto, whether owned by, or licensed to, Star, including its
subsidiaries, its registered trademarks, registered copyrights, and all pending
applications therefor, whether or not issued that relate to the Star Cure(TM)
Process and Star Cure(TM) Marks and Star's Trade Secrets.
Star's Scientific Advisory Board means a panel of expert medical,
scientific and public health policy members who will provide scientific advice
to Star on the development of Low TSNA Cigarettes and Other Tobacco Products and
advise Star on the design and interpretation of clinical studies using Star
Cure(TM) Tobacco and the validity of any Claims which Star proposes to make, as
well as other relevant scientific advice and counsel concerning a broad range of
biomedical and/or health related issues for the Star Cure Tobacco.
Star's Tobacco Requirements means [***]
Statement means with respect to cigarettes or Other Tobacco Products
containing Star Cure(TM) Tobacco that such product is understood to contain Star
Cure(TM) Tobacco, carries the Star Cure(TM) mark and/or the Star Cure(TM) Inside
designator, or is designated as having low or lower TSNA levels than a
comparable Tobacco Product which does not contain any Star Cure(TM) Tobacco.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
4
<PAGE> 5
[***]
[***]
[***]
Tobacco Products means cigarettes and Other Tobacco Products.
Trade Marketing Support means that level of in-market field sales
support normally used by B&W for test marketing its own brands.
Trade Secrets means, with respect to Star or B&W, information,
including a formula, pattern, compilation, program, device, method, technique or
process, that: (i) derives independent economic value, actual or potential, from
not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclosure or
use, and (ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
TSNA means the tobacco specific nitrosamines - N-nitrosonomicotine
(NNN), 4-(methyl nitrosamine) - (3 Pyridyl) - 1 - butanone (NNK),
N-nitrosoanabasine (NAT) and N-nitrosoanabasine (NAB).
SECTION 2
DEVELOPMENT OF LOW TSNA CIGARETTE AND
OTHER TOBACCO PRODUCTS; TRADEMARK LICENSES
2.01 Star's Scientific Advisory Board.
Star intends to establish a Scientific Advisory Board utilizing the
scientists and/or healthcare professionals identified to B&W in writing, or
other individuals with comparable credentials, expertise and stature in their
respective fields. The resulting Star Scientific Advisory Board will be in place
by December 31, 1999. All issues related to the Scientific Advisory Board are
within the sole domain of Star and its designees.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
5
<PAGE> 6
2.02 Regulatory Acceptance.
Star will continue to develop the Star Cure(TM) Process and will
seek any necessary or available regulatory acceptance and recognition of the
process. During the term of this Agreement, Star will, from time to time, advise
B&W of the status of these ongoing efforts as well as its analysis of potential,
possible and/or actual Claims and Statements which may be made with respect to
Tobacco Products manufactured with Star Cure(TM) Tobacco.
[***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
6
<PAGE> 7
[***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
7
<PAGE> 8
[***]
2.09 Other Tobacco Products.
In the event that Star and/or B&W develop Other Tobacco Products
using Star Cure(TM) Tobacco, Star at its expense will conduct the Biological
Testing for such product. The Parties may enter into supplemental agreements
with respect to biological and market testing and the acquisition of any
necessary trademark licenses on terms comparable to those set forth herein with
respect to such Other Tobacco Products.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
8
<PAGE> 9
2.10 Restrictions on Claims.
Neither Star nor B&W will make any health or health related Claim,
directly or indirectly, with respect to the effect of using Star Cure(TM)
Tobacco in any Tobacco Product unless such Claim has been approved by Star's
Scientific Advisory Board.
SECTION 3
PURCHASE OF STAR CURE(TM) TOBACCO
3.01 Purchase of Star Cure(TM) Tobacco.
Subject to the terms and provisions of this Agreement, in addition
to amounts of tobacco purchased under the 1999 Purchase Orders, Star agrees to
sell to B&W and B&W agrees to purchase from Star five million pounds/year of
Star Cure F.C. Tobacco for delivery in each of the years 2000 and 2001.
[***] upon issuance of such notice, Star agrees to sell to B&W and
B&W agrees to purchase from Star three million pounds/year of Star Cure(TM)
Burley Tobacco for delivery to B&W in each of 2000 and 2001.
In the event B&W [***], B&W shall purchase from Star and Star shall
sell to B&W at least five million pounds/year, Green Weight, of Star Cure F.C.
Tobacco in each of the years 2002, 2003 and 2004. In the event B&W issues the
Star Cure(TM) Burley Tobacco Acceptance Notice then B&W shall purchase from Star
and Star shall sell to B&W at least three million pounds/year, Green Weight, of
Star CureO Burley Tobacco in each of the years 2002, 2003 and 2004.
3.02 Condition of Tobacco.
All Star Cure (TM) Tobacco delivered by, or on behalf of, Star to
B&W Affiliates pursuant to this Agreement shall be in marketable condition and
good keeping order and of comparable smoking quality or better than the tobacco
delivered by Star to B&W pursuant to the 1999 Purchase Order. Comparable smoking
quality will be determined by a commonly accepted sensory blind comparison test
between the Star Cure(TM) Tobacco delivered to B&W Affiliates pursuant to this
Agreement and conventional Burley or flue-cured tobacco from conventional fields
during the same growing season.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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3.03 Prices.
The purchase price for Star Cure(TM) Tobacco purchased for delivery
in the years 2000 and 2001 shall be [***]. The purchase price for Star Cure(TM)
Tobacco delivered in the year 2002 and thereafter shall be the [***]. With
respect to Star Cure (TM) Tobacco delivered in the calendar year 2003 and
thereafter, [***] Star will review with B&W the components of such incremental
costs and permit B&W to audit such costs periodically. Star will make good faith
efforts to incorporate any reasonable recommendations made by B&W to keep the
Burley Incremental Cost Factor as low as possible. Identification of the goods
to the contract shall occur when they are placed in the hands of the carrier.
The prices are F.O.B. Star's processing facility or such other facility as Star
may determine. Payments shall be made to Star, at Star's option, by check or
wire transfer. Payments shall be due within [***] of receipt of the invoice.
Notwithstanding the foregoing, a different method of payment or credit
arrangement may be agreed to in writing by the Parties in which case such other
method of payment or credit arrangement will govern until Star gives B&W [***]
written notice that it will require payment as noted above. Commencing with Star
Cure (TM) Tobacco delivered to B&W Affiliates in the year 2002 and for all such
shipments thereafter, B&W shall pay based on a Purchase Price calculated using
the Market Price established for the previous selling season. Within [***] of
the end of each selling season, the Purchase Price of all tobacco purchased that
season shall be recomputed using the Market Price for that season, and the
Parties shall adjust the payments made accordingly within [***].
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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3.04 Option to Purchase Star (TM) Cure Tobacco.
Commencing with respect to Star Cure (TM) Tobacco to be delivered in
the calendar year 2000 and during each calendar year thereafter during the term
of this Agreement, subject only to the fulfillment of Star's Tobacco
Requirements, [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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[***]
Except for amounts required to meet Star's Tobacco Requirements in
the event that B&W Affiliates purchase 30,000,000 pounds/year or more of Star
Cure(TM) Tobacco in each of the years 2002, 2003 and 2004, Star agrees not to
sell Star Cure(TM) Tobacco to any Persons other than B&W Affiliates and sales
which are made pursuant to Star's Tobacco Requirements during that year.
All orders, including those exercising the option to purchase Star
Cure (TM) Tobacco, shall be submitted to Star in the form of a written purchase
order which shall be sent by mail or by facsimile to Star at Star's principal
place of business and shall set forth (i) the identity of Star Cure Tobacco
being purchased; (ii) the quantity (in pounds) to be purchased; (iii) the
purchase price in accordance with Section 3.03; (iv) the general shipping
instructions including destination address; (v) a reference to this Agreement;
(vi) any other special information required by this Agreement or by the
circumstances of the purchase order.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 13
3.05 Incorporation of Terms and Conditions.
The terms and conditions of this Agreement shall be deemed
incorporated into and made a part of each purchase order, and shall not be
modified, supplemented, or superseded by any terms or conditions in a purchase
order except as expressly agreed to in a writing separate from such purchase
order signed by authorized representatives of both Parties and specifying the
extent to which such purchase order overrides the terms and conditions of this
Agreement.
3.06 Additional Payments to Star.
Subject to the terms and conditions hereof, and in consideration of
the undertakings herein by Star, in addition to the payments made pursuant to
Sections 3.03 and 3.09, B&W shall pay to Star a nonrefundable deposit on the
Purchase Price of Star Cure(TM) Tobacco to be purchased in the year 2000 in the
amount of $6,000,000, payable upon execution of this Agreement.
3.07 Late Fees on Delinquent Payments.
In the event B&W or any B&W Affiliate does not pay any amounts due
Star pursuant to this Agreement, B&W shall pay late charges on such past due
amounts at a monthly rate of one and one-half percent (1 1/2%) (or, if less, the
maximum interest rate then allowed under applicable law).
3.08 Most Favored Purchaser.
[***]
3.09 Covenant re Star's Intellectual Property.
In the event Star receives a communication from any Person which
asserts that Star's Intellectual Property, whether owned by or licensed to Star,
is infringing the rights of any Person, Star shall give B&W written notice of
such communication within ten (10) Business Days of its receipt.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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SECTION 4
FINANCIAL AND OTHER ASSISTANCE PROVIDED BY B&W TO STAR.
4.01 Financing of Barns.
To assist Star in the acquisition of Barns for the curing of Star
Cure(TM) Tobacco, B&W will make available to Star a credit facility pursuant to
the Credit Facility. [***]
4.02 Trademark Registrations.
[***]
SECTION 5
REPRESENTATIONS AND WARRANTIES OF STAR
Star represents and warrants to B&W:
5.01 Corporate Status.
Star is a corporation, duly organized, validly existing and in good
standing under the laws of the State of Delaware. Star is duly qualified to do
business and is in good standing in such states in which the failure to so
qualify would have a material adverse effect on its business. Star has requisite
power to carry on its business as it is now being conducted and Star has the
requisite power to enter into and complete the transactions contemplated by this
Agreement.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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5.02 Authority.
All corporate actions necessary to be taken by or on the part of
Star in connection with the transactions contemplated by this Agreement have
been duly and validly taken, and this Agreement has been duly and validly
authorized, executed, and delivered by Star and constitutes the legal, valid and
binding obligation of Star, enforceable against Star in accordance with its
terms.
5.03 Star's Intellectual Property.
Star is, and to the best of its knowledge, will be, for the term of
this Agreement, either the sole owner or the sole and exclusive worldwide
licensee of all technology and Know-How necessary and utilized in the production
of Star Cure (TM) Tobacco. To the best of Star's knowledge and information, the
use of Star Cure Tobacco by any B&W Affiliate will not infringe any patent or
trade secret or other protected interest of any Person. Star has not received
any communications or notice of any claims or demands of any Person pertaining
to Star's Intellectual Property, or the rights of Star thereunder. To the
knowledge and information of Star, no proceedings have been instituted, or are
pending or, threatened, which challenge the rights of Star with respect to
"Star's Intellectual Property" and none of such intellectual property is subject
to any outstanding order, decree, judgment, stipulation, injunction restriction
or agreement affecting the scope of the free and unrestricted use by Star or the
benefits obtained by the B&W Affiliates under the Related Agreements. To the
best of Star's knowledge and information, Star is not infringing or violating,
and has not infringed or violated any intellectual property rights of others.
SECTION 6
REPRESENTATIONS AND WARRANTIES OF B&W
B&W represents and warrants to Star:
6.01 Corporate Status.
B&W is a corporation which is duly organized, validly existing and
in good standing under the laws of the State of Delaware. B&W is qualified to do
business and in good standing in such states in which the failure to so qualify
would have a material adverse effect on B&W's ability to perform its obligations
herein. B&W has the requisite power to enter into and complete the transactions
contemplated by this Agreement.
6.02 Authority.
All corporate actions necessary to be taken by or on the part of B&W
in connection with the transactions contemplated by this Agreement have been
duly and validly taken, and this Agreement has been duly and validly authorized,
executed and delivered by B&W and constitutes the legal, valid and binding
obligation of B&W, enforceable against B&W in accordance with and subject to its
terms.
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<PAGE> 16
SECTION 7
NEW TOBACCO TECHNOLOGIES
[***]
SECTION 8
WARRANTY AND LIMITATION OF LIABILITY
8.01 Warranty.
All Star Cure(TM) Tobacco shall have (subject to verification by
B&W) total TSNA levels equal to or less than:
Star Cure(TM) F.C. Tobacco: 0.4 ppm.
Star Cure(TM) Burley Tobacco: 1 ppm.
B&W's sole remedy for any breach of this warranty is replacement of
any Star Cure(TM) Tobacco at Star's expense which fails to meet such
specifications. The B&W Affiliate will give written notice to Star of its intent
to return such tobacco and provide Star with a copy of its TSNA test results or
other reports and analysis with respect to any returned tobacco.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 17
8.02 Limitation of Liability.
EXCEPT AS EXPRESSLY PROVIDED IN THE PREVIOUS SECTION, STAR MAKES NO
REPRESENTATIONS OR WARRANTIES OF ANY KIND TO B&W OR ITS CUSTOMERS, INCLUDING BUT
NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. FURTHERMORE, UNDER NO CIRCUMSTANCES SHALL STAR OR B&W BE
RESPONSIBLE FOR INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, OR
EXEMPLARY DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY
ACTS OR OMISSIONS ASSOCIATED THEREWITH OR RELATING TO THE USE OF THE STAR
CURE(TM) TOBACCO FURNISHED, WHETHER SUCH CLAIM IS BASED ON BREACH OF WARRANTY,
CONTRACT, TORT, OR OTHER DAMAGES OR WHETHER ANY OTHER REMEDY PROVIDED HEREIN
FAILS.
SECTION 9
MISCELLANEOUS
9.01 Public Announcements.
No Party shall, without the approval of the other Party hereto, make
any press release or other public announcement concerning the transactions
contemplated by this Agreement, except: (i) to announce it has been entered
into, in which case such Party shall give advance notice to the other Party and
the Parties shall use their best efforts to cause a mutually agreeable release
or announcement to be issued; (ii) as and to the extent that such Party shall be
so obligated by law; and (iii) to meet the requirements for appropriate
regulatory filings.
9.02 Confidentiality.
(a) Except to the extent otherwise permitted
under Section 10.01, each Party will hold in confidence and will not, without
the prior written consent of the other party, use, reproduce, distribute,
transmit, transfer or disclose, directly or indirectly, in any form or by any
means or for any purpose any Confidential Information of the other party except
as explicitly provided for in this Agreement. As used herein, the term
"Confidential Information" shall mean this Agreement and its subject matter, and
proprietary information that is provided to or obtained from one party to the
other party including without limitation Trade Secrets, B&W Technologies,
results of Biological Testing and Market Tests, information regarding the
development, manufacturing, marketing, promotion and sale of Tobacco Products
and any other information which derives economic value, actual or potential,
from not being generally known to, and not generally ascertainable by proper
means by, other persons. The recipient of Confidential Information may only
disclose such information to its employees on a need-to-know
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<PAGE> 18
basis and will exercise reasonable commercial care in protecting the
confidentiality of the other party's Confidential Information.
(b) The obligations of a recipient party with
respect to Confidential Information shall remain in effect during and after the
term of this Agreement (including any renewals and extensions hereof) and for a
period of 5 years thereafter except to the extent:
1. such Confidential Information is
or becomes generally available to the public other than as a result of a
disclosure by the recipient, or its directors, officers, employees, agents or
advisors;
2. such Confidential Information
becomes available to the recipient on a non-confidential basis from a source
other than the disclosing party or its affiliated companies (provided that such
source is not bound by any confidentiality obligations to the disclosing party
or its affiliated companies); or
3. the disclosure of such
Confidential Information is necessary to comply with applicable law or the order
or other legal process of any court, governmental or similar authority having
jurisdiction over the recipient.
(c) In the event the recipient becomes legally
compelled to disclose any of such Confidential Information by any governmental
body or court, recipient will provide the disclosing party with prompt notice so
that the disclosing party may seek a protective order or other appropriate
remedy. Recipient will furnish only that portion of such Confidential
Information which is legally required and will exercise its reasonable business
efforts to obtain appropriate assurance that confidential treatment will be
accorded such Confidential Information.
SECTION 10
TERM AND TERMINATION
10.01 Term.
[***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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10.02 Events of Default.
Either party (the "nonbreaching party") shall have the right to
terminate this Agreement upon thirty (30) days' prior written notice to the
other party (the "breaching party") or (if applicable) its trustees, receivers
or assigns upon the occurrence of one or more of the following events by the
breaching party:
(a) as to Star, a material cessation or stoppage
by Star to deliver to any B&W Affiliate the
quantity of StarCure(TM) Tobacco which such
B&W Affiliate has agreed to purchase for
such year, and as to B&W, the breach of any
material provision of this Agreement unless
the breaching party cures or corrects such
breach within thirty (30) days after the
written notice by the nonbreaching party;
(b) the institution of any proceeding against
the breaching party under any bankruptcy,
insolvency or moratorium law, to which the
breaching party consents or which is not
dismissed within sixty (60) days thereafter;
(c) any assignment by the breaching party of
substantially all of its assets for the
benefit of creditors; or
(d) the placement of the assets of the breaching
party in the hands of a trustee or receiver,
unless the receivership or trust is
dissolved within sixty (60) days
thereafter.
SECTION 11
GENERAL PROVISIONS
11.01 Successors and Assigns.
Except as otherwise expressly provided herein, this Agreement shall
be binding upon and inure to the benefit of the Parties hereto, and their
respective representatives, successors and assigns. Neither Party may assign any
of its rights or delegate any of its duties hereunder without the prior written
consent of the other, and any such attempted assignment or delegation without
such consent shall be void; provided, however, that B&W may assign its rights
and obligations hereunder, in whole or in part, to one or more of the B&W
Affiliates without Star's consent.
11.02 Amendments; Waivers.
The terms, covenants, representations, warranties and conditions of
this Agreement may be changed, amended, modified, waived, or terminated only by
a written instrument executed by the Party waiving compliance. The failure of
any Party at any time or times to require performance of any provision of this
Agreement shall in no
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manner affect the right of such Party at a later date to enforce the same. No
waiver by any Party of any condition or the breach of any provision, term,
covenant, representation or warranty contained in this Agreement, whether by
conduct or otherwise, in any one or more instances shall be deemed to be or
construed as a further or continuing waiver of any such condition or of the
breach of any other provision, term, covenant, representation or warranty of
this Agreement.
11.03 Notices.
All notices, requests, demand and other communications required or
permitted under this Agreement shall be in writing (which shall include notice
by telex or facsimile transmission) and shall be deemed to have been duly made
and received when personally served, or when delivered by Federal Express,
United Parcel Service or a similar nationally recognized overnight courier
service, expenses prepaid, or, if sent by telex, graphic scanning or other
facsimile communications equipment, delivered by such equipment, addressed as
set forth below:
(a) if to Star, then to: Star Scientific, Inc.
16 South Market Street
Petersburg, VA
Attention: Jonnie R. Williams
Telecopier No. 804-861-6215
with a copy (which shall
not constitute notice) to: Paul, Hastings, Janofsky & Walker
1299 Pennsylvania Avenue, N.W.
Tenth Floor
Washington, D.C. 20004-2400
Attention: Paul L. Perito,
Esq.Telecopier No.: (202) 508-9700 and
Paul, Hastings, Janofsky & Walker
600 Peachtree Street, Suite 2400
Atlanta, Georgia 30308
Attention: W. Andrew Scott,
Esq.Telecopier No. (404) 815-2424
(b) if to B&W, then to: Brown & Williamson Tobacco Corporation
200 Brown & Williamson Tower
401 South 4th Avenue
Louisville, KY 40232
Attention: [***]
Telecopier No. (502) 568-7107
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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with a copy (which shall not
constitute notice) to: Wiley, Rein & Fielding
1776 K Street, N.W.
Washington, D.C. 20006
Attention: Andrew S. Krulwich
Telecopier No. (202)-719-7049
and
Wiley, Rein & Fielding
1776 K Street, N.W.
Washington, D.C. 20006
Attention: Stuart F. Carwile
Telecopier No. (202)-719-0140
Any Party may alter the address to which communications are to be
sent by giving notice of such change of address in conformity with the
provisions of this Section providing for the giving of notice.
11.04 Captions.
The captions of Articles and Sections of this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any of the provisions of this Agreement.
11.05 Governing Law.
This Agreement shall be deemed to executed and to be performed in
the State of Georgia (without regard to its conflicts of laws principles) and
shall be construed in accordance with the laws of the State of Georgia.
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<PAGE> 22
11.06 Entire Agreement.
This Agreement constitutes the full and entire understanding and
agreement between the Parties with regard to the subject matter hereof, and
supersedes all prior agreements, understandings, inducements or conditions,
express or implied, oral or written, relating to the subject matter hereof;
including without limitation the undated letter of intent, the Memorandum of
Understanding between Star Scientific, Inc. and Brown and Williamson Tobacco
Corp. The express terms hereof control and supersede any course of performance
and/or usage of trade inconsistent with any of the terms hereof. This Agreement
has been prepared by all of the Parties hereto, and no inference of ambiguity
against the drafter of a document therefore applies against any Party hereto.
11.07 Counterparts.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original as against any Party whose signature
appears thereon, and all of which shall together constitute one and the same
instrument. This Agreement shall become binding when one or more counterparts
hereof, individually or taken together, shall bear the signatures of all of the
Parties reflected hereon as the signatories.
11.08 Severability.
The Parties agree that if one or more provisions contained in this
Agreement shall be deemed or held to be invalid, illegal or unenforceable in any
respect under any applicable law, this Agreement shall be construed with the
invalid, illegal or unenforceable provision deleted, and the validity, legality
and enforceability of the remaining provisions contained herein shall not be
affected or impaired thereby.
11.09 No Joint Venture.
Nothing contained in this Agreement shall be construed as creating a
joint venture, partnership, agent or employment relationship between Star and
any of the B&W Affiliates.
11.10 Force Majeure. Neither party shall be liable for any
delay or failure in its performance of any of the acts required by this
Agreement when such delay or failure arises from circumstances beyond the
control and without the fault or negligence of such party. Such causes may
include, without limitation, acts of God, acts of local, state or national
governments or public agencies, acts of public enemies, acts of civil or
military authority, labor disputes, material or component shortages, embargoes,
rationing, quarantines, blockades, sabotage, utility or communication failures
or delays, earthquakes, fire, flood, epidemics, riots or strikes. The time for
performance of any act delayed by any such event may be postponed for a period
equal to the period of such delay so long as the party whose actions are delayed
is diligently seeking to perform.
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<PAGE> 23
IN WITNESS WHEREOF each of the Parties has caused this Agreement to
be executed on its behalf by a duly authorized officer.
STAR SCIENTIFIC, INC.
By:
--------------------------
Name:
------------------------
Title:
-----------------------
BROWN & WILLIAMSON
TOBACCO CORPORATION
By:
--------------------------
Name:
------------------------
Title:
-----------------------
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<PAGE> 1
EXHIBIT 10.33
LOAN AGREEMENT
This Loan Agreement dated as of October 12, 1999, between Star
Scientific, Inc., a Delaware corporation ("the "Borrower"), and Brown &
Williamson Tobacco Corporation, a Delaware corporation (the "Lender").
ARTICLE I.
DEFINITIONS
For the purposes of this Agreement, the following terms shall have the
meanings set forth below:
"Affiliate" shall have the meaning ascribed to it in Section 4.01(l)
hereof.
"Barns" means the specially fabricated tobacco curing barns utilized by
Borrower to reduce the nitrosamine levels in tobacco.
"Benefit Commitments" shall have the meaning ascribed to it in Section
4.01(f) hereof.
"Business Day" shall mean any day other than a Saturday, Sunday, or
public or Lender holiday or the equivalent for Lenders generally under the laws
of the State of Virginia.
"Collateral" shall have the meaning ascribed to it in Section 7.01.
"Collateral Documents" shall mean the Security Agreement and all
related financing statements.
"Debt" shall mean (A) indebtedness for borrowed money or for the
deferred purchase price of property or services, (B) obligations as lessee under
leases which shall have been or should be, in accordance with generally accepted
accounting principles, recorded as capital leases, (C) obligations under direct
or indirect guaranties in respect of, and obligations (contingent or otherwise)
to purchase or otherwise acquire, or otherwise to assure a creditor against loss
in respect of, indebtedness or obligations of others of the kinds referred to in
clause (A) or (B) above, (D) liabilities incurred in respect of Benefit
Commitments in excess of plan assets under Pension Plans.
"Event of Default" shall have the meaning ascribed to it in Section
6.01 hereof.
"First Advance" shall mean the first advance by the Lender under the
Loan.
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<PAGE> 2
"GAAP" shall mean generally accepted accounting principals,
consistently applied.
"Loan Agreement" shall mean this Agreement.
"Loan" shall mean the term loan in the aggregate amount of $22,000,000,
but evidenced by two separate credit facilities, one in the amount of
$13,200,000 ("Credit Facility A") and the other in the amount of $8,800,000
("Credit Facility "B") from Lender to Borrower as provided for and subject to
the terms and conditions contained in this Loan Agreement, evidenced by Note A
and Note B respectively, and secured by the Collateral Documents.
"Loan Documents" shall mean the Loan Agreement, Note A, Note B, and the
Collateral Documents.
"Master Agreement" shall mean an agreement of like date between Lender
and Borrower relating to, inter alia, the purchase of low-TSNA tobacco from
Borrower by Lender [***].
"Note A" shall mean the promissory note dated as of the date hereof
executed by the Borrower payable to the Lender in the principal amount of
$13,200,000, in the form attached hereto as Exhibit A.
"Note B" shall mean the promissory note dated as of the date hereof
executed by the Borrower payable to the Lender in the principal amount of
$8,800,000, in the form attached hereto as Exhibit B.
"Notes" shall mean Note A and Note B.
"Obligations" means the obligation of the Borrower: (A) to pay the
principal of and interest on Note A and Note B (but only to the extent funded)
in accordance with the terms thereof and to satisfy all of its other liabilities
to the Lender arising under the Loan Documents, whether now existing or
hereafter incurred, matured or unmatured, direct or contingent, including any
extensions, modifications, renewals thereof and substitutions therefor; (B) to
repay to the Lender all amounts advanced by the Lender hereunder or otherwise on
behalf of the Borrower in connection with the Loan, including, but without
limitation, advances for the payment of insurance, repairs to or maintenance or
storage of any of the Collateral; and (C) to reimburse the Lender, on demand,
for all of the Lender's expenses and costs, including the reasonable fees and
expenses of its counsel, in connection with the enforcement of this Agreement
and the documents required hereunder, including, without limitation, any
proceeding brought or threatened to enforce payment of any of the obligations
referred to in clauses (A) and (B) above.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 3
"Person" shall mean any individual, corporation, partnership, trust,
unincorporated association, joint venture, joint stock company or other entity.
"Prime Rate" shall mean that rate of interest published in The Wall
Street Journal in the Money Rates Section from time to time as the Prime Rate.
"Security Agreement" shall mean the Security Agreement of even date
herewith by and between the Borrower and Lender in the form attached hereto as
Exhibit C.
"Taxes" shall mean all federal, state and local income taxes payable by
Borrower during a specified period of time.
"Unfunded Liabilities" shall have the meaning ascribed to it in Section
4.01(f) hereof.
"Unmatured Event of Default" shall mean any event of condition which
with passage of time or giving of notice or both would become or create an Event
of Default.
ARTICLE II.
AMOUNTS AND TERMS OF THE LOAN
SECTION 2.01. Credit Facilities. The Lender agrees, on the terms and
conditions hereinafter set forth, including without limiting the generality of
the foregoing, the conditions precedent set forth in Article III hereof, to
make: (i) a term loan to Borrower in the amount of $13,200,000 ("Credit Facility
A") evidenced by Note A, and (ii) subject to the occurrence of certain
conditions, the occurrence of which is solely in Lender's discretion, a term
loan to Borrower in the amount of $8,800,000 ("Credit Facility B") evidenced by
Note B, for the purpose of financing the acquisition of Barns by Borrower. The
Borrower agrees to repay the Obligations (to the extent funded) upon the terms
and conditions and as required by the Loan Documents. No funds will be advanced
by Lender to Borrower pursuant to Credit Facility B unless Lender gives Borrower
[***]. In the event such a notice is not given by Lender, Lender will mark
Note B "canceled" and return it to Borrower.
SECTION 2.02 Interest Rate and Payments of Interest. Interest
shall be paid as follows:
(a) Interest shall be due and payable as provided for in the
Notes.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 4
(b) Interest shall be calculated on the basis of a 360-day
year, counting the actual number of days elapsed, and shall be payable monthly
on the outstanding principal balances as provided for in the Notes.
SECTION 2.03. Advances. Upon two (2) Business Days prior written
notice to Lender, Borrower may request advances under the Loan for the sole
purpose of acquiring Barns at the rate of [***]. With the exception of the first
and last advance under each Note, the minimum advance under either of the Credit
Facilities shall be [***]. Lender may disburse such advances directly to
Borrower or on behalf of and for the account of Borrower directly to the
manufacturer of the Barns.
SECTION 2.04 Repayment of Principal. The principal advanced and
outstanding under Credit Facility A and Credit Facility B shall be repaid as
provided for in Note A and Note B, respectively.
SECTION 2.05 Payment to the Lender. All sums payable to the Lender
hereunder shall be paid directly to the Lender in immediately available funds by
wire transfer to:
[***]
SECTION 2.06. Prepayments. Borrower may prepay the Loan in whole or
in part only on the dates for regularly scheduled principal and interest
payments upon five (5) days prior written notice to Lender. Any amounts prepaid
by Borrower may not be re-borrowed.
SECTION 2.07. Payment on Non-Business Days. Whenever any payment to
be made hereunder or under the Note shall be stated to be due on a day other
than a Business Day, such payment may be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
compensation of payment of interest.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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ARTICLE III.
CONDITIONS OF LENDING
SECTION 3.01. Condition Precedent to the Loan. The obligation of
the Lender to make the Loan is subject to the condition precedent that the
Lender shall have received on or before the day of the request for the funding
of the First Advance all of the following agreements, duly executed, and other
documents, certificates and items, all of which shall be in form and substance
satisfactory to Lender:
(a) The Notes;
(b) The Security Agreement together with such UCC financing
statements or other documents as Lender shall deem necessary or appropriate;
(c) Copy of the certificate of authority to transact business
in any jurisdiction in which the nature of Borrower's activities require it to
register as a foreign corporation in such jurisdiction;
(d) Copy of the articles of incorporation of the Borrower,
certified by the Secretary of State of the State of Delaware;
(e) Copies of the bylaws of Borrower, certified by the
Secretary of Borrower;
(f) Copies of a resolution of the board of directors of
Borrower, approving the Loan and the execution and delivery of the Loan
Documents to which it is a party, certified by the Secretary of the Borrower;
(g) A good standing certificate for the Borrower from the
Secretary of State of the State of Delaware, and of each jurisdiction in which
it transacts business;
(h) Legal opinion of Paul, Hastings, Janofsky & Walker LLP,
counsel to Borrower, in form reasonably acceptable to Lender's counsel;
(i) UCC judgment and Federal tax lien searches for Borrower in
such jurisdictions as Lender may request;
(j) Signature and incumbency certificates with respect to each
officer executing the Loan Documents on behalf of Borrower;
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(k) Such other documents or certificates as Lender shall
reasonably require.
SECTION 3.02. Conditions Precedent to any Subsequent Advance. The
obligation of the Lender to make any subsequent advance under the Loan shall be
subject to the satisfaction of the following additional conditions precedent on
or before the date of the request for the funding of such Advance:
(a) the Lender shall have received a certificate signed by
Borrower, dated the date of the request for the funding of the Advance, stating
that, as of such date, the following statements are true:
(i) the representations and warranties contained in the
Loan Documents are correct on and as of such date;
(ii) no event has occurred and is continuing, or would
result from the Loan, which constitutes an Event of Default or would constitute
an Unmatured Event of Default, and
(iii) the number of Barns being acquired with such Advance
and the serial numbers of such Barns.
(b) the Lender shall have received such other approvals,
opinions or documents as the Lender may reasonably request.
SECTION 3.03. Priority of Security Interests. At the time of the
First Advance, the security interests in the Collateral in favor of Lender to
secure the Loan shall be perfected and a first priority on the Collateral
SECTION 3.04. Condition Precedent to Credit Facility B. Lender has
no obligation to advance any funds under Credit Facility B and Borrower has no
right to request the advance of any funds under Credit Facility B unless
Borrower receives from Lender [***].
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of Borrower. Borrower
represents and warrants to Lender as follows:
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 7
(a) The Borrower is duly incorporated, validly existing and in
good standing under the laws of the State of Delaware and is qualified to do
business as a foreign corporation and in good standing in each jurisdiction
where such qualification is necessary.
(b) The execution, delivery and performance of the Loan
Documents to which it is a party are within Borrower's corporate powers, have
been authorized by all necessary corporate action, does not contravene its (i)
articles of incorporation or bylaws or (ii) any law or regulation binding on or
affecting it, or any contractual restriction binding on or affecting it and
(iii) does not result in or require the creation of any lien, security interest
or other charge of encumbrance (other than pursuant to the Loan Documents) upon
or with respect to any of its properties.
(c) No authorization, consent or approval or other action by,
and no notice to or registration or filing with, any governmental authority or
regulatory body is required for the due execution, delivery and performance by
Borrower of any Loan Document to which it is a party.
(d) The Agreement and all of the other Loan Documents to which
it is a party are legal, valid and binding obligations of the Borrower
enforceable against Borrower in accordance with their respective terms.
(e) There is no material pending, or to the best of Borrower's
knowledge, threatened action or proceeding at law or in equity before any court,
governmental agency, or arbitrator affecting the Borrower.
(f) The Borrower (i) is not party to any indenture, agreement
or other instrument or subject to any restriction materially adversely affecting
its business, properties, assets, operations or conditions (financial or
otherwise), and (ii) is not in material default in the performance, observance
or fulfillment of any of the obligations, covenants or conditions contained in
any material agreement or instrument to which it is a party.
(g) The Borrower has obtained all material licenses, permits,
franchises, or other governmental authorizations reasonably necessary for the
ownership of its properties and the conduct of its business. The Borrower
possesses adequate licenses, patents, patent applications, copyrights,
trademarks, trademark applications, and trade names to continue its business as
heretofore conducted by it, without any conflict with the rights of any other
person or entity.
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(h) The Borrower and its subsidiaries have not received any
communication from any Person that asserts that Star's Intellectual Property is
infringing the rights of any Person.
ARTICLE V.
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as any Obligation
shall remain unpaid Borrower will, unless the Lender shall otherwise consent in
writing:
(a) Maintain Corporation. Do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate existence,
rights and franchises and comply with all applicable laws; continue to conduct
and operate its business substantially as conducted and operated during the
present and preceding calendar year; at all times maintain, preserve and protect
all franchises and trade names and preserve all the remainder of its property
used or useful in the conduct of its business and keep the same in good repair,
working order and condition; and from time to time, make, or cause to be made,
all needed and proper repairs, renewals, replacements, betterments and
improvements thereto so that the business carried on in connection therewith may
be properly and advantageously conducted at all times.
(b) Compliance with Laws, Agreements, Etc. Comply (i) in all
material respects with all applicable laws, rules, regulations, and orders, such
compliance to include, without limitation, paying before the same becomes
delinquent all taxes, assessments and governmental charges imposed upon it or
upon its property except to the extent contested in good faith, and strictly
with all Loan Documents, and other material agreements and all governmental
regulatory requirements.
(c) Insurance. Keep its insurable properties adequately
insured and maintain (i) insurance against fire and other risks customarily
insured against by companies engaged in the same or a similar business, (ii)
necessary worker's compensation insurance, (iii) public liability, and (iv) such
other insurance as may be required by law or as may be reasonably required in
writing by the Lender, all of which insurance shall be in such amounts,
containing such terms, in such form, for such purposes and written by such
companies as may be satisfactory to the Lender. Borrower will deliver evidence
satisfactory to the Lender that such insurance has been so procured and, with
respect to Borrower's casualty insurance, an endorsement to reflect that Lender
is a loss payee. If Borrower fails to maintain satisfactory insurance as herein
provided, the Lender shall have the option to do so, and Borrower agrees to
repay the Lender on demand, with interest at the rate of [***] per annum above
the Prime Rate, on all amounts so expended by the Lender.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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SECTION 5.02. Negative Covenants. So long as any amount under the
Note shall remain unpaid, Borrower will not, without the prior written consent
of the Lender:
(a) Liens, Etc. Create or suffer to exist, any lien, security
interest or other charge or encumbrance, or any other type of preferential
arrangement, upon or with respect to any of the Collateral whether now owned or
hereafter acquired, or assign, any right to receive income, in each case to
secure any Debt of any Person, other than as created or assigned under the Loan
Documents.
(b) Debt. Create or suffer to exist any Debt other than Debt
under the Loan Documents, and other Debt entered into in the ordinary course of
business.
(c) Mergers, Etc. Merge or consolidate with or into, or
convey, transfer, lease or otherwise dispose of (whether in one transaction or
in a series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to, or acquire all or substantially all of the
assets of, any person or entity.
(d) Sales, Etc. of Assets. Sell, lease, transfer or otherwise
dispose of any of its assets or any of its interests therein other than in the
normal course of its business without the prior written consent of Lender (which
consent may be conditioned upon using the proceeds of such sale or other
disposition to prepay the Notes).
(e) Maintenance of Licenses and Authorizations. Take or fail
to take any action which shall result directly or indirectly in the suspension,
revocation or termination of any license, franchise or other authorization held
by Borrower and necessary for its operations.
(f) Extension of Credit. Make loans, advances or extensions of
credit to any Person, except for sales on open account and in the ordinary
course of business.
(g) Guarantee Obligations. Guarantee or otherwise in any way
become or be responsible for obligations of any other Person, whether by
agreement to purchase the indebtedness of any other Person, or agreement for the
furnishing of funds of any other Person through the purchase of goods, supplies
or services (or by way of stock purchase, capital contribution, advance or loan)
for the purpose of paying or discharging the indebtedness of any other Person,
or otherwise, except for the endorsement of negotiable instruments in the
ordinary course of business for collection.
(h) Prepayment of Debt. Except as provided for in Section
2.06, make any payment in reduction of the principal amount of any Debt (other
than Debt evidenced by the
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<PAGE> 10
Notes) in advance of the scheduled maturity of such Debt except in the ordinary
course of business.
ARTICLE VI.
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following events
("Events of Default") shall occur and be continuing:
(a) Borrower shall fail to pay: (i) the principal of the Note
when due, or (ii) interest on, the Note when due and such failure continues for
more than 60 days after written notice from the Lender to the Borrower; or
(b) Lender elects to terminate the Master Agreement pursuant
to the provisions of Section 11(b) (c) (d) or (e) thereof; or
(c) A material cessation or stoppage by Star to deliver to any
B&W Affiliates the quantities of Star Curea Tobacco ordered for such year.
ARTICLE VII.
SECURITY
SECTION 7.01 Composition of the Collateral. The property in which
a lien or security interest is granted pursuant to the provisions of the Loan
Documents is herein collectively called the "Collateral." The Collateral,
together with all of Borrower's other property of any kind held by the Lender,
shall stand as one general, continuing collateral security for all Obligations
and may be retained by the Lender until all Obligations have been satisfied in
full.
SECTION 7.02 Rights in Property Held by the Lender. As further
security for the prompt satisfaction of all Obligations, the Borrower hereby
assigns, transfers and sets over to the Lender all of its right, title and
interest in and to, and grants the Lender a lien on and a security interest in,
all amounts that may be owing from time to time by the Lender to Borrower in any
capacity, including, but without limitation, any account with the Lender, which
lien and security interest shall be independent of any right of set-off which
the Lender may have.
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ARTICLE VIII.
MISCELLANEOUS
SECTION 8.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Note, nor consent to any departure by
Borrower therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Lender, and then such waiver or consent shall be
effective only in the specific instances and for the specific purpose for which
given.
SECTION 8.02. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telegraphic communication)
and shall be effective when delivered or when mailed, postage prepaid, by United
States certified or registered mail, return receipt requested, addressed as
follows:
If to Borrower:
Star Scientific, Inc.
16 South Market Street
Petersburg, Virginia 23803
Attension: Jonnie R. Williams
with a copy to:
Paul, Hastings, Janofsky & Walker
1299 Pennsylvania Avenue, N.W.
Tenth Floor
Washington, D.C. 20004-2400
Attention: Paul L. Perito, Esq.
Telecopier No.: (202) 508-9700
and
Paul, Hastings, Janofsky & Walker
600 Peachtree Street, Suite 2400
Atlanta, Georgia 30308
Attention: W. Andrew Scott, Esq.
Telecopier No. (404) 815-2424
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<PAGE> 12
And if to the Lender, to:
Brown & Williamson Tobacco Corporation
1500 Brown & Williamson Tower
Louisville, KY 40232
Attention: [***]
with a copy to:
Wiley, Rein & Fielding
1776 K Street, N.W.
Washington, D.C. 20006
Attention: Stuart F. Carwile
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party.
SECTION 8.03. No Waiver; Remedies. No failure on the part of the
Lender to exercise, and no delay in exercising, any right under any Loan
Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under any Loan Document preclude any other or further
exercise thereof or the exercise of any other right. The remedies provided in
the Loan Documents are cumulative and not exclusive of any remedies existing
law, in equity or otherwise.
SECTION 8.04. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with generally
accepted accounting principles consistently applied, except as otherwise stated
herein.
SECTION 8.05. Right of Set-Off. Upon the occurrence and during the
continuance of any Event of Default the Lender is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set-off and
apply any and all other indebtedness at any time owing by the Lender to or for
the credit or the account of the Borrower against any and all of the
Obligations, irrespective of whether or not the Lender shall have made any
demand respecting such Obligations and although such Obligations may be
unmatured. The rights of the Lender under this Section are in addition to other
rights and remedies (including, without limitation, other rights of set-off)
which the Lender may have.
SECTION 8.06 Binding Effect; Governing Law. This Agreement shall
be binding upon and inure to the benefit of Borrower and the Lender and their
respective successors and assigns, except that Borrower shall not have the right
to assign its rights hereunder or any interest herein without the prior written
consent of the Lender. This Agreement, the Note and the other Loan Documents
(except where otherwise expressly so stated) shall be governed by, and construed
in accordance with, the laws of the State of Virginia.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 13
IN WITNESS WHEREOF, the Borrower and the Lender have caused this Loan
Agreement to be executed by their respective officers thereunto duly authorized,
all as of the date first above written.
STAR SCIENTIFIC, INC.
By:
-------------------------------
Name:
Title:
BROWN & WILLIAMSON TOBACCO
CORPORATION
By:
-------------------------------
Name:
Title:
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<PAGE> 1
EXHIBIT 10.34
SECURITY AGREEMENT
This SECURITY AGREEMENT (this "Agreement") is dated as of December 16,
1999 between STAR SCIENTIFIC, INC., a Delaware corporation ("Debtor"), and BROWN
& WILLIAMSON TOBACCO CORPORATION, a Delaware corporation ("Lender").
W I T N E S S E T H :
WHEREAS, Debtor has entered into a Loan Agreement dated October 12,
1999 (as the same may hereafter be amended, restated, supplemented or otherwise
modified from time to time, the "Loan Agreement") with Lender providing for a
loan in the amount of $13,200,000 under Credit Facility A, and subject to the
fulfillment of certain conditions, a subsequent loan in the amount of $8,800,000
under Credit Facility B (collectively, the "Loan") to be made to Debtor by
Lender;
WHEREAS, it is a condition precedent to the obligations of the Lender
under the Loan Agreement that Debtor shall have granted the Liens contemplated
by this Agreement;
WHEREAS, Star is engaged in two lines of business (i) the production
and sale of discount brand cigarettes (the "Discount Cigarette Business") and
(ii) the acquisition of tobacco which has been or will be specially cured to
reduce the nitrosamines levels ("Low TSNA Tobacco") and the development of a low
nitrosamine cigarette using the Low TSNA Tobacco (the "Star Curea Business"),
and
WHEREAS, Star and Lender have agreed that Star will grant Lender a
security interest in certain of the assets comprising the Star Curea Business.
NOW, THEREFORE, in consideration of the foregoing and in order to
induce Lender to make the Loan contemplated by the Loan Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Debtor hereby agrees with Lender as follows:
SECTION 1. Definitions
1.1 Certain Defined Terms. Unless otherwise defined herein, all
capitalized terms used herein shall have the respective meanings given to such
terms in the Loan Agreement or in Exhibit A annexed hereto.
1.2 Other Definition Provisions. References to "Sections",
"subsections", "Exhibits" and "Schedules" shall be to Sections, subsections,
Exhibits and Schedules, respectively, of this Agreement unless otherwise
specifically provided. Any of the terms defined in Exhibit A may, unless the
context otherwise requires, be used in the singular or the plural depending on
the reference. All references to statutes and related regulations shall include
(unless otherwise specifically provided herein) any amendments of same and any
successor statutes and regulations.
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<PAGE> 2
SECTION 2. Grant of Security Interests
In order to secure the prompt and complete payment and performance of
the Secured Obligations in accordance with the terms thereof, Debtor hereby
grants to Lender, a purchase money continuing first priority security interest
in and to all right, title and interest of Debtor in the following property,
whether now owned or existing or hereafter acquired or arising and regardless of
where located (all being collectively referred to as the "Collateral"):
(A) Barns;
(B) Leaf Inventory;
(C) Proceeds of all or any of the property described in subparts
(A) - (B) above.
SECTION 3. Security for Secured Obligations
This Agreement secures the prompt and complete payment and performance
of the obligations of Debtor hereunder and under the Loan Agreement and Other
Loan Documents to which it is a party, now or hereafter existing, and all
renewals, extensions and restructurings of any of the above (all such debts,
obligations and liabilities of Debtor being collectively referred to herein as
the "Secured Obligations".
SECTION 4. Representations and Warranties
Debtor represents and warrants as follows:
4.1 Binding Obligation. This Agreement constitutes the legal, valid
and binding obligation of Debtor, enforceable against Debtor in accordance with
its terms.
4.2 Location of Equipment and Inventory. All of the Equipment and
Inventory is located at the places specified on Schedule I. The Barns comprising
a part of the Equipment are mobile and will be located in one or more of the
following states: Virginia, North Carolina, Georgia and Florida. Debtor will
annually and, upon request from Lender, promptly within ten (10) Business Days
inventory the Collateral and provide Lender with the current location and serial
numbers of the Barns. Upon the occurrence of an Event of Default, Debtor will
within ten (10) Business Days assemble the Collateral at a location designated
by Lender.
4.3 Ownership of Collateral. Debtor owns the Collateral free and
clear of any Lien.
4.4 Office Locations; Fictitious Names. The principal place of
business, the chief executive office and the office where Debtor keeps its books
and records are located at the places specified in subpart A of Schedule I. All
other locations of Collateral are specified in subpart B of Schedule I. If any
location specified on Schedule I is not owned by Debtor, the name and address of
the owner of such property is set forth opposite such location. Debtor
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does not do business and has not done business during the past five years under
any corporate name, trade-name or fictitious business name except as disclosed
on Schedule II.
4.5 Perfection. This Agreement creates a valid first priority
security interest in the Collateral, securing the payment of the Secured
Obligations.
SECTION 5. Further Assurances; Covenants
5.1. Other Documents and Actions. Debtor will, from time to time,
promptly execute and deliver all further instruments and documents and take all
further action that may be necessary, or that Lender may reasonably request, in
order to perfect and protect the Security Interests granted or purported to be
granted hereby or to enable Lender to exercise and enforce its rights and
remedies hereunder with respect to any Collateral. Without limiting the
generality of the foregoing, Debtor will: (a) execute and file such financing or
continuation statements, or amendments thereto, and such other instruments or
notices, as may be necessary, or as Lender may reasonably request, in order to
perfect and preserve the Security Interests granted or purported to be granted
hereby; (b) during normal business hours and, prior to the occurrence of an
Event of Default, upon two (2) Business Days' prior notice from Lender, allow
inspection of the Collateral by Lender or persons designated by Lender, and (c)
upon Lender's request, appear in and defend any action or proceeding that may
affect Debtor's title to, or the Security Interests of the Lender in, the
Collateral.
5.2 Lender Authorized. Debtor hereby authorizes Lender to file one
or more financing or continuation statements, and amendments thereto, relating
to all or any part of the Collateral and reflecting the terms of this Agreement
without the signature of Debtor to the extent permitted by law.
5.3 Corporate or Name Change. Without the prior written consent of
Lender, Debtor will not change Debtor's name.
5.4 Business Locations. Debtor will give Lender thirty (30) days
prior written notice of any change in Debtor's chief place of business, of any
new location of business, and of any new location for any of the Collateral.
With respect to any new location (which in any event shall be within the
continental United States), Debtor will execute such documents and take such
actions as Lender deems necessary to perfect and protect the Security Interests.
5.5 Instruments. Upon the occurrence and during the continuance of
an Event of Default (i) Debtor will deliver and pledge to Lender all Instruments
duly endorsed and accompanied by duly executed instruments of transfer or
assignment, all in form and substance satisfactory to Lender and (ii) Debtor
will mark conspicuously all chattel paper with a legend, in form and substance
reasonably satisfactory to Lender, indicating that such chattel paper is subject
to the Security Interests and will, upon Lender's request from time to time,
deliver possession thereof to Lender.
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5.6 Certificates of Title. Upon Lender's request, Debtor shall
promptly deliver to Lender any and all certificates of title, applications for
title or similar evidence of ownership of all Equipment and shall cause Lender
to be named as lienholder on any such certificate of title or other evidence of
ownership. Debtor shall not permit any Equipment to become a fixture to real
estate.
5.7 Collateral Description. Debtor will furnish to Lender, from time
to time, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as Lender
may reasonably request, all in reasonable detail.
5.8 No Transfer/Assignment. Debtor shall not sell, assign, transfer,
convey or otherwise dispose of any of the Collateral other than immaterial
dispositions in the ordinary course of business of items replaced with items of
equal or greater value, nor create, incur or permit to exist any pledge,
mortgage, lien, charge, encumbrance or security interest in or upon any of the
Collateral except in favor of the Lender. Notwithstanding the foregoing, so long
as no Event of Default (which when used herein shall have the meaning ascribed
to such term in the Loan Agreement) has occurred and is continuing, Debtor shall
have the exclusive, nontransferable right and license to use the Intellectual
Property and the exclusive right to grant to other Persons licenses and
sublicenses with respect to the Intellectual Property.
5.9 Taxes. Debtor shall, at its cost and expense, pay when due all
taxes, charges and assessments against any of the Collateral, except those
contested in good faith by appropriate proceedings with timely payment of any
amounts due prior to delinquency, and all rent due on any and all premises where
the Collateral may be located.
5.10 Defense of Claims. Debtor shall, at its cost and expense, defend
against all actions, claims and demands affecting the Collateral, the Security
Interest or Debtors' or Lender's right, title, interest or benefit in or to the
Collateral; Debtors shall give Lender notice of any such action, claim or demand
promptly and in any event within five (5) days;
5.11 Maintenance. Debtor shall maintain the Collateral in good
condition, ordinary wear and tear resulting from its intended use excepted.
SECTION 6. Lender Appointed Attorney-in-Fact
Debtor hereby irrevocably appoints Lender as Debtor's attorney-in-fact,
with full authority in the place and stead of Debtor and in the name of Debtor,
Lender or otherwise, from time to time after the occurrence and during the
continuance of an Event of Default in Lender's discretion to take any action and
to execute any instrument that Lender may deem necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation:
(a) to obtain and adjust insurance required to be paid to Lender;
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<PAGE> 5
(b) to ask, demand, collect, sue for, recover, compound, receive and
give acquittance and receipts for moneys due and to become due under or in
respect of any of the Collateral;
(c) to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clauses (a) and (b)
above;
(d) to file any claims or take any action or institute any
proceedings that Lender may reasonably deem necessary for the collection of any
of the Collateral or otherwise to enforce the rights of Lender with respect to
any of the Collateral;
(e) to pay or discharge taxes or Liens, levied or placed upon or
threatened in writing against the Collateral, the legality or validity thereof
and the amounts necessary to discharge the same to be determined by Lender in
its sole discretion;
(f) to sign and endorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, assignments, verifications and
notices in connection with Accounts and other documents (including without
limitation financing statements, continuation statements and other documents
necessary or advisable to perfect the Security Interests) relating to the
Collateral; and
(g) generally to sell, transfer, pledge, make any agreement with
respect to or otherwise deal with any of the Collateral as fully and completely
as though Lender were the absolute owner thereof for all purposes, and to do, at
Lender's option and Debtor's expense, at any time or from time to time, all acts
and things that Lender reasonably deems necessary to protect, preserve or
realize upon the Collateral.
Debtor hereby ratifies and approves all acts of Lender made or taken pursuant to
this Section 7. Neither Lender nor any person designated by Lender shall be
liable for any acts or omissions or for any error of judgment or mistake of fact
or law excluding gross negligence and willful misconduct. This power, being
coupled with an interest, is irrevocable so long as this Agreement shall remain
in force.
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<PAGE> 6
SECTION 7. Remedies
If any Event of Default shall have occurred and be continuing, Lender
may exercise in respect of the Collateral, in addition to all other rights and
remedies provided for herein or otherwise available to it, all the rights and
remedies of a secured party on default under the UCC (whether or not the UCC
applies to the affected Collateral) and also may: (a) require Debtor to, and
Debtor hereby agrees that it will, at its expense and upon request of Lender
forthwith, assemble all or part of the Collateral as directed by Lender and make
it available to Lender at a place to be designated by Lender; (b) without notice
or demand or legal process, except as otherwise required by law, enter upon any
premises of Debtor and take possession of the Collateral; and (c) without notice
except as specified below, sell the Collateral or any part thereof in one or
more parcels at public or private sale, at the Lender's offices or elsewhere, at
such time or times, for cash, on credit or for future delivery, and at such
price or prices and upon such other terms as Lender may deem commercially
reasonable. Debtor agrees that, to the extent notice of sale shall be required
by law, at least ten (10) days notice to Debtor of the time and place of any
public sale or the time after which any private sale is to be made shall
constitute commercially reasonable notification. At any sale of the Collateral,
if permitted by law, Lender may bid (which bid may be, in whole or in part, in
the form of cancellation of indebtedness) for the purchase of the Collateral or
any portion thereof for the account of Lender. Lender shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given. To
the extent permitted by law, Debtor hereby specifically waives all rights of
redemption, stay or appraisal which it has or may have under any law now
existing or hereafter enacted.
SECTION 8. License of Intellectual Property
[***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
-6-
<PAGE> 7
SECTION 9. Limitation on Duty of Lender with Respect to Collateral
Lender shall have no duty with respect to any Collateral in its
possession or control (or in the possession or control of any agent or bailee of
Lender) or with respect to any income thereon or the preservation of rights
against prior parties or any other rights pertaining thereto except for Lender's
gross negligence or willful misconduct. Lender shall not be liable or
responsible for any loss or damage to any of the Collateral, or for any
diminution in the value thereof, by reason of the act or omission of any
warehouseman, carrier, forwarding agency, consignee or other agent or bailee
selected by Lender in good faith.
SECTION 10. Application of Proceeds
Upon the occurrence and during the continuance of an Event of Default,
the proceeds of any sale of, or other realization upon, all or any part of the
Collateral and any cash held in any of Debtor's accounts shall be applied:
first, to all fees, costs and expenses incurred by Lender with respect to the
Loan Agreement, the Other Loan Documents or the Collateral; second, to accrued
and unpaid interest on the Secured Obligations (including any interest which but
for the provisions of the Bankruptcy Code, would have accrued on such amounts);
third, to the principal amounts of the Secured Obligations outstanding; and
fourth, the surplus, if any, to Debtor.
SECTION 11. Expenses
Upon the occurrence and during the continuance of any Event of Default,
all costs and expenses (including attorneys' fees, legal expenses and court
costs) incurred by Lender in enforcing or protecting the Security Interests or
any of its remedies under this Agreement shall be payable by Debtor on demand,
shall constitute Secured Obligations, shall bear interest until paid at the
highest rate provided in the Loan Agreement and shall be secured by the
Collateral.
SECTION 12. Termination of Security Interests: Release of Collateral
Upon payment in full of all Secured Obligations, the Security Interests
shall terminate and all rights to the Collateral shall revert to Debtor. Upon
such termination of the Security Interests or release of any Collateral, Lender
will, execute and deliver to Debtor such documents as Debtor shall reasonably
request to evidence the termination of the Security Interests or the release of
such Collateral, as the case may be.
-7-
<PAGE> 8
SECTION 13. Reinstatement.
Notwithstanding the provisions of Section 12, this Agreement shall
continue to be effective or be reinstated, as the case may be, if at any time
any amount received by Lender in respect of the Secured Obligations is rescinded
or must otherwise be restored or returned by Lender upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of any Debtor or upon the
appointment of any intervenor or conservator of, or trustee or similar official
for any Debtor or any substantial part of its properties, or otherwise, all as
though such payments had not been made.
SECTION 14. Notices
All notices, approvals, requests, demands and other communications
hereunder shall be given in accordance with the notice provisions of the Loan
Agreement.
SECTION 15. Successors and Assigns
This Agreement is for the benefit of Lender and its successors and
assigns, and in the event of an assignment of all or any of the Secured
Obligations as permitted under the Loan Agreement, the rights hereunder, to the
extent applicable to the Secured Obligations so assigned, may be transferred
with such Secured Obligations. This Agreement shall be binding on Debtor and its
successors and assigns.
SECTION 16. Changes in Writing
No amendment, modification, termination or waiver of any provision of
this Agreement or consent to any departure by Debtor therefrom, shall in any
event be effective without the written concurrence of Lender and Debtor.
SECTION 17. Applicable Law
Except as otherwise provided for herein, this Agreement shall be
governed by, and shall be construed and enforced in accordance with, the
internal laws of the State of Virginia, without regard to conflicts of laws
principles.
-8-
<PAGE> 9
SECTION 18. Failure or Indulgence Not Waiver: Remedies
Cumulative
No failure or delay on the part of Lender in the exercise of any power,
right or privilege hereunder shall impair such power, right or privilege or be
construed to be a waiver of any default or acquiescence therein, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or any other right, power or privilege. All rights
and remedies existing under this Agreement are cumulative to, and not exclusive
of, any rights or remedies otherwise available.
SECTION 19. Headings
Section and subsection headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose or be given any substantive effect.
SECTION 20. Counterparts
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument and any of the
parties hereto may execute this Agreement by signing any such counterpart.
[SIGNATURE PAGE FOLLOWS]
-9-
<PAGE> 10
[SIGNATURE PAGE FOR SECURITY AGREEMENT]
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day first written above.
STAR SCIENTIFIC, INC. BROWN & WILLIAMSON TOBACCO
CORPORATION
By: By:
------------------------------ -----------------------------
Name: Name:
Title: Title:
<PAGE> 1
EXHIBIT 10.35
SUPPLY AGREEMENT FOR STAR SCIENTIFIC BLEND
THIS AGREEMENT entered into and effective as of this 1st day of
January, 2000 by and between BROWN & WILLIAMSON TOBACCO CORPORATION, a Delaware
corporation with its principal office at 1500 Brown & Williamson Tower,
Louisville, Kentucky 40202 (hereinafter "B&W"), and STAR TOBACCO AND
PHARMACEUTICALS, INC., a Virginia corporation having its principal address at 16
South Market Street, Petersburg, Virginia (hereinafter "Star") (individually a
"Party" and collectively the "Parties").
W I T N E S S E T H:
WHEREAS, B&W and Star are in the business of manufacturing cigarettes,
including the manufacture and processing of component parts of cigarettes; and
WHEREAS, blended cut tobacco is an important component of Star's
cigarette products; and
WHEREAS, Star is willing to pay B&W to acquire and blend, and B&W
agrees to acquire and blend for Star, cut tobacco material in accordance with
the terms and conditions of this agreement (the "Agreement"); and
WHEREAS, B&W will provide additional services to Star, including the
procurement of leaf stocks, blend formulation and administrative services;
NOW THEREFORE, in consideration of the mutual representations,
warranties and covenants and subject to the terms and conditions herein
contained, the Parties hereto agree as follows:
<PAGE> 2
1. DEFINITIONS
1.01 "Star Scientific Blend" as used herein means blended tobacco
prepared by B&W which B&W may supply to Star from time to time hereunder, having
the Specifications and properties set forth by Star in Appendix A attached
hereto and made a part hereof, as revised form time to time by written agreement
of the Parties.
1.02 "B&W's Factory" shall mean B&W's manufacturing facility located in
Macon, Georgia.
1.03 "Specifications" shall mean the properties and ingredients of Star
Scientific Blend as set forth in Appendix "A."
1.04 "Blend" or any other form of the word shall mean the processing of
tobacco materials into Star Scientific Blend.
1.05 "Order(s)" shall mean Star's written instructions, to B&W to Blend
tobacco Materials into stated quantities of Star Scientific Blend.
1.06 "Materials" shall mean casings, flavorings, and other materials
normally utilized in cut tobacco processing.
1.07 "Cigarette Manufacturing Agreement" means an agreement between
Star and B&W dated January 1, 2000 for the manufacture of cigarettes for Star
by B&W.
- 2 -
<PAGE> 3
1.08 "Affiliated B&W Companies" means B&W and all other domestic and
international companies in which British American Tobacco, p.l.c. owns, directly
or indirectly, a thirty percent (30%) or greater equity interest.
2. SUPPLY OF STAR SCIENTIFIC BLEND
During the term of this Agreement, B&W agrees to acquire and blend cut
tobacco pursuant to Star's specifications and sell Star Scientific Blend to Star
and Star agrees to accept and purchase Star Scientific Blend from B&W in
accordance with the terms set forth herein.
All Orders under this Agreement shall be submitted to B&W at B&W's
Factory and shall set forth the type of Star Scientific Blend (i.e., non-menthol
or menthol), the quantity in pounds of each type to be purchased, and the
general shipping instructions including a destination address. The terms and
conditions of this Agreement: (i) shall be deemed incorporated into and made a
part of each Order, and (ii) shall not be modified, supplemented, or superseded
by any terms or conditions in a purchase order or acknowledgment or acceptance
thereof, except as expressly agreed to in a writing separate from such purchase
order signed by authorized representatives of both Parties and specifying the
extent to which such purchase order overrides the terms and conditions of this
Agreement. B&W shall accept all Orders that conform to the terms of this
Agreement which are consistent with the Firm Commitment issued in accordance
with paragraph 3.02 provided that Star is not in default under this Agreement.
Star will utilize the Star Scientific Blend [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 3 -
<PAGE> 4
[***].
3. PRICES, INVOICES, FORECASTING
3.01 The price for Star Scientific Blend for delivery on or before
December 31, 2000 shall be as set forth in Schedule A appended hereto.
Subsequent to the Year 2000, prices shall be determined on an annual
basis and appended hereto as Schedule A, on or before November 1 of the
preceding year to reflect changes in stock availability, market conditions,
buying expense, anticipated processing yields, and other factors that effect the
overall cost of the Star Scientific Blend. These prices include packaging in
mutually acceptable containers and are [***].
Prices shall be subject to change if the Star Scientific Blend or
Materials are changed or if Star requires additional blends other than those set
forth in Appendix A. In the event of a change in the importation duty rates
and/or the Tariff Rate Quota (TRQ) system or changes in other costs to import
tobacco into the United States which is used for the Star Scientific Blend, B&W
reserves the right to re-negotiate selling prices.
Identification of the goods to the contract shall occur and therefore
title and risk of loss will transfer to Star when they are placed in the hands
of the carrier. [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 4 -
<PAGE> 5
[***]. The container and shipping pallets will remain the property of B&W. Star
shall return the container and shipping pallets to B&W's Factory or other
designated location within thirty (30) days of receipt at Star's expense. The
returned containers and pallets shall be reasonably clean, neatly stacked, and
properly secured.
3.02 Within thirty (30) days following the signing of this Agreement
and on or before the first workday of each following calendar quarter,
throughout the duration of this Agreement, Star shall issue a forecast, by
quarter, of the anticipated requirements for Star Scientific Blend for the next
twelve months, for shipment to Star under the terms of this Agreement.
Additionally, Star shall provide B&W by July 1st of each year a Firm Commitment
for its requirements for Star Scientific Blend for the next calendar year (the
"Firm Commitment") and an estimate of the requirements for Star Scientific Blend
for the calendar year following the Firm Commitment.
[***]
[***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 5 -
<PAGE> 6
[***]
3.03 Star will pay B&W for all Star Scientific Blend [***], by wire
transfer to the account of B&W as follows:
[***]
3.04 In the event Star does not timely pay any amounts due B&W pursuant
to this Agreement, Star shall pay late charges on such past due amounts at a
monthly rate of [***] (or, if less, the maximum interest rate then allowed
under applicable law). If any invoice to Star under this Agreement or the
Cigarette Manufacturing Agreement for the manufacture of cigarettes for Star
by B&W is more than seven (7) days past due, [***].
3.05 B&W hereby reserves a vendor's lien purchase money security
interest in the Star Scientific Blend sold to Star to secure the payment of the
purchase price of the Star Scientific Blend as provided for in this Agreement.
Star will execute such additional instruments as B&W may reasonably request in
order to perfect the purchase money security interest hereby reserved.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 6 -
<PAGE> 7
4. TERM
4.01 The initial term of this Agreement shall terminate on [***] and
thereafter it shall automatically renew for successive one-year renewal terms,
subject to the right of either Star or B&W to terminate this Agreement for any
reason on at least one (1) year's prior written advance notice to the other
Party but such notice may not be effective until [***]. Notwithstanding the
foregoing provisions of this paragraph, the provisions of Paragraphs 5, 7 and 9
shall survive any expiration or earlier termination of this Agreement.
4.02 This Agreement may also be terminated by either Party in the event
of any material breach of any of the terms hereof, if the offending Party, after
having been given written notice of such breach, shall fail to cure such breach
within [***] of receipt of such notice. In such event, the non-offending Party
may elect to give notice of termination of this Agreement, effective as of the
date provided in such notice, but no later than [***] after the expiration of
the cure period. Failure to so terminate within such [***] period shall be
deemed to be a waiver only of the specific event of breach with respect to which
such notice of breach was given.
4.03 [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 7 -
<PAGE> 8
[***]
5. FAILURE TO MEET STAR SPECIFICATIONS
5.01 B&W will certify that each shipment of Star Scientific Blend meets
the Specifications as outlined in Appendix A hereof.
5.02 Star may, at its option, reject any shipment which, in Star's
reasonable opinion is not suitable for use, such reasons for rejection
including, but not limited to, contamination such as mold, odor, padding,
unacceptable particle size or foreign matter or which does not meet the
Specifications as represented by a proper analysis of the shipment; or Star may
accept the shipment at a mutually agreed upon price not to exceed the then
existing price for Star Scientific Blend. B&W may, in its sole discretion,
dispose of the rejected material in any manner it elects and shall bear the cost
of disposal. Star shall not return any rejected material until B&W is notified
in writing by Star concerning the reason for rejection, and B&W shall have had
the opportunity to inspect the rejected material. B&W's liability in the event
of a valid rejection of a shipment shall be limited to the removal and
replacement of the rejected product with product conforming to Star's
Specifications without additional cost to Star.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 8 -
<PAGE> 9
EXCEPT AS EXPRESSLY PROVIDED HEREIN, B&W MAKES NO REPRESENTATIONS OR
WARRANTIES OF ANY KIND TO STAR OR ITS CUSTOMERS, INCLUDING BUT NOT LIMITED TO,
ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
FURTHERMORE, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE RESPONSIBLE FOR
INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, OR EXEMPLARY DAMAGES
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY ACTS OR OMISSIONS
ASSOCIATED THEREWITH OR RELATING TO THE USE OF THE STAR SCIENTIFIC BLEND
FURNISHED, WHETHER SUCH CLAIM IS BASED ON BREACH OF WARRANTY, CONTRACT, TORT, OR
OTHER DAMAGES OR WHETHER ANY OTHER REMEDY PROVIDED HEREIN FAILS.
6. STAR ACCESS TO B&W'S FACILITIES
Star shall, on reasonable notice and during such periods that B&W is
blending Star Scientific Blend for Star, have access to those areas of the B&W's
Factory reasonably necessary to allow Star to observe and inspect B&W's
processing of Star Scientific Blend.
7. CONFIDENTIALITY
7.01 Each Party shall use its reasonable efforts to insure that all
information with respect to confidential information of the other Party is kept
confidential.
7.02 The respective obligations of Star and B&W under this Paragraph 9
shall not apply to any information that (i) is or becomes public without breach
of this Agreement, (ii) is developed independently by the Party receiving the
information without use of any confidential
- 9 -
<PAGE> 10
information disclosed by the other Party under this Agreement, or (iii) is in
the possession of the Party receiving the information prior to its receipt of
the information, or (iv) becomes known to the Party receiving the information
from a source other than the disclosing Party.
8. FORCE MAJEURE
8.01 B&W shall not be liable to Star by reason of delay for
non-performance, if and so long as such delay or non-performance is caused by
occurrences beyond the reasonable control of B&W (hereinafter "Force Majeure
Event") including, but not limited to the following: acts of God; expropriation
or confiscation of facilities; compliance with any regulation, order or law of
any governmental authority; shortage or unavailability of materials, equipment
or labor through no fault of B&W; criminal acts; acts of war, rebellion,
insurrection or sabotage, or damage resulting therefrom; fires, floods,
explosions, and washouts; accidents, epidemics, breakdowns, riots, strikes or
other industrial disturbances, whether direct or indirect; or any cause, whether
or not of the same class or kind as those specifically named above, not within
the reasonable control of the Party whose performance is affected. In the event
a Force Majeure Event continues for more than sixty (60) days), Star may in its
sole discretion, terminate the affected Order, or may terminate this Agreement
within seventy-five (75) days from the date of the first occurrence of the Force
Majeure Event.
8.02 [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 10 -
<PAGE> 11
[***]
9. INDEMNIFICATION
9.01 Each Party hereby agrees to indemnify, protect, save and keep
harmless the other Party, its parent, affiliates and subsidiaries and the
directors, officers, employees, agents, successors and assigns of each of them,
from and against any and all liabilities, obligations, costs, expenses
(including reasonable attorneys' fees), losses, damages, penalties, judgments,
claims, actions and suits brought by or through any third Party (herein
collectively called "liabilities") imposed on, incurred or asserted against any
one or more of them because of the breach of the other Party's obligations
hereunder.
9.02 Star agrees to indemnify, protect, save and keep harmless B&W, its
parent, affiliates and subsidiaries and the directors, officers, employees,
agents, successors and assigns of each of them, from and against any and all
liabilities, obligations, costs, expenses (including reasonable attorneys'
fees), losses, damages, penalties, judgments, claims, actions and suits brought
by or through any third Party (hereinafter collectively called "the
liabilities") imposed on, incurred by or asserted against any one or more of
them because of the sale, resale, consumption or use of any of the Star
Scientific Blend, or any product made therefrom by [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 11 -
<PAGE> 12
[***]
9.03 Each Party agrees to give the other Party prompt written notice of
any claimed liabilities coming within the purview of this paragraph 9 and to
cooperate fully in the defense thereof.
10. MISCELLANEOUS PROVISIONS
10.01 This Agreement shall inure to the benefit of and be binding upon
each of the Parties hereto and their respective successors and assigns. B&W
shall not, directly or indirectly, in whole or in part, assign any of its rights
under this Agreement except in connection with the sale of B&W's Factory or a
merger, consolidation or sale of all, or substantially all, of the assets of
B&W's business. Star shall not, directly or indirectly, in whole or in part,
assign any of its rights and/or obligations under this Agreement without the
prior written consent of B&W except in connection with a merger, consolidation
or sale of all, or substantially all, of the assets of Star's business. In the
event that either Party shall assign this Agreement at any time for any reason,
the other Party shall have the option to immediately (within [***] of receipt of
the notice of any such new successor or assignee) terminate this Agreement
effective [***] after written notice to the other Party.
10.02 Each and every one of the provisions of this Agreement is subject
to modification by reason of law, ruling, order, or regulation made by a
competent governmental authority affecting either Party.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 12 -
<PAGE> 13
10.03 All material notices given by either Party to the other Party
under the provisions of this Agreement shall be forwarded to and effective upon
receipt by:
BROWN & WILLIAMSON TOBACCO CORPORATION
2600 Weaver Road
Macon, GA 31298
Attn: [***]
STAR SCIENTIFIC, INC.
16 South Market Street
Petersburg, VA 23803
Attn: Jonnie R. Williams
with a copy to:
BROWN & WILLIAMSON TOBACCO CORPORATION
Brown & Williamson Tower
401 South 4th Avenue
Louisville, KY 40202
or at such other addresses that either Party may from time to time
designate by written notice as its address or addresses for the purposes
thereof.
10.04 This Agreement shall be governed by and construed in accordance
with the internal substantive laws of the State of Georgia.
[SIGNATURE PAGE FOLLOWS]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
- 13 -
<PAGE> 14
SIGNATURE PAGE TO SUPPLY AGREEMENT FOR STAR SCIENTIFIC BLEND
IN WITNESS WHEREOF, this Agreement has been duly executed by the
Parties hereto by their respective officers thereunto duly authorized, as of the
date first above written.
BROWN & WILLIAMSON TOBACCO CORPORATION
By:
-----------------------------------
Name:
Title:
STAR TOBACCO AND PHARMACEUTICALS, INC.
By:
-----------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.36
CIGARETTE MANUFACTURING AGREEMENT
THIS AGREEMENT is made this 1st day of January, 2000, between BROWN &
WILLIAMSON TOBACCO CORPORATION, a Delaware corporation ("B&W"), and STAR
TOBACCO AND PHARMACEUTICALS, INC., a Virginia corporation ("Star"),
individually a "Party" and collectively, the "Parties".
WHEREAS, B&W and Star are in the business of manufacturing cigarettes,
including the manufacture and processing of component parts of cigarettes; and
WHEREAS, Star is willing to pay B&W to manufacture for sale to Star
and Star agrees to purchase its designated requirements of Star cigarette
brands from B&W; and
WHEREAS, B&W will provide additional services to Star, including the
procurement of leaf stocks, blend formulation and administrative services;
NOW THEREFORE, in consideration of the mutual representations,
warranties and covenants and subject to the terms and conditions herein
contained, the Parties hereto agree as follows:
1. Definitions.
"B&W's Factory" means B&W's manufacturing facility located in Macon,
Georgia.
"Blended Tobacco" means the tobacco which B&W blends or prepares,
having the specification and properties set forth in Appendix A, for use in
manufacturing the cigarettes for Star pursuant to this Agreement.
"Bonded Warehouse" means a warehouse of Star which qualifies as a
bonded warehouse under the regulations promulgated by the Department of
Treasury, Division of Alcohol, Tobacco and Firearms.
-1-
<PAGE> 2
"Brands" means the individual brandnames of cigarettes marketed and
sold by Star, or its subsidiaries, under trademarks owned by or licensed to
Star, or its subsidiaries, which Star elects to have B&W manufacture and
package for Star pursuant to the terms of this Agreement.
"Cigarette Materials" means filters, tipping paper, cigarette paper
and packaging materials including, but not limited to, labels, foil,
cellophane, box blanks, carton blanks and case packaging materials.
"Cylinders" means the dies utilized to print the packaging materials
for the Brands.
"Materials" means Cigarette Materials and Tobacco Materials.
"Orders" shall mean Star's weekly written instructions to manufacture
cigarettes pursuant to this Agreement.
"Star's Specifications" means the properties and ingredients of Star's
cigarette brands in the respective Styles as set forth in Appendix A attached
hereto and made a part hereof, as revised from time to time by written
agreement of the Parties.
"Stick" means one cigarette.
"Style" means a type of cigarette such as: (i) kings, or 100's, or
(ii) filter or non-filter, or (iii) menthol or non-menthol, or (iv) a
combination of any two or more of the foregoing with respect to any Brand.
"Style/Brand" means an individual Style of a Brand.
"Supply Agreement for Star Scientific Blend" means an agreement
between Star and B&W dated January 1, 2000 for the supply of blended cut
tobacco to Star by B&W.
"Tobacco Materials" means casings, Blended Tobacco, flavorings and
other materials normally utilized in the production of cigarettes but excluding
Cigarette Materials.
-2-
<PAGE> 3
2. Manufacturing of Star's Brands.
2.01 During the term of this Agreement and subject to the
terms and provisions hereof, B&W agrees to acquire and blend cut tobacco which
will comply with Star's Specifications in sufficient quantities to manufacture
for Star the quantities of cigarettes which Star orders from B&W pursuant to
the terms of this Agreement and B&W agrees to manufacture, package and ship
Star's designated requirements of the cigarettes for each Style/Brand in
accordance with Star's Orders which conform to the terms and provisions of this
Agreement.
3. Forecasts, Requirements, Minimum Production Quantities.
3.01 Star shall provide B&W by July 1st of each year a
forecast and commitment ("Firm Commitment") for its requirements for cigarettes
to be manufactured under this Agreement for the next calendar year (by blend if
more than one blend is contemplated), and an estimate of the requirements for
cigarettes for the calendar year following the year for which the Firm
Commitment was issued. The Firm Commitment will be utilized by B&W as the basis
for acquiring the necessary Tobacco Materials to manufacture the Brands.
3.02 [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
-3-
<PAGE> 4
3.03 [***]
3.04 B&W will manufacture additional Styles/Brands at Star's
request provided that the volume for each [***].
3.05 All Orders under this Agreement shall be submitted to
B&W at B&W's Factory and shall set forth the weekly quantity for each
Style/Brand, and the general shipping instructions including a destination
address which must be a Bonded Warehouse. Star will provide weekly orders, for
its weekly requirements. The weekly Orders shall be issued to B&W at least two
weeks prior to the week shipment is requested. The weekly total quantity of
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
-4-
<PAGE> 5
Styles/Brands shall be fixed, but daily shipments may be varied provided Star
gives B&W two (2) days advance written notice. The terms and conditions of this
Agreement: (i) shall be deemed incorporated into and made a part of each Order,
and (ii) shall not be modified, supplemented, or superseded by any terms or
conditions in a purchase order or acknowledgment or acceptance thereof except
as expressly agreed to in a writing separate from such purchase order signed by
authorized representatives of both Parties and specifying the extent to which
such purchase order overrides the terms and conditions of this Agreement. B&W
shall accept all Orders that conform to the terms of this Agreement which are
consistent with the Firm Commitment issued in accordance with paragraph 3.01
provided that Star is not in default under this Agreement.
4. Pricing and Payment.
4.01 B&W shall invoice Star for the quantity of the Brands
shipped by B&W on a weekly basis. [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
-5-
<PAGE> 6
[***]
4.02 Any changes by Star to Star's Specifications (as to
cigarettes or tobacco blend), packaging, Star's ability to utilize random
health warnings, or a change in the importation duty rates and/or the Tariff
Rate Quota (TRQ) system or changes in other costs to import tobacco into the
United States which is used in the Blended Tobacco, will give B&W the right to
renegotiate the pricing set forth in Appendix B. For cigarettes to be delivered
after December 31, 2000, Star will provide B&W by November 1 of the preceding
year with a 12-month forecast breaking down its Firm Commitment under Paragraph
3 by Style and Brand, and pricing for the ensuing 12-month period will be
determined by B&W on an annual basis and appended hereto as Appendix B based
upon changes in stock availability, market conditions, buying expense,
anticipated processing yields, and other manufacturing costs.
4.03 Actual costs for transportation by an independent bonded
carrier, insurance, other standard commercial charges and any tax, duty or
payment to or for the benefit of a governmental entity, or payments required by
statute or regulation, incurred with respect to cigarettes manufactured by B&W
for Star under this agreement, will be for Star's account. These charges will
be noted separately from the standard manufactured price and will be invoiced
separately. Star will pay, without offset or setoff, all amounts due to B&W for
manufacturing of the Brands, freight insurance and other applicable charges
within ten (10) days of the date of B&W's invoice by wire transfer to:
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 7
[***]
4.04 In the event Star does not timely pay any amounts due
B&W pursuant to this Agreement, Star shall pay late charges on such past due
amounts at a monthly rate of [***].
4.05 B&W hereby reserves a vendor's lien purchase money
security interest in the Brands sold to Star to secure the payment of the
purchase price of the Brands as provided for in this Agreement. Star will
execute such additional instruments as B&W may reasonably request in order to
perfect the purchase money security interest hereby reserved.
5. Delivery, Shipment, Risk of Loss.
5.01 Identification of the goods to the contract shall occur
and therefore title and risk of loss will transfer to Star when they are placed
in the hands of the carrier. Freight from [***] to Star's Bonded
Warehouse in Petersburg, Virginia will be coordinated and paid by B&W but
billed to Star as an additional charge with each invoice.
5.02 The shipping pallets will remain the property of B&W.
Star shall return the shipping pallets to B&W's Factory or other designated
location within thirty (30) days of
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 8
receipt at Star's expense. The returned pallets shall be reasonably clean,
neatly stacked, and properly secured.
6. Term
6.01 The initial term of this Agreement shall terminate on
[***] and thereafter it shall automatically renew for successive one-year
renewal terms, subject to the right of either Star or B&W to terminate this
Agreement for any reason on at least one (1) year's prior written advance notice
to the other Party but such notice may not be effective until [***].
Notwithstanding the foregoing provisions of this paragraph, the provisions of
Section 6 shall survive any expiration or earlier termination of this Agreement.
6.02 This Agreement may also be terminated by either Party in
the event of any material breach of any of the terms hereof, if the offending
Party, after having been given written notice of such breach, shall fail to cure
such breach within [***] of receipt of such notice. In such event, the
non-offending Party may elect to give notice of termination of this Agreement,
effective as of the date provided in such notice, but no later than [***] after
the expiration of the cure period. Failure to so terminate within such [***]
period shall be deemed to be a waiver only of the specific event of breach with
respect to which such notice of breach was given.
6.03 [***]
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 9
[***]
6.04 The Parties agree that these notice provisions are
adequate in all circumstances, and, on termination of this Agreement in
accordance with this paragraph, neither Party shall be liable for any costs or
liabilities of the other associated with or resulting from such termination
except as provided in this Agreement.
7. Insurance
7.01 During the term of this agreement [***] shall maintain in
full force and effect adequate insurance for its benefit which shall provide
for coverage in an amount equal to at least the replacement cost of the
production materials, including any tobacco leaf, and any finished manufactured
cigarettes which are in [***] possession or control at the time of any loss or
damage thereto.
8. Indemnification
8.01 Each Party hereby agrees to indemnify, protect, save and
keep harmless the other Party, its parent, affiliates and subsidiaries and the
directors, officers, employees, agents, successors and assigns of each of them,
from and against any and all liabilities,
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<PAGE> 10
obligations, costs, expenses (including reasonable attorneys' fees), losses,
damages, penalties, judgments, claims, actions and suits brought by or through
any third Party (herein collectively called "liabilities") imposed on, incurred
or asserted against any one or more of them because of the breach of the other
Party's obligations hereunder.
8.02 Star agrees to indemnify, protect, save and keep
harmless B&W, its parent, affiliates and subsidiaries and the directors,
officers, employees, agents, successors and assigns of each of them, from and
against any and all liabilities, obligations, costs, expenses (including
reasonable attorneys' fees), losses, damages, penalties, judgments, claims,
actions and suits brought by or through any third Party (hereinafter
collectively called "the liabilities") imposed on, incurred by or asserted
against any one or more of them because of the sale, resale, consumption or use
of any of the cigarettes manufactured by B&W for Star pursuant to this
Agreement. This indemnity does not apply where the cigarettes supplied by B&W
fails to meet Star's Specifications and the liabilities for which this
indemnity is claimed result from such failure by B&W.
8.03 Each Party agrees to give the other Party prompt written
notice of any claimed liabilities coming within the purview of this Article 11
and to cooperate fully in the defense thereof.
8.04 EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, B&W MAKES
NO REPRESENTATIONS OR WARRANTIES OF ANY KIND TO STAR OR ITS CUSTOMERS,
INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE. FURTHERMORE, UNDER NO CIRCUMSTANCES SHALL
EITHER PARTY BE
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<PAGE> 11
RESPONSIBLE FOR INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, OR
EXEMPLARY DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY
ACTS OR OMISSIONS ASSOCIATED THEREWITH OR RELATING TO THE USE OF THE STAR
SCIENTIFIC BLEND FURNISHED, WHETHER SUCH CLAIM IS BASED ON BREACH OF WARRANTY,
CONTRACT, TORT, OR OTHER DAMAGES OR WHETHER ANY OTHER REMEDY PROVIDED HEREIN
FAILS.
9. Force Majeure
9.01 B&W shall not be liable to Star by reason of delay for
non-performance, if and so long as such delay or non-performance is caused by
occurrences beyond the reasonable control of B&W (hereinafter "Force Majeure
Event") including, but not limited to the following: acts of God; expropriation
or confiscation of facilities; compliance with any regulation, order or law of
any governmental authority; shortage or unavailability of Materials, equipment
or labor through no fault of B&W; criminal acts; acts of war, rebellion,
insurrection or sabotage, or damage resulting therefrom; fires, floods,
explosions, and washouts; accidents, epidemics, breakdowns, riots, strikes or
other industrial disturbances, whether direct or indirect; or any cause,
whether or not of the same class or kind as those specifically named above, not
within the reasonable control of the Party whose performance is affected. In
the event a Force Majeure Event continues for more than sixty (60) days), Star
may in its sole discretion, terminate the affected Order, or may terminate this
Agreement within seventy-five (75) days from the date of the first occurrence
of the Force Majeure Event.
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<PAGE> 12
9.02 The Parties recognize that B&W will be manufacturing
cigarettes for its own needs and those of its Affiliated BAT Companies, [***].
10. Miscellaneous Provisions
10.01 B&W represents and warrants that it has and will have
the available manufacturing capacity to and will produce on a timely basis
Star's designated requirements of the Brands as specified in Star's Orders,
subject to the annual volume limitation set forth in Paragraph 4.
10.02 Star will recognize, and will reimburse B&W for, the
cost of any Tobacco Materials or Cigarette Materials which may become obsolete
due to changes in specifications mandated as a result of changes in laws or
regulations.
10.03 Star grants to B&W any license that may be necessary
under any of Star's registered trademarks and issued or pending patents to
enable B&W to fulfill its obligations under this Agreement.
Note: Redacted portions have been marked with [***]. The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
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<PAGE> 13
10.04 No amendment or modification or addition to this
Agreement shall be binding upon either Party unless reduced to writing.
10.05 Any notice or other communication to either Party to
this Agreement required or permitted hereunder shall be in writing and shall be
deemed to be effective when received by such Party.
10.06 The validity, construction and performance of this
Agreement shall be governed and interpreted in accordance with the laws of the
State of Georgia.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 14
SIGNATURE PAGE TO CIGARETTE MANUFACTURING AGREEMENT
IN WITNESS WHEREOF, the parties have executed this Agreement by their
duly authorized officers as of the effective date shown above.
BROWN & WILLIAMSON TOBACCO CORPORATION
By:
------------------------------------
Date:
------------------------------------
STAR TOBACCO AND PHARMACEUTICALS, INC.
By:
------------------------------------
Date:
------------------------------------
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<PAGE> 1
EXHIBIT 10.37
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of January 20, 2000
between FINOVA CAPITAL CORPORATION, BUSINESS CREDIT, a Delaware corporation
(FINOVA), with a place of business located at 1000 Abernathy Road N.E., Building
400, Suite 1500, Atlanta, Georgia 30328 and STAR TOBACCO AND PHARMACEUTICALS,
INC., a Virginia corporation (Borrower), with its chief executive office located
at 16 South Market Street, Petersburg, Virginia 23803.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 TERMS. In addition to the terms that are defined
within this Agreement, the following terms shall have the following definitions
when used in this Agreement:
Account Debtor means any Person who is or who may become
obligated under, with respect to, or on account of an Account.
Accounts means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods or the rendition of services by
Borrower, whether or not earned by performance, all credit insurance,
guaranties, and other security therefor, as well as all goods returned to or
reclaimed by Borrower, and Borrower's Books relating to any of the foregoing.
Agreement means this Loan and Security Agreement and any
riders, addenda, extensions, supplements, amendments or modifications to or in
connection with this Loan and Security Agreement.
Applicable Margin means a percentage equal to one half percent
(0.5%).
Authorized Representative means any officer, employee or other
representative of Borrower authorized in writing by Borrower to transact
business with Finova.
Bankruptcy Code means the United States Bankruptcy Code (11
U.S.C. Sections 101 et seq.), as amended, and any successor statute.
Borrower's Books means all of Borrower's books and records
including all of the following: ledgers; records indicating, summarizing or
evidencing Borrower's assets (including the Collateral) or liabilities; all
information relating to Borrower's business operations or financial condition;
and all computer programs (whether owned by Borrower or in which it has an
interest), disk or tape files, printouts, runs or other computer prepared
information, and the equipment containing such information.
Business Day means any day which is not a Saturday, Sunday or
other day on which banks in the State of Georgia are authorized or required to
close.
Code means the Georgia Uniform Commercial Code, as amended
from time to time.
Collateral means all of the following: the Accounts; the
General Intangibles; the Investment Property; the Negotiable Collateral; any
money or other assets of Borrower which hereafter come into the possession,
custody or control of Finova; and all proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of insurance covering
any or all of the Collateral, and any and all Accounts, Equipment, General
Intangibles, Inventory, Investment Property, Negotiable Collateral, money,
deposit accounts or other tangible or intangible property resulting from the
sale or other disposition of the Collateral, or any portion thereof or interest
therein, and the proceeds thereof.
Conditions Precedent Rider means that certain Conditions
Precedent Rider to this Agreement dated as of the date hereof between Finova and
Borrower.
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<PAGE> 2
Eligible Accounts means those Accounts created by Borrower in
the ordinary course of business that arise out of Borrower's sale of goods or
rendition of services, are owing from Account Debtors that are acceptable to
Finova, strictly comply with all of the representations and warranties made by
Borrower to Finova in the Loan Documents; PROVIDED, HOWEVER, that standards of
eligibility may be established and revised from time to time by Finova in
Finova's reasonable credit judgment. In determining such eligibility, Finova
may, but is not obligated to, rely on agings, reports and schedules of Accounts
furnished to Finova by Borrower. Eligible Accounts shall not include any of the
following: (a) Accounts that the Account Debtor has failed to pay within thirty
(30) days after the original invoice date; (b) all Accounts owed by any Account
Debtor that has failed to pay fifty percent (50%) or more of the aggregate
amount of its Accounts owed to Borrower within thirty (30) days after the
original invoice date; (c) Accounts with respect to which the Account Debtor is
an officer, director, employee or agent of Borrower; (d) Accounts with respect
to which the Account Debtor is a subsidiary of, related to, affiliated with or
has common shareholders, officers or directors with Borrower; (e) Accounts with
respect to which goods are placed on consignment, guaranteed sale, sale or
return, sale on approval, bill and hold, or which contain other terms by reason
of which payment by the Account Debtor may be conditional; (f) Accounts with
respect to which the Account Debtor is not a resident of the United States or
Canada; (g) Accounts with respect to which the Account Debtor is the United
States or any department, agency or instrumentality of the United States, unless
Borrower has complied, to the satisfaction of Finova, with the Federal
Assignment of Claims Act with respect to such Accounts; (h) Accounts with
respect to which the Account Debtor is a state, county or municipality, or
political subdivision or agency thereof, and applicable law disallows or
restricts an assignment of Accounts on which it is the Account Debtor; (i)
Accounts with respect to which Borrower is or may become liable to the Account
Debtor for goods sold or services rendered by the Account Debtor to Borrower or,
for any other reason, are subject to any right of offset in favor of the Account
Debtor; (j) Accounts with respect to an Account Debtor whose total obligations
to Borrower exceed fifteen percent (15%) of all Accounts, to the extent such
obligations exceed such percentage; (k) Accounts with respect to which the
Account Debtor disputes liability or makes any claim with respect thereto, or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; (l) Accounts that represent progress billings or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract for goods or services; (m) Accounts that are payable in
currency other than United States dollars; (n) Accounts that arise from a retail
sale of goods to a Person who is purchasing same primarily for personal, family
or household purposes; or (o) Accounts owing from Brown & Williamson Tobacco
Corporation.
Environmental Law means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, the Resource
Conservation and Recovery Act of 1976, the Hazardous Materials Transportation
Act, the Toxic Substances Control Act, the regulations pertaining to such
statutes, and any other safety, health or environmental statutes, laws,
regulations or ordinances of the United States or of any state, county or
municipality in which Borrower conducts its business or the Collateral is
located.
Equipment means all of Borrower's present and hereafter
acquired equipment, machinery, machine tools, motors, furniture, furnishings,
fixtures, motor vehicles, rolling stock, processors, tools, parts, dies, jigs,
goods (other than consumer goods, farm products or Inventory), wherever located,
and any interest of Borrower in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions and improvements
to any of the foregoing, wherever located.
ERISA means the Employee Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
ERISA Affiliate means each trade or business (whether or not
incorporated and whether or not foreign) which is or may hereafter become a
member of a group of which Borrower is a member and which is treated as a single
employer under ERISA Section 4001(b)(1), or IRC Section 414.
Event of Default means each of the events specified in Section
8.
Fixed Charge Coverage Ratio means, for any period, a ratio of
(a) Borrower's earnings before interest expense, tax expense, depreciation,
amortization and any other non-cash charges less unfinanced capital expenditures
to (b) the sum of Borrower's interest expense, tax expense, scheduled current
portion of long term debt, capital lease expenses, amounts required to be
escrowed by Borrower under the Master Tobacco Settlement Agreement ("MSA") or
the model statutes created under the MSA and dividends, advances and other
distributions to shareholders, all accrued, paid or payable and determined in
accordance with GAAP.
Finova Expenses means all of the following: costs and expenses
(including taxes, assessments and insurance premiums) required to be paid by
Borrower under any of the Loan Documents which are paid or advanced by Finova;
2
<PAGE> 3
filing, recording, publication, appraisal (including periodic Collateral
appraisals), real estate survey, environmental audit and search fees assessed,
paid or incurred by Finova in connection with Finova's transactions with
Borrower; costs and expenses incurred by Finova in the disbursement or
collection of funds to or from Borrower; charges resulting from the dishonor of
checks; costs and expenses paid or incurred by Finova to cure any Event of
Default or enforce any provision of the Loan Documents, or in the direct
collection of the Accounts or in gaining possession of, maintaining, handling,
preserving, storing, shipping, selling, preparing for sale or advertising to
sell the Collateral, or any portion thereof, irrespective of whether a sale is
consummated; costs and expenses paid or incurred by Finova that result from
third party claims against Finova covered by Borrower's indemnification of
Finova in Section 11.4; costs and expenses paid or incurred by Finova in
enforcing or defending the Loan Documents; and Finova's reasonable attorneys
fees and expenses incurred (including the reasonable allocated costs of Finova's
in-house counsel) in advising, structuring, drafting, reviewing, administering,
amending, terminating, enforcing, defending or otherwise representing Finova in
connection with the Loan Documents or the Obligations (including reasonable
attorneys fees and expenses incurred in connection with a workout, a
restructuring, an action to lift the automatic stay of Section 362 of the
Bankruptcy Code, any other action or participation by Finova in an Insolvency
Proceeding concerning Borrower or any guarantor of the Obligations or any
defense or participation by Finova in any lender liability, preference or
fraudulent conveyance actions).
General Intangibles means all of Borrower's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes or regulations (except relating to
trademark and trademark applications), choses or things in action, goodwill,
purchase orders, customer lists, monies due or recoverable from pension funds,
route lists, infringement claims, computer programs, computer discs, source
codes, computer tapes, literature, reports, catalogs, deposit accounts,
insurance premium rebates, tax refunds and tax refund claims) other than goods,
Accounts, licenses, franchises, patents and patent applications, trade names,
trademarks and trademark applications, service marks, copyrights and copyright
applications, trade secrets, blueprints, drawings and monies due under any
royalty or licensing agreements, and Borrower's Books relating to any of the
foregoing.
Hazardous Material means any substance, material, emission or
waste which is or hereafter becomes regulated or classified as a hazardous
substance, hazardous material, toxic substance or solid waste under any
Environmental Law, asbestos, petroleum products, urea formaldehyde,
polychlorinated biphenyls (PCBs), radon and any other hazardous or toxic
substance, material, emission or waste.
Insolvency Proceeding means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, including assignments for the benefit of
creditors, formal or informal moratoria, compositions, extensions generally with
its creditors or proceedings seeking reorganization, liquidation, arrangement or
other similar relief.
Inventory means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service, Borrower's present and future raw
materials, work in process, finished goods and materials used in or consumed in
Borrower's business, goods which have been returned to, repossessed by or
stopped in transit by Borrower, packing and shipping materials, wherever
located, any documents of title representing any of the above, and Borrower's
Books relating to any of the foregoing.
Investment Property means all of Borrower's present and future
investment property, including all certificated and uncertificated securities,
securities entitlements, securities accounts, commodity accounts and commodity
contracts, except any escrow fund amounts to be established under the MSA or the
model statutes created under the MSA.
IRC means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
Loan Documents means, collectively, this Agreement, any Notes,
any security agreements, pledge agreements, deeds of trust, mortgages or other
encumbrances or agreements which secure the Obligations, any guaranties of the
Obligations, any lock box or blocked account agreements and any other agreement
entered into between Borrower or any guarantor of the Obligations and Finova
relating to or in connection with this Agreement.
Maximum Rate means the maximum non-usurious rate of interest
permitted by applicable law that at any time, or from time to time, may be
contracted for, taken, reserved, charged or received on the Obligations in
question or, to the extent permitted by applicable law, under such applicable
laws that may hereafter be in effect and which allow a higher maximum
non-usurious interest rate than applicable laws now allow. Notwithstanding any
other provision in this Agreement, the Maximum Rate shall be calculated on a
daily basis (computed on the actual number of days elapsed over a year of 365 or
366 days, as the case may be).
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<PAGE> 4
Multiemployer Plan means a multiemployer plan as defined in
ERISA Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees
of Borrower or any ERISA Affiliate.
Negotiable Collateral means all of Borrower's present and
future letters of credit, notes, drafts, instruments, documents, leases and
chattel paper, and Borrower's Books relating to any of the foregoing.
Note means any promissory note made by Borrower to the order
of Finova concurrently herewith or at any time hereafter.
Obligations means all loans, advances, debts, liabilities
(including all amounts charged to Borrower's loan account pursuant to any
agreement authorizing Finova to charge Borrower's loan account), obligations,
fees, lease payments, guaranties, covenants and duties owing by Borrower to
Finova of any kind and description (whether pursuant to or evidenced by the Loan
Documents, by any Note or other instrument or by any other agreement between
Finova and Borrower, and irrespective of whether for the payment of money),
whether direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter arising, and all interest thereon, including any interest
that, but for the provisions of the Bankruptcy Code, would have accrued, and all
Finova Expenses which Borrower is required to pay or reimburse pursuant to the
Loan Documents, by law or otherwise.
Person means and includes natural persons, corporations,
limited partnerships, general partnerships, limited liability companies, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
Plan means any plan described in ERISA Section 3(2) maintained
for employees of Borrower or any ERISA Affiliate, other than a Multiemployer
Plan.
Reference Rate means the variable rate of interest, per annum,
published by The Wall Street Journal as the "Prime Rate" and based on "the base
rate on corporate loans posted by at least 75% of the nation's 30 largest
banks". The Reference Rate is nothing more nor less than an index for
determining the interest rate payable under the terms of this Agreement. The
Reference Rate is not necessarily the best rate, or any other definition of
rates, offered by the banks that establish the rate or by Finova. In the event
The Wall Street Journal ceases to publish the "Prime Rate", Finova, in its
reasonable judgment, may substitute any similar index for the Reference Rate.
1.2 CONSTRUCTION. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the term "including" is not
limiting and the term "or" has the inclusive meaning generally represented by
the phrase "and/or". The words hereof, herein, hereby, hereunder and similar
terms in this Agreement refer to this Agreement as a whole and not to any
particular provision of this Agreement. Section, subsection, clause, exhibit and
schedule references are to this Agreement unless otherwise specified. Any
reference in this Agreement or in any of the other Loan Documents to this
Agreement or any of the other Loan Documents shall include all alterations,
amendments, changes, extensions, modifications, renewals, replacements,
restatements, substitutions and supplements thereto and thereof.
1.3 ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with generally
accepted accounting principles (GAAP) as in effect from time to time. When used
herein, the term financial statements shall include the notes and schedules
thereto.
1.4 RIDERS, EXHIBITS, ETC. The Conditions Precedent Rider
and any other riders, exhibits, addenda and schedules to this Agreement shall be
deemed incorporated herein by reference.
1.5 CODE. Any terms used in this Agreement, which are
defined in the Code, shall be construed and defined as set forth in the Code
unless otherwise defined herein.
2. ADVANCES AND TERMS OF PAYMENT
2.1 REVOLVING ADVANCES. Upon the request of Borrower, made
at any time during the term hereof, and so long as no Event of Default exists,
Finova shall, in its sole discretion, make advances (the Revolving Advances) to
Borrower in an amount equal to eighty percent (80%) of the aggregate outstanding
amount of Eligible Accounts; PROVIDED, HOWEVER, that in no event shall the
aggregate amount of the outstanding Revolving Advances be greater than, at any
time, the sum of Three Million
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<PAGE> 5
Dollars ($3,000,000) (the Revolving Advance Limit). Finova may reduce its
advance rates on Eligible Accounts, reduce the Revolving Advance Limit or
establish reserves with respect to borrowing availability if Finova determines,
in its sole discretion, that there has occurred, or is likely to occur, an
impairment of the prospect of repayment of all or any portion of the
Obligations, the value of the Collateral or the validity or priority of Finova's
security interests in the Collateral.
2.2 INITIAL ADVANCE. Finova agrees that, upon satisfaction
on or before January 21, 2000 of each of the conditions precedent set forth in
the Conditions Precedent Rider and elsewhere in this Agreement, Finova shall
advance to Borrower, on Borrower's request therefor, an amount not less than Two
Hundred Fifty Thousand Dollars ($250,000) as Finova's initial Revolving Advance
under this Agreement, and all future Revolving Advances under this Agreement
shall be for an amount not less than Three Thousand Dollars ($3,000) and shall
be deemed to be and constitute, together with the initial Revolving Advance, one
general obligation of Borrower and a single loan from Finova to Borrower, and
shall be secured by Finova's security interest in and lien upon all of the
Collateral, and by all other security interests and liens heretofore, now or at
any time or times hereafter granted by Borrower to Finova.
2.3 OVERADVANCES. All Revolving Advances made hereunder
shall be added to and deemed part of the Obligations when made. If, at any time
and for any reason, the aggregate amount of the outstanding Revolving Advances
exceeds the dollar or percentage limitations contained in Section 2.1 (an
Overadvance), then Borrower shall, upon demand by Finova, immediately pay to
Finova, in cash, the amount of such excess.
2.4 OVERADVANCE FEE. Without affecting Borrower's
obligation to immediately repay to Finova the amount of each Overadvance in
accordance with the provisions of Section 2.3, in the event Finova agrees to
permit any Overadvance to exist and continue and in consideration for permitting
such Overadvance to exist and continue, Finova shall be entitled to charge
Borrower a fee in an amount equal to Two Hundred Fifty Dollars ($250) per day
for each day any Overadvance exists or, alternatively, such other fee as Finova
and Borrower may agree to at the time the Overadvance is made or discovered. If
the fee provided for in this Section 2.4 is held to constitute interest under
applicable law, it shall be deemed to be interest on the total outstanding
principal balance of all the Obligations and not merely interest on the
Overadvance.
2.5 AUTHORIZATION TO MAKE REVOLVING ADVANCES. Borrower
hereby authorizes Finova to make Revolving Advances based upon telephonic or
other instructions received from anyone purporting to be an Authorized
Representative, or, at the discretion of Finova without instructions from or
notice to Borrower, if such Revolving Advances are necessary to satisfy any
Obligations. All requests for Revolving Advances hereunder shall specify the
date on which the requested Revolving Advance is to be made (which day shall be
a day that Finova is open for business) and the amount of the requested
Revolving Advance. Requests received after 11:00 a.m. Eastern time on any day
shall be deemed to have been made as of the opening of business on the
immediately following Business Day. All Revolving Advances made under this
Agreement shall be conclusively presumed to have been made to, at the request
of, and for the benefit of Borrower when deposited to the credit of Borrower or
otherwise disbursed in accordance with the instructions of Borrower or in
accordance with the terms and conditions of this Agreement.
2.6 INTEREST.
A. BASIC RATE; DEFAULT RATE. Except where specified to the
contrary in any Loan Document, the aggregate outstanding principal balances of
all Obligations shall bear interest at an annual rate equal to the lesser of (a)
the Maximum Rate or (b) the Reference Rate plus the Applicable Margin. At
Finova's option, the aggregate outstanding principal balances of all Obligations
shall bear interest, from and after written notice by Finova to Borrower of the
existence of an Event of Default and without constituting a waiver of any such
Event of Default, at an annual rate equal to the lesser of (a) the Maximum Rate
or (b) the Reference Rate plus the Applicable Margin plus three percent (3.0%);
provided, however, that in the event an Insolvency Proceeding is commenced by or
against Borrower, Finova may charge such default rate of interest without
providing written notice thereof to Borrower. Borrower acknowledges that the
default rate of interest reflects a substantially greater level of risk to
Finova when an Event of Default exists and that Finova is entitled to additional
compensation for such risk. All interest payable by Borrower under the Loan
Documents shall be due and payable on the first day of each calendar month
during the term of this Agreement and shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed, based on the
aggregate principal amount of the Obligations that are outstanding on each day.
Interest shall continue to accrue until all of the Obligations are paid in full.
B. INITIAL RATE. The Reference Rate as of the date of this
Agreement is eight and one-half percent (8.50%) per annum, and, therefore, the
effective rate of interest hereunder as of the date of this Agreement, expressed
in simple
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interest terms, is nine percent (9.00%) per annum. The interest rate
payable by Borrower under the terms of this Agreement shall be adjusted in
accordance with any change in the Reference Rate from time to time on the date
of any such change.
C. MINIMUM INTEREST. Notwithstanding anything to the
contrary contained in the Loan Documents, Borrower shall pay Finova a minimum
monthly interest charge in respect of the outstanding principal balance of the
Obligations equal to Four Thousand Dollars ($4,000) per month.
2.7 VERIFICATION AND COLLECTION OF ACCOUNTS. Finova may,
at any time, (a) notify Account Debtors of Borrower that the Accounts have been
assigned to Finova and that Finova has a security interest in the Accounts; and
(b) contact Account Debtors of Borrower, either in writing or by telephone, for
the purpose of verifying the validity, amount or any other matter relating to
any Accounts. Finova may, at any time that an Event of Default exists, collect
the Accounts directly. Unless and until Finova begins direct collection of the
Accounts or gives Borrower other written instructions, Borrower shall collect
all Accounts and the proceeds of other Collateral for the benefit of Finova,
receive in trust all payments thereon as Finova's trustee and immediately
deliver said payments to Finova in their original form as received by Borrower
(subject to the terms of any lockbox, blocked account or similar agreement
entered into for the purpose of collection of the Accounts).
2.8 CREDITING PAYMENTS. For the purpose of calculating the
availability of Revolving Advances under Section 2.1, the receipt by Finova of
any wire transfer of funds, check or other item of payment shall be applied
immediately to provisionally reduce the Obligations, but such receipt shall not
be considered a payment on account unless such wire transfer is of immediately
available federal funds and is made to the appropriate deposit account of Finova
or unless and until such check or other item of payment is honored when
presented for payment. For the purpose of calculating interest under Section
2.6A, the receipt by Finova of any wire transfer of funds, check or other item
of payment shall be deemed to have occurred three (3) Business Days after the
date Finova actually receives such item of payment. In the event any check or
other item of payment is not honored when presented for payment, Borrower shall
be deemed not to have made such payment. Notwithstanding anything to the
contrary contained herein, any wire transfer, check or other item of payment
received by Finova after 11:00 a.m. Eastern time shall be deemed to have been
received by Finova as of the opening of business on the immediately following
Business Day.
2.9 INTENTIONALLY OMITTED.
2.10 LOAN ORIGINATION FEE. Borrower shall pay Finova a fee
(the Loan Origination Fee) in the amount of Fifteen Thousand Dollars ($15,000).
The Loan Origination Fee shall be fully earned and is due and payable on the
date that the initial Revolving Advance is made hereunder.
2.11 INTENTIONALLY OMITTED.
2.12 INTENTIONALLY OMITTED.
2.13 INTENTIONALLY OMITTED.
2.14 EXAMINATION FEE. Borrower shall pay Finova a fee in an
amount equal to Seven Hundred Dollars ($700) per day per examiner plus
out-of-pocket expenses incurred by Finova for each field examination of Borrower
performed by Finova during the entire term of this Agreement.
2.15 MISCELLANEOUS FEES. Borrower shall pay Finova its
customary fees for wire transfers (including a premium for early and late
transfers), returned checks, letter of credit guarantees and any other services
provided by Finova to Borrower that are incidental to this Agreement. Upon
Borrower's request, Finova shall provide Borrower with a written schedule of the
amounts of all such miscellaneous fees.
2.16 MAXIMUM CHARGES. Notwithstanding any provision contained
in this Agreement or any of the other Loan Documents, in no contingency or event
whatsoever shall the aggregate of all amounts that are contracted for, charged
or collected pursuant to the terms of this Agreement or any of the other Loan
Documents and that are deemed interest under applicable law exceed that highest
rate permissible under any applicable law. No agreements, conditions, provisions
or stipulations contained in this Agreement or any of the other Loan Documents
or the exercise by Finova of the right to accelerate the payment or maturity of
all or any portion of the Obligations, or the exercise of any option whatsoever
contained in any of the Loan Documents, or the prepayment by Borrower of any of
the Obligations, or the occurrence of any contingency whatsoever, shall entitle
Finova to charge or receive in any event, interest or any charges, amounts,
premiums or fees deemed interest by applicable law (such interest, charges,
amounts, premiums and fees referred to in this Section 2.16 collectively as
Interest) in excess of the Maximum Rate and in no event
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shall Borrower be obligated to pay Interest exceeding the Maximum Rate, and all
agreements, conditions or stipulations, if any, which may in any event or
contingency whatsoever operate to bind, obligate or compel Borrower to pay
Interest exceeding the Maximum Rate shall be without binding force or effect, at
law or in equity, to the extent only of the excess of Interest over the Maximum
Rate. If any Interest is charged or received in excess of the Maximum Rate
(Excess), Borrower acknowledges and stipulates that any such charge or receipt
shall be the result of an accident and bona fide error, and such Excess, to the
extent received, shall be applied first to reduce the principal Obligations and
the balance, if any, returned to Borrower, it being the intent of the parties
hereto not to enter at any time into a usurious or otherwise illegal
relationship. The right to accelerate the maturity of any of the Obligations
does not include the right to accelerate any interest that has not otherwise
accrued on the date of such acceleration, and Finova does not intend to collect
any unearned interest in the event of any such acceleration. Borrower recognizes
that, with fluctuations in the rates of interest set forth in Section 2.6 and
the Maximum Rate, such an unintentional result could inadvertently occur but for
the agreements of the parties to limit interest to the Maximum Rate and to
apply, credit or return any Excess as provided herein. All monies paid to Finova
hereunder or under any of the other Loan Document, whether at maturity or by
prepayment, shall be subject to any rebate of unearned interest as and to the
extent required by applicable law. By the execution of this Agreement, Borrower
covenants that (a) the credit or return of any Excess shall constitute the
acceptance by Borrower of such Excess, and (b) Borrower shall not seek or pursue
any other remedy, legal or equitable, against Finova, based in whole or in part
upon contracting for, charging or receiving any Interest in excess of the
Maximum Rate. For the purpose of determining whether or not any Excess has been
contracted for, charged or received by Finova, all Interest at any time
contracted for, charged or received from Borrower in connection with this
Agreement shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread in equal parts throughout the full term of the
Obligations. Borrower and Finova shall, to the extent permitted by applicable
law, (a) characterize any non-principal payment as an expense, fee or premium
rather than as Interest and (b) exclude voluntary prepayments and the effects
thereof. The provisions of this Section 2.16 shall be deemed to be incorporated
into every Loan Document (whether or not any provision of this Section 2.16 is
referred to therein). All such Loan Documents and communications relating to any
Interest owed by Borrower and all figures set forth therein shall, for the sole
purpose of computing the extent of the Obligations, be automatically recomputed
by Borrower, and by any court considering the same, to give effect to the
adjustments or credits required by this Section 2.16. Notwithstanding any
provisions contained in this Agreement or any of the other Loan Documents
providing that interest is to be computed on the basis of a 360 day year,
interest shall never exceed the Maximum Rate computed on the basis of a 365 or
366 year, as the case may be. In no event shall Borrower be obligated to pay any
of the fees payable under this Agreement to the extent that the amount of such
fees otherwise payable under such sections, when added to the amount of interest
charged under Section 2.6 or otherwise, would result in the assessment or
collection of sums deemed to be Interest in excess of the Maximum Rate (it being
the express intent and understanding of the parties hereto that such fees not
constitute interest or a charge for the use or detention of money).
2.17 MONTHLY STATEMENTS. Finova shall render monthly
statements to Borrower of all Obligations, including statements of all
principal, interest, fees and Finova Expenses charged, and such statements shall
be conclusively presumed to be correct and accurate and constitute an account
stated between Borrower and Finova unless, within thirty (30) days after receipt
thereof by Borrower, Borrower shall deliver to Finova, by registered or
certified mail or overnight courier service, at Finova's address stated in
Section 12, written objection to Finova's statement specifying the error or
errors, if any, contained in such statements.
2.18 PAYMENT MECHANICS. As an administrative convenience to
Borrower to ensure the timely payment of amounts owing by Borrower to Finova
under this Agreement, Borrower hereby requests Finova to advance for the account
of Borrower an amount each month sufficient to pay interest accrued on the
principal amount of the Obligations during the immediately preceding month and
all monthly principal installments or other payments due under a Note or other
Loan Document and amounts from time to time sufficient to pay all fees and
Finova Expenses owing by Borrower under this Agreement. Borrower authorizes
Finova to make a Revolving Advance for Borrower's account of a sum sufficient
each month to pay, on the due date thereof, all interest accrued on the
principal amount of the Obligations during the immediately preceding month and
all monthly principal installments or other payments due under a Note or other
Loan Document and sums from time to time sufficient to pay, on the due date
thereof, all fees and Finova Expenses owing by Borrower under this Agreement,
and Finova may apply the proceeds of each such Revolving Advance to the payment
of such interest, installments, fees and Finova Expenses. Each such Revolving
Advance shall thereafter accrue interest at the rate then applicable under this
Agreement. Finova, however, shall not be obligated to make any such Revolving
Advance and Borrower acknowledges that Finova will be particularly disinclined
to do so if an Event of Default or an Overadvance exists at the time of, or
would result from the making of, such Revolving Advance.
2.19 REPAYMENT OF THE OBLIGATIONS. All of the Obligations
shall be payable by Borrower to Finova upon the earliest of (a) the receipt by
Finova or Borrower of any collections or proceeds of any of the Collateral, to
the extent of such collections or proceeds, (b) the occurrence of an Event of
Default in consequence of which Finova elects to accelerate the maturity and
payment of the Obligations or (c) termination of the Loan Agreement pursuant to
Section 3.1 or Section 3.2; provided, however, that any portion of the
Obligations payable on demand under any of the Loan Documents shall be paid on
demand.
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3. TERM OF AGREEMENT AND EARLY TERMINATION
3.1 TERM. This Agreement shall become effective in
accordance with Section 14.1 and shall continue in full force and effect for a
term ending five (5) years after the date hereof and shall be deemed
automatically renewed for successive terms of one (1) year thereafter until
terminated as of the end of the initial term or any renewal term (each a Term)
by either party giving the other written notice at least sixty (60) days prior
to the end of the then current Term.
3.2 EARLY TERMINATION. Borrower, subject to the payment of
the fee described below, may terminate this Agreement other than at the end of
the then current Term by giving Finova prior written notice of its intention to
effect an early termination of this Agreement. Finova may terminate this
Agreement at any time that an Event of Default exists. In view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Finova's lost
profits as a result of an early termination of this Agreement, in either of the
instances described in the preceding two sentences, Borrower shall pay to
Finova, upon the effective date of such early termination and in addition to all
other Obligations, as liquidated damages for the loss of the bargain and not as
a penalty, an early termination fee (the Early Termination Fee) in an amount
equal to: (a) four percent (4.0%) of the Revolving Advance Limit if such
termination occurs at any time during the first year of the initial Term; (b)
two percent (2.0%) of the Revolving Advance Limit if such termination occurs at
any time during the second year of the initial Term; and (c) one percent (1.0%)
of the Revolving Advance Limit if such termination occurs during the third,
fourth or fifth year of the initial Term or during any renewal Term. The Early
Termination Fee shall be presumed to be the amount of damages sustained by
Finova as the result of the early termination and Borrower agrees that it is
reasonable under the circumstances currently existing. The Early Termination Fee
shall be deemed included in the Obligations. Notwithstanding anything herein to
the contrary, if and to the extent the Early Termination Fee constitutes
interest under applicable law, the Early Termination Fee, when added to all
other interest contracted for, charged or received under this Agreement or any
other Loan Documents, shall not exceed, and shall be limited to an amount which
constitutes, interest at the Maximum Rate.
3.3 RIGHT OF FIRST REFUSAL. If Borrower seeks to terminate
this Agreement prior to the end of the initial Term in order to refinance with
another lender, Borrower shall give Finova the opportunity to match the pricing
and credit structure terms being offered by the refinancing lender by delivering
to Finova a copy of the written commitment for financing issued by the
refinancing lender. Finova shall deliver to Borrower written notice of its
decision within fifteen (15) days after Finova's receipt of the commitment. If
Finova decides to match the pricing and credit structure terms set forth in the
commitment, this Agreement and the other Loan Documents shall be amended
accordingly and the Term of this Agreement shall be extended for a period of
four (4) years from the date of the amendment. If Finova decides not to match
the pricing and credit structure terms set forth in the commitment and Borrower
proceeds with the refinancing and causes an early termination hereof, Finova
shall be entitled to payment of an Early Termination Fee as provided in Section
3.2.
3.4 EFFECT OF TERMINATION. Upon termination of this
Agreement, all of the Obligations shall be immediately due and payable in full.
No termination of this Agreement shall relieve or discharge Borrower of
Borrower's duties, obligations and covenants hereunder until all of the
Obligations have been fully and indefeasibly paid and satisfied, and Finova's
continuing security interest in the Collateral shall remain in effect until all
of the Obligations have been fully and indefeasibly paid and satisfied.
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to
Finova a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each
and all of its covenants and duties under the Loan Documents. Finova's security
interest in the Collateral shall attach to all Collateral without further act on
the part of Finova or Borrower. Other than sales of Inventory to buyers in the
ordinary course of business, Borrower has no authority, express or implied, to
dispose of any item or portion of the Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower shall, upon the request of Finova, immediately endorse and assign such
Negotiable Collateral to Finova and deliver physical possession of such
Negotiable Collateral to Finova.
4.3 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower
shall execute and deliver to Finova, concurrently with Borrower's execution and
delivery of this Agreement and at any time thereafter at the request of Finova,
all financing statements, continuation financing statements, fixture filings,
security agreements, chattel mortgages, pledges, assignments, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority, and
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all other documents that Finova may reasonably request, in form satisfactory to
Finova, to perfect and continue perfected Finova's security interest in the
Collateral and in order to fully consummate all of the transactions contemplated
hereunder and under the other Loan Documents.
4.4 POWER OF ATTORNEY. Borrower hereby irrevocably
designates and appoints Finova (and any Persons designated by Finova) as
Borrower's true and lawful attorney-in-fact, and authorizes Finova, in either
Borrower's or Finova's name, to: (a) at any time that an Event of Default exists
(i) demand payment on Accounts or other proceeds of Inventory or other
Collateral, (ii) enforce payment of Accounts by legal proceedings or otherwise,
(iii) exercise all of Borrower's rights and remedies to collect any Account or
other Collateral, (iv) sell or assign any Account upon such terms, for such
amount and at such time or times as Finova deems advisable, (v) settle, adjust,
compromise, extend or renew an Account, (vi) discharge and release any Account,
(vii) notify the post office authorities to change the address for delivery of
Borrower's mail to an address designated by Finova, and open all mail addressed
to Borrower, (viii) make, settle and adjust all claims under Borrower's policies
of insurance and endorse the name of Borrower on any item of payment for the
proceeds of such policies of insurance, and (ix) do all other acts and things
necessary, in Finova's determination, to fulfill Borrower's obligations under
this Agreement or any of the other Loan Documents; and (b) at any time that
Finova determines that it is necessary or appropriate to preserve, protect,
insure or maintain its rights hereunder (i) take control, in any manner, of any
item of payment or proceeds of any Collateral, (ii) sign Borrower's name on any
of the documents described in Section 4.3 or on any other similar documents to
be executed, recorded or filed in order to perfect or continue perfected
Finova's security interest in the Collateral and file or record any of the
foregoing documents, (iii) endorse Borrower's name on any items of payment or
proceeds thereof and deposit the same to the account of Finova for application
to the Obligations, (iv) sign Borrower's name on any invoices, bills of lading,
freight bills, chattel paper, documents, instruments or similar documents or
agreements relating to any Accounts or any goods pertaining thereto or any other
Collateral, (v) sign Borrower's name on any verification of Accounts and notices
thereof to Account Debtors, and (vi) prepare, file and sign Borrower's name on
any proof of claim in bankruptcy or other similar document against an Account
Debtor. The appointment of Finova as Borrower's attorney-in-fact and each and
every one of Finova's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and this Agreement has been terminated.
4.5 RIGHT TO INSPECT. Finova, through any of its officers,
employees or agents, shall have the right at any time or times during Borrower's
usual business hours and after notice to Borrower, or during the usual business
hours of any third party having control over any of Borrower's Books and after
notice to such third party, to inspect Borrower's Books in order to verify the
amount or condition of, or any other matter relating to, the Collateral or
Borrower's financial condition. Finova also shall have the right at any time or
times during Borrower's usual business hours and after notice to Borrower to
inspect and examine the Inventory and the Equipment and to check and test the
same as to quality, quantity, value and condition. If an Event of Default exists
or if Finova reasonably believes that an Event of Default exists, Finova may
conduct any of the inspections referenced in this Section 4.5 at any time
without regard to Borrower's or any third party's usual business hours and
without notice.
4.6 SECURITY AGREEMENT FILED AS UCC-1 FINANCING STATEMENT.
A carbon, photographic or other reproduction or copy of this Agreement or of a
financing statement is sufficient as, and may be filed in lieu of, a financing
statement.
5. REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to
Finova and each such representation and warranty shall be deemed to be repeated
with each Revolving Advance made by Finova and shall be conclusively presumed to
have been relied on by Finova regardless of any investigation made or
information possessed by Finova. The following representations and warranties
shall be cumulative and in addition to any and all other representations and
warranties which Borrower shall now or hereafter give, or cause to be given, to
Finova.
5.1 NO PRIOR ENCUMBRANCES; SECURITY INTERESTS. Borrower has
good and indefeasible title to the Collateral, free and clear of liens, claims,
security interests or encumbrances, except for those permitted under Section
7.2.
5.2 ACCOUNTS. All of Borrower's Accounts constitute bona
fide existing obligations created by the sale and delivery of Inventory or the
rendition of services to Account Debtors in the ordinary course of Borrower's
business, and, in the case of Accounts created by the sale and delivery of
Inventory, the Inventory giving rise to such Accounts has been delivered to the
Account Debtor. At the time of the creation of each Eligible Account or the
assignment thereof to Finova, each such Eligible Account is unconditionally owed
to Borrower without defense, dispute, offset, counterclaim or right of return or
cancellation and Borrower has not received notice of actual or imminent
bankruptcy, insolvency or material impairment of the financial condition of the
Account Debtor regarding such Eligible Account.
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5.3 INVENTORY. All Inventory is of good and merchantable
quality, free from defects.
5.4 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment are not stored with a bailee, warehouseman, processor or similar party
unless Finova has consented thereto in writing and are located only at the
locations listed on Schedule 5.4 attached hereto and incorporated herein by
reference.
5.5 INVENTORY RECORDS. Borrower keeps correct and accurate
records itemizing and describing the kind, type, quality and quantity of the
Inventory and Borrower's cost therefor.
5.6 LOCATION OF CHIEF EXECUTIVE OFFICE. The chief executive
office of Borrower is located at the address stated in the first paragraph of
this Agreement and/or at offices located at 2200 Wilson Boulevard, Arlington,
Virginia 22201.
5.7 DUE INCORPORATION AND QUALIFICATION. Borrower is a
corporation duly organized and existing and in good standing under the laws of
the state of its incorporation and is qualified or licensed to do business in,
and is in good standing in, any state in which the nature of Borrower's business
requires such qualification or licensing.
5.8 FICTITIOUS NAMES. Borrower is conducting its business
at the present time under the following trade or fictitious names: Star Tobacco
and Star Tobacco and Pharmaceuticals. Borrower has complied with the fictitious
name laws of all jurisdictions in which compliance is required in connection
with its use of such names. During the five (5) years prior to the date of this
Agreement, Borrower conducted business under the following trade or fictitious
names in addition to those stated above: Star Tobacco Corporation and Star
Tobacco.
5.9 PERMITS AND LICENSES. Borrower holds all licenses,
permits, franchises, approvals and consents as are required in the conduct of
its business and the ownership and operation of its properties.
5.10 DUE AUTHORIZATION; NO CONFLICT; ENFORCEABILITY. The
execution, delivery and performance of the Loan Documents to which Borrower is a
party are within Borrower's corporate powers, have been duly authorized and are
not in conflict with nor constitute a breach of any provision contained in
Borrower's Articles or Certificate of Incorporation or Bylaws; nor will they
create a default or breach under any material agreement to which Borrower is a
party. The Loan Documents constitute Borrower's legal, valid and binding
obligations, enforceable in accordance with their respective terms.
5.11 LITIGATION. There are no actions or proceedings pending
by or against Borrower before any court or administrative agency and Borrower
has no knowledge or notice of any pending, threatened or imminent litigation,
governmental investigations, or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of the Obligations, except for ongoing
collection matters in which Borrower is the plaintiff and such matters as have
been disclosed to Finova in writing prior to the date of this Agreement.
5.12 TAXES. All assessments and taxes, whether real, personal
or otherwise, due or payable by, or imposed, levied or assessed against Borrower
or any of its property or in connection with Borrower's business have been paid
in full prior to delinquency or the expiration of any extension period.
Borrower's federal tax identification number is 54-1564447.
5.13 NO MATERIAL ADVERSE CHANGE IN FINANCIAL CONDITION. All
financial statements relating to Borrower which have been or may hereafter be
delivered by Borrower to Finova have been prepared or will be parepared in
accordance with GAAP and fairly present Borrower's financial condition as of the
date thereof and Borrower's results of operations for the period then ended.
There has been no material adverse change in the financial condition of Borrower
since the date of the most recent of such financial statements submitted to
Finova.
5.14 SOLVENCY. Borrower is able to pay its debts (including
trade debts) as they mature, has capital sufficient to carry on its business and
the fair saleable value of its assets exceeds the amount of its liabilities. No
transfer of property is being made by Borrower and no obligation is being
incurred by Borrower in connection with the transactions contemplated by this
Agreement or the other Loan Documents with the intent to hinder, delay or
defraud either present or future creditors of Borrower.
5.15 ERISA. Neither Borrower, nor any ERISA Affiliate nor any
Plan is or has been in violation of any of the provisions of ERISA, any of the
qualification requirements of IRC Section 401(a), or any of the published
interpretations thereof. No lien upon the assets of Borrower has arisen with
respect to any Plan. No prohibited transaction within the meaning of ERISA
Section 406 or IRC Section 4975(c) has occurred with respect to any Plan.
Neither Borrower nor any ERISA Affiliate has
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incurred any withdrawal liability with respect to any Multiemployer Plan.
Borrower and each ERISA Affiliate have made all contributions required to be
made by them to any Plan or Multiemployer Plan when due. There is no accumulated
funding deficiency in any Plan, whether or not waived.
5.16 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower has
complied with all Environmental Laws. Except as disclosed to Finova in writing
prior to the date of this Agreement, Borrower has not caused or permitted any
Hazardous Materials to be located, incorporated, generated, stored,
manufactured, transported to or from, released, disposed of or used at, upon,
under or within any premises at which Borrower conducts its business, or in
connection with Borrower's business. To the best of Borrower's knowledge, no
prior owner or operator of any premises at which Borrower conducts its business
has caused or permitted any of the above to occur at, upon, under or within any
of such premises.
5.17 INTELLECTUAL PROPERTY. As of the date hereof, Borrower
does not own or have rights as licensee in or to any trademarks, except as set
forth on Schedule 5.17 attached hereto and incorporated herein by reference.
5.18 LABOR AND EMPLOYMENT DISPUTES. There are no pending
grievances, disputes or controversies with any union or other organization of
Borrower's employees, or pending threats of strikes or work stoppages, or
demands for collective bargaining by any union or other organization of
Borrower's employees.
5.19 YEAR 2000 COMPLIANCE. Borrower has taken all action
necessary to assure that there will be no material adverse change to Borrower's
internal business systems by reason of the advent of the year 2000, including
that all of Borrower's computer-based systems, embedded microchips and other
processing capabilities effectively recognize and process dates after December
31, 1999.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that during the term of this Agreement
and until payment in full of the Obligations, and unless Finova shall otherwise
consent in writing, Borrower shall do all of the following:
6.1 ACCOUNTING SYSTEM. Borrower at all times shall maintain
a standard and modern system of accounting in accordance with GAAP with ledger
and account cards or computer tapes, disks, printouts and records pertaining to
the Collateral which contain information as may from time to time be requested
by Finova. Borrower also shall keep proper books of account showing all sales,
claims and allowances on its Inventory.
6.2 COLLATERAL REPORTS. Borrower shall deliver to Finova, no
later than the fifteenth day of each month during the term of this Agreement, a
detailed aging of the Accounts, a reconciliation statement, a summary aging, by
vendor, of all accounts payable and any book overdraft, and copies of Borrower's
bank account statements. Borrower shall deliver to Finova, as Finova may from
time to time require, collection reports, sales journals, invoices, original
delivery receipts, customers' purchase orders, shipping instructions, bills of
lading and other documentation respecting shipment arrangements. Absent such a
request by Finova, copies of all such documentation shall be held by Borrower as
custodian for Finova.
6.3 RETURNS. Returns and allowances, if any, as between
Borrower and its Account Debtors, shall be permitted by Borrower on the same
basis and in accordance with the usual and customary practices of Borrower as
they exist at the time of the execution and delivery of this Agreement or as may
be established by Borrower from time to time with Finova's consent, which shall
not be unreasonably withheld. If any Account Debtor returns any Inventory to
Borrower, Borrower shall promptly determine the reason for such return and, if
Borrower accepts such return, issue a credit memorandum (with a copy to be sent
to Finova) in the appropriate amount to such Account Debtor. Borrower shall
promptly notify Finova of all returns and recoveries and of all disputes and
claims.
6.4 [Omitted].
6.5 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower
shall deliver to Finova: (a) as soon as available, but in any event within
thirty (30) days after the end of each month during each of Borrower's fiscal
years, a company prepared balance sheet and profit and loss statement covering
Borrower's operations during such period; and (b) as soon as available, but in
any event within ninety (90) days after the end of each of Borrower's fiscal
years, financial statements of Borrower for each such fiscal year, audited by
independent certified public accountants acceptable to Finova. All such annual
financial statements shall include a balance sheet and profit and loss
statement, together with the accountants' letter to management. Borrower shall
also deliver Borrower's Form 10-Qs, 10-Ks or 8-Ks, and any other filings made by
Borrower with the Securities and Exchange Commission, if any, as soon as the
same become available, and any other report reasonably requested by Finova
relating to the
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Collateral or the financial condition of Borrower, including financial
projections, and a certificate signed by the chief financial officer of Borrower
to the effect that all reports, statements or computer prepared information of
any kind or nature delivered or caused to be delivered to Finova under this
Section 6.5 fairly present the financial condition of Borrower and further
certifying that Borrower is in compliance with all financial covenants contained
in this Agreement and that there exists on the date of delivery of such
certificate to Finova no condition or event which constitutes an Event of
Default. If Borrower is a parent company of one or more subsidiaries or is a
subsidiary of another company, then, in addition to the financial statements
referred to above, Borrower agrees to deliver financial statements prepared on a
consolidating basis so as to present Borrower and each such related entity
separately, and on a consolidated basis.
6.6 LITIGATION. Borrower shall promptly notify Finova in
writing of any litigation, governmental investigations or criminal prosecutions
involving Borrower where Borrower's exposure is greater than $100,000 in a
single matter or when Borrower's exposure on all litigation matters exceeds
$250,000, other than collection matters in which Borrower is the plaintiff.
6.7 TAX RETURNS, RECEIPTS. Borrower shall deliver to Finova
copies of each of Borrower's federal income tax returns, and any amendments
thereto, within thirty (30) days after the filing thereof with the Internal
Revenue Service. Furthermore, Borrower shall deliver to Finova, promptly upon
request by Finova, satisfactory evidence of Borrower's payment of all federal
withholding taxes and excise taxes required to be paid by Borrower.
6.8 [Omitted]
[Omitted]
6.10 MAINTENANCE OF EQUIPMENT. Borrower shall keep and
maintain the Equipment in good operating condition and repair and shall make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved.
6.11 TAXES. All assessments and taxes, whether real, personal
or otherwise, due or payable by, or imposed, levied or assessed against Borrower
or any of its property or in connection with Borrower's business shall be paid
in full prior to delinquency or the expiration of any extension period. Borrower
shall make due and timely payment or deposit of all federal, state and local
taxes, assessments or contributions required of it by law and will execute and
deliver to Finova, on demand, appropriate certificates attesting to the payment
or deposit thereof. Borrower shall make timely payment or deposit of all tax
payments and withholding taxes required of it by applicable laws, including
those laws concerning F.I.C.A., F.U.T.A., state disability and local, state and
federal income taxes, and shall, upon request, furnish Finova with proof
satisfactory to Finova indicating that Borrower has made such payments or
deposits, except that Borrower may refrain from funding an escrow required by
MSA or any statutes promulgated thereunder so long as the same is being
diligently contested through appropriate procedures and Borrower is maintaining
adequate reserves therefor.
6.12 INSURANCE. Borrower, at its expense, shall keep and
maintain the Collateral insured against all risk of loss or damage from fire,
theft, vandalism, malicious mischief, explosion, sprinklers and all other
hazards and risks of physical damage included within the meaning of the term
"extended coverage" in such amounts as are ordinarily insured against by other
similar businesses. Borrower shall also keep and maintain comprehensive general
public liability insurance and property damage insurance, and insurance against
loss from business interruption, insuring against all risks relating to or
arising from Borrower's ownership and use of the Collateral and Borrower's other
assets and the operation of Borrower's business. All such policies of insurance
shall be in such form, with such companies and in such amounts as may be
satisfactory to Finova. Borrower shall deliver to Finova certified copies of
such policies of insurance and evidence of the payments of all premiums
therefor. All such policies of insurance (except those of public liability and
property damage) shall contain a Lender's Loss Payable endorsement in a form
satisfactory to Finova, naming Finova as loss payee thereof (as its interests
appear), and shall contain a waiver of warranties. All proceeds payable under
any such policy shall be payable to Finova to be applied to the Obligations. All
public liability and property damage policies shall name Finova as an additional
insured. All such policies shall provide that Finova shall receive no less than
thirty (30) days prior written notice of any cancellation or termination of such
policies.
6.13 NO OFFSETS OR COUNTERCLAIMS. All payments hereunder and
under the other Loan Documents made by or on behalf of Borrower shall be made
without offset or counterclaim, and Borrower hereby waives any right to offset,
against the repayment of the Obligations, any claims it may have against Finova.
6.14 FINOVA EXPENSES. Borrower acknowledges that Finova
Expenses include, among other things, (a) Finova's reasonable attorneys fees and
expenses incurred in defending or otherwise representing Finova concerning the
Loan Documents or the Obligations and (b) charges resulting from the dishonor of
checks. Since Finova Expenses are a part of the Obligations which are secured by
the Collateral, Finova shall not be required to discharge any lien or terminate
any security interest
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in the Collateral unless and until (y) Borrower and Finova execute a mutual
general release of liability and indemnification in favor of and acceptable to
Finova and (z) to the extent another financial institution refinances the
Obligations, such financial institution delivers an agreement, acceptable to
Finova, to indemnify Finova for loss arising from checks delivered to Finova for
collection and payment of the Obligations which are returned for non-payment or
for any other reason.
6.15 COMPLIANCE WITH LAW. Borrower shall comply with the
requirements of all applicable laws, rules, regulations and orders of
governmental authorities relating to Borrower and the conduct of Borrower's
business, including the Fair Labor Standards Act and the Americans with
Disabilities Act.
6.16 [Omitted]
6.17 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower
shall not permit any lien under any Environmental Law to be filed against any of
the Collateral or any of Borrower's real property, and will promptly notify
Finova of any proceeding, inquiry or claim relating to any alleged violation of
any Environmental Law, or any alleged loss, damage or injury resulting from any
Hazardous Material. Finova shall have the right to join and participate in, to
the extent necessary to protect the Collateral and to defend Finova against any
claim, as a party if it so elects, any legal or administrative proceeding
initiated against Borrower or any guarantor of the Obligations with respect to
any Hazardous Material or in connection with any Environmental Law.
6.18 FIXED CHARGE COVERAGE RATIO. Borrower shall maintain a
Fixed Charge Coverage Ratio of at least 1.0 to 1.0, calculated at the end of
each of Borrower's fiscal quarters for the twelve (12) month period ending on
the last day of such fiscal quarter. Borrower shall deliver a certificate to
Finova within fifteen (15) days after the end of each fiscal quarter, certifying
its compliance with this covenant and attaching any supporting documentation
requested by Finova.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that during the term of this Agreement
and until payment in full of the Obligations, Borrower will not do any of the
following without Finova's prior written consent:
7.1 INDEBTEDNESS. Create, incur, assume, permit or otherwise
become liable with respect to any indebtedness outside of the ordinary and usual
course of Borrower's business, except (a) indebtedness set forth in Borrower's
latest financial statements submitted to Finova prior to the date of this
Agreement and renewals or extensions of such indebtedness, (b) indebtedness for
the payment of all or any part of the purchase price of any fixed assets and any
renewals or extensions of such indebtedness, but not any increases in the
principal amount thereof outstanding at the time and (c) the Obligations.
7.2 SECURITY INTERESTS. Create, incur, assume or permit to
exist any security interest, lien, pledge, mortgage or encumbrance on any
Collateral or on any of Borrower's real property, except (a) the security
interests granted to Finova by Borrower, (b) the security interests disclosed in
the UCC searches obtained by Finova prior to the funding of the initial
Revolving Advance hereunder (other than security interests required to be
terminated pursuant to the Conditions Precedent Rider) , (c) the purchase money
security interest granted to Brown & Williamson Tobacco Corporation ("B&W") in
cut tobacco under that certain Supply Agreement for Star Scientific Blend
between B&W and the Borrower, (d) purchase money security interests upon fixed
assets which secure indebtedness permitted by Section 7.1(b) above, but only if
such security interests shall at all times be confined solely to the fixed
assets, the purchase price of which was financed through the incurrence of such
indebtedness and (e) any security interest which Borrower has disclosed in
writing to Finova and to which Finova has given its prior written consent.
7.3 EXTRAORDINARY TRANSACTIONS. Enter into any transaction
not in the ordinary and usual course of Borrower's business, including the sale,
lease or other disposition of, whether by sale or otherwise, any of Borrower's
assets other than sales of Inventory in the ordinary and usual course of
Borrower's business; or make any advance, loan or capital contribution to any
Person except in the ordinary and usual course of Borrower's business.
7.4 CHANGE NAME. Change Borrower's name, business structure
or identity, or add any new fictitious name.
7.5 FUNDAMENTAL CHANGES. Except upon prior written consent
of FINOVA, which consent shall not be unreasonably withheld, enter into any
acquisition, merger, consolidation, reorganization or recapitalization, or
reclassify its capital stock, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or acquire by purchase or otherwise all
or substantially all of the assets, stock or other beneficial ownership interest
of any other Person.
7.6 GUARANTY. Guaranty or otherwise become in any way liable
with respect to the obligations of
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any third party except by endorsement of instruments or items of payment for
deposit to the account of Borrower for negotiation and delivery to Finova.
7.7 RESTRUCTURE. Except upon prior written consent of
FINOVA, which consent shall not be unreasonably withheld, make any change in
Borrower's capital structure or in the principal nature of Borrower's business
operations.
7.8 PREPAYMENTS. Prepay any indebtedness owing to any third
party.
7.9 CHANGE OF OWNERSHIP. Except upon prior written consent
of FINOVA, which consent shall not be unreasonably withheld, cause, permit or
suffer any transfer, whether direct or indirect, of the ownership of ten percent
(10%) or more of Borrower's outstanding capital stock or other beneficial
ownership interest in any single transaction or series of transactions.
7.10 [Omitted]
7.11 [Omitted]
7.12 [Omitted]
7.13 CONSIGNMENTS. Consign any Inventory; or sell any
Inventory on bill and hold, sale on approval or other conditional terms of sale.
7.14 [Omitted]
7.15 ACCOUNTING METHODS. Modify or change its method of
accounting or enter into, modify or terminate any agreement currently existing
or at any time hereafter entered into with any third party accounting firm or
service bureau for the preparation or storage of Borrower's accounting records
without said accounting firm or service bureau agreeing to provide Finova
information regarding the Collateral or Borrower's financial condition. Borrower
waives the right to assert a confidential relationship, if any, it may have with
any accounting firm or service bureau in connection with any information
requested by Finova pursuant to or in accordance with this Agreement, and agrees
that Finova may contact directly any such accounting firm or service bureau in
order to obtain such information.
7.16 SUSPENSION. Suspend or go out of business.
7.17 LOCATION OF CHIEF EXECUTIVE OFFICE. Relocate its chief
executive office to a new location unless Finova is given thirty (30) days prior
written notice thereof.
8. EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall
constitute an "Event of Default" under this Agreement:
8.1 FAILURE TO PAY. Borrower fails to pay when due any of
the Obligations;
8.2 FAILURE TO PERFORM. Borrower fails or neglects to timely
perform, keep or observe any term, provision, condition, representation,
warranty, covenant or agreement contained in this Agreement, in any of the other
Loan Documents or in any other present or future agreement between Borrower and
Finova;
8.3 MISREPRESENTATION. Any representation, warranty or
statement of fact made by Borrower or any officer, employee, agent or director
of Borrower to Finova shall when made or deemed to be made be false or
misleading in any material respect;
8.4 MATERIAL ADVERSE CHANGE. There is a material adverse
change in Borrower's business or financial condition;
8.5 LEVY OR ATTACHMENT. Any material portion of Borrower's
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any judicial officer;
8.6 INSOLVENCY BY BORROWER. An Insolvency Proceeding is
commenced by Borrower;
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8.7 INSOLVENCY AGAINST BORROWER. An Insolvency Proceeding
is commenced against Borrower;
8.8 INJUNCTION AGAINST BORROWER. Borrower is enjoined,
restrained or in any way prevented by court order from continuing to conduct all
or any material part of its business affairs;
8.9 GOVERNMENT LIEN. A notice of lien, levy or assessment is
filed of record with respect to any of Borrower's assets by the United States
government, or any department, agency or instrumentality thereof, or by any
state, county, municipal or other governmental agency, or any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any of Borrower's assets and the same is not
paid on the payment date thereof;
8.10 JUDGMENT. A judgments or other claims for an amount in
excess of One Hundred Thousand Dollars ($100,000) in any single action or Two
Hundred Fifty Thousand Dollars ($250,000) in the aggregate becomes a lien or
encumbrance on Borrower's assets;
8.11 CROSS DEFAULT TO MATERIAL AGREEMENTS. There is a
default in any material agreement to which Borrower is a party with one or more
third parties or by which Borrower or Borrower's property or assets are bound;
8.12 SUBORDINATED DEBT PAYMENTS. Borrower makes any payment
on account of indebtedness that has been contractually subordinated in right of
payment to the payment of the Obligations, except to the extent such payment is
permitted by the terms of the subordination agreement applicable to such
indebtedness;
8.13 [Omitted]
8.14 ERISA VIOLATION. A prohibited transaction within the
meaning of ERISA Section 406 or IRC Section 4975(c) shall occur with respect to
a Plan which could have a material adverse effect on the financial condition of
Borrower; any lien upon the assets of Borrower in connection with any Plan shall
arise; Borrower or any ERISA Affiliate shall completely or partially withdraw
from a Multiemployer Plan and such withdrawal could, in the opinion of Finova,
have a material adverse effect on the financial condition of Borrower; Borrower
or any of its ERISA Affiliates shall fail to make full payment when due of all
amounts which Borrower or any of its ERISA Affiliates may be required to pay to
any Plan or any Multiemployer Plan as one or more contributions thereto;
Borrower or any of its ERISA Affiliates creates or permits the creation of any
accumulated funding deficiency, whether or not waived; the voluntary or
involuntary termination of any Plan which termination could, in the opinion of
Finova, have a material adverse effect on the financial condition of Borrower;
or Borrower shall fail to notify Finova promptly in writing and in any event
within ten (10) days of the occurrence of any event which constitutes an Event
of Default under this clause or would constitute such an Event of Default upon
the exercise of Finova's judgment; or
8.15 CRIMINAL PROCEEDINGS. Criminal proceedings are
instituted against Borrower, any member of Borrower's senior management or any
guarantor of the Obligations that could result in the forfeiture or loss of
Collateral or a material impairment of the financial condition of Borrower or
any guarantor of the Obligations.
Notwithstanding anything contained in this Section 8 to the
contrary, Finova shall refrain from exercising its rights and remedies and an
Event of Default shall not be deemed to exist by reason of the occurrence of any
of the events set forth in Sections 8.5, 8.7, 8.8, 8.9 or 8.10 of this Agreement
if, within twenty (20) days after the date thereof, the same is released,
discharged, dismissed, bonded against or satisfied; PROVIDED, HOWEVER, Finova
shall not be obligated to make Revolving Advances to Borrower during such
period.
9. FINOVA'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. At any time that an Event of
Default exists, Finova may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, any of the other Loan Documents or otherwise, immediately due and
payable in full;
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, any of the other Loan Documents or any
other agreement between Borrower and Finova;
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(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Finova, but without
affecting Finova's rights and security interest in the Collateral and without
affecting Borrower's duties, obligations and covenants hereunder, including
payment of the Obligations;
(d) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Finova considers advisable and,
in such cases, Finova will credit Borrower's loan account with only the net
amounts received by Finova in payment of such disputed Accounts, after deducting
all Finova Expenses incurred or expended in connection therewith;
(e) Seek the appointment of a receiver (and Borrower hereby
consents to such appointment);
(f) Without notice to or demand upon Borrower or any
guarantor, make such payments and do such acts as Finova considers necessary or
reasonable to protect its security interest in the Collateral. Borrower agrees
to assemble the Collateral if Finova so requires and to deliver or make the
Collateral available to Finova at a place designated by Finova. Borrower
authorizes Finova to enter any premises where the Collateral is located, to take
and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest or compromise any encumbrance, charge or lien that in Finova's
determination appears to be prior or superior to its security interest and to
pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Finova a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of Finova's rights or remedies provided herein, at law, in equity,
or otherwise;
(g) Without notice to Borrower (such notice being expressly
waived) and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9505 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits of Borrower held
by Finova (including any amounts received in a lockbox or blocked account), or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Finova;
(h) Hold, as cash collateral, any and all balances and
deposits of Borrower held by Finova (including any amounts received in a lockbox
or blocked account) to secure the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale and sell (in the manner provided for
herein) the Collateral. Finova is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale and selling any Collateral.
Borrower's rights under all licenses and all franchise agreements shall inure to
Finova's benefit;
(j) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Finova
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(k) Finova shall give notice of the disposition of the
Collateral as follows:
(1) Finova shall give the Borrower and any other
Person entitled to notice under applicable law, a notice in writing of the time
and place of public sale or, if the sale is a private sale or some other
disposition other than a public sale is to be made, then the time on or after
which the private sale or other disposition is to be made;
(2) The notice shall be personally delivered or
mailed, postage prepaid, to Borrower as provided in Section 12, at least five
(5) calendar days before the date fixed for the sale, or at least five (5)
calendar days before the date on or after which the private sale or other
disposition is to be made, unless the Collateral is perishable or threatens to
decline speedily in value;
(l) Finova may credit bid and purchase at any public sale;
(m) Any deficiency that exists after disposition of the
Collateral as provided above shall be paid immediately by Borrower. Any excess
will be remitted without interest by Finova to the party or parties legally
entitled to such excess; and
(n) In addition to the foregoing, Finova shall have all
rights and remedies provided by law and any rights and remedies contained in any
other Loan Documents. All such rights and remedies shall be cumulative.
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9.2 NO WAIVER. No delay on the part of Finova in exercising
any right, power or privilege under this Agreement shall operate as a waiver,
nor shall any single or partial exercise of any right, power or privilege under
this Agreement or otherwise, preclude other or further exercise of the right,
power or privilege or the exercise of any other right, power or privilege.
10. TAXES AND EXPENSES REGARDING THE COLLATERAL
If Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums or otherwise) due to third parties regarding the Collateral,
or fails to make any deposits or furnish any required proof of payment or
deposit, or fails to perform any of Borrower's other covenants under the terms
of this Agreement or any other Loan Document, then, Finova may, in its
reasonable credit judgment, do any or all of the following: (a) make any payment
which Borrower has failed to pay or any part thereof; (b) set up such reserves
in Borrower's loan account as Finova deems necessary to protect Finova from the
exposure created by such failure; (c) obtain and maintain insurance policies of
the type described in Section 6.12 and take any action with respect to such
policies as Finova deems prudent; or (d) take any other action deemed necessary
by Finova to preserve and protect its interests and rights under this Agreement
or any other Loan Document. Any payments made by Finova shall not constitute an
agreement by Finova to make similar payments in the future or a waiver by Finova
of any Event of Default under this Agreement. Finova need not inquire as to, or
contest the validity of, any such expense, tax, security interest, encumbrance
or lien and the receipt of notice for the payment thereof shall be conclusive
evidence that the same was validly due and owing.
11. WAIVERS AND INDEMNIFICATIONS
11.1 WAIVERS. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, notice of nonpayment at maturity, notice of intention to
accelerate and notice of acceleration, so that Finova may exercise any and all
rights and remedies under the Loan Agreement or any other Loan Documents, or as
otherwise provided at law or in equity, at any time that an Event of Default
exists, without any further notice, grace or opportunity to cure whatsoever.
Borrower further waives notice prior to Finova's taking possession or control of
the Collateral, any bond or security which might be required by any court prior
to allowing Finova to exercise any of Finova's remedies, and the benefit of all
valuation, appraisement and exemption laws. Borrower agrees that, at any time
that an Event of Default exists, Finova may compromise, settle or release
without notice to Borrower any accounts, documents, instruments, chattel paper
or guaranties at any time held by Finova on which Borrower may in any way be
liable.
11.2 NO MARSHALING. Borrower hereby expressly waives all
rights, if any, to require a marshaling of assets by Finova or to require that
Finova first resort to some or any portion of the Collateral before foreclosing
upon, selling or otherwise realizing on any other portion thereof.
11.3 FINOVA'S LIABILITY FOR COLLATERAL. So long as Finova
complies with its obligations, if any, under Section 9207 of the Code, Finova
shall not in any way or manner be liable or responsible for: (a) the safekeeping
of the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding agency
or other Person. All risk of loss, damage or destruction of the Collateral shall
be borne by Borrower.
11.4 INDEMNIFICATION. Borrower shall defend, indemnify and
hold harmless Finova, its directors, officers, agents, employees, participants
and assigns, from and against any and all claims, suits, actions, causes of
action, debts, liabilities, damages, losses, obligations, charges, judgments and
expenses, including attorneys fees and costs, of any nature whatsoever, in any
way relating to or arising from the transactions contemplated by this Agreement
or any other Loan Document (including those relating to or arising from any
alleged or actual violation of any Environmental Law, or any loss, damage or
injury resulting from any Hazardous Material); provided that the foregoing
indemnification shall not extend to liabilities, damages, losses, obligations,
judgments and expenses proximately caused by the gross negligence or willful
misconduct of Finova. This indemnification provision shall survive the
termination of this Agreement.
12. NOTICES
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement, the Loan Documents or any other
agreement entered into in connection herewith shall be in writing and (except
for financial statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be personally delivered or sent by
registered or certified mail, postage prepaid, return receipt requested, or by
receipted overnight delivery service to Borrower or to Finova, as the case may
be, at their addresses set forth below:
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IF TO BORROWER: STAR TOBACCO AND PHARMACEUTICALS, INC.
16 South Market Street
Petersburg, Virginia 23803
Attn: Jim McNulty
WITH A COPY TO: PAUL, HASTINGS, JANOFSKY & WALKER LLP
Tenth Floor
1299 Pennsylvania Avenue, N.W.
Washington, DC 20004-2400
Attn: Paul L. Perito
IF TO FINOVA: FINOVA CAPITAL CORPORATION, BUSINESS
CREDIT
1000 Abernathy Road N.E.
Building 400, Suite 1500
Atlanta, Georgia 30328
Attn: Service Center Manager
WITH A COPY TO: FINOVA CAPITAL CORPORATION
2020 Santa Monica Blvd., Suite 500
Santa Monica, CA 90404
Attn: Michael N. Rosner
The parties hereto may change the address at which they are to
receive notices hereunder by notice in writing in the foregoing manner given to
the other. All notices or demands sent in accordance with this Section 12, other
than notices by Finova in connection with Sections 9504 and 9505 of the Code,
shall be deemed received on the earlier of the date of actual receipt or three
(3) calendar days after the deposit thereof in the mail or one (1) calendar day
after deposit thereof with an overnight delivery service. Borrower acknowledges
and agrees that notices sent by Finova in connection with Sections 9504 or 9505
of the Code shall be deemed sent when deposited in the mail or with an overnight
delivery service or otherwise sent by Finova in accordance with the delivery
methods set forth above.
13. DESTRUCTION OF PAPERS DELIVERED TO FINOVA
All documents, schedules, invoices, agings or other papers delivered
to Finova may be destroyed or otherwise disposed of by Finova four (4) months
after they are delivered to or received by Finova unless Borrower requests, in
writing, the return of said documents, schedules, invoices, agings or other
papers and makes arrangements, at Borrower's expense, for their return.
14. GENERAL PROVISIONS
14.1 EFFECTIVENESS; TIME OF THE ESSENCE. This Agreement and
the other Loan Documents shall be binding and deemed effective when executed by
Borrower and Finova. Time is of the essence of this Agreement and the other Loan
Documents.
14.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of the respective successors and assigns of each of the
parties; PROVIDED, HOWEVER, that Borrower may not assign this Agreement or any
rights or duties hereunder without Finova's prior written consent and any
prohibited assignment shall be void and of no effect as against Finova. No
consent to an assignment by Finova shall release Borrower from its Obligations.
Finova and its successors and assigns may assign this Agreement and any other
Loan Document and its rights and duties hereunder and thereunder. Finova
reserves the right to sell, assign, transfer, negotiate or grant participations
in all or any part of, or any interest in Finova's rights and benefits
hereunder. In connection therewith, Finova may disclose all documents and
information which Finova now or hereafter may have relating to Borrower or
Borrower's business. Borrower expressly consents to any assignment by Finova to
its wholly owned subsidiary, Finova Funding Inc., of certain of Finova's rights
hereunder and under the other Loan Documents, including the beneficial interest
in loans made by Finova, and any subsequent assignment by Finova Funding Inc. to
LaSalle National Bank (or any successor trustee), as trustee of the Finova Small
Business Loan Master Trust, of such rights.
14.3 SECTION HEADINGS. Section headings in this Agreement are
included for convenience of reference only and shall not constitute a part of
this Agreement for any other purpose or be given any substantive effect.
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<PAGE> 19
14.4 INTERPRETATION. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Finova or
Borrower, whether under any rule of construction or otherwise. On the contrary,
this Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
14.5 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
14.6 AMENDMENTS IN WRITING. Neither this Agreement nor any
provision hereof may be amended, modified, waived or terminated orally or by
course of conduct or pattern of dealing, but only by a written agreement signed
by an authorized officer of Finova. Any purported amendment, modification,
waiver or termination of this Agreement or any provision hereof that is not in
writing and signed by an authorized officer of Finova shall be void and of no
effect.
14.7 INTEGRATION. This Agreement, together with the other
Loan Documents, constitutes the entire agreement between the parties with
respect to the subject matter hereof. This Agreement, together with the other
Loan Documents, supersedes all prior agreements, understandings and
negotiations, if any, which are merged into this Agreement and the other Loan
Documents.
14.8 COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts each of
which, when executed and delivered, shall be deemed to be an original and all of
which, when taken together, shall constitute but one and the same Agreement.
14.9 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the
incurrence or payment of the Obligations by Borrower or any guarantor of the
Obligations or the transfer by either or both of such parties to Finova of any
property of either or both of such parties should for any reason subsequently be
declared to be void or voidable under any state or federal law relating to
creditors' rights, including provisions of the Bankruptcy Code relating to
fraudulent conveyances, preferences and other voidable or recoverable payments
of money or transfers of property (a Voidable Transfer), and if Finova is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Finova is required or elects
to repay or restore, and as to all reasonable costs, expenses and attorneys fees
of Finova related thereto, the liability of Borrower or such guarantor
automatically shall be revived, reinstated and restored and shall exist as
though such Voidable Transfer had never been made.
14.10 CONSULTATION WITH COUNSEL. Borrower and Finova
acknowledge that they have been given the opportunity to consult with counsel
and other advisors of their choice prior to entering into this Agreement.
14.11 LIMITATION OF LIABILITY. No claim may be made by
Borrower or any other Person against Finova or the officers, directors,
employees, participants, assignees or agents of Finova for any special,
indirect, punitive or consequential damages in respect of any claim for breach
of contract or any other theory of liability arising out of or related to the
transactions contemplated by this Agreement, or any act, omission or event
occurring in connection therewith, and Borrower hereby waives, releases and
agrees not to sue upon any claim for any such damages.
14.12 TELEFACSIMILE EXECUTION. Delivery of an executed
counterpart of this Agreement or any other Loan Document by telefacsimile
transmission shall be equally as effective as delivery of an executed hard copy
of the same. Any party delivering an executed counterpart of this Agreement or
any other Loan Document by telefacsimile transmission shall also deliver an
executed hard copy of the same, but the failure by such party to deliver an
executed hard copy shall not affect the validity, enforceability and binding
effect of this Agreement or such other Loan Document.
14.13 FINANCE LENDER LICENSE. Finova is licensed as a Finance
Lender by the California Department of Corporations, file number 603 2362.
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<PAGE> 20
15. CHOICE OF LAW AND VENUE
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION,
AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA
(EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW); PROVIDED,
HOWEVER, THAT THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED SHALL
GOVERN WITH RESPECT TO (A) THE CREATION OF LIENS ON COLLATERAL LOCATED IN SUCH
STATE AND (B) THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF FINOVA'S LIENS
UPON ANY PORTION OF THE COLLATERAL LOCATED IN SUCH STATE AND THE ENFORCEMENT IN
SUCH STATE OF FINOVA'S OTHER REMEDIES WITH RESPECT TO THE COLLATERAL LOCATED IN
SUCH STATE.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE
COURTS LOCATED IN THE COUNTY OF MARICOPA, STATE OF ARIZONA, THE FEDERAL COURTS
WHOSE VENUE INCLUDES THE COUNTY OF MARICOPA, STATE OF ARIZONA, OR, AT THE SOLE
OPTION OF FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN CONTROVERSY. THE PARTIES EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT, AND THE
PARTIES HEREBY WAIVE ANY OBJECTION WHICH EITHER MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION AND HEREBY CONSENT TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT. FURTHERMORE,
BORROWER AND FINOVA EACH WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW,
ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO
OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS
SECTION 15.
16. WAIVER OF JURY TRIAL
BORROWER AND FINOVA HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH
OF DUTY CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND FINOVA
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE
EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT
TO A TRIAL BY THE COURT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered at Finova's place of business in Atlanta, Georgia.
<TABLE>
<S> <C>
STAR TOBACCO AND PHARMACEUTICALS, INC.,
Attest: a Virginia corporation
Signed By:
- ------------------------------ ----------------------------
Secretary/Assistant Secretary Print Name:
[Corporate Seal] Title/Capacity:
FINOVA CAPITAL CORPORATION,
BUSINESS CREDIT, a Delaware corporation
Signed By:
----------------------------
Print Name:
Title/Capacity
</TABLE>
20
<PAGE> 1
EXHIBIT 10.38
LEASE AND PURCHASE OPTION CONTRACT
OWNER/LANDLORD: Industrial Development Authority of
The Town of Chase City, Virginia
OPTIONEE/TENANT: Star Scientific, Inc.
DATE OF CONTRACT: March 10, 2000
THIS LEASE AND PURCHASE OPTION CONTRACT is made this 10th of March,
2000, by and between the INDUSTRIAL DEVELOPMENT AUTHORITY OF THE TOWN OF CHASE
CITY, VIRGINIA, a body politic and corporate (hereafter the "IDA")
Grantor/Landlord, whose address is 319 Main Street, Chase City, Virginia 23927,
and STAR SCIENTIFIC, INC. (hereafter "Star"), Grantee/Tenant, whose address is
16 South Market Street, Petersburg, Virginia 23802;
WITNESSETH:
That for an in consideration of the mutual covenants of the reciprocal
benefits inuring to the parties hereunder, and in consideration of the
reciprocal duties hereby imposed upon the parties, and for other good and
valuable consideration, IDA hereby leases, the real property described in the
attachment hereto and identified as "Exhibit A" (hereafter the "Property"), and
Star hereby leases the Property from IDA, said lease being made upon the
following terms and conditions.
1. LEASE TERM: The term of the lease shall be for a period of one
hundred twenty (120) months commencing on the first day of May, 2000, and ending
at midnight on the 30th day of April, 2010, unless the lease term is shortened
by Star's exercise of its purchase option.
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<PAGE> 2
2. RENT: The monthly rent due from Star to IDA during the term of this
lease shall be ELEVEN THOUSAND ONE HUNDRED TWENTY-THREE & 63/100 ($11,123.63)
DOLLARS, the first of which monthly installments shall be due on the first day
of May, 2000, with a like installment to be due and payable on the first day of
each month thereafter, to and including April 1, 2010.
3. USE OF THE PREMISES: The parties hereby acknowledge that the
premises shall be used for activities related to the processing of tobacco,
production of Lamina and other products, and fabrication of mobile units for
farm use. Star shall make no illegal use of the premises nor permit the same to
be done by any agent, employee or assign.
4. EXPENSES BORNE BY STAR: Throughout the term of this lease, and
throughout any renewal or extension hereof, Star shall pay in full all costs
arising from any of the following:
a. Insurance of all types on the premises, including hazard
and property insurance, and liability insurance on the
premises to indemnify the IDA in an amount of at least
$1,000,000.00. IDA shall be shown as a named insured on the
policy and furnished with evidence of insurance upon request.
Insurance on the premises shall be maintained in an amount not
less than ONE MILLION FOUR HUNDRED THOUSAND & NO/100
($1,400,000.00) DOLLARS, or the maximum insurable amount. Star
shall endeavor to obtain cancellation notification provisions
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<PAGE> 3
requiring the insurer to afford a minimum of sixty (60) days
notice of any proposed cancellation.
b. All taxes assessed, levied, and imposed upon the personal
property located on the premises and any business licenses,
merchants capital or business operation taxes arising because
of business activities thereon.
c. All real estate taxes, both town and county, assessed
levied, or imposed upon the real estate which taxes shall be
paid on or before the due date. Taxes for the initial and
final year shall be prorated with Star paying a proportionate
share representing the number of months during which the lease
existed in said years.
d. Star hereby agrees that during the term of this lease or
any renewal, it shall be responsible exclusively for all
maintenance of the premises, including both the interior and
exterior of the premises, and the demised real property
surrounding the premises, and including (although not
exclusively) exterior painting, glass, roof, heating and
cooling, air conditioning, driveways, parking areas and any
maintenance or repairs necessary to be made to maintain the
premises.
5. ASSIGNMENT OR SUBLEASE PROHIBITED: Star shall not assign this lease
or sublet any portion of the premises, without the prior written consent of IDA,
which consent shall not be unreasonably withheld. Any such assignment or
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<PAGE> 4
subletting without written consent shall be void at the option of IDA, and shall
constitute a cause for termination by IDA.
6. ENTRY AND INSPECTIONS: Prior to occupying the premises, Star shall
be permitted to inspect the premises and the personal property leased hereby to
determine the condition of the premises and property. Any exception taken by
Star as to the conditions found shall be noted in writing and acknowledge by the
IDA; otherwise Star shall accept the premises and property on an "as is" basis.
During this lease Star shall permit IDA or IDA's agent to enter upon
the premises at reasonable times and upon reasonable notice for the purpose of
inspection the same, and will permit IDA at any time within sixty (60) days
prior to the expiration of this lease, to place upon the premises any usual "for
lease" or "for sale" signs permitting persons desiring to lease or purchase the
premises to inspect the same.
7. INDEMNIFICATION: Star shall hold harmless IDA from and against any
and all claims for personal injury and/or property damage arising out of
resulting from, or incident to its entry upon, and/or its use or occupancy of
the leased premises.
This is a covenant of first payment and defense, not merely of
indemnity. If a claim for personal injury and/or property damage is asserted
against IDA by any person or legal entity alleged to have arisen out of Star's
entry upon the leased premises or to have arising out of, to have resulted from
or to have occurred as an incident of its use and/or occupancy of the premises,
then, upon written notification from IDA, Star shall immediately and without
further demand enter upon the affirmative defense of any such claim and shall
pay promptly, to the complete indemnification and exoneration of IDA,
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<PAGE> 5
all fees, costs and expenses (including attorney's fees) that might be, or
become, due incident to any such claim (to include negotiated settlements or
compromises or any awards or judgments as a result of arbitration or judicial
proceeding) to the end that IDA shall have no exposure and shall suffer no
damage or expense incident thereto.
8. UTILITIES: Star agrees that Star shall be responsible for all
utilities, including water, gas, electricity, heat and other services delivered
to the premises.
9. TRADE FIXTURES: Any and all improvements made to the premises during
the term hereof shall belong to IDA, except trade fixtures of Star. Star may
upon termination hereof remove all trade fixtures owned by Star, provided
however the premises shall be restored to the original condition by Star,
reasonable wear and tear excepted, and Star shall make repair to or pay for all
repairs necessary for damage to the premises occasioned by removal of the trade
fixtures.
10. CONDEMNATION: If any part of the premises shall be taken or
condemned for public use, and a part thereof remains which is susceptible of
occupation hereunder, the lease shall as to the part taken terminate as of the
date the condemnor acquires possession and thereafter Star shall be required to
pay such proportion of the rent of the remaining term as the value of the
premises remaining bears to the total value to the premises, and its permitted
use for the original purpose of this lease, at the date of condemnation.
Provided, however, IDA may at its option, terminate this lease as of the date
the condemnor acquires possession. In the event that the demised premises are
condemned in whole, or that such portion is condemned that the remainder is not
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<PAGE> 6
susceptible for use hereunder, this lease shall terminate upon the date upon the
condemnor acquires possession.
In the event IDA receives notification of condemnation proceedings
against the premises, IDA shall immediately notify Star and allow Star the
election of invoking its purchase agreement contained hereinafter, and in the
event Star exercises its option IDA shall defer to Star all decisions pertaining
to settlement with the condemning authority. In the event Star fails to elect
its purchase option, the parties hereto agree that any amount received by IDA
from the condemning authority shall be deducted from the purchase price of the
property as provided hereinafter in Section 17, if and when said purchase is
elected by Star.
Star shall be permitted to be a party to the condemnation proceeding in
light of the option held by Star for the purchase of the property. No settlement
of account with the condemning authority shall be permitted by IDA without the
agreement of Star or assignment of Star's respective right to seek its own
remedy against the condemnor.
11. DESTRUCTION OF THE PREMISES: In the event of a partial destruction
of the premises during the term hereof, from any cause, IDA shall forthwith
repair the same provided that such repairs can be made within sixty (60) days
under the existing governmental laws and regulations. If such repairs cannot be
made, IDA at its option may make the same within a reasonable time, the lease
continuing in effect with the rent proportionately abated as aforesaid and in
the event IDA shall not elect to make such repairs the lease may be terminated
at the option of either party.
12. DEFAULT PROVISIONS: If default is made in the payment of rent or
failure to complete the purchase of the property following election of the
option,
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<PAGE> 7
IDA shall give notification to Star at the address specified herein stating the
reasons for default and IDA's intention to seek a remedy. Should the breach or
default not be corrected, including all rents paid and/or closing held, within
thirty (30) days of the receipt of such notice IDA shall have the right to
re-enter without further demand or notice and at IDA's option, terminate the
lease and with it the option for the purchase of the property or rights of Star
under any other option. It is provided however nothing contained herein shall
prevent IDA from enforcing, by an action for specific performance of its rights
against Star.
13. MEMORANDUM OF LEASE AND OPTION: The parties agree that they shall
execute a Memorandum of Lease and Purchase Option which may be recorded by
either party in the Circuit Court of Mecklenburg County, all costs of such
recordation to be borne by Star even if IDA opts for such recordation.
14. OPTION TO PURCHASE: So long as Star is not in substantial default
of its performance of any term of this lease, Star shall have the option to
purchase the Property for the purchase price hereinafter set forth, upon the
terms and conditions specified in the provisions hereinafter stated.
15. PURCHASE PRICE: The purchase price for the property shall be the
sum of the following:
a. The balance due on a note or notes secured by a credit line
deed of trust dated March 10, 2000, securing unto Community
National Bank repayment of debt in the original principal sum
not to exceed FIVE HUNDRED THOUSAND & NO/100 ($500,000.00)
DOLLARS; PLUS,
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<PAGE> 8
b. The balance due on a note or notes secured by a deed of
trust dated July 24, 1998, securing unto Lake County
Development Corporation repayment of a debt in the original
principal sum of $250,000.00; PLUS,
c. The balance due on a note or notes securing unto IDA,
repayment of a debt in the original principal sum of
$200,000.00; PLUS,
d. The sum of FIFTY THOUSAND & NO/100 ($50,000.00) DOLLARS.
Star may exercise its option to purchase at any time during the term of
this lease by paying the balance then due on each of said three notes, plus
paying to IDA an additional FIFTY THOUSAND & NO/100 ($50,000.00) DOLLARS. Upon
receipt of such payments, IDA shall deliver title to the premises to Star by
SPECIAL WARRANTY Deed. Should Star make all rental payments due hereunder, and
then elect to exercise its option to purchase, IDA shall, after receipt of the
last of said monthly rental payments, and upon receipt of the sum of FIFTY
THOUSAND & NO/100 ($50,000.00) DOLLARS, deliver title to the premises to Star by
Special Warranty Deed.
16. EXPIRATION OF STAR'S PURCHAES OPTION: If star is in compliance with
the terms and conditions hereof, it shall have the right to exercise its
purchase option at any time during the term of the lease. However, Star's
purchase option shall, if not duly exercised on or before April 30, 2010,
automatically terminate and expire on May 1, 2010.
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<PAGE> 9
17. EXERCISE OF PURCHASE OPTION: Star's purchase option must be
exercised by Star in writing, by mailing via certified mail/return receipt, or
by hand-delivery to IDA, of written notice of Star's exercise of its purchase
option. To be effective, such written notice must be received by IDA on or
before April 30, 2000. Such written notice shall state the date of closing,
which date shall be a maximum of sixty (60) days from the date said written
notice is received by IDA.
18. CLOSING COSTS: If Star exercises its purchase option, IDA shall pay
the cost of preparation of a Special Warranty deed, grantor's tax assessed upon
recordation of the deed, and any attorney's fee incurred by IDA at its election.
Star shall pay all other costs incurred as an incident of closing.
19. RETURN OF PREMISES: Should Star not exercise its purchase option,
then upon termination of this lease the Property and personal property shall be
returned to IDA in the condition which existed upon commencement of this lease,
reasonable wear and tear excepted. Star shall have the right to replace personal
property.
20. REQUIREMENT FOR NOTICES: Any notice required hereunder shall be
deemed effective if mailed by the mailing party to the other party via certified
mail, return receipt requested, to the addresses provided for each party herein,
or to such other address as either party may designate in writing from time to
time. Hand-delivered notices shall also be effective, but the notifying party
shall bear the burden of proof of delivery.
21. BINDING EFFECT: This agreement shall be binding upon the parties
hereto and upon any successor or assign of either party hereto. The terms hereof
may be amended only by written document signed by the duly authorized officers
or
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<PAGE> 10
agents of either party, and no modification or amendment hereof shall have
any force or effect unless in writing and duly signed.
22. SEVERABILITY: The parts and provisions of this contract are
severable. If any part or provision shall be held invalid by a court of
competent jurisdiction, the remainder of this contract shall remain in effect.
23. SUCCESSORS IN TITLE: The parties covenant and agree that all terms
and conditions hereof shall be binding upon the parties, their heirs, assigns,
devisees, executors, administrators and other successors in title.
24. WRITTEN MODIFICATION REQUIRED: This contract supersedes and
replaces any agreement or understanding, whether oral or written, heretofore
entered into between the parties, and no amendment hereto shall be binding
unless made in writing and duly executed on behalf of both parties hereto.
25. EXECUTION IN DUPLICATE ORIGINAL AND COUNTERPARTS: This Contract is
made in duplicate on the day, month and year aforesaid, and each copy hereof
bearing original signatures shall be deemed an original. In addition, this lease
may be executed in counterparts, so that the execution of one original by a
party and another original by the other party shall together constitute one
fully binding original.
26. RESCISSION OF PRIOR LEASE: Upon execution hereof on behalf of both
parties, the terms and conditions hereof shall become effective, and in addition
all terms and conditions of the Lease and Option agreement between the parties,
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<PAGE> 11
dated May 29, 1998, shall automatically terminate and be superceded by the terms
and conditions hereof.
27. AUTHORITY TO SIGN: This Contract is executed on behalf of each
party pursuant to action duly taken to authorize the undersigned individuals to
execute this contract on behalf of his or her principal. Either party shall be
the right to require written evidence of such authority from the other party.
WITNESS the following signatures and seals:
INDUSTRIAL DEVELOPMENT STAR SCIENTIFIC, INC.
AUTHORITY OF THE TOWN
OF CHASE CITY, VIRGINIA
BY: BY:
--------------------------- --------------------
Charles L. Duckworth Authorized Officer
Chairman
Attest:
- ------------------------------
Charley Ramsey, Secretary
STATE OF VIRGINIA
COUNTY/CITY OF ____________to wit:
The foregoing instrument was acknowledged before me this ____day of
March, 2000, on behalf of the Industrial Development Authority Chase City,
Virginia, by Charles L. Duckworth, its Chairman, whose signature was attested by
Charley Ramsey, its secretary.
----------------------------------
Notary Public
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<PAGE> 12
My commission expires:_______________
STATE OF VIRGINIA
COUNTY/CITY OF ________________. to-wit:
The foregoing instrument was acknowledged before me this _____day of
March, 2000, by James A. McNulty, CFO of Star Scientific, Inc., on behalf of
said corporation.
------------------------------
Notary Public
My commission expires:
-----------------
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<PAGE> 1
DIRECTOR INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of this _____
day of _________, 2000, between Star Scientific, Inc., a Delaware corporation
(the "Company"), and ______________ ("Director").
WITNESSETH THAT:
WHEREAS, Director is a member of the Board of Directors of the Company
and in such capacity is performing a valuable service for the Company; and
WHEREAS, the by-laws of The Company (the "By-laws") provide for the
indemnification of its directors and executive officers to the maximum extent
authorized by law; and
WHEREAS, Section 145 of the Delaware General Corporation Law (the
"DGCL") specifically provides that it shall not be deemed exclusive of any other
rights to indemnification or advancement of expenses to which directors or
officers may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise; and
WHEREAS, the number of lawsuits and shareholders' derivative lawsuits
against corporations, their directors and officers has increased in recent
years, such lawsuits frequently are without merit and seek damages in amounts
having no reasonable relationship to the amount of compensation received by the
directors and officers from the corporation, and such lawsuits whether or not
meritorious are expensive and time-consuming to defend; and
WHEREAS, recent developments with respect to the application and
interpretation of the business judgment rule and statutory and by-law
indemnification provisions have created uncertainty regarding the adequacy and
reliability of the protections afforded to directors and officers thereby; and
WHEREAS, adequate directors and officers liability insurance may not be
available at a reasonable cost; and
WHEREAS, the Company wishes to have Director continue to serve as a
member of the Company's Board of Directors free from undue concern for
unpredictable or unreasonable claims for damages by reason of Director's status
as a director of the Company, by reason of Director's decisions or actions on
its behalf or by reason of Director's decisions or actions in another capacity
while serving as a director of the Company; and
WHEREAS, Director has expressed reluctance to continue to serve as a
member of the Company's Board of Directors without assurances that adequate
insurance and indemnification is and will continue to be provided; and
<PAGE> 2
WHEREAS, in order to induce Director to continue to serve as a member
of the Board of Directors of the Company, the Company has determined and agreed
to enter into this Agreement with Director;
NOW, THEREFORE, in consideration of Director's continued service as a
member of the Board of Directors of the Company, the parties agree as follows:
1. Directors and Officers Liability Insurance.
(a) Except as provided in (b) below, the Company hereby agrees to
use its best efforts to obtain and maintain directors and officers liability
insurance for Director for so long as Director shall continue to serve as a
director of the Company and thereafter so long as Director shall be subject to
any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that Director was a director of the Company.
(b) The Company shall have no obligation hereunder to obtain or
maintain directors and officers liability insurance if, in the reasonable
business judgment of the Board of Directors of the Company, such insurance is
not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, or the coverage provided by
such insurance is limited, by exclusions or otherwise, so as to provide an
insufficient benefit.
(c) In all policies of directors and officers liability
insurance, Director shall be covered as an insured party in such a manner as to
provide Director the same rights and benefits, subject to the same limitations,
as are accorded to the Company's director most favorably insured by such
policies.
(d) The Company shall give prompt written notice to Director of
any amendment or other change or modification, or any proposed amendment, change
or modification, to any policy of directors and officers liability insurance
maintained by the Company and covering Director.
2. Indemnification of Director. Subject only to the exclusions set
forth in this Agreement, the Company hereby agrees to hold harmless and
indemnify Director to the full extent authorized or permitted by Section 145 of
the DGCL, including any amendment thereof, or any other statutory provisions
authorizing or permitting such indemnification which are adopted after the date
hereof. Notwithstanding the foregoing, the Company shall not be required to
indemnify Director for any losses to the extent that such losses are covered by
directors and officers liability insurance as described in Section 1 above.
Without limiting the generality of the foregoing:
(a) Third Party Actions. The Company shall indemnify Director if
Director was or is a party or is threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Company) by reason of the fact
that Director is or was or had agreed to serve as (so long as Director actually
is serving or did so serve) a director of the Company, or is or was serving or
had agreed to serve as a director (so long as Director actually is serving or
did so serve) at the request of the Company as a director, officer,
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<PAGE> 3
employee or agent of another corporation, limited liability company,
partnership, joint venture, trust or other enterprise, against any and all
expenses (including attorneys' fees), liabilities, judgments, penalties, fines
and amounts paid in settlement actually and reasonably incurred by Director or
on Director's behalf in connection with such action, suit or proceeding, and any
appeal therefrom, if Director acted in good faith and in a manner Director
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Director's conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that Director did not satisfy the foregoing standard of conduct to
the extent applicable thereto.
(b) Suits By or in the Right of the Company. The Company shall
indemnify Director if Director is or was a party or is threatened to be made a
party to any action or suit by or in the right of the Company by reason of the
fact that Director is or was or had agreed to be (so long as Director actually
is or did become) a director of the Company, or is or was serving or had agreed
to serve (so long as Director actually is or did so serve) at the request of the
Company as a director, officer, employee or agent of another corporation,
limited liability company, partnership, joint venture, trust or other
enterprise, against any and all expenses (including attorneys' fees) and, to the
extent permitted by law, amounts paid in settlement actually and reasonably
incurred by Director or on Director's behalf in connection with the defense or
settlement of such action or suit or any appeal therefrom provided that Director
acted in good faith and in a manner Director reasonably believed to be in or not
opposed to the best interests of the Company and except that no indemnification
shall be made in respect of any claim, issue or matter as to which Director
shall have been adjudged to be liable to the Company unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, Director is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
(c) Successful Defense. To the extent that Director has been
successful on the merits or otherwise in the defense of any action, suit or
proceeding referred to in subsections (a) or (b) of this Section 2, or in the
defense of any claim, issue or matter therein, the Company shall indemnify
Director against any and all expenses (including attorneys' fees) actually and
reasonably incurred by Director or on Director's behalf in connection therewith.
Dismissal of any action with prejudice, or a settlement not involving any
payment or assumption of liability, shall be deemed a successful defense.
(d) Partial Indemnification. If Director is entitled to
indemnification under any provision of this Agreement for a portion of the
expenses (including attorneys' fees), liabilities, judgments, penalties, fines
and amounts paid in settlement actually and reasonably incurred by Director or
on Director's behalf in the investigation, defense, appeal or settlement of such
suit, action or proceeding, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Director for the portion thereof to which
Director is entitled.
-3-
<PAGE> 4
(e) Advancement of Expenses. All expenses (including attorney and
other expert and professional fees and expenses) incurred by Director or on
Director's behalf in defending a civil or criminal action, suit or proceeding,
or in enforcing Director's rights under any provisions of this Agreement, shall
be paid by the Company in advance of the final disposition of such action, suit
or proceeding in the manner prescribed by Section 4 hereof.
(f) Amendments to Indemnification Rights. The Company shall not
adopt any amendment to its Restated Certificate of Incorporation, as amended
(the "Certificate") or By-Laws the effect of which would be to deny, diminish or
encumber Director's rights to indemnity pursuant to the Certificate, By-Laws,
the DGCL or any other applicable law as applied to any act or failure to act
occurring in whole or in part prior to the date (the "Effective Date") upon
which the amendment was approved by the Company's Board of Directors or
stockholders, as the case may be. In the event that the Company shall adopt any
amendment to the Certificate or By-Laws the effect of which is to change
Director's rights to indemnity under such instruments, such amendment shall
apply only to acts or failures to act occurring entirely after the Effective
Date thereof. The Company shall give written notice to Director of any proposal
with respect to any such amendment no later than the date such amendment is
first presented to the Board of Directors (or any committee thereof) for
consideration, and shall provide a copy of any such amendment to Director
promptly after its adoption.
(g) Indemnification for Expenses as a Witness. To the extent
Director is, by reason of Director's status as a director of the Company, a
witness in any proceeding, the Company shall indemnify Director against all
expenses in connection therewith.
3. Limitations on Indemnification. No indemnity pursuant to Section 2
hereof shall be paid by the Company:
(a) on account of Director's conduct which is finally adjudged in
a non-appealable decision to have been fraudulent, dishonest or willful
misconduct, or a knowing violation of law;
(b) on account of any suit in which judgment in a final, non-
appealable decision is rendered against Director for an accounting of profits
made from the purchase or sale by Director of securities of the Company within
the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended,
or similar provisions of federal or state law;
(c) on account of the receipt by Director of any personal profit
or advantage to which Director is adjudged in a final, non-appealable decision
not to be entitled;
(d) for expenses incurred by Director, as a plaintiff, in suits
against the Company or against other directors of the Company (other than suits
brought by Director to enforce Director's rights under any provisions of this
Agreement), unless such suit is authorized by the Board of Directors or such
indemnification is required by law;
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<PAGE> 5
(e) if a final, non-appealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful; or
(f) for amounts paid by Director in settlement of any action or
proceeding without the Company's written consent.
4. Indemnification Procedures.
(a) Notice to the Company. Promptly after receipt by Director of
notice of the commencement of any action, suit or proceeding, Director shall, if
a claim in respect thereof is to be made against the Company under this
Agreement, notify the Company of the commencement thereof. Such notice shall set
forth in reasonable detail the events giving rise to such claim and the amount
requested, if known. Failure of Director to provide such notice shall not
relieve the Company of its obligations under this Agreement except to the extent
such failure has a material and adverse effect on the ability of the Company to
meet such obligations.
(b) Notice to Insurers. If, at the time of receipt of such
notice, the Company has directors and officers liability insurance in effect,
the Company shall give prompt notice of the commencement of such action, suit or
proceeding to the insurers in accordance with the procedures set forth in the
respective policies in favor of Director. The Company shall thereafter take all
necessary or desirable action to cause such insurers to pay, on behalf of
Director, all losses and expenses payable as a result of such action, suit or
proceeding in accordance with the terms of such policies.
(c) Advancement of Expenses. Subject to subsections (d) and (e)
below, the costs and expenses reasonably incurred by Director or on Director's
behalf in investigating, defending or appealing any action, suit or proceeding,
whether civil, criminal, administrative or investigative, or in enforcing
Director's rights under any provisions of this Agreement, covered by Section 2
above shall be paid by the Company within 20 days of Director's written request
therefor even if there has been no final disposition of such action, suit or
proceeding. Director's written request shall state the amount requested and
shall be accompanied by copies of the invoices or other relevant documentation.
(d) Undertaking to Repay Advances. Director agrees that Director
will reimburse the Company for all advances paid by the Company to Director
under this Agreement in the event and only to the extent that it shall
ultimately be determined that Director was not entitled to be indemnified under
this Agreement.
(e) Assumption of Defense by the Company. Except as otherwise
provided below, the Company, jointly with any other indemnifying party similarly
notified, will be entitled to assume the defense of any action, suit or
proceeding of which it has been notified by Director pursuant to subsection (a)
above, with counsel reasonably satisfactory to Director. After notice from the
Company to Director of its election to assume the defense thereof, the Company
will not be liable to Director under this Agreement for any legal or other
expenses subsequently incurred by Director; provided, however, that Director
shall have the right to employ Director's own counsel in such action, suit or
proceeding at the expense of the Company if, at any time after such notice
-5-
<PAGE> 6
from the Company, (i) the employment of counsel by Director has been authorized
by the Company, (ii) Director shall have reasonably concluded that there may be
a conflict of interest between the Company and Director in the conduct of such
defense, or (iii) the Company shall not in fact have employed counsel to assume
the defense of such action, in each of which cases the fees and expenses of
Director's counsel shall be subject to reimbursement in accordance with the
terms of this Agreement. The Company shall not be entitled to assume Director's
defense of any action, suit or proceeding brought by the Company or as to which
Director shall have made the conclusion provided for in clause (ii) above.
(f) Determination of Right to Entitlement. (i) In the event that
Director incurs liability for any fines, judgments, liabilities, penalties or
amounts paid in settlement, and indemnification is sought under this Agreement,
the Company shall pay (or provide for payment if so required by the terms of any
judgment or settlement) such amounts within 30 business days of Director's
written request therefor unless a determination is made within such 30 business
days that the claims giving rise to such request are excluded or indemnification
is otherwise not due under this Agreement. Such determination, and any
determination required by applicable law as to whether Director has met the
standard of conduct required to qualify and entitle Director, partially or
fully, to indemnification under Section 2 of this Agreement, shall be made, at
the Company's discretion, (1) by the Board of Directors of the Company by a
majority vote of the directors who were not parties to such action, suit or
proceeding even though less than a quorum, or (2) if such a majority is not
obtainable, or even if obtainable a majority of the disinterested directors so
directs, by written opinion of independent legal counsel selected by the Company
and reasonably satisfactory to Director, or (3) by the Company's stockholders;
provided, however, that if a change of control has occurred such determination
shall be made by written opinion of independent legal counsel selected by
Director or, if requested by Director, by the Company. The term "independent
legal counsel" shall mean for this purpose an attorney or firm of attorneys
experienced in matters of corporation law that is not now nor has within the
previous three years been retained to represent Director, the Company or any
other party to the proceeding giving rise to the claim for indemnification
hereunder; provided that "independent legal counsel" shall not include any
person who under applicable standards of professional conduct would have a
conflict of interest in representing Director or the Company in an action to
determine Director's rights under this Agreement. The term "change of control"
shall mean: (1) the consummation of any transaction after which any "person" or
"group" (as such terms are used in Sections 3(a)(9), 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934 (the "Exchange Act")) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities, or possesses the power to vote or control the vote
of securities, of the Company representing 30% or more of the combined voting
power of either the Common Stock or all outstanding securities of the Company;
or (2) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation or entity, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 66 2/3% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the stockholders of the
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<PAGE> 7
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets.
(ii) Notwithstanding the foregoing, Director may within 60
days after a determination adverse to Director has been made as provided above,
or if no determination has been made within 30 business days of Director's
written request for payment, petition the Court of Chancery of the State of
Delaware or any other court of competent jurisdiction, or may seek an award in
arbitration to be conducted by a single arbitrator pursuant to the rules of the
American Arbitration Association, which award shall be deemed final,
unappealable and binding, to determine whether Director is entitled to
indemnification under this Agreement, and such court or arbitrator, as the case
may be, shall thereupon have the exclusive authority to make such determination
unless and until such court or arbitrator dismisses or otherwise terminates such
action without having made a determination. The court or arbitrator, as the case
may be, shall make an independent determination of entitlement irrespective of
any prior determination made by the Board of Directors, independent legal
counsel or stockholders. In any such action before the court or arbitrator,
Director shall be presumed to be entitled to indemnification and the Company
shall have the burden of proving that indemnification is not required under this
Agreement. All fees and expenses of any arbitrator pursuant to this provision
shall be paid by the Company.
(g) Enforcement Expenses. In the event that Director brings suit
or takes any other action to enforce Director's rights or to collect monies due
under this Agreement, and if Director is successful therein, the Company shall
reimburse (to the extent not previously advanced) Director for all of Director's
reasonable expenses, including attorneys' fees, in any such suit or action.
5. Continuation of Indemnification. The Company's obligations to
indemnify Director hereunder shall continue throughout the period Director is a
director of the Company (or is serving at the Company's request in the
capacities described in sub sections 2(a) and 2(b) above) and thereafter so long
as Director shall be subject to any possible claim, action, suit or proceeding
by reason of the fact that Director was a director of the Company (or was
serving in such other capacities).
6. Successors and Assigns. This Agreement shall be binding upon the
Company, its successors and assigns (including any transferee of all or
substantially all of its assets and any successor by merger or otherwise by
operation of law), and shall inure to the benefit of Director and Director's
heirs, personal representatives, executors and administrators and shall be
binding upon Director and Director's successors in interest under this
Agreement.
7. Rights Not Exclusive. The rights provided hereunder shall not be
deemed exclusive of any other rights to which Director may be entitled under any
provision of law, Certificate of Incorporation, By-law, other agreement, vote of
stockholders or of disinterested directors or otherwise, both as to action in
Director's official capacity and as to action in any other capacity while
occupying any of the positions referred to in Section 2 of this Agreement.
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<PAGE> 8
8. Subrogation. Upon payment of any amount under this Agreement, the
Company shall be subrogated to the extent of such payment to all of Director's
rights of recovery therefor and Director shall take all reasonable actions
requested by the Company to secure such rights, including, without limitation,
execution of all documents necessary to enable the Company to enforce such
rights.
9. Severability. In the event that any provision of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason, such
provision shall be limited or modified in its application to the minimum extent
necessary to avoid a violation of law, and, as so limited or modified, such
provision and the balance of this Agreement shall be enforceable in accordance
with their terms.
10. Integration. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to the
subject matter hereof.
11. Modification. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
12. Notices. All notices given under this Agreement shall be in writing
and delivered either (i) personally, (ii) by registered or certified mail
(postage prepaid, return receipt requested), (iii) by recognized overnight
courier service or (iv) by telecopy (if promptly followed by a copy delivered as
provided in clauses (i), (ii) or (iii) above), as follows:
If to Director: [NAME]
[ADDRESS]
[ADDRESS]
If to the Company: 16 South Market Street
Petersburg, Virginia 23803
Notices hereunder given as provided above shall be deemed to be duly given upon
delivery if delivered personally, three business days after mailing if by
registered or certified mail, one business day after mailing if by overnight
courier service and upon confirmation of transmission if by telecopy.
13. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware.
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<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
STAR SCIENTIFIC, INC.
By:
----------------------------------------
Name:
Title:
----------------------------------------
Director
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
STAR SCIENTIFIC, INC.
By:
----------------------------------------
Name:
Title:
----------------------------------------
Director
<PAGE> 1
OFFICER INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of this ___ day
of _________, 2000, between Star Scientific, Inc., a Delaware corporation (the
"Company"), and __________________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee is an executive officer of the Company and in such
capacity is performing a valuable service for the Company; and
WHEREAS, the by-laws of the Company (the "By-laws") provide for the
indemnification of its directors and executive officers to the maximum extent
authorized by law; and
WHEREAS, Section 145 of the Delaware General Corporation Law (the
"DGCL") specifically provides that it shall not be deemed exclusive of any other
rights to indemnification or advancement of expenses to which directors or
officers may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise; and
WHEREAS, the number of lawsuits and shareholders' derivative lawsuits
against corporations, their directors and officers has increased in recent
years, such lawsuits frequently are without merit and seek damages in amounts
having no reasonable relationship to the amount of compensation received by the
directors and officers from the corporation, and such lawsuits whether or not
meritorious are expensive and time-consuming to defend; and
WHEREAS, recent developments with respect to the application and
interpretation of the business judgment rule and statutory and by-law
indemnification provisions have created uncertainty regarding the adequacy and
reliability of the protections afforded to directors and officers thereby; and
WHEREAS, adequate directors and officers liability insurance may not be
available at a reasonable cost; and
WHEREAS, the Company wishes to have Indemnitee continue to serve as an
executive officer of the Company free from undue concern for unpredictable or
unreasonable claims for damages by reason of Indemnitee's status as an officer
of the Company, by
<PAGE> 2
reason of Indemnitee's decisions or actions on its behalf or by reason of
Indemnitee's decisions or actions in another capacity while serving as an
officer of the Company; and
WHEREAS, Indemnitee has expressed reluctance to continue to serve as an
executive officer of the Company without assurances that adequate insurance and
indemnification is and will continue to be provided; and
WHEREAS, in order to induce Indemnitee to continue to serve as an
executive officer of the Company, the Company has determined and agreed to enter
into this Agreement with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued service as
an executive officer of the Company, the parties agree as follows:
1. Directors and Officers Liability Insurance.
(a) Except as provided in (b) below, the Company hereby agrees to
use its best efforts to obtain and maintain directors and officers liability
insurance for Indemnitee for so long as Indemnitee shall continue to serve as an
executive officer of the Company and thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that Indemnitee was an executive officer of the Company.
(b) The Company shall have no obligation hereunder to obtain or
maintain directors and officers liability insurance if, in the reasonable
business judgment of the Board of Directors of the Company, such insurance is
not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, or the coverage provided by
such insurance is limited, by exclusions or otherwise, so as to provide an
insufficient benefit.
(c) In all policies of directors and officers liability
insurance, Indemnitee shall be covered as an insured party in such a manner as
to provide Indemnitee the same rights and benefits, subject to the same
limitations, as are accorded to the Company's executive officer most favorably
insured by such policies.
(d) The Company shall give prompt written notice to Indemnitee of
any amendment or other change or modification, or any proposed amendment, change
or modification, to any policy of directors and officers liability insurance
maintained by the Company and covering Indemnitee.
2. Indemnification. Subject only to the exclusions set forth in this
Agreement, the Company hereby agrees to hold harmless and indemnify Indemnitee
to the full extent authorized or permitted by Section 145 of the DGCL, including
any amendment thereof, or any other statutory provisions authorizing or
permitting such indemnification which are adopted after the date hereof.
Notwithstanding the foregoing, the Company shall not be required to indemnify
Indemnitee for any losses to the extent that such losses are covered by
directors and officers liability insurance as described in Section 1 above.
Without limiting the generality of the foregoing:
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<PAGE> 3
(a) Third Party Actions. The Company shall indemnify Indemnitee
if Indemnitee was or is a party or is threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that Indemnitee is or was or had agreed to serve (so long as
Indemnitee actually is serving or did so serve) as an executive officer of the
Company, or is or was serving or had agreed to serve (so long as Indemnitee
actually is serving or did so serve) at the request of the Company as an
executive officer, employee or agent of another corporation, limited liability
company, partnership, joint venture, trust or other enterprise, against any and
all expenses (including attorneys' fees), liabilities, judgments, penalties,
fines and amounts paid in settlement actually and reasonably incurred by
Indemnitee or on Indemnitee's behalf in connection with such action, suit or
proceeding, and any appeal therefrom, if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe Indemnitee's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that Indemnitee did not satisfy the
foregoing standard of conduct to the extent applicable thereto.
(b) Suits By or in the Right of the Company. The Company shall
indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made
a party to any action or suit by or in the right of the Company by reason of the
fact that Indemnitee is or was or had agreed to be (so long as Indemnitee
actually is or did become) an executive officer of the Company, or is or was
serving or had agreed to serve (so long as Indemnitee actually is or did so
serve) at the request of the Company as an executive officer, officer, employee
or agent of another corporation, limited liability company, partnership, joint
venture, trust or other enterprise, against any and all expenses (including
attorneys' fees) and, to the extent permitted by law, amounts paid in settlement
actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in
connection with the defense or settlement of such action or suit or any appeal
therefrom provided that Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company and except that no indemnification shall be made in respect of any
claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company unless and only to the extent that the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper.
(c) Successful Defense. To the extent that Indemnitee has been
successful on the merits or otherwise in the defense of any action, suit or
proceeding referred to in subsections (a) or (b) of this Section 2, or in the
defense of any claim, issue or matter therein, the Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) actually and
reasonably incurred by Indemnitee or on Indemnitee's behalf in connection
therewith. Dismissal of any action with prejudice, or a settlement not involving
any payment or assumption of liability, shall be deemed a successful defense.
(d) Partial Indemnification. If Indemnitee is entitled to
indemnification under any provision of this Agreement for a portion of the
expenses
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<PAGE> 4
(including attorneys' fees), liabilities, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by Indemnitee or on
Indemnitee's behalf in the investigation, defense, appeal or settlement of such
suit, action or proceeding, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled.
(e) Advancement of Expenses. All expenses (including attorney and
other expert and professional fees and expenses) incurred by Indemnitee or on
Indemnitee's behalf in defending a civil or criminal action, suit or proceeding,
or in enforcing Indemnitee's rights under any provisions of this Agreement,
shall be paid by the Company in advance of the final disposition of such action,
suit or proceeding in the manner prescribed by Section 4 hereof.
(f) Amendments to Indemnification Rights. The Company shall not
adopt any amendment to its Restated Certificate of Incorporation, as amended
(the "Certificate") or By-Laws the effect of which would be to deny, diminish or
encumber Indemnitee's rights to indemnity pursuant to the Certificate, By-Laws,
the DGCL or any other applicable law as applied to any act or failure to act
occurring in whole or in part prior to the date (the "Effective Date") upon
which the amendment was approved by the Company's Board of Directors or
stockholders, as the case may be. In the event that the Company shall adopt any
amendment to the Certificate or By-Laws the effect of which is to change
Indemnitee's rights to indemnity under such instruments, such amendment shall
apply only to acts or failures to act occurring entirely after the Effective
Date thereof. The Company shall give written notice to Indemnitee of any
proposal with respect to any such amendment no later than the date such
amendment is first presented to the Board of Directors (or any committee
thereof) for consideration, and shall provide a copy of any such amendment to
Indemnitee promptly after its adoption.
(g) Indemnification for Expenses as a Witness. To the extent
Indemnitee is, by reason of Indemnitee's status as an executive officer of the
Company, a witness in any proceeding, the Company shall indemnify Indemnitee
against all expenses in connection therewith.
3. Limitations on Indemnification. No indemnity pursuant to Section 2
hereof shall be paid by the Company:
(a) on account of Indemnitee's conduct which is finally adjudged
in a non-appealable decision to have been fraudulent, dishonest or willful
misconduct, or a knowing violation of law;
(b) on account of any suit in which judgment in a final, non-
appealable decision is rendered against Indemnitee for an accounting of profits
made from the purchase or sale by Indemnitee of securities of the Company within
the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended,
or similar provisions of federal or state law;
(c) on account of the receipt by Indemnitee of any personal
profit or advantage to which Indemnitee is adjudged in a final, non-appealable
decision not to be entitled;
-4-
<PAGE> 5
(d) for expenses incurred by Indemnitee, as a plaintiff, in suits
against the Company or against directors or other officers of the Company (other
than suits brought by Indemnitee to enforce Indemnitee's rights under any
provisions of this Agreement), unless such suit is authorized by the Board of
Directors or such indemnification is required by law;
(e) if a final, non-appealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful; or
(f) for amounts paid by Indemnitee in settlement of any action or
proceeding without the Company's written consent.
4. Indemnification Procedures.
(a) Notice to the Company. Promptly after receipt by Indemnitee
of notice of the commencement of any action, suit or proceeding, Indemnitee
shall, if a claim in respect thereof is to be made against the Company under
this Agreement, notify the Company of the commencement thereof. Such notice
shall set forth in reasonable detail the events giving rise to such claim and
the amount requested, if known. Failure of Indemnitee to provide such notice
shall not relieve the Company of its obligations under this Agreement except to
the extent such failure has a material and adverse effect on the ability of the
Company to meet such obligations.
(b) Notice to Insurers. If, at the time of receipt of such
notice, the Company has directors and officers liability insurance in effect,
the Company shall give prompt notice of the commencement of such action, suit or
proceeding to the insurers in accordance with the procedures set forth in the
respective policies in favor of Indemnitee. the Company shall thereafter take
all necessary or desirable action to cause such insurers to pay, on behalf of
Indemnitee, all losses and expenses payable as a result of such action, suit or
proceeding in accordance with the terms of such policies.
(c) Advancement of Expenses. Subject to subsections (d) and (e)
below, the costs and expenses reasonably incurred by Indemnitee or on
Indemnitee's behalf in investigating, defending or appealing any action, suit or
proceeding, whether civil, criminal, administrative or investigative, or in
enforcing Indemnitee's rights under any provisions of this Agreement, covered by
Section 2 above shall be paid by the Company within 20 days of Indemnitee's
written request therefor even if there has been no final disposition of such
action, suit or proceeding. Indemnitee's written request shall state the amount
requested and shall be accompanied by copies of the invoices or other relevant
documentation.
(d) Undertaking to Repay Advances. Indemnitee agrees that
Indemnitee will reimburse the Company for all advances paid by the Company to
Indemnitee under this Agreement in the event and only to the extent that it
shall ultimately be determined that Indemnitee was not entitled to be
indemnified under this Agreement.
(e) Assumption of Defense by the Company. Except as otherwise
provided below, the Company, jointly with any other indemnifying party similarly
notified, will be entitled to assume the defense of any action, suit or
proceeding of which it has been notified by Indemnitee pursuant to subsection
(a) above, with counsel
-5-
<PAGE> 6
reasonably satisfactory to Indemnitee. After notice from the Company to
Indemnitee of its election to assume the defense thereof, the Company will not
be liable to Indemnitee under this Agreement for any legal or other expenses
subsequently incurred by Indemnitee; provided, however, that Indemnitee shall
have the right to employ Indemnitee's own counsel in such action, suit or
proceeding at the expense of the Company if, at any time after such notice from
the Company, (i) the employment of counsel by Indemnitee has been authorized by
the Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of such
defense, or (iii) the Company shall not in fact have employed counsel to assume
the defense of such action, in each of which cases the fees and expenses of
Indemnitee's counsel shall be subject to reimbursement in accordance with the
terms of this Agreement. The Company shall not be entitled to assume
Indemnitee's defense of any action, suit or proceeding brought by the Company or
as to which Indemnitee shall have made the conclusion provided for in clause
(ii) above.
(f) Determination of Right to Entitlement. (i) In the event that
Indemnitee incurs liability for any fines, judgments, liabilities, penalties or
amounts paid in settlement, and indemnification is sought under this Agreement,
the Company shall pay (or provide for payment if so required by the terms of any
judgment or settlement) such amounts within 30 business days of Indemnitee's
written request therefor unless a determination is made within such 30 business
days that the claims giving rise to such request are excluded or indemnification
is otherwise not due under this Agreement. Such determination, and any
determination required by applicable law as to whether Indemnitee has met the
standard of conduct required to qualify and entitle Indemnitee, partially or
fully, to indemnification under Section 2 of this Agreement, shall be made, at
the Company's discretion, (1) by the Board of Directors of the Company by a
majority vote of the directors who were not parties to such action, suit or
proceeding even though less than a quorum, or (2) if such a majority is not
obtainable, or even if obtainable a majority of the disinterested directors so
directs, by written opinion of independent legal counsel selected by the Company
and reasonably satisfactory to Indemnitee, or (3) by the Company's stockholders;
provided, however, that if a change of control has occurred such determination
shall be made by written opinion of independent legal counsel selected by
Indemnitee or, if requested by Indemnitee, by the Company. The term "independent
legal counsel" shall mean for this purpose an attorney or firm of attorneys
experienced in matters of corporation law that is not now nor has within the
previous three years been retained to represent Indemnitee, the Company or any
other party to the proceeding giving rise to the claim for indemnification
hereunder; provided that "independent legal counsel" shall not include any
person who under applicable standards of professional conduct would have a
conflict of interest in representing Indemnitee or the Company in an action to
determine Indemnitee's rights under this Agreement. The term "change of control"
shall mean: (1) the consummation of any transaction after which any "person" or
"group" (as such terms are used in Sections 3(a)(9), 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934 (the "Exchange Act")) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities, or possesses the power to vote or control the vote
of securities, of the Company representing 30% or more of the combined voting
power of either the Common Stock or all outstanding securities of the Company;
or (2) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation or entity, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted
-6-
<PAGE> 7
into voting securities of the surviving entity) at least 66 2/3% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets.
(ii) Notwithstanding the foregoing, Indemnitee may within 60
days after a determination adverse to Indemnitee has been made as provided
above, or if no determination has been made within 30 business days of
Indemnitee's written request for payment, petition the Court of Chancery of the
State of Delaware or any other court of competent jurisdiction, or may seek an
award in arbitration to be conducted by a single arbitrator pursuant to the
rules of the American Arbitration Association, which award shall be deemed
final, unappealable and binding, to determine whether Indemnitee is entitled to
indemnification under this Agreement, and such court or arbitrator, as the case
may be, shall thereupon have the exclusive authority to make such determination
unless and until such court or arbitrator dismisses or otherwise terminates such
action without having made a determination. The court or arbitrator, as the case
may be, shall make an independent determination of entitlement irrespective of
any prior determination made by the Board of Directors, independent legal
counsel or stockholders. In any such action before the court or arbitrator,
Indemnitee shall be presumed to be entitled to indemnification and the Company
shall have the burden of proving that indemnification is not required under this
Agreement. All fees and expenses of any arbitrator pursuant to this provision
shall be paid by the Company.
(g) Enforcement Expenses. In the event that Indemnitee brings
suit or takes any other action to enforce Indemnitee's rights or to collect
monies due under this Agreement, and if Indemnitee is successful therein, the
Company shall reimburse (to the extent not previously advanced) Indemnitee for
all of Indemnitee's reasonable expenses, including attorneys' fees, in any such
suit or action.
5. Continuation of Indemnification. The Company's obligations to
indemnify Indemnitee hereunder shall continue throughout the period Indemnitee
is an executive officer of the Company (or is serving at the Company's request
in the capacities described in subsections 2(a) and 2(b) above) and thereafter
so long as Indemnitee shall be subject to any possible claim, action, suit or
proceeding by reason of the fact that Indemnitee was an executive officer of the
Company (or was serving in such other capacities).
6. Successors and Assigns. This Agreement shall be binding upon the
Company, its successors and assigns (including any transferee of all or
substantially all of its assets and any successor by merger or otherwise by
operation of law), and shall inure to the benefit of Indemnitee and Indemnitee's
heirs, personal representatives, executors and administrators and shall be
binding upon Indemnitee and Indemnitee's successors in interest under this
Agreement.
7. Rights Not Exclusive. The rights provided hereunder shall not be
deemed exclusive of any other rights to which Indemnitee may be entitled under
any provision of law, Certificate of Incorporation, By-law, other agreement,
vote of stockholders or of disinterested directors or otherwise, both as to
action in Indemnitee's official capacity and as to action in any other capacity
while occupying any of the positions referred to in Section 2 of this Agreement.
-7-
<PAGE> 8
8. Subrogation. Upon payment of any amount under this Agreement, the
Company shall be subrogated to the extent of such payment to all of Indemnitee's
rights of recovery therefor and Indemnitee shall take all reasonable actions
requested by the Company to secure such rights, including, without limitation,
execution of all documents necessary to enable the Company to enforce such
rights.
9. Severability. In the event that any provision of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason, such
provision shall be limited or modified in its application to the minimum extent
necessary to avoid a violation of law, and, as so limited or modified, such
provision and the balance of this Agreement shall be enforceable in accordance
with their terms.
10. Integration. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to the
subject matter hereof.
11. Modification. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
12. Notices. All notices given under this Agreement shall be in writing
and delivered either (i) personally, (ii) by registered or certified mail
(postage prepaid, return receipt requested), (iii) by recognized overnight
courier service or (iv) by telecopy (if promptly followed by a copy delivered as
provided in clauses (i), (ii) or (iii) above), as follows:
If to Indemnitee: [NAME]
[ADDRESS]
[ADDRESS]
If to the Company: 16 South Market Street
Petersburg, Virginia 23803
Notices hereunder given as provided above shall be deemed to be duly given upon
delivery if delivered personally, three business days after mailing if by
registered or certified mail, one business day after mailing if by overnight
courier service and upon confirmation of transmission if by telecopy.
13. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
STAR SCIENTIFIC, INC.
By:
----------------------------------
Name:
Title:
----------------------------------
Indemnitee
-9-
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Star Scientific, Inc. and Subsidiaries
Petersburg, Virginia
As independent certified public accountants for Star Scientific, Inc. and
Subsidiaries, we hereby consent to the use in this Form 10K for Star
Scientific, Inc. and Subsidiaries of our report included herein, which has a
date of February 9, 2000, relating to the consolidated balance sheet of Star
Scientific, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, cash flows, and stockholders'
equity for the years then ended.
/s/Aidman, Piser & Company, P.A.
Tampa, Florida
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,205,248
<SECURITIES> 0
<RECEIVABLES> 3,825,835
<ALLOWANCES> 225,870
<INVENTORY> 3,570,609
<CURRENT-ASSETS> 27,017,612
<PP&E> 12,962,687
<DEPRECIATION> 1,988,658
<TOTAL-ASSETS> 38,708,947
<CURRENT-LIABILITIES> 18,884,800
<BONDS> 0
0
0
<COMMON> 587,493
<OTHER-SE> 11,731,975
<TOTAL-LIABILITY-AND-EQUITY> 38,708,947
<SALES> 99,324,789
<TOTAL-REVENUES> 99,552,437
<CGS> 31,878,879
<TOTAL-COSTS> 65,699,991
<OTHER-EXPENSES> 16,688,212
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,604
<INCOME-PRETAX> 17,078,630
<INCOME-TAX> 5,564,000
<INCOME-CONTINUING> 11,514,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,514,630
<EPS-BASIC> .32
<EPS-DILUTED> .30
</TABLE>
