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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 333-13287
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EARTHSHELL CORPORATION
(Exact name of Registrant as specified in its charter)
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DELAWARE 77-0322379
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9020 JUNCTION DRIVE, ANNAPOLIS JUNCTION, MARYLAND 20701
(Address of principal executive office) (Zip Code)
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(410) 949-1300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act:
NONE
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $.01 par value
(Title of each 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 or 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 voting stock held by non-affiliates of the
Registrant as of March 3, 2000 was $161,505,376.
The number of shares outstanding of the Registrant's Common Stock as of
March 3, 2000 was 100,045,166.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on May 12, 2000 are incorporated by reference in
Part III of this Annual Report on Form 10-K.
As used herein, the terms "EarthShell" and the "Company" shall mean
EarthShell Corporation unless the context otherwise indicates and the term
"Proxy Statement" shall mean the Proxy Statement for the Company's 2000 Annual
Meeting of Stockholders to be held on May 12, 2000.
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EXPLANATORY NOTE
This Form 10-K/A is being filed to correct inadvertent errors in the
Financial Data Schedule, filed as Exhibit 27 to the Company's Form 10-K,
including (i) Depreciation, which was listed as $5,428,749 and which is actually
$5,478,749 and (ii) Income--Pretax, which was listed as $(44,182,872) and which
is actually $(44,182,972).
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 10
ITEM 3. LEGAL PROCEEDINGS........................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 11
ITEM 6. SELECTED FINANCIAL DATA..................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 19
ITEM 11. EXECUTIVE COMPENSATION...................................... 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON
FORM 8-K.................................................... 19
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PART I
ITEM 1. BUSINESS
GENERAL
EarthShell Corporation (the "Company") was organized in November 1992 as a
Delaware corporation and is a development stage company engaged in the
commercialization of a proprietary composite material for the manufacture of
disposable packaging for the foodservice industry, such as hinged-lid
containers, cups, plates, trays, and bowls.
Since the Company's inception it has not generated any revenues from
operations and, as of December 31, 1999, had incurred aggregate net losses of
approximately $145 million. The Company has an exclusive, worldwide,
royalty-free license pursuant to an Amended and Restated License Agreement (the
"License Agreement") between the Company and the Company's principal
stockholders, E. Khashoggi Industries, LLC and its predecessors ("EKI"), to use
and license the EKI technology to manufacture and sell disposable, single-use
containers for packaging or serving food or beverages intended for consumption
within a short period of time. The Company does not have the right to use the
EKI technology for other purposes.
The new composite material is made from commonly available raw materials
such as limestone, natural potato, corn and other starch binders, natural fibers
and functional coatings. The Company believes that foodservice disposables made
of this material ("EARTHSHELL Products") will have comparable or superior
performance characteristics, such as greater strength and rigidity, and can be
commercially produced at lower costs and sold at a price that is competitive
with comparable paper and polystyrene foodservice disposables.
The Company's objective is to establish EARTHSHELL Products as the preferred
disposable packaging material for the foodservice industry throughout the world
based on their performance, price and environmental characteristics. The
Company's strategy for obtaining this objective is: (i) to demonstrate customer
acceptance through key market leaders; (ii) to demonstrate the manufacturability
and improved economics with initial strategic partners, and (iii) to enter into
joint ventures with existing manufacturers of disposable packaging to market,
produce and distribute EARTHSHELL Products. The Company believes that utilizing
joint ventures aligns key market segments with select industry partners,
minimizes direct competition among these partners, enables effective brand
management, captures the value of manufacturing process improvements, and
creates income streams beyond the life of the patents.
KEY CUSTOMER
As the first step in its strategy, the Company worked closely with
McDonald's Corporation ("McDonald's") in developing and testing prototype
sandwich containers. As a result of this work, McDonald's primary packaging
purchaser, Perseco, entered into a supply agreement with the Company's licensee,
Sweetheart Cup Company Inc. ("Sweetheart"), pursuant to which Perseco committed
to purchase not less than 1.8 billion EarthShell Big Mac-Registered Trademark-
sandwich containers over a three-year period, subject to certain conditions. To
support the supply agreement between Sweetheart and Perseco to supply McDonald's
U.S. restaurants with EARTHSHELL containers for the Big
Mac-Registered Trademark- sandwich, the Company agreed to provide
EarthShell-owned manufacturing equipment to be used by Sweetheart with adequate
capacity to fulfill the Perseco/McDonald's supply contract. At the time the
supply agreement was signed, there was no existing commercial manufacturing
capacity to manufacture EARTHSHELL Products.
FIRST COMMERCIAL MANUFACTURING FACILITY
In 1998 and 1999, the Company built its first commercial manufacturing plant
at Sweetheart's facility in Owings Mills, Maryland to produce the EarthShell Big
Mac-Registered Trademark- sandwich container for sale to Perseco. The debugging
and startup of the first line has taken longer than originally anticipated. One
of the primary
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causes of the delay was the failure of a high-speed conveyor segment to meet its
original performance specifications. A new conveyor segment was designed,
installed, and placed in operation in November 1999 and is functioning as
required. The Company's operating partner, Sweetheart, is running the line with
the new conveyor system and the Company believes the current production volumes
are sufficient to support near term demand. Building on the first line
experience, the startup process for remaining lines is expected to proceed more
quickly. As these lines achieve their design capacity, the Company believes they
will be sufficient to meet the Perseco supply agreement requirement.
Additionally, the Company and Sweetheart are progressing through a product
validation process with Perseco with respect to the EarthShell Big
Mac-Registered Trademark- sandwich container, which is typical for all new
product introductions into the McDonald's system. Although the Company believes
that the production from these first three lines will be profitable once they
have been optimized and reach full capacity, due to the protracted time delays
and additional costs to initially commercialize its first plant, the Company may
not realize the full economic potential of the technology with this first
facility.
SECOND GENERATION MANUFACTURING DEVELOPMENT
With the benefit of its experience at Sweetheart's Maryland facility and the
broad manufacturing experience of its partners, the Company is developing a next
generation manufacturing approach that utilizes, as much as possible,
commercially available conventional processing equipment. This next generation
commercial product set will include bowls, plates, cups and other hinged-lid
containers in addition to the Big Mac-Registered Trademark- container.
Under the terms of existing and contemplated joint venture agreements,
EarthShell and its partners will invest jointly in the commercial facilities
based on projected economic returns. The Company does not intend to commit to
its next series of commercial plant investments until it has demonstrated, using
commercial scale equipment in integrated pilot lines, that its next generation
products can be manufactured at a cost that will produce returns acceptable to
both EarthShell and its partners.
The Company's manufacturing process is comprised of four core operations;
mixing, forming, coating and printing. These operations must be integrated in a
continuous process through the use of material handling and conveyance systems.
The Company is utilizing conventional, commercially available process equipment
for mixing, forming and printing that it believes can meet its next generation
manufacturing goals. Additionally, the Company has contracted with conventional
film thermoforming equipment suppliers to develop a process to apply
biodegradable film as a coating for EARTHSHELL Products. Pilot equipment has
been built and used to manufacture and coat products such as plates, bowls and
trays on a small scale. These products have been used in demonstration projects
with the U.S. Department of the Interior and other users to evaluate the
performance of products as well as customer acceptance. Initial trials with
conventional commercial scale machinery have also been encouraging. The Company
believes it is well positioned to source competitively priced biodegradable
films for the middle and higher selling price markets for plates, bowls and
cups.
The Company believes it will be able to prove next generation manufacturing
economics for plates, bowls and hot cups during 2000. Based on its current
product costing models, the Company believes its products will be able to
compete in the middle and higher selling price markets at higher profit margins
when compared to competitive foodservice disposables. Additional value
engineering and a lower total cost of coating will be required to be competitive
in lower selling price markets.
OPERATING PARTNERS AND OTHER CUSTOMERS
In May 1999, the Company signed definitive agreements with Huhtamaki Van
Leer Oyj, ("Huhtamaki") a leading international food and food packaging company,
establishing a new joint venture company, Polarcup EarthShell, to commercialize
EARTHSHELL Products throughout Europe, Australia, New Zealand, and, on a country
by country basis, Asia. The Company believes that the opportunity for
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rapid market acceptance of its products in Europe is exceptional due to their
unique environmental profile and the more demanding regulations regarding
disposal of conventional foodservice disposable products in Europe.
In August 1999, the Company signed a non-binding letter of intent with
Sweetheart to expand and further develop the manufacturing facility in Owings
Mills, Maryland beyond the scope of the initial commitment for the Big
Mac-Registered Trademark- sandwich container. This proposal would require joint
investment by the Company and Sweetheart in additional capacity. The Company
also believes that there will be a significant reduction in the capital cost
necessary to build this new capacity as well as the level of first time,
non-recurring expenses as compared to its initial manufacturing lines. The
Company cannot assure, however, that this letter of intent will result in
definitive agreements with Sweetheart.
In November 1999, the Company signed definitive agreements with Prairie
Packaging, Inc. ("Prairie)" to establish a joint venture to produce an expanded
product set in the U.S. The proposed arrangement with Prairie encompasses the
production of plates, bowls, hinged-lid containers and cups.
Based on the definitive joint venture agreements with Huhtamaki and Prairie
and the letter of intent with Sweetheart, planning is underway to establish
manufacturing capacity based on the Company's next generation manufacturing
processes. Delays in developing cost competitive next generation products for
these joint ventures could delay or stop the introduction and market acceptance
of one or more EARTHSHELL Products which could have an adverse effect on the
Company's business, financial condition and results of operations.
McDonald's is expected to be the first foodservice operator using EARTHSHELL
Products. Other interest in distributing and using EarthShell packaging
continues to expand. Sysco Corporation, the leading foodservices distributor in
North America, the U.S. Department of the Interior, and others are engaged in
discussions with the Company or its joint venture partners regarding a range of
EARTHSHELL Products including plates, bowls and sandwich containers. The loss of
McDonald's or any other initial purchasers of the Company's products, or the
exercise of McDonald's priority rights under certain circumstances, could delay
the introduction and market acceptance of one or more EARTHSHELL Products which
could have an adverse effect on the Company's business, financial condition and
results of operations.
PRODUCTS
Foodservice disposables are currently manufactured from a variety of
materials, including paper and polystyrene. The Company believes that none of
these materials fully addresses all three principal challenges of the
foodservice industry--performance, cost and environmental impact. The Company
believes that EARTHSHELL Products will best address the combination of these
challenges and therefore will be able to achieve significant penetration of the
foodservice disposables market.
PERFORMANCE CHARACTERISTICS. The Company has produced hinged-lid
containers, as well as prototype plates, bowls, trays, and cups that the Company
believes meet the critical performance requirements of the marketplace,
including rigidity, graphic capabilities, insulation, shipping, handling and
stacking performance. The Company further believes that foodservice disposables
made of the new composite material can be designed to have comparable or
superior performance characteristics, such as strength, rigidity and insulating
characteristics. In addition, EARTHSHELL Products are designed to be
microwaveable.
COST COMPETITIVE. The Company believes that EARTHSHELL Products will be
able to be manufactured and sold at prices which are competitive with comparable
existing foodservice disposables based on material and machinery costs received
from vendors and suppliers. Although the Company has built its first commercial
manufacturing capacity at Sweetheart's facility in Owings Mills, Maryland to
produce the EarthShell Big Mac-Registered Trademark- sandwich container for sale
to Perseco, it has not yet produced the hinged-lid container at the commercial
volumes relative to the supply contract and therefore, the actual cost of
manufacture is unproven. Additionally, the Company has produced prototype
plates, trays, bowls and cups.
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The Company has successfully demonstrated most of the individual processing
steps for the first of its next generation products using primarily standard
commercial equipment from established suppliers. To date, however, these
prototypes have not been produced on fully integrated, commercial production
lines and therefore their actual cost of manufacture is unproven as well. The
Company expects that the cost of producing EARTHSHELL Products will decrease
over time as the technology and initial production processes are further
refined.
ENVIRONMENTAL IMPACT. EARTHSHELL Products offer a number of attractive
environmental features that are expected to appeal to customers and anyone
concerned about the environment. Through the use of an environmental assessment
("life cycle analysis") and in consultation with leading environmental experts,
EARTHSHELL Products have been designed to reduce certain environmental burdens
of rigid packaging through the careful selection of raw materials, processes and
suppliers. EARTHSHELL Products are made primarily from limestone, natural starch
binders, natural fibers, biodegradable polymer and wax coatings, and water.
According to research on the performance of various formulations of the
EarthShell sandwich container commissioned by the Company and performed by Cal
Recovery Inc., an international waste management consulting company, when
crushed or broken, such EarthShell sandwich containers were shown to be
biodegradable in a composting environment and to physically disintegrate in
water over time. As a result, the Company believes that EARTHSHELL Products
substantially reduce the risk to wildlife when compared to certain conventional
foodservice disposables and may help mitigate potentially adverse environmental
consequences created by their improper disposal. In addition, since EARTHSHELL
Products are compostable, they can offer a disposal alternative not available
with certain conventional foodservice packaging.
FOODSERVICE DISPOSABLES MARKETS
According to industry studies, about $9.0 billion was spent in the United
States during 1997 on the types of foodservice disposables that the Company
believes can be manufactured using the new composite material. Since then, the
Company estimates an increase of two percent per year in the United States. In
addition, according to an industry study, approximately $4.0 billion was spent
in Europe and Japan on such products in 1997. The Company believes that the
remaining unquantified international markets are both large and rapidly
developing and therefore present significant opportunities for EARTHSHELL
Products.
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The following data indicates the key product segments comprising the
approximately $9.0 billion of U.S. sales of those foodservice disposables
targeted for replacement by EARTHSHELL Products:
EARTHSHELL TARGET MARKET
1997 U.S. PURCHASES
(DOLLARS IN MILLIONS)
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AMOUNT OF
PRODUCT TYPE PURCHASES PERCENT
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Cold cups................................................. $1,800 20.2%
Hot cups.................................................. 1,000 11.2
Straws.................................................... 300 3.4
Plates and bowls.......................................... 1,400 15.7
Containers, trays and carriers............................ 1,225 13.8
Pizza boxes............................................... 700 7.9
Beverage lids............................................. 700 7.9
Cutlery................................................... 600 6.8
Hinged-lid containers..................................... 550 6.2
Wrap replacements......................................... 610 6.9
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Total................................................... $8,885 100.0%
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According to industry studies on the U.S. market, approximately 56% of the
total foodservice disposables purchased in 1997 were purchased by quick-serve
restaurants, 44% by other institutions, such as hospitals, stadiums, airlines,
schools and restaurants (other than quick-serve restaurants), as well as retail
stores. Of the foodservice disposables purchased in the United States by
quick-serve restaurants and other institutions, approximately 40% were made of
paper and 60% were made of plastic, polystyrene or foil.
AVAILABILITY OF RAW MATERIALS
The new composite material used to manufacture EARTHSHELL Products is made
from commonly available raw materials such as limestone, natural potato, corn
and other starch binders, natural fibers and functional coatings. While the
Company has determined that sufficient quantities of these raw materials are
generally available, should any of these raw materials become unavailable, the
unavailability of any such raw materials could result in delays in the
commercial introduction and could hinder acceptance of EARTHSHELL Products,
thereby adversely affecting the Company's business, financial condition and
results of operations. In addition, the Company and its licensees may become
significant consumers of certain key raw materials, such as starch, and if such
consumption is substantial in relation to the available resources, raw materials
prices may increase which in turn may increase the cost of EARTHSHELL Products.
THE TECHNOLOGY
The new composite material used to make EARTHSHELL Products is the result of
more than 11 years of basic research by EKI in the materials science of natural
minerals (such as limestone and sand) and natural binders (such as starch). EKI
has employed materials science methodologies and state-of-the-art analytical
equipment and research methods to develop this proprietary composite material
and related manufacturing processes. EKI has carefully considered the
environmental impact in the selection of these materials and processes.
EKI made several significant discoveries that led to the commercial
potential of this new composite material. For example, EKI developed a method of
using a high percentage of natural, low-cost fillers (such as limestone and
sand) in the composite. These fillers reduce cost and provide rigidity, thermal
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stability and environmental benefits to the materials, without significantly
compromising strength, flexibility and moldability. EKI also developed a
potential manufacturing process to disperse fibers into the material at a very
low water content. Further, EKI has been able to modify the composite material
formulation of the EARTHSHELL Products to enable them to be manufactured using
established processes such as heated mold forming systems. The result of these
discoveries is a new composite material which can be made from low-cost
materials, which can be processable using conventional manufacturing processes
and equipment and which the Company has engineered for specific product
applications and performance characteristics. The product composition can be
readily tailored to use widely available raw materials while maintaining product
properties and performance. Based on its economic models, the Company believes
that this technology will allow for the manufacturing of EARTHSHELL Products at
a reduced cost compared to conventional foodservice products of comparable
performance.
The Company's initial research and development efforts have focused on
EARTHSHELL Products made from a moldable foam. The EarthShell sandwich container
and the Company's current prototype products are made of this formulation. There
is also a potential paper-like application of EKI's technology that the Company
believes can be formulated into EARTHSHELL Products in the future.
Although the initial development of EARTHSHELL Products was conducted and
paid for by EKI prior to November 1992, the Company has incurred substantial
expenses in connection with the commercial application of this technology for
the foodservice packaging market since the Company's formation in 1992. The
Company's research and development expenses related to the continued development
of EARTHSHELL Products by EKI and the Company were approximately $30.5 million,
$20 million and $8.9 million in the years ended December 31, 1999, 1998 and
1997, respectively. The Company's research and development efforts are ongoing
and the Company expects to continue to incur substantial research and
development expenses in the future. During 2000, the Company expects to incur
approximately $15 million in research and development costs.
PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS
The technology that the Company licenses from EKI is the subject of numerous
issued and pending patents in both the United States and foreign countries. The
Company believes that these patent and patent applications provide a strategic
web of patent protection broadly covering the EARTHSHELL Products, their
material composition and the manufacturing processes used to make them. As of
February 14, 2000, EKI had obtained the rights to 72 U.S. and 61 foreign
patents, and had 8 U.S. and 95 foreign pending patent applications relating to
the compositions, products and manufacturing processes used to produce
EarthShell food and beverage containers. The patents currently issued in the
United States and internationally expire between 2012 and 2015. Pending patents,
if granted, would give the Company additional patent protection through 2019.
Twenty-three of the issued U.S. patents and 2 of the pending U.S. applications
relate specifically to molded food and beverage containers manufactured from the
new composite material, the formulation of the new composite material used in
the EarthShell Big Mac-Registered Trademark- sandwich container and
substantially all of the EARTHSHELL Products currently under development. While
the Company and EKI intend to continue to seek broad patent protection, the
Company cannot assure that the pending patents relating to the Company's
products or other additional patents will be issued or that the Company or EKI
will develop new technology that is patentable. Moreover, the Company cannot
assure that patents and patent applications licensed to the Company are
sufficient to protect the Company's technology or that any patent issued to EKI
and licensed to the Company will not be held invalid, circumvented or infringed
by others. Patent and patent applications on formulations of the new composite
material are based in part on specific proportional mixtures of the components
of the material. The Company continues to test and modify the components and
their proportional mixtures to improve environmental profile, reduce materials
and processing cost and improve product performance. The Company cannot assure
that the mixture that is ultimately determined to be optimal will be protected
under the Company's patents or that it will not be subject to a patent held by
others. If the optimal mixture
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is not protected under the Company's patents or is subject to a patent held by
others and a third party asserts patent infringement, this could have an adverse
effect on the Company's business, financial condition and results of operations.
Litigation may be necessary to enforce patents issued or licensed to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. For instance, Novamont S.p.A., an Italian company specializing in the
manufacture of a biodegradable plastic resin and products, filed a complaint
against the Company in the United States District Court for the Northern
District of Illinois in 1999, alleging infringement of three patents. The
Company has analyzed all three patents and believes it has strong meritorious
defenses and has been vigorously defending the lawsuit. See "Legal Proceedings."
The Company believes that it owns or has the rights to use all technology
incorporated into its products, but an adverse determination in any such
proceedings or in other litigation or infringement proceedings to which the
Company may become a party could subject the Company to significant liabilities
to third parties or require the Company to seek licenses from third parties.
Although patent and intellectual property disputes have often been settled
through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, the Company cannot assure that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses would prevent the Company from manufacturing or
licensing others to manufacture certain of its products, which could have an
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies on proprietary know-how and trade secrets which are
not the subject of patents. All of this proprietary information is licensed from
EKI. To protect its rights in proprietary know-how and trade secrets, both the
Company and EKI sometimes require licensees, joint venture partners, employees,
consultants, advisors and collaborators to enter into confidentiality
agreements. These confidentiality agreements, however, have limited terms, and
the Company cannot assure that these agreements will provide meaningful
protection for the Company's and EKI's trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure. In
addition, the Company's business could be adversely affected by competitors who
independently develop competing technologies.
The Company owns the trademark EARTHSHELL and certain other trademarks, and
has been licensed by EKI to use the trademark Ali(ite)-Registered Trademark- for
the new composite material.
RELATIONSHIP WITH AND RELIANCE ON EKI
The Company does not own the technology necessary for the manufacture of
EARTHSHELL Products and, pursuant to its License Agreement with EKI, the Company
is dependent upon its royalty-free, exclusive license from EKI to use the
technology. The Company's use of the technology is limited to the development,
manufacture and sale of foodservice disposables for use in the foodservice
industry, and the Company has no right to exploit opportunities for the
application of this technology or improvements outside this field of use. EKI
may terminate the license at any time if the Company is in breach of any
material obligations under the License Agreement and does not cure such breach
within a specified period. If EKI were to file for or be declared bankrupt, the
Company would likely be able to retain its rights under the License Agreement
with respect to U.S. patents; however, it is possible that steps could be taken
to terminate its rights under the License Agreement with respect to
international patents.
The Company continues to share a key officer with EKI, relies on EKI and
EKI's scientific and technical personnel for substantially all of its
scientific, and a portion of its technical and product development needs and
leases a small office space from EKI. Scientific and technical services are
provided and the office space is leased to the Company by EKI pursuant to an
Amended and Restated Technical
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Services and Sublease Agreement (the "Technical Services Agreement"),
terminating on December 31, 2002. The Company is also dependent on EKI for
further development and refinement of the basic materials technology used in
EARTHSHELL Products. EKI is not obligated to complete any further development or
refinement under the terms of the License Agreement, however EKI agreed to give
the Company first priority rights to certain EKI technical personnel pursuant to
the Technical Services Agreement. Any disruptions in the operations or financial
condition of EKI or the failure by EKI to perform services required by the
Company could have an adverse effect on the business, financial condition and
results of operations of the Company.
The Company and EKI are also parties to an Amended and Restated Agreement
for Allocation of Patent Costs (the "Patent Agreement"), effective October 1,
1997. Until September 30, 1999, the Company was responsible for paying all costs
associated with prosecuting, filing, maintaining or acquiring patents and patent
applications in connection with patents and patent applications that are
directly related to foodservice disposables. After September 30, 1999, the
Company is obligated to pay all costs associated with prosecuting, filing,
maintaining or acquiring patents and patent applications in connection with
technology that primarily benefits the foodservice disposable applications
licensed to the Company (as compared with applications of such patents outside
the foodservice disposables field of use). EKI will pay for all other patent
related costs. EKI and the Company will review, on a biennial basis, the
comparative benefits of each existing patent and patent application to determine
whether EARTHSHELL Products licensed to the Company derive the principal
benefits from the patent or patent application in question and will allocate the
associated patent costs for the ensuing two-year period accordingly. Neither
party will have the right to be reimbursed for any costs following notification
in writing by the other party that it does not desire to incur such costs.
POTENTIAL CONFLICTS WITH EKI
The Company and EKI are both controlled by a common indirect, majority
equity owner, Mr. Essam Khashoggi, and they share certain directors and
officers, including Mr. Khashoggi, who is also the Chairman of the Board of the
Company, and Mr. Simon Hodson, the Vice Chairman of the Board and Chief
Executive Officer of the Company. Certain conflicts may arise between EKI and
the Company, particularly with respect to corporate opportunities, including the
development of new markets and uses for products based on the EARTHSHELL
Products, the allocation of research and development resources, the devotion of
the common directors' and officers' time to the respective businesses and the
performance by EKI and the Company of their respective obligations under the
License Agreement, the Technical Services Agreement and the Patent Agreement.
Under the Patent Agreement, the Company is obligated to pay or reimburse EKI for
all costs and expenses associated with filing, prosecuting, acquiring and
maintaining certain patents or patent applications. The costs and expenses
incurred in connection with these patents and patent applications will be
controlled by EKI. Any patents granted would be the property of EKI, and EKI may
obtain a benefit therefrom other than under the License Agreement, including the
utilization and/or licensing of the patents and related technology in a manner
or for uses unrelated to the license granted to the Company in the foodservice
disposables field of use.
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Essam Khashoggi, the Chairman of the Board of the Company, is the
beneficial owner of approximately 70% of the outstanding shares of common stock
directly or indirectly through various entities that he controls, including EKI.
Thus, Mr. Khashoggi has the ability to elect all of the directors of the
Company, to control the direction and policies of the Company, to determine the
outcome of corporate transactions requiring the approval of the Company's
stockholders, including mergers, consolidations and the sale of all or
substantially all of the assets of the Company, and to prevent or cause a change
in control of the Company. Mr. Khashoggi also has the power to control the
Company's
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relationship with EKI, which he also controls, and upon which the Company is
dependent, among other things, for some of its research and development efforts.
COMPETITION
Competition among existing food and beverage container manufacturers in the
foodservice industry is intense. At present, most of these competitors have
substantially greater financial and marketing resources at their disposal than
does the Company, and many have well-established supply, production and
distribution relationships and channels. Companies producing competitive
products may reduce their prices or engage in advertising or marketing campaigns
designed to protect their respective market shares and impede market acceptance
of EARTHSHELL Products. In addition, all of the Company's licensees and joint
venture partners manufacture paper, plastic or foil packaging that may compete
with EARTHSHELL Products.
Several paper and plastic disposable packaging manufacturers and converters
and others have made efforts to increase the recycling of these products.
Increased recycling of paper and plastic products could lessen their
environmental impact, one significant basis upon which the Company intends to
compete. A number of companies have introduced or are attempting to develop
biodegradable starch-based materials, plastics, or other materials that may be
positioned as potential environmentally superior packaging alternatives. It is
expected that many existing packaging manufacturers may actively seek to develop
competitive alternatives to the Company's products and processes. The Company
believes its patents uniquely position it to incorporate a significant
proportion of low cost, inorganic fill with its material, which, relative to
other starch-based or specialty polymers will allow it to ultimately have a more
competitive material cost. The development of competitive, environmentally
attractive, disposable foodservice containers could render the Company's
technology obsolete and could have an adverse effect on the business, financial
condition and results of operations of the Company.
GOVERNMENT REGULATION
The manufacture, sale and use of EARTHSHELL Products is subject to
regulation by the U.S. Food and Drug Administration (the "FDA"). The FDA's
regulations are concerned with substances used in food packaging materials, not
with specific finished food packaging products. Thus, food or beverage
containers will be in compliance with FDA regulations if the components used in
the food and beverage containers: (i) are approved by the FDA as indirect food
additives for their intended uses and comply with the applicable FDA indirect
food additive regulations; or (ii) are generally recognized as safe ("GRAS") for
their intended uses and are of suitable purity for those intended uses. Each of
the components of the EarthShell Big Mac-Registered Trademark- sandwich
container and all other current prototype EARTHSHELL Products is either approved
by the FDA as an indirect food additive for its intended use, codified in the
FDA's regulations as GRAS for its intended use, or a commonly recognized food
ingredient regarded by the Company and its consultants as GRAS for its intended
use. The Company, however, has not sought the concurrence of the FDA in this
determination. The Company intends to ensure that the raw materials used in the
EarthShell Big Mac-Registered Trademark- sandwich container are suitable for
their intended uses by specifying standards to be met by suppliers of raw
materials and by material and product testing. There is no requirement that the
Company or a manufacturer of EARTHSHELL Products seek FDA concurrence that
certain components are GRAS for their intended uses or that the raw materials
are of suitable purity for their intended uses. However, the Company believes
that the EarthShell Big Mac-Registered Trademark- sandwich container and other
current prototype products of the Company will be in compliance with all
requirements of the FDA and do not require FDA approval. The Company cannot
assure, however, that the FDA will agree with these conclusions.
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If the FDA were to disagree with the Company's determinations with respect
to the EarthShell Big Mac-Registered Trademark- sandwich container or future
products, the FDA could ask the Company to voluntarily withdraw the products
from the marketplace. They could also initiate legal action to remove the
products from the marketplace and, if appropriate, pursue additional sanctions
against the Company and its management. Such actions by the FDA could have an
adverse effect on the business, financial condition and results of operations of
the Company.
Other EARTHSHELL Products that may be developed in the future may use
components that are not approved by the FDA as indirect food additives, or that
cannot reasonably be considered GRAS for their intended uses. If such a
component is used, it will be necessary for the manufacturers of the product, or
the Company on their behalf, to: (i) obtain an FDA indirect food additive
approval covering the component and its intended uses, or (ii) submit a
notification to the FDA regarding a food contact substance. A food additive
petition must be supported by detailed information concerning the composition
and manufacture of the food additive, as well as by the results of testing to
establish the safety of the additive. Typically, safety testing at exaggerated
doses in several species of laboratory animals is required. The testing required
to support a food additive petition could take a considerable length of time to
perform. According to FDA data, from October 1995 to September 1996, the average
time for FDA review and approval of a food additive petition was 32 months from
the date of submission. The Food and Drug Administration Modernization Act of
1997, which became effective February 19, 1998, added a new provision to the
Federal Food, Drug, and Cosmetic Act that permits the manufacturer or supplier
of a food contact substance to notify the FDA at least 120 days before beginning
distribution of the substance. The notification would have to set forth the
manufacturer's or supplier's rationale for why the substance is safe. Unless the
FDA notifies the submitter within the 120-day period that it disagrees with the
submitter's conclusion that the food contact substance is safe, the substance
could be lawfully distributed in commerce. The FDA is required to adopt
regulations to implement this provision. At this time, it is not possible to
determine whether the notification procedure, as implemented by the FDA, will be
suitable for any of the Company's products.
PERSONNEL
As of December 31, 1999, the Company had 43 employees. In addition, pursuant
to the terms of the Technical Services Agreement, the Company has a priority
right to the services of 37 technical personnel serving as employees of EKI as
of December 31, 1999. None of the Company's employees are represented by a labor
union and the Company believes that it has a good relationship with its
employees.
ITEM 2. PROPERTIES
The Company leases 8,066 square feet of office space in Baltimore, Maryland.
The Company's monthly lease payment with respect to this space is $18,149. The
Company has assigned this lease to another company, effective April 1, 2000 for
the full lease obligation. The Company leases 34,956 square feet of research and
development and office space in Annapolis Junction, Maryland. This lease expires
on September 30, 2004. The monthly lease payment with respect to this space is
$18,876. The Company subleases 1,600 square feet of office and research and
development space from EKI in Santa Barbara, California. This sublease expires
upon the earlier of March 31, 2001 or 30 days after notice by the Company. The
Company's monthly lease payment with respect to this space is $5,600. The
Company leases 54,800 square feet of space for its product development center in
Goleta, California. This lease expires on June 30, 2003. The Company's monthly
lease payment with respect to this space is $41,905.
ITEM 3. LEGAL PROCEEDINGS
On August 2, 1999, Novamont S.p.A., an Italian company specializing in the
manufacture of a biodegradable plastic resin and products, filed a complaint in
the United States District Court for the Northern District of Illinois alleging
infringement of three patents. The Company has analyzed all three
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patents and believes it has strong meritorious defenses and has been vigorously
defending the lawsuit. The Company believes this legal proceeding will not have
a material adverse effect on the Company's financial condition or results of
operations. However, the ultimate resolution of this claim is subject to many
uncertainties. It is reasonably possible that the Company could suffer an
adverse determination in this proceeding which could have a material adverse
effect on the Company's financial position, operating results or cash flows when
resolved in a future reporting period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on The National Association of
Securities Dealers Automated Quotation System National Market ("Nasdaq Stock
Market") under the symbol: ERTH. The high and low sale closing prices for the
Company's common stock for each quarter of 1999 as reported by The Nasdaq Stock
Market are contained in the Financial Notes entitled "Quarterly Financial
Information" on page F-18 of this Annual Report on Form 10-K.
The number of stockholders of record of the Company's common stock at
March 15, 2000 was 534. At February 29, 2000, Mr. Essam Khashoggi, directly or
indirectly, owned approximately 70% of the outstanding common stock of the
Company.
The Company is a developmental stage company and does not intend to declare
or pay cash dividends on its common stock in the foreseeable future.
USE OF PROCEEDS
In connection with the Company's initial public offering, the Company issued
10,526,316 shares of its common stock, $.01 par value (the "IPO Shares"), on
March 27, 1998. The IPO Shares were offered and sold by the underwriters at an
initial public offering price of $21.00 per share, resulting in aggregate
offering proceeds of $221,052,636. In addition, selling stockholders sold
2,673,684 shares of common stock. Net offering proceeds were $205,873,995.
As of December 31, 1999, the Company had applied $175.8 million of the
$205.9 million in net offering proceeds from the IPO shares. During the year
ended December 31, 1999, the Company applied $61.2 million of such net offering
proceeds. Of this amount, $20.4 million was used for the purchase of
manufacturing equipment, $10.2 million was used for construction and engineering
costs related to the manufacturing plant, $2.4 million was used for the
demonstration and prototype facility, and $28.2 million for other operating
expenses.
The cost of the Company's first manufacturing lines at Sweetheart has
exceeded the Company's initial estimates as discussed in "Management's
Discussion and Analysis of Financial Conditions and Results of Operations." As a
result, the Company will demonstrate the manufacturing and performance economies
of its next generation manufacturing systems in advance of the next tier of
commercial plant investment. The Company has refined its business strategy and
is utilizing joint ventures in which the joint venture partner generally will
share equally the cost and operating risks of turnkey equipment lines. The
Company believes using joint ventures in which both venturers generally assume
equal responsibility and risk, as well as share equally any upside
opportunities, better aligns its interests with the interests of its partners
while maintaining a favorable return on investment to the Company. As a result
of those and other changed circumstances, the actual use of initial public
offering proceeds will vary from the anticipated use of proceeds described in
the prospectus for the Company's IPO (the "Company's Prospectus"), dated
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March 23, 1998. For example, the Company plans now to use most of the
$7.4 million initial public offering proceeds that were shown in the Company's
Prospectus as anticipated to be used for patent enforcement and protection for
the development of its next generation manufacturing systems and to fund
operations.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report on Form 10-K.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
FOR THE YEAR ENDED DECEMBER 31 THROUGH
---------------------------------------------------- DECEMBER 31,
1999 1998 1997 1996 1995 1999
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Research and development
expenses..................... $ 30,471 $ 19,982 $ 8,901 $ 10,159 $ 9,100 $ 92,853
General and administrative
expenses..................... 11,872 9,296 5,685 3,405 2,362 38,548
Interest (income) expenses,
net.......................... (3,448) (4,026) 3,246 1,692 478 (2,496)
Patent expenses................ 645 486 653 1,382 1,929 8,331
Net loss....................... 44,188 26,620 18,992 16,950 13,914 145,029
Preferred dividends............ -- 777 2,134 2,134 2,134 9,927
Net loss available to common
stockholders................. $ 44,188 $ 27,397 $ 21,126 $ 19,084 $ 16,048 $154,956
Average shares outstanding..... 100,045 95,707 82,530 82,530 82,530 86,377
BALANCE SHEET DATA
Cash and cash equivalents...... $ 26,413 $ 86,590 $ 8 $ 21 $ 266
Short-term investments......... 8,971 6,531 -- -- --
Working capital (deficit)...... 32,886 87,054 (48,308) (31,489) (14,569)
Total assets................... 87,199 135,638 3,778 2,817 2,228
Notes payable, payables to
majority stockholder, accrued
interest and accrued
dividends.................... 1,386 1,181 45,163 29,873 13,560
Deficit accumulated during
development stage............ 145,029 100,841 74,221 55,229 38,279
Stockholders' equity
(deficit).................... $ 80,686 $124,875 $(44,567) $(28,732) $(12,678)
Shares outstanding............. 100,045 100,045 82,530 82,530 82,530
PER COMMON SHARE
Basic and diluted loss per
share........................ $ 0.44 $ 0.29 $ 0.26 $ 0.23 $ 0.19
Closing market price
High......................... $ 17 3/8 $ 23 7/8 -- -- --
Low.......................... $1 13/32 $ 5 5/16 -- -- --
Close........................ $ 4 1/4 $11 15/16 -- -- --
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Company's Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K. Such financial statements and
information have been prepared to reflect the historical operations, assets and
liabilities of the Company from the date of the Company's organization on
November 1, 1992 through December 31, 1999.
Information in this Annual Report on Form 10-K including "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as amended. These statements may be identified by
the use of forward-looking terminology such as "may," "will," "expect,"
"anticipate," "estimate," or "continue," or the negative thereof or other
comparable terminology. Any one factor or combination of factors could cause the
Company's actual operating performance or financial results to differ
substantially from those anticipated by management that are described herein.
Factors influencing the Company's operating performance and financial results
include, but are not limited to, changes in the general economy, the
availability of financing, governmental regulations concerning, but not limited
to, environmental issues, and other risks and unforeseen circumstances affecting
the Company's business which may be discussed elsewhere in this Annual Report on
Form 10-K.
OVERVIEW
The Company was organized in November 1992, as a Delaware corporation and
remains a development stage enterprise. E. Khashoggi Industries LLC, the
Company's principal stockholder, or its predecessors ("EKI"), has been involved
since July 1985, in the development of various new material technologies
including the new composite material. The Company was formed to develop, license
and commercialize foodservice disposables made of EarthShell composite material
("EARTHSHELL Products"). The Company has an exclusive, worldwide, royalty-free
license from EKI to use certain technology for this purpose. The Company intends
to continue to license or joint venture with existing manufacturers of
foodservice disposables for the manufacture and distribution of EARTHSHELL
Products. The Company expects to derive revenues primarily from license
royalties and distributions from joint ventures that are licensed to manufacture
EARTHSHELL Products.
The Company has experienced aggregate net losses of approximately
$145 million from its inception on November 1, 1992 through December 31, 1999.
The Company has been unprofitable to date and expects to continue to incur
operating losses until its products are commercially introduced and achieve
broader market acceptance and market penetration. Since its inception, the
Company has not generated any revenues from operations. Successful future
operations will depend upon the ability of the Company, its licensees and joint
venture partners to commercialize multiple EARTHSHELL Products. Prior to the
Company's initial public offering in March 1998, in which the Company raised net
proceeds of $206 million, the Company financed its operations from inception
primarily through the private placement of preferred stock and loans from its
principal stockholder, EKI, and Imperial Bank. Since inception, the Company has
relied on EKI to provide extensive management and technical support. The Company
and EKI entered into an Amended and Restated Technical Services and Sublease
Agreement (the "Technical Services Agreement") which continues through
December 31, 2002. Under the terms of the Technical Services Agreement, the
Company pays EKI for all direct project labor hours incurred by EKI technical
personnel and direct expenses incurred on approved projects. In addition, under
an Amended and Restated Agreement for the Allocation of Patent Costs (the
"Patent Agreement"), the Company reimburses EKI for the costs and expenses of
filing, prosecuting, acquiring and maintaining certain patents and patent
applications relating to the technology licensed to the Company under an Amended
and Restated License Agreement (the "License Agreement").
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DEVELOPMENT OF FIRST COMMERCIAL MANUFACTURING FACILITY.
The development and installation of the Company's first commercial
manufacturing lines at Sweetheart Cup Company Inc.'s ("Sweetheart") Owings
Mills, Maryland facility has been the Company's major focus since Sweetheart
secured the Perseco (the primary packaging purchasing agent for McDonald's
Corporation) supply agreement for EARTHSHELL containers for the Big
Mac-Registered Trademark- sandwich in October 1997. Following the Company's
initial public offering in early 1998 and in cooperation with Sweetheart, the
Company contracted for the design and construction of commercial scale
EarthShell manufacturing lines to meet projected demand under the
Perseco/McDonald's supply contract. In late 1998, the Company began the process
of debugging and startup of the first of these manufacturing lines.
The debugging and startup of the first line has taken longer than originally
anticipated. One of the primary causes of the delay has been the failure of a
high-speed conveyor segment to meet its original performance specifications. A
new conveyor segment was designed, installed, and placed in operation in early
November 1999. The new conveyor section is functioning as required and the
Company is operating the entire line to produce commercial products to meet the
immediate demand for validation testing. The Company is proceeding to start-up
the second line.
Previously, the Company had developed a contingency plan to ensure that it
would have adequate capacity to meet the anticipated Perseco/McDonald's rollout
schedule. Based on recent progress, the Company no longer believes it will be
necessary to install additional capacity to meet the commitment for the Big
Mac-Registered Trademark- sandwich container.
Because the Owings Mills facility is the Company's first commercial
implementation of the EarthShell technology, the Company believes that the cost
incurred on the manufacturing lines in this facility will be significantly
higher than the cost of manufacturing lines in subsequent facilities. The
Company believes the estimated capitalized cost of the Sweetheart lines will be
approximately $51.6 million upon completion. The Company expects to have
expensed approximately $10.6 million of process development, design and
engineering costs and approximately $13.9 million in start-up and debugging
expense associated with preparing the Sweetheart facility for full-scale
production. The total project cost for this facility upon completion is
estimated to be approximately $76 million as of December 31, 1999.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
The Company's net loss increased $17.6 million from $26.6 million for the
year ended December 31, 1998 to $44.2 million for the year ended December 31,
1999.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenditures for the development of EARTHSHELL Products increased $10.5 million
from $20.0 million for the year ended December 31, 1998 to $30.5 million for the
year ended December 31, 1999. The increase was more than expected as the Company
continued to experience persistent problems with the debugging and start-up of
its first commercialization activities at Sweetheart's Maryland facility. Cost
reimbursement to Sweetheart increased by $4.5 million for the year ended
December 31, 1999 compared with the year ended December 31, 1998. The 1999 cost
reimbursement period represented twelve months of activity while the 1998 cost
reimbursement period represented three months of activity. The Company also
incurred an additional $1.2 million in start-up supplies at Sweetheart when
comparing the year ended December 31, 1999 with the year ended December 31,
1998. Expenses for next generation product development increased $3.0 million
from December 31, 1998 compared to the year ended December 31, 1999. This
increase included personnel and facility costs as well as research supplies. The
Company was billed by EKI for research and development services totaling
$11.7 million for the year ended December 31, 1999 and $8.9 million for the year
ended December 31, 1998.
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TOTAL GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses increased $2.6 million from $9.3 million for the year ended
December 31, 1998 to $11.9 million for the year ended December 31, 1999.
Personnel and facility costs in Maryland increased $0.5 million when comparing
the year ended December 31, 1999 with the year ended December 31, 1998 because
the 1999 period included twelve months of activity while the 1998 period
included less than twelve months of activity. Legal costs increased
$1.1 million for deal structuring and general corporate matters when comparing
the year ended December 31, 1999 with the year ended December 31, 1998. Cost
associated with managing a publicly traded company, such as transfer agent and
registrar costs and investor relations costs increased $0.9 million when
comparing the year ended December 31, 1999 with the year ended December 31,
1998. Net consulting costs for the year ended December 31, 1999 decreased
$1.3 million primarily due to the completion of a strategic planning effort by
the Boston Consulting Group during the year ended December 31, 1998.
Additionally, the Company wrote-off $0.7 million, primarily in leasehold
improvements related to consolidating office space in Maryland.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $3.7 million from $0.9 million for the year ended
December 31, 1998 to $4.6 million for the year ended December 31, 1999. The
increase in depreciation expense was primarily the result of the Company's
commercial manufacturing equipment at Sweetheart's Maryland facility being
placed in service during the year ended December 31, 1999.
RELATED PARTY PATENT EXPENSES. Legal fees reimbursed to EKI under the
Patent Agreement with EKI, increased $0.1 million from $0.5 million for the year
ended December 31, 1998 to $0.6 million for the year ended December 31, 1999.
This cost varies with the number of patents filed, researched and/or abandoned
during the year.
INTEREST INCOME. Interest income decreased $1.7 million from $5.1 million
for the year ended December 31, 1998 to $3.4 million for the year ended
December 31, 1999. The decrease was a result of less cash invested during the
year as cash was used for the Company's Sweetheart facility and to fund
operations.
INTEREST EXPENSE. Interest expense decreased by $1.1 million from
$1.1 million for the year ended December 31, 1998 to zero for the year ended
December 31, 1999. The decrease was due to the repayment of outstanding debt
from the proceeds of the Company's initial public offering in March 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
The Company's net loss increased $7.6 million from $19.0 million for the
year ended December 31, 1997 to $26.6 million for the year ended December 31,
1998.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenditures for the development of EARTHSHELL Products increased $11.1 million
from $8.9 million for the year ended December 31, 1997 to $20.0 million for the
year ended December 31, 1998. The increase was anticipated as part of the
Company's first commercialization activities, and was due primarily to
$4.4 million in additional design and engineering fees for the Sweetheart
facility, $2.4 million in abandoned early generation prototype equipment related
to the development of the Company's first commercial manufacturing lines and
$1.2 million in start-up cost reimbursed to Sweetheart related to the first
commercial manufacturing lines. The Company was billed by EKI for research and
development services totaling $8.9 million for the year ended December 31, 1998
and $7.4 million for the year ended December 31, 1997, respectively.
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses increased $3.6 million from $5.7 million for the year ended
December 31, 1997 to $9.3 million for the year ended December 31, 1998. The
increase was due to approximately $4.0 million related to the executive staffing
additions and start-up of the new Baltimore headquarters, $1.5 million for
strategic business planning
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efforts with the Boston Consulting Group and $0.3 million for increases in
various insurance coverages. Included in general and administrative expense for
the year ended December 31, 1997 was $3.1 million resulting from the extension
of the terms of certain option agreements in October 1997 that had been deemed
re-grants and, therefore, have been treated as stock options granted at prices
below market.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $0.4 million from $0.5 million for the year ended
December 31, 1997 to $0.9 million for the year ended December 31, 1998. The
increase in depreciation expense was primarily the result of the purchase of
pilot manufacturing equipment for the Company's product development center.
RELATED PARTY PATENT EXPENSES. Legal fees reimbursed to EKI under the prior
patent cost allocation agreement with EKI, which terminated September 30, 1997
(the "Prior Patent Agreement"), and the current Patent Agreement with EKI,
decreased $0.2 million from $0.7 million for the year ended December 31, 1997 to
$0.5 million for the year ended December 31, 1998. The decrease was primarily a
result of filing fewer new patent applications during the year ended
December 31, 1998.
INTEREST INCOME. Interest income was $5.1 million for the year ended
December 31, 1998 and minimal for the year ended December 31, 1997, reflecting
investment earnings on the net proceeds of the Company's initial public offering
completed during March 1998.
INTEREST EXPENSE. Interest expense decreased by $2.1 million from
$3.2 million for the year ended December 31, 1997 to $1.1 million for the year
ended December 31, 1998. The decrease was due primarily to the repayment of
outstanding debt from the proceeds of the Company's initial public offering in
March 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
The Company's net loss increased $2.0 million from $17.0 million for the
year ended December 31, 1996 to $19.0 million for the year ended December 31,
1997.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenditures for the development of EARTHSHELL Products decreased $1.3 million
from $10.2 million for the year ended December 31, 1996 to $8.9 million for the
year ended December 31, 1997. The amount of research and development services
billed by EKI to the Company decreased $1.7 million from $9.1 million for the
year ended December 31, 1996 to $7.4 million for the year ended December 31,
1997. In 1996, the Company incurred higher research and development expenses
primarily due to development and operation of the Company's sandwich container
pilot line at a research facility in Rock Hill, South Carolina operated by
Genpak, one of the Company's licensees. The Company completed its development
efforts with Genpak near the end of 1996 and relocated the pilot line to Santa
Barbara, California in the fourth quarter of 1996 and, accordingly, costs
related to this off-site manufacturing effort were not incurred during 1997.
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative
expenses increased $2.3 million from $3.4 million for the year ended
December 31, 1996 to $5.7 million for the year ended December 31, 1997. This
increase was primarily due to the recognition of compensation expense of
$3.1 million resulting from the extension of the terms of certain option
agreements in October 1997 that were deemed as re-grants and, therefore, treated
as stock options granted at prices below market. Similarly in 1996, the Company
recognized compensation expense of $0.7 million related to executive stock
options.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $0.2 million from $0.3 million for the year ended December 31, 1996 to
$0.5 million for the year ended December 31, 1997. The increase in depreciation
expense was mainly a result of the purchase of pilot manufacturing equipment
formerly located at the Genpak, Rock Hill, South Carolina facility for the
Company's Santa Barbara product development center.
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RELATED PARTY PATENT EXPENSES. Legal fees under the Prior Patent Agreement
and the Patent Agreement with EKI decreased $0.7 million from $1.4 million for
the year ended December 31, 1996 to $0.7 million for the year ended
December 31, 1997. The decrease was primarily a result of filing fewer new
patent applications.
INTEREST (INCOME) EXPENSES, NET. Total interest expense increased
$1.5 million from $1.7 million for the year ended December 31, 1996 to
$3.2 million for the year ended December 31, 1997. The increase in interest
expense during 1997 was due to additional borrowings from EKI and additional
borrowings against the Company's line of credit.
LIQUIDITY AND CAPITAL RESOURCES AT DECEMBER 31, 1999
CASH FLOW. The Company's principal uses of cash for the year ended
December 31, 1999 were to fund operations and purchase equipment to facilitate
the development of manufacturing capacity for EARTHSHELL Products. Net cash used
in operations was $40.0 million for the year ended December 31, 1999 and
$15.0 million for the year ended December 31, 1998. Net cash used in investing
activities was $20.1 million and $48.4 million for the years ended December 31,
1999 and 1998, respectively. As of December 31, 1999 the Company had cash and
short-term investments totaling $35.4 million.
CAPITAL REQUIREMENTS. The Company expects to spend approximately
$18 million in capital expenditures in the year 2000, approximately $8 million
of which will be related to completing development of Sweetheart's Maryland
facility and approximately $10 million of which will be related to designing and
developing the next generation manufacturing facilities and prototypes for an
expanded line of products.
SOURCES OF CAPITAL. As part of the Company's initial public offering on
March 27, 1998, the Company issued 10,526,316 shares of its common stock, $.01
par value, for which the Company received net proceeds of $206 million. The
Company has used $175.8 million of the net proceeds through December 31, 1999. A
portion of the proceeds was used to repay indebtedness to the majority
stockholder of $36.6 million, bank debt of $14.0 million and to pay accrued
dividends on the Company's Series A preferred stock of $9.9 million.
The Company expects to use the remaining proceeds over the next year for:
(i) general corporate purposes, including the continued design and development
of EARTHSHELL Products and anticipated operating losses; (ii) to complete the
development of its first commercial manufacturing capacity at Sweetheart;
(iii) to complete the development and construction of its next generation
manufacturing lines for demonstration to its licensees or joint ventures; and
(iv) to launch an initial public relations and advertising campaign.
The Company is reducing its spending and focusing its resources on those
activities that are critical to demonstrate the commercial viability of the
EarthShell business model: these activities include, completing the startup of
the Sweetheart lines, achieving customer acceptance of its product, and
demonstrating the first of its next generation products and manufacturing lines.
As part of its cost reduction efforts, the Company has consolidated its Maryland
operations and is scaling down its Goleta, California development facility.
To ensure that the Company will have the capital to continue funding its
development activities as well as its share of the design and development of the
next joint ventured commercial manufacturing facilities, the Company is in
financing discussions with certain financial institutions. While the Company has
no current commitments for additional financing, the Company believes that
efforts to obtain additional financing will be successful based on these
discussions with these financial institutions. The Company cannot assure,
however, that commitments can be obtained on favorable terms, if at all. If the
Company is unable to obtain additional financing on a timely basis, the Company
will scale back its development activities to conserve resources until financing
becomes available.
17
<PAGE>
YEAR 2000
Beginning in late 1998, the Company began reviewing its major systems for
Year 2000 compliance. Most of the Company's hardware and software applications
were new and were not developed internally. The Company spent minimal amounts to
test for or correct any Year 2000 compliance issues because its purchases for
information and non-information technology systems were deemed to be Year 2000
compliant by its vendors.
To date, the Company has not experienced any disruptions in its operating
activities or any effect on its financial condition due to failure of its
computerized systems to accurately receive, provide and process date and time
data from, into and between the twentieth and twenty-first centuries. The
Company currently believes that the Year 2000 issue will not pose any
significant operational problems in the future.
NET OPERATING LOSS TAX CARRYFORWARDS
The Company has sustained net operating losses ("NOLs") for federal income
tax purposes in the aggregate amount of approximately $108.5 million from its
inception on November 1, 1992 through December 31, 1999. Under the Internal
Revenue Code of 1986, as amended, the Company generally is entitled to reduce
its future federal income tax liabilities by carrying unused NOLs forward for a
period of 20 years to offset future taxable income earned.
In the event that the Company is subject to the federal personal holding
company tax in any taxable year, the Company can only use its NOLs, if any, from
the immediately preceding taxable year to offset its income subject to the
personal holding company tax for such year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in the Company's Proxy
Statement for its 2000 annual meeting of stockholders which will be filed on or
before April 30, 2000 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Company's Proxy
Statement for its 2000 annual meeting of stockholders which will be filed on or
before April 30, 2000 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Company's Proxy
Statement for its 2000 annual meeting of stockholders which will be filed on or
before April 30, 2000 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Company's Proxy
Statement for its 2000 annual meeting of stockholders which will be filed on or
before April 30, 2000 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) INDEX TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1999, and 1998............ F-3
Statements of Operations for the years ended December 31,
1999, 1998, 1997 and for the period from November 1, 1992
(inception) to December 31, 1999.......................... F-4
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1999, 1998, 1997, 1996, 1995, 1994 and
1993...................................................... F-5
Statements of Cash Flows for the years ended December 31,
1999, 1998, 1997 and the period from November 1, 1992
(inception) to December 31, 1999.......................... F-6
Notes to the Financial Statements........................... F-8
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted because they are not required, not
applicable, or the information required to be set forth therein is
included in the Company's Financial Statements or the Notes therein.
(B) REPORTS ON FORM 8-K
None.
19
<PAGE>
(C) EXHIBITS
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of the Company.(1)
3.2 Bylaws of EarthShell the Company Corporation.(1)
3.3 Certificate of Designation, Preferences Relative,
Participating, Optional and Other Special Rights of the
Company's Series A Cumulative Senior Convertible Preferred
Stock.(1)
3.4 Amended and Restated Certificate of Incorporation of the
Company.(1)
3.5 Amended and Restated Bylaws of the Company.(1)
4.1 Specimen certificate of Common Stock.(1)
10.1 Amended and Restated License Agreement dated February 28,
1995 by and between the Company and E. Khashoggi Industries
("EKI").(2)
10.2 Registration Rights Agreement dated as of February 28, 1995
by and between the Company and EKI, as amended.(1)
10.3 Employment Agreement dated October 19, 1993 by and between
the Company and Scott Houston, as amended.(1)
10.4 Stock Purchase Agreement dated as of September 16, 1993 by
and between the Company and the persons named therein.(1)
10.5 Registration Rights Agreement dated as of September 16, 1993
by and between the Company and the persons named therein, as
amended.(1)
10.6 Sublicense Agreement dated June 19, 1995 by and between the
Company and Dopaco, Inc, as amended.(1)
10.7 Sublicense Agreement dated November 9, 1994 by and between
the Company and Genpak Corporation, as amended.(1)
10.8 EarthShell Container Corporation 1994 Stock Option Plan.(1)
10.9 EarthShell Container Corporation 1995 Stock Incentive
Plan.(1)
10.10 Form of Stock Option Agreement under the EarthShell
Container Corporation 1994 Stock Option Plan.(1)
10.11 Form of Stock Option Agreement under the EarthShell
Container Corporation 1995 Stock Incentive Plan.(1)
10.12 Warrant to Purchase Stock issued July 2, 1996 by the Company
to Imperial Bank.(1)
10.13 Warrant to Purchase Stock issued June 7, 1996 by the Company
to Imperial Bank.(1)
10.14 Employment Agreement dated October 1, 1997 by and between
the Company and Simon K. Hodson.(1)
10.15 Amended and Restated Technical Services and Sublease
Agreement dated October 1, 1997 by and between the Company
and EKI.(1)
10.16 Amended and Restated Agreement for Allocation of Patent
Costs dated October 1, 1997 by and between the Company and
EKI.(1)
10.17 Warrant to Purchase Stock issued November 15, 1996 by the
Company to Imperial Bank.(1)
10.18 Letters dated August 22, 1997 from Shelby Yastrow to Simon
K. Hodson and Simon K. Hodson to Shelby Yastrow.(1)
10.19 Warrant to Purchase Stock issued October 6, 1997 by the
Company to Imperial Bank.(1)
10.20 Sublicense Agreement dated October 16, 1997 by and between
the Company and Sweetheart Cup Company Inc.(1)
</TABLE>
20
<PAGE>
<TABLE>
<C> <S>
10.21 Operating Agreement for the Production of Hinged Sandwich
Containers for McDonald's Corporation between Sweetheart Cup
Company Inc. and the Company dated as of October 16,
1997.(1)
10.22 Warrant to Purchase Stock dated December 31, 1997 by the
Company to Imperial Bank.(1)
10.23 Letter Agreement re Haas/BIOPAC Technology dated February
17, 1998 by and between the Company and EKI.(1)
10.24 Second Amendment to 1995 Stock Incentive Plan of the
Company.(1)
10.25 Amendment No. 2 to Registration Rights Agreement dated as of
September 16, 1993.(1)
10.26 Amendment No. 2 to Registration Rights Agreement dated
February 28, 1995.(1)
10.27 Employment Agreement dated March 23, 1998 by and between the
Company and William F. Spengler.(3)
10.28 Employment Agreement dated April 15, 1998 by and between the
Company and Vincent J. Truant.(3)
10.29 Employment Agreement dated July 22, 1998 by and between the
Company and Michael M. Hagerty.(3)
10.30 Lease Agreement dated June 4, 1998 by and between the
Company and Baltimore Center Associates Limited
Partnership.(3)
10.31 Lease Agreement dated May 1, 1998 by and between the Company
and ORIX SBAP Goleta Venture, a general partnership.(3)
10.32 Design, Procurement and Construction Management Services
Agreement dated May 13, 1998 by and among the Company,
Sweetheart Cup Company Inc., CH2M Hill Industrial Design
Corporation, and IDC Construction Management, Inc.(3)
10.33 First Amendment dated June 2, 1998 to the Amended and
Restated License Agreement by and between the Company and E.
Khashoggi Industries ("EKI").(4)
10.34 First Amendment to 1995 Stock Incentive Plan of the
Company.(5)
10.35 Third Amendment to 1995 Stock Incentive Plan of the
Company.(6)
10.36 Fourth Amendment to 1995 Stock Incentive Plan of the
Company.(6)
10.37 Lease Agreement dated July 2, 1999 by and between the
Company and CHIPPEWA limited partnership.
27 Amended Financial Data Schedule.
</TABLE>
- ------------------------
(1) Previously filed, as an exhibit to the Company's Registration Statement on
Form S-1 and amendments thereto, File no. 333-13287, and incorporated herein
by reference.
(2) Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q, file no. 333-13287, for the quarter ended March 31, 1998, and
incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q, file no. 333-13287, for the quarter ended June 30, 1998, and
incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q, file no. 000-23567, for the quarter ended September 30, 1998, and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's annual report on Form 10-K,
file no. 000-23567, for the fiscal year ended December 31, 1998, and
incorporated herein by reference.
(6) Previously filed as part of the Company's definitive proxy statement on
Schedule 14A, file no. 000-23567, for its 1999 annual meeting of
stockholders, and incorporated herein by reference.
21
<PAGE>
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, on March 16, 2000.
<TABLE>
<S> <C> <C>
EARTHSHELL CORPORATION
By: /s/ SIMON K. HODSON
-----------------------------------------
Simon K. Hodson
VICE CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ESSAM KHASHOGGI
------------------------------------------- Chairman of the Board March 16, 2000
Essam Khashoggi
Vice Chairman of the Board and
/s/ SIMON K. HODSON Chief Executive Officer
------------------------------------------- (Principal Executive March 16, 2000
Simon K. Hodson Officer)
/s/ D. SCOTT HOUSTON Chief Financial Officer
------------------------------------------- (Principal Financial and March 16, 2000
D. Scott Houston Accounting Officer)
/s/ JOHN DAOUD
------------------------------------------- Secretary and Director March 16, 2000
John Daoud
/s/ ELLIS JONES
------------------------------------------- Director March 16, 2000
Ellis Jones
/s/ LAYLA KHASHOGGI
------------------------------------------- Director March 16, 2000
Layla Khashoggi
/s/ HOWARD MARSH
------------------------------------------- Director March 16, 2000
Howard Marsh
/s/ WILLIAM A. MARQUARD
------------------------------------------- Director March 16, 2000
William A. Marquard
/s/ JEROLD H. RUBINSTEIN
------------------------------------------- Director March 16, 2000
Jerold H. Rubinstein
/s/ LYNN SCARLETT
------------------------------------------- Director March 16, 2000
Lynn Scarlett
</TABLE>
22
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Financial Statements:
Index to Financial Statements and Schedules................. F-1
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1999 and 1998............. F-3
Statements of Operations for the years ended December 31,
1999, 1998 and 1997, and for the period from November 1,
1992 (inception) through December 31, 1999................ F-4
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1999, 1998, 1997, 1996, 1995, 1994 and
1993...................................................... F-5
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997, and for the period from November 1,
1992 (inception) through December 31, 1999................ F-6
Notes to Financial Statements............................... F-8
</TABLE>
Financial Statement Schedules:
None.
All schedules have been omitted because they are not required, not
applicable, or the information required to be set forth therein is included in
the Company's Financial Statements or the Notes therein.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EarthShell Corporation:
We have audited the accompanying balance sheets of EarthShell Corporation (a
development stage enterprise) (the "Company") as of December 31, 1999 and 1998,
and the related statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999 and for the
period from November 1, 1992 (inception) through December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 and for the period from November 1,
1992 (inception) through December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
Baltimore, Maryland
March 15, 2000
F-2
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 26,412,553 $ 86,590,163
Restricted cash........................................... 3,500,000 3,500,000
Short-term investments.................................... 8,970,638 6,530,928
Other assets.............................................. 514,662 1,196,373
------------- -------------
Total current assets.................................... 39,397,853 97,817,464
PROPERTY AND EQUIPMENT, NET................................. 47,355,382 37,820,917
INVESTMENT IN JOINT VENTURE................................. 445,318 --
------------- -------------
TOTAL....................................................... $ 87,198,553 $ 135,638,381
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 5,126,590 $ 9,559,437
Trade payable to majority stockholder..................... 1,385,737 1,181,300
Notes payable to banks.................................... -- 22,975
------------- -------------
Total current liabilities............................... 6,512,327 10,763,712
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; 9,170,000 Series A shares designated; no
shares issued and outstanding as of December 31, 1999
and 1998, respectively.................................. -- --
Additional paid-in preferred capital...................... -- --
Common stock, $.01 par value, 200,000,000 shares
authorized; 100,045,166 issued and outstanding as of
December 31, 1999 and 1998.............................. 1,000,451 1,000,451
Additional paid-in common capital......................... 224,715,255 224,715,255
Deficit accumulated during the development stage.......... (145,029,480) (100,841,037)
------------- -------------
Total stockholders' equity.............................. 80,686,226 124,874,669
------------- -------------
TOTAL....................................................... $ 87,198,553 $ 135,638,381
============= =============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
--------------------------------------- DECEMBER 31,
1999 1998 1997 1999
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Expenses:
Related party research and
development.......................... $11,663,499 $ 8,883,365 $ 7,413,736 $ 58,270,976
Other research and development......... 18,807,098 11,098,769 1,487,304 34,581,863
Related party general and
administrative expenses.............. 214,109 67,200 67,200 2,082,909
Other general and administrative
expenses............................. 11,657,896 9,229,267 5,618,055 36,464,756
Depreciation and amortization.......... 4,644,234 880,677 506,546 7,784,288
Related party patent expenses.......... 644,584 485,670 652,867 8,330,861
----------- ----------- ----------- ------------
Total expenses....................... 47,631,420 30,644,948 15,745,708 147,515,653
Interest income.......................... (3,448,448) (5,112,126) (66) (9,055,913)
Related party interest expense........... -- 651,586 2,185,177 4,770,731
Other interest expense................... -- 434,844 1,060,404 1,788,738
----------- ----------- ----------- ------------
Loss Before Income Taxes................. 44,182,972 26,619,252 18,991,223 145,019,209
Income Taxes............................. 5,471 800 800 10,271
----------- ----------- ----------- ------------
Net Loss................................. 44,188,443 26,620,052 18,992,023 145,029,480
Preferred Dividends...................... -- 776,813 2,134,000 9,926,703
----------- ----------- ----------- ------------
Net Loss Available To Common
Stockholders........................... $44,188,443 $27,396,865 $21,126,023 $154,956,183
----------- ----------- ----------- ------------
Basic And Diluted Loss Per Common Share.. $ 0.44 $ 0.29 $ 0.26 $ 1.79
Weighted Average Number Of Common
Shares................................. 100,045,166 95,706,942 82,530,000 86,377,296
</TABLE>
See notes to financial statements.
F-4
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CUMULATIVE
CONVERTIBLE
PREFERRED STOCK DEFICIT
---------------------- ADDITIONAL ADDITIONAL ACCUMULATED
SERIES A PAID-IN COMMON STOCK PAID-IN DURING
---------------------- PREFERRED ------------------------- COMMON DEVELOPMENT
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL STAGE
----------- -------- ------------ ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK AT
INCEPTION.................... -- $ -- $ -- 82,530,000 $ 3,150 $ 6,850 $ --
Sale of preferred stock, net... 6,988,850 267 24,472,734 -- -- -- --
Net loss....................... -- -- -- -- -- -- (7,782,551)
----------- -------- ------------ ------------ ---------- ------------ -------------
BALANCE,
DECEMBER 31, 1993............ 6,988,850 267 24,472,734 82,530,000 3,150 6,850 (7,782,551)
Net loss....................... -- -- -- -- -- -- (16,582,080)
----------- -------- ------------ ------------ ---------- ------------ -------------
BALANCE,
DECEMBER 31, 1994............ 6,988,850 267 24,472,734 82,530,000 3,150 6,850 (24,364,631)
Contribution to equity......... -- -- -- -- -- 1,117,723 --
Net loss....................... -- -- -- -- -- -- (13,914,194)
----------- -------- ------------ ------------ ---------- ------------ -------------
BALANCE,
DECEMBER 31, 1995............ 6,988,850 267 24,472,734 82,530,000 3,150 1,124,573 (38,278,825)
Contribution to equity......... -- -- -- -- -- 650,000 --
Issuance of stock warrants..... -- -- -- -- -- 246,270 --
Net loss....................... -- -- -- -- -- -- (16,950,137)
----------- -------- ------------ ------------ ---------- ------------ -------------
BALANCE,
DECEMBER 31, 1996............ 6,988,850 267 24,472,734 82,530,000 3,150 2,020,843 (55,228,962)
Compensation related to stock
options and warrants......... -- -- -- -- -- 3,156,659 --
Net loss....................... -- -- -- -- -- -- (18,992,023)
----------- -------- ------------ ------------ ---------- ------------ -------------
BALANCE,
DECEMBER 31, 1997............ 6,988,850 267 24,472,734 82,530,000 3,150 5,177,502 (74,220,985)
262 to 1 stock split........... -- 69,621 (69,621) -- 822,150 (822,150) --
Conversion of preferred stock
to common stock.............. (6,988,850) (69,888) (24,403,113) 6,988,850 69,888 24,403,113 --
Issuance of common stock....... -- -- -- 10,526,316 105,263 205,883,493 --
Preferred stock dividends...... -- -- -- -- -- (9,926,703) --
Net loss....................... -- -- -- -- -- -- (26,620,052)
----------- -------- ------------ ------------ ---------- ------------ -------------
BALANCE,
DECEMBER 31, 1998............ -- -- -- 100,045,166 1,000,451 224,715,255 (100,841,037)
Net loss....................... -- -- -- -- -- -- (44,188,443)
----------- -------- ------------ ------------ ---------- ------------ -------------
BALANCE,
DECEMBER 31, 1999............ -- $ -- $ -- 100,045,166 $1,000,451 $224,715,255 $(145,029,480)
=========== ======== ============ ============ ========== ============ =============
<CAPTION>
TOTAL
------------
<S> <C>
ISSUANCE OF COMMON STOCK AT
INCEPTION.................... $ 10,000
Sale of preferred stock, net... 24,473,001
Net loss....................... (7,782,551)
------------
BALANCE,
DECEMBER 31, 1993............ 16,700,450
Net loss....................... (16,582,080)
------------
BALANCE,
DECEMBER 31, 1994............ 118,370
Contribution to equity......... 1,117,723
Net loss....................... (13,914,194)
------------
BALANCE,
DECEMBER 31, 1995............ (12,678,101)
Contribution to equity......... 650,000
Issuance of stock warrants..... 246,270
Net loss....................... (16,950,137)
------------
BALANCE,
DECEMBER 31, 1996............ (28,731,968)
Compensation related to stock
options and warrants......... 3,156,659
Net loss....................... (18,992,023)
------------
BALANCE,
DECEMBER 31, 1997............ (44,567,332)
262 to 1 stock split........... --
Conversion of preferred stock
to common stock.............. --
Issuance of common stock....... 205,988,756
Preferred stock dividends...... (9,926,703)
Net loss....................... (26,620,052)
------------
BALANCE,
DECEMBER 31, 1998............ 124,874,669
Net loss....................... (44,188,443)
------------
BALANCE,
DECEMBER 31, 1999............ $ 80,686,226
============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOVEMBER 1,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------------------- DECEMBER 31,
1999 1998 1997 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(44,188,443) $ (26,620,052) $(18,992,023) $(145,029,480)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 4,644,234 880,677 506,546 7,784,288
Issuance of stock options to director, consultant and
officer.............................................. -- 114,761 3,096,761 3,861,522
Amortization of debt issue costs....................... -- -- 230,232 271,277
Loss on sale or disposal of property and equipment..... 3,015,310 3,436,837 -- 6,517,786
Loss from investment in joint venture.................. 70,120 -- -- 70,120
Net loss on sale of investments........................ -- -- -- 32,496
Accretion of discounts on investments.................. -- -- -- (410,084)
Changes in operating assets and liabilities:
Other assets........................................... 681,711 (1,167,837) 10,784 (514,662)
Accounts payable and accrued expenses.................. (4,432,847) 6,376,902 1,505,891 5,126,588
Trade payable to majority stockholder.................. 204,437 2,588,331 8,996,134 28,268,950
Accrued interest on notes payable to majority
stockholder.......................................... -- (636,068) 204,927 --
------------ ------------- ------------ -------------
Net cash used in operating activities................ (40,005,478) (15,026,449) (4,440,748) (94,021,199)
------------ ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments U.S. government securities....... (8,970,638) (6,530,928) -- (52,419,820)
Purchase of restricted time deposit...................... -- (3,500,000) -- (3,500,000)
Proceeds from sales and redemptions of investments....... 6,530,928 -- -- 43,826,770
Proceeds from sale of property and equipment............. -- -- -- 297,670
Investment in joint venture.............................. (515,438) (515,438)
Purchase of property and equipment....................... (17,194,009) (38,397,302) (1,461,994) (62,826,861)
------------ ------------- ------------ -------------
Net cash used in investing activities................ (20,149,157) (48,428,230) (1,461,994) (75,137,679)
------------ ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable to
stockholders........................................... -- 1,450,000 2,275,000 14,270,000
Proceeds from drawings on line of credit with bank....... -- 2,150,000 4,740,000 14,000,000
Proceeds from issuance of common stock................... -- 221,052,636 -- 221,062,636
Common stock issuance costs.............................. -- (15,178,641) -- (15,178,641)
Preferred dividends paid................................. -- (9,926,703) -- (9,926,703)
Proceeds from issuance of preferred stock................ -- -- -- 25,675,000
Preferred stock issuance costs........................... -- -- -- (1,201,999)
Repayment of line of credit with bank.................... -- (14,000,000) -- (14,000,000)
Repayment of notes payable............................... (22,975) (35,510,887) (1,125,000) (39,128,862)
------------ ------------- ------------ -------------
Net cash (used in) provided by financing
activities......................................... (22,975) 150,036,405 5,890,000 195,571,431
------------ ------------- ------------ -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS......... (60,177,610) 86,581,726 (12,742) 26,412,553
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 86,590,163 8,437 21,179 --
------------ ------------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 26,412,553 $ 86,590,163 $ 8,437 $ 26,412,553
------------ ------------- ------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Income taxes........................................... $ 5,471 $ 800 $ 800 $ 10,271
Interest............................................... -- $ 1,722,551 $ 829,943 $ 3,028,240
Warrants issued with debt................................ -- -- $ 59,898 $ 306,168
Transfer of property from EKI............................ -- -- $ 28,745 $ 28,745
Conversion of preferred stock to common stock............ -- $ 69,888 -- $ 69,888
</TABLE>
See notes to financial statements.
F-6
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In 1998, all outstanding preferred stock was converted to common stock
resulting in an increase of $69,888 in the par value of common stock.
Non-cash compensation of $3,096,761 and $114,761 was recorded in 1997 and
1998, respectively, representing the difference between fair market value and
exercise price of options on the date of grant.
In consideration of the $14,000,000 line of credit established in 1997, the
Company issued stock warrants to Imperial Bank which entitled the lender to
purchase a total of $300,000 of common stock issuable upon the completion of the
initial public offering at a price per share equal to 110% of the initial public
offering price. These warrants were valued and recorded in 1997 at $59,898 based
upon the Company's option pricing model.
See notes to financial statements.
F-7
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
BASIS OF PRESENTATION AND NATURE OF OPERATIONS
EarthShell Corporation (the "Company") was incorporated in Delaware on
November 1, 1992 and is a majority-owned subsidiary of E. Khashoggi Industries,
LLC (together with its predecessor entities, "EKI"). Both the Company and EKI
are development stage enterprises. In connection with the formation of the
Company, the Company entered into an Amended and Restated License Agreement (the
"License Agreement") for certain technology developed by EKI, exclusively for
use in connection with the manufacture and sale of selected disposable food and
beverage containers for use in the foodservice industry. Investments in
affiliated companies with a 20% to 50% ownership interest where control does not
exist are accounted for on the equity method. The accompanying financial
statements reflect only the costs and expenses related to the application of the
technology under development since the Company's formation on November 1, 1992.
Management has made estimates and assumptions in the preparation of these
financial statements that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ.
OPERATIONS AND FINANCING
Since its inception on November 1, 1992, the Company has been in the
development stage and has experienced aggregate net losses through December 31,
1999 of approximately $145 million. To date, no revenues have been realized and
development activities are still ongoing. The Company has recently implemented a
number of procedures to reduce costs not necessary to complete the
commercialization of the products using its initial manufacturing facility or
next generation manufacturing development. The Company expects to continue to
incur operating losses until its products are commercially produced and achieve
broader market acceptance and market penetration. Successful future operations
and recovery of the Company's investment in its property and equipment depends
upon the Company commercializing its products using its initial manufacturing
facility and ultimately, commercializing multiple products and achieving broader
market acceptance and penetration.
To ensure that the Company will have the capital in the second half of 2000
to continue funding the facility at Sweetheart, proceed with its next generation
development and fund its share of design and development of its next commercial
facility, the Company is in financing discussions with certain financial
institutions. While the Company has no current commitments for additional
financing, the Company believes that efforts to obtain additional financing will
be successful. However, the Company can not assure it will be able to obtain
such financing on favorable terms, if at all. If the required financing can not
be obtained on a timely basis, the Company will scale back its development
activities to conserve resources until financing becomes available.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, funds invested in money market funds
and cash invested temporarily in various instruments with maturities of three
months or less at the time of purchase. The carrying value of cash equivalents
approximates fair value. The money market fund deposits have an investment
objective to provide high current income to the extent consistent with the
preservation of capital and the maintenance of liquidity and, therefore, are
subject to minimal risk.
F-8
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RESTRICTED CASH
At March 30, 1998, a certificate of deposit for $3,500,000 was opened as
collateral on the letter of credit related to the Company's obligation under a
letter agreement between the Company's majority stockholder, EKI, and the
Company relating to a patent purchase agreement between EKI and a third party as
discussed in the COMMITMENTS note and is classified as restricted cash on the
balance sheet at December 31, 1999 and December 31, 1998.
SHORT-TERM INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115 and are classified as available for sale.
This standard requires that certain debt and equity securities be adjusted to
market value at the end of each accounting period. At December 31, 1999 and
December 31, 1998, the market value of short-term investments approximated cost.
LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss available to
common shareholders by the weighted-average number of common shares outstanding
during the period. Diluted loss per common share is computed by dividing net
loss available to common shareholders by the weighted-average number of common
shares outstanding plus an assumed increase in common shares outstanding for
dilutive securities. Net loss as reported is adjusted for preferred dividends.
Dilutive securities consist entirely of stock options and warrants to acquire
common stock for a specified price and their dilutive effect are measured using
the treasury stock method. Basic and diluted loss per common share is the same
because the impact of dilutive securities is anti-dilutive.
NEW ACCOUNTING STANDARD
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. The Company is evaluating the effect that implementation of SFAS
No. 133 will have on its financial statements.
EVALUATION OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standard No. 121 ("SFAS
No. 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", the Company evaluates the potential
impairment of long-lived assets based on projections of undiscounted cash flows
whenever events or changes in circumstances indicate that the carrying value
amount of an asset may not be fully recoverable. Because of delays and cost
overruns experienced in the installation and commercialization of the Company's
initial manufacturing facility, an evaluation for potential impairment of
property and equipment was performed as of December 31, 1999 using projected
undiscounted cash flows expected from this facility during a 15 year operating
cycle. Based on these projections, management believes no impairment of this
facility exists at December 31, 1999.
F-9
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization is
provided by the straight-line method for financial reporting purposes based upon
the estimated useful lives of the assets which range from three to twenty years.
The cost of assets sold or retired and the related amounts of accumulated
depreciation are eliminated from the accounts and the resulting gain or loss is
included in income. Renewals and betterments are capitalized. Repairs and
maintenance are charged to expense when incurred and were $167,919 in 1999,
$24,146 in 1998 and $152,022 in 1997. During 1999, the Company abandoned
$2.3 million of equipment related to commercializing technology for its first
manufacturing plant and $736,471 related primarily to leasehold improvements at
its office space in Maryland. The Company is consolidating its space in Maryland
at its research and development center at Annapolis Junction, Maryland.
The cost and accumulated depreciation of property and equipment at
December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commercial Manufacturing Property: Construction in
progress
Sweetheart Cup Company........................... $44,473,386 $32,896,842
Product Development Center
Equipment........................................ 4,541,344 3,432,686
Construction in progress......................... 2,919,322 808,190
Leasehold improvements........................... 559,787 521,253
----------- -----------
8,020,453 4,762,129
Office leasehold improvements...................... -- 803,908
Office equipment & furniture....................... 340,292 337,318
----------- -----------
Total cost......................................... 52,834,131 38,800,197
Less: accumulated depreciation and amortization.... (5,478,749) (979,280)
----------- -----------
Property and equipment--net........................ $47,355,382 $37,820,917
=========== ===========
</TABLE>
INVESTMENT IN JOINT VENTURE
On May 24, 1999, the Company entered into a joint venture agreement with
Huhtamaki Van Leer Oyj to commercialize EARTHSHELL Products throughout Europe,
Australia, New Zealand, and, on a country by country basis, Asia. Polarcup
EarthShell ApS, a Danish holding company, was formed for the purpose of
establishing operating companies to manufacture, market, sell and distribute
EARTHSHELL Products.
The Company contributed approximately 10,000 Euros as nominal share capital
and 500,000 Euros for start-up capital. The Company is required to pay for the
development of the initial prototypes of the next generation manufacturing
systems. After both joint venture partners agree that acceptable next generation
manufacturing economics can be achieved, the joint venture partners will share
in the commercialization costs on an equal basis. During 1999, the Company
recorded an equity loss of $70,120 on its investment in Polarcup EarthShell ApS.
On November 15, 1999, the Company entered into a joint venture agreement
with Prairie Packaging, Inc.("Prairie") to commercialize certain EARTHSHELL
Products in the continental United States, Canada and Mexico. The Company will
be required to contribute $5,000 as initial capital in the near
F-10
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
future. The Company will be required to bear the cost of development for
prototype lines. If the Company has not developed a prototype product line
within twelve months from the joint venture commencement date, Prairie has the
right to dissolve the joint venture. Once Prairie has approved the initial
prototype lines, the joint venture partners will share in the commercialization
costs on an equal basis.
RELATED PARTY TRANSACTIONS
In connection with the formation of the Company, the Company entered into an
Amended and Restated License Agreement (the "License Agreement"), which was
amended in 1998, with EKI to manufacture, use, sell and sublicense certain
foodservice disposable products and to use certain trademarks owned by EKI in
connection with the products covered under the License Agreement. The license
continues in effect during the life of the patents licensed under the License
Agreement covering the technologies.
The Company's product and manufacturing process development offices and some
administrative offices are located in shared facilities with EKI. In addition,
the conduct of the Company's current operations requires sharing of technical
support and management personnel of EKI, primarily to assist in furthering the
Company's development of the licensed technology and product applications. To
confirm these arrangements, the Company and EKI entered into a Technical
Services and Sublease Agreement (the "Prior Technical Services Agreement"),
effective July 1, 1994. Under the terms of the Prior Technical Services
Agreement, the Company paid EKI for all direct project labor hours incurred at
specified hourly billing rates and direct expenses incurred on approved
projects. The specified hourly billing rates, which are subject to revision
semiannually, are fully burdened to include all EKI facility, equipment and
overhead costs and vary according to job classification. The intercompany rates
were compared to a market rate study previously prepared by an independent third
party provider of similar services and were within the range of average market
rates for each job classification. The Company also subleased office space from
EKI for $5,600 per month under this agreement. The Prior Technical Services
Agreement terminated on September 30, 1997. Effective October 1, 1997, the
Company entered into an Amended and Restated Technical Services and Sublease
Agreement (the "Technical Services Agreement") that contains substantially the
same terms as the Prior Technical Services Agreement and expires on
December 31, 2002. For the years ended December 31, 1999, 1998 and 1997, the
Company paid or accrued $11,663,499, $8,883,365, and $7,413,736, respectively,
for services performed under these agreements and $67,200 in sublease payments
for each of the respective periods.
Pursuant to resolutions adopted by the Board of Directors during 1999, the
Company reimbursed $146,909 to EKI for salaries and benefits paid by EKI for
administrative support personnel during the twelve months ended December 31,
1999.
The Company and EKI entered into the Amended and Restated Agreement for
Allocation of Patent Costs (the "Patent Agreement"), effective October 1, 1997.
Until September 30, 1999, the Company paid all costs associated with
prosecuting, filing, maintaining or acquiring patents and patent applications in
connection with patents and patent applications that are directly related to
foodservice disposables. After September 30, 1999, the Company is obligated to
pay all costs associated with prosecuting, filing, maintaining or acquiring
patents and patent applications in connection with technology that primarily
benefits the foodservice disposables applications licensed to the Company (as
compared with applications of such patents and patent applications outside of
the foodservice disposables field of use). EKI will pay for all other patent
related costs. EKI and the Company will review, on a biennial basis, the
comparative benefits of each existing patent and patent application to determine
whether EARTHSHELL Products derive
F-11
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the principal benefits from the patent or patent application in question and
will allocate the associated patent costs for the ensuing two-year period
accordingly. No party will have the right to be reimbursed for any costs
following notification in writing by the other party that it does not desire to
incur such costs.
Any costs incurred by EKI or the Company in connection with filing,
prosecuting, and maintaining patents or patent applications prior to
December 31, 1997 were allocated in accordance with the terms and provisions of
the prior patent agreement between the Company and EKI (the "Prior Patent
Agreement") which expired September 30, 1997. Under the Prior Patent Agreement,
the Company reimbursed EKI for all costs associated with prosecuting, filing and
maintaining patents and patent applications in connection with technology that
was directly related to food and beverage containers within, or which had
significant teachings with respect to, the field of use licensed to the Company.
EKI paid for all other patent related costs. Under the Prior Patent Agreement,
the patents and patent applications were the property of EKI, and EKI could
obtain a benefit therefrom other than under the License Agreement, including the
utilization and/or licensing of the patents and related technology in a manner
or for uses unrelated to the License Agreement. Under these agreements, legal
fees of $644,584, $485,670, and $652,867 were paid to or on behalf of EKI during
1999, 1998 and 1997, respectively.
The amount payable to the majority stockholder of $1,385,737 and $1,181,300
as of December 31, 1999 and 1998, respectively, includes amounts due to EKI
under the Technical Services Agreement and the Prior Technical Services
Agreement and the Patent Agreement and the Prior Patent Agreement.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Trade payables and accrued expenses.................. $4,086,452 $6,241,610
Salaries, wages and benefits......................... 920,524 1,483,122
Deferred payments on purchases....................... 119,614 1,834,705
---------- ----------
$5,126,590 $9,559,437
========== ==========
</TABLE>
NOTES PAYABLE
In 1996, the Company established a $9,000,000 line of credit with a bank
that originally expired on May 30, 1997 and was extended to April 15, 1998 and
increased to $14,000,000. Interest was payable monthly at an annual rate of 1%
in excess of the bank's announced prime lending rate. During 1998, the Company
repaid the balance and accrued interest on the outstanding line of credit. The
Company also repaid the notes payable due to EKI during 1998.
At December 31, 1998, the Company was obligated to the bank for a property
loan of $22,975, bearing interest at 8.00% and due April 2002. During 1999, the
Company repaid the balance and accrued interest on this loan.
COMMITMENTS
The Company has committed to capital equipment expenditures mostly for the
Sweetheart installation of $2.0 million as of December 31, 1999.
F-12
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Effective July 1, 1998 and August 1, 1998, the Company entered into
non-cancelable operating leases for development facilities and headquarter
office space in California and Maryland, respectively, which expire over the
next eight years. On July 2, 1999, the Company entered into a lease, effective
October 1, 1999, for 34,956 square feet of research and development space in
Maryland that expires in five years. All leases provide the Company with options
to renew the leases for five years subject to certain conditions. The Company
has assigned its lease and all obligations under the lease for the office space
in Maryland, effective April 1, 2000. This lease expires on July 31, 2006.
Future minimum lease payments required under these leases as of
December 31, 1999, exclusive of the office space in Maryland, were as follows:
<TABLE>
<S> <C>
2000........................................................ $ 851,895
2001........................................................ 750,544
2002........................................................ 737,240
2003........................................................ 447,401
2004........................................................ 180,373
Thereafter.................................................. --
----------
Total....................................................... $2,967,453
==========
</TABLE>
During 1998, EKI entered into certain agreements with an equipment
manufacturer providing for the purchase by EKI of certain technology applicable
to starch-based disposable packaging. EKI licenses such technology to the
Company on a royalty-free basis pursuant to the License Agreement. In connection
with the purchase, and pursuant to the terms of a letter agreement with EKI, the
Company agreed to pay the seller of the technology $3,500,000 on or about
December 31, 2003, which obligation is secured by a letter of credit.
The Company's obligation to the seller of the technology will be reduced by
5% of the purchase price of any equipment purchased by EKI, the Company or its
licensees or joint venture partners from the seller of the technology. In
addition, the Company is required to pay $3,000,000 over the five year period
commencing January 1, 2004 if EKI, the Company or the Company's licensees or
joint venture partners have not purchased, by December 31, 2003, at least
$35,000,000 of equipment from the seller of the technology and EKI, the Company
or the Company's licensees or joint venture partners make active use of the
purchased technology. EKI has agreed to indemnify the Company to the extent the
Company is required to pay any portion of this $3,000,000 obligation solely as a
result of EKI's or its licensees' active use of such patents and related
technology (other than use by the Company or its sublicensees).
CONTINGENCIES
On August 2, 1999, Novamont S.p.A., an Italian company specializing in the
manufacture of a biodegradable plastic resin and products, filed a complaint in
the United States District Court for the Northern District of Illinois alleging
infringement of three patents. The Company has analyzed all three patents and
believes it has strong meritorious defenses and has been vigorously defending
the lawsuit. The Company believes this legal proceeding will not have a material
adverse effect on the Company's financial condition or results of operations.
However, the ultimate resolution of this claim is subject to many uncertainties.
It is reasonably possible that the Company could suffer an adverse determination
in this proceeding which could have a material adverse effect on the Company's
financial position, operating results or cash flows when resolved in a future
reporting period.
F-13
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RETIREMENT BENEFITS
The Company established a qualified 401(k) plan for all of its employees in
1998. The 401(k) plan allows employees to contribute, on a tax-deferred basis,
up to fifteen percent of their annual base compensation subject to certain
regulatory and plan limitations. The Company uses a discretionary matching
formula that matches one half of the employee's 401(k) deferral up to a maximum
of three percent of annual base compensation. The 401(k) employer match was
$100,492 in 1999 and $9,929 in 1998.
CUMULATIVE CONVERTIBLE PREFERRED STOCK
During 1993, the Company completed a private placement of preferred stock
totaling $26,675,000, with net proceeds to the Company totaling $24,473,001.
Under the Series A Cumulative Senior Convertible Preferred Stock Purchase
Agreement, the Company issued 6,988,850 shares of Series A cumulative senior
convertible preferred stock at $3.82 per share. Dividends, when declared, are
payable on a quarterly basis at 8% per annum. At December 31, 1996, and
December 31, 1997 cumulative undeclared dividends totaled $7,016,000 and
$9,149,890, respectively. Each share of preferred stock was convertible into one
share of common stock. Subject to the right of the holders of the preferred
stock to convert their shares into common stock, the Company had the right to
redeem the preferred stock at a price of $3.87 per share between September 30,
1997 and September 30, 1998 and at a price of $3.82 per share after
September 30, 1998. After three years from the issuance, registration rights
enabled the preferred stockholders to cause the Company to effect two
registration statements for the common stock into which their shares of
preferred stock are convertible. Preferred stockholders had the right to vote
with the common stock as if the preferred stock had converted to common stock of
the Company. Preferred stockholders had the right to elect one member to the
Board of Directors.
To facilitate the sale by stockholders of Series A preferred stock in the
Company's March 1998 initial public offering of common stock, 3,993,404 shares
of the 6,988,850 shares of outstanding Series A preferred stock were converted
to 3,993,404 shares of common stock. A portion of the converted shares was sold
in the initial public offering by stockholders. In April 1998, the Board of
Directors declared a cash dividend to preferred stockholders of $1.40 per share
based on the dividend rate of 8% per annum on the liquidation preference of the
shares. The total dividends paid were $9,725,201. By notice dated May 13, 1998,
the Company called for redemption, effective July 14, 1998, of the remaining
2,995,446 shares of Series A preferred stock. In August 1998, the Board of
Directors declared a cash dividend to former preferred stockholders of $.0033
per share based on the dividend rate of 8% per annum of the liquidation
preference pursuant to the Certificate of Designation, Preferences Relative,
Participating, Optional and Other Special Rights for Series A Cumulative Senior
Convertible Preferred Stock, which provided for dividends to accrue until the
time of conversion, together with interest thereon at the rate of 8% per annum
from the date of conversion until the date of payment. Total dividends and
interest paid to the remaining Series A preferred stockholders was $201,502. As
of September 30, 1998, all outstanding shares of Series A preferred stock had
been converted to common stock.
STOCK OPTIONS
The Company established the EarthShell Corporation 1994 Stock Option Plan in
1994 (the "1994 Plan"). The Company subsequently established the EarthShell
Corporation 1995 Stock Incentive Plan in 1995 (the "1995 Plan") which
effectively supersedes the 1994 Plan for options issued on or after the date of
the 1995 Plan's adoption. The 1994 and 1995 Plans as amended (the "Plans"),
provide that the Company
F-14
<PAGE>
EARTHSHELL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
may grant an aggregate number of options for up to 10,000,000 shares of common
stock to employees, directors and other eligible persons as defined by the
Plans. Options issued to date under the 1994 Plan and the 1995 Plan generally
vest over varying periods from 0 to 5 years and generally expire 10 years from
the date of grant.
In October 1997, options to purchase 262,000 shares of common stock were
re-granted as a result of an extension of the terms of the option agreement to a
director with an exercise price of $3.82 per share.
The fair value of the common stock at the date of grant was $15.20 per
share. Compensation expense was recorded during 1997 in the amount of $2,982,000
related to the re-grant of these options.
In October 1997, options to purchase 26,200 shares of common stock were
re-granted as a result of an extension of the terms of the option agreement to a
consultant with an exercise price of $7.63 per share. The fair value of the
common stock at the date of grant was $15.20 per share. Compensation expense in
the amount of $114,761 was recorded during 1997 and an additional expense of
$114,761 was recorded in 1998 related to the re-grant of these options.
Stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
--------- ------------ --------
<S> <C> <C> <C>
Outstanding at January 1, 1997............................. 990,360 $ 5.06
Options granted............................................ 455,880 $3.82-$16.80 $ 8.39
Options canceled or expired................................ (288,200) $3.82-$7.63 $ 4.16
---------
Outstanding at December 31, 1997........................... 1,158,040 -- $ 6.60
Options granted............................................ 670,000 $21.00 $21.00
Options canceled or expired................................ (91,920) $7.63-$21.00 $17.67
---------
Outstanding at December 31, 1998........................... 1,736,120 -- $11.57
Options granted............................................ 1,474,000 $5.00-$21.00 $ 6.21
Options canceled or expired................................ (925,870) $3.82-$21.00 $11.64
---------
Outstanding at December 31, 1999........................... 2,284,250 -- $ 8.08
=========
</TABLE>
F-15
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE
- -------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.82 402,170 4.24 $ 3.82 402,170 $ 3.82
$ 5.00 1,105,000 9.75 $ 5.00 0 $ 5.00
$ 7.63 313,090 5.53 $ 7.63 282,174 $ 7.63
$15.20 99,560 3.87 $15.20 99,560 $15.20
$16.80 36,680 2.02 $16.80 36,680 $16.80
$21.00 327,750 8.81 $21.00 85,000 $21.00
---------- -------
2,284,250 905,584
========== =======
</TABLE>
The Company accounts for its 1994 and 1995 Plans in accordance with
Accounting Principles Board Opinion No. 25. To measure stock-based compensation
in accordance with SFAS No. 123, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model. The
fair value of each option grant will be amortized as pro forma compensation
expense over the vesting period of the options. The following table sets forth
the assumptions used and the pro forma net loss and loss per share resulting
from applying SFAS No. 123.
<TABLE>
<CAPTION>
YEAR ENDED, YEAR ENDED, YEAR ENDED,
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported................................ $44,188,443 $27,396,865 $21,126,023
Pro forma.................................. $44,709,965 $28,374,937 $22,676,181
Net loss per common share:
As reported................................ $ 0.44 $ 0.29 $ 0.26
Pro forma.................................. $ 0.45 $ 0.30 $ 0.27
Risk-free interest rate...................... 5.89% 5.5% 6.0%
Expected life in years....................... 4.0 4.0 3.4
Volatility................................... 79% 60% 20%
Weighted average fair value of options
granted during the year.................... $ 2.43 $ 3.81 $ 8.48
</TABLE>
STOCK WARRANTS
On June 7, 1996, in consideration of a $3,000,000 line of credit financing
arrangement, the Company issued a warrant which entitled the lender to purchase
common stock shares equal to $150,000 divided by the price per share of the
Company's common stock in the initial public offering. The warrant exercise
price was equal to the initial public offering price and could be exercised at
any time following six months after the initial public offering by the Company
and prior to its expiration date of June 7, 2001.
On July 2, 1996, the line of credit was increased to $4,500,000 and an
additional warrant was issued which entitled the lender to purchase another
$150,000 in common stock on terms similar to those in the previously issued
warrant of June 7, 1996.
On November 15, 1996, the line of credit was increased to $9,000,000 and an
additional warrant was issued which entitled the lender to purchase $450,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on November 15, 2003.
F-16
<PAGE>
On October 6, 1997, the line of credit was increased to $13,000,000 and an
additional warrant was issued which entitled the lender to purchase $250,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on October 6, 2004.
On December 31, 1997, the line of credit was increased to $14,000,000 and an
additional warrant was issued which entitled the lender to purchase $50,000 in
common stock at a price per share equal to 110% of the initial public offering
price. This warrant expires on December 31, 2004. The warrants issued in 1997
were valued at $59,898 based upon the Company's option pricing model.
INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets and
liabilities. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the differences are
expected to reverse. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amounts expected to be realized. Income
tax expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred income tax assets and liabilities.
Deferred income taxes result from temporary differences in the recognition
of revenues and expenses for financial and tax reporting purposes. At
December 31, 1999 and 1998, deferred tax assets were comprised primarily of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Federal:
Depreciation.............................................. $ 164,859 $ (14,933)
Capitalized operating expenses............................ 9,819,959 11,543,264
Capitalized research and development...................... 322,555 344,700
Deferred compensation..................................... 1,091,917 1,091,917
Deferred contributions.................................... 359,721 359,721
Net operating loss carryforward........................... 36,897,671 21,790,822
----------- -----------
48,656,682 35,115,491
=========== ===========
State:
Depreciation.............................................. 45,094 (4,085)
Capitalized operating expenses............................ 2,686,047 3,157,423
Capitalized research and development...................... 5,382,581 5,470,053
Deferred compensation..................................... 298,672 298,672
Deferred contributions.................................... 98,394 98,394
Net operating loss carryforward........................... 3,278,952 137,968
----------- -----------
11,789,740 9,158,425
----------- -----------
Deferred tax asset.......................................... 60,446,422 44,273,916
Valuation allowance......................................... (60,446,422) (44,273,916)
----------- -----------
Net deferred tax asset.................................... $ -- $ --
=========== ===========
</TABLE>
The increase in the valuation allowance of $16,172,506 at December 31, 1999
as compared to December 31, 1998, and $12,438,940 at December 31, 1998 as
compared to December 31, 1997, was the result of changes in the components of
the deferred tax items.
For federal income tax purposes, the Company has net operating loss
carryforwards of $108,521,762 as of December 31, 1999 that expire through 2019.
For state income tax purposes, the Company has California net operating loss
carryforwards of $11,312,158 as of December 31, 1999 that expire through 2004.
Maryland net operating loss carryforwards follow the federal treatment and
expire in 2019.
F-17
<PAGE>
Income tax expense for 1999, 1998 and 1997 consists primarily of the minimum
state franchise tax.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
FIRST SECOND THIRD FOURTH YEAR
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1999:
Research and development
expenses.................. $ 3,301,905 $ 4,026,548 $ 6,151,749 $ 5,326,896 $18,807,098
Related party research and
development............... 2,400,310 2,957,725 2,683,296 3,622,168 11,663,499
Related party patent
expense................... 301,747 26,273 167,486 149,078 644,584
General and
administrative............ 3,001,856 4,696,307 2,608,145 1,351,588 11,657,896
Net loss common
shareholders.............. 8,260,033 12,202,330 12,391,826 11,334,254 44,188,443
Basic and diluted loss per
common share.............. $0.08 $0.12 $0.12 $0.11 $0.44
Weighted average common
shares outstanding........ 100,045,166 100,045,166 100,045,166 100,045,166 100,045,166
Market price per common
share (1)
High...................... $17 3/8 $10 11/16 $8 $5 1/2 $17 3/8
Low....................... $ 8 35/64 $ 6 $3 7/8 $1 13/32 $ 1 13/32
Close..................... $ 9 3/4 $ 7 $3 7/8 $4 1/4 $ 4 1/4
1998:
Research and development
expenses.................. $ 650,415 $ 3,653,482 $ 2,164,243 $ 4,630,629 $11,098,769
Related party research and
development............... 1,759,666 2,044,706 2,492,976 2,586,017 8,883,365
Related party patent
expense................... 58,389 26,712 33,024 367,545 485,670
General and
administrative............ 420,227 1,646,351 4,201,497 3,028,392 9,296,467
Net loss common
shareholders.............. 4,701,982 5,915,746 7,413,275 9,365,862 27,396,865
Basic and diluted loss per
common share.............. $0.06 $0.06 $0.07 $0.09 $0.29
Weighted average common
shares outstanding........ 83,820,642 98,831,320 99,883,320 100,045,166 95,706,942
Market price per common
share (1):
High...................... $23 7/8 $18 $10 15/32 $16 31/32 $23 7/8
Low....................... $16 5/8 $ 9 3/4 $ 5 5/16 $ 5 1/2 $ 5 5/16
Close..................... $17 7/8 $ 9 3/4 $ 7 3/16 $11 15/16 $11 15/16
</TABLE>
- ------------------------
(1) The Company's common stock commenced trading on The Nasdaq Stock Market on
March 24, 1998.
F-18
<PAGE>
Std. Ind. Lease
Revised 1/15/99
LEASE AGREEMENT
THIS LEASE, made this 2nd day of July, 1999, by and between CHIPPEWA
LIMITED PARTNERSHIP, a Maryland limited partnership (hereinafter called
"Landlord"), and EARTHSHELL CORPORATION, a Delaware corporation (hereinafter
called "Tenant"). In consideration of the premises and the covenants, conditions
and rents hereinafter set forth, it is agreed as follows:
1. PREMISES AND TERM:
A. Landlord does hereby lease, demise and let to Tenant, and
Tenant does hereby lease, take and accept from Landlord, the "Premises", being
comprised of approximately 34,956 square feet of space located in a one story
building known as 9020 Junction Drive, Annapolis Junction, Maryland (hereinafter
the "Improvements") as outlined in red on the building and site plan attached
hereto as Exhibit A, which Improvements contain a leasable area of 96,666 square
feet and is located on all that lot of ground in Howard County, Maryland more
fully described in Exhibit B attached hereto, containing 6.3 acres of land more
or less, together with the use in common with other occupants of the
Improvements of the parking areas and the right to use in common with other
occupants of said Improvements any access road serving the Improvements.
B. TO HAVE AND TO HOLD the same for a term commencing on the 1st
day of October, 1999, (hereinafter the "Commencement Date") and terminating on
the 30th day of September, 2004, (hereinafter the "Termination Date"). Reference
in this Lease to the "term" shall include any renewal term, provided for in a
Rider to this Lease, unless the context plainly requires a contrary meaning.
2. TENANT IMPROVEMENTS:
A. Landlord shall install the tenant improvements in a good and
workmanlike manner, set forth in both the Tenant Improvement Specifications
attached hereto as EXHIBIT C-1 and the floor plan attached hereto as EXHIBIT
C-2. Tenant shall reimburse Landlord for a portion of the cost of Landlord's
tenant improvements, shown on EXHIBIT C-I and EXHIBIT C-2. Specifically, Tenant
shall pay to Landlord, as additional rent, within thirty (30) days after
substantial completion of Landlord's tenant improvements, the sum of
Thirty-eight Thousand Five Hundred Thirty-four Dollars ($38,534.00).
Additionally, any additions to or modifications of the work and/or materials
shown on the attached exhibits which result in additional costs shall be handled
as change orders and paid for by Tenant within twenty (20) days after delivery
to Tenant of a reasonably detailed invoice therefore.
B. Notwithstanding the date specified in Paragraph l.B. above for
the commencement of the term of this Lease, such term shall not commence until
the substantial completion of the construction of all tenant improvements as
specified above and Landlord has given notification to Tenant in writing that
the Premises are ready for possession. Possession of the Premises shall be
deemed delivered to Tenant at the date specified in such notification,
<PAGE>
notwithstanding any item of incomplete work set forth on a "punch list" prepared
by Landlord and Tenant in writing at the time of or within forty-five (45) days
after the Commencement Date. Tenant shall have the right to enter the Premises
at least thirty (30) days prior to the Commencement Date for the purpose of
installing Tenant's equipment, fixtures and furnishings, provided, however, that
Tenant first notifies Landlord prior to such entries and receives Landlord's
consent, which shall not be unreasonably withheld, conditioned or delayed and
that Tenant does not, under any circumstances, interfere with or delay the
completion of the tenant improvements being installed by Landlord. No rent shall
be due to Landlord on account of such activities of Tenant. Landlord shall not
be liable to Tenant if Landlord does not deliver possession of the Premises to
Tenant on the date specified in Paragraph l.B. above, and Landlord's
non-delivery of the Premises shall not affect this Lease or the obligations of
Tenant under this Lease. In such event, the term of this Lease shall be extended
for a period equal to the delay in delivery of possession of the Premises to
Tenant, plus the number of days necessary to end the term of this Lease on the
last day of a month and rent at the applicable rate, shall be payable for such
additional portion of the month. If delivery of possession of the Premises to
Tenant is delayed, Landlord and Tenant shall, at the request of either, upon
such delivery, execute an amendment to this Lease setting forth the Commencement
Date and Termination Date of this Lease. In all events (but subject to the
provisions of Paragraph 2.D., below), if Landlord fails, despite the exercise of
its commercially reasonable efforts to substantially complete the tenant
improvements, or for any other reason fails to deliver the Premises to Tenant by
October 31, 1999, then the Tenant, as its sole and exclusive remedy, shall have
the right to elect either to (i) terminate this Lease, by giving written notice
to Landlord no later than November 15, 1999, and if Tenant does so terminate
this Lease, Landlord shall promptly refund to Tenant any security deposit and
any pre-paid rent then being held by Landlord and neither Landlord nor Tenant
shall have any further liability to the other in connection with this Lease
(except with respect to obligations or liabilities which accrued prior to the
date of such termination or which relate to surrender of the Premises), or (ii)
to file suit for specific performance of Landlord's obligations under this Lease
(provided, however, Tenant shall not be entitled to claim or recover any
monetary damages against Landlord).
C. If Tenant occupies or enters the Premises prior to the
Commencement Date, such occupancy or entry shall not advance the Termination
Date of this Lease. All of the terms, covenants and provisions of this Lease
shall apply from the date of occupancy and possession or entry and the rent
shall be paid at the rate herein set forth on a pro rata basis for the early
occupancy period, provided, however, Tenant shall not be required to pay rent if
Tenant, or its agents, contractors or employees, merely enters the premises for
the limited purposes described in Paragraph 2.13. above.
D. If Landlord is delayed in substantially completing tenant
improvements as a result of any of the following, then commencement of the term
of this Lease and the Termination Date of this Lease shall be as stated in
Paragraph 1.B. above; and, Tenant shall not be relieved of its obligations to
pay rent as prescribed in Paragraph 3 below:
(1) Tenant's failure to approve or "approved as noted"
detailed working drawings or other drawings, plans or specifications within five
(5) business days after submission by Landlord.
2
<PAGE>
(2) The performance by any person, firm or corporation
(other than Landlord's contractor) employed at Tenant's request and the
completion of work by said person, firm or corporation;
(3) Delay in delivery of materials, finishes, or
installations requested by Tenant other than materials, finishes and
installation used as Building Standard items by Landlord's contractors in the
Improvements; and
(4) Any other delay (including, without limitation, delay in
providing necessary approvals or disapprovals required of Tenant) caused
primarily by the action or inaction of Tenant or its employees, agents,
contractors or invitees.
E. Tenant's occupancy of the Premises shall constitute acceptance
thereof and shall be deemed to constitute Tenant's agreement that the Premises
comply with all requirements of Tenant and all obligations of Landlord with
respect to the condition, order and repair thereof, including, but not limited
to, the tenant improvements required to be made by Landlord, pursuant to this
Paragraph 2 or elsewhere in this Lease, except for those matters of which Tenant
notifies Landlord in writing within forty-five (45) days after the Commencement
Date, and except for latent defects which were not manifest within such
forty-five (45) day period and which could not have been ascertained by Tenant
by a reasonably thorough inspection of Landlord's tenant improvements. Tenant
shall have no right whatsoever to raise any objection with respect to the
condition of the Premises, including, but not limited to, Landlord's tenant
improvements, unless set forth in such a written notice timely given.
3. RENT:
A. Tenant covenants to pay to Landlord % Emory Hill Management
Co., Suite 100, 92 Reads Way, New Castle, Delaware 19720, or at such place as
Landlord shall from time to time direct, the basic rent ("Basic Rental") in the
amounts set forth below during the term of this Lease. Such Basic Rental shall
be payable in equal monthly installments, in advance and without demand, on the
first day of each and every month during the term of this Lease, commencing on
the Commencement Date.
The Basic Rental shall be composed of two components, the first of
which is a fixed component as follows:
<TABLE>
<CAPTION>
Lease Year Annual Basic Rent Monthly Payment
---------- ----------------- ---------------
<S> <C> <C>
1 $166,041.00 $13,836.75
2 $169,536.60 $14,128.05
3 $173,032.20 $14,419.35
4 $176,527.80 $14,710.65
5 $180,023.40 $15,001.95
</TABLE>
3
<PAGE>
In addition to the amount set forth above, Basic Rental shall also
include, and Tenant shall pay to Landlord monthly, on the first day of each and
every month during the term and without demand, commencing with the first
payment of Basic Rental due under the Lease, the sum of Five Thousand
Thirty-nine and 49/100 Dollars ($5,039.49) (the "Amortized Amount"). The
Amortized Amount is the amount obtained by amortizing, for repayment on a
monthly basis, the sum of Two Hundred Thirty-six Thousand Seven Hundred
Seventy-eight Dollars ($236,778.00) (the "Financed Amount") over a period of
five (5) years at an interest rate equal to ten percent (10%) per annum.
Landlord and Tenant have agreed that Landlord shall, in effect, finance for
Tenant up to the amount of Two Hundred Thirty-six Thousand Seven Hundred
Seventy-eight Dollars ($236,778.00) on account of the cost of Landlord's tenant
improvements. The Landlord will also pay the balance of the cost of the
Landlord's tenant improvements described on EXHIBIT C-1 and EXHIBIT C-2, subject
to Tenant's obligation to pay the sum of Thirty-eight Thousand Five Hundred
Thirty-four Dollars ($38,534.00), as described above, and any additional costs
resulting from additions to or modifications of the work and/or materials shown
on those exhibits, as also described above. Thus, the full amount of Basic
Rental for the first month of the Lease will be Eighteen Thousand Eight Hundred
Seventy-six and 24/100 Dollars ($18,876.24), and the full amount of the Basic
Rental for the first month of the second lease year will be Nineteen Thousand
One Hundred Sixty-seven and 54/100 Dollars ($19,167.54), and so on for the
remaining three (3) lease years of the term.
4. LATE PAYMENT:
In the event that any payment required by Tenant under the provisions
of this Lease shall not be paid within five (5) days after the date due, Tenant
shall, upon demand, pay to Landlord (i) a late charge equal to five (5) percent
(5%) of such payment, and (ii) interest on such payment from the date when due
until paid at the rate of eighteen percent (18%) per annum, or, if less, the
highest rate permitted by applicable law. The late charges imposed under this
Paragraph 4 shall be deemed "rent" for all purposes under this Lease, are not
penalties and have been agreed to by Landlord and Tenant as necessary to
compensate Landlord for its additional costs associated with late payment.
5. FIRST MONTH'S BASIC RENTAL:
The first month's Basic Rental in the amount of Eighteen Thousand
Eight Hundred Seventy-six and 24/100 Dollars ($18,876.24) will accompany this
Lease, when submitted for approval by the Landlord. If this Lease is not
approved by the Landlord within thirty (30) days of its submission to the
Landlord, the above sum, as well as any security deposit made pursuant to
Paragraph 6 below, will be refunded in full. If this Lease is approved by
Landlord, the first month's Basic Rental shall be applied against the first full
monthly payment of Basic Rental due under this Lease.
6. SECURITY DEPOSIT:
Tenant has deposited with Landlord Thirty-eight Thousand Nine Hundred
Seventeen and 68/100 Dollars ($38,917.68), which sum shall be held without
payment of interest as security for the performance by Tenant of its obligations
under this Lease. Landlord is authorized to deposit those funds in an account
commingled with Landlord's general funds or otherwise, and Landlord
4
<PAGE>
shall not be responsible for the solvency of the depository so long as it is
insured by the Federal Deposit Insurance Corporation or similar insurer. If
Tenant shall perform all such obligations, said security deposit shall be
refunded to Tenant within thirty (30) days after termination of this Lease. If
Tenant shall default in any obligation, Landlord shall be entitled to apply any
or all of said security deposit toward Landlord's damages as determined by
Landlord, and Tenant shall, within five (5) days after notice thereof, deposit
with Landlord an amount sufficient to restore said security deposit to its
original amount, which amount shall constitute "rent" under this Lease. The
security deposit shall not bear interest, until after the end of the second full
lease year, at which time the security deposit shall begin to bear interest at
then prevailing money market rates. Reference in this Lease to the "security
deposit" shall include interest, if any, accrued thereon.
7. TAXES:
A. Tenant agrees to pay to Landlord Tenant's proportionate share
of all real estate taxes which are levied, imposed, or assessed, from time to
time, upon or against the Improvements and the real property of which the
Improvements are a part. Such proportionate share shall consist of the ratio
that the square footage of the Premises bears to the square footage of the
Improvements. The parties agree that the square footage of the Premises comprise
thirty-six and two tenths percent (36.2%) of the square footage of the
Improvements. Tenant shall make any such payment to Landlord within twenty (20)
days after Landlord submits a bill therefore to Tenant. If Landlord undertakes
any action to contest the amount of real estate taxes applicable to the
Improvements, or the real property of which the Improvements are a part, the
Tenant shall, within twenty (20) days after Landlord submits a bill therefore
reimburse Landlord for thirty-six and two tenths percent (36.2%) of any and all
reasonable costs, fees and expenses incurred by Landlord in connection with any
such contest, including, but not limited to Landlord's reasonable legal,
accounting and appraisal fees. If Landlord obtains a reduction in real estate
taxes retroactive to any tax year for which Tenant has previously paid Landlord
its proportionate share of real estate taxes pursuant to this Paragraph 7.A.,
then Landlord shall credit Tenant with Tenant's proportionate share of such
reduction, net of the costs, fees and expenses described in the preceding
sentence, against Tenant's proportionate share of real estate taxes next due
under this Lease, all prorated, if the reduction occurred during a year in which
this Lease was not in effect for a full year.
B. For purposes of this Paragraph 7, the term "real estate taxes"
shall include any taxes, assessments and charges against the Improvements or the
land of which the Improvements are a part (including assessments by any City,
County, Municipality, Metropolitan District or Commission), but shall exclude
penalties or interest for late payment and federal, state and local income
taxes.
C. If at any time during the term of this Lease, the present
method of taxation shall be changed so that in lieu of the whole or any part of
any taxes, assessments, levies, or charges levied, assessed or imposed on real
estate and the improvements thereon, there shall be levied, assessed or imposed
on Landlord, a capital levy or other tax directly on the rents received
therefrom and/or a franchise tax assessment, levy, or charge measured by or
based, in whole or in part, upon the rents of the Improvements, then such taxes,
assessments, levies, or charges that
5
<PAGE>
are in lieu of the present method of taxation shall be deemed to be included
within the term "real estate taxes" for the purposes hereof.
D. Tenant shall be liable for all taxes levied against personal
property and trade fixtures placed by Tenant in the Premises. If any such taxes
based on the personal property or trade fixtures placed by Tenant in the
Premises are levied against Landlord or Landlord's property and if Landlord
elects to pay the same or if the assessed value of Landlord's property is
increased by inclusion of personal property and trade fixtures placed by Tenant
in the Premises and Landlord elects to pay the taxes based on such increase,
Tenant shall pay to Landlord within twenty (20) days after demand (which demand
shall include documentation evidencing such increase) that part of such taxes
for which Tenant is liable hereunder.
8. FIRE AND EXTENDED COVERAGE AND RENTAL INSURANCE:
A. Tenant shall pay to Landlord Tenant's proportionate share of
all premiums for all fire and extended coverage insurance on the Improvements,
all rental insurance or any other insurance carried by Landlord from time to
time. Tenant's proportionate share shall be thirty-six and two tenths percent
(36.2%).
B. Premiums shall be adjusted and pro-rated to the Commencement
Date or the Termination Date of the term of this Lease, as the case may be.
C. Tenant shall pay its proportionate share of such insurance
premiums as set forth above within twenty (20) days after Landlord submits a
bill, together with a statement of its calculations supported by copies of the
actual billings rendered to Landlord.
D. Tenant will not do, omit to do, or suffer to be done or keep
or suffer to be kept anything in, upon, or about the Premises that will violate
the provisions of Landlord's policies insuring the Premises and the Improvements
against loss or damage by fire or other hazards (including, but not limited to,
public liability), that will materially adversely affect Landlord's fire or
liability insurance premium rating or that will prevent Landlord from procuring
such policies in companies acceptable to Landlord. If anything done, omitted to
be done, or suffered to be done by Tenant, or kept or suffered by Tenant to be
kept in, upon, or about the Premises, shall cause any increase in premiums for
fire and extended coverage insurance, or rental insurance on the Improvements
above the rate in effect as of the date of this Lease, for the uses in existence
as of the date of this Lease, (such uses, including, but not limited to, general
warehouse and the assembly and manufacture of electronic technology components),
Tenant shall pay the additional premiums by reason thereof. Bills for such
additional premiums shall be rendered by Landlord to Tenant at such times as
Landlord may elect and shall be due from and payable by Tenant within twenty
(20) days after the date such bills shall be rendered, and the amount thereof
shall be deemed to be, and be paid as, additional rent. In addition, if
applicable, Landlord may at its option rectify the condition existing on the
Premises that is causing or is a contributing cause of the increased premium
rate in the event that Tenant should fail to do so after thirty (30) days prior
written notice from Landlord, and Landlord may charge the cost of such action to
Tenant as additional rent.
6
<PAGE>
E. Tenant shall obtain and maintain fire insurance with standard
broad form extended coverage and full replacement cost endorsements covering all
of Tenant's contents, furniture, furnishings, machinery, such equipment as is
not affixed to the Premises, trade fixtures and signs and Tenant's interest in
all of the improvements and alterations installed in the Premises by Tenant. A
certificate evidencing such insurance shall be delivered to Landlord prior to
the Commencement Date and as otherwise reasonably required by Landlord and
evidence of renewals shall be delivered to Landlord annually and as otherwise
reasonably required by Landlord.
F. Notwithstanding anything to the contrary contained in
Paragraph 8.A, if the Property and other properties owned by landlord or its
affiliates are insured under a blanket insurance policy and the loss experience
for one or more of the other properties under such policy result in an increase
in the premium for such policy, then, so long as such loss experience continues
to cause an increase in the premium for such policy, the amount that Tenant is
required to pay pursuant to Paragraph 8.A., may not increase by more than 10%
per year. For instance, if in year 3 of the lease, Tenant paid $1,000 on account
of its obligations pursuant to Paragraph 8.A, and in year 4 of the lease, on
account of an increase in premiums resulting from the loss experience of one or
more of the other properties under landlord's blanket policy, Tenant would,
absent this provision, be required to pay $1,250, Tenant's obligation during
year 4 under Paragraph 8.A., would be capped at $1,100.
9. COMMON AREA:
A. Tenant shall pay to Landlord, within twenty (20) days after
demand, as additional rent, thirty-six and two tenths percent (36.2%) of all
actual costs incurred by Landlord, from time to time, for common area
maintenance, which includes, but is not limited to, snow and ice removal,
parking lot maintenance, grass cutting, grounds maintenance, landscaping,
security, repairs to or replacements of the Improvements or portions thereof and
common area electric and for water and sewer charges for all of the Improvements
during the term of this Lease.
B. Subject to the remaining provisions of this Paragraph 9.B.,
all common areas shall be subject to the exclusive control of Landlord. Landlord
shall operate, manage, equip, police, light and maintain the common areas in a
manner comparable to similar buildings in the Annapolis Junction Business Park.
Landlord shall use commercially reasonable efforts not, in so doing, to
materially adversely affect Tenant's use and occupancy of the Premises. Landlord
hereby expressly reserves the right (but not the obligation) to maintain
security for the common areas; to use and to allow others to use the common
areas for any legal purpose; to change the size, area, level, location and
arrangement of the common areas; to close temporarily all or any portion of the
common areas for the purpose of making repairs, changes, or alterations thereto
or performing necessary maintenance in connection with any emergency or for any
other purpose whatsoever, whether such purpose is similar or dissimilar to the
foregoing. If the size, area, level, location or arrangement of such common
areas or the type of facilities at any time forming a part thereof be changed,
altered, rearranged or diminished, Landlord shall not be subject to any
liability therefor, nor shall Tenant be entitled to any compensation or
diminution or abatement of rent therefor, nor shall such alteration,
rearrangement, revocation, change or diminution of such common areas be deemed a
constructive or actual eviction or otherwise be grounds for terminating or
modifying this Lease, provided, however, if the same shall materially
7
<PAGE>
adversely affect the ability of Tenant to carry on its business in the
Premises, then, within thirty (30) days after any such change, alteration,
rearrangement or diminution, Tenant, provided Tenant has first given Landlord
prompt written notice of the material, adverse effect upon Tenant and sixty
(60) days to cure, shall have the right to terminate this Lease, in which
event, the Landlord shall return any security deposit to Tenant and Landlord
shall have no further liability to Tenant under this Lease. Tenant shall not
obstruct the common areas or use them for any purpose other than their
customary or intended purposes. Prior to making a material alteration to the
common areas, Landlord will notify Tenant of its proposed alterations or
modifications.
10. UTILITIES:
Tenant shall pay when due all charges for gas, electricity, light,
heat, power and all other utilities and telephone or other communication
services used, rendered or supplied upon or in connection with the Premises.
Tenant shall have the right to install, at its expense, an above-ground propane
storage tank for use in Tenant's operations in the Premises, provided the same
is permitted by applicable laws and restrictive covenants. The tank shall be
located in an area reasonably acceptable to Landlord and Tenant. Tenant shall
cause such tank to be maintained in good condition and appearance. At the
expiration or earlier termination of this Lease, Tenant shall cause such tank to
be removed at Tenant's sole cost and expense. Tenant shall be responsible for
any increased insurance costs related to the installation or use of the tank.
Tenant shall also have the right to use the existing propane tank on the
property for the purpose of supplying propane to the Premises for Tenant's use.
Tenant shall pay the cost for the propane it uses.
11. LIENS OR ENCUMBRANCES:
Tenant shall not do or suffer to be done any act, matter or thing
whereby Landlord's or Tenant's interest in the Premises, or any part thereof,
may be encumbered by any mechanics' lien. Tenant shall discharge or stay the
enforcement by bond or otherwise, within fifteen (15) days after the date of
filing, any final or interlocutory mechanics' liens filed against Landlord's or
Tenant's interest in the Premises, or any part thereof, purporting to be for
labor or material furnished or to be furnished to Tenant. Landlord may, at its
option, discharge by bond or otherwise any such mechanics' lien not discharged
by Tenant within such fifteen (15) day period, and Tenant, within twenty (20)
days after demand, shall reimburse Landlord for any such expense incurred by
Landlord. Any monies expended by Landlord shall be deemed additional rent,
collectible as such by Landlord and the late charge specified in Paragraph 4
shall accrue from the date Landlord pays such expenses. Landlord shall not be
liable for any labor or materials furnished or to be furnished to Tenant upon
credit, and no mechanics' or other lien for labor or materials shall attach to
or affect the reversionary or other estate or interest of Landlord in and to the
Premises or the Improvements.
12. USE OF PREMISES:
A. Tenant shall use and occupy the Premises throughout the term
hereof solely for the purpose of research and administrative offices, the
fabrication of biodegradable container equipment, and general warehouse
purposes. Furthermore, no use of the Premises shall be made or permitted to be
made that shall result in: (i) waste of the Premises or any part
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thereof; (ii) a public or private nuisance that may disturb the quiet enjoyment
of Landlord or other tenants of the Improvements; (iii) unlawful use; or (iv)
noises, vibrations, odors or anything else that may unreasonably disturb the
Landlord or other tenants.
B. Tenant shall not load the Premises beyond their present
carrying capacity of 125 pounds per square foot.
13. ALTERATIONS AND IMPROVEMENTS:
A. Upon completion of the tenant improvements in accordance with
Paragraph 2 hereof, Landlord shall assign to Tenant all warranties relating to
such tenant improvements and shall have no further obligation to make any
alterations or improvements to the Premises except as provided in Paragraph
14.C. hereof.
B. Tenant further covenants that it will at no time or times make
any alterations, improvements or changes of any kind to the Premises (structural
or otherwise) without first submitting the plans thereof and securing the prior
written consent of the Landlord, which consent shall not be unreasonably
withheld. Tenant may either:
1) Contract with Landlord or Landlord's agent to make
alterations and improvements at Tenant's expense, or
2) Contract with any licensed contractor to make alterations
and improvements after first providing the following items to Landlord and
obtaining Landlord's written consent therefore (which consent shall not be
unreasonably withheld):
a) approval of the Fire Marshal of the authority having
jurisdiction (City or State), and
b) copy of a building permit issued by the local
authority having jurisdiction (City or County) or evidence from the authority
that no permit is required, and
c) copy of license of contractor performing the work,
and
d) copy of insurance certificate from contractor naming
the Landlord as an additional insured and showing evidence of coverages as
reasonably required by Landlord, but at least equal to the following:
<TABLE>
<CAPTION>
TYPE LIMITS
---- ------
<S> <C> <C>
General Liability Each occurrence $1,000,000
general aggregate $2,000,000
Automobile Liability Each accident $1,000,000
Workers Compensation Statutory
</TABLE>
e) release of mechanic's liens for all work to be
performed.
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Notwithstanding the foregoing provisions of this Paragraph 13.B.,
Tenant shall not be required to obtain Landlord's prior written consent with
respect to alterations, improvements or changes which are cosmetic in nature
(and are not visible from the exterior of the Premises) or which do not affect
the roof, exterior or structural, mechanical, plumbing or electrical elements or
systems of the Premises.
C. Tenant further covenants that if it makes alterations and
improvements to the Premises that:
1) During the construction period, Landlord or Landlord's
agent will have reasonable access to the Premises at their risk to verify that
all work is in accordance with approved plans. Tenant shall reimburse Landlord
for all reasonable costs incurred for inspection services.
2) Within thirty (30) days of completion of construction,
Tenant will, if required by applicable law or any Mortgagee (defined below),
furnish Landlord copies of a Fire Marshal's Final Inspection Report and a
Certificate of Occupancy or use, issued by the local authority having
jurisdiction.
3) At the end of term of this Lease, at Landlord's sole
option, the Tenant shall remove all alterations and improvements and restore the
Premises to its prior condition at Tenant's sole cost (ordinary wear and tear
excluded).
4) All improvements, alterations, replacements and building
service equipment made or installed by or on behalf of Tenant and permanently
affixed to the Improvements shall immediately upon completion or installment
thereof be and become the property of Landlord without payment therefor by
Landlord, but subject to the provisions of this Lease, including the provisions
of Paragraph 13.C(3) above and Paragraph 24.B. below, provided that all
machinery, equipment (other than building service equipment), trade fixtures,
movable partitions, furniture and furnishings installed by Tenant or maintained
on the Premises, even if permanently affixed thereof, shall remain the property
of Tenant, and Tenant shall be entitled to remove the same or any part thereof
at any time during the term of this Lease, but Tenant shall at its expense,
repair any and all damage to the Premises resulting from or caused by such
removal. The interest of Tenant in any property which is not so removed shall at
the end of the time provided for removal thereof vest in Landlord.
D. Landlord shall have the exclusive right to use all or any part
of the roof and exterior walls of the Improvements for any purpose; to make
alterations to the Improvements and to build adjoining the same; and to erect
and maintain in connection with any construction thereof, temporary scaffolds
and other aids to construction on the exterior of the Improvements, provided
Landlord shall use commercially reasonable efforts not to interfere unreasonably
with Tenant's use of the Premises. Landlord shall have access to the Premises
that may be necessary or desirable to perform such work, and Tenant shall not be
entitled to any abatement of rent on account thereof.
E. Notwithstanding anything to the contrary contained in this
Lease, at any time Tenant requests Landlord's written consent for an alteration
or improvement to the
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Premises, the Tenant may specifically request Landlord to advise Tenant, in
writing, at such time, whether or not Landlord will, at the expiration or
earlier termination of the Lease, require such alteration or such improvement to
be removed and Tenant to restore the Premises to its condition prior to the
installation thereof. If Tenant makes such specific written request, then
Landlord must elect, in writing, whether or not the alteration or improvement
must be removed at the expiration or earlier termination of this Lease and such
election shall be binding upon Landlord.
F. All work done by Tenant, or its agents, contractors or
employees shall be done in a good and workmanlike manner.
14. REPAIRS AND MAINTENANCE:
A. Tenant covenants throughout the term of this Lease, at its
expense, to maintain in good order and repair and replace when necessary the
Premises, including, but not limited to, all window and door glass therein,
interior and exterior, the floor, all interior structural elements, and all
building service equipment therein or exclusively serving the Premises
including, but not limited to, electrical, plumbing, heating, air conditioning
and sprinkler equipment, pipes, wires, ducts, fixtures and appliances, except
where such items are damaged by Landlord or its agents, employees or contractors
(and in the event such items are damaged by Landlord or its agents, employees or
contractors, Tenant shall provide Landlord with all insurance proceeds, if any,
which are available to Tenant on account of such damage). Tenant further
covenants to keep the Premises in a safe, clean and sanitary condition, to
provide for the removal of trash and rubbish; and to surrender the Premises at
the end of the tern in as good condition as when received except for ordinary
wear, tear and use, fire or other unavoidable casualty.
B. Without limiting Tenant's obligations under Paragraph 14.A.
above, Tenant shall, at all times during the term of this Lease, have and keep
in force a maintenance contract, in form and with a contractor reasonably
satisfactory to Landlord, providing for inspection at least once each calendar
quarter of the heating, air conditioning and ventilating equipment (which
inspection shall encompass the work described on Exhibit D attached hereto and
made a part hereof), and providing for necessary repairs thereto. Said contract
shall provide that it will not be cancelable by either party thereto except upon
thirty (30) days' prior written notice to Landlord. Tenant shall send to
Landlord a copy of this contract within thirty (30) days of the Commencement
Date of this Lease, as well as provide Landlord with copies of all service calls
and reports within fifteen (15) days after any service call.
C. Landlord agrees to perform at its expense and in a good and
workmanlike manner, maintenance to the exterior structure of the Improvements
and roof except when such repairs are necessitated by negligence or intentional
or other act of the Tenant or Tenant's agents, servants, contractors, invitees
or licensees.
D. The Tenant covenants and agrees that the Landlord shall not be
held responsible for and the Landlord is hereby released and relieved from, and
forever saved harmless from, any liability by reason of or resulting from damage
or injury to person or property of the Tenant or of anyone else, directly or
indirectly caused by
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<PAGE>
(1) dampness or water in any part of the Premises or in any
part of any other property of the Landlord or of others and/or
(2) any leak or break in any part of the Premises or in any
part of any other property of the Landlord or of others or in the pipes of the
plumbing or heating works thereof, no matter how caused.
E. Landlord shall have no liability to Tenant by reason of any
inconvenience, annoyance, interruption, or injury to business arising from the
making of any repairs or changes that Landlord is required or permitted by this
Lease to make, or by any other tenant's lease or required by law to make in or
to any portion of the Premises, Improvements or common areas, but Landlord
agrees to act in a commercially reasonable manner when making such repairs or
changes.
15. LIABILITY INSURANCE:
A. Tenant shall obtain and maintain public liability insurance in
form and substance reasonably satisfactory to Landlord or as required by any
Mortgagee, from time to time insuring Landlord and if Landlord so elects, any
Mortgagee and such other person(s) as required by Landlord, against claims for
bodily injury or death or property damage occurring in or about the Premises and
on, in or about the adjoining driveways and passageways, with limits as
reasonably required by Landlord or as required by any Mortgagee, from time to
time, but in no event with combined single limits less than Three Million
Dollars ($3,000,000.00) per occurrence, and in the aggregate. Such liability
insurance shall, in addition, extend, through contractual liability insurance,
to any liability of Tenant arising out of the indemnifications provided in this
Lease and shall be subject to the waiver of subrogation specified in this Lease.
Such policy of insurance shall provide that notwithstanding any negligent act of
Tenant which might otherwise result in its forfeiture, the policy shall not be
canceled without at least thirty (30) days written notice to each named insured.
A copy of (or, if satisfactory to each Mortgagee, a certificate evidencing) said
policy shall be delivered to Landlord, prior to the Commencement Date and as
otherwise reasonably required by Landlord or as required by any Mortgagee, and
evidence of renewals shall be delivered to Landlord annually and as otherwise
reasonably required by Landlord or as required by any Mortgagee. If Tenant is
required to supply a copy of said policy, Landlord shall be responsible for the
copying costs incurred in obtaining a copy of said policy.
B. Landlord agrees to maintain commercially reasonable casualty
insurance with respect to the Improvements throughout the term of this Lease.
16. DAMAGE OR DESTRUCTION:
A. If during the term of this Lease the Premises or the
Improvements are damaged by fire or other casualty, but not to the extent that
Tenant is prevented from carrying on its business in the Premises, Landlord (at
its expense - but in all events subject to the provisions of Paragraph 16.C.
below) shall promptly restore the Premises or the Improvements to their
condition immediately prior to the casualty and the rent and additional rent
shall not be abated.
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B. If during the term of this Lease the Premises are destroyed or
so damaged by fire or other casualty that Tenant is prevented from carrying on
business in the Premises or if more than twenty percent (20%) of the floor area
of the Improvements is destroyed or damaged (whether or not the Premises shall
be affected), Landlord shall have the option either to restore the Premises or
such other portion of the Improvements to their condition immediately prior to
the casualty or to terminate this Lease. Such option shall be exercised by
Landlord by written notice to Tenant within thirty (30) days after the casualty.
C. If Landlord chooses to restore the Premises, it shall prepare
or cause to be prepared a reasonable estimate of the time needed to restore the
Premises to their condition immediately prior to the casualty. Such estimate
shall accompany the written notice to Tenant. If the time period indicated in
the notice exceeds one hundred twenty (120) days, Tenant may terminate this
Lease within ten (10) days of receipt of Landlord's notice, provided, however,
that termination shall not occur unless Landlord's lender has been given notice
and opportunity to cause repairs to be made within a reasonable time. In no
event shall Landlord be obligated to expend for any repairs or reconstruction
pursuant to this Paragraph 16 an amount in excess of the insurance proceeds, if
any, recovered by it and allocable to the damage to the Premises after deducting
therefrom Landlord's reasonable expenses in obtaining such proceeds and any
amounts required to be paid to any lender of Landlord. Landlord shall not be
responsible to repair or restore any alterations or improvements made by Tenant
or any of Tenant's machinery, equipment, trade fixtures, movable partitions,
furniture and furnishings.
D. If the restoration period is less than the period indicated
above or if Tenant agrees to a period in excess of one hundred twenty (120)
days, then Landlord shall promptly commence such repair work and diligently
proceed to complete the same.
E. Rent shall be equitably abated for any period that the
Premises are destroyed or damaged to the extent that Tenant is substantially
prevented from carrying on its business in the Premises.
F. Notwithstanding anything to the contrary contained in this
Paragraph 16, in the event that the Premises shall not be substantially restored
within one hundred eighty (180) days after Landlord provides the written notice
to Tenant described in Paragraph 16.13. above (or, if no such notice is given,
after the last date on which such notice could have been given), then Tenant
shall have the right, at any time within thirty (30) days after the expiration
of such one hundred eighty (180) day period, to terminate this Lease, in which
event Landlord shall return any security deposit to Tenant and neither Landlord
nor Tenant shall have any further liability to the other in connection with this
Lease (except with respect to obligations or liabilities which accrued prior to
the date of such termination or which relate to surrender of the Premises).
17. COMPLIANCE WITH REGULATIONS, ETC.:
Tenant covenants throughout the term of this Lease at its expense to
comply promptly with all laws, codes, ordinances, administrative and court
orders and directives, rules and regulations, whether now in effect or hereafter
promulgated, applicable to the Premises and/or Tenant's use and occupancy of the
Premises and with all recorded covenants, conditions, easements, agreements and
restrictions that affect the Premises; provided, however, that Tenant
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<PAGE>
shall have the right to contest the applicability and/or validity of any of the
above so long as by reason of such action, the Premises or the Improvements
would not be in danger of forfeiture or loss and so long as Tenant shall comply
with such reasonable conditions as Landlord may stipulate to protect Landlord,
the Premises and the Improvements from loss, expense or liability.
Notwithstanding anything to the contrary contained in this Paragraph 17, in the
event that some aspect of the Premises is not, as of the day prior to the
Commencement Date in compliance with the Americans With Disabilities Act of
1990, then Tenant shall not be required to take any action to cause such aspect
of the Premises to comply with such Act.
18. CONDEMNATION:
A. If during the term of this Lease all or a substantial part of
the Premises or the Improvements shall be taken by eminent domain, then at the
option of Tenant or Landlord this Lease shall terminate as of, and the rent
shall be apportioned to and abate from and after, the date of taking. Tenant
shall have no claim against Landlord or the condemning authority for the value
of the unexpired term of this Lease and no right to participate in any award or
damages for such taking (except as set forth in sub-paragraph E hereof) and
hereby assigns all of its right, title and interest therein to Landlord. For
purposes of this Paragraph 18, "a substantial part of the Premises or the
Improvements" shall mean a taking which renders Tenant unable or substantially
unable to carry on its business on the Premises in substantially the manner it
was carried on prior to such taking.
B. If during the term of this Lease, less than "a substantial
part of the Premises or the Improvements" shall be taken by eminent domain, this
Lease shall remain in full force and effect according to its terms; and Tenant
shall have no right to participate in any award or damages for such taking and
hereby assigns all of its right, title and interest therein to Landlord;
provided that Landlord shall at its expense promptly make such repairs and
improvements as shall be necessary to restore the Premises to substantially the
same efficiency as before the taking.
C. If the whole or any part of the Improvements shall be so
taken, then in such event notwithstanding that the Premises in whole or in part
is not so taken or conveyed, Landlord shall have the right and power, at its
option to be exercised by written notice to Tenant, to terminate this Lease
effective either the date title vests in the condemning authority or the date
Landlord is required to deliver possession of the part so taken or conveyed. In
any event, Tenant shall have no claim against Landlord or the condemning
authority for the value of any unexpired term of this Lease.
D. For the purpose of this Paragraph 18, "taken by eminent
domain" or "taking under the power of eminent domain" shall include a negotiated
sale or lease and transfer of possession to a condemning authority under bona
fide threat of condemnation for public use, and Landlord alone shall have the
right to negotiate with the condemning authority and conduct and settle all
litigation connected with the condemnation. As hereinabove used, the words
"award of damage" shall, in the event of such sale or settlement, include the
purchase or settlement price of any such negotiated transfer.
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E. Nothing herein shall be deemed to prevent Tenant from
claiming, negotiating and receiving from the condemning authority, if legally
payable, compensation for the taking of Tenant's own tangible property,
improvements upon the Premises constructed at Tenant's sole expense and damages
for Tenant's loss of business, business interruption and/or removal and
relocation. Should the condemnation be effected without a cancellation of this
Lease, there shall be an appropriate reduction in rent commensurate with the
area so taken.
19. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS:
If Tenant shall fail to perform any agreement, covenant or duty
required of it by this Lease or by law, Landlord shall at any time within ten
(10) days after written notice to Tenant (provided, no written notice and/or
cure period shall be required in the event of an emergency) have the right (but
not the duty) to perform the same, including but not limited to the right to
enter the Premises, if necessary, without any liability to Tenant for damage to
the Premises or otherwise, to perform the same, but the reasonable cost thereof
shall be deemed to be additional rent, and shall give the Landlord the same
rights and remedies as though the additional rent were part of the monthly rent
due the Landlord under this Lease.
20. INDEMNIFICATION AND WAIVER OF CLAIM:
A. Except to the extent the claim results from the negligence or
intentional misconduct of Landlord or its agents or employees, Tenant will
defend and will indemnify Landlord and save it harmless from and against any and
all claims, actions, damages, liability, and expense (including, but not limited
to, reasonable attorney's fees) in connection with the loss of life, bodily
injury, or damage to property or business arising from, related to, or in
connection with the occupancy or use by Tenant or any assignee, subtenant,
concessionaire, or licensee of the Premises or the Improvements or occasioned
wholly or in part by any act or omission of Tenant or any assignee, subtenant,
concessionaire, or licensee or its or their contractors, subcontractors, agents,
employees, invitees or other persons on the Premises. Tenant shall also pay all
costs, expenses, and reasonable attorney's fees that may be expended or incurred
by Landlord in enforcing or defending against the enforcement of the covenants
and agreements of this Lease.
B. Landlord shall not be liable for, and Tenant, in consideration
of Landlord's execution of this Lease, hereby releases all claims against
Landlord for loss or damage that may be occasioned by or through the acts or
omissions of other tenants, their contractors and subcontractors and their
agents, employees or invitees, or for loss of life, bodily injury, or damage to
property or business sustained by Tenant or any person claiming through Tenant
or on the Premises resulting from any fire, accident, occurrence, or any other
condition in or upon the Premises or any part thereof including, but not limited
to, such claims for loss of life, bodily injury, or damage resulting from (a)
any defect in or failure of plumbing or plumbing fixtures, heating equipment,
electrical wiring or installation thereof, water pipes, stairs, elevators,
railings, or walks; (b) any equipment or appurtenances being out of repair; (c)
the bursting, leaking, or running of any tank, washstand, water closet, waste
pipe, drain, or any other pipe or tank in, upon, or about the Premises; (d) the
backing up of any sewer pipe; (e) the escape of steam or hot water; (f) water,
snow, or ice being upon or coming through the roof or any other place upon or
near the Premises or the Improvements or otherwise; (g) the falling of any
fixture, plaster, brick,
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mortar, or stucco; (h) broken glass; and (i) any act or omission of other
tenants or other occupants of the Premises.
C. Notwithstanding anything to the contrary contained in this
Lease, Landlord and Tenant do mutually each release and discharge the other, and
all persons against whom their insurance company or companies would have a right
or claim by virtue of subrogation, of and from all suits, claims, and demands
whatsoever, for loss or damage to the property of the other, even if caused by
or occurring through or as a result of any negligent act or omission of the
party released hereby or its contractors, subcontractors, agents, or employees,
so long as and to the extent that such loss or damage is covered by insurance
benefiting the party suffering such loss or damage or was expressly required to
be so covered under this Lease. Each party further agrees that each will cause
its policies of insurance for fire and extended coverage to be so written as to
include a waiver of subrogation by causing such policies to contain a clause in
substantially the following form:
It is hereby stipulated that this insurance shall not be
invalidated should the insured or any of them waive in writing
prior to a loss any or all right of recovery against any person
or entity for loss occurring to the property described herein.
D. The provisions of this Paragraph 20 shall survive the
termination or earlier expiration of the Term of this Lease.
21. DEFAULT PROVISIONS: Tenant shall have breached this Lease and
shall be considered in default hereunder if:
(1) Tenant fails to pay any installment of Basic Rental or
additional rent when due and payable and such failure continues for five (5)
days after notice thereof is sent to Tenant;
(2) Tenant fails to perform any of the other covenants or
conditions of this Lease on the part of Tenant to be performed (other than those
described elsewhere in this Paragraph 21) and such failure continues for fifteen
(15) days after notice thereof is sent to Tenant provided, however, if such
failure is of such a nature that it cannot be cured within fifteen (15) days,
then Tenant shall not have breached this Lease and shall not be considered in
default hereunder so long as Tenant commences cure within such fifteen (15) day
period and thereafter continuously and diligently pursues cure and attempts to
complete cure as promptly as possible;
(3) Tenant makes an assignment for the benefit of its
creditors or any guarantor of Tenant's obligations under this Lease (a
"Guarantor") makes an assignment for the benefit of such Guarantor's creditors;
(4) a receiver or trustee is appointed for all or part of
the property of Tenant or any Guarantor, provided, however, if such receiver or
trustee is appointed on the motion of a party other than Tenant or such
Guarantor, then Tenant shall not have breached this Lease and shall not be
considered in default hereunder so long as such receiver or trustee is dismissed
within sixty (60) days of the date of its appointment;
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(5) Tenant or any Guarantor files a petition in bankruptcy;
(6) there is filed against Tenant or any Guarantor a
petition in bankruptcy or for its reorganization or for an arrangement under any
bankruptcy law or other law and the same is not dismissed within sixty (60) days
after the date filed;
(7) Tenant or any Guarantor becomes insolvent;
(8) the Premises shall be abandoned, deserted or become
vacant, unless Tenant shall have first given Landlord not less than thirty (30)
days prior written notice, specifying the date upon which Tenant intends to
abandon, desert or vacate the Premises; or
(9) Any final or interlocutory lien is established against
the Premises or Tenant's interest in this Lease or any lien or levy is
established or made against any of Tenant's property or assets and the same is
not discharged or bonded within ten (10) days after the date it is established.
22. REMEDIES OF LANDLORD:
A. In the event of a breach (beyond applicable grace or cure
periods) of this Lease as set forth in Paragraph 21 above, Landlord shall have
the option to do any of the following in addition to and not in limitation of
any other remedy permitted by law or by this Lease: (i) to re-enter the Premises
to dispossess Tenant and all other occupants from the Premises and to remove any
or all of Tenant's property at the Premises, (ii) to store Tenant's property in
a public warehouse or elsewhere at the cost, risk, and expense of Tenant,
without Landlord's being deemed guilty of trespass or becoming liable for any
loss or damage which may occur on Tenant's property, and (iii) upon ten (10)
days' written notice to Tenant, which the parties agree is commercially
reasonable, to sell at public or private sale any or all of said property,
whether exempt or not from sale under execution or attachment, with the proceeds
of sale to be applied: first, to the costs and expenses of retaking, removal,
storage, preparing for sale, and sale of the property (including reasonable
attorneys' fees); and second, to the payment of any sum due hereunder to
Landlord (including rent, charges, and damages, both theretofore and thereafter
accruing); and, third, any surplus to Tenant or the person otherwise entitled
thereto.
B. Further, upon the occurrence of any such breach (beyond
applicable grace or cure periods), Landlord, in addition to any other remedies
it may have at law, in equity, by statute, or under any other provision of this
Lease, shall have the right to terminate this Lease, as well as all right,
title, and interest of Tenant hereunder, by giving to Tenant not less than five
(5) days' advance written notice of Landlord's election to cancel and to
terminate this Lease. Upon the expiration of the time fixed in the notice of
termination, this Lease and the balance of the term of this Lease then
remaining, as well as all of the right, title, and interest of Tenant under this
Lease, shall expire in the same manner and with the same force and effect
(except for the Tenant's liability as hereinafter set forth) as if the
expiration of the time fixed in the notice of termination were the date upon
which the term of this Lease would normally have expired. Tenant shall then
immediately quit and surrender the Premises and each and every part thereof to
Landlord, and Landlord may enter upon the Premises by summary proceedings or
otherwise. In
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any of such events, Landlord shall be entitled to the benefit of all provisions
of the ordinances and public local laws of the city or county where the Property
is located and of the Public General Laws of the State of Maryland dealing with
the speedy recovery of lands and tenements held over by tenants or proceedings
in forcible entry and detainer. Upon any entry or re-entry by Landlord, with or
without legal process, Landlord shall also have the right (but not the
obligation) to relet all or any part of the Premises, from time to time, at the
risk and expense of Tenant. No re-entry by Landlord with or without a
declaration of termination shall be deemed to be an acceptance or a surrender of
this Lease or as a release of Tenant's liability for damages under the
provisions of this Paragraph 22. Tenant hereby forever waives and relinquishes
(i) any and all rights of redemption or reinstatement now or hereafter existing
at law or in equity or provided by statute, and (ii) any right to bring a
counterclaim in any action brought by Landlord for nonpayment of rent or any
other summary proceedings thereon or in any action for recovery of the Premises.
Landlord agrees that if Tenant fails to bring a counterclaim in any action
brought by Landlord for nonpayment of rent, or any other summary proceedings
thereon, or in any action for recovery of the Premises, Landlord shall not
thereafter assert a defense based upon res adjudicata or collateral estoppel,
with respect to any such counterclaim or the elements thereof, which was not
brought by Tenant on account of its compliance with the provisions of the
preceding sentence.
C. Tenant further agrees (i) notwithstanding re-entry by Landlord
with or without termination pursuant to the provisions of subpart A or B of this
Paragraph 22, or (ii) if this Lease is otherwise terminated by reason of
Tenant's default, or (iii) if Landlord retakes possession with or without
process of law and/or re-enters with or without a declaration of termination, or
(iv) if Landlord, following any of the foregoing events, elects to let or relet
the Premises (whether once or more than once during the remainder of the term of
this Lease, and upon such conditions as are satisfactory to Landlord) that
Tenant shall, nevertheless, in each instance, remain liable for the performance
of any covenant of this Lease then in default and for all rent and all other
charges and damages that may be due or sustained before and after the date of
default and/or termination, together with the cost of seizure and repossession
of the Premises and attorney's fees incurred by Landlord as a result of the
breach of this Lease.
D. In any of the events described above, Tenant agrees that it
will remain liable to Landlord for liquidated damages to be calculated and paid,
at Landlord's option, in either of the following ways:
(i) the rent that, but for the termination of this Lease,
would have become due during the remainder of the term of this Lease, less the
amount or amounts of rent, if any, that Landlord shall receive during such
period from others to whom the Premises may be rented net of all costs and
expenses incurred by Landlord in connection with Tenant's default, including,
but not limited to, the cost to repair, restore, renovate, or decorate the
Premises for a new tenant, attorney's fees, real estate commissions, the cost of
any legal actions brought against Tenant, in which case liquidated damages shall
be computed and payable in monthly installments, in advance, on the first day of
each calendar month following the termination of this Lease and shall continue
until the date on which the term of this Lease would have expired but for such
termination; or
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(ii) the rent that, but for the termination of this Lease,
would have become due during the remainder of the term of this Lease, less the
fair rental value of the Premises, as determined by an independent real estate
appraiser selected by Landlord. Such amount shall then be discounted to present
value at a rate of interest equal to the then applicable Federal Funds Rate
announced from time to time by the Federal Reserve Bank facility nearest the
Premises. Such liquidated damages shall be payable to Landlord in one lump sum,
on demand, and shall bear interest at the rate specified in Paragraph 4 hereof
until paid. In no event shall Landlord be required to account to Tenant for any
amounts by which the fair rental value shall have exceeded the stipulated rent
at the time of such termination.
E. Suit or suits for the recovery of such deficiency or damages
or for a sum equal to any installment of rent and other charges payable
hereunder may be brought by Landlord from time to time, at Landlord's election.
Nothing herein contained shall be deemed to require Landlord to await the date
when this Lease or the term of this Lease would have normally expired had there
been no such default by Tenant or no such termination by Landlord, nor shall
Landlord be barred by any claim involving a statute of limitations or other
defense should Landlord delay in filing suit.
F. In connection with any reletting(s) of the Premises, Landlord
shall have the absolute right, without such action's being or being deemed to be
a surrender of its rights or as a termination of this Lease or as a release of
the Tenant's liability hereunder for the balance of the term of this Lease to
let or relet the Premises for a longer or shorter term than that remaining after
Tenant's default, to lease more or less area than that contained in the
Premises, to lease the Premises together with other premises or property owned
or controlled by Landlord, and to change the character or use of the Premises.
G. No entry or re-entry by Landlord, whether had or taken under
summary proceedings or otherwise, nor any letting or reletting shall absolve or
discharge Tenant from liability hereunder. Tenant's liability hereunder, even if
there is no letting or reletting, shall survive the issuance of any dispossess
warrant, order of court terminating this Lease, or any other termination based
upon Tenant's default.
H. No payment received by Landlord from Tenant after re-entry or
the termination of this Lease in any manner shall reinstate, continue, or extend
the term of this Lease or affect any notice theretofore given to Tenant by
Landlord or operate as a waiver of the right of Landlord to recover possession
of the Premises by proper suit, action, proceedings, or other remedy.
I. In the event Tenant fails to vacate the Premises at any time
after termination of this Lease as provided above, Tenant shall pay one and
one-half (1 1/2) times the annual rent and additional rent for such holdover
period.
J. Nothing in this Paragraph 22 shall limit or prejudice the
right of Landlord to prove and to obtain, as liquidated damages by reason of a
termination arising out of the provisions of this Paragraph 22, an amount equal
to the maximum allowed by any statute or rule of law in effect as of the time
when, and governing the proceedings in which, such damages are
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to be proved, whether or not such amount be greater, equal to, or less than the
amount of liquidated damages computed under this Paragraph 22.
K. Notwithstanding anything to the contrary contained in this
Paragraph 22, in the event Tenant defaults (beyond applicable grace or cure
periods) under this Lease and vacates the Premises and removes all of its
property therefrom and otherwise returns the Premises to Landlord in the
condition which the Premises are required to be returned to Landlord at the
expiration of the term of this Lease and notifies Landlord, in writing, of
Tenant's desire that Landlord re-let the Premises, then Landlord will agree to
exercise commercially reasonable efforts to re-rent the Premises, provided,
however, that in no event shall Landlord be required to exert any efforts
whatsoever to re-rent the Premises at any time or times that Landlord is
attempting to lease any other space in the Improvements.
23. RELOCATION: Intentionally omitted.
24. SURRENDER OF PREMISES:
A. At the expiration or earlier termination of the term of this
Lease, Tenant shall peaceably surrender the Premises in broom clean condition
and good order and repair and otherwise in the same condition as the Premises
was upon the commencement of this Lease, except ordinary wear and tear, fire or
other unavoidable casualty.
B. If Landlord elects to require that alterations, installations,
changes, replacements, additions or improvements made by Tenant to the Premises
be removed at the termination of this Lease, Tenant hereby agrees to cause the
same to be removed at its sole cost and expense. If Tenant fails to remove the
same, Landlord may cause them to be removed at Tenant's expense, and Tenant
hereby agrees to reimburse Landlord for the reasonable cost of such removal
together with all and any damages which Landlord may suffer and sustain by
reason of the failure of Tenant to remove the same. At Landlord's election, any
or all of the alterations, installations, changes, replacements, additions to,
or improvements made by Tenant upon the Premises shall remain at the termination
of this Lease and not be removed. Tenant shall surrender to Landlord all keys
for the Premises at the place then fixed for the payment of rent and shall
notify Landlord in writing of all combinations of locks, safes, and vaults, if
any, in the Premises. Tenant's obligation to observe and perform the covenants
set forth in this Paragraph 24 shall survive the expiration or earlier
termination of this Lease.
C. At the expiration or earlier termination of this Lease, Tenant
shall immediately remove all property that it owns and is permitted to remove
from the Premises under the provisions of this Lease, and, failing to do so,
Landlord at its option may either (i) cause that property to be removed at the
risk and expense of Tenant (both as to loss and damage), and Tenant hereby
agrees to pay all costs and expenses incurred thereby, including sums paid to
store the property elsewhere and the cost of any repairs to the Premises caused
by the removal of the property, or (ii) upon ten (10) days' written notice to
Tenant, which the parties agree is commercially reasonable, sell at public or
private sale any or all of such property, whether exempt or not from sale under
execution or attachment, with the proceeds to be applied as set forth in
Paragraph 22.A., or (iii) at Landlord's option, title shall pass to Landlord.
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25. RIGHT TO ASSIGN AND SUBLEASE:
A. Tenant shall not make or permit an Assignment (defined below)
of this Lease or of the Premises or any interest of Tenant herein or therein, in
whole or in part, by operation of law or otherwise, without first obtaining in
each and every instance the prior written consent of Landlord, which consent
shall not be unreasonably withheld, conditioned or delayed. No less than fifteen
(15) days prior to the effective date of a proposed Assignment, Tenant shall
offer to reconvey to Landlord, as of the effective date, that portion of the
Premises which is the subject of the proposed Assignment, which offer shall
contain an undertaking by Tenant to accept, as full and adequate consideration
for the reconveyance, Landlord's release of Tenant from all fixture Basic Rental
and other obligations under this Lease with respect to the Premises or the
portion thereof so reconveyed. Landlord, in its absolute discretion, shall
accept or reject the offered reconveyance within fifteen (15) days of the offer,
and, if Landlord accepts, the reconveyance shall be evidenced by an agreement in
form and substance acceptable to Landlord. If Landlord fails to accept or reject
the offer within the fifteen (15) day period, Landlord shall be deemed to have
rejected the offer; however, no such rejection by Landlord shall be deemed to be
a consent to an Assignment. As used in this Lease, "Assignment" shall mean any
assignment, transfer, mortgage or encumbrance, whether voluntary, involuntary or
by operation of law, in whole or in part, of Tenant's interest in this Lease,
any sublease or license by Tenant of all or part of the space in the Premises,
or any agreement by Tenant giving any other person the right to use all or any
part of the Premises or any other event deemed an Assignment elsewhere in this
Lease.
B. Any consent by Landlord to an Assignment shall be held to
apply only to the specific transaction thereby authorized and shall not
constitute a waiver of the necessity for such consent to any subsequent
Assignment, including, but not limited to, a subsequent Assignment by any
trustee, receiver, liquidator, or personal representative of Tenant.
C. If this Lease or any interest herein be assigned in whole or
in part or if the Premises or any part thereof be sublet, used, or occupied by
anyone other than Tenant without Landlord's prior written consent having been
obtained thereto, Landlord may nevertheless collect rent (including additional
rent) from the assignee, sublessee, user, or occupant and apply the net amount
collected to the rents herein reserved. Furthermore, in the event of any
Assignment of this Lease or of the Premises or any interest of Tenant herein or
therein, in whole or in part, by operation of law or otherwise, Tenant shall pay
to Landlord monthly, as additional rent, fifty percent (50%) of the excess of
the net consideration received during such month for such Assignment (whether or
not denoted as rent) over the Basic Rental reserved for such month in this Lease
applicable to the portion of the Premises or of this Lease so assigned, sublet,
or occupied. In determining "net consideration", there shall be deducted from
the consideration received by Tenant during such month customary leasing
commissions paid to unrelated third parties by Tenant in connection with such
Assignment, reasonable concessions to unrelated third parties granted by Tenant
in connection with such Assignment, and any other reasonable out-of-pocket
expenses of Tenant paid to unrelated third parties in connection with such
Assignment. No such Assignment or collection shall be deemed a waiver of the
covenant herein against Assignment by others, or the acceptance of the assignee,
subtenant, user, or occupant as Tenant hereunder, or constitute a release of
Tenant from the further performance by Tenant of the terms and provisions of
this Lease. If this Lease or any interest of Tenant herein be assigned or if the
whole or any part of the Premises be sublet or used or occupied by others, after
having obtained
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Landlord's prior written consent thereto, Tenant shall nevertheless remain fully
liable for the full performance of all obligations under this Lease to be
performed by Tenant, and Tenant shall not be released therefrom in any manner.
D. If Tenant is a corporation and if at any time during the Term
of this Lease any part or all of the corporate shares of Tenant, or of a parent
corporation of which the Tenant is a direct or indirect subsidiary, shall be
transferred by sale, assignment, bequest, inheritance, operation of law, or
other disposition so as to result in a change in the present effective voting
control of Tenant or of such parent corporation by the person or persons owning
or controlling a majority of the shares of Tenant or of such parent corporation
on the date of this Lease, Tenant shall promptly notify Landlord in writing of
such change, and such change in voting control shall constitute an Assignment of
this Lease for all purposes of this Lease; provided, however, that this
provision shall not apply in the event that as of the date of this Lease over
fifty percent (50%) of the voting power of the Tenant corporation or of such
parent corporation is held by fifty (50) or more unrelated shareholders or
distributed to such number of unrelated shareholders in a public distribution of
securities. The foregoing provisions of this Paragraph 25.D., shall be of no
force or effect while the stock of Tenant is publicly traded and Tenant is
listed on a national stock exchange.
E. If Tenant is a partnership and if at any time during the Term
of this Lease any person or entity which at the time of the execution of this
Lease owns a general partner's interest ceases to own such general partner's
interest, such cessation of ownership shall constitute an Assignment of this
Lease for all purposes of this Lease, and Tenant shall promptly notify Landlord
in writing of such change.
26. INSPECTION BY LANDLORD. ETC.:
A. Landlord and its contractors and subcontractors, and its or
their agents and employees may at all reasonable times during the term of this
Lease enter to inspect the Premises and/or may show the Premises and
Improvements to others, provided that, except in the event of an emergency, such
entrance is with the prior notice to Tenant. Landlord shall also have the right
to display the customary "For Sale" and, during the last one hundred eighty
(180) days of the term, "For Rent" signs on the Premises.
B. Landlord also reserves the right, after notice of intention to
so enter (except that in the event of an emergency, no notice shall be
required), to enter the Premises at any time and from time to time to make such
repairs, additions, or alterations or remedy any contamination as it may deem
necessary for the safety, improvements, preservation, or condition thereof, or
of the Improvements, but Landlord assumes no obligation to do so, and the
performance thereof by Landlord shall not constitute a waiver of Tenant's
default in failing to perform the same. Landlord shall in no event be liable for
any inconvenience, disturbance, loss of business, or other damage to Tenant by
reason of the performance by Landlord of any work in, upon, above, under, or
outside the Premises. If during the last month of the term, Tenant has vacated
the Premises and removed all or substantially all of its personal property,
Landlord may immediately enter and alter, renovate, and redecorate the Premises.
The exercise of any such reserved right by Landlord shall not be deemed an
eviction or disturbance of Tenant's use and
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possession of the Premises and shall not render Landlord liable in any manner to
Tenant or to any other person, nor shall the same constitute any grounds for an
abatement of rent hereunder.
C. Whenever Landlord enters the Premises pursuant to the
provisions of this Paragraph 26, Landlord shall use commercially reasonable
efforts, under the circumstances, not to unduly interfere with or interrupt
Tenant's activities on or about the Premises.
27. ASSIGNMENT OF LANDLORD'S INTEREST:
If Landlord should ever assign this Lease or the rents hereunder to a
creditor as security for a debt, Tenant shall, after written notice of such
assignment and upon written demand by Landlord or the assignee, pay all sums
thereafter becoming due Landlord hereunder to the assignee (from and after the
time Tenant is furnished in writing with such assignee's address) and furnish
such evidence of insurance coverages required hereunder as the lender may
reasonably require so as to protect the assignee's interest as it may appear and
furnish such assurances to the assignee.
28. SUBORDINATION:
This Lease shall be subject and subordinate to the lien of any present
or future mortgage or mortgages upon the Premises or any property of which the
Premises are a part irrespective of the time of execution or the time of
recording of any such mortgage or mortgages, provided, however, with respect to
mortgages which are recorded among the Land Records after the date of this
Lease, the foregoing subordination shall be effective only if the holder of the
beneficial interest in such mortgage agrees that, as long as Tenant is not in
default beyond any applicable grace or cure period in the payment of rent or in
the performance of any of the other terms or conditions of the Lease, and so
long as Tenant executes such holder's standard Subordination, Non-Disturbance
and Attornment Agreement, Tenant's possession of the Premises will not be
disturbed by such holder following acquisition of title to the Improvements (a)
by the holder of such beneficial interest or the purchaser at a foreclosure sale
pursuant to any action or proceeding to foreclose such mortgage, or (b) by the
holder of such beneficial interest, pursuant to acceptance of a deed in lieu of
foreclosure. Additionally, upon Tenant's written request, Landlord agrees to
request any Mortgagee, having an interest in a mortgage which is a lien on the
Premises as of the date of this Lease, to enter into such Mortgagee's standard
Subordination, Non-Disturbance and Attornment Agreement with Tenant (provided,
however, Landlord shall have no liability to Tenant and none of Tenant's
obligations under this Lease shall in any way be diminished if such Mortgagee
shall refuse to do so). The word "mortgage" as used in this Lease includes
mortgages, deeds of trust or other similar instruments and modifications,
extensions, renewals and replacements thereof and any and all advances
thereunder.
29. ATTORNMENT:
In the event the Premises are sold at any foreclosure sale or sales,
by virtue of any judicial proceedings or otherwise, this Lease shall continue in
full force and effect and Tenant agrees upon request of any purchaser to attorn
to and acknowledge the foreclosure purchaser or purchasers at such sale as
Landlord hereunder.
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30. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT:
The Tenant shall, within ten (10) days after at the request of the
Landlord or the holder of any mortgage (herein referred to as "Mortgagee"), from
time to time execute, acknowledge and deliver such further instrument or
instruments to, among other things, confirm the agreements contained in
Paragraphs 28 and 29 above, including, but not limited to an instrument
substantially in the form attached hereto as Exhibit E. Notwithstanding the
foregoing, the provisions of Paragraphs 28 and 29 shall be self-operative and no
further instrument shall be required to implement them.
31. MORTGAGEE PROTECTION CLAUSE:
Tenant agrees to give any Mortgagees, by certified mail, a copy of any
notice of default served upon the Landlord, provided that prior to such notice,
Tenant has been notified in writing (by way of Notice of Assignment of Rents and
Leases, or otherwise) of the addresses of such Mortgagees. Tenant further agrees
that if Landlord shall have failed to cure such default, then the Mortgagees
shall have thirty (30) days from the date of receiving notice within which to
cure such default or if such default cannot be cured by such Mortgagee within
that time, then such additional time as may be reasonably necessary if within
such thirty (30) days any Mortgagee has commenced and is diligently pursuing the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings if necessary to effect such cure), in
which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
32. TENANT HOLDING OVER:
A. In the event that Tenant holds over at the expiration of the
original term of this Lease or at the earlier termination thereof, Landlord
shall be entitled to all the remedies now or hereafter provided by the current
or future ordinances and public local laws of the City or County where the
Premises are located and the public general laws of the State of Maryland
relating to the speedy recovery of possession of lands and damages for wrongful
detention.
B. Any holding over after the expiration of the term hereof,
without the written consent of Landlord shall be construed to be a tenancy from
month to month at one and one-half (1-1/2) times the monthly rent hereinbefore
specified, and shall otherwise be on the terms and conditions hereinbefore
specified. Such tenancy from month to month shall continue until either party
shall give at least thirty (30) days notice in writing to the other terminating
such tenancy.
33. UTILITY LINES AND FACILITIES:
Landlord reserves the right to place (or permit any other tenant
in the Improvements so to place) in, over, below and upon the Premises (in such
manner as to not unreasonably interfere with Tenant's use, occupancy or
enjoyment of the Premises), utility lines, conduits, pipes, tunneling and the
like to service the Premises and any other premises in the Improvements and to
use, replace, repair and maintain (or permit any other tenant so to do) such
utility lines, conduits, pipes, tunneling and the like, in, over, below and upon
the Premises in
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such manner as will not unreasonably interfere with Tenant's use, occupancy or
enjoyment thereof, provided that Landlord shall use reasonable efforts to see
that such work does not unreasonably interfere with the ongoing business and
operations of Tenant, that such work shall be done expeditiously and in a good
and workmanlike manner, and further that the Premises shall, upon conclusion of
the work, be promptly restored to substantially the same conditions as they were
prior to the commencement of the work.
34. HAZARDOUS MATERIALS:
A. Tenant shall not cause or permit any Hazardous Material
(defined below) to be brought upon, kept or used in or about the Premises by
Tenant, its agents, employees, contractors or invitees, except for such
Hazardous Material as is necessary or useful to Tenant's business.
B. Any Hazardous Material permitted on the Premises as provided
in Paragraph 34.A. above, and all containers therefore, shall be used, kept,
stored and disposed of in a manner that complies with all Federal, state and
local laws or regulations applicable to any such Hazardous Material.
C. Tenant shall not discharge, leak or emit, or permit to be
discharged, leaked or emitted, any material into the atmosphere, ground, sewer
system or any body of water, if such material (as reasonably determined by
Landlord, or as determined by any governmental authority) does or may, pollute
or contaminate the same, or may adversely affect (a) the health, welfare or
safety of persons, whether located on the Premises or elsewhere, or (b) the
condition, use or enjoyment of the Improvements or any other real or personal
property.
D. At the commencement of each calendar year, Tenant shall
disclose to Landlord the names and approximate amounts of all Hazardous Material
which Tenant intends to store, use or dispose of on the Premises in the coming
calendar year. In addition, at the commencement of each calendar year during the
terms of this Lease, beginning with the second lease year, Tenant shall disclose
to Landlord the names and amounts of all Hazardous Materials which were actually
used, stored or disposed of on the Premises if such materials were not
previously identified to Landlord at the commencement of the previous calendar
year.
E. As used herein, the term "Hazardous Material" means (a) any
"hazardous waste" as defined by the Resource Conservation and Recovery Act of
1976, as amended from time to time, and regulations promulgated thereunder; (b)
any "hazardous substance" as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended from time to time,
and regulations promulgated thereunder; (c) any "oil, petroleum products, and
their by-products"; and (d) any substance which is or becomes regulated by any
Federal, State or local governmental authority.
F. Tenant hereby agrees that it shall be fully liable for all
costs and expenses related to the use, storage and disposal of Hazardous
Material kept on the Premises by Tenant, and Tenant shall give immediate notice
to Landlord of any violation or potential violation of the provisions of
Paragraph 34.B. above and shall deliver to Landlord immediately after receipt by
Tenant from time to time copies of any correspondence or any written documents
sent to Tenant
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by (and from Tenant to) any Federal, State and local authorities, agencies, or
bodies relating to Hazardous Materials at or on the Premises. Tenant shall
defend, indemnify and hold harmless Landlord and its agents, from and against
any claims, demands, penalties, fines, liabilities, settlements, damages, costs,
or expenses (including, without limitation, reasonable attorney and consultant
fees, court costs and litigation expenses) of whatever kind or nature, known or
unknown, contingent or otherwise, arising out of or in any way related to (a)
the presence, disposal, release, or threatened release of any Hazardous Material
which is on, from, or affecting the soil, water, vegetation, buildings, personal
property, persons, animals, or otherwise; (b) any personal injury (including
wrongful death) or property damage (real or personal) arising out of or related
to Hazardous Material; (c) any lawsuit brought or threatened, settlement reached
or government order relating to Hazardous Material; and/or (d) any violation of
any laws applicable thereto. Notwithstanding anything to the contrary contained
in this Paragraph 34.F., Tenant shall not be required to indemnify Landlord with
respect to any Hazardous Material which was on the Premises prior to the date of
this Lease, unless Tenant handles or disposes of such Hazardous Material in a
negligent manner or in violation of applicable law. The provisions of this
Paragraph 34.F shall be in addition to any other obligations and liabilities
Tenant may have to Landlord at law or equity and shall survive the transactions
contemplated herein and shall survive the expiration or earlier termination of
this Lease.
35. SPRINKLER:
Landlord represents a wet sprinkler system has been installed in the
Premises, which is designed to meet NFPA Ordinary Group Three System. Any
additional sprinkler work, I.E., in rack sprinklers, additional heads, etc.,
required to meet any other standards or county requirements to satisfy Tenant's
material or use classification, shall be at the sole cost and expense of the
Tenant.
36. SIGNS:
Tenant shall not place any signs on the exterior of the Premises
without the written consent of Landlord, which consent shall not be unreasonably
withheld, conditioned or delayed. With respect to the Junction Business Park
only, the Rules and Regulations in Rider #1 to Lease Agreement shall apply to
Tenant and the Premises.
37. ACCORD AND SATISFACTION, ETC.:
No payment by Tenant or receipt by Landlord of a lesser amount
than any payment of rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated rent due and payable, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment as rent be deemed an accord and satisfaction. Landlord may accept such
check or payment without prejudice to Landlord's right to recover the balance of
such rent or pursue any other remedy provided in this Lease, at law or in
equity. It is agreed that, for the purpose of any suit brought or based on this
Lease, this Lease shall be construed to be a divisible contract, to the end that
successive actions may be maintained on this Lease as successive periodic sums
shall mature under this Lease, and it is further agreed that failure to include
in any suit or action any sum or sums then matured shall not be a bar to the
maintenance of any suit or action, for the recovery of said sum or sums so
omitted, and the
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Tenant agrees that it will not in any suit or suits brought on this Lease for a
matured sum for which judgment has not previously been received, plead, rely on
or urge as a bar to said suit or suits, the defenses of res adjudicata, former
recovery extinguishment, merger, election of remedies or other similar defense.
38. BROKERAGE COMMISSION:
Each of Tenant and Landlord represents and warrants to the other
that it has had no dealings, negotiations, or consultations with respect to the
Premises, the Improvements, or this transaction with any real estate agent,
broker, or finder other than Ryan Commercial Real Estate Services and Colliers
Pinkard (collectively, the "Broker") and that no real estate agent, broker, or
finder, other than Broker, called the Premises or any other space in the
Improvements to Tenant's attention for lease. In the event that either party has
breached the foregoing representation or warranty, the breaching party will be
responsible for and will defend, indemnify, and save the other party harmless
from and against all costs, fees (including, without limitation, reasonable
attorneys' fees), expenses, liabilities, and claims incurred or suffered by the
other party as a result of or related to such breach.
39. CUMULATIVE REMEDIES:
Any and all remedies available to Landlord for the enforcement of
the provisions of this Lease are cumulative and not exclusive, and Landlord
shall be entitled to pursue any of the rights enumerated in this Lease or
remedies authorized by law or available in equity, or all of the foregoing. In
the event of any litigation arising out of or in connection with this Lease, the
party that does not prevail in any such litigation shall pay the reasonable
attorneys' fees and the court costs of the party that does prevail in such
litigation, through all appeals.
40. NOTICES:
All notices to Tenant under this Lease shall be conclusively
presumed to have been delivered, one day after mailing by United States mail,
first class, certified or registered, and postage prepaid, addressed to
Tenant, at Earthshell Corporation, Attn: President, 111 South Calvert Street,
Baltimore, Maryland 21202 with a copy to Kevin L. Shepherd, Esquire, Venable,
Baetjer & Howard, LLP, 1800 Mercantile Bank & Trust Building, Two Hopkins
Plaza, Baltimore, Maryland 21201-2978, or to such other address as Tenant may
in writing from time to time designate. All notices to Landlord hereunder
shall be conclusively presumed to have been delivered one (1) business day
after mailing by United States mail, first class, certified, and postage
prepaid, addressed to Landlord, c/o Emory Hill Management Co., 92 Read's Way,
Suite 100, New Castle, Delaware 19720 or to such other address as Landlord
may in writing from time to time designate.
41. REVIEW OF LEASE:
Tenant and Landlord hereby acknowledge that the terms of this
Lease must be reviewed and .approved by Landlord's lender, which approval is
conclusively presumed unless Landlord shall notify Tenant in writing or by
facsimile within five (5) business days of the date a fully signed copy of this
Lease is received by Landlord, that the approval was not granted. In the
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event of rejection by Landlord's lender this Lease shall be deemed null and
void, Tenant shall have no right to terminate this Lease on account of this
Paragraph.
42. TENANT ESTOPPEL CERTIFICATE:
From time to time during the term of this Lease Tenant agrees to
submit to Landlord and/or to any Mortgagee, within ten (10) business days
following written demand therefor, a certificate substantially in the form
attached hereto as Exhibit E. The failure of Tenant to execute, acknowledge, and
deliver to Landlord and/or any Mortgagee a statement in accordance with the
provisions of this Paragraph 42 within the period set forth herein shall
constitute an acknowledgment by Tenant that may be relied upon by any person
holding or intending to acquire any interest whatsoever in the Premises or the
Improvements, that this Lease has not been assigned, amended, changed, or
modified, is in full force and effect, and that the rent has been duly and fully
paid not beyond the respective due dates immediately preceding the date of the
request for such statement. Such failure shall also constitute as to any persons
entitled to rely on such statements a waiver of any defaults by Landlord or
defenses, set-offs, recoupments, or counterclaims against the enforcement of
this Lease by Landlord that may exist prior to the date of the written request
and of such other matters as recited in such statement.
43. CONDITION OF TITLE AND PREMISES:
Tenant agrees that the Premises and the Improvements, the title
thereto, all encumbrances thereon, the zoning thereof, the street or streets,
sidewalks, parking areas, curbs and access ways adjoining them, any surface or
subsurface conditions thereof, the presence of any Hazardous Material therein or
thereon, and the permitted usage and restrictions on the uses thereof, have been
examined by, and/or are known to Tenant, and the Tenant accepts the Premises and
the balance of the same without representation, warranty or covenant, express or
implied, in fact or in law, except to the extent otherwise expressly set forth
in this Lease. Landlord represents that as of April 13, 1999, the zoning
designation of the Premises was M-2.
44. MISCELLANEOUS:
The captions and headings throughout this Lease are for
convenience and reference only, and the words contained therein shall in no way
be held or deemed to define, limit, describe, explain, modify, amplify or add to
the interpretation, construction or meaning of any provision of or the scope or
intent of this Lease nor in any way affect this Lease. Time is of the essence in
all provisions of this Lease. This Lease contains the entire agreement between
the parties and all agreements relating to this Lease and the Premises have been
integrated herein. This Lease cannot be changed or modified except by a written
instrument signed by the parties hereto. If any term, clause or provision of
this Lease is declared invalid by a court of competent jurisdiction, the
validity of the remainder of this Lease shall not be affected thereby but shall
remain in fill force and effect. This Lease shall be governed by, construed
under and enforced under the laws of the State of Maryland. Except as
hereinabove expressly otherwise provided, this Lease shall bind and inure to the
benefit of Landlord and Tenant and their respective personal representatives,
heirs, successors and assigns. Reference in this Lease to the term "person"
shall include a corporation, partnership, limited liability company, trust,
governmental body and other legal entity. Whenever Tenant is required by this
Lease to defend or indemnify
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Landlord, Tenant shall also be required to defend and indemnify each principal,
partner or member of Landlord and Landlord's management company. This Lease may
be executed in two (2) or more counterparts, each of which shall be deemed an
original, but all of which, taken together, shall constitute one (1) and the
same instrument. Transmission by facsimile of an executed counterpart copy of
this Lease shall be deemed to be effective delivery of such counterpart copy for
all purposes.
45. NON-WAIVER OF FUTURE ENFORCEMENT:
It is agreed that the failure of any party to insist in any one
or more instances upon a strict performance of any covenant of this Lease or to
exercise any right herein contained shall not be construed as a waiver or
relinquishment for the fixture of such covenant or right, but the same shall
remain in fill force and effect, unless the contrary is expressed in writing by
such party.
46. RIGHTS OF AND CLAIMS AGAINST LANDLORD:
A. Landlord may transfer all or part of its interest in the
Premises and this Lease without the consent of Tenant, at any time and from time
to time. If Landlord transfers its estate in the Premises, or if Landlord
further leases the Premises subject to this Lease, then Landlord shall be
relieved of all obligations of "Landlord" thereafter arising expressed in this
Lease or implied by law. Landlord and its successors shall be relieved of their
obligation to refund the security deposit and other similar finds to Tenant that
they have received from Tenant or a predecessor Landlord to the extent they
transfer such amounts to their respective transferees.
B. If Tenant obtains a money judgment against Landlord or its
successors or assigns under any provisions of, or with respect to this Lease or
on account of any matter, condition, or circumstance arising out of the
relationship of the parties under this Lease, Tenant's occupancy of the
Premises, or Landlord's ownership of the Premises, Tenant shall be entitled to
have execution upon such judgment only upon Landlord's estate in the
Improvements and not out of any other assets of Landlord, any of its
shareholders, members or partners, or its or their successors or assigns; and
Landlord shall be entitled to have any such judgment so qualified as to
constitute a lien only on Landlord's estate.
47. RULES AND REGULATIONS:
Landlord reserves the right, from time to time, to adopt and
promulgate reasonable rules and regulations applicable to the Premises and
Tenant agrees to be bound thereby. Notices of such rules and regulations shall
be given to Tenant, and Tenant agrees thereupon to comply with and observe all
such rules and regulations, so long as the rule or regulation in question is
enforced to substantially the same extent with respect to all other tenants of
the Improvements. A breach of any of such rules and regulations shall be deemed
a breach of this Lease, if not cured within the period specified in Paragraph 21
of this Lease.
48. WAIVER OF TRIAL BY JURY:
Landlord and Tenant hereby knowingly and voluntarily waive trial
by jury in any action or proceeding or counterclaim brought by either party
hereto against the other party on
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any and every matter, directly or indirectly, arising out of or with respect to
this Lease or the Premises.
49. RIDERS:
Attached hereto and incorporated into this Lease are Riders
numbered 1 through 3.
AS WITNESS the hands and seals of the parties hereto the date
first above written.
CHIPPEWA LIMITED PARTNERSHIP
ATTEST/WITNESS: Landlord
By: Emory Holdings II Limited
Partnership, its General Partner
/s/ [Illegible] By: /s/ R. Clayton Emory (SEAL)
----------------------------- ------------------------------
R. Clayton Emory, General Partner
EARTHSHELL CORPORATION
Tenant
/s/ William F. Spengler By: /s/ Michael M. Hagerty (SEAL)
----------------------------- ------------------------------
Michael M. Hagerty
Name: Michael M. Hagerty
Title: VP & CTO
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<PAGE>
RIDER #1 TO LEASE AGREEMENT
JUNCTION BUSINESS PARK
RULES AND REGULATIONS
1. SIGNAGE:
PERMANENT SIGNAGE: Exterior signage in Junction Business Park shall be for
identification only and may not be treated as an advertising device. Signage
text is limited to company name and/or logo. All signs must be submitted to
Landlord for approval (which shall not be unreasonably withheld) prior to
installation.
A. PERMITTED SIGN LOCATIONS
Single Tenant Building: Unless otherwise noted in site specific
criteria, each single tenant building will be permitted one free standing sign
at a point near the building entrance, and one building mounted sign.
Multi-Tenant Building: Unless otherwise noted in site specific
criteria, each multi-tenant building will have one free-standing sign with the
building or address only at a point near the building entrance, and a building
mounted tenant identification system.
B. PERMITTED SIGN TYPES
Free Standing Sign: Maximum size is limited to 24 square feet. Maximum
height is four feet above grade.
Sign shall be substantial and constructed of durable materials (wood signs will
not be allowed). Sign illumination, if desired, must be internal with
translucent letters and an opaque background. Sign must be mounted on a
substantial base.
C. BUILDING MOUNTED SIGN
Sign location on building must be compatible with the architectural design of
the building. No signs may extend above the roof or parapet line of the
building. Building mounted signs must be individual metal pinned-off letters.
Maximum letter size is 30". The scale of the building shall determine the
permitted letter size. The pinned-off letters shall have a return or depth in
proportion to their size (I.E., a 6" smaller letter shall have a minimum 1"
return, and maximum return, required will be 4" for the 30" letter.
Illumination, if desired, may be internal through a translucent letter face
or opaque letters projected lightly off the wall and back lit from a source
concealed within the letter.
D. PERMITTED SIGN COLORS
Color for signs shall be limited to one color for the background. Where an
additional color is necessary because it is a part of the firm's logo, this will
be considered.
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The background color MUST be darker than the message and graphics.
E. PROHIBITED SIGNS INCLUDE THE FOLLOWING:
1. No sign may be erected which does not have the written approval of Emory Hill
(which approval shall not be unreasonably withheld). No sign may be erected
without the necessary Howard County approvals. No flashing or moving signs will
be permitted. No exposed neon or other exposed light source will be permitted.
No signs using vacuum formed plastic letters will be permitted. No signs using
applied wood letters will be permitted. No permanent building identification
signs will be permitted where letters are painted in the sign face and do not
project.
2. No awnings, curtains, blinds, shades or screens shall be attached to or hung
in, or used in connection with any window or door of the Premises without the
prior consent of the Landlord (which consent shall not be unreasonably withheld)
and including approval by the Landlord (which approval shall not be unreasonably
withheld) of the quality, type, design, color and manner attached.
3. Tenant agrees that its use of electrical current shall never exceed the
capacity of existing feeders, risers or wiring installation. Any additional
electrical wiring shall be done by Landlord's electrician or supervised by such
electrician, and Tenant shall bear the expense of such additional materials and
installation.
4. The Tenant shall not do or permit to be done in or about the Premises or the
Improvements anything which shall increase the rate of insurance on the
Improvements or its property, or obstruct or interfere with the rights of other
tenants of Landlord, including but not limited to, using any musical instrument,
making loud or unseemly noises, or singing, etc., nor use the Premises for
sleeping, lodging, or cooking by any person at any time except with permission
of Landlord. Tenant will be permitted to use for its own employees within the
Premises a conventional coffee maker. No part of the Improvements or Premises
shall be used for gambling, immoral or other unlawful purposes. No intoxicating
beverage shall be sold or used in the Improvements or the Premises without prior
written consent of the Landlord. No area outside of the Premises shall be used
for storage purposes at any time.
5. No birds or animals of any kind shall be brought into the Improvements or
kept in or about the Premises.
6. The sidewalks, entrances, passages, corridors, halls, elevators, and
stairways in the Improvements shall not be obstructed by Tenant or used for any
purposes other than those for which same were intended as ingress and egress. No
windows, floors, or skylights that reflect or admit light into the Improvements
shall be covered or obstructed by Tenant. Toilets, wash basins, and sinks shall
not be used for any purpose other than those for which they were constructed,
and no sweeping, rubbish, or other obstructing substances shall be thrown
therein. Any damages resulting to them, or to heating apparatus, from misuse, by
Tenant or its employees, shall be borne by Tenant.
7. Only one key for each office in the Premises will be furnished Tenant without
charge. No additional lock, latch or bolt of any kind shall be placed upon any
door nor shall any changes be made in existing locks or mechanisms thereof
without written consent of Landlord. At the
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termination of this Lease, Tenant shall return to Landlord all keys furnished to
Tenant by Landlord, or otherwise procured by Tenant, and in the event of loss of
any keys so furnished, Tenant shall pay to Landlord the cost thereof.
8. Intentionally omitted.
9. Tenant shall not cause or permit any unusual or objectionable gases, liquids
or odors to be produced upon or permeate from the Improvements, and no
flammable, combustible or explosive fluid, chemical or substances except gas and
electricity for lighting the Premises shall be brought into the Improvements.
10. Intentionally omitted.
11. Intentionally omitted.
12. Except as otherwise expressly permitted by the Lease, no painting shall be
done, nor shall any alterations be made, to any part of the Improvements by
putting up or changing any partitions, doors or windows, nor shall there be any
nailing, boring or screwing into the woodwork or plastering, nor shall any
connection be made to the electric wires or gas or electric fixtures, without
the consent in writing on each occasion of Landlord (such consent not to be
unreasonably withheld). All glass, locks and trimmings in or upon the doors and
windows of the Improvements shall be kept whole and in good repair. Tenant shall
not injure, overload or deface the Improvements, the woodwork or the walls of
the Premises, nor carry upon the Premises any unreasonably noisy business.
13. Tenant and occupants shall observe and obey all parking and traffic
regulations as imposed by Landlord on the lot on which the Improvements are
located. Landlord in all cases retains the power to designate "no parking"
zones, traffic right-of-ways, and general parking area procedures.
14. Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the Improvements.
15. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular Tenant, but no such waiver by Landlord shall be
construed as a waiver of such Rules and Regulations in favor of any other
tenant, nor prevent Landlord from thereafter enforcing any such Rules and
Regulations against any or all of the tenants of the Improvements.
16. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify or amend, in whole or in part, the terms, covenants,
agreements and conditions of the Lease.
17. Landlord reserves the right to make such other reasonable Rules and
Regulations as in its judgment may from time to time be needed for the safety,
care and cleanliness of the Improvements, and for the preservation of good order
therein.
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ATTEST/WITNESS: CHIPPEWA LIMITED PARTNERSHIP
Landlord
By: Emory Holdings II Limited
Partnership, its General Partner
/s/ [Illegible] By:/s/ R. Clayton Emory (SEAL)
- ------------------------------ ----------------------------------
R. Clayton Emory, General Partner
EARTHSHELL CORPORATION
Tenant
/s/ William F. Spengler By:/s/ Michael M. Hagerty (SEAL)
--------------------------- ----------------------------------
Michael M. Hagerty
Name: Michael M. Hagerty
Title: VP & CTO
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(Market)
RIDER #2 TO LEASE AGREEMENT
OPTION TO RENEW
THIS RIDER is attached to and forms apart of a certain Lease dated July
2nd, 1999 between CHIPPEWA LIMITED PARTNERSHIP, a Maryland limited partnership
(hereinafter called "Landlord"), and EARTHSHELL CORPORATION, a Delaware
corporation (hereinafter called "Tenant").
Tenant shall have the Option to Renew the Lease for one (1) additional
five (5) year term upon giving written notice of intention to renew to Landlord
not less than one hundred eighty (180) days prior to the expiration of the
initial term of the Lease. In order to be effective, any such written notice
must advise Landlord of Landlord's obligation, described in below in this Rider,
to make an initial determination of the "Market Rate" for the renewal term. All
terms and conditions of the Lease shall remain in full force and effect during
the renewal term, except that there shall be no further rights of renewal and
the Basic Rental for the renewal term shall be ninety percent (90%) of the
"Market Rate," as defined below, effective the first day of the renewal term.
The following procedure shall be used to determine the Market Rate, for
the renewal term. Not less than one hundred fifty (150) days prior to the
commencement of the renewal term, Landlord shall send to Tenant a written notice
specifying its determination of the Market Rate. Within twenty (20) days after
receipt of such notice from Landlord, Tenant shall send Landlord a written
notice of Tenant's acceptance or challenge of Landlord's determination of such
Market Rate; provided, however, that in the event that Tenant fails to respond
within such twenty (20) day period, Tenant shall be deemed to have accepted
Landlord's determination of the Market Rate.
In the event that Tenant challenges Landlord's determination of the
Market Rate and Landlord and Tenant are not able to agree on such Market Rate
within fifteen (15) days (hereinafter referred to as the "Negotiation Period")
after Landlord receives Tenant's initial rejection of Landlord's determination
of such Market Rate, then Landlord and Tenant shall each, within ten (10) days
after the expiration of the Negotiation Period, select an appraiser, each of
whom shall be an MAI-certified real estate appraiser with at least five (5)
years' experience in the Columbia, Maryland market who shall determine the
Market Rate in accordance with this paragraph. The appraisers shall be
instructed to complete the appraisal procedure independently and to submit their
written determinations to Landlord and Tenant within thirty (30) days after
their appointment.
In the event that the higher determination of the Market Rate submitted
by one of the appraisers is equal to or less than one hundred fifteen percent
(115%) of the determination of the Market Rate submitted by the other appraiser,
the Market Rate shall be the average of such determinations. If the
determination of the Market Rate submitted by one of the appraisers is greater
than one hundred fifteen percent (115%) of the determination of the Market Rate
submitted by the other appraiser, the appraisers shall, within five (5) days of
notice from either
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Landlord or Tenant, appoint a third appraiser with similar qualifications to
make a determination of the Market Rate. The third appraiser shall be instructed
to complete the appraisal procedure and to subnut a written determination of the
Market Rate to Landlord and Tenant within thirty (30) days after such
appraiser's appointment.
The determination which is neither the highest nor the lowest of the
three determinations shall be binding upon Landlord and Tenant as the Market
Rate unless two determinations are the same, in which event the Market Rate
shall be such amount. Landlord and Tenant shall each bear the costs of their
respective appraisers. The expenses of the third appraiser shall be borne
one-half (1/2) by Landlord and one-half (1/2) by Tenant. "Market Rate" shall
mean what a Landlord under no compulsion to lease the Premises and a Tenant
under no compulsion to lease the Premises would determine as the Basic Rental,
given the other provisions of the Lease which remain applicable to the parties.
Notwithstanding anything to the contrary contained in this Rider, in no event
shall the Basic Rental for the renewal term be less than the Basic Rental for
the last full year of the initial term of the Lease. In the event the Market
Rate has not been determined by the commencement of the renewal term, Tenant
shall pay Basic Rental equal to one hundred twenty percent (120%) of the Basic
Rental in effect during the last full year of the initial term of this Lease,
until the Market Rate is determined and promptly after such determination, the
parties shall make an appropriate adjustment to reconcile any overpayments or
under payments of Basic Rental made prior to the determination of the Market
Rate.
The Option to Renew granted to Tenant in this Lease is personal to
Tenant (or an affiliate of Tenant), and may not be exercised or be assigned by
or to any person or entity other than Tenant (or an affiliate of Tenant),
without the prior written consent of Landlord, which shall not be unreasonably
withheld. The Option to Renew does not extend to any subtenant.
At the Landlord's election, the foregoing Option to Renew may not be
exercised and will not be effective if, either at the time of the exercise or at
the time the renewal term is to commence, the Tenant is in default of any of its
obligations under the Lease, beyond any applicable grace or cure period.
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AS WITNESS the hands and seals of the parties hereto the date first
above written.
ATTEST/WITNESS: CHIPPEWA LIMITED PARTNERSHIP
Landlord
By: Emory Holdings II Limited
Partnership, its General Partner
/s/ [Illegible] By:/s/ R. Clayton Emory (SEAL)
- ------------------------------- --------------------------------
R. Clayton Emory, General Partner
EARTHSHELL CORPORATION
Tenant
/s/ William F. Spengler By:/s/ Michael M. Hagerty (SEAL)
- ------------------------------- ---------------------------------
Michael M. Hagerty
Name: Michael M. Hagerty
Title: VP & CTO
37
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RIDER #3 TO LEASE AGREEMENT
RIGHT OF REFUSAL
THIS RIDER is attached to and forms a part of a certain Lease dated
July 2nd, 1999 between CHIPPEWA LIMITED PARTNERSHIP, a Maryland limited
partnership (hereinafter called "Landlord"), and EARTHSHELL CORPORATION, a
Delaware corporation (hereinafter called "Tenant").
Landlord agrees that during the term of the Lease, Tenant, subject to
the provisions of this Rider, shall be offered the right of refusal to lease all
or any spa (herein the "Expansion Space") in the Improvements, as it may become
available from time to time. As used in this Rider "available" means that the
prior lease of such space has expired or otherwise terminated and the prior
occupant of such space has vacated and surrendered possession of such space and
Landlord has the right to lease such space to others. This right of refusal
shall be subject and subordinate to any currently existing rights to renew,
rights of refusal or expansion, or similar options or rights of persons or
entities that are tenants of some portion of the Improvements on the date of
this Lease, as well as to any extension of a lease, whether such lease is in
existence on the date hereof or is entered into after the date hereof. Subject
to the terms of the preceding sentence, at anytime prior to ten (10) days after
any portion of the Improvements becomes available, Landlord shall provide Tenant
with written notice of such availability, which notice shall include the date
when Tenant would begin occupancy of such Expansion Space. Tenant shall have ten
(10) days after Landlord's written notice to respond to such offer in writing
and either unconditionally accept or reject such Expansion Space. Tenant's
failure to respond timely in writing to such offer (or to accept such offer with
or subject to any condition) shall be construed as a rejection of Landlord's
offer. Tenant's rejection of any Expansion Space in any one instance shall
terminate Tenant's rights to be offered the same Expansion Space or any portion
thereof as it may become available again at some later date, it being agreed
that should Tenant reject an offer to lease any particular Expansion Space when
offered, Landlord shall have the right to lease all or any part of such
Expansion Space to other prospective tenants, without having to re-offer the
Expansion Space to the Tenant. If Tenant unconditionally accepts Landlord's
offer, such acceptance shall be binding upon Landlord and Tenant, provided,
however, at the request of either, Landlord and Tenant shall each execute an
amendment of this Lease to reflect the addition of the Expansion Space to the
Premises, in accordance with the terms of this Rider. Additionally, at the time
of Tenant's acceptance, Tenant shall request Landlord to advise Tenant of
Landlord's obligation, described below in this Rider, to make an initial
determination of the "Market Rent" for the Expansion Space.
In the event Tenant timely unconditionally accepts, in writing,
Landlord's offer to lease the Expansion Space. Then the following shall apply:
(i) Tenant may elect only to lease all of the Expansion
Space offered by Landlord and shall have no right to elect to lease less than
all of such Expansion Space.
(ii) Tenant's leasing of the Expansion Space shall
commence upon the date Landlord makes such Expansion Space available to Tenant.
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(iii) The Expansion Space shall be delivered in its then
"AS IS" condition and Tenant shall be deemed to have accepted the same in its
then "AS IS" condition, and Landlord shall have no obligation to make any
repair, refurbishing or improvement to the Expansion Space.
(iv) If Tenant does elect to lease the Expansion Space,
the Expansion Space shall become a part of the Premises for all purposes of the
Lease and subject to all of the terms and conditions of the Lease; the term of
the Lease, as it relates to the Expansion Space, shall expire on the same day
that the term of the Lease, as it relates to the balance of the Premises,
expires and the Expansion Space shall be considered a part of the Premises for
purposes of any renewal options available to Tenant; Tenant's proportionate
share, for purposes of the Lease (including, but not limited to, for purposes of
paragraphs 7, 8 and 9 of the Lease) shall be increased so that Tenant's
proportionate share shall consist of the ratio that the square footage of the
Premises (as increased by the addition of the Expansion Space) bears to the
square footage of the Improvements; and the Basic Rental for the Expansion Space
shall be the greater of (1) the then-current Basic Rental being paid by Tenant
for the balance of the Premises, on a per square foot basis (subject to increase
whenever the Basic Rental for the balance of the Premises increases), or (2) the
Market Rate for the Expansion Space. For purposes of this clause (2), "Market
Rate" means when a landlord under no compulsion to lease the Premises and a
tenant under no compulsion to lease the Premises, would determine as Basic
Rental, given the other provisions of this Lease that remain applicable to the
parties and after taking into account the specific variables that influence the
determination of a rental rate, including the base expenses set forth in this
Lease for real estate taxes, insurance premiums and common area maintenance
expenses, the level of interior leasehold improvements to be provided at
landlord's expense, and the commencement date of the Lease for the Expansion
Space. The Market Rental is to be determined in the manner described in Rider #2
above. For purposes of computing the Market Rate for the Expansion Space,
Landlord's initial written notice specifying its determination of the Market
Rate shall be sent to Tenant no later than fifteen (15) days after Tenant has
elected to lease the Expansion Space and requested, in writing, Landlord to
stipulate the Market Rate for the Expansion Space.
The Right of Refusal granted to Tenant in this Lease is personal to
Tenant (or an affiliate of Tenant), and may not be exercised or be assigned by
or to any person or entity other than Tenant (or an affiliate of Tenant),
without the prior written consent of Landlord, which shall not be unreasonably
withheld. The Right of Refusal does not extend to any subtenant and may only be
exercised by the same entity that leases the balance of the Premises.
At the Landlord's election, the foregoing Right of Refusal may not be
exercised and will not be effective if, either at the time of the exercise or at
the time the Expansion Space is to become a part of the Premises, the Tenant is
in default of any of its obligations under the Lease, beyond any applicable
grace or cure period.
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AS WITNESS the hands and seals of the parties hereto the date first
above written.
ATTEST/WITNESS: CHIPPEWA LIMITED PARTNERSHIP
Landlord
By: Emory Holdings II Limited
Partnership, its General Partner
/s/ [Illegible] By:/s/ R. Clayton Emory (SEAL)
- --------------------------------- ---------------------------------
R. Clayton Emory, General Partner
EARTHSHELL CORPORATION
Tenant
/s/ William F. Spengler By:/s/ Michael M. Hagerty (SEAL)
- --------------------------------- ---------------------------------
Michael M. Hagerty
Name: Michael M. Hagerty
Title: VP & CTO
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EXHIBIT "A"
BUILDING AND SITE PLAN
[GRAPHIC]
<TABLE>
<S> <C> <C> <C>
BUILDING SIZE ONE STORY, 97,000 SQ. FT. SPRINKLERS WET
UNIT SIZE UNITS FROM 4,753 TO OFFICE AREA TO SUIT
97,000 SQ. FT. (BAY SIZES
8,000 SQ. FT.)
LOT SIZE 6.3 ACRES ELECTRIC 1,600 AMPS, 4 WIRE, 3
PHASE BALTIMORE GAS &
ELECTRIC
CONSTRUCTION MASONRY AND STEEL PARKING 188 SPACES
TRUSS HEIGHT 20' CLEAR ZONING INDUSTRIAL
LIGHTING METAL HALIDE HEATING AND AIR GAS UNIT HEATERS AND
CONDITIONING ENERGY EFFICIENT HEAT
PUMPS
LOADING FACILITIES TAILGATE LOADING LEASE TERM 3/5 YEARS
WATER HOWARD COUNTY
SEWER HOWARD COUNTY
</TABLE>
9060 JUNCTION DRIVE
ANNAPOLIS JUNCITON, MD 20701
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EXHIBIT "B"
LEGAL DESCRIPTION
BEING all that certain parcel of real property located in the 6" Election
District of Howard County, State of :Maryland, and designated as Parcel "C-2" on
that certain subdivision plat entitled "The Junction Industrial Park Parcels B-2
and C-2 Resubdivision of section 1 Area 1 Sheet 1 of 1 ", dated December 27,
1985 and recorded among the Land Records of Howard County, Maryland, as Plat No.
6555, being also described by metes and bounds as follows:
BEGINNING for the same at an iron pipe on the northerly right of way line of
Junction (80'R/W) Drive, said point being the southwesterly corner of Parcel
"C-2" as shown on the aforedescribed subdivision plat, thence with the westerly
property line North 19 degrees 30 minutes 30 seconds East, 335.00 feet to an
iron pipe; thence South 70 degrees 29 minutes 40 seconds East, 820.12 feet to an
iron pipe; thence South 19 degrees 30 minutes 20 seconds West, 335.00 feet to an
iron pipe; said point being on the northerly right of way line of Junction (80'
R/W) Drive; thence with the said right of way line North 7 0 degrees 29 minutes
= 10 seconds West 820.12 feet to the point of beginning; containing 6.3071 acres
of land.
Together with the right to use in common with others entitles thereto a 30 foot
Common Drive Easement as more fully described in the Common Drive Easement by
and between Chippewa Limited Partnership and D & E Junction Limited Partnership,
dated November 22, 1988 and recorded among the Land Records of Howard County in
Liber 1919, folio 204.
BEING the same lot of ground described in a Deed, dated January 28, 1988 and
recorded among the Land Records of Howard County in Liber No. 1787, folio 718,
from Lucas Management Services Company, a General Partnership to Chippewa
Limited Partnership.
42
<PAGE>
EXHIBIT "C-1"
TENANT IMPROVEMENT SPECIFICATIONS
DRYWALL
* 926 LF Type B-9' standard interior partition-to underside of grid
* 294 LF Type D-Full Ht Office/Warehouse separation wall-Drywall &
insulated to 10 ft. on office side.
* 256 LF Type C-1 Perimeter condition (1/2" drywall on 1-5/8 metal
studs-insulated)
* 2-Column Boxes
* 26 Type A-1 Demising wall
* 120 SF Drywall ceiling at receiving office (in lieu of full Ht
walls)
* Infill-Demising wall as shown @ one place
* Patching where demolition occurs
* 294 LF Type E-14' office/warehouse separation wall-6" stud on top
of masonry
CEILINGS
* 2x4 Lay-in Type at 9 feet A.F.F. tile to be U.S.G. Omni
Fissured-White
* Grid - Standard non-rated white
CARPENTRY/MILLWORK
* 10 LF Wire Closet Rod & Shelf Unit
* 2-4x8 Fire rated plywood @ phone room
* Blocking and support for overhead doors and strip door
MASONRY
* 134 LF 12" CMU 10 FT high Dyrowall @ 16" O.C.V., #6 vertical
dowels @ corners filled solid
OVERHEAD DOORS/DOCK EQUIPMENT
* 2-10'x10' full vertical lift doors
* 1-10'x 10' strip curtain
DOORS AND HARDWARE
* 40 ea Standard 3'0"x6'8" Interior door, Birch veneer in hollow
metal frame, with lever latch set & wall stop
* 1 ea Standard 6'0"x6'8" Interior closet, pair door, Birch veneer
in hollow metal frame with lever latch set, flush bolts & wall
stop
* 3 ea Standard 3'0"x6'8" Office to Warehouse door, Birch veneer in
hollow metal frame with lever lock set, closer and wall stop
43
<PAGE>
* 1 ea Standard 3'0" x6'8" Lunch Room Door, Birch veneer in hollow
metal frame with push/pull set, closer and wall stop
* 3 ea Standard 6'0'x6'8" Office to Warehouse Pair door, Birch
veneer in hollow metal frame with lever lock set, closet flush
bolts and wall stop
* 2 ea Replace lockset on existing hollow metal doors with lever
lock set
* Existing Overhead doors to remain
PAINTING & WALLCOVERING
* All new walls to receive 2 coats Latex Flat Paint
* All existing walls in warehouse - EXCLUDED
* Lunch Room and Bath Room to be Semi-Gloss
* Door Frames 2 coats Alkyd Semi-Gloss
* Doors - 1 coat sanding sealer, 2 coats clear polyurethane
FLOORING
* Carpet 26 oz Nylon Level Loop with vinyl cove base throughout
except as noted below
* V.C.T. in lunch room, computer, storage, new bath room
* Existing floors to remain in warehouse, bath rooms, existing
rooms
* Patch V.C.T. where demo occurs
DEMOLITION
* 465 LF Partitions demolish and dispose of
* Strip, neutralize and prep VCT for carpet overlay at office area.
* 15 LF-Masonry
MINI-BLINDS
* Existing to Remain
CASEWORK/BUILT-INS
* 12 LF Upper and Lower Cabinets with counter (Merrilatt-Omni)
PLUMBING
* Add Kitchen sink, ADA bath room fixtures, and rough-in
* Cutting and patching of concrete
* 12 LF trench drain in mix room
* 1- side by side two compartment sink with cold water feed
44
<PAGE>
HVAC
* An allowance has been made for adding duct drops diffusers to
existing units #15 and #17 re-balancing and reworking existing
ducts, common central return systems or plenum return, pending
further evaluation
SPRINKLERS
* An allowance has been made for relocation or adding heads per
N.F.P.A. 13 and pending ceiling layout by the architect and
review by Fire Marshall
ROOFING
* 1 vent through roof for plumbing stack
ELECTRICAL/LIGHTING
* 88 ea 120 volt duplex receptacles for general use
* 4 ea dedicated 120v 20amp circuits
* 2 ea dedicated circuit with three duplexes
* 37 light switches
* 4 pairs three way switches
* 2-four way switches
* 109 building standard 2x4 fluorescent light fixtures
* 35 rings and strings for telephone
* 8 exit lights
* 10 emergency lights
* demolition as required
* remove existing cord drops and blankoff junction boxes
* Existing warehouse lighting to Remain, Relocate as necessary
* Demolish 51-Two light fixtures over office
* Other than lighting, no electrical work is to be provided in mix
& dry room
FIRE EQUIPMENT
* 7 Five pound ABC wall hung extinguishers for office ara
* 2 Ten pound ABC wall hung extinguishers for mix & dry rooms
SPLIT GAS SERVICE
* Reconnect gas piping for new meter
UPGRADE ELECTRICAL SERVICE
* Eightway duct bank to transformer pad
* 2000 amp 480 volt 3 phase control cabinet
* 2000 amp 277/480 volt 3 phase 4 wire bolted pressure switch
* 2000 amp 277/480 volt 4 wire main distribution panel
45
<PAGE>
* Install 800 amp feeder from new service equipment to existing
HV-1 Panel
* One new 75 KVA transformer
* Two new 400 amp 3 phase 4 wire 277/480 volt MLO 42 circuit panels
* Two new 200 amp 3 phase 4 wire 120/208 volt 42 circuit panels
* Ground service per N.E.C. Code
* Asphalt cutting, trenching, backfill and compaction included
* POWER COMPANY CHARGES ARE EXCLUDED
GENERAL CONDITIONS & MISC. ITEMS
Permits, supervision, daily clean-up, final construction cleaning of
office prior to tenant move in, broom sweep warehouse area, removal of debris,
landfill fees, scheduling and project management.
JOB CONDITIONS
Costs are based on the following conditions: Normal working hours,
nonunion labor, use of electric, water, bathroom, H.V.A.C. at no charge to
Landlord's Contractor or its subcontractors
EXCLUDED
Premium time, telephone systems, alarm systems, painting of existing
walls, mini-blinds, removal of items left by previous tenant, repair to dock
equipment doors, liquidated damages or penalties due to delays caused by
government agencies, availability of materials, war, strikes, weather, acts of
God or other causes beyond the control of Landlord's contractor. Additional work
required by County, or other governing agencies, items not specifically included
above.
46
<PAGE>
EXHIBIT "D"
The following work will be required in accordance with the maintenance
contract required in the attached Lease under the Paragraph entitled "Repairs
and Maintenance".
1. Check performance of all major components.
2. Lubricate moving parts as required.
3. Check refrigerant charges (during cooling season).
4. Inspect for oil and refrigerant leaks.
5. Check operating and safety controls.
6. Check pressures and temperatures.
7. Inspect condensers.
8. Inspect fans, motors and starters.
9. Tighten electrical connections at equipment.
10. Test amperages and voltages.
11. Check belts and drives.
12. Change oil and filters, or dryers, as required (at least four times
per year).
13. Check temperature on control system.
14. Thoroughly inspect heat exchanger.
47
<PAGE>
EXHIBIT "E"
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
This Subordination, Non-disturbance and Attornment ("Agreement") is
made as of the ____ day of ______________, ____, between _______________________
("Tenant") and _______________________________ ("Lender").
Recitals:
A. Lender is the owner and holder or will be the owner and holder of a
mortgage, deed of trust or similar instrument (collectively, as the same may
from time to time be extended, amended, restated, supplemented or otherwise
modified, a "Mortgage") recorded or to be recorded among the appropriate Land
Records, encumbering property (the "Property") more particularly described
therein (the mortgage and all increases, renewals, recastings, modifications,
consolidations, participation, replacements and/or extensions thereof are
hereinafter collectively called the "Mortgage").
B. The owner of the Property, ______________________, a Maryland
limited partnership ("Landlord"), and Tenant entered into a lease dated as of
_________, ____, covering Premises of approximately ________ rentable square
feet (the "Premises") within the Property.
C. The Lease is subject and subordinate to the lien, operation and
effect of the Mortgage, and Tenant wishes to obtain from Lender assurances that
Tenant's possession of the Premises will not be disturbed in certain
circumstances, and Lender is willing to provide such assurances to Tenant, upon
and subject to the terms and conditions of this Agreement.
NOW, THEREFORE, for $10.00 and other valuable consideration exchanged
between Lender and Tenant, the receipt and sufficiency of such consideration
being hereby acknowledged, Lender and Tenant agree as follows:
1. Subordination. The Lease is and will remain subject and subordinate
in all respects to the lien, operation and effect Mortgage and all voluntary and
involuntary advances made thereunder, in accordance with the terms and
conditions hereof.
2. Non-Disturbance Agreement. As long as Tenant is not in default
beyond any applicable grace period in the payment of rent, additional rent or
other charges or in the performance of any of the terms or conditions of the
Lease, Tenant's rights under the Lease and its possession of the Premises will
not be interfered with or disturbed by Lender during the term of the Lease
(including any renewal or extension term) following acquisition of title to the
Property (a) by Lender or the purchaser at a foreclosure sale pursuant to any
action or proceeding to foreclose the Mortgage, or (b) by Lender pursuant to
acceptance of a deed in lieu of foreclosure (in either case, a "Transfer of
Ownership").
3. Attornment Agreement. If a Transfer of Ownership occurs, Lender and
Tenant will, unless Lender elects otherwise in writing, be bound to each other,
as landlord and tenant, respectively, under all of the terms and conditions of
the Lease for the balance of the term
48
<PAGE>
thereof (including any renewal or extension term), and Tenant hereby attorns to
Lender as its landlord, such attornment to be effective and self-operative,
without the execution of any other instruments on the part of either party
hereto, immediately upon a Transfer of Ownership. As used in this paragraph and
in the subsequent provisions hereof, whenever the context allows the term
"Lender" will also include a purchaser of the Property at a foreclosure sale.
4. Lender's Liability. Notwithstanding any other provision of this
Agreement, Lender will not in any way be: (a) liable for acts or omissions of
any prior landlord (including Landlord); (b) subject to any offsets or defenses
that Tenant might have had against any prior landlord (including Landlord); (c)
bound by any rent, additional rent or other charges that Tenant might have paid
for more than 30 days in advance to any prior landlord (including Landlord); (d)
bound by any amendment or modification of the Lease made without Lender's prior
written consent; (e) responsible for any money or other security delivered to
Landlord pursuant to the Lease but not subsequently received by Lender; or (f)
obligated to pay Tenant any construction allowance or other payment referred to
in the Lease, all such payment obligations being personal to Landlord.
5. Condemnation Awards and Insurance Proceeds. Without limiting any
other provision of this Agreement, until a Transfer of Ownership occurs the
provisions of the Mortgage regarding Lender's rights in and to insurance
proceeds and awards or other compensation made for the taking by eminent domain
(or conveyance in lieu thereof) will be superior to, and will govern and control
over, any contrary provision of the Lease. Notwithstanding anything contained in
the Lease that may require Landlord to repair or restore damage to the Premises
caused by fire or other casualty or by exercise of eminent domain, if a Transfer
of Ownership occurs Lender will have no obligation for such repair or
restoration.
6. No Lease Modification or Claims. Tenant hereby confirms that the
Lease has not been modified or amended and is in full force and effect without
any claims or default, offset or deduction by Tenant.
7. Recognition of Mortgage and Collateral Assignment. To the extent
that the Lease entitles Tenant to notice of any mortgage affecting the Premises,
this Agreement constitutes such notice with respect to the Mortgage, and Tenant
also acknowledges Landlord's collateral assignment of the Lease to Lender.
8. Lender's Right to Cure Default. Notwithstanding any provision of the
Lease, no notice by Tenant to Landlord of any breach or default by Landlord
under the Lease will be effective unless and until (a) a copy of the notice is
received by Lender, and (b) a reasonable period of time has elapsed following
Lender's receipt of such copy, during which period Lender will have the right,
but will not be obligated, to cure the breach or default.
9. Notices. To be effective, any notice or other communication given
pursuant to this Agreement must be in writing and sent postpaid by United States
certified mail with return receipt requested. Rejection or other refusal to
accept, or inability to deliver because of changed address of which no notice
has been given, will constitute receipt of the notice or other communication.
For purposes hereof, Lender's address is:
49
<PAGE>
_______________________________________
_______________________________________
_______________________________________
Attn:_______________________________________
and Tenant's address is
_______________________________________
_______________________________________
_______________________________________
Attn:_______________________________________
At any time(s), each party may change its address for the purposes hereof by
giving the other party a change of address notice in the manner stated above.
10. Entire Agreement, Etc. This Agreement (a) is to be construed and
enforced in accordance with the laws of the State of Maryland, (b) contains the
entire understanding of Lender and Tenant regarding matters dealt with herein
(any prior written or oral agreements between them as to such matters being
superseded hereby), (c) can be modified or waived in whole or in part only by a
written instrument signed on behalf of the party against whom enforcement of the
modification or waiver is sought, and (d) will bind and inure to the benefit of
the parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, this Agreement has been duly signed as of the date
first above written.
(The foregoing shall be signed, witnessed, and notarized on behalf of
Lender and Tenant.)
50
<PAGE>
EXHIBIT "F"
TENANT ESTOPPEL CERTIFICATE
Landlord:_____________________________________________________
Tenant:_______________________________________________________
Identification of Leased Premises:
Approximately _______ square feet within a warehouse and office
building on land known as____________________________________, as more fully set
forth in the Lease.
Date of Original Lease:_______________________________________
Date(s) of any amendments:____________________________________
The undersigned, Tenant named above of the Premises identified above
(the "Premises") to induce _____________________________________ (the "Lender")
to make a loan to Landlord or to induce _______________________________________
(the "Buyer") to purchase the property in which the Premises is located from
Landlord hereby certifies, represents, warrants and agrees with and to Lender
and/or the Buyer the following:
1. The undersigned has accepted and is in possession of and occupies
the Premises under the Lease, which is in full force and effect. The initial
term of the Lease commenced on _______________, __ and expires on __________,
____. [Or if applicable, the current renewal term commenced on ___________,
_____ and expires on _____________, _____.]
2. There have been no modifications or changes in the Lease, except by
those amendments listed above. A true, complete and correct copy of the Lease,
with all amendments, is attached hereto as EXHIBIT A.
3. The undersigned is paying the full Basic Rental, which as of the
monthly rental payment due on _____________, _____ is $_____________ per month,
and is also paying its proportionate share (____%) of taxes and other expenses.
Tenant has paid to Landlord a security deposit of $_____________.
4. No rent or other sum payable under the Lease has been paid for more
than thirty (30) days in advance of its due date.
5. To the best of Tenant's knowledge, information and belief, Landlord
is not in default under the Lease and the undersigned has no defense, set-off or
counterclaim against Landlord under the Lease or otherwise.
6. The undersigned has not assigned, mortgaged or encumbered Tenant's
interest under the Lease or sublet all or any portion of the Premises.
51
<PAGE>
7. Neither the undersigned nor any of its principals or affiliates is
the subject of any bankruptcy or insolvency proceeding and neither the
undersigned nor any of its principals or affiliates is insolvent or
contemplating the filing of any bankruptcy or insolvency proceeding.
8. To the best of Tenant's knowledge, information and belief, all
conditions and agreements under the Lease to be satisfied or performed by
Landlord have been satisfied and performed (including, without limitation, any
Tenant Improvements or other construction or work to be performed by Landlord).
9. Tenant acknowledges receipt of notice that all of Landlord's
interest in the Lease has been or is being assigned to Lender as further
security for one or more loans to Landlord and/or that the Premises and the
improvements of which they are a part have been or are being sold to Buyer.
10. These agreements, representations, warranties and certifications
shall bind the undersigned, its personal representatives, heirs, successors and
assigns and the undersigned shall deliver a copy hereof to any assignee of its
interest in the Lease. The Lender and/or the Buyer and its or their respective
personal representatives, heirs, successors and assigns may rely upon all of the
foregoing agreements, representations, warranties and certifications.
IN WITNESS WHEREOF, the undersigned has caused this Estoppel
Certificate to be duly executed this ____ day of ________________, ____.
WITNESS/ATTEST: __________________________________
______________________________ By:_______________________________(SEAL)
Name:
Title:
52
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS AMENDED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENT OF OPERATION FOUND ON F3 AND F4 OF THE COMPANY'S 10K
FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,912,553
<SECURITIES> 8,970,638
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,397,853
<PP&E> 52,834,131
<DEPRECIATION> 5,478,749
<TOTAL-ASSETS> 87,198,553
<CURRENT-LIABILITIES> 6,512,327
<BONDS> 0
0
0
<COMMON> 1,000,451
<OTHER-SE> 79,685,775
<TOTAL-LIABILITY-AND-EQUITY> 80,686,226
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 47,631,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (44,182,972)
<INCOME-TAX> 5,471
<INCOME-CONTINUING> (44,188,443)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,188,443)
<EPS-BASIC> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
