<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____ to ____
Commission File Number : 0-28444
EPL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0990658
(State of incorporation) (I.R.S. Employer Identification Number)
2 INTERNATIONAL PLAZA, SUITE 245
PHILADELPHIA, PA
19113-1507
(address of principal executive offices)
<TABLE>
<S> <C>
Registrant's telephone number, including area code: (610) 521-4400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.001 par value
</TABLE>
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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of February 28, 1997 was approximately $52,138,707. This excludes
6,066,435 shares of common stock held by directors, officers and stockholders
whose ownership exceeds five percent of the shares outstanding at February 28,
1997.
The number of shares outstanding of the Registrant's Common Stock, as of
February 28, 1997 was: 15,546,200 Shares
<PAGE> 2
EPL TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1. PART I
PAGE
<S> <C> <C>
1. ITEM 1. BUSINESS 2
2. ITEM 2. PROPERTIES 7
3. ITEM 3. LEGAL PROCEEDINGS 7
4. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
5. ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS 8
6. ITEM 6. SELECTED FINANCIAL DATA 10
7. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
8. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
9. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 35
10. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 35
11. ITEM 11. EXECUTIVE COMPENSATION 37
12. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 40
13. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 43
14. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 44
15. SIGNATURES
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT
EPL Technologies, Inc. and its subsidiaries (the "Company") are
principally engaged in the development, manufacture and marketing of
proprietary processing aids, packaging technologies and related
scientific services that facilitate the maintenance of the quality and
integrity of fresh produce.
The Company targets its current and expected future operations to develop
an international sales, marketing, distribution and scientific services
network for fresh produce processing and packaging technologies.
Toward that goal the Company began in 1994 to seek strategic acquisitions,
which would add incremental resources and capabilities towards a systems
approach in the fresh produce industry that would complement its
internally developed proprietary processing aid technology base. On
September 30, 1994, the Company acquired Respire Films, Inc. ("Respire")
a U.S.-based business involved in the marketing of packaging films that
are contract-manufactured under the Respire name. The Company believes
that this acquisition provided synergy to the Company's processing aid
business in the fresh cut produce market and since its acquisition has
represented a growing source of revenues.
On September 19, 1995, the Company acquired Bakery Packaging Services
Limited ("BPS"), based in northwest England. BPS has developed a
proprietary perforating technology for packaging materials which are
used by leading companies in the fresh-cut produce and institutional
bakery industries. BPS also produces, in substantially smaller volumes,
wax-coated packaging used principally in the confectionery industry. The
Company believes that the acquisition of BPS provides an additional
proprietary technology to enhance the company's strategic position,
together with providing an incremental source of packaging revenue and an
opportunity for additional cross-marketing activities between the US and
UK markets. The latter has been demonstrated by the installation in the
U.S. of the Company's proprietary gas flame equipment (see below) and the
servicing of US customers.
On April 19, 1996, the Company acquired the tangible and intangible
assets of Pure Produce, a Massachusetts general partnership, through a
wholly-owned subsidiary, Pure Produce, Inc., a Massachusetts corporation.
Pure Produce is in the business of providing companies in the food
industry, especially those involved with fresh and minimally processed
produce, with analysis, protocols and plans relating to food and quality
assurance programs, including microbial testing. The Company believes
that this acquisition extends the range of technical support services it
can offer as part of its systems approach, as well as raising the overall
scientific content of the Company in its relationship with the fresh-cut
produce and food services industry.
In July 1996, the Company acquired, through a wholly owned UK subsidiary
(EPL Flexible Packaging Limited ("EPL Flexible")), some of the fixed
assets located at Gainsborough, Lincolnshire, England, of a division of
Printpack Europe (St. Helens) Limited. This company specializes in the
printing of flexible packaging films serving primarily the snack food
industry. The Company believes that this acquisition broadens the range
of printed packaging materials it can offer its customers, as well as
increasing productive capacity. Since this acquisition, the printing
press previously located at BPS has been relocated to EPL Flexible. The
Company believes that this will lead to economies of scale by
concentrating printing at one location, as well as freeing up productive
space at BPS's Runcorn, England location to accomodate higher margin
perforation activities.
-2-
<PAGE> 4
In addition, also in July 1996, the Company formed Newcorn Co. L.L.C., a
jointly owned limited liability company in which the Company owns a 51%
membership interest. The other member of Newcorn Co. is Underwood Ranches,
the trade name of Agricultural Innovation and Trade, Inc. Newcorn Co.
utilizes the Company's proprietary processing aid and packaging
technologies and Underwood's existing corn processing and distribution
capabilities with the aim of developing a year-round, national,
value-added market for fresh corn products.
Also in July 1996, the Company acquired through a wholly-owned US
subsidiary, Crystal Specialty Films, Inc., the assets and assumed some of
the liabilities of Crystal Plastics, Inc., based in Illinois. Crystal
uses "K" resin and polystyrene resins to manufacture a range of
proprietary films for a variety of applications. Crystal serves as the
site for the proprietary gas flame perforation equipment which the
Company had custom-built in the UK, shipped and installed at Crystal and
which is planned to be the basis for penetration of the US film
perforation market. This is based on the initial contract the Company has
with E.I. duPont de Nemours and Company ("DuPont") for the perforation of
DuPont's Mylar Film (the "DuPont Agreement"). DuPont is shipping film to
the Crystal location, where it is being perforated according to required
specifications and then shipped either back to DuPont or to DuPont
customers.
PRODUCTS
The Company's products fall into two major classifications: processing
aids and related technical support services and packaging materials. The
Company's food processing aid products, using ingredients that are
included in the Food and Drug Administration (FDA) list as generally
recognized as safe ("GRAS") help to maintain the quality and integrity of
fresh-cut fruits and vegetables. See "Business - Regulatory Requirements."
Products have been developed for apples, artichokes, broccoli florets,
carrots, baby leaf lettuce, mushrooms, onions, parsnips, potatoes and
sweet corn. These are currently being marketed to processors of fresh cut
fruits and vegetables. The Company has also developed products for use on
organically grown carrots and baby leaf lettuce. Work is continuing on
products for application on other vegetables, such as celery, radicchio,
peppers and spinach. All fruits or vegetables processed with the
Company's developed applications technology, using strict protocols
included in such technology, are dipped into a water bath containing the
specified concentration of the Company's products for the specified time,
after which the produce undergoes a thorough washing intended to ensure
that there is little residue of the EPL product. The Company's
complementary packaging technologies incorporate technologies that help
to control temperature, gas and humidity. The Company believes that a
proper packaging process can be designed to enhance the effectiveness of
processing aids as part of an integrated processing system (which
includes technical services support), and is continuing to commit
resources to further develop this system.
INDUSTRY AND GEOGRAPHIC AREA SEGMENTS
Of the Company's two primary product lines, processing aids are sold
primarily in the United States with smaller amounts also sold in Canada,
while packaging materials are marketed in North America, the United
Kingdom and, to a lesser extent, Continental Europe. Since the
acquisition of BPS in late 1995 there has been an increase in marketing
activity, both in the Company's processing aid and applications
technology in Europe. In addition, proprietary perforating technologies
developed by BPS have been introduced into the US market.
MARKETS
Fresh fruits and vegetables begin to deteriorate after harvest. In
response, processing aids have long been used to increase shelf life and,
consequently, the economic value of fresh produce. Bisulfates, previously
the most common of such aids, have been the subject of some debate in
recent years. The Company's processing aid product-line was originally
developed in response to the market need to eliminate the use of
bisulfates in the pursuit of extending freshness for vegetables. Use of
the Company's products enabled food processors to address product quality
concerns, without requiring the use of any governmentally mandated labels.
Markets for the Company's food processing products
-3-
<PAGE> 5
include the processing of fresh vegetables for both the retail and food
service markets. By improving the maintenance of produce integrity (and
thus increasing the economic value) of fresh produce, the Company's
products have the potential to open up a national market for processors
previously limited to regional activities. Respire's packaging products
are used exclusively in the fresh-cut produce industry in the U.S. BPS's
products are used by leading companies in the U.K. and Europe, mainly
involved in the fresh cut produce and institutional bakery industries.
Pure Produce provides companies in the food industry especially those
involved with fresh and minimally processed produce, with analysis,
protocols and plans relating to food and quality assurance programs,
including microbial testing, and provides additional internal technical
support in developing the Company's processing aid and packaging
protocols. EPL Flexible specializes in the printing of flexible packaging
films serving primarily the snack food industry. Crystal manufactures a
range of proprietary films for various applications. The Company's
products are increasingly being marketed in concert as part of a
co-ordinated line of products, processes and technical support services
as a system for maintaining fresh produce integrity. To date, the
Company's penetration of the various markets it is seeking to develop is
insignificant.
SOURCES OF SUPPLY
The Company purchases its U.S. raw material requirements from a number of
suppliers, some of which use sources outside the U.S. BPS and EPL
Flexible purchase their requirements from a number of suppliers, most of
which are based in the U.K. and Europe. The Company currently obtains all
of its requirements for certain raw materials pursuant to a long-term
contract with Jungbunzlauer, Inc., a U.S. subsidiary of a Swiss-based
company, and is also one of the Company's stockholders. See "Certain
Relationships and Related Transactions." These raw materials transactions
are undertaken on an ongoing commercial arms-length basis.
COMPETITION
Since the FDA originally banned the use of sulfites on freshly processed
fruits and vegetables (a ban that was subsequently overturned), other
"sulfite substitutes" have appeared in the marketplace. The Company faces
competition from these products as well as alternative preservation and
packaging technologies in the marketplace such as packaging, temperature,
gas and humidity control. The Company believes that these complementary
technologies operate synergistically with the Company's products and
services and that the Company's products combined with, for example,
appropriate modified atmosphere packaging, are capable of maintaining the
integrity of fresh cut produce by a time period in excess of that which
either technology can achieve alone. The Company faces competition in
each of its markets from numerous enterprises, many of which are larger
and currently have greater resources than the Company. The Company
believes that to succeed, its proprietary technologies must add value to
the business of its customers. In this respect, the Company believes that
its integrated systems approach to the sales and marketing of its related
technologies provide it with a competitive advantage.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
The Company currently has two U.S. patents, two U.S. patents pending, and
numerous others under review for application. The U.S. patent for the
Company's "Carrot Fresh"(TM) product was granted on September 13, 1994,
and its "Broccoli Fresh"(TM) product was granted patent pending status in
the U.S. on January 17, 1995. Patents that had been granted, or
applications that were pending as of June 8, 1995 run for the longer of
17 years from the date of formal grant or 20 years from the date of
filing. For all subsequent filings, U.S. patents (once granted) run for
20 years from the date of formal application. The Company also has
various registered U.S. trademarks. Furthermore, it has one non-U.S.
patent, patents pending in
-4-
<PAGE> 6
26 countries outside the U.S. for its main technology, with others under
review. To help protect the Company's technology and proprietary
information, the Company has confidentiality agreements with its
customers, as well as internal non-disclosure agreements and safeguards
although there can be no assurance that these safeguards, will be adequate
to fully protect the Company. The importance the Company attaches to its
patent position is reflected in the significant efforts made on research
and development (see Consolidated Financial Statements and the notes
thereto). In addition to its patent protection, the Company believes it
has a competitive advantage through its proprietary knowledge of the
applications for its technology.
SALES AND PRODUCT COMMERCIALIZATION PROCESS
The Company markets its products to processors of fresh vegetables and
fruits for both the retail and food service markets. Upon an
expression of interest from a potential customer, the Company through its
technical service representatives, initiates a detailed review and
testing process to customize the application of the Company's
technologies relating to that particular product to the potential
customer's production system. This testing process involves both
reproducing the Company's processing aids and designing tailored
packaging materials. The development of new product formulations can be a
time-consuming and expensive process. To increase the resources and
expertise available to the Company for development, it has entered into a
number of collaborative ventures with well-known scientific and
commercial institutions. These include the Washington Apple Commission
for several varieties of apples, Rutgers University for residue analysis
Penn State University for mushrooms and the Ben Franklin Foundation. The
Company also has a CRADA (Cooperative Research and Development Agreement)
with the USDA/ARS (United States Department of Agriculture/Agricultural
Research Services) in Philadelphia, Pennsylvania. Once the development
is completed, then the product moves through successive steps of an
increasingly sophisticated testing program, leading to a product
decision. Testing is a complex undertaking within which the Company has
had to build documentation in order to perform successfully and with
consistency. The problems uncovered in the testing process have been
documented in detailed Company protocols to better control the process
outcome and begin to shorten the marketing/sales time frames, with a
resulting positive effect on the sales cycle. However, if the Company is
unable to control the testing process satisfactorily, such lack of
control of the time and resources so required could have an adverse
effect on the Company's revenues. Due to the extended nature of this
development, testing and sales process for processing aids, the Company
has experienced no significant backlog of orders to date in this area
and, based on the relatively small incremental cost and time frame
required to increase product output, the Company does not believe that
any backlog measurement is material. The Company has also not experienced
a significant backlog of orders for its packaging materials. The
Company's market development activities continue to increase. The main
areas of activity include potatoes and apples, where the Company is in
volume market test in retail, food and food service outlets.
REGULATORY REQUIREMENTS
All of the ingredients used in the production of the Company's processing
aid products are detailed on the FDA GRAS (generally recognized as safe)
list. In addition, the Company employs a firm of Washington-based FDA
consultants to advise the Company on existing product development,
together with any planned/potential changes in government attitude and
legislation. Compliance with existing FDA regulations has not been a
material burden on the Company's operations to date, although there can
be no assurance that the regulatory requirements will not change and
increase the burden to the Company.
FUTURE
The FDA ban introduced in March 1990 on the use of sulfites on freshly
processed potatoes was subsequently struck down by federal courts for
technical flaws, but the Company believes there is a possibility that this
ban may be reintroduced within the next few years. In addition, the recent
changes in labeling requirements on processed food products, introduced by
the FDA, have increased consumer
-5-
<PAGE> 7
awareness of substances that could be harmful to health. Furthermore,
government promotion of fresh fruits and vegetables by the five-a-day
program has made consumers more conscious of the need to include such
foods as part of a balanced diet. As this awareness continues to grow,
management believes interest in the Company's products will increasingly
benefit. Management is continually searching for new ways to market its
products and expand operations, both internally and, where appropriate,
through strategic acquisitions. In this regard, among other initatives
the Company has recently signed a letter of intent containing its
conditional offer to acquire a specialty packaging business (see note 18
to the Company's Consolidated Financial Statements). The Company also
plans, at some point in the future, to invite other fresh corn processors
with specific regional processing and distribution strengths
complementary to California based Underwood Ranches, to work with or
join Newcorn Co. LLC.
EMPLOYMENT
As of December 31, 1996, the Company had 111 employees providing services
in North America and Europe, of which 21 were engaged in sales and
marketing, 61 in production, 11 in applications and research and 18 in
management and administration. The Company expects to recruit additional
personnel as and when required.
PARENTS AND SUBSIDIARIES
1. Parents - The Company disclaims that it is controlled by any one or
more persons or a group of persons and therefore disclaims that any
person or group is its "parent" within the meaning of that term
under the Securities Exchange Act of 1934, as amended. However, by
virtue of the powers vested by law in the Company's Board of
Directors, it is possible that some or all of the Company's
directors might be deemed to be parents of the Company as that term
is so defined, to the extent that they act in concert.
2. Subsidiaries - At December 31, 1996, the Company had six wholly
owned US subsidiaries. Integrated Produce Systems, Inc., a
Pennsylvania corporation, is the vehicle through which the US
processing aid business is conducted; Respire Films, Inc., also a
Pennsylvania corporation, provides packaging related technology to
the fresh cut produce industry; IPS Produce, Inc., a Pennsylvania
corporation, is involved in the market testing of produce; Crystal
Specialty Films, Inc., ("Crystal") an Illinois corporation, is
involved in the manufacture of films; Pure Produce, Inc., a
Massachusetts corporation, provides companies in the food industry
with analysis, protocols, plans and microbial analysis; and Agra
Research, Inc., an Indiana corporation, which is currently inactive.
The Company also owns a 51% membership equity interest in Newcorn
Co. LLC, a Delaware limited liability company, which is involved in
the processing and distribution of fresh corn products. The Company
also had five subsidiaries in the U.K all of which are English
companies. These are Integrated Produce Systems Limited (formerly
known as Extended Product Life Limited), which is the vehicle
through which the Company conducts its activities in the U.K. and
Europe in relation to processing aids; a U.K. holding company, EPL
Technologies (Europe) Limited, which in turn owns 100% of BPS and
EPL Flexible Packaging Limited. In addition, BPS has a dormant
subsidiary, BPS Produce Packaging Limited.
-6-
<PAGE> 8
FORWARD LOOKING STATEMENTS
The above discussions include certain forward looking statements of
management's expectations of product development and potential
results of operations. For a discussion of factors that may
materially affect realization of these expectations, see
Management's Discussion and Analysis of Financial Condition and
Results of Operations--Forward Looking Statements.
ITEM 2. PROPERTIES
The Company's principal administrative office comprises 6,600 square
feet of space located just outside Philadelphia, Pennsylvania. The
space is rented pursuant to a lease expiring in January 2002. In
addition, the Company formulates its products at a facility located
in Auburn, Alabama, occupying 4,250 square feet. The Company has not
formally renewed this lease, which expired on September 30, 1994 and
thus currently operates on a month-to-month basis pending its
evaluation of the most cost-effective location from which to
operate. In 1994 the Company entered into a lease for an
applications laboratory in Fresno, California, occupying 2,700
square feet, expiring in February 1999. Crystal occupies 16,000
square feet in Oswego, Illinois, pursuant to a lease expiring in
June 1998. For its European packaging and materials business, BPS
owns three adjoining industrial buildings in the U.K. covering a
total of 17,478 square feet. In addition, it rents a building of
5,085 square feet under a lease expiring September 2007. It also
rents an additional building of 5,000 square feet on a
month-to-month basis. EPL Flexible occupies 19,500 square feet of an
industrial property in the U.K., pursuant to a lease expiring in
October 2004. The Company believes that its current facilities are
adequate for its present needs and that it would not have any
difficulty obtaining additional or alternate space at prevailing
rates if required.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
is a party or to which any of its property is subject. There were no
proceedings terminated during the fourth quarter of the fiscal year
ended December 31, 1996. None of the Company's officers or directors
are involved in any legal proceedings relating to the Company. To
the best of the Company's knowledge, there are no proceedings known
as being contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders
during the fourth quarter of the fiscal year ended December 31,
1996.
-7-
<PAGE> 9
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET INFORMATION
The Company's common stock currently trades on the Nasdaq Small Cap
Market tier of the Nasdaq Stock Market under the symbol "EPTG",
having been traded on the National Association of Securities Dealers
"bulletin board" prior to July 1996. The quotations below reflect
inter-dealer prices, without retail markup, markdowns or commission
and may not necessarily represent actual transactions. The high and
low bid prices for the Company's $0.001 par value Common Stock for
the quarterly periods during the years ended December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- ---------------------------
QUARTER ENDED HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
March 31, 5.88 3.06 1.00 0.63
June 30, 9.00 4.75 1.50 0.50
September 30, 7.63 5.00 3.13 1.25
December 31, 7.13 4.00 3.88 2.38
</TABLE>
As of December 31, 1996, there were 15,531,200 shares of the
Company's $0.001 par value Common Stock issued and outstanding, held
by 331 shareholders of record. During the twelve months ended
December 31, 1996, the Company did not declare any cash dividends on
its Common Stock. It is unlikely that dividends will be paid by the
Company on its Common Stock in the foreseeable future, as the
Company intends to reinvest its results of operations for further
growth.
PREFERRED STOCK
In January 1994 the Company completed a private placement under
Section 4(2) of the Securities Act of 1933, as amended, (the "1933
Act") of 3,250,000 shares of Series A Preferred Stock (the Series A
Stock") at a price of $1.00 per share. The Series A Stock carry a
dividend of 10% per annum payable in cash and/or shares of Common
Stock at the Company's option. This dividend is cumulative, and is
to be paid in priority to any dividends to holders of Common Stock.
If paid in shares, the deemed value will be $0.75 per share of
Common Stock. The aggregate dividend due on the Series A Stock at
December 31, 1996 was $1,100,716. Each $1 share of Series A Stock
carries an option to convert into shares of Common Stock at a rate
of $0.75 per common share. The Series A Stock carry equal voting
rights to the shares of Common Stock, based on the underlying
number of common shares after conversion. In addition, 20% of the
Common Stock option conversion carries detachable warrants at a
price of $1.00 per warrant, i.e., every 100 shares of Series A
Stock has 20 warrants exercisable at $1.00 each. These can be
exercised any time up to 5:00 p.m., December 31, 1998.
At the Annual Meeting of the Company held on July 22, 1996, the
shareholders of the Company approved the issuance of up 2,000,000
shares of preferred stock, to bear such designations and
preferences as the Board may determine ("Board Designated Preferred
Stock"). On July 23, 1996, the Company issued 531,915 of these
shares, to be designated as 10% cumulative convertible Series B
Preferred Stock ("Series B Preferred Stock"). These shares carry
the option to convert into
-8-
<PAGE> 10
shares of Common Stock at the rate of $4.70 per share and carry
equal voting rights to the shares of Common Stock, based on the
underlying number of shares of Common Stock after conversion. The
Series B Preferred Stock carries a dividend rate of 10% per annum,
payable in cash and/or shares at the Company's option. The
aggregate dividend due on the Series B Preferred Stock at
December 31, 1996 was $110,445.
During 1996, the Company filed a resale registration statement on
Form S-3, which was declared effective on November 12, 1996. The
Company registered a total of 12,784,011 shares, comprising
8,740,429 outstanding shares of Common Stock, 293,334 shares of
Common Stock issuable by the Company pursuant to the terms of
certain outstanding warrants, 45,000 share of Common Stock issuable
by the Company pursuant to the terms of certain outstanding options,
3,173,333 shares of Common Stock issuable by the Company upon
conversion of outstanding shares of the Company's Series A Preferred
Stock and 531,915 shares of Common Stock issuable by the Company
upon conversion of outstanding shares of the Company's Series B 10%
Preferred Stock.
-9-
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended December
31, 1996, 1995, 1994, 1993 the eight months ended December 31, 1992 and
the fiscal year ended April 30, 1992 are derived from the Company's
audited consolidated financial statements. The selected financial
information presented below should be read in conjunction with the
consolidated financial statements, related notes and other financial
information included in this report.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL EIGHT FISCAL
YEAR YEAR YEAR YEAR MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 4/30/92
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Sales $ 11,314,141 $ 3,239,566 $ 578,463 $ 177,552 $ 141,597 $ 165,491
Gross profit 2,177,885 770,723 190,916 131,470 65,477 81,037
Expenses:
Selling, general, administrative 6,352,119 3,812,938 3,471,952 2,768,685 496,149 310,802
research and development,
depreciation and amoritization
interest expense (income) and 121,655 277,719 91,554 28,725 (14,680) (27,348)
income taxes ------------ ------------ ---------- ----------- --------- ---------
Net loss (4,295,919) (3,319,934) (3,372,590) (2,665,940) (415,992) (202,417)
Deduct effect of 10% cumulative
preferred dividend 373,924 313,854 324,185 199,198
------------ ------------ ----------- ----------- ----------- -----------
Net loss for common stockholders $ (4,669,843) $ (3,633,788) $(3,696,775) $(2,865,138) $ (415,992) $ (202,417)
============ ============ =========== =========== =========== ===========
Weighted average number of
common shares 14,873,518 9,311,059 7,258,725 6,071,241 5,908,616 5,865,241
Net loss per common share $ (0.31) $ (0.39) $ (0.51) $ (0.47) $ (0.07) $ (0.03)
============ ============ =========== =========== =========== ===========
BALANCE SHEET
Working capital (deficiency) $ 2,069,594 $ 1,166,921 $ (378,207) $ (622,924) $ (149,627) $ (267,774)
Total assets 15,215,422 10,041,197 3,188,745 2,629,846 3,193,949 1,905,211
Long-term debt 1,554,161 844,333 1,812,181 75,880 238,331
Total liabilities 6,796,945 3,665,358 2,770,606 983,722 1,011,226 321,599
Total shareholders' equity 8,418,477 6,375,839 418,139 1,646,124 2,182,723 1,583,652
</TABLE>
Note: See Item 1. - "Business - General Development" for description of
acquisitions of businesses which affect the comparability between years.
-10-
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
EPL Technologies, Inc. develops, manufactures and markets complementary
proprietary technologies designed to maintain the quality and integrity
of fresh produce. The Company's primary products are processing aids and
packaging materials, together with related technical support services
which are designed and marketed to processors of fresh vegetables and
fruits to be integrated into a customer's fresh produce production
system. The Company believes its products are safe, environmentally
friendly and add significant value to the business of its customers.
The Company's goal is to become a world class provider of products and
scientific services designed to maintain the integrity of fresh produce.
As consumer awareness of the potential health hazards of sulfite-based
preservatives, which the Company's products do not contain, continues to
grow, management believes interest in the Company's products will
increase. Management is continually searching for new ways to market its
products and expand operations, both internally and, where appropriate,
through strategic and opportunistic acquisitions. In this regard, the
Company has recently signed a letter of intent containing its conditional
offer to acquire a European based specialty packaging business (see note
18 to the Company's Consolidated Financial Statements). In negotiations
and diligence in connection with the potential UK acquisition announced
last fall, the Company has recently terminated these discussions and
does not expect them to resume in the near future. However, the Company
continues to be interested in this or similar opportunities and thus
may revisit this potential acquisition in the future in the right
circumstances. There can however, be no assurance that this or any other
acquisition will in fact occur.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales for the twelve months ended December 31, 1996 were $11,314,141, an
increase of $8,074,575 (249%) over the 1995 total revenue of $3,239,566.
The 1996 total comprised $1,326,669 of processing aids and related
activities (an increase of 181% over 1995), $1,716,984 of U.S. packaging
materials (an increase of 98% over 1995) and $8,270,488 of UK and European
packaging materials (an increase of 336% over 1995).
Within the U.S. processing aid business management continues to work
with and target medium to large food processors as the customer base to
provide the Company a balance of satisfactory sales growth. This activity
has continued in 1996 and as detailed below, costs have been incurred
which are yet to show in significant revenue increases. The current
market development activity includes work on potatoes and apples, where
the Company is in volume market test in retail, food and food service
outlets. Additional activities were added during the year to extend the
range of services offered. This included Pure Produce Inc., which signed
a contract with the U.S. Apple Institute for work on residual analysis in
the final quarter of 1996. The main increase in revenue came from the
inclusion of revenue from the Company's corn activities through the
majority owned Newcorn Co. LLC, which transaction was completed on July
22, 1996.
The growth in the U.S. packaging materials business reflects mainly the
contribution of the Crystal business acquired in July 1996, although
management believes that the activity during 1996 in Respire will also
provide an improved growth base for 1997. In both businesses, the Company
continues to target and to expand product development activities and to
seek to exploit the synergies that exist with the processing aid business.
The successful completion of the DuPont Agreement in late 1996 did not
generate significant revenue in the U.S. in the period. The new gas-flame
film perforation machine was successfully installed at the Crystal factory
and, while initial revenue contribution was at a low level, it is
expected to contribute to the 1997 totals.
Revenue from the UK and European packaging materials businesses grew from
$1,898,590 to $8,270,488. This reflected a full period contribution from
BPS, acquired in September 1995, together with an initial contribution
from EPL Flexible. BPS continues to develop, and the Company is beginning
to exploit the synergies between the two businesses. At the end of 1996
the Company relocated all of the film printing activities that were
located at BPS to the EPL Flexible site, which is expected to yield
economies of scale from having all of the printing activities in one
location. It will
-11-
<PAGE> 13
also facilitate an increase in higher margin film perforation capacity at
BPS and a plant reorganization to achieve this is expected to be
undertaken during the first half of 1997. Having acquired the assets at
EPL Flexible in July 1996, business has been increasing during the
period, principally from its main customer Pepsico, and new customers are
actively being sought to help maximize the available capacity and further
diversify the customer base. There can be no assurance, however, that the
Company will be successful in doing so.
In 1996, one customer accounted for 13% of annual revenues for the group
and in 1995 no customers accounted for more than 10% or more of annual
revenues. Gross margin for the year was 19.2% as compared to 23.8% for the
same period last year. This reduction is due principally to the inclusion
in consolidation of sales of UK and European packaging materials, which
generate a lower average margin than processing aids. In addition, it
reflects the relationship between the volume of product sold and dollar
volumes, which can be substantially affected from quarter to quarter by
varying product mix, varying processor efficiency levels and by
promotional pricing of products used for tests and evaluation. As the
proportion of revenue generated from processing aids or perforated film
increases, management believes that this gross margin will increase,
although, there can be no assurance that such in fact will be the case.
Selling, general and administrative expenses rose to $4,413,365 from
$2,638,116, an increase of $1,775,249. A significant part of this was due
to the inclusion on consolidation of expenses from the BPS operations, as
well as some incremental expenses from the inclusion of EPL Flexible,
Crystal and Newcorn Co. The remainder was due to the continuing
development of the sales and marketing effort as well as projects to
support prospective large customers. As discussed above, this effort is
focused on a number of vegetable categories, including potatoes and
apples, where market test activity is continuing. The Company expects
that this level of additional expenditure will continue, at least in the
short-term. Furthermore, as interest in the Company has grown and the
shareholders base has expanded significantly, additional costs have been
incurred in investor relations, including SEC and other legal work,
notably in connection to registrations of the Company's securities under
federal and state securities laws. Research and development costs
increased from $600,529 to $938,719, an increase of $338,190. This
reflects the costs of some of the third-party collaborative projects
commenced during 1995, as well as additional staff to support the
Company's scientific and technical objectives in relation to the ongoing
sales effort for prospective large customers. Again, the Company
expects that these higher expenses will continue in the short-term,
although it believes the results of these expenditures will be seen in
incremental revenues in 1997 and beyond. Depreciation and amortization
expense increased by $435,453 from $574,293 in 1995 to $1,009,746 in
1996. The most significant proportion of this increase was due to a full
years depreciation of fixed assets and amortization of goodwill arising
from the acquisition of BPS in September 1995, with the remainder due to
increased depreciation as a result of capital expenditure and the assets
acquired in the EPL Flexible, Crystal and Newcorn Co. acquisitions during
1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales for the twelve months ended December 31, 1995 was $3,239,566, an
increase of 460% on total revenue of $578,463 achieved in 1994. The
1995 total comprised $472,747 of processing aids (an increase of 36.7%
over 1994), $868,229 of US packaging materials (an increase of 273% over
1994) and $1,898,590 of UK and European packaging materials (representing
the sales of BPS since its acquisition by the Company on September 19,
1995).
This reflects the lack of occasional sales to very small processors,
offset by new customers. In 1995, no such customer accounted for 10% or
more of annual revenues while two customers represented 35% of the
Company's annual revenues in 1994. Management continues to target medium
to large volume food processors as the customer base to best provide the
Company a balance of
-12-
<PAGE> 14
satisfactory sales growth within a reasonable time frame and to limit the
Company's customer concentration.
The US packaging materials business results in 1995 reflect the inclusion
of a full year's sales of Respire, representing sales to 66 customers
during this period. This total compares with the 1994 total sales (pre and
post acquisition) of $494,289, an increase of 76%. The Company continues
to target new areas for growth and to exploit the synergies that exist
with the processing aid business.
The UK and European packaging materials business of BPS was acquired on
September 19, 1995. On a comparable basis, the total revenues for the year
grew by some 20%.
Selling, general and administrative expenses rose from $2,571,865 in 1994
to $2,638,116 in 1995, an increase of only 2.5%, despite the 460% increase
in revenues. This is evidence of the infrastructure being able to support
increases in sales revenue without corresponding increases in costs.
Research and development costs increased from $522,495 in 1994 to $600,529
in 1995, an increase of 14.9%. This reflects the costs of some of the
collaborative projects commenced in 1995. Depreciation and amortization
rose from $377,592 in 1994 to $574,293 in 1995, an increase of 52%. Of
this increase of $196,701, $87,597 represents increased amortization of
goodwill on acquisition, consisting of BPS in September 1995 and a full
year of Respire. The remainder represents increased depreciation as a
result of 1994 and 1995 capital expenditures.
-13-
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents of
$1,639,567, compared to $1,522,075 as of December 31, 1995, an increase of
$117,492. For 1996, $3,839,976 of net cash was used in operations,
compared to $1,893,444 for 1995. The increase in the net cash used in
operations in 1996 was due primarily to the net loss and the increase in
accounts receivable and inventory.
Net cash used in investing activities totaled $2,741,907 in 1996, compared
to $3,622,966 in 1995. This amount in 1996 included the acquisitions of
assets for Pure Produce, Crystal and EPL Flexible, as well as the
investment in Newcorn Co. The 1995 amount reflected the acquisition of
BPS.
Financing activities for 1996 provided net cash of $6,439,146 compared to
$6,976,036 in 1995. In 1996, the Company raised $3,554,396 through the
exercise of warrants and options. A further $2,500,000 was raised from
the issuance of Series B Preferred Stock.
Also in 1996, a net $359,625 was raised from the refinancing of the BPS
debt. Two seven year loan facilities, totaling $1,387,125 were obtained
and the proceeds used to repay the existing BPS mortgage and pension fund
loan. In addition, EPL Technologies (Europe) Ltd. obtained a line of
credit of $513,750 in 1996.
At December 31, 1996, the Company had 393,532 warrants outstanding to
purchase common stock at between $1 and $2.00 per share, which if
exercised would provide the Company with gross proceeds of approximately
$598,000.
In addition, at December 31, 1996 the Company had 3,295,000 options
outstanding to purchase Common Stock at an weighted average price of
$3.01 per share, which if exercised would provide the Company with gross
proceeds of approximately $9,900,000.
Subsequent to the year end, in March 1997, the Company received
$1,000,000 through a private placement of common stock and Board
Designated Preferred Stock. Further subscriptions are expected shortly
for this limited private placement from other existing offeree
shareholders.
The Company's continued ability to operate is dependent upon its ability
to maintain adequate financing and to achieve levels of revenue necessary
to support its cost structure. The Company's management believes that
cash flows from operations, together with its current resources
(including cash received in the recent private placement) and with the
availability of financing from other sources, will allow the Company to
maintain adequate financing for the next year.
-14-
<PAGE> 16
FORWARD LOOKING STATEMENTS
The discussions above include certain forward looking statements regarding
the Company's expectations of gross margin, expenses, market penetration,
success in obtaining large new customers, possible acquisitions, access to
capital and new product introduction. Consequently, actual results may
vary materially from such expectations. Meaningful factors that might
affect such results include: a) the length and effectiveness of the sales
process for processing aids and packaging, b) raw material availability
and pricing, c) changes in regulatory environment and d) difficulty with
research and development activities regarding new products, including
extension of necessary time periods or increase in expense for product
introduction.
-15-
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 17
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 18
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 19
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994 20
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22
</TABLE>
-16-
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EPL Technologies, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of EPL
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of EPL Technologies, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 28, 1997
-17-
<PAGE> 19
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,639,567 $ 1,522,075
Accounts receivable, net 2,911,660 1,333,353
Due from related parties 34,101 74,777
Inventories 1,938,819 561,255
Prepaid expenses and other current assets 623,792 442,814
------------ ------------
Total current assets 7,147,939 3,934,274
------------ ------------
PROPERTY AND EQUIPMENT, Net 4,005,711 1,786,534
------------ ------------
OTHER ASSETS:
Patent and distribution rights, net of accumulated
amortization of $2,459,757 and $2,130,381 at
December 31, 1996 and 1995, respectively 1,303,121 1,632,497
Goodwill 2,503,655 2,396,380
Other intangibles, less accumulated amortization
of $82,161 and $45,645 at
December 31, 1996 and 1995, respectively 254,996 291,512
------------ ------------
Total other assets 4,061,772 4,320,389
------------ ------------
TOTAL ASSETS $ 15,215,422 $ 10,041,197
============ ============
CURRENT LIABILITIES:
Accounts payable $ 3,005,577 $ 1,701,578
Accrued expenses 1,213,964 539,313
Other liabilities 396,418 288,651
Current portion of long-term debt 262,779 237,811
------------ ------------
Total current liabilities 4,878,738 2,767,353
LONG-TERM DEBT 1,554,161 844,333
DEFERRED INCOME TAXES 161,926 53,672
MINORITY INTEREST 202,120
------------ ------------
Total liabilities 6,796,945 3,665,358
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred Stock, $1.00 par value -
authorized, 3,250,000 shares; issued and outstanding
2,490,000 and 2,890,000 shares in 1996 and 1995, respectively 2,490,000 2,890,000
Convertible Series B Preferred Stock $0.01 par value
authorized, issued and outstanding $531,915 and $0 1996
and 1995, respectively 5,319
Common Stock, $0.001 par value - authorized,
50,000,000 shares; issued and outstanding, 15,531,200
and 13,208,552 shares in 1996 and 1995, respectively 15,531 13,208
Additional paid-in capital 21,314,678 14,843,992
Accumulated deficit (15,658,464) (11,362,545)
Foreign currency translation adjustment 251,413 (8,816)
------------ ------------
Total stockholders' equity 8,418,477 6,375,839
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,215,422 $ 10,041,197
============ ============
</TABLE>
See notes to consolidated financial statements.
-18-
<PAGE> 20
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
SALES $ 11,314,141 $ 3,239,566 $ 578,463
COST OF SALES 9,136,286 2,468,843 387,547
------------ ----------- -----------
GROSS PROFIT 2,177,855 770,723 190,916
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,413,365 2,638,116 2,571,865
RESEARCH AND DEVELOPMENT COSTS 938,719 600,529 522,495
DEPRECIATION AND AMORTIZATION 1,009,746 574,293 377,592
------------ ----------- -----------
LOSS FROM OPERATIONS (4,183,975) (3,042,215) (3,281,036)
INTEREST EXPENSE, NET 20,223 267,176 91,554
MINORITY INTEREST (9,711)
------------ ----------- -----------
LOSS BEFORE INCOME TAX EXPENSE (4,194,487) (3,309,391) (3,372,590)
INCOME TAX EXPENSE 101,432 10,543
------------ ----------- -----------
NET LOSS (4,295,919) (3,319,934) (3,372,590)
DEDUCT EFFECT OF 10% CUMULATIVE PREFERRED DIVIDENDS 373,924 313,854 324,185
------------ ----------- -----------
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS $ (4,669,843) $(3,633,788) $(3,696,775)
============ =========== ===========
LOSS PER COMMON SHARE $ (0.31) $ (0.39) $ (0.51)
============ =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,873,518 9,311,059 7,258,725
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
-19-
<PAGE> 21
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED SHARES PREFERRED SHARES
COMMON SHARES -------------------------- ---------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 6,160,991 $ 6,161 3,000,000 $ 3,000,000
Shares issued to employees 25,000 25
Shares issued for professional services 31,289 31
Shares issued as commitment fee 75,000 75
Common shares issued for cash 1,224,133 1,224
Shares issued for acquisition of subsidiary 140,000 140
Preferred shares issued for cash 250,000 250,000
Net loss
Foreign currency translation adjustment
---------- -------- --------- ------------- --------- -------
BALANCE, DECEMBER 31, 1994 7,656,413 7,656 3,250,000 3,250,000
Shares issued in private placement (net of
issuance cost) 2,750,000 2,750
Conversion of note payable to common shares
(net of write-off of deferred finance costs) 2,025,000 2,025
Shares issued to pay expenses and fees 230,472 230
Conversion of preferred shares to common shares 480,000 480 (360,000) (360,000)
Exercise of warrants 66,667 67
Net loss
Foreign currency translation adjustment
---------- -------- --------- ------------- --------- -------
BALANCE, DECEMBER 31, 1995 13,208,552 13,208 2,890,000 2,890,000
Preferred shares issued for cash 531,915 $5,319
Exercise of options 384,000 384
Shares issued to pay expenses and fees 5,983 6
Conversion of preferred shares to common shares 533,334 534 (400,000) (400,000)
Exercise of warrants (net of costs) 1,399,331 1,399
Net loss
Foreign currency translation adjustment
---------- -------- --------- ------------- --------- -------
BALANCE, DECEMBER 31, 1996 15,531,200 $ 15,531 2,490,000 $ 2,490,000 531,915 $5,319
========== ======== ========= ============= ========= =======
</TABLE>
<TABLE>
<CAPTION>
FOREIGN
CURRENCY TOTAL
ADDITIONAL ACCUMULATED TRANSLATION STOCKHOLDERS'
PAID-IN CAPITAL DEFICIT ADJUSTMENT EQUITY
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 3,310,476 $ (4,670,021) $ (492) $ 1,646,124
Shares issued to employees 32,475 32,500
Shares issued for professional services 46,907 46,938
Shares issued as commitment fee 104,925 105,000
Common shares issued for cash 1,431,575 1,432,799
Shares issued for acquisition of subsidiary 279,860 280,000
Preferred shares issued for cash 250,000
Net loss (3,372,590) (3,372,590)
Foreign currency translation adjustment (2,632) (2,632)
------------- ------------- --------- -----------
BALANCE, DECEMBER 31, 1994 5,206,218 (8,042,611) (3,124) 418,139
Shares issued in private placement (net of
issuance cost) 4,877,250 4,880,000
Conversion of note payable to common shares
(net of write-off of deferred finance costs) 3,909,630 3,911,655
Shares issued to pay expenses and fees 424,774 425,004
Conversion of preferred shares to common shares 359,520
Exercise of warrants 66,600 66,667
Net loss (3,319,934) (3,319,934)
Foreign currency translation adjustment (5,692) (5,692)
------------- ------------- --------- -----------
BALANCE, DECEMBER 31, 1995 14,843,992 (11,362,545) (8,816) 6,375,839
Preferred shares issued for cash 2,494,681 2,500,000
Exercise of options 255,136 255,520
Shares issued to pay expenses and fees 23,926 23,932
Conversion of preferred shares to common shares 399,466
Exercise of warrants (net of costs) 3,297,477 3,298,876
Net loss (4,295,919) (4,295,919)
Foreign currency translation adjustment 260,247 260,247
------------- ------------- --------- -----------
BALANCE, DECEMBER 31, 1996 $ 21,314,678 $ (15,658,464) $ 251,413 $ 8,418,477
============= ============= ========= ===========
</TABLE>
See notes to consolidated financial statements.
-20-
<PAGE> 22
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,295,919) $(3,319,934) $(3,372,590)
Adjustments to reconcile net loss to net cash
used in operating activities:
Expenses paid with common stock 23,932 425,004 184,438
Depreciation and amortization 1,009,746 574,293 377,592
Minority interest and gain on sale of fixed assets (10,375)
Changes in assets and liabilities, net of effects from acquisitions of
businesses, which provided (used) cash:
Accounts receivable (1,381,262) 536,394 (174,860)
Due from related parties 40,676 1,429 (76,206)
Inventories (1,136,800) 247,262 (76,391)
Prepaid expenses and other current assets (168,520) (8,549) (50,900)
Accounts payable 1,192,893 (185,067) 264,093
Accrued expenses 669,632 (207,513) (187,775)
Other liabilities 216,021 43,237 41,444
----------- ----------- -----------
Net cash used in operating activities (3,839,976) (1,893,444) (3,071,155)
----------- ----------- -----------
INVESTING ACTIVITIES:
Fixed assets acquired (1,997,071) (442,438) (168,343)
Proceeds from sale of fixed assets 23,033
Acquisition of businesses, net of cash acquired (767,869) (3,172,528) (57,156)
Cost of patent acquired (8,000) (44,914)
----------- ----------- -----------
Net cash used in investing activities (2,741,907) (3,622,966) (270,413)
----------- ----------- -----------
FINANCING ACTIVITIES:
Deferred financing cost (90,778)
Repayment to stockholders (74,912) (41,863)
Proceeds from long-term debt 1,511,127
Payment of long-term debt (1,126,377) (145,719) (89,015)
Proceeds from notes payable - stockholder 2,250,000 1,800,000
Proceeds from sale of common stock/warrants/options 3,554,396 4,946,667 1,432,799
Proceeds from sale of preferred stock 2,500,000 250,000
----------- ----------- -----------
Net cash provided by financing activities 6,439,146 6,976,036 3,261,143
----------- ----------- -----------
EFFECT OF EXCHANGE RATE ON CASH 260,229 (5,692) (2,632)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 117,492 1,453,934 (83,057)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,522,075 68,141 151,198
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,639,567 $ 1,522,075 $ 68,141
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid $ 107,027 $ 26,683 $ 60,290
Income taxes paid $ 55,635
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock for:
Conversion of note payable to common shares $ 4,050,000
Acquisition of subsidiary $ 280,000
Exchange for services and other fees $ 23,932 $ 114,840 $ 184,438
Payment of interest $ 310,164
Conversion of preferred shares to common shares $ 400,000 $ 360,000
</TABLE>
See notes to consolidated financial statements.
-21-
<PAGE> 23
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - EPL Technologies, Inc. (the "Company") is
engaged in the development, manufacture and
marketing of proprietary processing aids and packaging
technologies and related scienctific services that facilitate
the maintenance of the quality and integrity of fresh produce.
B. PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of EPL Technologies, Inc. and
its majority and wholly owned subsidiaries. All material
intercompany transactions and balances have been eliminated in
consolidation.
C. CASH AND CASH EQUIVALENTS - The Company considers all
short-term investments with a maturity of three months or less
to be cash equivalents.
D. ACCOUNTS RECEIVABLE - Accounts receivable are shown net of
allowance for doubtful accounts of $153,037 and $143,210 as of
December 31, 1996 and 1995, respectively.
E. INVENTORIES - Inventories are stated at the lower of cost or
net realizable value. Cost is determined in a manner which
approximates the first-in, first-out (FIFO) method (Note 3).
F. PROPERTY AND EQUIPMENT - Property and equipment are stated at
cost. Depreciation and amortization is calculated on the
straight-line method, based upon the estimated useful lives
of the assets which are as follows:
<TABLE>
<S> <C>
Production and laboratory equipment 5-10 years
Machinery and office equipment 3-7 years
Leasehold improvements The term of the lease or
the estimated life of the asset,
whichever is shorter.
Motor Vehicles 3-4 years
Buildings 40 years
</TABLE>
G. OTHER ASSETS -
GOODWILL (NOTE 6) - Goodwill related to the acquisition
of certain subsidiaries is being amortized on a
straight-line basis over 10 years
DISTRIBUTION RIGHTS (NOTE 5) - Are being amortized on a
straight-line basis over the ten-year life of the
distribution rights agreement.
PATENTS (NOTE 5) - Are being amortized on a
straight-line basis over the life of the patent.
Initially, costs related to new patents are expensed as
incurred. However, once a patent has been confirmed to
patent pending status, then the direct incremental cost
is capitalized and amortized over the estimated useful
life of the patent.
OTHER INTANGIBLES (NOTE 6) - Other intangibles which
consist of trademarks, formulations and non-compete
agreements are being amortized on a straight-line basis
over 5 to 10 years.
-22-
<PAGE> 24
H. INCOME TAXES - The Company has adopted the provisions of Financial
Accounting Standards Board Statement No. 109, Accounting for Income
Taxes (SFAS No. 109). SFAS No. 109 requires that deferred income taxes
reflect the tax consequences in future years of differences between the
tax basis of assets and liabilities and their financial report amounts
using the enacted marginal rate in effect for the year in which the
differences are expected to reverse.
I. REVENUE RECOGNITION - Revenues are recognized either at the time of
shipment to customers or, for inventory held at customers' facilities,
at the time the product is utilized in the customers' processing
operations.
J. FOREIGN CURRENCY TRANSLATION ADJUSTMENT - The financial statements of
the Company's foreign subsidiary have been translated into U.S. dollars
in accordance with SFAS No. 52. All balance sheet accounts have been
translated using the current exchange rate at the balance sheet date.
Income statement amounts have been translated using the average rate
for the year. The profit or loss resulting from the change in exchange
rates has been reported separately as a component of stockholders'
equity.
K. RECLASSIFICATIONS - Certain reclassifications have been made to the
1995 consolidated financial statements in order to conform with the
1996 presentation.
L. USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
M. LONG LIVED ASSETS - The Company evaluates the carrying value of its
long lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Measurement of the amount of impairment, if any, is based
upon the difference between the carrying value and fair value.
N. STOCK-BASED COMPENSATION - During the year ended December 31, 1996, the
Company adopted Statement of Financial Accounting Standard (SFAS) No.
123, Accounting for Stock-Based Compensation. The Company will continue
to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees. See Note 11
for pro forma disclosures of net income and earnings per share as if
the fair value-based method prescribed by SFAS 123 had been applied in
measuring compensation expense.
2. OPERATIONS
The Company's continued ability to operate is dependent upon its ability to
maintain adequate financing and to achieve levels of revenue necessary to
support the Company's cost structure. The nature of the processing aid
business is such that fresh cut produce processors and other third-party
users supplying retail markets require extensive on site, and, in certain
cases, independent testing prior to utilizing the Company's product in their
production. This results in an extended sales process. Management believes
that this process is the basis for developing sustainable growth in revenues
which will enable the Company to achieve profitable operations.
-23-
<PAGE> 25
The Company's management believe that cash flows from operations,
together with its current resources (including cash received in the
recent private placement, see Note 18) and with the availability of
financing from other sources, will allow the Company to maintain
adequate financing for the next year.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
<S> <C> <C>
Raw materials and supplies $ 938,050 $361,252
Finished goods 1,000,769 200,003
---------- --------
Total inventories $1,938,819 $561,255
========== ========
</TABLE>
-24-
<PAGE> 26
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
<S> <C> <C>
Production and laboratory equipment $ 3,489,187 $ 868,128
Machinery and office equipment 243,213 233,315
Leasehold improvements 26,099 24,099
Motor vehicles 88,251 143,645
Buildings 814,154 731,247
----------- -----------
Total property and equipment 4,660,904 2,000,434
Accumulated depreciation and amortization (655,193) (213,900)
----------- -----------
Property and equipment (net) $ 4,005,711 $ 1,786,534
=========== ===========
</TABLE>
Depreciation expense was $384,902, $121,929, and $33,945 for the years ended
December 31, 1996, 1995 and 1994, respectively.
5. PATENTS AND DISTRIBUTION RIGHTS
The Company owns the exclusive right to establish the worldwide sales,
marketing and distribution network for the food processing products of Agra
Research, Inc. for a period of ten years. The Company issued 3,061,312
restricted shares of common stock for these product rights at a value of
$0.75 per share for a total of $2,295,984. The asset is being amortized on a
straight-line basis over the ten-year life of the distribution rights
agreement. Distribution rights, net, totaled $229,599 and $459,197 as of
December 31, 1996 and 1995, respectively.
In connection with the acquisition of Agra Research, Inc. on December 31,
1992, the purchase cost was allocated primarily to patents acquired. The
patent was formally approved in June 1990, and, therefore, the patent value
is being amortized over the remaining fourteen and one half years of its
life commencing January 1, 1993. Patents, net totaled $1,073,522 and
$1,173,299 as of December 31, 1996 and 1995, respectively.
6. ACQUISITIONS
On April 19, 1996, the Company acquired substantially all of the tangible
and intangible assets of Pure Produce, a Massachusetts general partnership,
through a wholly-owned subsidiary, Pure Produce, Inc., a Massachusetts
corporation. The total cost of the acquisition was approximately $150,000.
Pure Produce is in the business of providing companies in the food industry,
especially those involved with fresh and minimally processed produce, with
analysis, protocols and plans relating to food and quality assurance
programs including microbial testing.
In July 1996, the Company acquired, through a wholly-owned UK subsidiary
(EPL Flexible Packaging Limited ("EPL Flexible")), some of the fixed assets
located at Gainsborough, Lincolnshire, UK, of a division of Printpack
Europe (St. Helens) Limited ("Printpack St. Helens"). EPL Flexible also
assumed a real estate lease and offered employment to some of the employees
of Printpack St. Helens. The total net consideration paid was $1,286,500.
This company specializes in the printing of flexible packaging films serving
primarily the snack food industry.
-25-
<PAGE> 27
In July 1996, the Company formed a wholly-owned US subsidiary, Crystal
Specialty Films, Inc., to acquire the assets and assume some of the
liabilities of Crystal Plastics, Inc., based in Illinois. Crystal uses "K"
resin and polystyrene resins to manufacture a range of proprietary films
for a variety of applications. After an initial payment of approximately
$400,000, an additional amount of $267,000 is payable in quarterly
installments over two years, with a final payment based on the performance
of the business over the next two years. Crystal serves as the site for
proprietary gas flame perforation equipment which the Company has had
custom-built in the UK and which is planned to be the basis for penetration
of the US film perforation market.
In addition, also in July 1996, the Company formed Newcorn Co. LLC, a
jointly-owned limited liability company in which the Company owns 51% equity
interest. The Company's partner is Underwood Ranches ("Underwood"), the
trade name of Agricultural Innovation and Trade, Inc. The new company will
utilize the Company's proprietary processing aid and packaging technologies
and Underwood's existing corn processing and distribution capabilities to
develop a year-round, national, value-added market for fresh corn products.
The pro forma effects on the above acquisitions were not significant in
1996.
On September 19, 1995 the Company acquired all of the issued and
outstanding share capital of Bakery Packaging Services Limited ("BPS"),
an English company, through a wholly owned subsidiary of the
Company, EPL Technologies (Europe) Limited, also an English Company. BPS is
based in the northwest of England and is in the business of the manufacture
and sale of packaging materials, principlly perforated packaging materials,
used by leading companies in the fresh cut produce and institutional bakery
industries, which the Company intends that BPS continue. BPS also produces
wax-coated packaging used principally in the confectionery industry, which
also is intended to continue. The total purchase price (including
acquisition costs) was approximately $3,251,000. The acquisition has been
accounted for under the purchase method of accounting. The cost of the
acquisition has been allocated on the basis of the estimated fair market
value of the assets acquired and the liabilities assumed. This allocation
resulted in goodwill of approximately $2,456,000 which is being amortized
over 10 years.
The results of BPS have been included with those of the Company since
the date of the acquisition. Pro Forma unaudited consolidated operating
results of the Company and BPS for the year ended December 31, 1995,
assuming the acquisition had been made as of January 1, 1995, are
summarized below:
<TABLE>
<S> <C>
Sales $ 8,149,255
Net loss (3,281,953)
Loss per common share (0.35)
</TABLE>
-26-
<PAGE> 28
7. INCOME TAXES
The provision for income taxes for the year ended December 31, 1996 and 1995
consists of deferred foreign income tax of $101,432 and $10,543,
respectively. There was no federal or state benefit provided for domestic
losses as a 100% valuation allowance was recorded based on management's
assessment that realization was not likely. In addition, there was no
foreign benefit provided for certain foreign losses as a 100% valuation
allowance was recorded based on management's assessment that realization was
not likely. The tax rate on other foreign income was less than the U.S.
rate.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and is a summary of the significant components of the
Company's deferred federal tax assets and liabilities:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Deferred Tax Asset
Other assets $ 31,340 $ 49,414 $ 11,488
Operating loss carryforwards 4,552,532 3,396,572 2,292,211
----------- ----------- -----------
Gross deferred tax asset 4,583,872 3,445,986 2,303,699
Valuation allowance (4,570,246) (3,338,968) (2,195,845)
----------- ----------- -----------
Deferred tax asset 13,626 107,018 107,854
----------- ----------- -----------
Deferred Tax Liability
Fixed assets 13,626 160,690 107,854
Foreign liability 161,926
----------- ----------- -----------
Deferred tax liability 175,552 160,690 107,854
----------- ----------- -----------
NET DEFERRED TAX LIABILITY $ 161,926 $ 53,672 $
=========== =========== ===========
</TABLE>
For income tax reporting purposes, the Company has net operating loss
carryforwards as follows:
<TABLE>
<CAPTION>
NET
OPERATING LOSS
CARRYFORWARDS EXPIRATION
U.S. DATE
<S> <C> <C>
Net Operating Loss 4/30/88 $ 75,031 2003
Net Operating Loss 4/30/89 269,949 2004
Net Operating Loss 4/30/90 203,605 2005
Net Operating Loss 4/30/91 42,024 2006
Net Operating Loss 12/31/92 262,926 2007
Net Operating Loss 12/31/93 2,301,851 2008
Net Operating Loss 12/31/94 3,159,453 2009
Net Operating Loss 12/31/95 3,182,663 2010
Net Operating Loss 12/31/96 3,892,298 2011
-----------
$13,389,800
===========
</TABLE>
-27-
<PAGE> 29
A change in fiscal year caused the $262,926 of U.S. loss for the period
ended December 31, 1992 to be utilized ratably over a six-year period. The
Company's ability to utilize the U.S. net operating loss carryover amounts
disclosed above may be significantly limited under U.S. Internal Revenue
Code ("IRC") Section 382 as a result of various changes affecting the
Company's capital structure during 1996 and prior years.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
<S> <C> <C>
Mortgage loan $ 465,600
Directors' pension fund loan 465,600
Bank term loan $1,387,125
Notes payable 233,625
Capital leases 196,190 150,944
---------- ----------
1,816,940 1,082,144
Less current portion 262,779 237,811
---------- ----------
Long-term debt $1,554,161 $ 844,333
========== ==========
</TABLE>
In 1996, the Company refinanced the mortgage loan and Directors' pension
fund loan by EPL Technologies (Europe) Limited ("EPL Europe") entering
into a bank term loan agreement. The bank term loan matures over the next
seven years and carries an interest rate ranging from 2% to 2-1/4% over
the Bank of Scotland Base Rate, which base rate at December 31, 1996 was
6%. EPL Europe also entered into a line of credit with the Bank of Scotland
for approximately $514,000 which bears interest of 2-1/2% over bank base
rate. Both the term loan and the line of credit are collaterallized by the
assets of BPS.
In conjunction with the acquisition of some of the assets of Crystal
Plastics, Inc., (Note 6), the Company entered into a $267,000 note payable
with the prior owner. The note is payable in 8 quarterly principal
installments of $33,375 through June 1998 with additional consideration
based on the performance of the business over the next two years and bears
an interest rate of 8%.
Other debt relates to capital leases that bear interest rates from 5.9%
through 13.0%, with varying monthly principal and interest payments.
At December 31, 1996, aggregate annual maturities of long-term debt were as
follows:
YEAR ENDING DECEMBER 31,
<TABLE>
<S> <C>
1997 $ 262,779
1998 325,926
1999 200,735
2000 205,500
2001 222,625
Thereafter 599,375
----------
$1,816,940
==========
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock, (the "Series A Stock") which has been issued
up to its authorized limit of 3,250,000, was issued at a price of $1.00 per
share with each share, of Series A Stock carrying the option to convert into
common shares at a rate of $0.75 per share. The Series A Stock carries equal
voting rights to the common shares, based on the underlying number of common
shares after
-28-
<PAGE> 30
conversion. The Series A Stock carries a dividend rate of 10% per annum,
payable in cash and/or common shares ($0.75 per share) at the Company's
option (dividends in arrears at December 31, 1996 and 1995 totaled
$1,100,716 and $837,237, respectively.) During 1996, shareholders holding
400,000 shares of Series A Stock elected to exercise their right of
conversion, leaving 2,490,000 shares of Stock outstanding at December 31,
1996. In addition, 20% of the common stock conversion option carries
detachable warrants at a price of $1.00 per warrant. During 1996 and 1995,
24,667 and 66,667 warrants were exercised, respectively, leaving 238,532
unexercised at December 31, 1996.
At the Annual Meeting of the Company held on July 22, 1996, the shareholders
of the Company authorized the issuance of up 2,000,000 shares of Board
Designated Preferred Stock. On July 23, 1996, the Company issued 531,915 of
these shares, designated as Series B Preferred Stock (the "Series B
Stock"). The Series B Stock contains the option to convert into shares of
Common Stock at the rate of $4.70 per share and carries equal voting rights
to the shares of Common Stock, based on the underlying number of shares of
Common Stock after conversion. The Series B Stock carries a dividend rate
of 10% per annum, payable in cash and/or shares at the Company's option.
Gross proceeds to the Company were $2,500,000. The outstanding dividends on
the Series B Stock at December 31, 1996 totaled $110,445.
10. COMMON STOCK
During 1996 the Company issued a total of 2,322,648 shares of Common Stock.
A total of 1,399,331 shares were issued from the exercise of warrants,
resulting in net proceeds to the Company of $3,298,876. A total of 384,000
shares were issued from the exercise of options, resulting in net proceeds
to the Company of $255,520. A total of 533,334 shares were issued on
conversion of the Series A Preferred Stock. A further 5,983 shares were
issued in a non-public transaction as payment for professional services
resulting in expense of $23,932.
During 1995, the Company issued a total of 5,552,139 shares of common stock.
In September 1995, the Company completed a private placement transaction of
2,750,000 restricted shares of its common stock (the "Offering"), par value
$0.001 per share, at a price of $2.00 per share, to raise gross proceeds of
$5,500,000. Proceeds were used for the acquisition of BPS (see Note 6) and
for working capital. Expenses associated with the Offering were $620,000,
which were charged against additional paid-in capital. Furthermore, the
Company issued 2,025,000 shares of Common Stock in the conversion of a note
payable. A total of 46,500 shares were issued as a commitment fee
for a line of credit from a corporate shareholder, resulting in the
capitalization of deferred finance costs totaling $77,459. A further 21,361
shares were issued as compensation to employees and as payment for
professional services resulting in expense of $37,381, both in a non-public
transaction. In connection with the
-29-
<PAGE> 31
Offering, warrants for a total of 55,000 shares of Common Stock, exercisable
at $2.00 per share up to October 1998, were issued in October 1995.
At December 31, 1996, the Company had 393,532 warrants outstanding to
purchase shares of Common Stock at between $1.00 and $2.00 per share, which
if exercised would provide the Company with gross proceeds of approximately
$548,000. In addition, the company had 3,295,000 options outstanding to
purchase shares of Common Stock at an weighted average price of $3.01 per
share, which if exercised would provide the Company with gross proceeds of
approximately $9,900,000.
11. STOCK OPTION PLANS
The 1994 Stock Incentive Plan (the "1994 Plan") originally provided for up
to 1,500,000 shares of unissued Common Stock to be made available for the
granting of options. This was approved by shareholders on July 21, 1994. On
July 22, 1996, shareholders approved an increase in the number of shares
available for the granting of options under the 1994 Plan to 3,000,000. On
December 31, 1996 and 1995, 665,500 and 625,500 shares, respectively, were
available for grant.
Information regarding these plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
UNDER OPTION PRICE
<S> <C> <C>
Outstanding and Exercisable at December 31, 1993 1,070,000 $0.69
Activity for the Year Ended December 31, 1994
Expired/Canceled (40,000) $3.25
---------
Outstanding and Exercisable at December 31, 1994 1,030,000 $0.60
Activity for the Year Ended December 31, 1995
Granted 874,500 $1.84
Expired (30,000) $4.62
---------
Outstanding and Exercisable at December 31, 1995 1,874,500 $1.12
Activity for the Year Ended December 31, 1996
Granted 1,805,000 $4.47
Exercised (384,000) $0.67
---------
Outstanding and Exercisable at December 31, 1996 3,295,500 $3.01
========= =====
</TABLE>
The options expire between March 10, 1998 and December 4, 2001. Of the above
options, 345,000 options issued during 1996 were issued outside of the 1994
Plan.
The estimated fair value of options granted during 1996 and 1995 ranged
between $2.93 - $6.31 and $1.73 - $1.98 per share, respectively. The
Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of FASB Statement 123, the Company's net loss
and loss per share for the years ended December 31, 1996 and 1995 would
have been increased to the pro forma amounts indicated below:
-30-
<PAGE> 32
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net loss available for common shareholders
As reported $ 4,669,843 $ 3,633,788
Pro forma $ 11,041,398 $ 5,224,529
Net loss per common share
As reported $ 0.31 $ 0.39
Pro forma $ 0.74 $ 0.56
</TABLE>
The fair value of options granted under the company's stock option plans
during 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option-pricing mode with the following assumptions used: no
dividend yield, expected volatility ranging from 88% - 224%, risk free
interest rate ranging from 5.6% - 6.91%, and expected lives of 5 years.
Pro forma compensation cost of options granted under the 1994 Plan is
measured based on the discount from market value. The pro forma effect on
net income for 1995 and 1995 is not representative of the pro forma effect
on net income in future years because it does not take into consideration
pro forma compensation expense related to grants made prior to 1995. SFAS
123 does not apply to awards prior to 1995, and additional awards in future
years are anticipated.
12. NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the loss applicable to
common shareholders by the weighted average number of common shares and
common share equivalents outstanding during the period. Outstanding options,
convertible preferred stock and stock warrants were determined to be
antidilutive for the years ended December 31, 1996, 1995 and 1994, as
applicable, and were therefore excluded from the per share calculations.
13. COMMITMENTS
The Company has entered into various leases for facilities, vehicles and
equipment. At December 31, 1996, future minimum lease payments were as
follows:
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
<S> <C> <C>
1997 $ 39,020 $ 425,559
1998 40,689 399,877
1999 7,789 312,539
2000 264,972
2001 264,440
-------- -------
Future Minimum Lease Payments $ 87,498 $1,667,387
======== ==========
</TABLE>
Rental expense for operating leases amounted to $224,461, $162,559 and
$119,022 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company has entered into agreements for services with certain executive
officers, which currently will expire, if not renewed, in 1997. In addition
to a base salary, certain other benefits are provided.
-31-
<PAGE> 33
14. RELATED PARTY TRANSACTIONS
The Company purchased certain raw materials from Jungbunzlauer Inc., a
subsidiary of a shareholder, in the amount of $35,280 and $35,760 for the
years ended December 31, 1996 and 1995, respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, due
from related parties and accounts payable approximate fair value because of
the short maturities of these items.
Interest rates that are currently available to the company for issuance of
long-term debt (including current maturities) with similar terms and
remaining maturities are used to estimate fair value for long-term debt. The
estimated fair value of the long-term debt approximates its carrying value.
The fair values are based on pertinent information available to the
management as of respective year ends. Although management is not
aware of any factors that could significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date, and current
estimates of fair value may differ from amounts presented herein.
16. CUSTOMER CONCENTRATION
In 1996, one customer accounted for 13% of annual revenues and in 1995, no
customers accounted for 10% or more of annual revenues. Two customers
represented 35% of revenues for the year ended December 31, 1994.
-32-
<PAGE> 34
17. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION
The Company develops, manufactures, and markets proprietary technologies
designed to maintain the integrity of fresh produce. These products fall
into two major classifications; processing aids and packaging materials.
Processing aids are sold primarily in the United States with smaller amounts
also sold in Canada, while packaging materials are marketed in North
America, United Kingdom and, to a lesser extent, Continental Europe.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
SALES
Domestic Operations:
Processing aids $ 1,326,669 $ 472,747 $ 345,795
Packaging materials 1,716,984 868,229 232,668
Total Domestic 3,043,653 1,340,976 578,463
United Kingdom Operations - packaging materials 8,270,488 1,898,590
------------ ----------- -----------
Total $11,314,141 $ 3,239,566 $ 578,463
============ =========== ===========
NET (LOSS) INCOME FROM OPERATIONS
Domestic Operations:
Processing aids $ (2,700,793 $(2,661,480 $(3,289,917)
Packaging materials (1,552,376) (385,663) 8,881
------------ ----------- -----------
Total Domestic (4,253,169) (3,047,133) (3,281,036)
United Kingdom Operations - packaging materials 69,194 4,918
------------ ----------- -----------
Total $ (4,183,975) $(3,042,215) $(3,281,036)
============ =========== ===========
TOTAL ASSETS
Domestic Operations:
Processing aids $2,876,117 $3,061,720 $2,673,450
Packaging materials 2,149,822 657,357 515,295
------------ ----------- -----------
Total Domestic 5,025,939 3,719,077 3,188,745
United Kingdom Operations - packaging materials 10,189,483 6,322,120
------------ ----------- -----------
Total $ 15,215,422 $10,041,197 $ 3,188,745
============ =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE
Domestic Operations:
Processing aids $ 434,313 $ 432,135 $ 368,131
Packaging materials 117,543 43,172 9,461
------------ ----------- -----------
Total Domestic 551,856 475,307 377,592
United Kingdom Operations - packaging materials 459,890 98,986
------------ ----------- -----------
Total $ 1,009,746 $ 574,293 $ 377,592
============ =========== ===========
CAPITAL EXPENDITURES
Domestic Operations:
Processing aids $ 92,858 $ 127,471 $ 168,343
Packaging materials 4,994 75,989
------------ ----------- -----------
Total Domestic 94,852 203,460 168,343
United Kingdom Operations - packaging materials 1,899,219 238,978
------------ ----------- -----------
Total $ 1,997,071 $ 442,438 $ 168,343
============ =========== ===========
</TABLE>
18. SUBSEQUENT EVENTS
Subsequent to the year end, in March 1997, the Company executed a letter of
intent containing its conditional offer to acquire a specialty packaging
business, based in Europe with sales revenue of approximately $7,500,000
and net assets of approximately $6,300,000. The Company believes that this
would
-33-
<PAGE> 35
complement its existing European operations and advance its strategic plan
of products and services it should be offering. The expected purchase price
will be based on the net asset value of the business at the date of
acquisition, as adjusted by an agreed reduction in the book value of certain
assets. The offer is subject to the preparation, negotiation, and execution
of an agreement of definitive documentation and the Company's due diligence.
Such negotiation and investigations are continuing. There can, however, be
no assurance that such negotiations and due diligence will be satisfactory
or that this transaction will be in fact consummated.
In addition, also in March 1997, the Company received subscriptions of
$1.0 million in connection with a private placement of common and Board
Designated Preferred Stock. Further subscriptions for this limited private
placement are expected shorlty from other existing offeree shareholders,
although there can be no assurance that any further subscription will in
fact be received.
-34-
<PAGE> 36
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY AND AFFILIATE
<S> <C> <C>
Paul L. Devine 42 Chairman of the Board of Directors,
President, Chief Executive Officer
Timothy B. Owen 38 Treasurer and Secretary
Shawn J. Collins 41 Controller - U.S. Operations
Derrick W. Lyon 54 Chief Executive Officer - EPL
Technologies (Europe) Limited
Dr. William R. Romig 51 Vice President - Research and
Development
Karen A. Penichter 43 Vice President - Sales
Anthony E. Kendall 54 Chief Executive Officer of Bakery
Packaging Services Ltd. and EPL
Flexible Packaging Ltd.
Joel Longstreath 44 President of Respire Films, Inc.
Robert D. Mattei (1)(2) 58 Member of the Board of Directors
Dr. Rainer G. Bichlbauer (1)(2) 57 Member of the Board of Directors
William J. Hopke(1)(2)(3) 41 Member of the Board of Directors
</TABLE>
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Resigned December 1996
Paul L. Devine. Mr. Devine was appointed Chairman and Chief Executive
Officer of the Company in March 1992. From 1989 to 1992, Mr. Devine was
involved as a business consultant in the identification and targeting of
acquisitions for various public companies. During this time, he also served
as a director and chief executive officer of various companies, including
three United Kingdom (U.K.) subsidiaries of Abbey Home Healthcare, Inc., a
U.S. public health care group. Prior to this, he was the Chief Executive of
Leisure Time International, PLC from 1986 to 1989. From 1981 until 1986, he
worked for a U.K. clearing bank and prior to that was a research graduate at
London University spending time both teaching and lecturing. He is a
graduate of London University and holds Bachelors and Masters degrees in
curriculum research. Throughout his business career, he has been intimately
-35-
<PAGE> 37
involved in the design and implementation of new product strategies, both in
financial services and health/hygiene services.
Timothy B. Owen. Mr. Owen was appointed Secretary and Treasurer in October
1996 having been European Financial Controller of the Company since 1995.
From 1992 until 1995 Mr. Owen performed financial and accounting services
for the Company as an independent consultant. From 1990 to 1993, Mr. Owen
served as chief financial officer and secretary of various companies,
including three U.K. subsidiaries of Abbey Home Healthcare, Inc. Prior to
this, from 1986 to 1990, he was a financial controller for the Foseco Group
Plc, holding both corporate and operational positions. Mr. Owen qualified as
a chartered accountant with Touche Ross & Co. (now Deloitte & Touche) in
1985. He is a graduate of Brunel University, and holds an Honors degree in
economics.
Shawn J. Collins. Mr. Collins joined the Company in July 1993 as Controller.
He was appointed Treasurer in July 1994 and Secretary in October 1994 until
October 1996. Prior to joining the Company, Mr. Collins served from 1988 to
1993, as Vice-President of a privately held environmental
engineering/construction company. From 1978 to 1987, Mr. Collins was
controller for a Philadelphia-based economic development corporation. Mr.
Collins received his MBA from Drexel University and his B.S. degree in
accounting from Villanova University.
Derrick W. Lyon. Mr. Lyon was appointed Chief Operating Officer of Bakery
Packaging Services Limited (BPS), following its acquisition by the Company
in September 1995. Following the appointment of Mr. Anthony Kendall in
August 1996, Mr. Lyon became Chief Executive Officer of EPL Technologies
(Europe) Limited. From 1981 to 1995, Mr. Lyon was Managing Director and a
founder shareholder of BPS. Prior to this, Mr. Lyon held senior management
positions within Bernard Wardle & Co. Smurfit Limited, and W.R. Grace,
where he has gained over 25 years experience in the printing and packaging
industries. He holds a degree in mechanical engineering from City
University, London, and Bachelors and Masters degrees in economics from St.
John's College, Cambridge.
Dr. William R. Romig. Dr. Romig was appointed Vice President of Research and
Development to the Company in September of 1994. From 1988, Dr. Romig was
first Senior Director of Vegetable Genetics and then Senior Director of
Business Development and Director of Product Development for a joint venture
with DuPont, for DNA Plant Technology Corporation. Prior to 1988, he worked
for General Foods Corporation (Kraft) eventually attaining the highest
technical position of Principal Scientist. Dr. Romig received his B.S. in
Plant Pathology from Cornell University and his PhD from the University of
Delaware. He has held positions of Adjunct Professor at several Universities
and has lectured and published in the area of fresh, cut fruits and
vegetables.
Karen A. Penichter. Ms. Penichter joined the Company as Vice President Sales
in March 1996. From 1986, Ms. Penichter worked for FMC Corporation - Food
Ingredients Division in several sales management positions until attaining
the position of Director of Sales in 1993. She worked as a Sales
Representative and then Sales Manager for SCM Corporation - Durkee Foods
Division until 1986. Ms. Penichter was employed by Thomas J. Lipton Company
as a Food Technologist from 1978-1982. Ms. Penichter holds a BA in Biology
from SUNY Binghampton and an MS in Food Technology from Rutgers University.
Anthony P. Kendall. Mr. Kendall joined the Company as chief executive of BPS
and EPL Flexible, subsidiaries of the Company in August 1996. From
1970 to 1996, Mr. Kendall worked for the UCB group of Companies in various
senior management positions. Most recently he was Managing Director of UCB
Flexible Ltd., responsible for marketing their specialty packaging products
in the UK and for Pepsico European contracts. He holds a B.S. degree in
Mechanical Engineering from the University of London.
-36-
<PAGE> 38
From 1964 until 1970 he worked for Wiggins Teape Group reaching the position
of Production Manager of their main factory in Cheshire.
Joel Longstreth. Mr. Longstreth was appointed President of Respire Films,
Inc., a subsidiary of the Company and a Pennsylvania corporation, following
the acquisition of Respire Films, Inc., and Ohio Corporation ("RFI") on
September 30, 1994. From 1991 to 1994 Mr. Longstreth was President and a
founding shareholder of RFI.
Robert D. Mattei. Mr. Mattei is an investor and entrepreneur. Mr. Mattei has
been self-employed in various aspects of the food service industry for over
20 years. As a restaurateur, Mr. Mattei has developed, operated and sold
many successful operations. Mr. Mattei currently owns three restaurants, and
acts as an industry consultant primarily involved in the development of
restaurant concepts. Mr. Mattei has been a member of the Board of Directors
of the Company since February 1988 and was Secretary of the Company from
February 1988 to March 1993.
Dr. Rainer G. Bichlbauer. Dr. Bichlbauer was elected to the Board of
Directors of the Company in July 1994. He currently serves as Director of
Finance and Marketing of Jungbunzlauer Holding AG and Jungbunzlauer AG, and
Chairman and President of Jungbunzlauer International AG, ("JI") all based
in Basel, Switzerland. He is also Manager Director of Jungbunzlauer GmbH,
based in Vienna, Austria, which post he has held since 1988. From 1981 to
1987, he was Chief Financial Officer of Elin Union, a state-owned
electronics and electrical engineering conglomerate, based in Vienna. He has
also held key positions within Royal Dutch Shell Group, in Austria, Germany,
and the Netherlands. Dr. Bichlbauer received his Doctorate in law and
political science from the University of Vienna. In March 1997, JI and Dr.
Bichlbauer entered into a plea agreements with the US Justice Department,
which are subject to US District Court approval in San Francisco,
California, under which JI agreed to pay a $11.0 million fine and Dr.
Bichlbauer agreed to plead guilty and pay a $150,000 criminal fine in
connection with the Justice Department's investigation into the setting of
prices worldwide for citric acid.
William J. Hopke. Mr. Hopke has served as Vice President of Trilon Dominion
Partners LLC since June 1995. Mr. Hopke served as Senior Vice President and
Treasurer of Dominion Capital, Inc. and Assistant Treasurer - Finance of
Dominion Resources, Inc. from April 1993 to June 1995. Mr. Hopke held the
position of Vice President and Treasurer of Dominion Capital, Inc. and
Assistant Treasurer-Finance of Dominion Resources, Inc. from 1988 to April
1993. Mr. Hopke joined Dominion Resources, Inc. in 1984. Mr. Hopke served as
Director of Advanced Materials, Inc., Caldera Resources, Inc.,
Organogenesis, Inc., and Wilshire Technologies, Inc. Mr. Hopke was elected
to the Board of Directors of the Company in March 1993. Mr. Hopke resigned
for personal reasons from all of the above companies, including as a
director of the Company, in December 1996 for personal reasons.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company for the year ended December 31, 1996 for services rendered in all
capacities to each of the Company's most highly compensated executive
officers whose aggregate cash compensation for that period exceeded $100,000
(the "Named Executive Officers").
-37-
<PAGE> 39
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------- --------------------
NAME AND OTHER RESTRICTED ALL OTHER
PRINCIPAL COMPEN- STOCK OPTIONS/ LTIP COMPEN-
POSITION SALARY BONUS SATION AWARD(S) SARs PAYOUTS SATION
YEAR ($) ($) ($) ($) #S ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine, 1996 $225,000 $210,798 $ 0 $0 500,000 $ 0 $ 0
CEO 1995 56,250 100,000 120,000 0 200,000 0 0
1994 0 0 160,000 0 0 0 0
Howard S. Kravitz 1996 109,264 0 0 0
1995 109,264 0 0 0 50,000 0 0
1994 106,618 0 0 0 0 0 0
</TABLE>
No other executive officers are presented in the Summary Compensation Table
as no other officer of the Company during the period from 1994 to 1996
earned salary and bonus of more than $100,000 for any such year.
COMPENSATION OF DIRECTORS
With the exception of Mr. Devine, no cash compensation was paid to any
director of the Company during the year ended December 31, 1996. In May
1996, in accordance with the terms of the Company's 1994 Stock Incentive
Plan, William J. Hopke, Robert D. Mattei and Dr. Rainer G. Bichlbauer were
each granted 15,000 options at an exercise price of $7.625 per share, for
their services as members of the audit and compensation committees. These
options are exercisable for five-year terms and have exercise prices equal
to the fair market value of such shares on the date of grant.
EMPLOYMENT AND CONSULTING CONTRACTS
Effective October 1, 1995 Mr. Devine signed a new employment agreement with
the Company, serving as Chairman of the Board of Directors, President and
Chief Executive Officer. This agreement expires on September 30, 1997,
subject to automatic renewal for successive one-year terms, at a base salary
to be fixed by the Board of Directors to be, as of October 1, 1995, no less
than $225,000 per year.
Howard S. Kravitz was a party to an employment agreement pursuant to which
he served as the Company's Vice President - Sales and Marketing. Notice that
the Company did not desire to renew this contract was served on January 30,
1996, and thus, currently are being made on a month-to-month basis at the
equivalent annual rate of $109,264. Mr. Kravitz remains with the Company and
is now Director - Engineering and Technical Services.
The following table sets forth certain information concerning grants of
stock options made during the year ended December 31, 1996 to Named
Executive Officers.
-38-
<PAGE> 40
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------
% OF
TOTAL POTENTIAL REALIZABLE VALUE AT
OPTIONS ASSUMED ANNUAL RATES OF
GRANTED STOCK PRICE APPLICATION FOR
TO OPTION TERM (10 YEARS)(1)
OPTIONS EMPLOYEES EXERCISE -----------------------------
GRANTED IN FISCAL OR BASE EXPIRATION
NAME (#) YEAR PRICE DATE 0% 5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine, CEO 300,000 16.62% $4.00 3/7/01 $0 $331,538 $732,612
200,000 11.08 $4.063 12/4/01 0 224,429 496,039
</TABLE>
(1) The dollar amounts under these columns are the result of calculations at 0%,
5% and 10% rates set by the Securities Exchange Commission and therefore are not
intended to forecast possible future appreciation of the price of the Common
Stock. The Company did not use an alternative formula for a grant date
valuation, an approach which would state gains present, and therefore lower,
value. The Company is not aware of any formula which will determine with
reasonable accuracy a present value based on future unknown or volatile factors.
-39-
<PAGE> 41
The following table sets forth certain information concerning exercises of
stock options during the year ended December 31, 1996 and the value of
unexercised stock options at December 31, 1996 for Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR END OPTION VALUES (1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996
ACQUIRED VALUE ------------------------------------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---- ----------- -------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paul Devine, CEO 0 $0 1,000,000 0 $3,450,000 $0
Howard S. Kravitz 0 0 205,000 0 1,021,563 0
</TABLE>
(1) At December 31, 1996 the closing price of a share of unrestricted Common
Stock on the Nasdaq Small Cap market was $6.063.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1996
regarding the beneficial ownership of all directors, Named Executive
Officers, all directors and Named Executive Officers as a group, and each
person known to the Company to be a beneficial owner of more than five
percent of the Company's outstanding Common Stock and/or Series A Preferred
Stock (on an as converted basis) and/or Series B Preferred Stock (on an as
converted basis) (each beneficial owner has sole voting and investment power
with respect to the shares indicated as beneficially owned, except as
noted):
-40-
<PAGE> 42
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT PERCENT
BENEFICIALLY OF OF OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNER(1) COMMON A PREFERRED B PREFERRED
<S> <C> <C> <C> <C>
CERTAIN BENEFICIAL OWNERS
Trilon Dominion Partners, L.L.C.
245 Park Avenue
Suite 2820
New York, NY 10017 5,425,106(2) 29.72% 78.80% 0%
Lancer Partners
200 Park Avenue, 39th Floor
New York, NY 10017 3,257,079(3) 20.27% 0% 100.00%
Quaestas S.A.
38a Route de Malagnou
CH-1208
Geneva, Switzerland 413,333(4) 2.59% 10.04% 0%
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Paul L. Devine 1,340,833(5) 8.07% 2.00% 0%
Director and
Chief Executive Officer
2 International Plaza
Suite 245
Philadelphia, PA 19113-1507
Robert D. Mattei 428,965(6) 2.73% 0% 0%
Director
7060 Greenhill Road
Philadelphia, PA 19151
Dr. Rainer G. Bichlbauer 30,000(7) *(9) 0% 0%
Director
St. Alban Vorstadt 90
CH-4002 Basel,
Switzerland
Directors and executive officers as a
group (ten persons) 3,050,998(8) 17.03% *(9) 0%
Total number of shares outstanding--
common 15,531,200 100.00%
Preferred (as converted)--Series A 3,320,000 100.00%
Series B 531,915 100.00%
</TABLE>
-41-
<PAGE> 43
(1) Unissued shares of each owner subject to currently exercisable options
or options or other rights to acquire securities exercisable within 60
days are included in the totals listed and are deemed to be outstanding
for the purpose of computing the percentage of Common Stock owned by
such owner. Such calculation is required under Rule 13d-3(d) of the
Securities Exchange Act of 1934, as amended, which states that a person
shall be deemed to be the beneficial owner of a security if that person
has the right to acquire beneficial ownership of such security within
60 days, including the right to acquire such shares through the
exercise of any option or warrant or through the conversion of any
security. For purposes of Rule 13-d-3(d)(1) and the required
calculation of the Percent of Class outstanding, any securities not
outstanding which are beneficially owned, subject to the exercise of
options or warrants or through the conversion of any security, shall be
deemed to be outstanding for the purpose of computing the percentage of
outstanding securities by such person but shall not be deemed to be
outstanding for computing the percentage of class by any other person.
The effect of this rule is to increase the stated total ownership
percentage currently controlled.
(2) Includes 2,717,333 shares of Common Stock through the rights to convert
1,963,000 shares of Series A Preferred Stock into 2,617,333 shares
of Common Stock and through the rights to exercise 100,000 warrants to
acquire shares of Common Stock.
(3) Includes 468,085 shares of Common Stock through the rights to convert
468,085 shares of Series B Preferred Stock into shares of Common Stock.
It also includes 705,000 shares of Common Stock, and 63,830 shares of
Common Stock through the rights to convert 63,830 shares of Series B
Preferred Stock into shares of Common Stock, both held by other funds
but through which common management is exercised.
(4) Includes 413,333 shares of Common Stock through the right to convert
250,000 shares of Series A, Preferred Stock into 333,333 shares of
Common Stock and to exercise 80,000 warrants to acquire shares of
Common Stock.
(5) Includes 1,080,000 shares of Common Stock through the right to exercise
1,000,000 options to acquire shares of Common Stock and through the
rights to convert 50,000 shares of Series A, Preferred Stock into
66,667 shares of Common Stock and to exercise 13,333 warrants to
acquire shares of Common Stock.
(6) Includes 180,000 shares of Common Stock issuable upon the exercise of
outstanding options, and 20,000 shares of Common Stock owned by Mr.
Mattei's wife, as to which he disclaims beneficial ownership
(7) Includes 30,000 shares of Common Stock issuable upon the exercise of
outstanding options.
(8) Includes 2,380,000 shares of Common Stock through the rights to
exercise 2,300,000 options to acquire shares of Common Stock, the right
to convert 50,000 shares of Series A, Preferred Stock into 66,667
shares of Common Stock and to exercise 13,333 warrants to acquire
shares of Common Stock.
(9) "*" indicates less than one percent of class.
-42-
<PAGE> 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Consulting Agreement (the "Agreement") with Dr.
Joe H. Cherry, a former director of the Company, dated January 1, 1993, to
provide consultancy services to the Company in the area of research and
development. The Agreement had an original term of two years, expiring
December 31, 1994, with an annual consulting fee of $60,000 in 1993 and
$78,000 in 1994, plus certain bonuses based on the receipt of new patents by
the Company for applications previously approved by the Board of Directors.
This Agreement has not been renewed, and thus currently, payments are being
paid on a month-to-month basis.
The Company entered into a Consulting Agreement with DWL Associates Ltd.
(the "DWL Agreement") for the provision of consulting and advisory services
by Mr. Derrick W. Lyon. The DWL Agreement, which was signed as part of the
acquisition by the Company of BPS in September 1995, has an original term of
two years, expiring September 30, 1997. Annual fees of GBP 90,000
($154,125 at an exchange rate of $1.7125) per annum are payable, with this
Agreement plus the reimbursement of directly incurred expenses.
The Company currently obtains all of its requirements for certain raw
materials from Jungbunzlauer, Inc., a U.S. subsidiary of a Swiss-based
company, which is one of the Company's principal stockholders and with which
Dr. Bichlbauer, one of the Company's directors, is affiliated. In the years
ended December 31, 1996 and 1995, these purchases totaled $35,280 and
$35,760, respectively.
-43-
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
See index to Financial Statements and Supplemental Data at page 12.
REPORTS ON FORM 8-K AND FORM 8
On January 30, 1996, the Company filed a report on Form 8-K under Item 5
thereof, in connection with the execution of a letter of intent with
Potandon Produce, L.L.C.
On July 9, 1996 the Company filed a report on Form 8-K under Item 5 thereof,
in connection with trading of the Company's shares of common stock on the
Nasdaq Small Cap market.
On July 19, 1996 the Company filed a report on Form 8-K under Item 2
thereof, in connection with the acquisition of certain assets and certain
liabilities of Printpack Europe (St. Helens) Limited.
On September 12, 1996 the Company filed a report on Form 8-K under Item 5
thereof, in connection with the execution by BPS of a supply contract with
DuPont.
On November 27, 1996 the Company filed a report Form 8-K under Item 5
thereof, in connection with the effectiveness of the Company's Registration
Statement on Form S-3.
EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated, exhibits which were previously filed are
incorporated by reference:
Exhibit
No.
3.1 Amended and Restated Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-3 on file with the Commission).
3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 on file with the Commission).
4.1 Specimen Common Stock Certificate (Incorporated by reference to Exhibit
4.1 to the Company's Annual Report on Form 10-K for the eight months
ended December 31, 1992 on file with the Commission).
4.2 Specimen Series A, Preferred Stock Certificate (Incorporated by reference
to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 on file with the Commission).
4.3 Specimen Series A, Preferred Stock, Subscription Agreement (Incorporated
by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended
-44-
<PAGE> 46
December 31, 1993 on file with the Commission).
10.1 Office Lease Agreement dated October 15, 1993 between Extended Product
Life, Inc. and B.I.G., a Partnership for Fresno, CA Applications
Laboratory (Incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993
on file with the Commission).
10.2 Stock Purchase and Supply Agreement dated May 19, 1994 between
Jungbunzlaur Holding AG and Extended Product Life, Inc. (Incorporated
by reference to Exhibit 10.10 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 on file with the Commission).
10.3 1994 Stock Incentive Plan (Incorporated by reference to Exhibit 10.11
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994 on file with the Commission).
10.4 Employment Agreement between EPL Packaging, Inc. (now known as Respire
Films, Inc.) and Joel Longstreath, President, dated September 30, 1994.
(Incorporated by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,1994 on file
with the Commission).
10.5 Agreement for the sale and purchase of the entire issued share capital
of Bakery Packaging Services Limited, dated September 15, 1995
(Incorporated by reference to Exhibit 2.1 to the Company's Report on
Form 8-K dated October 3, 1995 on file with the Commission).
10.6 Disclosure letter in relation to the agreement for the sale of the
entire issued share capital of Bakery Packaging Services Limited, dated
September 15, 1995 (Incorporated by reference to Exhibit 2.2 to the
Company's Report on Form 8-K dated October 3, 1995 on file with the
Commission).
10.7 Agreement between EPL Technologies (Europe) Limited and DWL Associates
for the services of D. W. Lyon as Chief Operating Officer of Bakery
Packaging Services Limited (Incorporated by reference to Exhibit 2.3 to
the Company's Report on Form 8-K dated October 3, 1995 on file with the
Commission).
10.8 Employment agreement between EPL Technologies, Inc. and P. L. Devine,
Director, President and Chief Executive Officer, dated October 1, 1995
(Incorporated by reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 on file
with the Commission
10.9 Employment agreement dated March 4, 1996 between EPL Technologies, Inc.
and Karen Penichter, Vice-President Sales (Incorporated by reference to
Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 on file with the Commission).
10.10* Office Lease Agreement dated September 11, 1996 between EPL
Technologies, Inc. and K/B Fund II for Headquarters office.
11.01* Computation of Earnings per Common Share and Fully Diluted Earnings per
Common Share.
* Filed herewith
-45-
<PAGE> 47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date March 28, 1997 /s/ PAUL L. DEVINE
-------------------------
Paul L. Devine
Chairman and President
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on behalf of the Company and in the capacities on the
dates indicated.
Date March 28, 1997 /s/ PAUL L. DEVINE
-------------------------
Paul L. Devine
Chairman and President
Principal Executive Officer and
Director
Date March 28, 1997 /s/ TIMOTHY B. OWEN
-------------------------
Timothy B. Owen
Principal Financial Officer and
Principal Accounting Officer
Date March 28, 1997 /s/ ROBERT D. MATTEI
-------------------------
Robert D. Mattei
Director
Date _________________________
Dr. Rainer G. Bichlbauer
Director
-47-
<PAGE> 1
STANDARD OFFICE LEASE
1. BASIC LEASE PROVISIONS ("BASIC LEASE PROVISIONS")
1.1 PARTIES: This Lease, dated, for reference purposes only, September 11, 1996
is between K/B FUND II, a Delaware general partnership ("Landlord"), and EPL
TECHNOLOGIES, INC., a Colorado corporation, doing business under the name EPL
TECHNOLOGIES, INC. ("Tenant").
1.2 PREMISES: Suite Number(s) 245, 2nd floor, consisting of approximately six
thousand six hundred and seventy-four (6,674) rentable square feet, more or
less, as shown on Exhibit "A" hereto (the "Premises").
1.3 BUILDING: The building located at Scott Way and Route 291 in the City of
Tinicum, County of Delaware, State of Pennsylvania, as defined in paragraph 2.
1.4 USE: General Office, subject to paragraph 6.
1.5 TERM: Sixty (60) months commencing, subject to paragraph 3.2, October 15,
1996 ("Commencement Date") and ending October 14, 2001, as defined in paragraph
3. Accordingly, if Tender of Possession (as hereinafter defined) is delayed
pursuant to paragraph 3.2, the termination date shall be extended by the number
of days Tender of Possession is delayed beyond October 15, 1996.
1.6 BASE RENT: Ten thousand two hundred sixty-one dollars and twenty-eight cents
($10,261.28) per month, payable on the First (1st) day of each month per
paragraph 4.1.
<TABLE>
<CAPTION>
LEASE PERIOD ANNUAL BASE RENT MONTHLY BASE RENT
------------ ---------------- -----------------
<S> <C> <C>
10/15/96 -11/14/96 N/A Free Rent
11/15/96 -10/14/98 $123,135.36 $10,261.28
10/15/98 -10/14/99 $124,803.84 $10,400.32
10/15/99 -10/14/00 $126,472.32 $10,539.36
10/15/00 -10/14/01 $128,140.80 $10,678.40
</TABLE>
These dates may be adjusted pursuant to paragraph 3.2. It is understood
that in all cases Tenant shall receive one (1) month's free rent.
1.6(a) ELECTRIC: N/A.
1.7 BASE ALLOWANCE: The annualized dollar amount which results by multiplying
the sum of Base Year 1996 expenses by the rentable square footage of the
Building.
1.8 BASE RENT INCREASE: Intentionally Omitted.
1.9 BASE RENT PAYABLE UPON COMMENCEMENT: Intentionally Omitted
1.10 SECURITY DEPOSIT: $10,261.28.
1.11 TENANT'S SHARE OF OPERATING EXPENSE INCREASE: 2.2% as defined in paragraph
4.2.
<PAGE> 2
1.12 Intentionally Omitted.
1.13 PARKING: Tenant shall be entitled to parking for twenty-three (23)
automobiles, subject to paragraph 2.2.
1.14 LISTING BROKER: The Flynn Company.
1.15 COOPERATING BROKER: John M. Gola Company, Inc. A "cooperating broker" is
defined as any broker other than the Listing Broker entitled to a share of any
commission arising under this Lease.
1.16 ERISA PARTY: Landlord is not an employee benefit plan as that term is
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974
("ERISA"), or a trust formed to hold assets of one or more such plans or an
entity owned by such a plan or trust (each of which is referred to in this Lease
as an "ERISA Party"). Paragraph 48 of this Lease shall apply if Landlord is an
ERISA Party. Paragraph 12.13 of this Lease shall apply if Landlord is an ERISA
Party or if an ERISA Party subsequently becomes Landlord.
1.17 LANDLORD ALTERATIONS, IMPROVEMENTS OR ADDITIONS: Landlord will be making
alterations improvements or additions to the Premises in conjunction with this
Lease and therefore Paragraph 7.5(b) shall apply to this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 PREMISES: The Premises are a portion of a building identified in paragraph
1.3 of the Basic Lease Provisions (the "Building"). "Building" shall include
adjacent parking structures used in connection therewith. The Premises, the
Building, the Common Areas, as defined in paragraph 2.3, the land upon which the
same are located, along with the other two office buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
Building Project". Landlord hereby leases the Premises to Tenant and Tenant
leases the Premises from Landlord for the term, at the rental, and upon all of
the conditions set forth herein, including rights to the Common Areas as herein
specified.
2.1.1 Landlord reserves the right to relocate Tenant once during the term of
this Lease subject to the following conditions:
(a) The rentable area of the new location in the Office
Building Project shall be similar in layout and at least equal to the
Premises (subject to a variation of no more than 3%) provided the
amount of Rent payable pursuant to paragraph 4 of this Lease is not
increased; provided, further, that Rent and Tenant's Share shall be
equitably reduced if such space is smaller;
(b) If the then prevailing Rent for the new location is less
than the amount being paid for the Premises, the Rent shall be reduced
to equal the Rent for the new location;
(c) Landlord shall pay the cost of providing building standard
improvements in the new location comparable to the improvements in the
Premises to the reasonable satisfaction of Tenant, which shall be
completed before Tenant takes possession of the new space;
<PAGE> 3
(d) Landlord shall pay the expenses reasonably incurred by
Tenant in connection with such substitution of Premises, including but
not limited to costs of moving, door lettering, telephone relocation
and announcements and reasonable quantities of new stationery; and
(e) Landlord shall deliver to Tenant written notice of
Landlord's election to relocate Tenant, specifying the new location and
the amount of Rent payable for it at least ninety (90) days prior to
the date the relocation is to be effective. If the relocation of the
Premises is not acceptable to Tenant, Tenant for a period of ten (10)
days after receipt of Landlord's notice to relocate, shall have the
right (by delivering written notice to Landlord) to terminate this
Lease effective thirty (30) days after delivery of written notice to
Landlord.
2.2 VEHICLE PARKING. Subject to the rules and regulations attached hereto, and
as established by Landlord from time to time pursuant to paragraph 2.4, Tenant
shall be entitled to unreserved parking in the Office Building Project for the
number of automobiles specified in paragraph 1.13 of the Basic Lease Provisions.
Landlord reserves the right to charge for additional parking spaces.
2.2.1 If Tenant violates the parking rules then in effect, then Landlord shall
have the right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away the vehicle involved and charge the cost
to Tenant, which cost shall be immediately payable upon demand by Landlord.
2.2.2 Monthly parking fees for spaces in excess of 23 shall be payable one month
in advance prior to the first day of each month.
2.3 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all areas
and facilities outside the Premises and within the exterior boundary line of the
Office Building Project that are provided and designated by the Landlord from
time to time for the general non-exclusive use of Landlord, Tenant and other
lessees of the Office Building Project and their invitees. As used in this
Lease, the term "invitees" means the employees, visitors, suppliers, shippers
and customers of Landlord, Tenant and other lessees of the Office Building
Project. The Common Areas include, but are not limited to, common entrances,
lobbies, corridors, stairways and stairwells, public rest rooms, elevators,
escalators, parking areas and parking spaces to the extent not otherwise
prohibited by this Lease, loading and unloading areas, trash areas, roadways,
sidewalks, parkways, ramps, driveways, landscaped areas, windows, air shafts,
walkways, parking spaces and decorative walls.
2.4 COMMON AREAS - RULES AND REGULATIONS. Tenant agrees to abide by and conform
to the rules and regulations attached hereto as Exhibit B with respect to the
Office Building Project, and to cause its invitees to so abide and conform.
Landlord or such other person (s) as Landlord may appoint shall have the
exclusive control and management of the Common Areas and shall have the right,
from time to time, to modify, amend and enforce said rules and regulations. Such
modifications and amendments shall be in writing, reasonable and not
inconsistent with the terms of this Lease. Landlord shall not be responsible to
Tenant for the noncompliance with said rules and regulations by other lessees of
the Office Building Project or their invitees but will enforce such rules and
regulations consistently.
2.5 COMMON AREAS - CHANGES. Landlord shall have the right, in Landlord's sole
discretion, from time to time:
(a) To make changes to the Building interior and exterior and
the Common Areas, including, without limitation, changes in the
location, size, shape, number, and appearance
<PAGE> 4
thereof, including but not limited to the lobbies, windows, stairways,
air shafts, elevators, escalators, restrooms, driveways, entrances,
parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and
walkways; provided, however, Landlord shall at all times provide the
parking facilities required by applicable law and this Lease;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises
remains available;
(c) To designate other land and improvements outside the
present or future boundaries of the Office Building Project to be a
part of the Common Areas, provided that such other land and
improvements have a reasonable and functional relationship to the
Office Building Project;
(d) To add additional buildings and improvements to the Common
Areas.
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project or
any portion thereof;
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and the other
portions of the Office Building Project as Landlord may, in the
exercise of sound business judgment, deem to be appropriate.
Notwithstanding the foregoing, Tenant's access to the Premises and ability to
use and enjoy the Premises shall not be materially affected by Landlord.
3. TERM.
3.1 TERM. The term and Commencement Date of this Lease shall be as specified in
paragraph 1.5 of the Basic Lease Provisions.
3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any
reason Landlord, despite using best efforts, cannot cause Tender of Possession
to occur on or before said date and subject to paragraph 3.2.2, Landlord shall
not be subject to any liability therefor, nor shall such failure affect the
validity of this Lease or the obligations of Tenant hereunder or extend the term
hereof; but, in such case, Tenant shall not be obligated to pay Rent or perform
any other obligation of Tenant under the terms of this Lease, except as may be
otherwise provided in this Lease, until Tender of Possession; provided, however,
that if Landlord shall not have caused Tender of Possession to occur within
sixty (60) days following said Commencement Date, Tenant may, at Tenant's
option, by written notice to Landlord within ten (10) days thereafter, cancel
this Lease, in which event the parties shall be discharged from all obligations
hereunder, except that Landlord shall return any money previously deposited by
Tenant. If Tenant's written notice is not received by Landlord within said ten
(10) day period, Tenant's right to cancel this Lease hereunder shall terminate
and be of no further force or effect. Landlord shall use its best efforts to
cause Tender of Possession to occur on or before October 15, 1996. Tenant shall
receive a credit against Base Rent first coming due in the amount of $342.04 for
every day beyond October 15, 1996 that Tender of Possession has not occurred
because of Landlord's failure to use such best efforts. Before making any change
to the construction described in Exhibit C because of code requirements, or
<PAGE> 5
existing building conditions, Landlord shall notify Tenant and give Tenant
reasonable input with respect to such change.
3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises shall be deemed
tendered to Tenant ("Tender of Possession") when (1) the improvements to be
provided by Landlord under this Lease are substantially completed in a good and
workmanlike manner and in accordance with Exhibit C and all laws, (2) the
Building utilities are ready for use in the Premises, (3) Tenant has reasonable
access to the Premises, (4) state and local certificates of occupancy have been
issued, and (5) ten (10) days shall have expired following advance written
notice to Tenant of the occurrence of the matters described in (1), (2) (3) and
(4), above of this paragraph 3.2.1.
3.2.2 DELAYS CAUSED BY TENANT. There shall be no abatement of Rent, and the
sixty (60) day period following the Commencement Date before which Tenant's
right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended
to the extent of any delays caused by wrongful or negligent acts or omissions of
Tenant, Tenant's agents, employees and contractors.
3.3 EARLY POSSESSION. If Tenant occupies the Premises prior to said Commencement
Date, such occupancy shall be subject to all provisions of this Lease, and such
occupancy shall not change the termination date.
3.4 UNCERTAIN COMMENCEMENT. Because the commencement of the Lease term shall
occur on the date of Tender of Possession, or Tenant's actual occupancy,
whichever occurs first, Tenant and Landlord shall execute an amendment to this
Lease establishing the date of Tender of Possession or the actual taking of
possession by Tenant, whichever first occurs, as the Commencement Date, and
establishing the actual termination date, if the Lease term does not in fact
commence on the scheduled October 15, 1996 commencement date.
3.5 PUNCH LIST. Landlord shall diligently complete punchlist items.
4. RENT.
4.1 BASE RENT. Subject to adjustment as provided in paragraph 4.3 and except as
may be otherwise expressly provided in this Lease, Tenant shall pay Landlord the
Base Rent set forth in paragraph 1.6 of the Basic Lease Provisions, without
offset or deduction. Rent for any period during the term which is for less than
one month shall be prorated based upon the actual number of days of the calendar
month involved. Rent shall be payable in lawful money of the United States to
Landlord at the address stated herein or to such other persons or at such other
places as Landlord may designate in writing.
4.2 OPERATING EXPENSE INCREASE. Tenant shall pay to Landlord during the term of
this Lease Tenant's Share, as defined in paragraph 4.2(a), of all estimated
increases in Operating Expenses, as defined in paragraph 4.2(b), above the Base
Allowance, as defined in paragraph 1.7 of the Basic Lease Provisions. Payments
of Tenant's Share in excess of the Base Allowance are due and payable monthly on
the same date as the Base Rent. Tenant's Share of the increase may be adjusted
by Landlord on a quarterly basis should the actual Operating Expenses exceed the
then current reasonable estimates. Within sixty (60) days after the expiration
of each calendar year, Landlord shall provide Tenant with a reasonably detailed
statement showing the actual increase/decrease in Operating Expenses over the
Base Allowance for the prior year. If payments made by Tenant pursuant to this
paragraph are less than or exceed the amounts shown in any statement then
Tenant's account will be adjusted to reflect the amounts
<PAGE> 6
due. All deficiencies are payable upon receipt of invoice and all credits will
be applied by Landlord to the next installment of Operating Expense
reimbursement unless this Lease has terminated in which case they shall promptly
be paid to Tenant. Concurrently, with the remittance of the prior year
statement, or as soon thereafter as is reasonably possible, Landlord shall
advise Tenant of the then current year's estimate of Operating Expenses as well
as the monthly payment due thereon. Any deficiencies in the monthly billings
that may have accrued from either the commencement date of the Lease or the
first day of any subsequent calendar year, shall be due and payable upon receipt
by Tenant of an invoice from Landlord.
(a) "Tenant's Share" is defined as the product derived by
multiplying the percentage set forth in paragraph 1.11 of the Basic
Lease Provisions by the then current year's Operating Expenses less
Landlord's Base Allowance. The percentage set forth in paragraph 1.11
is calculated by dividing the rentable square footage of the Premises
by the total rentable square footage of the Building as defined by
Landlord. It is understood and agreed that the square footage figures
are approximations which Landlord and Tenant agree are reasonable and
shall not be subject to revision except in connection with an actual
change in the size of the Premises or a change in the space available
for lease in the Building. Notwithstanding any provision of this
paragraph to the contrary, if the Building is less than ninety (90%)
percent leased as of the last day of any calendar quarter an adjustment
may be made with respect to expenses that vary with occupancy in
Tenant's Share for such quarter to reflect at least eighty (80%)
percent of the rentable area of the Building as being leased. The
formula for such computation shall be a ratio, the numerator of which
is Tenant's rentable square footage as stated in paragraph 1.2 of the
Basic Lease Provisions and the denominator of which is the amount which
results when the total rentable square footage of the Building is
reduced by twenty (20%) percent.
(b) "Operating Expense(s)" is defined to include all costs
incurred by Landlord in the exercise of its reasonable discretion, for:
(i) The operation, repair, maintenance, and
replacement, in a neat, clean, safe, good order and condition,
of the Office Building Project, including but not limited to,
the following:
(aa) The Common Areas, including their
surfaces, coverings, decorative items, carpets,
drapes and window coverings, and including parking
areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, stairways, parkways,
driveways, landscaped areas, striping, bumpers,
irrigation systems, lighting facilities, building
exteriors and roofs, fences and gates;
(bb) All heating, air conditioning,
plumbing, electrical systems, life safety equipment,
telecommunications equipment, elevators and
escalators, lessee directories, fire detection
systems, sprinkler systems and other equipment used
in common by, or for the benefit of, occupants of the
Office Building Project;
(ii) Trash disposal, janitorial and security
services;
(iii) Any other service to be provided by Landlord
that is elsewhere in this Lease stated to be an "Operating
Expense";
<PAGE> 7
(iv) Premiums for the liability and property
insurance policies (including, but not limited to, earthquake,
flood and boiler and machinery insurance, if carried)
maintained by Landlord;
(v) Real property taxes payable by Landlord under
paragraph 10.1;
(vi) Water, sewer, gas, electricity, and other
publicly mandated services to the Office Building Project;
(vii) Wages, salaries and applicable fringe benefits
and materials, supplies and tools, used in maintaining and
cleaning the Office Building Project;
(viii) Maintaining and auditing accounting records
and a management fee (at market rates) attributable to the
operation of the Office Building Project.
(ix) Replacing and/or adding improvements mandated by
any governmental agency as a result of laws enacted after the
date hereof, and any repairs or removals necessitated thereby
amortized over their useful life as determined in the
reasonable judgment of Landlord's accountant (including
interest on the unamortized balance as reasonably determined
by Landlord's accountant);
(x) Replacing equipment or improvements that have a
useful life for depreciation purposes of five (5) years or
less, as determined in the reasonable judgment of Landlord's
accountant, amortized over such life (including interest on
the unamortized balance as reasonably determined by Landlord's
accountant);
(xi) Replacing and/or adding any equipment, device or
capital improvement to reduce operation or maintenance
expenses with respect to the Office Building Project to the
extent actually reduced in Landlord's reasonable
determination, amortized over its useful life as determined in
the reasonable judgment of Landlord's accountant (including
interest on the unamortized balance as reasonably determined
by Landlord's accountant).
(c) Landlord shall make a reasonable allocation of Operating
Expenses that affect the entire Office Building Project among the three
buildings comprising the same. Tenant's Share of Operating Expense
Increase shall be prorated for any calendar year, part of which falls
within the term of this Lease and part of which does not.
Notwithstanding anything to the contrary, within ninety (90) days after
Tenant's receipt of the statements described in this paragraph 4.2,
Tenant may audit Landlord's books and records with respect to the same.
(d) Notwithstanding anything to the contrary set forth in this
Lease, Operating Expenses shall not include the items set forth in this
subparagraph (d).
(i) Leasing commissions and other expenses incurred
for leasing, renovating or improving space for tenants or
enforcing the terms of any leases.
(ii) Costs incurred in renovating, improving,
decorating, painting or redecorating vacant space or space for
tenants.
<PAGE> 8
(iii) Landlord's cost of electricity or other
services sold to tenants for which Landlord is to be
reimbursed under the lease with that tenant.
(iv) Replacement of equipment or improvements having
a useful life in excess of five (5) years, as determined by
generally accepted accounting principles, unless they are the
type described in subparagraphs 4.2(b)(ix) or (xi), in which
case it shall be included.
(v) Depreciation or amortization on the Building.
(vi) Interest on debt or amortization payments on
mortgages or any other debt for borrowed money.
(vii) Items Landlord provides selectively to one or
more tenants of the Building other than Tenant.
(viii) Advertising and promotional expenditures, and
costs for services or supplies not obtained at market rates.
(ix) Repairs or other work needed because of fire or
other casualty or causes insured against by Landlord, or to
the extent Landlord's insurance required under this Lease
would have provided insurance, whichever is greater; provided,
that a commercially reasonable deductible may be included as
part of Operating Expenses.
(x) Any costs, fines or penalties incurred because
Landlord violated any governmental law or regulation, or to
repair original construction defects.
(xi) Costs incurred to test, survey, clean up,
contain, abate, remove or otherwise remedy hazardous
substances or asbestos containing materials.
(xii) Any fines or penalties for late payment of
taxes.
(xiii) Federal, state or local income taxes,
franchise, gift, transfer, excise, capital stock, estate,
succession or inheritance taxes.
4.3 BASE RENT INCREASE.
4.3.1 At the times set forth in paragraph 1.6 of the Base Lease Provisions, the
monthly Base Rent payable under paragraph 4.1 of this Lease shall be increased.
4.4 DEFINITION OF RENT. The capitalized term "Rent", as used in this Lease,
shall mean the Base Rent plus Tenant's Share of Operating Expense Increase.
5. SECURITY DEPOSIT. Tenant shall deposit with Landlord upon execution hereof
the security deposit set forth in paragraph 1.10 of the Basic Lease Provisions
as security for Tenant's faithful performance of Tenant's obligations hereunder.
If Tenant fails to pay Rent or other charges due hereunder, or otherwise
defaults with respect to any provision of this Lease, subject to applicable
notice and grace periods, Landlord may use, apply or retain all or any portion
of said deposit for the payment of any Rent
<PAGE> 9
or other charge in default, for the payment of any other sum to which Landlord
may become obligated by reason of Tenant's default, or to compensate Landlord
for any loss or damage which Landlord may suffer thereby. If Landlord so uses or
applies all or any portion of said deposit, Tenant shall within ten (10) days
after written demand deposit cash with Landlord in an amount sufficient to
restore said deposit to the full amount then required of Tenant. If the Base
Rent shall at anytime, increase during the term of this Lease, Tenant shall, at
the time of such increase, deposit with Landlord additional money as a security
deposit so that the total amount of the security deposit held by Landlord shall
at all times bear the same proportion to the then current Base Rent as the
initial security deposit bears to the initial Base Rent set forth in paragraph
1.6 of the Basic Lease Provisions. Landlord shall not be required to keep said
security deposit separate from its general accounts. If Tenant performs all of
Tenant's obligations hereunder, subject to applicable notice and grace periods,
said deposit, or so much thereof as has not been applied by Landlord as provided
in this paragraph 5, shall be promptly returned, without payment of interest or
other increment for its use, to Tenant (or, at Landlord's option, to the last
assignee, if any, of Tenant's interest hereunder) after the term expires and
Tenant vacates the Premises. No trust relationship is created herein between
Landlord and Tenant with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for the purpose set forth
in paragraph 1.4 of the Basic Lease Provisions and for no other purpose.
6.2 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS. Tenant shall, at Tenant's
expense, promptly comply with all applicable statutes, ordinances, rules,
regulations and orders and reasonable and customary requirements of insurance
underwriters or rating bureaus, now in effect or which may hereafter come into
effect, whether or not they reflect a change in policy from that now existing,
during the term or any part of the term hereof, relating to the manner Tenant
uses the Premises. Tenant shall conduct its business in a lawful manner and
shall not use or permit the use of the Premises or the Common Areas in any
manner that will create waste or a nuisance or shall unreasonably disturb other
occupants of the Office Building Project. Notwithstanding the foregoing, in no
case shall this provision be construed as requiring Tenant to make any
structural changes to the Premises or the Building or change or install systems.
Landlord represents and warrants that on the date of Tender of Possession, the
Premises will comply will all applicable laws, ordinances, rules and regulations
("Laws") and that Tenant's use is permitted under all Laws. Landlord further
represents and warrants that all easements, covenants and restrictions of record
permit such use. Landlord shall be responsible for any failure of the Building
to comply with Laws.
6.3 CONDITION OF PREMISES.
(a) Upon delivery of possession to Tenant the Premises shall
be clean and the plumbing, lighting, air conditioning, and heating
system in the Premises shall be in a good operating condition. Tenant
shall promptly notify Landlord in writing of any claimed violation of
the foregoing warranty, setting forth with specificity the nature of
the violation. If there has been a violation, Landlord shall promptly
after receipt of such notice from Tenant, at Landlord's sole cost,
rectify such violation.
(b) Except as otherwise provided in this Lease, Tenant hereby
accepts the Office Building Project in its "as is" condition as of the
date of delivery of possession of the Premises to Tenant, subject to
all applicable municipal, county and state laws, ordinances and
regulations governing and regulating the use of the Office Building,
and any easements, covenants or
<PAGE> 10
restrictions of record, and accepts this Lease subject thereto and to
all matters disclosed thereby and by any exhibits attached hereto.
Tenant acknowledges that it has satisfied itself by its own independent
investigation that the Premises are suitable for its intended use, and
that neither Landlord nor any agent of Landlord has made any
representation or warranty as to the present or future suitability of
the Premises, Common Areas, or Office Building Project for the conduct
of Tenant's business.
7. MAINTENANCE, REPAIRS, ALTERATIONS AND ADDITIONS.
7.1 MAINTENANCE AND REPAIR - LANDLORD'S OBLIGATIONS. Landlord shall maintain
(and replace, if necessary) the Common Areas of the Office Building Project, the
roof, bearing walls and other structural elements of the Building, and the
plumbing, heating, ventilating, air conditioning, elevator, electrical and other
systems of the Building in good working order and condition. Except as provided
in paragraphs 9.5 and 11.5, there shall be no abatement of Rent or liability of
Landlord on account of any injury or interference with Tenant's business with
respect to any improvements, alterations or repairs made by Landlord to the
Office Building Project or any part thereof if Landlord and its agents,
employees and contractors use reasonable care. Tenant expressly waives the
benefits of any statute now or hereafter in effect which would otherwise afford
Tenant the right to make repairs at Landlord's expense or to terminate this
Lease because of Landlord's failure to keep the Premises in good order,
condition and repair.
7.2 MAINTENANCE AND REPAIR - TENANT'S OBLIGATIONS. During the term of this
Lease, Tenant shall take good care of the Premises and fixtures therein except
structural elements and building systems, and maintain them in good order,
condition and repair equal to the original work, ordinary and reasonable wear
and damage by fire or other casualty or condemnation excepted. During the term
of this Lease, Tenant shall maintain at its own expense any plumbing facilities
located within the Premises serving only the Premises, except the rest rooms
located in the core of the Building, in good order, condition and repair to the
reasonable satisfaction of Landlord. Upon surrender of the Premises to Landlord,
Tenant shall deliver the Premises to Landlord, broom clean, in as good order,
condition and repair as they were upon delivery of possession to Tenant,
ordinary and reasonable wear and tear and damage by fire or other casualty or
condemnation excepted.
7.2(A) Notwithstanding the foregoing, all fit-out work performed by Landlord
pursuant to Exhibit C that would otherwise be the responsibility of Tenant to
repair or replace shall be repaired or replaced by Landlord at its sole expense
to the extent the same is necessary at any time within one (1) year after the
date of Tender of Possession. Landlord shall not be responsible for reasonable
wear and tear to such fit-out work.
<PAGE> 11
7.3 ALTERATIONS AND ADDITIONS.
(a) Tenant shall not, without Landlord's prior written
consent, not to be unreasonably withheld, delayed or conditioned, make
any alterations, improvements or additions in, on or about the Premises
or the Office Building Project. At the expiration of the term, Landlord
may require the removal of any or all of said alterations, improvements
or additions and the restoration of the Premises and the Office
Building Project to their prior condition, at Tenant's expense. Should
Landlord permit Tenant to make any alterations, improvements or
additions, Tenant shall use only contractors expressly approved by
Landlord. In addition, Landlord may require Tenant to provide Landlord,
at Tenant's sole cost and expense, with a lien and completion bond in
an amount equal to one and one half times the estimated cost of such
improvements, to insure Landlord against any liability for mechanic's
and materialmen's liens and to insure completion of the work. Such
contractors shall carry liability insurance of a type and in such
reasonable amounts as Landlord shall reasonably require, naming
Landlord and Tenant as additional insureds. Before commencing the work,
such contractors shall furnish Landlord with certificates of insurance
evidencing such coverage and with evidence of recording of a fully
executed waiver of mechanics' liens. Tenant shall also maintain a
policy of Builder's Risk for such work. Should Tenant make any
alterations, improvements or additions without the prior approval of
Landlord, or use a contractor not expressly approved by Landlord,
Landlord may, at any time during the term of this Lease, require that
Tenant remove any part or all of such work. Notwithstanding the
foregoing, nonstructural alterations, improvements or additions may be
made without Landlord's consent, but upon at least 10 days notice to
Landlord; provided, that Landlord has obtained any required consents
from the municipal authorities, which consents Landlord shall
diligently pursue upon Tenant's request. The fees for any such consents
or approvals shall be paid for by Tenant.
(b) Tenant shall present any alteration, improvement or
addition in or about the Premises or the Office Building Project that
Tenant desires to make to Landlord in written form, with proposed
detailed plans. If Landlord consents to such alteration, improvement or
addition, the consent shall be deemed conditioned upon Tenant acquiring
a permit to do so from the applicable government agencies, furnishing a
copy thereof to Landlord prior to the commencement of the work, and
compliance by Tenant with all conditions of said permit in a prompt and
expeditious manner.
(c) Tenant shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Tenant
at or for use in the Premises, which claims are or may be secured by
any mechanic's or materialmen's lien against the Premises, the Building
or the Office Building Project, or any interest therein.
(d) Tenant shall give Landlord not less than ten (10) days'
notice prior to the commencement of any work in the Premises by Tenant.
Landlord shall have the right to post notices of non-responsibility in
or on the Premises or the Building. If Tenant, in good faith, contests
the validity of any lien, claim or demand regarding the work, then
Tenant shall, at its sole expense, defend itself and Landlord and
Landlord's agents against the same and shall pay and satisfy any
adverse judgment that may be rendered thereon before the enforcement
thereof against Landlord or Landlord's agents or the Premises or the
Building or the Office Building Project, upon the condition that if
Landlord shall require, Tenant shall furnish to Landlord a surety bond
satisfactory to Landlord in an amount equal to such contested lien
claim or demand
<PAGE> 12
indemnifying Landlord and Landlord's agents against liability for the
same and holding the Premises, the Building and the Office Building
Project free from the effect of such lien or claim. In addition,
Landlord may require Tenant to pay Landlord's reasonable attorneys'
fees and costs in participating in such action if Landlord decides it
is in Landlord's best interest to participate.
(e) All alterations, improvements and additions made by Tenant
shall be done in a good, workmanlike, manner with good quality
materials and shall become upon installation the property of Landlord
and remain upon and be surrendered with the Premises at the expiration
of the Lease term, unless Landlord requires their removal pursuant to
paragraph 7.3(a). Any trade fixtures installed and paid for by Tenant
may, in the event Tenant is not in default beyond applicable notice and
grace periods under this Lease, be removed by Tenant during the term of
this Lease and shall upon demand by Landlord be removed upon expiration
of the term. Tenant shall in all events promptly repair any damage
caused by removal of trade fixtures.
(f) Tenant shall provide Landlord with as-built plans and
specifications for any alterations, improvements or additions.
7.4 UTILITY ADDITIONS. Landlord reserves the right to install new or additional
utility facilities throughout the Office Building Project for the benefit of
Landlord or Tenant, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, communication systems, and fire protection and detection systems, so
long as such installations do not unreasonably interfere with Tenant's use of
the Premises.
7.5 AMERICANS WITH DISABILITIES ACT.
(a) The provisions of the paragraph 7.5(a) will apply only if
Landlord will not be making alterations improvements or additions to
the Premises in conjunction with this Lease.
Tenant acknowledges that Landlord will not be making any alterations,
improvements or additions to the Premises under this Lease. In establishing the
Rent under this Lease the Landlord has relied on the agreement between Tenant
and Landlord that Landlord will not be required to make any alterations,
improvements or additions to the Premises. Landlord has made no representation
to Tenant that the Premises comply with or will comply with the Americans with
Disabilities Act (the "Act"). Tenant agrees to and shall be responsible for all
cost and expense incurred in connection with any alterations, improvements and
changes necessary to ensure compliance with the Act. It is the intent of this
paragraph that any alterations, improvements or additions required by the Act
with regard to the Premises, whether resulting from amendments to the Act or
otherwise shall be the sole responsibility of Tenant. Tenant covenants and
agrees to and does hereby indemnify, defend and hold Landlord harmless from and
against all liability (including, without limitation, attorneys' fees and court
costs) that Landlord may actually sustain by reason of Tenant's breach of its
obligations under this paragraph. In the event that Tenant fails to comply with
its obligations under this paragraph for a period of ten (10) days after written
notice from Landlord to Tenant specifying the action required to be taken,
Landlord shall have the right, but not the obligation, to enter into the
Premises and perform such action on behalf of Tenant. In such event, Landlord
shall not be liable for and Tenant hereby waives any and all claims against
Landlord arising out of any damage or injury to the Premises or any property
situated therein and Landlord shall have no liability to Tenant for any
interruption of Tenant's operations conducted in or about the Premises. Any and
all costs and expenses incurred by Landlord in performing such action on behalf
of Tenant shall be reimbursed by Tenant to Landlord upon demand and the failure
to do so shall, at the option of Landlord, constitute an event of default under
this Lease.
<PAGE> 13
(b) The provisions of the paragraph 7.5(b) will apply only if
Landlord will be making alterations improvements or additions to the
Premises in conjunction with this Lease.
Landlord covenants and agrees that all alterations, improvements and additions
to the Premises constructed by Landlord pursuant to the terms and provisions of
this Lease shall be constructed in accordance with the Americans with
Disabilities Act (the "Act"), such that all such alterations, improvements and
additions to the Premises constructed by Landlord will be in compliance with the
Act as of the date on which Tenant takes possession of the Premises. Tenant
covenants and agrees that all alterations, improvements and additions to the
Premises constructed by Tenant, whether prior to or after the date Tenant takes
possession of the Premises, shall be constructed in accordance with the Act. In
the event that, subsequent to the date Tenant takes possession of the Premises,
Tenant requests Landlord to perform any alterations, improvements and additions
to the Premises, whether by virtue of expansion, extension or otherwise, Tenant
agrees to and shall be responsible for all cost and expense incurred in
connection with any alterations, improvements and additions necessary to ensure
compliance with the Act. It is the intent of this paragraph that any additional
alterations, improvements or additions made by Tenant to the Premises after the
date Tenant takes possession of the Premises, whether resulting from amendments
to the Act or otherwise, shall be the sole responsibility of Tenant with respect
to compliance with the Act. Tenant covenants and agrees to and does hereby
indemnify, defend and hold Landlord harmless from and against all liability
(including, without limitation, reasonable attorneys' fees and court costs) that
Landlord may actually sustain by reason of Tenant's breach of its obligations
under this paragraph. In the event that Tenant fails to comply or commence
complying with its obligations under this paragraph for a period of ten (10)
days after written notice from Landlord to Tenant specifying the action required
to be taken, Landlord shall have the right, but not the obligation, to enter
into the Premises and perform such action on behalf of Tenant. In such event,
Landlord shall not be liable for and Tenant hereby waives any and all claims
against Landlord arising out of any damage or injury to the Premises or any
property situated therein and Landlord shall have no liability to Tenant for any
interruption of Tenant's operations conducted in or about the Premises. Any and
all reasonable costs and expenses incurred by Landlord in performing such action
on behalf of Tenant shall be reimbursed by Tenant to Landlord promptly and the
failure to do so shall, at the option of Landlord, constitute an event of
default under this Lease.
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE-TENANT. Tenant shall, at Tenant's expense, obtain and
keep in force during the term of this Lease a policy of Commercial General
Liability Insurance with Broad Form General Liability Endorsement, or
equivalent, in an amount of not less than $1,000,000 per occurrence of bodily
injury and property damage combined or in a greater amount as reasonably
determined by Landlord and shall insure Tenant with Landlord and Landlord's
asset manager and property manager as additional insureds against liability
arising out of the use, occupancy or maintenance of the Premises. Compliance
with the above requirement shall not, however, limit the liability of Tenant
hereunder.
8.2 LIABILITY INSURANCE - LANDLORD. Landlord shall obtain and keep in force
during the term of this Lease a policy of Commercial General Liability
Insurance, plus coverage against such other risks as Landlord deems advisable
from time to time, in such amounts as Landlord deems advisable from time to
time, insuring Landlord, but not Tenant, against liability arising out of the
ownership, use, occupancy or maintenance of the Office Building Project.
<PAGE> 14
8.3 PROPERTY INSURANCE - TENANT. Tenant shall, at Tenant's expense, obtain and
keep in force during the term of this Lease for the benefit of Tenant, fire and
extended coverage insurance, with vandalism and malicious mischief, sprinkler
leakage and earthquake sprinkler leakage endorsements, in an amount sufficient
to cover the full replacement cost, as the same may exist from time to time, of
all of Tenant's personal property, fixtures, equipment and tenant improvements,
except for items constructed or installed by Landlord pursuant to Exhibit C.
8.4 PROPERTY INSURANCE - LANDLORD. Landlord shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Office Building Project improvements, but not Tenant's personal
property, fixtures, equipment or tenant improvements (except for items
constructed or installed by Landlord pursuant to Exhibit C), in an amount equal
to the full replacement value of the Office Building Project providing
protection against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, plate glass, and such other
perils as Landlord deems advisable from time to time or may be required by a
lender having a lien on the Office Building. Such insurance may include
earthquake, flood and boiler and machinery insurance. In addition, Landlord may
obtain and keep in force, during the term of this Lease, rental value insurance,
with loss payable to Landlord, which insurance may also cover Operating
Expenses. Tenant will not be named in any such policies carried by Landlord and
shall have no right to any proceeds therefrom. The policies required by
paragraphs 8.2 and 8.4 shall contain such deductibles as Landlord or the
aforesaid lender may determine. In the event that the Premises shall suffer an
Insured Loss as defined in paragraph 9.1(e), the deductible amounts under the
applicable insurance policies shall be deemed an Operating Expense. Tenant shall
not do or permit to be done anything which shall invalidate the insurance
policies carried by Landlord, provided, that in all cases Tenant shall be
permitted to continue the use specified in paragraph 1.4. Tenant shall pay the
entirety of any increase in the property insurance premium for the Office
Building Project over what it was immediately prior to the commencement of the
term of this Lease if the increase is specified by Landlord's insurance carrier
as being caused by the nature of Tenant's occupancy or any act or omission of
Tenant, but only if Tenant's use has changed from the use permitted in Paragraph
1.4.
8.5 INSURANCE POLICIES. Tenant shall deliver to Landlord copies of the insurance
policies required under paragraphs 8.1 and 8.3 or, if permitted by Landlord,
certificates evidencing the existence and amounts of such insurance within seven
(7) days after the Commencement Date of this Lease. The policies or certificates
must include a copy of the endorsement naming the additional insureds required
under Section 8.1. Tenant shall, at least thirty (30) days prior to the
expiration of each policy, furnish Landlord with a copy of the policy or a
certificate evidencing the renewal thereof. If Tenant provides a certificate
Landlord may at any time thereafter require Tenant to provide Landlord with a
copy of the policy. The policies shall be issued by insurers having a rating of
A 10 or better in Best's Key Rating Guide, who are admitted carriers in the
state where the Office Building Project is located. No such policy shall be
cancelable or subject to reduction of coverage or other modification except
after thirty (30) days prior written notice to Landlord.
8.6 WAIVER OF SUBROGATION. Tenant and Landlord each hereby release and relieve
the other (and Landlord's asset manager and property manager) and waive their
entire right of recovery against the other (and Landlord's asset manager and
property manager), for direct or consequential loss or damage arising out of or
incident to the perils covered by property insurance carried by such party, or
that was required under the terms of this Lease to be carried, whether due to
the negligence of Landlord or Tenant or their agents, employees, contractors or
invitees. If necessary, all property insurance policies required under this
Lease shall be endorsed to so provide. Solely for the purposes of this waiver,
the deductible under any insurance policy carried by Landlord or Tenant shall be
deemed to be zero.
<PAGE> 15
8.7 INDEMNITY. Subject to paragraph 8.6, Tenant shall indemnify and hold
harmless Landlord and its agents, master or ground lessor, partners,
shareholders, directors and lenders, if any, from and against any and all claims
for damage to the person or property of anyone or any entity arising from
Tenant's use of the Office Building Project, or from the conduct of Tenant's
business or from any activity, work or things done, permitted or consented to by
Tenant in or about the Premises or elsewhere and shall further indemnify and
hold harmless Landlord from and against any and all claims, costs and expenses
arising from any default (beyond applicable notice and grace periods) in the
performance of any obligation on Tenant's part to be performed under the terms
of this Lease, or arising from any act or omission of Tenant, or any of Tenant's
agents, contractors, employees or invitees, and from and against all costs,
reasonable attorneys' fees, expenses and liabilities incurred by Landlord as the
result of any such use, conduct, activity, work, things done, permitted or
consented to, default or negligence, and in dealing reasonably therewith,
including but not limited to the defense or pursuit of any claim or any action
or proceeding involved therein; and in case any action or proceedings be brought
against Landlord by reason of any such matter, Tenant upon notice from Landlord
shall defend the same at Tenant's expense by counsel reasonably satisfactory to
Landlord and Landlord shall cooperate with Tenant in such defense. Landlord need
not have first paid any such claim in order to be so indemnified. Tenant, as a
material part of the consideration to Landlord, hereby assumes all risk of
damage to property of Tenant in, upon or about the Office Building Project
arising from any cause except the gross negligence or willful misconduct of
Landlord or any of its contractors, agents or employees, and Tenant hereby
waives all claims in respect thereof against Landlord. Notwithstanding anything
to the contrary contained in this Lease, in no case shall Tenant be required to
indemnify a party against its own negligence. The provisions of this paragraph
8.7 shall survive the expiration or termination of this Lease.
8.8 EXEMPTION OF LANDLORD FROM LIABILITY. Subject to paragraph 11.5 and the
requirement that Landlord and its contractors, agents and employees use
reasonable care when maintaining, operating and repairing the Office Building
Project and when within the Premises pursuant to paragraph 32, Tenant hereby
agrees that Landlord shall not be liable for injury to Tenant's business or any
loss of income therefrom or for loss of or damage to the goods, wares,
merchandise or other property of Tenant, Tenant's employees, invitees,
customers, or any other person in or about the Premises or the Office Building
Project, nor shall Landlord be liable for injury to the person of Tenant,
Tenant's employees, agents or contractors, whether such damage or injury is
caused by or results from theft, fire, steam, electricity, gas, water or rain,
or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause, whether said damage or injury results from conditions
arising upon the Premises or upon other portions of the Office Building Project,
or from other source or place, or from new construction or the repair,
alteration or improvement of any part of the Office Building Project, or of the
equipment, fixtures or appurtenances applicable thereto, and regardless of
whether the cause of such damage or injury or the means of repairing the same is
inaccessible. Landlord shall not be liable for any damages arising from any act
or neglect of any other tenant, occupant or user of the Office Building Project,
nor from the failure of Landlord to enforce the provisions of any other lease of
any other tenant of the Office Building Project.
8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Landlord makes no representation
that the limits or forms of coverage of insurance specified in this paragraph 8
are adequate to cover Tenant's property or obligations under this Lease.
9. DAMAGE OR DESTRUCTION.
<PAGE> 16
9.1 DEFINITIONS.
(a) "Premises Damage" shall mean damage or destruction of the
Premises to any extent.
(b) "Premises Building Partial Damage" shall mean damage or
destruction of the Building of which the Premises are a part to the
extent that the cost to repair is less than fifty percent (50%) of the
then Replacement Cost of the Building.
(c) "Premises Building Total Destruction" shall mean damage or
destruction of the Building of which the Premises are a part to the
extent that the cost to repair is fifty percent (50%) or more of the
then Replacement Cost of the Building.
(d) "Office Building Project Total Destruction" shall mean
damage or destruction of the buildings in the Office Building Project
to the extent that the cost of repair is fifty percent (50%) or more of
the then Replacement Cost of all of the buildings in the Office
Building Project.
(e) "Insured Loss" shall mean damage or destruction caused by
an event required to be covered by the insurance described in paragraph
8. The fact that an Insured Loss has a deductible amount shall not make
the loss an uninsured loss.
(f) "Replacement Cost" shall mean the amount of money
necessary to be spent to repair or rebuild the damaged area to the
condition that existed immediately prior to the damage occurring,
excluding all improvements made by tenants of the Office Building
Project.
9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4
and 9.5, if at any time during the term of this Lease there is an
Insured Loss and that falls into the classification of either Premises
Damage or Premises Building Partial Damage and that does not fall into
the classification of Premises Building Total Destruction or Office
Building Project Total Destruction, then Landlord shall, as soon as
reasonably possible and to the extent the required materials and labor
are readily available through usual commercial channels, at Landlord's
expense, repair such damage, including, without limitation, the items
constructed or installed by Landlord pursuant to Exhibit C (but not
Tenant's fixtures, equipment or tenant improvements originally paid for
by Tenant), to its condition existing at the time of the damage, and
this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs
9.4 and 9.5, if at any time during the term of this Lease there is
damage that is not an Insured Loss and that falls into the
classification of Premises Damage or Premises Building Partial Damage,
and that does not fall into the classification of Premises Building
Total Destruction or Office Building Project Total Destruction, unless
caused by the negligence or willful misconduct of Tenant (in which
event Tenant shall make the repairs at Tenant's expense), which damage
materially impairs Tenants' use of the Premises, Landlord may at
Landlord's option either (i) repair such damage as soon as reasonably
possible at Landlord's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to
Tenant within thirty (30) days after the date of the occurrence of such
damage of Landlord's intention to cancel and terminate this Lease as of
the
<PAGE> 17
date of the occurrence of such damage, in which event this Lease
shall terminate as of the date of the occurrence of such damage.
9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL
DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time
during the term of this Lease there is damage, whether or not it is an Insured
Loss, that falls into the classification of either (i) Premises Building Total
Destruction, or (ii) Office Building Project Total Destruction, then Landlord
may at Landlord's option either (i) repair such damage or destruction as soon as
reasonably possible at Landlord's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, including, without limitation, the items
constructed or installed by Landlord pursuant to Exhibit C, but not Tenant's
fixtures, equipment or tenant improvements originally paid for by Tenant, and
this Lease shall continue in full force and effect, or (ii) give written notice
to Tenant within thirty (30) days after the date of occurrence of such damage of
Landlord's intention to cancel and terminate this Lease, in which case this
Lease shall terminate as of the date of the occurrence of such damage.
9.4 DAMAGE NEAR END OF TERM.
(a) Subject to paragraph 9.4(b), if at any time during the
last twelve (12) months of the term of this Lease there is material
Premises Damage, either party may cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to the
other within 30 days after the date of occurrence of such damage.
(b) In the event that Tenant has an option to extend or renew
this Lease that has not expired, Tenant shall exercise such option, if
it is to be exercised at all, no later than twenty (20) days after the
occurrence during the last twelve (12) months of the term of an Insured
Loss that falls into the classification of material Premises Damage. If
Tenant duly exercises such option during said twenty (20) day period,
the provisions of paragraph 9.4(a) shall not apply. If Tenant fails to
exercise such option during said twenty (20) day period, then Landlord
may at Landlord's option terminate and cancel this Lease as of the
expiration of said twenty (20) day period, notwithstanding any term or
provision in the grant of option to the contrary.
9.5 ABATEMENT OF RENT; Tenant's Remedies.
(a) In the event Landlord repairs or restores the Building or
Premises pursuant to the provisions of this paragraph 9, or is
obligated to do so, and any part of the Premises are not usable
(including loss of use due to loss of access or essential services),
the Rent payable hereunder (including Tenant's Share of Operating
Expense Increase) for the period during which such damage, repair or
restoration continues shall be equitably abated; provided such
abatement shall only be to the extent the operation and profitability
of Tenant's use of the Premises is adversely affected. Notwithstanding
the preceding sentence, such abatement shall not apply if (i) the
damage was not an Insured Loss, and (ii) the damage was the result of
the negligence or willful misconduct of Tenant. Except for said
abatement of Rent, if any, Tenant shall have no claim against Landlord
for any damage suffered by reason of any such damage, destruction,
repair or restoration.
(b) If Landlord shall be obligated to repair or restore the
Premises or the Building or agrees to do so under the provisions of
this paragraph 9 and shall not commence such repair or restoration
within ninety (90) days after such occurrence, or if Landlord shall not
complete
<PAGE> 18
the restoration and repair within six (6) months after such
occurrence, Tenant may at Tenant's option cancel and terminate this
Lease by giving Landlord written notice of Tenant's election to do so
at any time prior to the commencement or completion, respectively, of
such repair or restoration. In such event this Lease shall terminate as
of the date of such notice.
(c) Tenant agrees to cooperate with Landlord in connection
with any such restoration and repair, including but not limited to the
approval or execution of plans and specifications if required.
9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to
this paragraph 9, an equitable adjustment shall be made concerning advance Rent
and any advance payments made by Tenant to Landlord. Landlord shall, in
addition, return to Tenant so much of Tenant's security deposit as has not
theretofore been applied by Landlord.
9.7 WAIVER. Landlord and Tenant waive the provisions of any statute relating to
termination of leases when leased property is destroyed and agree that such
event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Landlord shall pay the real property tax, as defined in
paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Tenant of Tenant's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 ADDITIONAL IMPROVEMENTS. Tenant shall not be responsible for paying any
increase in real property tax specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Landlord for the exclusive enjoyment of
any other lessee. Tenant shall, however, pay to Landlord at the time that
Operating Expenses are payable under paragraph 4.2 the entirety of any increase
in real property tax if assessed solely by reason of additional improvements
placed upon the Premises by Tenant or at Tenant's request.
10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real property
tax" shall include any form of real estate tax or assessment, general, special,
ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Landlord in the Office Building Project or in any
portion thereof, as against Landlord's right to rent or other income therefrom,
and as against Landlord's business of leasing the Office Building Project. The
term "real property tax" shall also include any increase in the real property
tax that occurs after a sale of the Office Building Project and any tax, fee,
levy, assessment or charge (i) in substitution of, partially or totally, or as a
supplement to any tax, fee, levy, assessment or charge included within the
definition of "real property tax," and (ii) which is imposed by reason of this
transaction, any modifications or changes hereto, or any transfers hereof.
10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for which are
to be paid separately by Tenant under paragraph 10.2 or 10.5 are not separately
assessed, Tenant's portion of that tax shall be equitably determined by Landlord
from the respective valuations assigned in the assessor's work sheets
<PAGE> 19
or such other information (which may include the cost of construction) as may be
reasonably available. Landlord's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Tenant shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all
other personal property of Tenant contained in the Premises or
elsewhere.
(b) If any of Tenant's said personal property shall be
assessed with Landlord's real property, Tenant shall pay to Landlord
the taxes attributable to Tenant within ten (10) days after receipt of
a written statement setting forth the taxes applicable to Tenant's
property.
11. UTILITIES.
11.1 SERVICES PROVIDED BY LANDLORD. Landlord shall provide passenger and freight
elevator service, security, 24 hour access, pest control, heating, ventilation,
air conditioning, and janitorial service as reasonably required, reasonable
amounts of electricity for normal lighting and office machines, hot and cold
water for reasonable and normal drinking and lavatory use, replacement light
bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. HVAC
shall be provided in such amounts as to maintain temperatures for comfortable
use and occupancy in light of Tenant's space plan. Landlord shall also provide
maintenance of all Common Areas in a manner comparable to other similar office
buildings in the Philadelphia area, including, without limitation, snow removal
and deicing. Security and janitorial service shall be provided in substantial
accordance with the specifications therefor previously delivered to Tenant.
11.2 SERVICES EXCLUSIVE TO TENANT. Tenant shall pay for all water, gas, heat,
light, power, telephone and other utilities and services specially or
exclusively supplied or metered exclusively to the Premises or to Tenant,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Tenant shall pay a reasonable proportion reasonably determined
by Landlord of all charges jointly metered with other areas in the Office
Building Project.
11.3 HOURS OF SERVICE. Except for 24-hour access, said services and utilities
shall be provided from 8:00 a.m. to 6 p.m., Monday through Friday and 8:00 a.m.
to noon, Saturday, exclusive of legal holidays. Utilities and services required
at other times shall be subject to advance request and reimbursement by Tenant
to Landlord of the cost thereof.
11.4 EXCESS USAGE BY TENANT. Tenant shall not make connection to the utilities
except by or through existing outlets and shall not install or use machinery or
equipment in or about the Premises that uses excess water, lighting or power, or
suffer or permit any act that causes extra burden upon the utilities or
services, including but not limited to security services, over standard office
usage for the Office Building Project. In no event shall Tenant permit
electrical consumption within the Premises to exceed five (5) kilowatt hours per
square foot per hour. Tenant shall reimburse Landlord for any excess expenses or
costs that may arise out of a breach of this paragraph 11.4 by Tenant. Landlord
may, in its reasonable discretion, install at Tenant's expense supplemental
equipment and/or separate metering applicable to Tenant's excess usage or
loading.
<PAGE> 20
11.5 INTERRUPTIONS. Landlord does not warrant that any services that Landlord
supplies will not be interrupted. Services may be interrupted because of
accidents, repairs, alterations, improvements or any other reason beyond the
reasonable control of Landlord. Notwithstanding the foregoing, if any essential
services (such as HVAC, elevators, electricity or water) supplied by Landlord
are interrupted, and the interruption does not result from the negligence or
misconduct of Tenant, Tenant shall be entitled to an abatement of Rent. The
abatement shall begin on the fourth consecutive business day of the interruption
and shall end when the services are restored.
12. ASSIGNMENT AND SUBLETTING.
12.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not sell, assign, mortgage,
pledge, hypothecate, encumber or otherwise transfer this Lease or any interest
therein (each of which actions is hereafter referred to as a "transfer"), and
shall not sublet the Premises or any part thereof, without the prior written
consent of Landlord in each instance, not to be unreasonably withheld, delayed
or conditioned, and any attempt to do so without such consent shall be voidable
at Landlord's election. It is understood that employees of Tenant's subsidiaries
and affiliates may work at the Premises.
12.2 TENANT'S APPLICATION. If Tenant desires at any time to transfer this Lease
(which transfer shall in no event be for less than its entire interest in this
Lease) or to sublet the Premises or any portion thereof, Tenant shall submit to
Landlord at least thirty (30) days prior to the proposed effective date of the
transfer or sublease ("Proposed Effective Date"), in writing:
(a) A notice of intent to transfer or sublease, setting forth
the Proposed Effective Date, which shall be no less than thirty (30)
days nor more than ninety (90) days after the sending of such notice;
(b) The name of the proposed transferee or subtenant;
(c) The nature of the proposed transferee's or subtenant's
business to be carried on in the Premises;
(d) The terms and provisions of the proposed transfer or
sublease;
(e) Such information as Landlord may request concerning the
proposed transferee or subtenant, including recent financial statements
and bank references; and
(f) Evidence satisfactory to Landlord that the proposed
transferee (if the transfer involves a transfer of possession) or
subtenant will immediately occupy and thereafter use the affected
portion of the Premises for the entire term of the transfer or sublease
agreement.
12.3 LANDLORD'S OPTIONS. Landlord shall have the right, to be exercised by
giving notice to Tenant within thirty (30) days after receipt of Tenant's
above-described notice and such further financial information as may be
requested by Landlord together with the fees required under paragraph 12.7, (i)
to terminate this Lease and recapture the portion of the Premises described in
Tenant's notice; provided, that this recapture right shall only apply to a
request by Tenant to sublease to another party the entire Premises, or a portion
of the Premises for the balance of the term of this Lease, (ii) approve the
transfer or sublease application, or (iii) reject the application for transfer
or sublease. If notice of termination is given by Landlord, it shall serve to
cancel and terminate this Lease with respect to such portion of the Premises;
provided, however, that such termination shall be subject to the written consent
of any
<PAGE> 21
mortgagee of Landlord. The effective date of such cancellation shall be
as specified in Landlord's notice of termination, but shall be no earlier than
ninety (90) days after the date of receipt of Tenant's notice and no later than
one hundred twenty (120) days after such date. If this Lease is canceled
pursuant to the foregoing with respect to only a portion of the Premises, the
Rent required under this Lease, and including Tenant's Share, shall be adjusted
proportionately based on the square footage retained by Tenant and the square
footage leased by Tenant hereunder immediately prior to such recapture and
cancellation, and Landlord and Tenant shall thereupon execute an amendment of
this Lease in accordance therewith. If Landlord so recaptures a portion of the
Premises, it shall construct and erect at its sole cost such partitions as may
be required to sever the space retained by Tenant from the space recaptured by
Landlord. Landlord may, without limitation, lease the recaptured portion of the
Premises to the proposed subtenant without liability to Tenant.
12.4 APPROVAL PROCEDURE. If Landlord approves a transfer or sublease, Tenant
shall, prior to the Proposed Effective Date, submit to Landlord (for prompt
execution) an executed original of the transfer or sublease agreement for
execution by Landlord on the signature page after the words "the foregoing is
hereby consented to." No purported transfer or sublease shall be deemed
effective as against Landlord and no proposed transferee or subtenant shall take
occupancy unless such document is so executed by Landlord.
12.5 REQUIRED PROVISIONS. Any and all transfer or sublease agreements shall:
(a) Contain such terms as are described in Tenant's notice
under Paragraph 12.2 or as otherwise agreed by Landlord;
(b) Prohibit further transfers or subleases without Landlord's
consent under this paragraph 12;
(c) Impose the same obligations and conditions on the
transferee or subtenant as are imposed on Tenant by this Lease (except
as to Rent and term or as otherwise agreed by Landlord);
(d) Be expressly subject and subordinate to each and every
provision of this Lease;
(e) Have a term that expires on or before the expiration of
the term of this Lease;
(f) Provide that the Tenant and/or transferee or subtenant
shall pay Landlord the amount of any additional costs or expenses
incurred by Landlord for repairs, maintenance or otherwise as a result
of any change in the nature of occupancy caused by the transfer or
sublease; and
(g) Contain Tenant's acknowledgment that Tenant remains liable
under this lease notwithstanding the transfer or sublease.
12.6 TRANSFER OF SUBLEASE PROFIT. Any sums or other economic consideration
received by Tenant directly or indirectly in connection with any transfer or
sublease (except to the extent of commissions paid by Tenant to a licensed real
estate broker at prevailing rates and leasehold improvement costs incurred by
Tenant) which exceed in the aggregate the sums which Tenant is obligated to pay
Landlord hereunder (prorated to reflect obligations allocable to the portion of
the Premises transferred or sublet) shall be payable to Landlord as additional
Rent under this Lease. Within fifteen (15) days after written request
<PAGE> 22
by Landlord, Tenant shall at any time, and from time to time, certify to
Landlord the amount of all such sums or other economic consideration received.
THE PROVISIONS OF THIS PARAGRAPH 12.6 SHALL NOT APPLY DURING ANY PERIOD THAT THE
LANDLORD IS TAX EXEMPT UNDER SECTION 501(A) OF THE INTERNAL REVENUE CODE OR ANY
SUCCESSOR STATUTE.
12.7 FEES FOR REVIEW. Tenant shall pay to Landlord or Landlord's designee,
together with the notice described in Paragraph 12.2, a non refundable fee as
reimbursement for expenses incurred by Landlord in connection with reviewing
each such transaction, in the amount of Three Hundred Dollars ($300.00). In
addition to such reimbursement, if Landlord retains the services of an attorney
to review the transaction, Tenant shall pay to Landlord all reasonable
attorneys' fees incurred by Landlord in connection therewith. Tenant shall pay
such attorneys' fees to Landlord within thirty (30) days after written request.
12.8 NO RELEASE OF TENANT. No consent by Landlord to any transfer or subletting
by Tenant shall relieve Tenant of any obligation to be performed by Tenant under
this Lease, whether occurring before or after such consent, transfer or
subletting. Landlord's consent to any transfer or subletting shall not relieve
Tenant from the obligation to obtain Landlord's express prior written consent to
any other transfer or subletting. The acceptance by Landlord of payment from any
other person shall not be deemed to be a waiver by Landlord of any provision of
this Lease or to be a consent to any subsequent transfer or sublease, or be a
release of Tenant from any obligation under this Lease.
12.9 ASSUMPTION OF OBLIGATIONS. Each transferee of this Lease shall assume all
obligations of Tenant under this Lease and shall be and remain liable jointly
and severally with Tenant for the payment of the Rent and the performance of all
the terms, covenants, conditions and agreements herein contained on Tenant's
part to be performed for the term of this Lease. No transfer shall be binding on
Landlord unless the transferee or Tenant delivers to Landlord a counterpart of
the instrument of transfer which contains a covenant of assumption by the
transferee reasonably satisfactory in substance and form to Landlord, consistent
with the above requirements. The failure or refusal of the transferee to execute
such instrument of assumption shall not release or discharge the transferee from
its liability to Landlord hereunder. Landlord shall have no obligation
whatsoever to perform any duty to or respond to any request from any subtenant,
it being the obligation of Tenant to administer the terms of its sublease.
12.10 DEEMED TRANSFERS. If the Tenant is a nonpublicly traded corporation, or is
an unincorporated association or partnership, the transfer, sale, exchange,
assignment or hypothecation of any stock or interest in such corporation,
association or partnership in the aggregate in excess of fifty percent (50%)
shall be deemed to be a transfer of this Lease and shall be subject to the
provisions of this paragraph 12.
12.11 ASSIGNMENT BY OPERATION OF LAW. No interest of Tenant in this Lease shall
be assignable by operation of law.
12.12 ASSIGNMENT OF SUBLEASE RENTS. Tenant immediately and irrevocably assigns
to Landlord, as security for Tenant's obligations under this Lease, all rent
from any subletting of all or any part of the Premises, and Landlord, as
assignee and as attorney-in-fact for Tenant for purposes hereof, or a receiver
for Tenant appointed on Landlord's application, may collect such rents and apply
same toward Tenant's obligations under this Lease, except that, until the
occurrence of an act of default (beyond applicable notice and grace periods) by
Tenant, Tenant shall have the right and license to collect such rents.
12.13 PROHIBITION OF ASSIGNMENT TO PARTY IN INTEREST OF ERISA PARTY. If Landlord
is an ERISA Party (see paragraph 1.16) or an ERISA Party subsequently becomes
Landlord hereunder and Tenant is
<PAGE> 23
notified of such event, Tenant shall inquire of any prospective transferee or
subtenant whether it is a "party in interest," as that term is defined in
Section 3 (14) of ERISA, as to Landlord. Tenant shall not transfer this Lease or
sublet any part of the Premises to a person or entity that Tenant knows or
reasonably should know is a "party in interest," as that term is defined in
Section 3(14) of ERISA, as to Landlord.
13. DEFAULT; REMEDIES.
13.1 DEFAULT. The occurrence of any one or more of the following events shall
constitute a material default of this Lease by Tenant:
(a) The failure by Tenant to pay Rent or make any other
payment required to be made by Tenant hereunder, as and when due, where
such failure shall continue for a period of 5 days after written
notice. In the event that Landlord serves Tenant with a notice
regarding such nonpayment pursuant to any applicable summary eviction
statute, such notice shall also constitute the notice required by this
subparagraph. Landlord need not give such notice more than two (2)
times in any 12-month period, and during any 12-month period in which
two (2) such notices have been given, the grace period shall be reduced
to three (3) days after the Rent or other payment was due.
(b) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or
performed by Tenant other than those referenced in subparagraphs 13.1
(a) and 13.1(f) where such failure shall continue for a period of
thirty (30) days after written notice thereof from Landlord to Tenant,
provided, however, that if the nature of Tenant's noncompliance is such
that more than thirty (30) days are reasonably required for its cure,
then Tenant shall not be deemed to be in default if Tenant commences
such cure within said thirty (30) days and thereafter diligently
pursues such cure to completion. To the extent permitted by law, such
thirty (30) day notice shall constitute the sole notice required to be
given to Tenant under any applicable summary eviction statute. It is
understood that failure of Tenant to cure defaults under paragraphs
7.3, 12.1 and 30.2 after the expiration of the notice and grace periods
set forth in this paragraph 13.1(b) is a material default.
(c) (i) The making by Tenant of any arrangement or assignment
for the benefit of creditors; (ii) Tenant becoming a "debtor" as
defined in the Bankruptcy Code or any successor statute, (unless, in
the case of a petition filed against Tenant, the same is dismissed or
stayed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where
possession is not restored to Tenant within sixty (60) days; or (iv)
the attachment, execution or other judicial seizure of substantially
all of Tenant's assets located at the Premises or of Tenant's interest
in this Lease, where such seizure is not discharged within sixty (60)
days, all of which are hereby deemed to be non-curable defaults without
the necessity of any notice by Landlord to Tenant thereof.
(d) The existence of materially false information in any
financial statement given to Landlord by Tenant, or its successor in
interest or by any guarantor of any of Tenant's obligations hereunder,
all of which are hereby deemed to be non-curable defaults without the
necessity of any notice by Landlord to Tenant thereof.
<PAGE> 24
(e) The default by Tenant or any guarantor of Tenant under
this Lease under any other lease with Landlord.
(f) The breach by Tenant of paragraphs 25 or 33. It is
understood that no notice need be given by Landlord to Tenant of a
default under paragraphs 25 or 33.
13.2 REMEDIES. In the event of any material default of this Lease by Tenant,
Landlord may at any time thereafter, with or without notice or demand and
without limiting Landlord in the exercise of any right or remedy which Landlord
may have by reason of such default:
(a) Terminate this Lease and Tenant's right to possession of
the Premises by any lawful means, in which case Tenant shall
immediately surrender possession of the Premises to Landlord. In such
event, Landlord shall be entitled to recover from Tenant all damages
incurred by Landlord by reason of Tenant's default including, but not
limited to, the cost of recovering possession of the Premises; expenses
of reletting, including necessary renovation and alteration of the
Premises, reasonable attorney's fees, and any real estate commission
actually paid; the worth at the time of award by the court having
jurisdiction thereof of the amount by which the unpaid Rent for the
balance of the term after the time of such award exceeds the amount of
Rent loss for the same period that Tenant proves could be reasonably
avoided; that portion of the leasing commission paid by Landlord
pursuant to paragraph 15, applicable to the unexpired term of the
Lease. No payment by Tenant after termination of this Lease following
default by Tenant shall reinstate the Lease. Neither shall the receipt
and retention of any such payment by Landlord reinstate the Lease.
(b) Without terminating this Lease, re-enter and take
possession of the Premises or any part thereof and expel Tenant and
those claiming through or under Tenant, and remove the effects of both
or either, and relet the Premises, or any part thereof, in Landlord's
or Tenant's name, but for the account of Tenant. In such event, Tenant
shall in no manner be relieved from liability for payment of Rent
covering the balance of the term of this Lease, and Landlord's retaking
shall not be considered an acceptance of the Premises nor a
manifestation of an intent to terminate this Lease. Amounts collected
from new tenants shall be applied to amounts due from Tenant.
(c) Maintain Tenant's right to possession, in which case this
Lease shall continue in effect whether or not Tenant shall have vacated
or abandoned the Premises. In such event, Landlord shall be entitled to
enforce all of Landlord's rights and remedies under this Lease,
including the right to recover the Rent as it becomes due hereunder.
(d) Whenever not prohibited by the law of the state in which
the Premises is located, when this Lease and the term or any extension
or renewal thereof shall have been terminated on account of default by
Tenant, or when the term hereby created or any extension or renewal
thereof shall have expired, it shall be lawful for an attorney for any
court of record to appear as attorney for Tenant as well as for all
persons claiming by, through or under Tenant, and to sign an agreement
for entering in any competent court action in ejectment and judgment
against Tenant and all persons claiming by, through or under Tenant and
therein confess judgment for the recovery by Landlord of possession of
the Premises, for which this Lease shall be sufficient warrant;
thereupon if Landlord so desires, an appropriate writ of possession may
issue forthwith, without any prior writ or proceeding whatsoever, and
provided that if for any reason after such action shall have been
commenced, it shall be determined and possession of the Premises remain
<PAGE> 25
in or be restored to Tenant, Landlord shall have the right, for the
same default and upon any subsequent default or defaults, or upon the
termination of this Lease or Tenant's right of possession as
hereinbefore set forth, to bring one or more further action or actions
are hereinbefore set forth to recover possession of the Premises and
confess judgment as hereinbefore provided.
(e) To require Tenant to pay immediately the rent reserved for
the entire unexpired portion of the term of this Lease, discounted at a
rate of five percent (5%) per annum, as if such rent were payable in
advance.
(f) Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the state wherein the
Premises are located.
13.3 DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event later than thirty (30) days after written notice by Tenant to Landlord and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Tenant in writing,
specifying wherein Landlord has failed to perform such obligation; provided
however, that if the nature of Landlord's obligation is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently pursues the same to completion.
13.4 LATE CHARGES. Tenant hereby acknowledges that late payment by Tenant to
Landlord of Base Rent, Tenant's Share of Operating Expense Increase or other
sums due hereunder will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to, processing and accounting charges, and
late charges which may be imposed on Landlord by the terms of any mortgage or
trust deed covering the Office Building Project. Accordingly, if any installment
of Base Rent, Operating Expense Increase, or any other sum due from Tenant shall
not be received by Landlord or Landlord's designee within ten (10) days after
such amount shall be due, then, upon notice to Tenant, Tenant shall pay to
Landlord a late charge equal to six percent (6%) of such overdue amount, but not
to exceed the maximum late charge permitted by law in the jurisdiction where the
Office Building Project is located. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of late payment by Tenant. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, nor prevent Landlord from exercising any of the other
rights and remedies granted hereunder. This late charge shall not apply to
accelerated rent under Paragraph 13.2.
13.5 INTEREST ON PAST-DUE OBLIGATIONS. Any amount not paid by Tenant to Landlord
when due shall bear interest from the date due at the Prime Rate of PNC Bank
plus 2%, except that interest shall not be payable on any late charge and
interest on any amount upon which a late charge is payable shall not commence to
accrue until thirty (30) days after the date due. Payment of interest shall not
excuse or cure any default by Tenant.
14. CONDEMNATION. If the Premises or any portion thereof or the Office Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs; provided that if so
much of the
<PAGE> 26
Premises or the Office Building Project is taken by such condemnation as would
materially adversely affect Tenant's use of the Premises, Tenant shall have the
option, to be exercised only in writing within thirty (30) days after the
condemning authority shall have taken possession, to terminate this Lease as of
the date the condemning authority takes such possession. If Tenant does not
terminate this Lease in accordance with the foregoing, this Lease shall remain
in full force and effect as to the portion of the Premises remaining, except
that the Rent and Tenant's Share of Operating Expense Increase shall be
equitably reduced in proportion to the adverse effect on Tenant's use of the
Premises. Common Areas taken shall be excluded from the Common Areas usable by
Tenant and no reduction of Rent shall occur with respect thereto or by reason
thereof. Landlord shall have the option in its sole discretion to terminate this
Lease as of the taking of possession of a material portion of the Office
Building Project by the condemning authority, by giving written notice to Tenant
of such election within thirty (30) days after receipt of notice of a taking by
condemnation of such part of the Office Building Project; provided, that it also
terminates the leases of similarly affected tenants. Any award for the taking of
all or any part of the Premises or the Office Building Project under the power
of eminent domain or any payment made under threat of the exercise of such power
shall be the property of Landlord, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Tenant shall be entitled
to pursue and obtain any separate award for moving expenses, relocation costs,
loss of or damage to Tenant's trade fixtures, removable personal property and
unamortized tenant improvements that have been paid for by Tenant. For that
purpose, the cost of such improvements shall be amortized over the original term
of the lease excluding any options. In the event that this Lease is not
terminated by reason of such condemnation, Landlord shall, to the extent of
damages received by Landlord in connection with such condemnation, repair any
damage to the Premises caused by such condemnation except to the extent that
Tenant has been reimbursed therefor by the condemning authority.
15. BROKER'S FEE.
(a) Subject to the execution of this Lease by both parties,
Landlord shall pay to the Listing Broker and the Cooperating Broker, if
any, designated in paragraphs 1.14 and 1.15 of this Lease jointly, or
in such separate shares as they may mutually designate in writing, a
fee as set forth in a separate agreement between Landlord and the
Listing Broker.
(b) Tenant and Landlord each represent and warrant to the
other that neither has had any dealing with any person, firm, broker or
finder (other than the person(s), if any, whose names are set forth in
paragraphs 1.14 and 1.15) in connection with the negotiation of this
Lease or the consummation of the transaction contemplated hereby, and
no other broker or other person, firm or entity is entitled to any
commission or finder's fee in connection with said transaction and
Tenant and Landlord do each hereby indemnify and hold the other
harmless from and against any costs, expenses, reasonable attorneys'
fees or liability for compensation or charges which may be claimed by
any such unnamed broker, finder or other similar party by reason of any
dealings or actions of the indemnifying party.
16. ESTOPPEL CERTIFICATES.
(a) Each party ("responding party") shall at any time upon not
less than ten (10) business days prior written notice from the other
party ("requesting party") execute, acknowledge and deliver to the
requesting party a statement in writing (i) certifying that this Lease
is
<PAGE> 27
unmodified and in full force and effect (or, if modified, stating the
nature of such modification and certifying that this Lease, as so
modified, is in full force and effect) and the date to which the rent
and other charges are paid in advance, if any, and (ii) acknowledging
that there are not, to the responding party's knowledge, any uncured
defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Office
Building Project or of the business of Tenant.
(b) At the requesting party's option, the responding party's
failure to deliver such statement within such time shall be a material
default of this Lease, without any further notice to such party, or it
shall be conclusive upon such party that (i) this Lease is in full
force and effect, without modification except as may be represented by
the requesting party, (ii) there are no uncured defaults in the
requesting party's performance, and (iii) if Landlord is the requesting
party, not more than one month's rent has been paid in advance.
(c) If Landlord desires to finance, refinance or sell the
Office Building Project, or any part thereof, Tenant hereby agrees to
deliver to any lender or purchaser designated by Landlord such Form
10-Q and Form 10-K reports of Tenant as may be reasonably required by
such lender or purchaser. All financial statements and information
shall be received by Landlord and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LANDLORD'S LIABILITY. The term "Landlord" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or the leasehold
interest under a ground lease of the Office Building Project. In the event of
any transfer of such title or interest, Landlord herein named (and in case of
any subsequent transfers then the grantor) shall be relieved from and after the
date of such transfer of all liability as respects Landlord's obligations
thereafter accruing, provided that any funds in the hands of Landlord or the
then grantor at the time of such transfer, in which Tenant has an interest,
shall be delivered to the grantee. The obligations contained in this Lease to be
performed by Landlord shall be binding on Landlord's successors and assigns,
only during their respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.
19. FORCE MAJEURE. Any obligation of a party which is delayed or not performed
due to an act of God, strike, riot, shortage of labor or materials, war (whether
declared or undeclared), laws, governmental regulations or restrictions or any
other governmental action or inaction, or any other cause of any kind whatsoever
which is beyond such party's reasonable control, shall not constitute a default
hereunder and shall be performed within a reasonable time after the end of the
cause for delay or non-performance. Notwithstanding the foregoing, this
provision shall not be deemed to extend the period of time within which Tenant
may pay Rent, or the time limits set forth in paragraphs 3.2, 9 or 11.5.
20. TIME IS OF ESSENCE. Time is of the essence with respect to the obligations
to be performed under this Lease.
<PAGE> 28
21. ADDITIONAL RENT. All monetary obligations of Tenant to Landlord under the
terms of this Lease, including but not limited to any expenses payable by Tenant
hereunder, shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENT; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Tenant hereby acknowledges that neither the Listing Broker nor
the Cooperating Broker, if any, designated in paragraphs 1.14 and 1.15 nor the
Landlord or any employee or agent of any of said persons has made any oral or
written warranties or representations to Tenant relative to the condition or use
by Tenant of the Premises or the Office Building Project and Tenant acknowledges
that Tenant assumes all responsibility regarding the Occupational Safety Health
Act, the Americans with Disabilities Act (subject to the provisions of paragraph
1.17 and paragraph 7.5(a) or (b), and 7.2 A, as the case may be), the legal use
and adaptability of the Premises and the compliance thereof with all applicable
laws and regulations in effect during the term of this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified or registered mail
(provided that notice of exercise of any Option, as defined in paragraph 39,
must in all events be given by certified or registered mail) addressed to a
party at the address beneath such party's signature on this Lease or such other
address for notice purposes as may be later specified by notice to the other
party, except that upon Tenant's taking possession of the Premises, the Premises
shall constitute Tenant's address for notice purposes. Mailed notices shall be
deemed given upon actual receipt at the address required, or forty-eight hours
following deposit in the mail, postage prepaid, whichever first occurs. A copy
of all notices required or permitted to be given to Landlord hereunder shall be
concurrently transmitted to such other party or parties at such addresses as
Landlord may from time to time hereafter designate by notice to Tenant.
24. WAIVERS. No waiver by a party of any provision hereof shall be deemed a
waiver of any other provision or of any subsequent breach by the other of the
same or any other provision. Landlord's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Landlord's consent to
or approval of any subsequent act by Tenant. The acceptance of rent by Landlord
shall not be a waiver of any preceding breach of this Lease by Tenant, other
than Tenant's failure to pay the particular rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
25. VACATION OR ABANDONMENT OF PREMISES. Tenant shall not vacate or abandon the
Premises. Abandonment of the Premises shall include the failure to occupy the
Premises for a continuous period of sixty (60) days or more, whether or not the
Rent is paid.
26. HOLDING OVER. If Tenant, with Landlord's consent, remains in possession of
all or any part of the Premises after the expiration of the term of this Lease,
such occupancy shall be a tenancy from month-to-month upon all of the provisions
of this Lease pertaining to the obligations of Tenant, except that the Base Rent
payable shall be one hundred fifty percent (150%) of the Base Rent payable
immediately preceding the expiration of the term.
<PAGE> 29
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease to be performed by
Tenant shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting
assignment or subletting by Tenant and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.
30. SUBORDINATION.
30.1 This Lease, including but not limited to any Option, as defined in
paragraph 39, shall, at Landlord's option, be subordinate to any ground lease,
mortgage, trust deed, or any other security interest now or hereafter affecting
the Office Building Project and to any and all advances made on the security
thereof and to all renewals, modifications, consolidations, replacements and
extensions thereof. Notwithstanding such subordination, Tenant's right to quiet
possession of the Premises pursuant to the terms of this Lease shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease (subject to
applicable notice and grace periods), unless this Lease is otherwise terminated
pursuant to its terms. If any ground lessor or the holder of any mortgage ,
trust deed or other security interest shall elect to have this Lease prior to
its ground lease, mortgage, trust deed or other security interest, and shall
give written notice thereof to Tenant, this Lease shall be deemed prior to such
ground lease, mortgage, trust deed or other security interest, whether this
Lease is dated prior or subsequent to the date of said ground lease, mortgage,
trust deed or other security interest or the date of recording thereof. Upon
termination of any ground lease or foreclosure of any mortgage, deed of trust or
other security interest, Tenant shall attorn to the ground lessor or any
purchaser upon foreclosure. Landlord represents and warrants that as of the date
of Tender of Possession no ground lease, mortgage, trust deed or other security
interest affects the Office Building.
30.2 Tenant agrees to execute any documents reasonably required to effectuate a
subordination or attornment, or to make this Lease prior to any ground lease,
mortgage, trust deed or other security interest, if requested by the ground
lessor or holder of the mortgage, trust deed or other security interest, subject
to the nondisturbance provisions set forth above. Tenant's failure to execute
such documents within ten (10) business days after written demand shall
constitute a material default by Tenant hereunder without further notice to
Tenant or, at Landlord's option, Landlord may execute such documents on behalf
of Tenant as Tenant's attorney-in-fact. Tenant does hereby make, constitute and
irrevocably appoint Landlord as Tenant's attorney-in-fact and in Tenant's name,
place and stead, to execute such documents.
31. ATTORNEYS' FEES. If either party brings any lawsuit to enforce or declare
rights under this Lease, the prevailing party in the action, including any
appeal, shall be entitled to reasonable attorneys' fees paid by the losing party
as fixed by the court in the same or a separate proceeding, whether or not such
action is pursued to decision or judgment. The attorneys' fee award shall not be
computed in accordance with
<PAGE> 30
any court fee schedule, but shall be such as to fully reimburse all attorneys'
fees reasonably incurred in good faith. Landlord shall be entitled to reasonable
attorneys' fees and all other costs and expenses reasonably incurred in the
preparation and service of notice of default beyond the expiration of applicable
notice and grace periods and consultations in connection therewith, whether or
not a legal action is subsequently commenced.
32. LANDLORD'S ACCESS.
32.1 Landlord and Landlord's agents shall have the right to enter the Premises
at reasonable times, upon prior notice except in the case of emergency, for the
purpose of inspecting the same, performing any services required of Landlord,
showing the same to prospective purchasers, lenders, or lessees, taking such
measures, erecting such scaffolding or other necessary structures, making such
alterations, repairs, improvements or additions to the Premises or to the Office
Building Project as Landlord may reasonably deem necessary or desirable and the
erecting, using and maintaining of utilities, services, pipes and conduits
through the Premises and/or other premises as long as there is no material
adverse effect on Tenant's use of the Premises. Landlord may at any time place
on or about the Premises, the Building or the Office Building Project "For Sale"
signs and Landlord may at any time during the last 120 days of the term place on
or about the Premises "For Lease" signs.
32.2 Subject to paragraph 11.5, all activities of Landlord pursuant to paragraph
32 shall be without abatement of Rent and Landlord shall not have any liability
to Tenant for the same; provided Landlord has used reasonable care.
32.3 Landlord shall have the right to retain keys to the Premises and to unlock
all doors in or upon the Premises other than files, vaults and safes, and in the
case of emergency to enter the Premises by any reasonably appropriate means, and
any such entry shall not be deemed a forcible or unlawful entry or detainer of
the Premises or an eviction. Tenant waives any charges for damages or injuries
or interference with Tenant's property or business in connection therewith;
provided Landlord has used reasonable care.
33. AUCTIONS, OTHER SALES AND CESSATION OF BUSINESS. Tenant shall not conduct,
nor permit to be conducted, either voluntarily or involuntarily, any auction
upon the Premises or the Common Areas without Landlord's prior written consent.
Notwithstanding anything to the contrary in this Lease, Landlord shall not be
obligated to exercise any standard of reasonableness in determining whether to
grant such consent. Tenant shall not make a bulk sale of its goods or move, or
attempt to or threaten to move its goods and equipment out of the Premises
(other than in the ordinary course of business) or cease to conduct business
from the Premises.
34. SIGNS. Tenant shall not place any sign upon the Premises or the Office
Building Project without Landlord's prior written consent. Under no
circumstances shall Tenant place a sign on any roof of the Office Building
Project. Landlord shall provide a listing for Tenant in the building directory.
35. MERGER. The voluntary or other surrender or mutual cancellation or
termination by Landlord of this Lease shall not work a merger, but shall, at the
option of Landlord, terminate all or any subtenancies or may, at the option of
Landlord, operate as an assignment to Landlord of any or all subtenancies.
<PAGE> 31
36. CONSENTS. Except for paragraphs 33 (Auctions, Other Sales and Cessation of
Business), 34 (Signs), and 49 (Hazardous Material) as it relates to causing or
permitting any Hazardous Material to be brought upon, kept or used in or about
the Premises, wherever in this Lease the consent of one party is required to an
act of the other party such consent shall not be unreasonably withheld or
delayed.
37. GUARANTOR. In the event that there is a guarantor of this Lease, the
guarantor shall have the same obligations as Tenant under this Lease.
38. QUIET POSSESSION. Upon Tenant paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Tenant's part
to be observed and performed hereunder (subject to applicable notice and grace
periods) , Tenant shall have quiet possession of the Premises for the entire
term subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 Provided that Tenant is not in default of this Lease beyond applicable
notice and grace periods, Tenant shall have the option to renew this Lease, upon
the same terms and conditions, except for the amount of Base Rent, for two (2)
additional periods of three (3) years each at the then current fair market rent.
In order to exercise said option to renew, Tenant shall give Landlord six (6)
months written notice before the expiration of the initial Term, or the first
option Term, if applicable, of the intent to renew, failing which, Tenant's
option to renew shall be null and void and of no further effect.
39.2 Options Personal. The term "Option" as used in this Lease refers to any
option to extend, renew or expand and to any right of first refusal or first
offer granted to Tenant. Each Option is personal to the original Tenant and any
successor thereto by merger or consolidation or purchase and may be exercised
only by such party while occupying the Premises without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be, voluntarily or involuntarily, exercised by or assigned to any other
person or entity. Options shall not be assignable separate and apart from this
Lease, and may not be separated from this Lease in any manner, by reservation or
otherwise.
39.3 MULTIPLE OPTIONS. If Tenant has multiple options to extend or renew this
Lease, a later option cannot be exercised unless the prior option to extend or
renew has been exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Tenant shall have no right to exercise any Option,
notwithstanding any provision in the grant of the Option to the
contrary, from the date Landlord gives Tenant notice of a default until
the default is cured; provided, that this cure right shall not apply to
any bankruptcy declared by Tenant. The period of time within which an
Option may be exercised shall not be extended by reason of Tenant's
inability to exercise an option because of the provisions of this
paragraph.
(b) All rights of Tenant under the provisions of any Option
shall terminate and be of no further force or effect, notwithstanding
Tenant's due and timely exercise of the Option, if after such exercise
Tenant fails to cure a default when required after notice given
pursuant to paragraph 13.1.
<PAGE> 32
40. SECURITY MEASURES-LANDLORD'S RESERVATIONS.
40.1 Except as otherwise provided in this Lease, Tenant hereby acknowledges that
Landlord shall have no obligation whatsoever to provide guard service or other
security measures for the benefit of the Premises or the Office Building
Project, and Tenant assumes all responsibility for the protection of Tenant and
its agents and invitees and the property of Tenant and its agents and invitees
from acts of third parties. Nothing herein contained shall prevent Landlord, at
Landlord's sole option, from providing security protection for the Office
Building Project or any part thereof, in which event the cost thereof shall be
included within the definition of Operating Expenses, as set forth in paragraph
4.2(b).
40.2 LANDLORD SHALL HAVE THE FOLLOWING RIGHTS:
(a) To change the name, address or title of the Office
Building Project or the Building upon not less than 90 days prior
written notice;
(b) To grant to any lessee of the Office Building Project the
exclusive right to conduct any business as long as such exclusive right
does not conflict with any rights expressly given herein;
(c) To place such signs, notices or displays as Landlord
reasonably deems necessary or advisable upon the roof and exterior of
the Office Building Project or on pole signs in the Common Areas.
(d) To provide and install Building standard graphics on the
door of the Premises and such portion of the Common Areas as Landlord
shall reasonably deem appropriate.
40.3 TENANT SHALL NOT:
(a) Use a representation (photographic or otherwise) of the
Building or the Office Building Project or their name(s) in connection
with Tenant's business;
(b) Consent to or permit anyone, except in emergency, to go
upon the roof of the Building.
41. EASEMENTS.
41.1 Landlord reserves the right, from time to time, to grant easements and
rights, make dedications, agree to restrictions and record maps affecting the
Office Building Project as Landlord may deem necessary or desirable, so long as
such easements, rights, dedications, restrictions and maps do not unreasonably
interfere with the use of the Premises by Tenant, or otherwise impose any
obligations on Tenant. Tenant shall sign any of the aforementioned documents
within ten (10) business days after request by Landlord, and failure to do so
shall constitute a material default of this Lease by Tenant without the need for
further notice to Tenant.
41.2 The obstruction of Tenant's view, air, or light by any structure erected in
the vicinity of the Building, whether by Landlord or third parties, shall in no
way affect this Lease or impose any liability upon Landlord.
<PAGE> 33
42. PERFORMANCE. If at any time a dispute shall arise as to any amount or sum of
money to be paid by one party to the other under the provisions hereof, the
party against whom the obligation to pay the money is asserted shall have the
right to make payment "under protest" and such payment shall not be regarded as
a voluntary payment, and there shall survive the right on the part of said party
to institute suit for recovery of such sum. If it shall be adjudged that there
was no legal obligation on the part of said party to pay such sum or any part
thereof, said party shall be entitled to recover such sum or so much thereof as
it was not legally required to pay under the provisions of this Lease.
43. AUTHORITY. If Tenant is a corporation, trust, limited liability company or
general or limited partnership, Tenant, and each individual executing this Lease
on behalf of such entity represent and warrant that such individual is duly
authorized to execute and deliver this Lease on behalf of said entity and shall,
within thirty (30) days after execution of this Lease, deliver to Landlord
evidence of such authority reasonably satisfactory to Landlord.
44. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the typewritten or handwritten provisions, if any, shall be
controlled by the typewritten or handwritten provisions.
45. NO OFFER. Preparation of this Lease by Landlord or Landlord's agent and
submission of same to Tenant shall not be deemed an offer to Tenant to lease.
This Lease shall become binding upon Landlord and Tenant only when fully
executed by both parties.
46. LENDER MODIFICATION. Tenant agrees to make such reasonable modifications to
this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Office
Building Project.; provided, that none of the same shall increase Tenant's
obligations or decrease its rights under the Lease.
47. MULTIPLE PARTIES. If more than one person or entity is named as either
Landlord or Tenant herein, except as otherwise expressly provided herein, the
obligations of the Landlord or Tenant herein shall be the joint and several
responsibility of all persons or entities named herein as such Landlord or
Tenant, respectively.
48. (Deleted)
49. HAZARDOUS MATERIAL. Tenant shall not cause or permit any Hazardous Material
(as hereinafter defined) to be brought upon, kept or used in or about the
Premises by Tenant, its agents, employees, contractors or invitees, without the
prior written consent of Landlord, which consent may be granted or withheld in
Landlord's sole discretion. For the purpose of this Lease, "Hazardous Material"
shall include oil, flammable explosives, asbestos, urea formaldehyde,
radioactive materials or waste, or other hazardous, toxic, contaminated or
polluting materials, substances or wastes, including, without limitation, any
"hazardous substances," "hazardous wastes," "hazardous materials" or "toxic
substances"
<PAGE> 34
as such terms are defined in the Resource Conservation and Recovery Act and the
Comprehensive Environmental Response, Compensation and Liability Act, and in any
other law, ordinance, rule, regulation or order promulgated by the federal or
state government, or any other governmental entity having jurisdiction over the
Office Building Project or the parties to this Lease. If Tenant breaches the
obligations set forth in this paragraph, or if the presence of Hazardous
Material in the Premises or at the Office Building Project caused or permitted
by Tenant (whether or not Landlord has given its consent to the presence of such
Hazardous Material in the Premises) results in contamination of the Premises or
any other part of the Office Building Project, or if contamination of the Office
Building Project by Hazardous Material otherwise occurs for which Tenant is
legally liable, then Tenant shall indemnify, defend and hold Landlord harmless
from any and all claims, judgments, damages, penalties, fines, assessments,
costs, liabilities or losses, including, without limitation, diminution in value
of the Office Building Project, damages for the loss or restriction on use of
rentable or useable space or floor area in or of any amenity of the Office
Building Project, damages arising from any adverse impact on leasing space in
the Office Building Project, sums paid in settlement of claims, and any
reasonable attorneys' fees, consultant fees and expert fees which arise during
or after the term of this Lease as a result of such contamination. This
indemnification of Landlord by Tenant shall survive expiration or termination of
this Lease and includes, without limitation, costs incurred in connection with
any investigation of site conditions or any cleanup, remedial, removal or
restoration work required by any federal, state or local governmental agency or
political subdivision because of Hazardous Material present in, on or under the
Premises. Without limiting the foregoing, if the presence of any Hazardous
Material caused or permitted by Tenant or its agents, employees, contractors or
invitees, results in any contamination of the Office Building Project, Tenant
shall promptly take all actions, at its sole expense, as are necessary to return
the Office Building Project to the condition existing prior to the introduction
of any such Hazardous Material; provided that Landlord's approval, and that of
any ground lessor or mortgagee of Landlord, of such actions shall first be
obtained, which approval shall not be unreasonably withheld or delayed so long
as such actions would not potentially have any material adverse long-term or
short-term effects on the Office Building Project. Tenant shall promptly notify
Landlord of any such contamination. Notwithstanding the foregoing, Tenant may
use normal cleaning and office supplies and equipment on the Premises if it does
so in accordance with all applicable law.
50. ATTACHMENTS. Attached hereto are the following documents which constitute a
part of this Lease.
EXHIBIT A: Floor Plan.
EXHIBIT B: Rules And Regulations.
EXHIBIT C. Work Letter.
EXHIBIT D. Disclosure and Waiver Relating to Confession of Judgement
and Execution Proceedings.
51. LIABILITY OF LANDLORD. The liability of Landlord and all officers,
directors, shareholders, partners, members and employees of Landlord to Tenant
for any default by Landlord under the terms of this Lease shall be limited to
the interest of Landlord in the Office Building Project, and Landlord or any
officer, director, shareholder, partner, member or employee of Landlord shall
not be personally liable for any deficiency. The foregoing limitation shall not
apply to misapplication of any security deposit, or any casualty or condemnation
proceeds.
<PAGE> 35
LANDLORD AND TENANT HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH
PROVISION IN IT AND BY EXECUTING IT, SHOW THEIR INFORMED AND VOLUNTARY CONSENT.
THE PARTIES AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, ITS TERMS ARE
COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LANDLORD AND
TENANT WITH RESPECT TO THE PREMISES.
This Lease has been prepared for submission to your attorney for approval; no
representation or recommendation is made as to the legal sufficiency, legal
effect, or tax consequences of this Lease or the transaction relating thereto;
the parties shall rely solely upon the advice of their own legal counsel as to
the legal and tax consequences of this issue.
LANDLORD: K/B Fund II, a Delaware general partnership
By: K/B Opportunity Fund II, L.P. a
Delaware limited partnership, its general
partner
By: KB Opportunity Investors, a California
general partnership
By: Koll Investment Management, Inc. d/b/a/
K/B Realty Advisors, a California
corporation
WITNESSES: Its: Authorized Agent
By: /s/ Tara Weekes
- - -------------------- -----------------------------
Tara Weekes
- - -------------------- Its: Vice President
1101 17th Street, NW
Washington, DC 20036
TENANT: EPL Technologies, Inc., a Colorado
corporation
WITNESSES:
By: Paul Devine
- - -------------------- -----------------------------
Title: CEO
- - -------------------- ----------------------------
<PAGE> 36
EXHIBIT A
Exhibit 10.10
[FLOORPLAN DIAGRAM]
<PAGE> 37
EXHIBIT A
EPL TECHNOLOGIES, INC. is situated on the second floor of a six story building.
The total area of the suite is 6,674 rentable square feet. The suite contains
the following rooms: 6 private offices at 13' x 10'; an executive office at 23'
x 19'; a large conference room at 29' x 15'; a small conference room at 12' x
15'; a phone/storage room at 8' x 15'; a file room at 13' x 19'; a lunch room
with sink at 13' x 10'; a shower room at 13' x 5'; a bullpen area at 25' x 20'
and a large bullpen area at 31' x 55'.
The basis finish is as follows: 2' x 5' acoustic tile and grid at 9' 6" above
finished floor; 2' x 4' florescent lighting; walls are painted and drywalled
except for the executive office and large conference room which has vinyl wall
covering. Doors are solid core flush and hollow metal painted frames; 26 oz.
Level loop direct glue carpet and 4" vinyl case; the building has a 100% wet
sprinkler system; the center bullpen areas have built-in cubicles and plastic
laminate work counters; the suite has a battery back-up exit and energy
lighting.
<PAGE> 38
EXHIBIT B
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
(ALL RULES AND REGULATIONS ARE SUBJECT TO THE PROVISIONS OF THE LEASE)
Dated:
By and Between: K/B Fund II and EPL Technologies, Inc.
GENERAL RULES
1. Tenant shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.
2. Landlord reserves the right to refuse access to any persons Landlord in
good faith judges to be a threat to the safety, reputation, or property
of the Office Building Project and its occupants.
3. Tenant shall not make or permit any noise or odors that unreasonably
annoy or interfere with other lessees or persons having business within
the Office Building Project.
4. Tenant shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles or other vehicles
into areas not designated as authorized for same.
5. Tenant shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Tenant shall not alter any lock or install new or additional locks or
bolts.
7. Tenant shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind
are to be inserted therein.
8. Tenant shall not deface the walls, partitions or other surfaces of the
premises or Office Building Project.
9. Tenant shall not suffer or permit any thing in or around the Premises
or Building that causes excessive vibration or floor loading in any
part of the Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or out
of the building only with the Landlord's knowledge and consent, and
subject to such reasonable limitations, techniques and timing, as may
be designated by Landlord. Tenant shall be responsible for any damage
to the Office Building Project arising from any such activity.
11. Tenant shall not employ any service or contractor for services or work
to be performed in the Building, except as approved by Landlord.
<PAGE> 39
12. Tenant shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.
13. No window coverings, shades or awnings shall be installed or used by
Tenant.
14. Neither Tenant or any employee or invitee of Tenant shall go upon the
roof of the Building.
15. Tenant shall not suffer or permit smoking or carrying of lighted cigar
or cigarettes in areas reasonably designated by Landlord or by
applicable governmental agencies as non-smoking areas.
16. Tenant shall not use any method of heating or air conditioning other
than as provided by Landlord.
17. Tenant shall not install, maintain or operate any vending machines upon
the Premises without Landlord's written consent.
18. The Premises shall not be used for lodging or manufacturing, cooking or
food preparation.
19. Tenant shall comply with all safety, fire protection and evacuation
regulations established by Landlord or any applicable governmental
agency.
20. Landlord reserves the right to waive any one of these rules or
regulations, and/or as to any particular lessee, and any such waiver
shall not constitute a waiver of any other rule or regulation or any
subsequent application thereof to such Tenant.
21. Tenant assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.
22. Landlord reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the
appropriate operation and safety of the Office Building Project and its
occupants. Tenant agrees to abide by such rules and regulations as well
as these rules and regulations.
<PAGE> 40
PARKING RULES
1. Parking areas shall be used only for parking vehicles no longer than
full size passenger automobiles herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles are herein
referred to as "Oversized Vehicles."
2. Tenant shall not permit or allow any vehicles that belong to or are
controlled by Tenant or Tenant's employees, suppliers, shippers,
customers, or invitees to be loaded, unloaded, or parked in areas other
than those designated by Landlord for such activities.
3. Parking stickers or identification devices shall be the property of
Landlord and be returned to Landlord by the holder thereof upon
termination of the holder's parking privileges. Tenant will pay such
replacement charge as is reasonably established by Landlord for the
loss of such devices.
4. Landlord reserves the right to refuse the sale of monthly
identification devices to any person or entity that willfully refuses
to comply with the applicable rules, regulations, laws and/or
agreements.
5. Landlord reserves the right to relocate all or a part of parking spaces
from floor to floor within one floor, and/or to reasonably adjacent
offsite location(s), and to reasonably allocate them between compact
and standard size spaces, as long as the same complies with applicable
laws, ordinances and regulations.
6. Users of the parking area will obey all posted signs and park only in
the areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Landlord will not be
responsible for any damage to vehicles, injury to persons or loss of
property, all of which risks are assumed by the party using the parking
area.
8. Validation, if established, will be permissible only by such method or
methods as Landlord and/or its licensee may establish at rates
generally applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the parking
structure or Common Areas is prohibited.
10. Tenant shall be responsible for seeing that all its employees, agents
and invitees comply with the applicable parking rules, regulations,
laws and agreements.
11. Landlord reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations as it may
deem necessary for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a license
only and no bailment is intended or shall be created hereby.
<PAGE> 41
EXHIBIT C
SCOPE OF WORK
EPL Technologies, Inc.
Plaza II - 2nd Floor
Job #A-1438-96
June 17, 1996
Revised August 22, 1996
The following information is based on Plan IP 96-00-25, dated 6/11/96, with
final revision on 8/20/96. The final and exact layout of the proposed space
shall be reviewed and verified by an architect of our choosing. Any changes or
alternatives required by code, or due to existing building conditions, shall be
incorporated into the plan.
1.00 Sprinkler
1.01 Supply and install ordinary hazard wet system. System to be compatible
with building "core" system that will be installed at a later date.
1.02 Supply and install two (2) portable fire extinguishers.
2.00 Plumbing
2.01 Supply and install one (1) 25" wide x 22" deep stainless steel sink in
Room 217.
2.02 Supply and install all associated supply and drain lines.
2.03 Supply and install one (1) 30" x 30" fiberglass stall shower.
<PAGE> 42
Scope Of Work - EPL Technologies, Inc.
Page 2
August 22, 1996
3.00 HVAC
3.01 Supply and install appropriately sized fire damper at demising wall for
return air plenum.
4.00 Carpentry
4.01 Build new one-hour rated tenant-to-tenant demising wall, as per plan.
4.02 Build new steel stud and 1/2" GWB partitions from slab to underside of
acoustical ceiling grid.
4.03 Supply and install "C" rated entrance doors, as per plan.
4.04 Replace damaged acoustical tile, as required.
4.05 Prepare all new and existing GWB to receive wall finish.
4.06 Supply and install blocking for cabinetry.
4.07 Supply and install labor to install millwork at kitchen and cubes.
4.08 Relocate building stock door jambs.
4.09 Remove and discard existing partitions, as per plan.
4.10 Supply and install low height partition, with wood cap, as per plan.
5.00 Millwork
5.01 Supply plastic laminate base and wall cabinet.
5.02 Supply plastic laminate counter at kitchen and cubes.
6.00 Wall Finish
6.01 Paint to cover all new and existing exposed GWB surfaces. (Paint to be
flat latex, one (1) color; choice by Tenant.)
6.02 Paint to cover kitchen utilizing latex semi-gloss, one (1) color;
choice by Tenant.
<PAGE> 43
Scope Of Work - EPL Technologies, Inc.
Page 3
August 22, 1996
6.00 Wall Finish (cont.)
6.03 Paint/finish doors and frames (frame color choice by Tenant). Apply
urethane at previously urethane door surface.
6.04 Supply and install vinyl wall covering, as per plan, at Rooms 205 and
212.
6.05 Supply and install stain and finish at wood cap.
6.06 "Spray" ceiling grid and tile.
7.00 Overhead Doors & Docks - N/A
8.00 Finish Floor
8.01 Remove and discard existing carpet, base and V.C.T.
8.02 Supply and install carpet, as per plan. Base carpet 26 oz. level loop,
as per plan (color choice by Tenant).
8.03 Supply and install upgrade carpet, as per plan, at Rooms 212 and 205.
8.04 Supply and install V.C.T., as per plan (color choice by Tenant).
8.05 Supply and install vinyl base at all G.W.B. partitions, one (1) color
choice by Tenant.
8.06 Prepare floor as necessary to receive carpet.
9.00 Electric
9.01 Supply and install up to forty (40) wall mounted outlets.
9.02 Supply and install up to twenty (20) wall mounted wall switches (to
control existing light fixtures.)
9.03 Re-tube and re-zone all existing florescent light fixtures. (Re-zone as
per new partition layout.)
9.04 Supply and install battery back-up exit and emergency light fixtures.
(Re-zone as per new partition layout.)
9.05 Perform miscellaneous demolition as required.
<PAGE> 44
Scope Of Work - EPL Technologies, Inc.
Page 4
August 22, 1996
9.06 Supply and install high hat fixtures, as per plan, at Rooms 212
and 205.
10.00 Exterior & Interior Glazing - N/A
11.00 Caulking & Seal Coating - N/A
12.00 Concrete & Masonry - N/A
13.00 Asphalt Paving - N/A
14.00 Insulation - N/A
15.00 Roofing - N/A
16.00 Site Work - N/A
17.00 Structural Steel - N/A
18.00 Architecturals & Permits
18.01 Provide architectural drawing suitable for submission to Pennsylvania L
& I for State permit.
18.02 Apply for State and local permit.
19.00 General Conditions
19.01 Provide ongoing general clean up and final clean up of work area.
19.02 Provide for trash removal as needed.
<PAGE> 45
EXHIBIT D
DISCLOSURE AND WAIVER RELATING TO
CONFESSION OF JUDGMENT AND EXECUTION PROCEEDINGS
Tenant: EPL Technologies, Inc., a Colorado corporation
Landlord: K/B Fund II, a Delaware general partnership
Premises: 6,674 square feet known as Suite 245
Scott Way, Tinicum Township
Delaware County, Pennsylvania
Lease: Lease dated 9-11-96 between Landlord and Tenant for the Premises
Tenant is executing the above referenced Lease on the date set forth below.
A. TENANT ACKNOWLEDGES AND UNDERSTANDS THAT THE LEASE CONTAINS PROVISIONS UNDER
WHICH LANDLORD MAY ENTER JUDGMENT BY CONFESSION IN EJECTMENT AGAINST THE TENANT.
BEING FULLY AWARE OF TENANT'S RIGHT TO PRIOR NOTICE AND A HEARING IN CONNECTION
WITH THE JUDGMENT OR OTHER CLAIMS THAT MY BE ASSERTED AGAINST THE TENANT BY
LANDLORD THEREUNDER BEFORE JUDGMENT IS ENTERED, THE TENANT HEREBY VOLUNTARILY,
KNOWINGLY AND INTELLIGENTLY WAIVES ALL SUCH RIGHTS AND EXPRESSLY AGREES AND
CONSENTS TO LANDLORD'S ENTERING JUDGMENT AGAINST IT BY CONFESSION PURSUANT TO
THE TERMS THEREOF.
B. THE TENANT HEREBY REPRESENTS, WARRANTS AND CERTIFIED TO LANDLORD THAT: (1)
TENANT IS REPRESENTED BY COUNSEL OR HAD THE ABILITY TO HAVE COUNSEL PRESENT AND
AGREES TO AND UNDERSTANDS THE ABOVE TERMS EXPLICITLY; (2) TENANT'S ANNUAL INCOME
EXCEEDS $10,000; AND (3) TENANT HAS RECEIVED A COPY OF THIS DISCLOSURE AND
WAIVER AT THE TIME OF EXECUTION.
TENANT: EPL Technologies, Inc., a
Colorado corporation
By: /s/ Paul L. Devine
------------------------------
Date of Execution:
9-3, 1996
---------------------------------
<PAGE> 1
EPL Technologies, Inc.
EXHIBIT 11.0
Computation of Earnings per Common Share and
Fully Diluted Earnings per Common Share
<PAGE> 2
EXHIBIT 11.0
EPL TECHNOLOGIES, INC.
COMPUTATION OF LOSS PER COMMON SHARE AND
FULLY DILUTED LOSS PER COMMON SHARE
(in thousands except per share data)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
Net Loss $(4,296) $(3,320) $(3,373)
Deduct effect of 10% cumulative preferred dividend 374 314 324
------- ------- -------
Adjusted net loss for loss per share computation $(4,670) $(3,634) $(3,697)
======= ======= =======
Weighted average number of common shares $14,874 9,311 7,259
outstanding ======= ======= =======
Primary loss per share $ (0.31) $ (0.39) $ (0.51)
======= ======= =======
Net loss for fully diluted loss per common share $(4,296) $(3,320) $(3,373)
computation ======= ======= =======
Weighted average number of common shares 14,874 9,311 7,259
outstanding
Common share equivalent applicable to:
Series A, convertible preferred stock 2,618 4,143 4,333
Series A, warrants 248 313 464
Series B, convertible preferred stock 266
Other warrants 499 1,530 1,031
Stock options outstanding 2,477 1,579 1,043
------- ------- -------
Weighted average number of common shares and
common share equivalents used to compute fully
diluted loss per share 20,982 16,876 14,130
======= ======= =======
Fully diluted loss per share $ (0.20) $ (0.20) $ (0.24)
======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 1996 AND THE AUDITED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE 12 MONTHS ENDED DECEMBER 31, 1996 TOGETHER
WITH ALL NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,639,567
<SECURITIES> 0
<RECEIVABLES> 2,911,660
<ALLOWANCES> 153,057
<INVENTORY> 1,938,819
<CURRENT-ASSETS> 7,147,939
<PP&E> 4,660,904
<DEPRECIATION> 665,193
<TOTAL-ASSETS> 15,215,422
<CURRENT-LIABILITIES> 4,878,738
<BONDS> 0
0
2,495,319
<COMMON> 15,531
<OTHER-SE> 5,907,627
<TOTAL-LIABILITY-AND-EQUITY> 15,215,422
<SALES> 11,314,141
<TOTAL-REVENUES> 11,314,141
<CGS> 9,136,286
<TOTAL-COSTS> 9,136,286
<OTHER-EXPENSES> 6,352,003
<LOSS-PROVISION> 9,827
<INTEREST-EXPENSE> 20,223
<INCOME-PRETAX> (4,194,487)
<INCOME-TAX> 101,432
<INCOME-CONTINUING> (4,295,919)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,295,919)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.20)
</TABLE>
